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Section 1: 10-K (10-K)

COLB 2013 Pub.10-K
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013 or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-20288
COLUMBIA BANKING SYSTEM, INC.
(Exact name of registrant as specified in its charter)
Washington
 
91-1422237
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
1301 “A” Street
Tacoma, Washington 98402
(Address of principal executive offices) (Zip code)
Registrant’s Telephone Number, Including Area Code: (253) 305-1900
 
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, No Par Value
(Title of class)
Securities Registered Pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 C.F.R. 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):
ý  Large Accelerated Filer        ¨  Accelerated Filer        ¨  Non-accelerated Filer        ¨  Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The aggregate market value of Common Stock held by non-affiliates of the registrant at June 30, 2013 was $1,204,816,739 based on the closing sale price of the Common Stock on that date.
The number of shares of registrant’s Common Stock outstanding at January 31, 2014 was 51,282,776.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant’s definitive 2014 Annual Meeting Proxy Statement.                     Part III


Table of Contents

COLUMBIA BANKING SYSTEM, INC.
FORM 10-K ANNUAL REPORT
DECEMBER 31, 2013

TABLE OF CONTENTS
 
PART I
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
PART II
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
PART III
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
PART IV
 
 
 
Item 15.
 
 
 


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions that are not historical facts, and other statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates” or words of similar meaning. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. In addition to the factors set forth in the sections titled “Risk Factors,” “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K, the following factors, among others, could cause actual results to differ materially from the anticipated results:

local and national economic conditions could be less favorable than expected or could have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth and maintain the quality of our earning assets;
the local housing/real estate markets where we operate and make loans could face challenges;
the risks presented by an uncertain economy, which could adversely affect credit quality, collateral values, including real estate collateral, investment values, liquidity and loan originations and loan portfolio delinquency rates;
the inability to smoothly integrate West Coast Bancorp with Columbia and retain customers and employees;
the efficiencies and enhanced financial and operating performance we expect to realize from investments in personnel, acquisitions and infrastructure may not be realized;
interest rate changes could significantly reduce net interest income and negatively affect funding sources;
projected business increases following strategic expansion or opening of new branches could be lower than expected;
changes in the scope and cost of FDIC insurance and other coverages;
the impact of acquired loans on our earnings;
changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking;
competition among financial institutions could increase significantly;
continued consolidation in the Pacific Northwest financial services industry resulting in the creation of larger financial institutions who may have greater resources could change the competitive landscape;
the goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings and capital;
the reputation of the financial services industry could deteriorate, which could adversely affect our ability to access markets for funding and to acquire and retain customers;
our ability to effectively manage credit risk, interest rate risk, market risk, operational risk, legal risk, liquidity risk and regulatory and compliance risk; and
our profitability measures could be adversely affected if we are unable to effectively manage our capital.

You should take into account that forward-looking statements speak only as of the date of this report. Given the described uncertainties and risks, we cannot guarantee our future performance or results of operations and you should not place undue reliance on these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required under federal securities laws.


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PART I

ITEM 1.    BUSINESS
General
Columbia Banking System, Inc. (referred to in this report as “we,” “our,”, “the Company”, and "Columbia") is a registered bank holding company whose wholly owned banking subsidiary is Columbia State Bank (“Columbia Bank” or “the Bank”). Headquartered in Tacoma, Washington, we provide a full range of banking services to small and medium-sized businesses, professionals and individuals. As part of the acquisition of West Coast Bancorp on April 1, 2013, the Company also acquired West Coast Trust Company, Inc. (“West Coast Trust”), an Oregon trust company that provides agency, fiduciary and other related trust services with offices in Portland and Salem, Oregon.
Columbia Bank was established in 1993 to take advantage of commercial banking business opportunities in our principal market area. The opportunities to capture commercial banking market share were due to increased consolidations of banks, primarily through acquisitions by out-of-state bank holding companies, which created dislocation of customers.
At December 31, 2013 Columbia Bank had 142 branch locations in Washington and Oregon. Substantially all of Columbia Bank’s loans, loan commitments and core deposits are within its service areas. Columbia Bank is a Washington state-chartered commercial bank, the deposits of which are insured in whole or in part by the Federal Deposit Insurance Corporation (“FDIC”). Columbia Bank is subject to regulation by the FDIC, the Washington State Department of Financial Institutions Division of Banks, and the Oregon Department of Consumer and Business Services Division of Finance and Corporate Securities. Although Columbia Bank is not a member of the Federal Reserve System, the Board of Governors of the Federal Reserve System has certain supervisory authority over the Company, which can also affect Columbia Bank.
Business Overview
Our goal is to continue to be a leading Pacific Northwest regional community banking company while consistently increasing shareholder value. We continue to build on our reputation for excellent customer service in order to be recognized as the bank of choice for retail deposit customers, small to medium-sized businesses and affluent households in all markets we serve.
We have established a network of 142 branches in Washington and Oregon as of December 31, 2013 from which we intend to grow market share. We operate 65 branches in western Washington, 15 branches in eastern Washington, 52 branches in western Oregon, and 10 branches in eastern Oregon. Washington counties include: Adams, Asotin, Benton, Clallam, Clark, Cowlitz, Franklin, Grant, Jefferson, King, Kitsap, Klickitat, Mason, Pierce, Skagit, Snohomish, Spokane, Thurston, Walla Walla, Whatcom, Whitman and Yakima. Oregon counties include Clackamas, Clatsop, Deschutes, Hood River, Jefferson, Lane, Lincoln, Marion, Multnomah, Polk, Tillamook, Umatilla, Wasco, Washington and Yamhill.
Our branch system funds our lending activities and allows for increased contact with customers, better serving both retail and business depositors. We believe this approach enables us to expand lending activities while attracting a stable core deposit base and enhancing utilization of our full range of products and services. To support our strategy of market penetration and increased profitability while continuing our personalized banking approach, we have invested in experienced banking and administrative personnel and have incurred related costs in the creation of our branch network. Our branch system and other delivery channels are continually evaluated as an important component of ongoing efforts to improve efficiencies without compromising customer service.
Business Strategy
Our business strategy is to provide our customers with the financial sophistication and product depth of a regional banking company while retaining the appeal and service level of a community bank. We continually evaluate our existing business processes while focusing on maintaining asset quality and diverse loan and deposit portfolios, building our strong core deposit base, expanding total revenue and controlling expenses in an effort to increase our return on average equity and gain operational efficiencies. As a result of our strong commitment to highly personalized, relationship-oriented customer service, our varied products, our strategic branch locations and the long-standing community presence of our managers, banking officers and branch personnel, we believe we are well positioned to attract and retain new customers and to increase our market share of loans, deposits, investments, and other financial services. We are committed to increasing market share in the communities we serve by continuing to leverage our existing branch network, adding new branches in key locations and considering business combinations that are consistent with our expansion strategy throughout the Pacific Northwest. We have grown our franchise over the past decade through a combination of acquisitions and organic growth.


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To that end, on April 1, 2013, the Company completed its acquisition of West Coast Bancorp ("West Coast"). The Company acquired approximately $2.63 billion in assets, including $1.41 billion in loans measured at fair value, and approximately $1.88 billion in deposits. See Note 2 to the Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" of this report for further information regarding this acquisition.

Products & Services
We place the highest priority on customer service and assist our customers in making informed decisions when selecting from the products and services we offer. We continuously review our product and service offerings to ensure that we provide our customers with the tools to meet their financial needs. A more complete listing of all the services and products available to our customers can be found on our website: www.columbiabank.com. Some of the core products and services we offer include:
 
Personal Banking
  
Business Banking
 
Wealth Management
•      Checking and Saving Accounts
  
•      Agricultural Lending
 
•      Investment Services through CB Financial Services
•      Consumer Lending
  
•      Cash Management
 
•      Private Banking
•      Electronic Bill Pay
  
•      Checking and Saving Accounts
 
•      Professional Banking
•      Online Banking
  
•      Commercial & Industrial Lending
 
•      Trust Services
•      Mobile Banking
 
•      International Banking
 
 
•      Residential Lending
  
•      Merchant Card Services
 
 
•      VISA® Card Services
  
•      Mobile Banking
 
 
 
  
•      Municipal Lending
 
 
 
  
•      Online Banking
 
 
 
  
•      Real Estate and Real Estate Construction Lending
 
 
 
  
•      Remote Deposit Capture
 
 
 
  
•      SBA Lending
 
 
 
 
•      Small Business Services
 
 
 
  
•      VISA® Card Services
 
 
Personal Banking: We offer our personal banking customers an assortment of account products including noninterest and interest-bearing checking, savings, money market and certificate of deposit accounts. Overdraft protection is also available with direct links to the customer’s checking account. Personal banking customers are also provided with a variety of borrowing products including fixed and variable rate home equity loans and lines of credit, home mortgages for purchases and refinances, personal loans, and other consumer loans. Eligible personal banking customers with checking accounts are provided a Visa® Debit Card which can be used both to make purchases and as an ATM card. A variety of Visa® Credit Cards are also available to eligible personal banking customers.
Online Banking
Columbia Bank’s Premier Personal Online Banking provides simple navigation, access to important information and frequently used features, as well as the foundation for a best-in-class mobile banking solution. Our online banking service, Columbia OnlineTM, provides our personal banking customers with the ability to safely and securely conduct their banking business 24 hours a day, 7 days a week.








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Business Banking: We offer our business banking customers the foundation of a variety of checking, savings, interest bearing money market and certificate of deposit accounts to satisfy all their banking needs. In addition to these core banking products we provide a breadth of services to support the complete financial needs of small and middle market businesses including Wealth Management, Cash Management, Professional Banking, International Banking, VISA Credit Cards, Merchant Services and Commercial Lending.
Cash Management
Columbia Bank’s diversified Cash Management Programs are tailored to meet specific banking needs of each individual business. We combine technology with integrated operations and local expertise for safe, powerful, flexible solutions.  Columbia customers, of all sizes, choose from a full range of transaction and Cash Management tools to gain more control over and make more from their money. Services include Commercial Online Banking, Positive Pay fraud protection, Automated Clearing House (ACH) payments, and Remote Deposit Capture.
Our Cash Management professionals work with businesses to find the best combination of services to meet their needs. This customized, modular approach ensures their business banking operations are cost-effective now, with flexibility for future growth.
 Commercial Lending
We offer a variety of loan products tailored to meet the various needs of business banking customers. Commercial loan products include accounts receivable and inventory financing as well as Small Business Administration ("SBA") financing. We also offer commercial real estate loan products for construction and development or permanent financing. Real estate lending activities have been focused on construction and permanent loans for both owner occupants and investor oriented real estate properties. Commercial banking has been directed toward meeting the credit and related deposit needs of various sized businesses and professional practice organizations operating in our primary market areas.
International Banking
Columbia Bank’s International services division offers a range of financial services to help forward-thinking independent businesses explore global markets and conduct international trade smoothly and expediently. We are proud to provide small and mid-size businesses with the same caliber of expertise and personalized service that national banks usually limit to large businesses. Our experience with foreign currency exchange, letters of credit, foreign collections and trade finance services can help independent companies open the door to new markets and suppliers overseas.
Merchant Card Services
Business clients that use Columbia’s Merchant Card Services have the ability to accept Visa®, MasterCard® and Discover® sales drafts for deposit directly into their business checking account. Merchants are provided with a comprehensive accounting system tailored to their needs, which includes month-to-date credit card deposit information on a transaction statement. Internet access is available, allowing business customers to review merchant statements, authorized, captured, cleared and settled transactions. Columbia offers state-of-the-art point of sale solutions to suit our customers’ needs for card acceptance, including terminals, mobile platforms, virtual terminals and on-line applications.
Business VISA® Debit and Credit Cards
We offer our business banking customers a selection of Visa® Cards including the Business Debit Card that works like a check wherever Visa® is accepted. We partner with Elan Financial Services to offer a variety of Visa® Credit Cards that come with important business features including award-winning expense management tools, free employee cards and added security benefits. A specialty community card for nonprofit organizations and municipalities is also available.


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Wealth Management: We offer tailored solutions to high net-worth individuals, families and professional businesses in the areas of private banking, professional banking, financial services and trust and estate services.
CB Financial Services
Located at Columbia State Bank, CB Financial Services(1), offers a comprehensive array of financial solutions that focuses on wealth management by delivering personalized service and experience through dedicated Financial Advisors serving various geographical areas.
Comprehensive solutions include:
Ÿ Individual and Business Retirement Solutions: 401(k) plans, SEPs, IRAs, SIMPLE, Profit Sharing, Non-Qualified Deferred Compensation Plans, Money Pension Plans, Exit Planning Strategies.
Ÿ Insurance Solutions: Long-Term Care, Disability, Life Insurance (Key Man Life Insurance, Buy-Sell Agreements).
Ÿ Wealth Management: Professional Asset Management, Strategic Asset Allocation, Fixed Income (Bond) Investing (Municipal, Corporate, Government), Exchange Traded Funds (ETFs), Annuities, Mutual Funds, Equities.
Ÿ Financial Planning: Asset Allocation, Net Worth Analysis, Estate Planning & Preservation(2), Education Funding, Wealth Transfer.
Private Banking
Columbia Private Banking offers affluent clientele and their businesses complex financial solutions, such as deposit and cash management services, credit services, and wealth management strategies. Each private banker coordinates a relationship team of experienced financial professionals to meet the unique needs of each discerning customer.
Professional Banking
Columbia Professional Bankers are uniquely qualified to help medical and dental professionals acquire, build and grow their practice. We offer tailored banking and investment solutions delivered by experienced bankers with the industry knowledge necessary to meet their business’s unique needs. No matter what the needs are now or in the years to come, we guide professionals through all their financial options to make their banking as easy and personal as possible.
Trust and Investment Services
Trust services are provided through Columbia Bank Trust and West Coast Trust. We offer a wide range of high quality fiduciary, investment and administrative trust services, coupled with local, personalized attention to the unique requirements of each trust. Services include Personal Trusts, Special Needs (Supplemental) Trusts, Estate Settlement Services, Investment Agency and Charitable Management Services.
Our highly skilled and experienced professionals are fully dedicated to providing the information, diligence and care to help our customers achieve their financial goals and plan for a better future.






__________
(1)
Securities and insurance products are offered through Cetera Investment Services LLC (doing insurance business in CA as CFGIS Insurance Agency), member FINRA/SIPC. Advisory services are offered through Cetera Investment Advisers LLC. Neither firm is affiliated with the financial institution where investment services are offered.
* Investment products are Not FDIC insured * No bank guarantee * Not a deposit * Not insured by any federal government agency * May lose value.
(2)
For a comprehensive review of your personal situation, always consult a tax or legal Advisor. Neither Cetera, nor any of its representatives may give legal or tax advice.


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Competition
Our industry remains highly competitive despite uncertain economic conditions. Several other financial institutions with greater resources compete for banking business in our market areas. These competitors have the ability to make larger loans, finance extensive advertising and promotion campaigns, access international financial markets and allocate their investment assets to regions of highest yield and demand. In addition to competition from other banking institutions, we continue to compete with non-banking companies such as credit unions, brokerage houses and other financial services companies. We compete for deposits, loans, and other financial services by offering our customers similar breadth of products as our larger competitors while delivering a more personalized service level with faster transaction turnaround time.

Market Areas
With the acquisition of West Coast, Columbia ranked seventh in deposit market share(1) in both Washington and Oregon, with 2013 state deposit market share of 3.00% and 3.94% respectively. We continue to pursue initiatives that will improve our operating efficiency through the combination of increased revenues and lower expenses. These initiatives have led to consolidation of branches and operating systems. At year-end we had 142 branches, down from a combined 159 branches in September 2012 when we announced the West Coast acquisition.
Washington: Approximately 26%, or 21 of our 80 Washington branches are located in Pierce County, with an estimated 2013 population of 815,000 residents. At June 30, 2013 our Pierce County branch locations’ share of the county’s total deposit market was over 18%(1), ranking first among our competition. Also located in Pierce County is our Company headquarters in the city of Tacoma and two nearby operational facilities. Some of the most significant contributors to the Pierce County economy are the Port of Tacoma, whose activities are related to more than 43,000 jobs in the county and well over 110,000 in the state of Washington; Joint Base Lewis-McChord is the third largest employer in Pierce County, accounting for over 20% of the County’s total employment, and the manufacturing industry which supplies the Boeing Company.
We operate 12 branch locations in King County, including Seattle, Bellevue and Redmond. King County, which is Washington’s most highly populated county at over two million residents, is a market that has significant growth potential for our Company. At June 30, 2013 we ranked 14th in our share of the King County deposit market or just over 1%(1); and continue to make inroads within this market through the strategic outreach of our banking teams. The north King County economy is primarily made up of the aerospace, construction, computer software and biotechnology industries. South King County, with its close proximity to Pierce County, is considered a natural extension of our primary market area. The economy of south King County is predominantly comprised of residential communities supported by light industrial, retail, aerospace and distributing and warehousing industries.
Columbia ranks first in market share in Pierce County, Bainbridge Island, the Enumclaw Plateau and Cowlitz County(1). We also have locations in Adams, Asotin, Benton, Clallam, Clark, Franklin, Grant, Jefferson, Kitsap, Klickitat, Lewis, Mason, Skagit, Snohomish, Spokane, Thurston, Walla Walla, Whatcom, Whitman, and Yakima counties.
Oregon: With the acquisition of West Coast in April 2013, we significantly expanded our market area in Oregon, bringing our total to 62 branch locations in the state at the end of 2013. Approximately 21%, or 13 of our 62 Oregon branches are located in Clackamas and Multnomah counties. Both counties are part of the Portland metropolitan area, the most populous in the state, and another area with significant growth potential for Columbia. At June 30, 2013, our combined Clackamas and Multnomah branch locations share of the counties’ total deposit market was 7.2%(1), up from 0.78% for the prior year. The principal industries in the metropolitan area include manufacturing, transportation, wholesale and retail trade, and tourism. Oregon has no sales tax, and attracts shoppers from southwest Washington. Approximately 19% of our Oregon branches are in Marion County, the location of Salem, the state capital. Our total deposit market share in this county was 15.1%(1) at June 30, 2013. While government is the county’s primary employer, Marion County is the leader in agricultural production among all other counties in the state.
Columbia ranks first in deposit market share in Clatsop (29%), Hood River (23%), Lincoln (22%) and Wasco counties(1). Other Oregon counties we serve include Clackamas, Deschutes, Jefferson, Lane, Marion, Multnomah, Polk, Tillamook, Umatilla, Washington and Yamhill. Columbia Bank ranks seventh(1) in total deposit market share in Oregon, with just under 4% of the deposit market share.
For additional information regarding our branches, see Item 2. "Properties" of this report.

___________
(1) Source: FDIC Annual Summary of Deposit Report as of June 30, 2013.

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Employees
As of December 31, 2013 the Company employed approximately 1,695 full-time equivalent employees, a 41% increase from 1,198 employees at December 31, 2012. The increase was primarily due to the acquisition of West Coast during the second quarter of 2013. We value our employees and pride ourselves on providing a professional work environment accompanied by comprehensive benefit programs. We are committed to providing flexible and value-added benefits to our employees through a “Total Compensation Philosophy” which incorporates all compensation and benefits. Our continued commitment to employees was demonstrated by Columbia Bank being honored as one of the Puget Sound Business Journal’s “Washington’s Best Workplaces” for the seventh consecutive year.
Available Information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, periodic reports on Form 8-K, proxy statements and other information with the United States Securities and Exchange Commission (“SEC”). The public may obtain copies of these reports and any amendments at the SEC’s Internet site, www.sec.gov.
 Additionally, reports filed with the SEC can be obtained through our website at www.columbiabank.com. These reports are made available through our website as soon as reasonably practicable after they are filed electronically with the SEC. Information contained on our website is not intended to be incorporated by reference into this report.
Supervision and Regulation
The following discussion provides an overview of certain elements of the extensive regulatory framework applicable to the Company and Columbia State Bank, which operates under the name Columbia Bank in Washington and Oregon. This regulatory framework is primarily designed for the protection of depositors, federal deposit insurance funds and the banking system as a whole, rather than specifically for the protection of shareholders. Due to the breadth and growth of this regulatory framework, our costs of compliance continue to increase in order to monitor and satisfy these requirements.
To the extent that this section describes statutory and regulatory provisions, it is qualified by reference to those provisions. These statutes and regulations, as well as related policies, are subject to change by Congress, state legislatures and federal and state regulators. Changes in statutes, regulations or regulatory policies applicable to us, including the interpretation or implementation thereof, could have a material effect on our business or operations. In light of the financial crisis, numerous changes to the statutes, regulations or regulatory policies applicable to us have been made or proposed. The full extent to which these changes will impact our business is not yet known. However, our continued efforts to monitor and comply with new regulatory requirements add to the complexity and cost of our business.
Federal Bank Holding Company Regulation
General.  The Company is a bank holding company as defined in the Bank Holding Company Act of 1956, as amended (“BHCA”), and is therefore subject to regulation, supervision and examination by the Federal Reserve. In general, the BHCA limits the business of bank holding companies to owning or controlling banks and engaging in other activities closely related to banking. The Company must file reports with and provide the Federal Reserve such additional information as it may require. Under the Financial Services Modernization Act of 1999, a bank holding company may apply to the Federal Reserve to become a financial holding company, and thereby engage (directly or through a subsidiary) in certain expanded activities deemed financial in nature, such as securities and insurance underwriting.
Holding Company Bank Ownership. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares; (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company.
Holding Company Control of Nonbanks. With some exceptions, the BHCA also prohibits a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities that, by statute or by Federal Reserve regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks.

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Transactions with Affiliates. Subsidiary banks of a bank holding company are subject to restrictions imposed by the Federal Reserve Act on extensions of credit to the holding company or its subsidiaries, on investments in their securities and on the use of their securities as collateral for loans to any borrower. These regulations and restrictions may limit the Company's ability to obtain funds from Columbia Bank for its cash needs, including funds for payment of dividends, interest and operational expenses.
Tying Arrangements. We are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither the Company nor its subsidiaries may condition an extension of credit to a customer on either (i) a requirement that the customer obtain additional services provided by us; or (ii) an agreement by the customer to refrain from obtaining other services from a competitor.
Support of Subsidiary Banks. Under Federal Reserve policy and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), the Company is expected to act as a source of financial and managerial strength to Columbia Bank. This means that the Company is required to commit, as necessary, resources to support Columbia Bank. Any capital loans a bank holding company makes to its subsidiary banks are subordinate to deposits and to certain other indebtedness of those subsidiary banks.
State Law Restrictions. As a Washington corporation, the Company is subject to certain limitations and restrictions under applicable Washington corporate law. For example, state law restrictions in Washington include limitations and restrictions relating to indemnification of directors, distributions to shareholders, transactions involving directors, officers or interested shareholders, maintenance of books, records, and minutes, and observance of certain corporate formalities.
Federal and State Regulation of Columbia Bank
General. The deposits of Columbia Bank, a Washington chartered commercial bank with branches in Washington and Oregon, are insured by the FDIC. As a result, Columbia Bank is subject to supervision and regulation by the Washington Department of Financial Institutions' Division of Banks and the FDIC. With respect to branches of Columbia Bank in Oregon, the Bank is also subject to supervision and regulation by the Oregon Department of Consumer and Business Services, as well as the FDIC. These agencies have the authority to prohibit banks from engaging in what they believe constitute unsafe or unsound banking practices.
Consumer Protection. The Bank is subject to a variety of federal and state consumer protection laws and regulations that govern its relationship with consumers including laws and regulations that impose certain disclosure requirements and regulate the manner in which we take deposits, make and collect loans, and provide other services. Failure to comply with these laws and regulations may subject the Bank to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil monetary penalties, criminal penalties, punitive damages, and the loss of certain contractual rights.
Community Reinvestment. The Community Reinvestment Act ("CRA") of 1977 requires that, in connection with examinations of financial institutions within their jurisdiction, the Federal Reserve or the FDIC evaluate the record of the financial institution in meeting the credit needs of its local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of the institution. A bank's community reinvestment record is also considered by the applicable banking agencies in evaluating mergers, acquisitions and applications to open a branch or facility.
Insider Credit Transactions. Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders or any related interests of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, and follow credit underwriting procedures that are at least as stringent as those prevailing at the time for comparable transactions with persons not related to the lending bank; and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to insiders. A violation of these restrictions may result in the assessment of substantial civil monetary penalties, regulatory enforcement actions, and other regulatory sanctions.
Regulation of Management. Federal law (i) sets forth circumstances under which officers or directors of a bank may be removed by the institution's federal supervisory agency; (ii) places restraints on lending by a bank to its executive officers, directors, principal shareholders, and their related interests; and (iii) generally prohibits management personnel of a bank from serving as directors or in other management positions of another financial institution whose assets exceed a specified amount or which has an office within a specified geographic area.

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Safety and Soundness Standards. Certain non-capital safety and soundness standards are also imposed upon banks. These standards cover internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation. An institution that fails to meet these standards may be subject to regulatory sanctions, including limitations on growth.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Act”) together with the Dodd-Frank Act relaxed prior interstate branching restrictions under federal law by permitting, subject to regulatory approval, state and federally chartered commercial banks to establish branches in states where the laws permit banks chartered in such states to establish branches. The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area. Federal banking agency regulations prohibit banks from using their interstate branches primarily for deposit production and the federal banking agencies have implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition.
Dividends
The principal source of the Company's cash is from dividends received from Columbia Bank, which are subject to government regulation and limitations. Regulatory authorities may prohibit banks and bank holding companies from paying dividends in a manner that would constitute an unsafe or unsound banking practice or would reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital requirements. Washington law also limits a bank's ability to pay dividends that are greater than the bank's retained earnings without approval of the applicable banking agency. Basel III introduces additional limitations on banks’ ability to issue dividends by imposing a capital conservation buffer requirement.
Capital Adequacy
Regulatory Capital Guidelines. Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. The guidelines are “risk-based,” meaning that they are designed to make capital requirements more sensitive to differences in risk profiles among banks and bank holding companies.
Tier I and Tier II Capital. Under the guidelines, an institution's capital is divided into two broad categories, Tier I capital and Tier II capital. Tier I capital generally consists of common stockholders' equity (including surplus and undivided profits), qualifying non-cumulative perpetual preferred stock, and qualified minority interests in the equity accounts of consolidated subsidiaries. Tier I capital generally excludes goodwill and intangible assets, net unrealized gains and losses on available for sale securities and accumulated net gains and losses on cash flow hedges. Tier II capital generally consists of the allowance for loan losses, hybrid capital instruments and qualifying subordinated debt. The sum of Tier I capital and Tier II capital represents an institution's total capital. The guidelines require that at least 50% of an institution's total capital consist of Tier I capital.
Risk-based Capital Ratios. The adequacy of an institution's capital is gauged primarily with reference to the institution's risk-weighted assets. The guidelines assign risk weightings to an institution's assets in an effort to quantify the relative risk of each asset and to determine the minimum capital required to support that risk. An institution's risk-weighted assets are then compared with its Tier I capital and total capital to arrive at a Tier I risk-based ratio and a total risk-based ratio, respectively. The guidelines provide that an institution must have a minimum Tier I risk-based ratio of 4% and a minimum total risk-based ratio of 8%.
Leverage Ratio. The guidelines also employ a leverage ratio, which is Tier I capital as a percentage of average total assets, less intangibles. The principal objective of the leverage ratio is to constrain the maximum degree to which a bank holding company may leverage its equity capital base. The minimum leverage ratio is 3%; however, for all but the most highly rated bank holding companies and for bank holding companies seeking to expand, regulators expect an additional cushion of at least 1% to 2%.
Prompt Corrective Action. Under the guidelines, an institution is assigned to one of five capital categories depending on its total risk-based capital ratio, Tier I risk-based capital ratio, and leverage ratio, together with certain subjective factors. The categories range from “well capitalized” to “critically undercapitalized.” Institutions that are “undercapitalized” or lower are subject to certain mandatory supervisory corrective actions. At each successively lower capital category, an insured bank is subject to increased restrictions on its operations. During these challenging economic times, the federal banking regulators have actively enforced these provisions. Some of the thresholds have been revised under Basel III, which will become effective for insured depository institutions in 2015.

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Basel III. Basel III updates and revises significantly the current international bank capital accords (so-called “Basel I” and “Basel II”). Basel III is intended to be implemented by participating countries for large, internationally active banks. However, standards consistent with Basel III will be formally implemented in the United States through a series of regulations, some of which may apply to other banks. In addition to the standards agreed to by the Basel III Committee, the U.S. implementing rules also incorporate certain provisions of the Dodd-Frank Act. Among other things, Basel III:
Creates “Tier 1 Common Equity,” a new measure of regulatory capital closer to pure tangible common equity than the present Tier 1 definition;
Establishes a required minimum risk-based capital ratio for Tier 1 Common Equity at 4.5 percent and adds a 2.5 percent capital conservation buffer;
Increases the required Tier 1 Capital risk-based ratio to 6.0 percent and the required total capital risk-based capital ratio to 8.0 percent;
Increases the required leverage ratio to 4.0 percent; and
Allows for permanent grandfathering of non-qualified instruments, such as trust preferred securities, issued prior to May 19, 2010 for depository institutions holding companies with less than $15 billion in total assets as of year-end 2009, subject to a limit of 25 percent of Tier 1 capital.
The full impact of the Basel III rules cannot be determined at this time as many regulations are still being written and the implementation of currently released regulations for banks not subject to the advanced approach rule, such as the Company and Columbia Bank, will not begin until January 1, 2015. Certain aspects of Basel III will be phased in over a period of time after January 1, 2015. Management believes that, as of December 31, 2013, the Company would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect.
Regulatory Oversight and Examination
The Federal Reserve conducts periodic inspections of bank holding companies, which are performed both onsite and offsite. The supervisory objectives of the inspection program are to ascertain whether the financial strength of the bank holding company is being maintained on an ongoing basis and to determine the effects or consequences of transactions between a holding company or its non-banking subsidiaries and its subsidiary banks. For holding companies under $10 billion in assets, the inspection type and frequency varies depending on asset size, complexity of the organization, and the holding company's rating at its last inspection.
Banks are subject to periodic examinations by their primary regulators. Bank examinations have evolved from reliance on transaction testing in assessing a bank's condition to a risk-focused approach. These examinations are extensive and cover the entire breadth of operations of the bank. Generally, safety and soundness examinations occur on an 18-month cycle for banks under $500 million in total assets that are well capitalized and without regulatory issues, and 12-months otherwise. Examinations alternate between the federal and state bank regulatory agency or may occur on a combined schedule. The frequency of consumer compliance and CRA examinations is linked to the size of the institution and its compliance and CRA ratings at its most recent examinations. However, the examination authority of the Federal Reserve and the FDIC allows them to examine supervised banks as frequently as deemed necessary based on the condition of the bank or as a result of certain triggering events.
Corporate Governance and Accounting
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the “Act”) addresses, among other things, corporate governance, auditing and accounting, enhanced and timely disclosure of corporate information, and penalties for non-compliance. Generally, the Act (i) requires chief executive officers and chief financial officers to certify to the accuracy of periodic reports filed with the SEC; (ii) imposes specific and enhanced corporate disclosure requirements; (iii) accelerates the time frame for reporting of insider transactions and periodic disclosures by public companies; (iv) requires companies to adopt and disclose information about corporate governance practices, including whether or not they have adopted a code of ethics for senior financial officers and whether the audit committee includes at least one “audit committee financial expert;” and (v) requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate filings.
Anti-Money Laundering and Anti-terrorism
Bank Secrecy Act and USA Patriot Act of 2001. The Bank Secrecy Act (the "BSA") requires all financial institutions, including banks and securities broker-dealers, to, among other things, establish a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism. It includes a variety of recordkeeping and reporting requirements (such as cash and suspicious activity reporting) as well as due diligence/know-your-customer documentation requirements.

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The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, intended to combat terrorism, was renewed with certain amendments in 2006 (the “Patriot Act”). The Patriot Act further augments and strengthens the requirements set forth in the BSA. The Patriot Act, in relevant part, (i) prohibits banks from providing correspondent accounts directly to foreign shell banks; (ii) imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals; (iii) requires financial institutions to establish an anti-money-laundering compliance program; and (iv) eliminates civil liability for persons who file suspicious activity reports. The Patriot Act also includes provisions providing the government with power to investigate terrorism, including expanded government access to bank account records. Columbia Bank has established compliance programs designed to comply with the BSA and USA Patriot Act requirements.
Financial Services Modernization
Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the "GLBA") brought about significant changes to the laws affecting banks and bank holding companies. Generally, the GLBA (i) repeals historical restrictions on preventing banks from affiliating with securities firms; (ii) provides a uniform framework for the activities of banks, savings institutions and their holding companies; (iii) broadens the activities that may be conducted by national banks and banking subsidiaries of bank holding companies; (iv) provides an enhanced framework for protecting the privacy of consumer information and requires notification to consumers of bank privacy policies; and (v) addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. Bank holding companies that qualify and elect to become financial holding companies can engage in a wider variety of financial activities than permitted under previous law, particularly with respect to insurance and securities underwriting activities.
Deposit Insurance
The Bank's deposits are insured under the Federal Deposit Insurance Act, up to the maximum applicable limits and are subject to deposit insurance assessments designed to tie what banks pay for deposit insurance to the risks they pose. The Dodd-Frank Act broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. In addition, the Dodd-Frank Act raised the minimum designated reserve ratio (the FDIC is required to set the reserve ratio each year) of the Deposit Insurance Fund ("DIF") from 1.15% to 1.35%; required that the DIF meet that minimum ratio of insured deposits by 2020; and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. The FDIC has established a higher reserve ratio of 2% as a long-term goal beyond what is required by statute. The deposit insurance assessments to be paid by Columbia Bank could increase as a result.
The Dodd-Frank Act
As a result of the financial crisis, on July 21, 2010 the Dodd-Frank Act was signed into law. The Dodd-Frank Act significantly changed the bank regulatory structure and is affecting the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies, including the Company and Columbia Bank. The full impact of the Dodd-Frank Act may not be known for years. Some of the provisions of the Dodd-Frank Act that may impact our business are summarized below.
Corporate Governance. The Dodd-Frank Act requires publicly traded companies to provide their shareholders with (i) a non-binding shareholder vote on executive compensation, (ii) a non-binding shareholder vote on the frequency of such vote, (iii) disclosure of “golden parachute” arrangements in connection with specified change in control transactions, and (iv) a non-binding shareholder vote on golden parachute arrangements in connection with these change in control transactions.
Prohibition Against Charter Conversions of Troubled Institutions. The Dodd-Frank Act generally prohibits a depository institution from converting from a state to federal charter, or vice versa, while it is the subject to an enforcement action unless the bank seeks prior approval from its regulator and complies with specified procedures to ensure compliance with the enforcement action.
Consumer Financial Protection Bureau. The Dodd-Frank Act created a new, independent federal agency called the Bureau of Consumer Financial Protection (“CFPB”). The CFPB has broad rulemaking, supervision and enforcement authority for a wide range of consumer protection laws applicable to banks and thrifts with greater than $10 billion in assets. Smaller institutions are subject to certain rules promulgated by the CFPB but will continue to be examined and supervised by their federal banking regulators for compliance purposes. The CFPB has issued numerous additional regulations that will likely become industry best practice and increase the compliance burden of Columbia Bank.

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Repeal of Demand Deposit Interest Prohibition. The Dodd-Frank Act repeals the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.
Proposed Legislation
General. Proposed legislation is introduced in almost every legislative session. Certain of such legislation could dramatically affect the regulation of the banking industry. We cannot predict if any such legislation will be adopted or if it is adopted how it would affect the business of Columbia Bank or the Company. Recent history has demonstrated that new legislation or changes to existing laws or regulations usually results in a greater compliance burden and therefore generally increases the cost of doing business.
Effects of Government Monetary Policy
Our earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve implements national monetary policy for such purposes as curbing inflation and combating recession, but its open market operations in U.S. government securities, control of the discount rate applicable to borrowings from the Federal Reserve, and establishment of reserve requirements against certain deposits, influence the growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and impact of future changes in monetary policies and their impact on us cannot be predicted with certainty.
ITEM 1A.
RISK FACTORS
Our business exposes us to certain risks. The following is a discussion of what we currently believe are the most significant risks and uncertainties that may affect our business, financial condition and future results.
A continued slow or fragile economic recovery could adversely affect our future results of operations or market price of our stock.
The national and global economy and the financial services sector in particular continue to face significant challenges. We cannot accurately predict how quickly or strongly the economy will recover from the recent recession, which has adversely impacted the markets we serve. The U.S. economy has also experienced substantial volatility in the financial markets. Any further deterioration in the economies of the nation as a whole or in our markets would have an adverse effect, which could be material, on our business, financial condition, results of operations and prospects, and could also cause the market price of our stock to decline. While it is impossible to predict how long challenging economic conditions may exist, a slow or fragile recovery could continue to present risks into the future for the industry and our company.
Economic conditions in the market areas we serve may adversely impact our earnings and could increase our credit risk associated with our loan portfolio and the value of our investment portfolio.
Substantially all of our loans are to businesses and individuals in Washington and Oregon, and continuing soft economies in these market areas could have a material adverse effect on our business, financial condition, results of operations and prospects. While housing prices have stabilized, unemployment remains relatively high in both Washington and Oregon. A deterioration in the market areas we serve could result in the following consequences, any of which could have an adverse impact, which could be material, on our business, financial condition, results of operations and prospects:
loan delinquencies may increase;
problem assets and foreclosures may increase;
collateral for loans made may decline further in value, in turn reducing customers’ borrowing power, reducing the value of assets and collateral associated with existing loans;
certain securities within our investment portfolio could become other than temporarily impaired, requiring a write-down through earnings to fair value, thereby reducing equity;
low cost or non-interest bearing deposits may decrease; and
demand for our loan and other products and services may decrease.

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Our loan portfolio mix, which has loans secured by real estate, could result in increased credit risk in a challenging economy.
Our loan portfolio is concentrated in commercial real estate and commercial business loans. These types of loans generally are viewed as having more risk of default than residential real estate loans or certain other types of loans or investments. In fact, the FDIC has issued pronouncements alerting banks of its concern about heavy loan concentrations. Because our loan portfolio contains commercial real estate and commercial business loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in our non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in loan charge-offs, any of which could have a material adverse impact on our results of operations and financial condition.
Any downturn in the economies or real estate values in the markets we serve could have a material adverse effect on both borrowers’ ability to repay their loans and the value of the real property securing such loans. Our ability to recover on defaulted loans would then be diminished, and we would be more likely to suffer losses on defaulted loans.
Our Allowance for Loan and Lease Losses (“ALLL”) may not be adequate to cover future loan losses, which could adversely affect earnings.
We maintain an ALLL in an amount that we believe is adequate to provide for losses inherent in our loan portfolio. While we strive to carefully monitor credit quality and to identify loans that may become non-performing, at any time there are loans in the portfolio that could result in losses, but that have not been identified as non-performing or potential problem loans. We cannot be sure that we will be able to identify deteriorating loans before they become non-performing assets, or that we will be able to limit losses on those loans that have been identified. Additionally, the process for determining the ALLL requires different, subjective and complex judgments about the future impact from current economic conditions that might impair the ability of borrowers to repay their loans. As a result, future significant increases to the ALLL may be necessary.
Future increases to the ALLL may be required based on changes in the composition of the loans comprising the portfolio, deteriorating values in underlying collateral (most of which consists of real estate) and changes in the financial condition of borrowers, such as may result from changes in economic conditions, or as a result of actual future events differing from assumptions used by management in determining the ALLL. Additionally, banking regulators, as an integral part of their supervisory function, periodically review our ALLL. These regulatory agencies may require us to increase the ALLL. Any increase in the ALLL would have an adverse effect, which could be material, on our financial condition and results of operations.
Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition.
Our nonperforming assets adversely affect our net income in various ways. Until economic and market conditions improve to pre-recession levels, we expect to continue to incur additional losses relating to elevated levels of nonperforming loans. We do not record interest income on nonaccrual loans, thereby adversely affecting our income, and increasing loan administration costs. Assets acquired by foreclosure or similar proceedings are recorded at the lower of carrying value or fair value less estimated costs to sell. The valuation of these foreclosed assets is periodically updated and resulting losses, if any, are charged to earnings in the period in which they are identified. An increase in the level of nonperforming assets also increases our risk profile and may impact the capital levels our regulators believe is appropriate in light of such risks. We utilize various techniques such as loan sales, workouts, and restructurings to manage our problem assets. Decreases in the value of these problem assets, the underlying collateral, or in the borrowers’ performance or financial condition, could adversely affect our business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and staff, which can be detrimental to performance of their other responsibilities. We may experience further increases in nonperforming loans in the future.

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Our acquisitions and the integration of acquired businesses may not result in all of the benefits anticipated, and future acquisitions may be dilutive to current shareholders.
We have in the past and may in the future seek to grow our business by acquiring other businesses. Our acquisitions may not have the anticipated positive results, including results relating to: correctly assessing the asset quality of the assets being acquired; the total cost of integration including management attention and resources; the time required to complete the integration successfully; the amount of longer-term cost savings; being able to profitably deploy funds acquired in an acquisition; or the overall performance of the combined entity.
We also may encounter difficulties in obtaining required regulatory approvals and unexpected contingent liabilities can arise from the businesses we acquire. Integration of an acquired business can be complex and costly, sometimes including combining relevant accounting and data processing systems and management controls, as well as managing relevant relationships with employees, clients, suppliers and other business partners. Integration efforts could divert management attention and resources, which could adversely affect our operations or results.
Given the continued market volatility and uncertainty, notwithstanding our loss-sharing arrangements with the FDIC, we may experience increased credit costs or need to take additional markdowns and allowances for loan losses on the assets and loans acquired that could adversely affect our financial condition and results of operations in the future.

We may also experience difficulties in complying with the technical requirements of our loss-sharing agreements with the FDIC, which could result in some assets which we acquire in FDIC-assisted transactions losing their coverage under such agreements.
Acquisitions may also result in business disruptions that cause us to lose customers or cause customers to remove their accounts from us and move their business to competing financial institutions. It is possible that the integration process related to acquisitions could result in the disruption of our ongoing businesses or inconsistencies in standards, controls, procedures and policies that could adversely affect our ability to maintain relationships with clients, customers, depositors and employees. The loss of key employees in connection with an acquisition could adversely affect our ability to successfully conduct our business.
We may engage in future acquisitions involving the issuance of additional common stock and/or cash. Any such acquisitions and related issuances of stock may have a dilutive effect on earnings per share, book value per share or the percentage ownership of current shareholders. The use of cash as consideration in any such acquisitions could impact our capital position and may require us to raise additional capital.
Furthermore, notwithstanding our recent acquisitions, we cannot provide any assurance as to the extent to which we can continue to grow through acquisitions as this will depend on the availability of prospective target opportunities at valuations we find attractive and the competition for such opportunities from other parties.
The long-term success of our acquisition of West Coast will depend upon our ability to successfully continue to integrate the two organizations.
On April 1, 2013, we completed the acquisition of West Coast. The long-term success of our acquisition of West Coast will depend upon, among other things, the ability to continue to successfully integrate the organizations and their cultures. If we are not able to achieve this objective, the anticipated benefits of the acquisition may not be realized fully, or may take longer than expected to be realized.
Our decisions regarding the fair value of assets acquired could be inaccurate, which could materially and adversely affect our business, financial condition, results of operations, and future prospects.
Management makes various assumptions and judgments about the collectability of the acquired loans, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of secured loans. If our assumptions are incorrect, significant earnings volatility can occur and credit loss provisions may be needed to respond to different economic conditions or adverse developments in the acquired loan portfolio. Any increase in future loan losses could have a material adverse effect on our operating results.

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Our management of capital could adversely affect profitability measures, the market price of our common stock, and dilute the holders of our outstanding common stock.
Our capital ratios are significantly higher than regulatory minimums. We may lower our capital ratios through either selective acquisitions that meet our disciplined criteria, organic loan growth, investment in securities, or a combination of all three. Although we are periodically engaged in discussions with other potential acquisition candidates, we are not currently a party to any purchase or merger agreement. There can be no assurance that we will be able to negotiate future acquisitions on terms acceptable to us.
Conversely, there may be circumstances under which it would be prudent to consider alternatives for raising capital to take advantage of significant acquisition opportunities or in response to changing economic conditions. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at the time, which are outside our control, and our financial performance. Any capital raising alternatives could dilute the holders of our outstanding common stock and may adversely affect the market price of our common stock.
If the goodwill we have recorded in connection with acquisitions becomes impaired, it could have an adverse impact on our earnings and shareholders' equity.
Accounting standards require that we account for acquisitions using the acquisition method of accounting. Under acquisition accounting, if the purchase price of an acquired company exceeds the fair value of its net assets, the excess is carried on the acquirer’s balance sheet as goodwill. In accordance with generally accepted accounting principles, our goodwill is evaluated for impairment on an annual basis or more frequently if events or circumstances indicate that a potential impairment exists. Such evaluation may be based on a variety of factors, including the quoted price of our common stock, market prices of common stock of other banking organizations, common stock trading multiples, discounted cash flows, and data from comparable acquisitions. Future evaluations of goodwill may result in impairment and ensuing write-down, which could be material, resulting in an adverse impact on our earnings and shareholders' equity.
Fluctuating interest rates could adversely affect our business.
Significant increases in market interest rates on loans, or the perception that an increase may occur, could adversely affect both our ability to originate new loans and our ability to grow. Conversely, decreases in interest rates could result in an acceleration of loan prepayments. An increase in market interest rates could also adversely affect the ability of our floating-rate borrowers to meet their higher payment obligations. If this occurred, it could cause an increase in nonperforming assets and charge offs, which could adversely affect our business.
Further, our profitability is dependent to a large extent upon net interest income, which is the difference (or “spread”) between the interest earned on loans, securities and other interest-earning assets and the interest paid on deposits, borrowings, and other interest-bearing liabilities. Because of the differences in maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect our interest rate spread, and, in turn, our profitability.
We operate in a highly regulated environment and changes of or increases in, or supervisory enforcement of, banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us.
We are subject to extensive regulation, supervision and examination by federal and state banking authorities. In addition, as a publicly-traded company, we are subject to regulation by the Securities and Exchange Commission. Any change in applicable regulations or federal, state or local legislation or in policies or interpretations or regulatory approaches to compliance and enforcement, income tax laws and accounting principles could have a substantial impact on us and our operations. Changes in laws and regulations may also increase our expenses by imposing additional fees or taxes or restrictions on our operations. Additional legislation and regulations that could significantly affect our powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on our financial condition and results of operations. Failure to appropriately comply with any such laws, regulations or principles could result in sanctions by regulatory agencies or damage to our reputation, all of which could adversely affect our business, financial condition or results of operations.

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In that regard, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in July 2010. Among other provisions, the legislation (i) created a new Bureau of Consumer Financial Protection with broad powers to regulate consumer financial products such as credit cards and mortgages, (ii) created a Financial Stability Oversight Council comprised of the heads of other regulatory agencies, (iii) will lead to new capital requirements from federal banking agencies, (iv) places new limits on electronic debit card interchange fees and (v) requires the Securities and Exchange Commission and national stock exchanges to adopt significant new corporate governance and executive compensation reforms. The new legislation and regulations are expected to increase the overall costs of regulatory compliance. In addition, the CFPB has broad rulemaking, supervision and enforcement authority for a wide range of consumer protection laws applicable to banks with greater than $10 billion in assets.  Should Columbia grow to more than $10 billion in assets it could see a substantial increase in the cost and burden of compliance for Columbia Bank.
Basel III is expected to be phased in between 2013 and 2019. Basel III sets forth more robust global regulatory standards on capital adequacy, qualifying capital instruments, leverage ratios, market liquidity risk, and stress testing, which may be stricter than standards currently in place. The implementation of these new standards could have an adverse impact on our financial position and future earnings due to, among other things, the increased minimum Tier 1 capital ratio requirements that will be implemented. The new legislation and regulations are expected to increase the overall costs of regulatory compliance.
Further, regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws or regulations by financial institutions and holding companies in the performance of their supervisory and enforcement duties. Recently, these powers have been utilized more frequently due to the serious national, regional and local economic conditions we are facing. The exercise of regulatory authority may have a negative impact on our financial condition and results of operations. Additionally, our business is affected significantly by the fiscal and monetary policies of the U.S. federal government and its agencies, including the Federal Reserve Board.
We cannot accurately predict the full effects of recent legislation or the various other governmental, regulatory, monetary and fiscal initiatives which have been and may be enacted on the financial markets, on the Company and on the Bank. The terms and costs of these activities, or any worsening of current financial market and economic conditions, could materially and adversely affect our business, financial condition and results of operations, as well as the trading price of our common stock.
We may be required, in the future, to recognize impairment with respect to investment securities.
Our securities portfolio currently includes securities with unrecognized losses. We may continue to observe declines in the fair market value of these securities. Securities issued by certain states and municipalities have recently come under scrutiny due to concerns about credit quality. Although management believes the credit quality of the Company’s state and municipal securities portfolio to be good, there can be no assurance that the credit quality of these securities will not decline in the future. We evaluate the securities portfolio for any other than temporary impairment each reporting period, as required by generally accepted accounting principles in the United States of America. There can be no assurance, however, that future evaluations of the securities portfolio will not require us to recognize further impairment charges with respect to these and other holdings. For example, it is possible that government-sponsored programs to allow mortgages to be refinanced to lower rates could materially adversely impact the yield on our portfolio of mortgage-backed securities, since a significant portion of our investment portfolio is composed of such securities.
Substantial competition in our market areas could adversely affect us.
Commercial banking is a highly competitive business. We compete with other commercial banks, savings and loan associations, credit unions, finance, insurance and other non-depository companies operating in our market areas. We also experience competition, especially for deposits, from Internet-based banking institutions, which have grown rapidly in recent years. We are subject to substantial competition for loans and deposits from other financial institutions. Some of our competitors are not subject to the same degree of regulation and restriction as we are and/or have greater financial resources than we do. Some of our competitors have severe liquidity issues, which could impact the pricing of deposits in our marketplace. If we are unable to effectively compete in our market areas, our business, results of operations and prospects could be adversely affected.

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We may not be able to attract or retain key employees.
We expect our future success to be driven in large part by the relationships maintained with our clients by our executives and other key employees. The unexpected loss of key employees could have a material adverse effect on our business and possibly result in reduced revenues and earnings.
We strive to attract and retain key executives, senior management and staff. Competition to attract the best professionals in the industry can be intense which may limit our ability to hire new professionals. Revenues and net income could be adversely affected in the event of the unexpected loss of key personnel.
Changes in accounting standards could materially impact our financial statements.
From time to time the Financial Accounting Standards Board and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be very difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements.
There can be no assurance as to the level of dividends we may pay on our common stock.
Holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so and there may be circumstances under which we would eliminate our common stock dividend in the future. This could adversely affect the market price of our common stock.
Our ability to sustain or improve upon existing performance is dependent upon our ability to respond to technological change, and we may have fewer resources than some of our competitors to continue to invest in technological improvements.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands for convenience, as well as to create additional efficiencies in our operations. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. There can be no assurance that we will be able to successfully manage the risks associated with our increased dependency on technology.
A failure in or breach of our operational or security systems, or those of our third party service providers, including as a result of cyber attacks, could disrupt our business, result in unintentional disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses.
As a financial institution, our operations rely heavily on the secure processing, storage and transmission of confidential and other information on our computer systems and networks. Any failure, interruption or breach in security or operational integrity of these systems could result in failures or disruptions in our online banking system, customer relationship management, general ledger, deposit and loan servicing and other systems. The security and integrity of our systems could be threatened by a variety of interruptions or information security breaches, including those caused by computer hacking, cyber attacks, electronic fraudulent activity or attempted theft of financial assets. We cannot assure you that any such failures, interruption or security breaches will not occur, or if they do occur, that they will be adequately addressed. While we have certain protective policies and procedures in place, the nature and sophistication of the threats continue to evolve. We may be required to expend significant additional resources in the future to modify and enhance our protective measures.
Additionally, we face the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate our business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, our operational systems. Any failures, interruptions or security breaches in our information systems could damage our reputation, result in a loss of customer business, result in a violation of privacy or other laws, or expose us to civil litigation, regulatory fines or losses not covered by insurance.

17

Table of Contents

Significant legal or regulatory actions could subject us to substantial uninsured liabilities and reputational harm and have a material adverse effect on our business and results of operations.
We are from time to time subject to claims and proceedings related to our operations. These claims and legal actions, which could include supervisory or enforcement actions by our regulators, or criminal proceedings by prosecutorial authorities, could involve large monetary claims, including civil money penalties or fines imposed by government authorities, and significant defense costs. To mitigate the cost of some of these claims, we maintain insurance coverage in amounts and with deductibles that we believe are appropriate for our operations. However, our insurance coverage does not cover any civil money penalties or fines imposed by government authorities and may not cover all other claims that might be brought against us or continue to be available to us at a reasonable cost. As a result, we may be exposed to substantial uninsured liabilities, which could adversely affect our business, prospects, results of operations and financial condition. Substantial legal liability or significant regulatory action against us could have material adverse financial effects or cause significant reputational harm to us, which in turn could seriously harm our business prospects.
We are subject to a variety of operational risks, including reputational risk, legal risk and compliance risk, and the risk of fraud or theft by employees or outsiders, which may adversely affect our business and results of operations.
We are exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, and unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems.
If personal, non-public, confidential or proprietary information of customers in our possession were to be mishandled or misused, we could suffer significant regulatory consequences, reputational damage and financial loss. Such mishandling or misuse could include, for example, if such information were erroneously provided to parties who are not permitted to have the information, either by fault of our systems, employees, or counterparties, or where such information is intercepted or otherwise inappropriately taken by third parties.
Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon automated systems to record and process transactions and our large transaction volume may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. We also may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control (for example, computer viruses or electrical or telecommunications outages, or natural disasters, disease pandemics or other damage to property or physical assets) which may give rise to disruption of service to customers and to financial loss or liability. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) and to the risk that we (or our vendors’) business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in a diminished ability of us to operate our business (for example, by requiring us to expend significant resources to correct the defect), as well as potential liability to clients, reputational damage and regulatory intervention, which could adversely affect our business, financial condition and results of operations, perhaps materially.
We have various anti-takeover measures that could impede a takeover.
Our articles of incorporation include certain provisions that could make it more difficult to acquire us by means of a tender offer, a proxy contest, merger or otherwise. These provisions include certain non-monetary factors that our board of directors may consider when evaluating a takeover offer, and a requirement that any “Business Combination” be approved by the affirmative vote of no less than 66 2/3% of the total shares attributable to persons other than a “Control Person.” These provisions may have the effect of lengthening the time required for a person to acquire control of us through a tender offer, proxy contest or otherwise, and may deter any potentially hostile offers or other efforts to obtain control of us. This could deprive our shareholders of opportunities to realize a premium for their Columbia common stock, even in circumstances where such action is favored by a majority of our shareholders.
ITEM 1B.    UNRESOLVED STAFF COMMENTS
None.

18

Table of Contents

ITEM 2.     PROPERTIES
The Company’s principal Columbia Bank properties include our corporate headquarters which is located at 13th & A Street, Tacoma, Washington, and two operations facilities in Lakewood, Washington.
The Company’s branch network as of December 31, 2013 is made up of 142 branches located throughout several Washington and Oregon counties compared to 99 branches at December 31, 2012. The number of branches per county, as well as whether it is owned or operated under a lease agreement is detailed in the following table.
 
 
Number of
Branches
 
Occupancy Type
County
 
Owned
 
Leased
Pierce
 
21

 
16

 
5

King
 
13

 
8

 
5

Kitsap
 
6

 
3

 
3

Snohomish
 
5

 
5

 

Thurston
 
4

 
3

 
1

Skagit
 
3

 
3

 

Clark
 
3

 

 
3

Other Washington counties
 
25

 
23

 
2

Total Washington branches
 
80

 
61

 
19

Marion
 
12

 
4

 
8

Washington
 
9

 
1

 
8

Clackamas
 
7

 
1

 
6

Multnomah
 
6

 
1

 
5

Lincoln
 
5

 
3

 
2

Clatsop
 
4

 
4

 

Deschutes
 
3

 
2

 
1

Polk
 
3

 
2

 
1

Yamhill
 
3

 
2

 
1

Other Oregon counties
 
10

 
8

 
2

Total Oregon branches
 
62

 
28

 
34

Total Columbia Bank branches
 
142

 
89

 
53

For additional information concerning our premises and equipment and lease obligations, see Notes 9 and 16, respectively, to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
ITEM 3.    LEGAL PROCEEDINGS
On June 24, 2009, West Coast Trust, which as a result of our recent acquisition of West Coast Bancorp (“West Coast”) is now a subsidiary of the Company, was served with an Objection to Personal Representative's Petition and Petition for Surcharge of Personal Representative in Linn County Circuit Court. The petition was filed by the beneficiaries of the estate of Archie Q. Adams, for which West Coast Trust acts as the personal representative. The petitioners allege a breach of fiduciary duty with respect to West Coast Trust's prior sale of real property owned by the Adams estate and sought relief in the form of a surcharge to West Coast Trust of $215.6 million, the amount of the alleged loss to the estate. West Coast Trust filed a motion to dismiss on July 2, 2009, which was granted in a letter ruling dated September 15, 2009. Petitioners appealed and briefs have been filed. Appeals Court oral arguments were heard in November, 2012, and the Company has not yet received the Appeals Court decision. The Company believes the appeal and underlying petition are without merit.

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On October 3, 2012, a class action complaint was filed in the Circuit Court of the State of Oregon for the County of Multnomah against West Coast, its directors, and the Company challenging the merger: Gary M. Klein v. West Coast Bancorp, et al., Case No. 1210-12431. The complaint names as defendants West Coast, all of the former members of West Coast's board of directors, and the Company. The complaint alleges that the West Coast directors breached their fiduciary duties to West Coast and West Coast shareholders by agreeing to the merger at an unfair price. The complaint also alleges that the merger was being driven by an unfair process, that the directors approved provisions in the merger agreement that constitute preclusive deal protection devices, that certain large shareholders of West Coast were using the merger as an opportunity to sell their illiquid holdings in West Coast, and that West Coast directors and officers would obtain personal benefits from the merger not shared equally by other West Coast shareholders. The complaint further alleges that West Coast and the Company aided and abetted the directors' alleged breaches of their fiduciary duties. Thereafter, a second lawsuit challenging the merger was filed in the Circuit Court of the State of Oregon for Clackamas County: Leoni v. West Coast Bancorp et al., Case No. CV12100728. The two lawsuits have been consolidated for all purposes in the Circuit Court of the State of Oregon for Multnomah County.
While the Company believes that the claims in both complaints were without merit, the Company agreed, in order to avoid the expense and burden of continued litigation and pursuant to the terms of the proposed settlement, to make certain supplemental disclosures in the joint proxy statement/prospectus related to the merger. Accordingly, prior to the closing of the merger on April 1, 2013, West Coast and the other defendants in the two actions entered into a memorandum of understanding to settle both actions. Pursuant to the memorandum of understanding, Plaintiffs’ counsel has conducted certain confirmatory discovery, and the Company approved the form of a stipulation of settlement, which has been executed by the parties. The stipulation of settlement is subject to customary conditions, including court approval following notice to West Coast's stockholders. On February 18, 2014, the Circuit Court of the State of Oregon for Multnomah County conducted a final hearing to consider the fairness, reasonableness, and adequacy of the settlement and entered an order approving settlement. The order resolves and releases all claims in all actions that were or could have been brought challenging any aspect of the merger, the merger agreement, and any disclosure made in connection therewith, pursuant to terms that will be disclosed to stockholders before final approval of the settlement.
ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable


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Table of Contents

PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Quarterly Common Stock Prices and Dividends
Our common stock is traded on the NASDAQ Global Select Market under the symbol “COLB”. Quarterly high and low sales prices and dividend information for the last two years are presented in the following table. The prices shown do not include retail mark-ups, mark-downs or commissions:
 
 
 
 
 
 
 
Cash Dividends Declared
2013
 
High
 
Low
 
Regular
 
Special
 
Total Cash Dividends Declared
First quarter
 
$
22.08

 
$
18.27

 
$
0.10

 
$

 
$
0.10

Second quarter
 
$
23.88

 
$
19.85

 
0.10

 

 
0.10

Third quarter
 
$
25.59

 
$
23.17

 
0.10

 

 
0.10

Fourth quarter
 
$
28.37

 
$
23.53

 
0.11

 

 
0.11

For the year
 
$
28.37

 
$
18.27

 
$
0.41

 
$

 
$
0.41

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash Dividends Declared
2012
 
High
 
Low
 
Regular
 
Special
 
Total Cash Dividends Declared
First quarter
 
$
23.35

 
$
19.65

 
$
0.08

 
$
0.29

 
$
0.37

Second quarter
 
$
23.52

 
$
17.38

 
0.08

 
0.14

 
0.22

Third quarter
 
$
19.85

 
$
17.22

 
0.09

 
0.21

 
0.30

Fourth quarter
 
$
19.15

 
$
16.18

 
0.09

 

 
0.09

For the year
 
$
23.52

 
$
16.18

 
$
0.34

 
$
0.64

 
$
0.98

On December 31, 2013, the last sale price for our stock on the NASDAQ Global Select Market was $27.49. At January 31, 2014, the number of shareholders of record was 2,358. This figure does not represent the actual number of beneficial owners of common stock because shares are frequently held in “street name” by securities dealers and others for the benefit of individual owners who may vote the shares.
At December 31, 2013, a total of 116,197 stock options were outstanding. Additional information about stock options and other equity compensation plans is included in Note 21 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
The payment of future cash dividends is at the discretion of our Board and subject to a number of factors, including results of operations, general business conditions, growth, financial condition and other factors deemed relevant to capital management strategies by the Board of Directors. In addition, the payment of cash dividends is subject to Federal regulatory requirements for capital levels and other restrictions. In this regard, current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters.
Subsequent to year end, on January 23, 2014 the Company declared a quarterly cash dividend of $0.12 per share payable on February 19, 2014, to shareholders of record at the close of business on February 5, 2014.


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Table of Contents

Equity Compensation Plan Information
The following table provides information as of December 31, 2013, regarding securities issued and to be issued under our equity compensation plans that were in effect during 2013:
 
 
Year ended December 31, 2013
 
 
Number of Shares to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights (1)(2)
 
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
 
Number of Shares
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (3)
Equity compensation plans approved by security holders
 
116,197

 
$
65.01

 
945,704

Equity compensation plans not approved by security holders
 

 

 

 __________
(1)
Includes shares to be issued upon exercise of options under plans of West Coast Bancorp, Bank of Astoria, Mountain Bank Holding Company and Town Center Bancorp, which were assumed as a result of their acquisitions.
(2)
Consists of shares that are subject to outstanding options.
(3)
Includes 369,792 shares available for future issuance under the stock option and equity compensation plan and 575,912 shares available for purchase under the Employee Stock Purchase Plan as of December 31, 2013.

The following table provides information about repurchases of common stock by the Company during the quarter ended December 31, 2013:
Period
 
Total Number of Common Shares Purchased (1)
 
Average Price Paid per Common Share
 
Total number of Shares Purchased as Part of Publicly Announced Plan (2)
 
Maximum Number of Remaining Shares That May Be Purchased at Period End Under the Plan
10/1/2013 - 10/31/2013
 
1,531

 
$
24.70

 

 
2,000,000

11/1/2013 - 11/30/2013
 

 

 

 
2,000,000

12/1/2013 - 12/31/2013
 

 

 

 
2,000,000

 
 
1,531

 
$
24.70

 

 
 
(1)
All common share repurchases during the quarter relate to shares withheld to pay taxes due upon vesting of restricted stock. During the three months ended December 31, 2013, no shares were repurchased pursuant to the Company’s publicly announced corporate stock repurchase plan described in (2) below.
(2)
The repurchase plan, which was approved by the Board and announced in 2011, originally authorized the repurchase of up to 2 million shares.



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Table of Contents

Five-Year Stock Performance Graph
The following graph shows a five-year comparison of the total return to shareholders of Columbia’s common stock, the Nasdaq Composite Index (which is a broad nationally recognized index of stock performance by companies listed on the Nasdaq Stock Market), the SNL Bank NASDAQ (comprised of banks listed on the NASDAQ exchange) and the SNL Columbia Peer Group (comprised of banks with assets of $1 billion to $5 billion, all of which are located in the western United States). As the Company has recently increased in total assets beyond the $1 to $5 billion range, the comparison to the SNL Columbia Peer Group is being replaced by a comparison to the SNL Bank NASDAQ.
The definition of total return includes appreciation in market value of the stock as well as the actual cash and stock dividends paid to shareholders. The graph assumes that the value of the investment in Columbia’s common stock, the NASDAQ Composite, the SNL Bank NASDAQ and the SNL Columbia Peer Group was $100 on December 31, 2008, and that all dividends were reinvested.
 
Index
 
Period Ending
12/31/2008
 
12/31/2009
 
12/31/2010
 
12/31/2011
 
12/31/2012
 
12/31/2013
Columbia Banking System, Inc.
 
100.00

 
136.52

 
178.07

 
165.46

 
161.94

 
252.60

NASDAQ Composite
 
100.00

 
145.36

 
171.74

 
170.38

 
200.63

 
281.22

SNL Bank NASDAQ
 
100.00

 
81.12

 
95.71

 
84.92

 
101.22

 
145.48

SNL Columbia Peer Group
 
100.00

 
86.58

 
93.69

 
76.46

 
95.84

 
128.04

Source: SNL Financial LC, Charlottesville, VA

23

Table of Contents

ITEM 6.     SELECTED FINANCIAL DATA
Five-Year Summary of Selected Consolidated Financial Data (1) 
 
 
2013
 
2012
 
2011
 
2010
 
2009
 
 
(dollars in thousands except per share amounts)
For the Year
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
296,935

 
$
248,504

 
$
251,271

 
$
185,879

 
$
143,035

Interest expense
 
$
5,840

 
$
9,577

 
$
14,535

 
$
21,092

 
$
27,683

Net interest income
 
$
291,095

 
$
238,927

 
$
236,736

 
$
164,787

 
$
115,352

Provision for loan and lease losses, excluding covered loans
 
$
3,160

 
$
13,475

 
$
7,400

 
$
41,291

 
$
63,500

Noninterest income (loss)
 
$
26,700

 
$
27,058

 
$
(9,283
)
 
$
52,781

 
$
29,690

Noninterest expense
 
$
230,886

 
$
162,913

 
$
155,759

 
$
137,147

 
$
94,488

Net income (loss)
 
$
60,016

 
$
46,143

 
$
48,037

 
$
30,784

 
$
(3,968
)
Net income (loss) applicable to common shareholders
 
$
59,984

 
$
46,143

 
$
48,037

 
$
25,837

 
$
(8,371
)
Per Common Share
 
 
 
 
 
 
 
 
 
 
Earnings (loss) (Basic)
 
$
1.24

 
$
1.16

 
$
1.22

 
$
0.73

 
$
(0.38
)
Earnings (loss) (Diluted)
 
$
1.21

 
$
1.16

 
$
1.21

 
$
0.72

 
$
(0.38
)
Book Value
 
$
20.50

 
$
19.25

 
$
19.23

 
$
17.97

 
$
16.13

Averages
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
6,558,517

 
$
4,826,283

 
$
4,509,010

 
$
4,248,590

 
$
3,084,421

Interest-earning assets
 
$
5,754,543

 
$
4,246,724

 
$
3,871,424

 
$
3,583,728

 
$
2,783,862

Loans, including covered loans
 
$
4,140,826

 
$
2,900,520

 
$
2,607,266

 
$
2,485,650

 
$
2,124,574

Securities
 
$
1,474,744

 
$
1,011,294

 
$
928,891

 
$
720,152

 
$
584,028

Deposits
 
$
5,420,577

 
$
3,875,666

 
$
3,541,399

 
$
3,270,923

 
$
2,378,176

Core deposits
 
$
5,146,776

 
$
3,609,467

 
$
3,218,425

 
$
2,828,246

 
$
1,945,039

Shareholders’ equity
 
$
979,099

 
$
761,185

 
$
730,726

 
$
668,469

 
$
462,127

Financial Ratios
 
 
 
 
 
 
 
 
 
 
Net interest margin
 
5.16
%
 
5.77
%
 
6.27
%
 
4.76
%
 
4.33
 %
Return on average assets
 
0.92
%
 
0.96
%
 
1.07
%
 
0.72
%
 
(0.13
)%
Return on average common equity
 
6.14
%
 
6.06
%
 
6.57
%
 
4.15
%
 
(2.16
)%
Efficiency ratio (tax equivalent) (2)
 
66.16
%
 
69.17
%
 
70.68
%
 
67.56
%
 
61.53
 %
Average equity to average assets
 
14.93
%
 
15.77
%
 
16.21
%
 
15.73
%
 
14.98
 %
At Year End
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
7,161,582

 
$
4,906,335

 
$
4,785,945

 
$
4,256,363

 
$
3,200,930

Covered assets, net
 
$
289,790

 
$
407,648

 
$
560,055

 
$
531,504

 
$

Loans, excluding covered loans
 
$
4,219,451

 
$
2,525,710

 
$
2,348,371

 
$
1,915,754

 
$
2,008,884

Allowance for noncovered loan and lease losses
 
$
52,280

 
$
52,244

 
$
53,041

 
$
60,993

 
$
53,478

Securities
 
$
1,696,640

 
$
1,023,484

 
$
1,050,325

 
$
781,774

 
$
631,645

Deposits
 
$
5,959,475

 
$
4,042,085

 
$
3,815,529

 
$
3,327,269

 
$
2,482,705

Core deposits
 
$
5,696,357

 
$
3,802,366

 
$
3,510,435

 
$
2,998,482

 
$
2,072,821

Shareholders’ equity
 
1,053,249

 
764,008

 
759,338

 
706,878

 
528,139

Nonperforming Assets, Excluding Covered Assets
 
 
 
 
 
 
 
 
 
 
Nonaccrual loans
 
34,015

 
37,395

 
53,483

 
89,163

 
110,431

Other real estate owned and other personal property owned
 
23,918

 
11,108

 
31,905

 
30,991

 
19,037

Total nonperforming assets, excluding covered assets
 
$
57,933

 
$
48,503

 
$
85,388

 
$
120,154

 
$
129,468

Nonperforming loans to year end loans, excluding covered loans
 
0.81
%
 
1.48
%
 
2.28
%
 
4.65
%
 
5.50
 %
Nonperforming assets to year end assets, excluding covered assets
 
0.84
%
 
1.08
%
 
2.02
%
 
3.23
%
 
4.04
 %
Allowance for loan and lease losses to year end loans, excluding covered loans (3)
 
1.24
%
 
2.07
%
 
2.26
%
 
3.18
%
 
2.66
 %
Allowance for loan and lease losses to nonperforming loans, excluding covered loans
 
153.70
%
 
139.71
%
 
99.17
%
 
68.41
%
 
48.43
 %
Net loan charge-offs
 
$
3,124

 
$
14,272

 
$
15,352

 
$
33,776

 
$
52,769

Other nonfinancial data
 
 
 
 
 
 
 
 
 
 
Full-time equivalent employees
 
1,695

 
1,198

 
1,256

 
1,092

 
715

Banking branches
 
142

 
99

 
102

 
84

 
52

 __________
(1)
These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report.
(2)
Noninterest expense, excluding net benefit of operation of other real estate and other personal property, FDIC clawback liability and acquisition-related expenses, divided by the sum of (1)net interest income on a tax equivalent basis, excluding incremental accretion income on the acquired loan portfolio, premium amortization on acquired securities, interest reversals on nonaccrual loans, and prepayment expenses on FHLB advances, and (2)noninterest income on a tax equivalent basis, excluding gain/loss on investment securities and the change in FDIC loss-sharing asset.
(3)
The allowance for loan and lease losses to nonperforming loans, excluding covered loans was impacted by including recently acquired loans in the ratio, which had a fair value discount applied as of the acquisition date. Please refer to the section titled “Allowance for Loan and Lease Losses and Unfunded Commitments and Letters of Credit” in
Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation, of this report for further discussion.

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Table of Contents

.
Consolidated Five-Year Financial Data (1)
 
 
 
Years ended December 31,
2013
 
2012
 
2011
 
2010
 
2009
(in thousands, except per share amounts)
Interest Income:
 
 
 
 
 
 
 
 
 
 
Loans
 
$
266,284

 
$
219,433

 
$
218,420

 
$
157,292

 
$
117,062

Taxable securities
 
20,459

 
18,276

 
21,870

 
18,276

 
17,300

Tax-exempt securities
 
9,837

 
9,941

 
10,142

 
9,348

 
8,458

Federal funds sold and deposits with banks
 
355

 
854

 
839

 
963

 
215

Total interest income
 
296,935

 
248,504

 
251,271

 
185,879

 
143,035

Interest Expense:
 
 
 
 
 
 
 
 
 
 
Deposits
 
3,962

 
5,887

 
10,478

 
16,733

 
23,250

Federal Home Loan Bank advances
 
(404
)
 
2,608

 
2,980

 
2,841

 
2,759

Prepayment charge on Federal Home Loan Bank advances
 
1,548

 
603

 

 

 

Long-term obligations
 

 

 
579

 
1,029

 
1,197

Other borrowings
 
734

 
479

 
498

 
489

 
477

Total interest expense
 
5,840

 
9,577

 
14,535

 
21,092

 
27,683

Net Interest Income
 
291,095

 
238,927

 
236,736

 
164,787

 
115,352

Provision for noncovered loan and lease losses
 
3,160

 
13,475

 
7,400

 
41,291

 
63,500

Provision (recapture) for losses on covered loans
 
(3,261
)
 
25,892

 
(1,648
)
 
6,055

 

Net interest income after provision
 
291,196

 
199,560

 
230,984

 
117,441

 
51,852

Noninterest income (loss)
 
26,700

 
27,058

 
(9,283
)
 
52,781

 
29,690

Noninterest expense
 
230,886

 
162,913

 
155,759

 
137,147

 
94,488

Income (loss) before income taxes
 
87,010

 
63,705

 
65,942

 
33,075

 
(12,946
)
Provision (benefit) for income taxes
 
26,994

 
17,562

 
17,905

 
2,291

 
(8,978
)
Net Income (Loss)
 
$
60,016

 
$
46,143

 
$
48,037

 
$
30,784

 
$
(3,968
)
Less: Dividends on preferred stock
 
32

 

 

 
4,947

 
4,403

Net Income (Loss) Applicable to Common Shareholders
 
$
59,984

 
$
46,143

 
$
48,037

 
$
25,837

 
$
(8,371
)
Per Common Share
 
 
 
 
 
 
 
 
 
 
Earnings (loss) basic
 
$
1.24

 
$
1.16

 
$
1.22

 
$
0.73

 
$
(0.38
)
Earnings (loss) diluted
 
$
1.21

 
$
1.16

 
$
1.21

 
$
0.72

 
$
(0.38
)
Average number of common shares outstanding (basic)
 
47,993

 
39,260

 
39,103

 
35,209

 
21,854

Average number of common shares outstanding (diluted)
 
49,051

 
39,263

 
39,180

 
35,392

 
21,854

Total assets at year end
 
$
7,161,582

 
$
4,906,335

 
$
4,785,945

 
$
4,256,363

 
$
3,200,930

Long-term obligations
 
$

 
$

 
$

 
$
25,735

 
$
25,669

Cash dividends declared per common share
 
$
0.41

 
$
0.98

 
$
0.27

 
$
0.04

 
$
0.07

 __________
(1)
These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this report.


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Table of Contents

Selected Quarterly Financial Data (1)
The following table presents selected unaudited consolidated quarterly financial data for each quarter of 2013 and 2012. The information contained in this table reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods.
 
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Year Ended
December 31,
 
 
(in thousands, except per share amounts)
2013
 
 
 
 
 
 
 
 
 
 
Total interest income
 
$
54,761

 
$
82,268

 
$
81,599

 
$
78,307

 
$
296,935

Total interest expense
 
1,279

 
2,279

 
1,184

 
1,098

 
5,840

Net interest income
 
53,482

 
79,989

 
80,415

 
77,209

 
291,095

Provision for noncovered loan and lease losses
 
(1,000
)
 
2,000

 
4,260

 
(2,100
)
 
3,160

Provision (recapture) for losses on covered loans
 
980

 
(1,712
)
 
(947
)
 
(1,582
)
 
(3,261
)
Noninterest income (loss)
 
1,658

 
6,808

 
7,622

 
10,612

 
26,700

Noninterest expense
 
38,049

 
64,504

 
64,714

 
63,619

 
230,886

Income before income taxes
 
17,111

 
22,005

 
20,010

 
27,884

 
87,010

Provision for income taxes
 
4,935

 
7,414

 
6,734

 
7,911

 
26,994

Net income
 
$
12,176

 
$
14,591

 
$
13,276

 
$
19,973

 
$
60,016

Per Common Share (2)
 
 
 
 
 
 
 
 
 
 
Earnings (basic)
 
$
0.31

 
$
0.28

 
$
0.26

 
$
0.39

 
$
1.24

Earnings (diluted)
 
$
0.31

 
$
0.28

 
$
0.25

 
$
0.38

 
$
1.21

2012
 
 
 
 
 
 
 
 
 
 
Total interest income
 
$
69,712

 
$
62,114

 
$
59,469

 
$
57,209

 
$
248,504

Total interest expense
 
2,649

 
2,413

 
2,204

 
2,311

 
9,577

Net interest income
 
67,063

 
59,701

 
57,265

 
54,898

 
238,927

Provision for noncovered loan and lease losses
 
4,500

 
3,750

 
2,875

 
2,350

 
13,475

Provision (recapture) for losses on covered loans
 
15,685

 
11,688

 
(3,992
)
 
2,511

 
25,892

Noninterest income (loss)
 
9,574

 
11,828

 
(911
)
 
6,567

 
27,058

Noninterest expense
 
44,352

 
39,825

 
40,936

 
37,800

 
162,913

Income before income taxes
 
12,100

 
16,266

 
16,535

 
18,804

 
63,705

Provision for income taxes
 
3,198

 
4,367

 
4,655

 
5,342

 
17,562

Net income
 
$
8,902

 
$
11,899

 
$
11,880

 
$
13,462

 
$
46,143

Per Common Share (2)
 
 
 
 
 
 
 
 
 
 
Earnings (basic)
 
$
0.22

 
$
0.30

 
$
0.30

 
$
0.34

 
$
1.16

Earnings (diluted)
 
$
0.22

 
$
0.30

 
$
0.30

 
$
0.34

 
$
1.16

 __________
(1)
These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this report.
(2)
Due to averaging of shares, quarterly earnings per share may not add up to the totals reported for the full year.



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Table of Contents

ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
This discussion should be read in conjunction with our Consolidated Financial Statements and related notes in “Item 8. Financial Statements and Supplementary Data” of this report. In the following discussion, unless otherwise noted, references to increases or decreases in average balances in items of income and expense for a particular period and balances at a particular date refer to the comparison with corresponding amounts for the period or date for the previous year.
Critical Accounting Policies
We have established certain accounting policies in preparing our Consolidated Financial Statements that are in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are presented in Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report. Certain of these policies require the use of judgments, estimates and economic assumptions which may prove inaccurate or are subject to variation that may significantly affect our reported results of operations and financial position for the periods presented or in future periods. Management believes that the judgments, estimates and economic assumptions used in the preparation of the Consolidated Financial Statements are appropriate given the factual circumstances at the time. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our consolidated financial statements.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses (“ALLL”) is established to absorb known and inherent losses in our loan and lease portfolio. Our methodology in determining the appropriate level of the ALLL includes components for a general valuation allowance in accordance with the Contingencies topic of the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”), a specific valuation allowance in accordance with the Receivables topic of the FASB ASC and an unallocated component. Both quantitative and qualitative factors are considered in determining the appropriate level of the ALLL. Quantitative factors include historical loss experience, delinquency and charge-off trends and the evaluation of specific loss estimates for problem loans. Qualitative factors include existing general economic and business conditions in our market areas as well as the duration of the current business cycle. Changes in any of the factors mentioned could have a significant impact on our calculation of the ALLL. Our ALLL policy and the judgments, estimates and economic assumptions involved are described in greater detail in the “Allowance for Noncovered Loan and Lease Losses and Unfunded Commitments and Letters of Credit” section of this discussion and in Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
Business Combinations
The Company applies the acquisition method of accounting for business combinations. Under the acquisition method, the acquiring entity in a business combination recognizes 100 percent of the assets acquired and liabilities assumed at their acquisition date fair values. Management utilizes prevailing valuation techniques appropriate for the asset or liability being measured in determining these fair values. Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized. Acquisition-related costs are expensed as incurred.
Acquired Impaired Loans
Loans acquired at a discount for which it is probable that all contractual payments will not be received are generally accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). In addition, certain acquired loans with evidence of deteriorated credit quality may be accounted for under this topic even if it is not yet probable that all contractual payments will not be received. These loans are recorded at fair value at the time of acquisition. Estimated credit losses are included in the determination of fair value, therefore, an allowance for loan losses is not recorded on the acquisition date. The excess of expected cash flows at acquisition over the initial investment in acquired loans (“accretable yield”) is recorded as interest income over the life of the loans if the timing and amount of the future cash flows is reasonably estimable. Subsequent to acquisition, the Company aggregates individual loans with common risk characteristics into pools of loans. Increases in estimated cash flows over those expected at the acquisition date are recognized as interest income, prospectively. Decreases in expected cash flows after the acquisition date are recognized by recording an allowance for loan losses.

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Table of Contents

Loans accounted for under ASC 310-30 are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans. If the timing and amount of future cash flows is not reasonably estimable, the loans may be classified as nonaccrual loans and the purchase price discount on those loans is not recorded as interest income until the timing and amount of future cash flows can be reasonably estimated.
FDIC Loss-sharing Asset
In conjunction with certain of the FDIC-assisted acquisitions, the Bank entered into loss-sharing agreements with the FDIC. At the date of the acquisitions, the Company elected to account for amounts receivable under the loss-sharing agreements as an indemnification asset in accordance with the Business Combinations topic of the FASB ASC. Subsequent to initial recognition, the FDIC loss-sharing asset is reviewed quarterly and adjusted for any changes in expected cash flows. These adjustments are measured on the same basis as the related covered assets. Any decrease in expected cash flows due to an increase in expected credit losses will increase the FDIC loss-sharing asset and any increase in expected future cash flows due to a decrease in expected credit losses will decrease the FDIC loss-sharing asset. Increases and decreases to the FDIC loss-sharing asset are recorded as adjustments to noninterest income.
Valuation and Recoverability of Goodwill
Goodwill represented $344.0 million of our $7.16 billion in total assets and $1.05 billion in total shareholders’ equity as of December 31, 2013. The Company has one, single reporting unit. We review goodwill for impairment annually, during the third quarter, and also test for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of our reporting unit below its carrying amount. Such events and circumstances may include among others: a significant adverse change in legal factors or in the general business climate; significant decline in our stock price and market capitalization; unanticipated competition; the testing for recoverability of a significant asset group within the reporting unit; and an adverse action or assessment by a regulator. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our consolidated financial statements.
Under the Intangibles – Goodwill and Other topic of the FASB ASC, the testing for impairment may begin with an assessment of qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. When required, the goodwill impairment test involves a two-step process. In step one we would test goodwill for impairment by comparing the fair value of the reporting unit with its carrying amount. If the fair value of the reporting unit exceeds the carrying amount of the reporting unit, goodwill is not deemed to be impaired, and no further testing is necessary. If the carrying amount of the reporting unit were to exceed the fair value of the reporting unit, we would perform a second test to measure the amount of impairment loss, if any. To measure the amount of any impairment loss, we would determine the implied fair value of goodwill in the same manner as if the reporting unit were being acquired in a business combination. Specifically, we would allocate the fair value of the reporting unit to all of the assets and liabilities of the reporting unit in a hypothetical calculation that would determine the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, we would record an impairment charge for the difference.
The accounting estimates related to our goodwill require us to make considerable assumptions about fair values. Our assumptions regarding fair values require significant judgment about economic and industry factors, as well as our views regarding the growth and earnings prospects of the bank. Changes in these judgments, either individually or collectively, may have a significant effect on the estimated fair values.
Based on the results of the annual goodwill impairment test, we determined that no goodwill impairment charges were required as our single reporting unit's fair value exceeded its carrying amount. As of December 31, 2013 we determined there were no events or circumstances which would more likely than not reduce the fair value of our reporting unit below its carrying amount.
Even though we determined that there was no goodwill impairment during 2013, additional adverse changes in the operating environment for the financial services industry may result in a future impairment charge.
Please refer to Note 10 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report for further discussion.

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Table of Contents

2013 Highlights
Consolidated net income for 2013 was $60.0 million, or $1.21 per diluted common share, compared with a net income of $46.1 million, or $1.16 per diluted common share, in 2012.
Net interest income for 2013 increased 22% to $291.1 million compared to $238.9 million for 2012. Interest income was $296.9 million in 2013, compared to $248.5 million in 2012. The increase was primarily due to the interest and accretion income related to the West Coast acquisition, which closed on April 1, 2013. Interest expense decreased $3.7 million due to lower average cost of interest-bearing deposits and lower Federal Home Loan Bank advance balances during the year.
Provision expense on noncovered loans was $3.2 million in 2013, compared to $13.5 million in 2012, a decrease of 77%. Provision expense on covered loans was a recapture of $3.3 million in 2013, compared to a provision of $25.9 million in 2012. The noncovered loan provision for the current year and prior year approximated net charge-offs for the respective period. The provision recapture on covered loans during the current year was due to increased expected future cash flows as remeasured during the current year when compared to the prior year's remeasurement.
Noninterest income was $26.7 million for 2013, a small decrease from $27.1 million for 2012. The decrease was primarily due to the adverse change of $20.6 million in the change in the FDIC loss-sharing asset, partially offset by increases of 18.4 million in service charges and other fees and $3.7 million in other noninterest expense.
Noninterest expense increased $68.0 million, or 42% to $230.9 million for 2013 due to additional ongoing noninterest expense resulting from the West Coast acquisition as well as the acquisition-related expenses of $25.5 million recorded in 2013, compared to only $1.8 million for the prior year period.
Total assets at December 31, 2013 were $7.16 billion, up 46% from $4.91 billion at the end of 2012, primarily due to the acquisition of West Coast.
Investment securities available for sale totaled $1.66 billion at December 31, 2013 compared to $1.00 billion at December 31, 2012.
Loans, excluding covered loans, were $4.22 billion, up 67% from $2.53 billion at the end of 2012. The increase from December 31, 2012 was due in large part to the acquisition of West Coast, which added $1.41 billion in loans.
The allowance for noncovered loan and lease losses was relatively unchanged at $52.3 million at December 31, 2013 compared to $52.2 million at December 31, 2012 due to improved loan quality on a substantially larger loan portfolio. The Company’s allowance amounts to 1.24% of total noncovered loans, compared with 2.07% at the end of 2012. This ratio was impacted by including recently acquired loans in the ratio, which had a fair value discount applied as of the acquisition date. Please refer to the section titled “Allowance for Loan and Lease Losses and Unfunded Commitments and Letters of Credit” for further discussion.
Nonperforming assets totaled $57.9 million at December 31, 2013, up from $48.5 million at December 31, 2012. The increase in nonperforming assets was primarily due to the nonperforming assets acquired from West Coast, which consisted of $9.4 million of nonaccrual loans and $6.9 million of other real estate owned at December 31, 2013. However, nonperforming assets to year end assets, excluding covered loans, decreased to 0.84% at December 31, 2013 compared to 1.48% at December 31, 2012. Net loan charge-offs were $3.1 million in 2013, compared with $14.3 million in 2012.
Deposits totaled $5.96 billion at December 31, 2013 compared to $4.04 billion at December 31, 2012. Core deposits totaled $5.70 billion at December 31, 2013, comprising 96% of total deposits compared to $3.80 billion, or 94%, of total deposits at December 31, 2012.
The Company is well capitalized with a total risk-based capital ratio of 14.68% at December 31, 2013 compared to 20.62% at December 31, 2012. The decrease in the total risk-based capital ratio was due to the deployment of capital for the acquisition of West Coast.
The number of branches increased from 99 at December 31, 2012 to 142 at December 31, 2013 due to the acquisition of West Coast.

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Table of Contents

Business Combinations
On April 1, 2013, the Company completed its acquisition of West Coast. The Company acquired approximately $2.63 billion in assets, including $1.41 billion in loans measured at fair value, and approximately $1.88 billion in deposits. See Note 2 to the Consolidated Financial Statements in "Item 8. Financial Statements" of this report for further information regarding this acquisition.
On August 5, 2011, the Bank acquired certain assets and assumed certain liabilities of the Bank of Whitman from the FDIC in an FDIC-assisted transaction. The Bank and the FDIC entered into a modified whole bank purchase and assumption agreement without loss share. The bank acquired approximately $437.5 million in assets, including $200.0 million in loans measured at fair value, and approximately $401.1 million in deposits located in nine branches in eastern Washington. The Bank participated in a competitive bid process in which the accepted bid included no deposit premium on non-brokered deposits and a negative bid of $30.0 million on net assets acquired.
On May 27, 2011, the Bank acquired certain assets and assumed certain liabilities of First Heritage Bank from the FDIC in an FDIC-assisted transaction. The Bank acquired approximately $165.0 million in assets and approximately $159.5 million in deposits located in five branches in the King and Snohomish counties of Washington. First Heritage Bank's loans and other real estate assets acquired of approximately $89.7 million are subject to a loss-sharing agreement with the FDIC. The Bank participated in a competitive bid process in which the accepted bid included a 0.75% deposit premium on non-brokered deposits and a negative bid of $10.5 million on net assets acquired.
On May 20, 2011, the Bank acquired certain assets and assumed certain liabilities of Summit Bank from the FDIC, in an FDIC-assisted transaction. The Bank acquired approximately $131.1 million in assets and approximately $123.3 million in deposits located in three branches in the northern Puget Sound region of Washington. Summit Bank's loans and other real estate assets acquired of approximately $71.9 million are subject to a loss-sharing agreement with the FDIC. The Bank participated in a competitive bid process in which the accepted bid included a 0.75% deposit premium on non-brokered deposits and a negative bid of $9.5 million on net assets acquired.


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Table of Contents

RESULTS OF OPERATIONS
Summary
A summary of the Company’s results of operations for each of the last five years ended December 31 follows:

 
 
Year ended
 
Increase
(Decrease)
 
Year ended
 
Increase
(Decrease)
 
Years ended December 31,
2013
Amount
 
%
 
2012
Amount
 
%
 
2011
 
2010
 
2009
 
 
(dollars in thousands, except per share amounts)
Interest income
 
$
296,935

 
$
48,431

 
19

 
$
248,504

 
$
(2,767
)
 
(1
)
 
$
251,271

 
$
185,879

 
$
143,035

Interest expense
 
5,840

 
(3,737
)
 
(39
)
 
9,577

 
(4,958
)
 
(34
)
 
14,535

 
21,092

 
27,683

Net interest income
 
291,095

 
52,168

 
22

 
238,927

 
2,191

 
1

 
236,736

 
164,787

 
115,352

Provision for loan and lease losses
 
3,160

 
(10,315
)
 
(77
)
 
13,475

 
6,075

 
82

 
7,400

 
41,291

 
63,500

Provision (recapture) for losses on covered loans
 
(3,261
)
 
(29,153
)
 
(113
)
 
25,892

 
27,540

 
(1,671
)
 
(1,648
)
 
6,055

 

Noninterest income (loss)
 
26,700

 
(358
)
 
(1
)
 
27,058

 
36,341

 
(391
)
 
(9,283
)
 
52,781

 
29,690

Noninterest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation and employee benefits
 
125,432

 
39,998

 
47

 
85,434

 
3,882

 
5

 
81,552

 
69,780

 
47,275

Other expense
 
105,454

 
27,975

 
36

 
77,479

 
3,272

 
4

 
74,207

 
67,367

 
47,213

Total
 
230,886

 
67,973

 
42

 
162,913

 
7,154

 
5

 
155,759

 
137,147

 
94,488

Income (loss) before income taxes
 
87,010

 
23,305

 
37

 
63,705

 
(2,237
)
 
(3
)
 
65,942

 
33,075

 
(12,946
)
Provision (benefit) for income taxes
 
26,994

 
9,432

 
54

 
17,562

 
(343
)
 
(2
)
 
17,905

 
2,291

 
(8,978
)
Net income (loss)
 
$
60,016

 
$
13,873

 
30

 
$
46,143

 
$
(1,894
)
 
(4
)
 
$
48,037

 
$
30,784

 
$
(3,968
)
Less: Dividends on preferred stock
 
32

 
32

 

 

 

 

 

 
4,947

 
4,403

Net income (loss) applicable to common shareholders
 
$
59,984

 
$
13,841

 
30

 
$
46,143

 
$
(1,894
)
 
(4
)
 
$
48,037

 
$
25,837

 
$
(8,371
)
Earnings (loss) per common share, diluted
 
$
1.21

 
$
0.05

 
4

 
$
1.16

 
$
(0.05
)
 
(4
)
 
$
1.21

 
$
0.72

 
$
(0.38
)
Net Interest Income
Net interest income is the difference between interest income and interest expense. Net interest income on a fully taxable-equivalent basis expressed as a percentage of average total interest-earning assets is referred to as the net interest margin, which represents the average net effective yield on interest-earning assets.

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Table of Contents

The following table sets forth the average balances of all major categories of interest-earning assets and interest-bearing liabilities, the total dollar amounts of interest income on interest-earning assets and interest expense on interest-bearing liabilities, the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities by category and in total, net interest income, net interest spread, net interest margin and the ratio of average interest-earning assets to interest-earning liabilities:
Net Interest Income Summary
 
 
2013
 
2012
 
2011
 
 
Average
Balances
 
Interest
Earned/
Paid
 
Average
Rate
 
Average
Balances
 
Interest
Earned/
Paid
 
Average
Rate
 
Average
Balances
 
Interest
Earned/
Paid
 
Average
Rate
 
 
(dollars in thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans, excluding covered loans, net (1)(3)
 
$
3,783,925

 
$
213,191

 
5.63
%
 
$
2,413,307

 
$
131,413

 
5.45
%
 
$
2,064,568

 
$
126,520

 
6.13
%
Covered loans, net (2)
 
356,901

 
53,712

 
15.05
%
 
487,213

 
88,785

 
18.22
%
 
542,698

 
92,467

 
17.04
%
Taxable securities
 
1,155,066

 
20,459

 
1.77
%
 
740,418

 
18,276

 
2.47
%
 
675,010

 
21,870

 
3.24
%
Tax exempt securities (3)
 
319,678

 
15,262

 
4.77
%
 
270,876

 
15,423

 
5.69
%
 
253,881

 
15,736

 
6.20
%
Interest-earning deposits with banks and federal funds sold
 
138,973

 
355

 
0.26
%
 
334,910

 
854

 
0.26
%
 
335,267

 
839

 
0.25
%
Total interest-earning assets
 
5,754,543

 
302,979

 
5.27
%
 
4,246,724

 
254,751

 
6.00
%
 
3,871,424

 
257,432

 
6.65
%
Other earning assets
 
111,228

 
 
 
 
 
76,327

 
 
 
 
 
57,518

 
 
 
 
Noninterest-earning assets
 
692,746

 
 
 
 
 
503,232

 
 
 
 
 
580,068

 
 
 
 
Total assets
 
$
6,558,517

 
 
 
 
 
$
4,826,283

 
 
 
 
 
$
4,509,010

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
535,656

 
$
1,998