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Section 1: 10-K (10-K)

COLB 2012 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, 2012 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.  ý
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, 2012 was $731,595,865 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, 2013 was 39,707,319.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant’s definitive 2013 Annual Meeting Proxy Statement.                     Part III


Table of Contents

COLUMBIA BANKING SYSTEM, INC.
FORM 10-K ANNUAL REPORT
DECEMBER 31, 2012

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 at historical rates and maintain the quality of our earning assets;
the local housing/real estate markets where we operate and make loans could continue to face challenges;
the risks presented by a continued challenging economy, including the current uncertainty regarding sequestration, which could adversely affect credit quality, collateral values, including real estate collateral, investment values, liquidity and loan originations and loan portfolio delinquency rates;
the efficiencies and enhanced financial and operating performance we expect to realize from investments in personnel, acquisitions and infrastructure could not be realized;
the possibility that the proposed acquisition of West Coast Bancorp (“West Coast”) does not close when expected or at all because required regulatory, shareholder or other approvals and other conditions to closing are not received or satisfied on a timely basis or at all;
the effect on the trading price of our stock if the acquisition of West Coast is not completed;
the ability to successfully combine Columbia and the West Coast organizations;
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;
our reliance on FHLB advances and FRB borrowings as additional sources of short and long-term funding;
changes in the scope and cost of FDIC insurance and other coverages;
the impact of FDIC-assisted 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;
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;
the terms and costs of the numerous actions taken by the Federal Reserve, the U.S. Congress, the Treasury, the FDIC, the SEC and others in response to the liquidity and credit crisis, or the failure of these actions to help stabilize the financial markets, asset prices, market liquidity, or worsening of current financial market and economic conditions could materially and adversely affect our business, financial condition, results of operations, and the trading price of our common stock;
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, Columbia State Bank (“Columbia Bank” or “the Bank”) also does business under the Bank of Astoria name and conducts full-service commercial banking business in the states of Washington and Oregon. Headquartered in Tacoma, Washington, we provide a full range of banking services to small and medium-sized businesses, professionals and individuals.
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, 2012 Columbia Bank had 99 branch locations in Washington and Oregon. Included in these branch locations are six Columbia Bank branches doing business in Oregon under the Bank of Astoria name in Astoria, Warrenton, Seaside and Cannon Beach in Clatsop County and in Manzanita and Tillamook in Tillamook County. 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 and the Washington State Department of Financial Institutions Division of Banks. 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 99 branches in Washington and Oregon as of December 31, 2012 from which we intend to grow market share. We operate 59 branches in western Washington, 15 branches in eastern Washington, 15 branches in western Oregon, and 10 branches in eastern Oregon. Washington counties include: Adams, Asotin, Benton, Clallam, Clark, Cowlitz, Franklin, Jefferson, King, Kitsap, Klickitat, Mason, Pierce, Snohomish, Skagit, Spokane, Thurston, Walla Walla, Whatcom, Whitman and Yakima. Oregon counties include Clackamas, Clatsop, Deschutes, Hood River, Jefferson, Marion, Multnomah, Tillamook, Umatilla, Wasco and Yamhill.
In order to fund our lending activities and to allow for increased contact with customers, we utilize a branch system to better serve both retail and business depositors. We believe this approach enables us to expand lending activities while attracting a stable core deposit base. 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.
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 balanced 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 branch locations and considering business combinations that are consistent with our expansion strategy throughout the Pacific Northwest.


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To that end, on September 25, 2012, we entered into a definitive agreement to acquire West Coast Bancorp, the parent company of West Coast Bank of Lake Oswego, Oregon, with $2.49 billion in assets at December 31, 2012 (“West Coast”). Under the terms of the merger, West Coast shareholders will receive a combination of Company stock and cash valued at just over $500 million. Regulatory applications have been filed and special shareholder meetings for the Company and West Coast are scheduled for March 18, 2013. The merger is scheduled to close on April 1, 2013.

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
  
•      Checking & Saving Accounts
 
•      Investment Services through CB Financial Services
•      Online Banking
  
•      Online Banking
 
•      Private Banking
•      Electronic Bill Pay
  
•      Remote Deposit Capture
 
•      Trust Services
•      Consumer Lending
  
•      Cash Management
 
•      Professional Banking
•      Residential Lending
  
•      Commercial & Industrial Lending
 
 
•      VISA® Card Services
  
•      VISA® Card Services
 
 
 
  
•      Agricultural Lending
 
 
 
  
•      SBA Lending
 
 
 
  
•      Small Business Services
 
 
 
  
•      International Banking
 
 
 
  
•      Merchant Card Services
 
 
 
  
•      Real Estate and Real Estate Construction Lending
 
 
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. 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. 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.








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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 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.
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 business 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.
 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.
Business VISA® Credit and Debit 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 First National Bank of Omaha to offer Visa® Credit Cards such as the Corporate Card which can be used all over the world as well as the Business Edition® and Business Edition Plus® that earns reward points with every purchase.
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.

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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 designed to grow, protect and transition wealth by delivering an unprecedented level of personalized service and expertise.
Comprehensive solutions include:
Financial Planning: Asset Allocation, Net Worth Analysis, Estate Planning, Retirement Planning, Education Planning, Insurance Analysis, Wealth Transfer.
Investment Management Solutions: Professional Asset Management(1), Strategic Asset Allocation, Fixed Income (Bond) Investing (Municipal, Corporate, Government), Exchange Traded Funds (ETFs), Annuities, Mutual Funds, Equities.
Insurance Solutions: Long-Term Care, Disability, Life Insurance (Key Man Life Insurance, Buy-Sell Agreements).
Retirement Solutions: 401(k) plans, SEPs, IRAs, SIMPLE, Profit Sharing, Non-Qualified Deferred Compensation Plans, Money Pension Plan.
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 provides advisory services(2) and coordinates a relationship team of experienced financial professionals to meet the unique needs of each discerning customer.
Trust Services
Columbia Bank Trust Services 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.
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.







__________
(1)
Securities, insurance products and advisory services are offered through Cetera Investment Financial Services, Inc., an independent, registered broker/dealer. Member FINRA/SIPC. CB Financial Services is a marketing name for Cetera. * Investment products are Not FDIC insured * No bank guarantee * Not a deposit * Not insured by any federal government agency * May lose value.

(2)
Advisory services may only be offered by Investment Adviser Representatives in connection with an appropriate Cetera Advisory Services Agreement and disclosure brochure as provided.

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Competition
Our industry remains highly competitive despite challenging 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
Washington: Approximately 30%, or 22, of our Washington branches are located in Pierce County, with an estimated 2012 population of 808,000 residents. At June 30, 2012 our Pierce County branch locations’ share of the county’s total deposit market was 18%(1), ranking first among our competition. Also located in Pierce County is our Company headquarters in the city of Tacoma and one nearby operational facility. Some of the most significant contributors to the Pierce County economy are the Port of Tacoma whose activities are related to more than 40,000 jobs in the county and well over 100,000 in the state of Washington, Joint Base Lewis-McChord which accounts for nearly 20% of the County’s total employment, and the manufacturing industry which supplies the Boeing Company.
We operate 13 branch locations in King County, including Seattle, Bellevue and Redmond. King County, which is Washington’s most highly populated county at close to two million residents, is a market that has significant growth potential for our Company. At June 30, 2012 we ranked 14th in our share of the King County deposit market or just over 1%(1); however, we continue to make inroads within this market through the strategic expansion of our banking team. 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.
Some other market areas served by the Company include Cowlitz County where we rank second, or 17% (1), in deposit market share, operating two branch locations; and Kitsap County, where we operate six branches with 8%(1) of the deposit market share. We also have locations in Adams, Asotin, Benton, Clallam, Clark, Franklin, Grant, Jefferson, Klickitat, Skagit, Snohomish, Spokane, Thurston, Walla Walla, Whatcom, Whitman, and Yakima counties.
Oregon: With the acquisition of Columbia River Bank in January 2010, we significantly expanded our market area in western Oregon, and entered the eastern Oregon market area, bringing our total to 25 branch locations in the state. Oregon counties include Clackamas, Clatsop, Deschutes, Hood River, Jefferson, Marion, Multnomah, Tillamook, Umatilla, Wasco and Yamhill. Columbia Bank ranks fourteenth(1) in total deposit market share in Oregon, with just over 1% of the deposit market share. We are first(1) in deposit market share in Clatsop County (29%), Hood River (23%) and Wasco counties (30%). Oregon market areas provide a significant opportunity for expansion in the future, particularly after the acquisition of West Coast.
For additional information regarding our branches, see Item 2. Properties of this report.
Employees
As of December 31, 2012 the Company and its banking subsidiary employed approximately 1,198 full-time equivalent employees, a 5% decrease from 1,256 employees at December 31, 2011. 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 contributed to Columbia Bank being again awarded one of the Puget Sound Business Journal’s “Washington’s Best Workplaces 2012”.








___________
(1) Source: FDIC Annual Summary of Deposit Report as of June 30, 2012.

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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 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 names Columbia Bank in Washington, and Columbia State Bank and Bank of Astoria in Oregon (collectively, referred to herein as “Columbia Bank”). 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 recent 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.
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.

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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 liability, 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.
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.
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.

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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. Additionally, 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.
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.
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.

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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-terrorism
USA Patriot Act of 2001. 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, 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 Act also includes provisions providing the government with power to investigate terrorism, including expanded government access to bank account records.
Financial Services Modernization
Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 brought about significant changes to the laws affecting banks and bank holding companies. Generally, the Act (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.
Insurance of Deposit Accounts. The Emergency Economic Stabilization Act of 2008 (the EESA") included a provision for a temporary increase from $100,000 to $250,000 per depositor in deposit insurance. The temporary increase was made permanent under the Dodd-Frank Act. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category. EESA also temporarily raised the limit on federal deposit insurance coverage to an unlimited amount for non-interest or low-interest bearing demand deposits. Unlimited coverage for non-interest transaction accounts expired December 31, 2012.

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Recent Legislation
As a result of the recent financial crises, 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.
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.
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. 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. Basel III also increases minimum capital ratios. Capital buffers are added to each capital ratio to enable banks to absorb losses during a stressed period while remaining above their regulatory minimum ratios. The full impact of the Basel III rules cannot be determined at this time as many regulations are still being written and the implementation date has not yet been finalized.
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.

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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, including the current uncertainty regarding sequestration. 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.
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.

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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.
The pending acquisition of West Coast Bancorp ("West Coast") is subject to closing conditions that, if not satisfied or waived, could result in our inability to consummate the transaction, which may cause the price of our stock to decline.
On September 25, 2012, we entered into an Agreement and Plan of Merger with West Coast. The closing of the transaction is subject to the satisfaction of certain customary conditions, including the receipt of required regulatory approvals and the approval of West Coast's and our respective shareholders. No assurance can be given as to when or whether these approvals will be received.  If we do not complete this acquisition, the trading price of our stock may decline to the extent that the current prices reflect a market assumption that the acquisition will be completed.
Furthermore, if the merger agreement is terminated (i) due to our failure to obtain requisite approval from our shareholders or (ii) due to our failure to obtain regulatory approval, we will be required to pay West Coast a termination fee of $5 million. In that regard, special shareholder meetings have been called by both Columbia and West Coast to be held March 18, 2013 to act on the transaction and the requisite applications have been filed with the Federal and State bank regulators, with an anticipated closing date of April 1, 2013.
We may fail to realize all of the anticipated benefits of our pending acquisition of West Coast.
The success of our pending acquisition of West Coast will depend on, among other things, the ability to successfully combine Columbia and the West Coast organizations. If we are not able to achieve this objective, the anticipated benefits of the acquisition may not be realized fully or at all, or may take longer than expected to be realized.
Columbia and West Coast have operated and, until the completion of the acquisition, will continue to operate, independently. The companies may have challenges integrating different standards, procedures and policies. It is also possible that clients, customers, depositors and counterparties of West Coast could choose to discontinue their relationships with the combined company post-acquisition, which could adversely affect our future anticipated performance. These transition matters could have an adverse effect on us during the pre-acquisition period and for an undetermined time after the completion of the acquisition.

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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 pending and 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.
Our decisions regarding the fair value of assets acquired, including the FDIC loss-sharing assets, 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. In FDIC-assisted acquisitions that include loss-sharing agreements, we may record a loss-sharing asset which is accounted for on the same basis as the assets covered under the loss-sharing agreements. The FDIC loss-sharing asset primarily represents the present value of the cash flows the Company expects to collect from the FDIC under the loss-sharing agreements.
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 other than our pending acquisition of West Coast. Following our pending acquisition of West Coast, 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.
The expiration of unlimited FDIC insurance on certain noninterest-bearing transaction accounts may increase our interest expense and reduce our liquidity.
On December 31, 2012, unlimited FDIC insurance on certain noninterest-bearing transaction accounts under the Transaction Account Guarantee (“TAG”) program expired. Prior to its expiration, all funds under TAG in a noninterest-bearing transaction account were insured in full by the FDIC from December 31, 2010, through December 31, 2012. This temporary unlimited coverage was in addition to, and separate from, the coverage of at least $250,000 available to depositors under the FDIC's general deposit insurance rules.  The reduction in FDIC insurance on these noninterest-bearing transaction accounts to the standard $250,000 maximum may cause depositors to move funds previously held in such noninterest-bearing accounts to interest-bearing accounts, which could increase our costs of funds and negatively impact our results of operations, or may cause depositors to withdraw their deposits and invest funds in other investments.  This could reduce the Company's liquidity, or require us to pay higher interest rates to retain deposits in order to maintain our liquidity and could adversely affect the Company's earnings.

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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.
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.
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, results of operations, and 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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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.
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.

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Table of Contents

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.
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.

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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 an operations facility in Lakewood, Washington.
The Company’s branch network as of December 31, 2012 is made up of 99 branches located throughout several Washington and Oregon counties compared to 102 branches at December 31, 2011. 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
 
22

 
16

 
6

King
 
13

 
8

 
5

Kitsap
 
6

 
3

 
3

Snohomish
 
5

 
5

 

Skagit
 
3

 
3

 

Other Washington counties
 
25

 
20

 
5

Total Washington branches
 
74

 
55

 
19

Clatsop (dba Bank of Astoria)
 
4

 
4

 

Tillamook (dba Bank of Astoria)
 
2

 
2

 

Clackamas
 
4

 

 
4

Multnomah
 
2

 
1

 
1

Deschutes
 
4

 
3

 
1

Other Oregon counties
 
9

 
7

 
2

Total Oregon branches
 
25

 
17

 
8

Total Columbia Bank branches
 
99

 
72

 
27

For additional information concerning our premises and equipment and lease obligations, see Note 8 and 15, respectively, to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.
ITEM 3.    LEGAL PROCEEDINGS
The Company and its banking subsidiary are parties to routine litigation arising in the ordinary course of business. Management believes that, based on the information currently known to them, any liabilities arising from such litigation will not have a material adverse impact on the Company’s financial condition, results of operations or cash flows.
ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable


19

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
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash Dividends Declared
2011
 
High
 
Low
 
Regular
 
Special
 
Total Cash Dividends Declared
First quarter
 
$
22.14

 
$
17.91

 
$
0.03

 
$

 
$
0.03

Second quarter
 
$
19.95

 
$
16.56

 
0.05

 

 
0.05

Third quarter
 
$
18.14

 
$
14.01

 
0.06

 

 
0.06

Fourth quarter
 
$
19.76

 
$
13.46

 
0.08

 
0.05

 
0.13

For the year
 
$
22.14

 
$
13.46

 
$
0.22

 
$
0.05

 
$
0.27

On December 31, 2012, the last sale price for our stock on the NASDAQ Global Select Market was $17.94. At January 31, 2013, the number of shareholders of record was 2,135. 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, 2012, a total of 25,952 stock options were outstanding. Additional information about stock options and other equity compensation plans is included in Note 19 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 24, 2013 the Company declared a quarterly cash dividend of $0.10 per share payable on February 20, 2013, to shareholders of record at the close of business on February 6, 2013.


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Table of Contents

Equity Compensation Plan Information
 
 
Year ended December 31, 2012
 
 
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
 
25,952

 
$
20.13

 
1,026,135

Equity compensation plans not approved by security holders
 

 

 

 __________
(1)
Includes shares to be issued upon exercise of options under plans of 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 417,625 shares available for future issuance under the stock option and equity compensation plan and 608,510 shares available for purchase under the Employee Stock Purchase Plan as of December 31, 2012.
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) and the Columbia Peer Group (comprised of banks with assets of $1 billion to $5 billion, all of which are located in the western United States). 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 and the Columbia Peer Group was $100 on December 31, 2007, and that all dividends were reinvested.
 
Index
 
Period Ending
12/31/2007
 
12/31/2008
 
12/31/2009
 
12/31/2010
 
12/31/2011
 
12/31/2012
Columbia Banking System, Inc.  
 
100.00

 
41.29

 
56.38

 
73.53

 
68.32

 
66.87

NASDAQ Composite
 
100.00

 
60.02

 
87.24

 
103.08

 
102.26

 
120.42

SNL Columbia Peer Group
 
100.00

 
70.80

 
61.43

 
66.94

 
56.80

 
70.48

Source: SNL Financial LC, Charlottesville, VA

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Table of Contents

ITEM 6.     SELECTED FINANCIAL DATA
Five-Year Summary of Selected Consolidated Financial Data (1) 
 
 
2012
 
2011
 
2010
 
2009
 
2008
 
 
(dollars in thousands except per share amounts)
For the Year
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
248,504

 
$
251,271

 
$
185,879

 
$
143,035

 
$
175,060

Interest expense
 
$
9,577

 
$
14,535

 
$
21,092

 
$
27,683

 
$
55,547

Net interest income
 
$
238,927

 
$
236,736

 
$
164,787

 
$
115,352

 
$
119,513

Provision for loan and lease losses, excluding covered loans
 
$
13,475

 
$
7,400

 
$
41,291

 
$
63,500

 
$
41,176

Noninterest income (loss)
 
$
27,058

 
$
(9,283
)
 
$
52,781

 
$
29,690

 
$
14,850

Noninterest expense
 
$
162,913

 
$
155,759

 
$
137,147

 
$
94,488

 
$
92,125

Net income (loss)
 
$
46,143

 
$
48,037

 
$
30,784

 
$
(3,968
)
 
$
5,968

Net income (loss) applicable to common shareholders
 
$
46,143

 
$
48,037

 
$
25,837

 
$
(8,371
)
 
$
5,498

Per Common Share
 
 
 
 
 
 
 
 
 
 
Earnings (loss) (Basic)
 
$
1.16

 
$
1.22

 
$
0.73

 
$
(0.38
)
 
$
0.30

Earnings (loss) (Diluted)
 
$
1.16

 
$
1.21

 
$
0.72

 
$
(0.38
)
 
$
0.30

Book Value
 
$
19.25

 
$
19.23

 
$
17.97

 
$
16.13

 
$
18.82

Averages
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
4,826,283

 
$
4,509,010

 
$
4,248,590

 
$
3,084,421

 
$
3,134,054

Interest-earning assets
 
$
4,246,724

 
$
3,871,424

 
$
3,583,728

 
$
2,783,862

 
$
2,851,555

Loans, including covered loans
 
$
2,900,520

 
$
2,607,266

 
$
2,485,650

 
$
2,124,574

 
$
2,264,486

Securities
 
$
1,011,294

 
$
928,891

 
$
720,152

 
$
584,028

 
$
565,299

Deposits
 
$
3,875,666

 
$
3,541,399

 
$
3,270,923

 
$
2,378,176

 
$
2,382,484

Core deposits
 
$
3,609,467

 
$
3,218,425

 
$
2,828,246

 
$
1,945,039

 
$
1,911,897

Shareholders’ equity
 
$
761,185

 
$
730,726

 
$
668,469

 
$
462,127

 
$
354,387

Financial Ratios
 
 
 
 
 
 
 
 
 
 
Net interest margin
 
5.77
%
 
6.27
%
 
4.76
%
 
4.33
 %
 
4.38
%
Return on average assets
 
0.96
%
 
1.07
%
 
0.72
%
 
(0.13
)%
 
0.19
%
Return on average common equity
 
6.06
%
 
6.57
%
 
4.15
%
 
(2.16
)%
 
1.59
%
Efficiency ratio (tax equivalent) (2)
 
69.17
%
 
70.68
%
 
67.56
%
 
61.53
 %
 
59.88
%
Average equity to average assets
 
15.77
%
 
16.21
%
 
15.73
%
 
14.98
 %
 
11.31
%
At Year End
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
4,906,335

 
$
4,785,945

 
$
4,256,363

 
$
3,200,930

 
$
3,097,079

Covered assets, net
 
$
407,648

 
$
560,055

 
$
531,504

 
$

 
$

Loans, excluding covered loans
 
$
2,525,710

 
$
2,348,371

 
$
1,915,754

 
$
2,008,884

 
$
2,232,332

Allowance for noncovered loan and lease losses
 
$
52,244

 
$
53,041

 
$
60,993

 
$
53,478

 
$
42,747

Securities
 
$
1,023,484

 
$
1,050,325

 
$
781,774

 
$
631,645

 
$
540,525

Deposits
 
$
4,042,085

 
$
3,815,529

 
$
3,327,269

 
$
2,482,705

 
$
2,382,151

Core deposits
 
$
3,802,366

 
$
3,510,435

 
$
2,998,482

 
$
2,072,821

 
$
1,941,047

Shareholders’ equity
 
764,008

 
759,338

 
706,878

 
528,139

 
415,385

Nonperforming Assets, Excluding Covered Assets
 
 
 
 
 
 
 
 
 
 
Nonaccrual loans
 
37,395

 
53,483

 
89,163

 
110,431

 
106,163

Other real estate owned and other personal property owned
 
11,108

 
31,905

 
30,991

 
19,037

 
2,874

Total nonperforming assets, excluding covered assets
 
$
48,503

 
$
85,388

 
$
120,154

 
$
129,468

 
$
109,037

Nonperforming loans to year end loans, excluding covered loans
 
1.48
%
 
2.28
%
 
4.65
%
 
5.50
 %
 
4.76
%
Nonperforming assets to year end assets, excluding covered assets
 
1.08
%
 
2.02
%
 
3.23
%
 
4.04
 %
 
3.52
%
Allowance for loan and lease losses to year end loans, excluding covered loans
 
2.07
%
 
2.26
%
 
3.18
%
 
2.66
 %
 
1.91
%
Allowance for loan and lease losses to nonperforming loans, excluding covered loans
 
139.71
%
 
99.17
%
 
68.41
%
 
48.43
 %
 
40.27
%
Net loan charge-offs
 
$
14,272

 
$
15,352

 
$
33,776

 
$
52,769

 
$
25,028

Other nonfinancial data
 
 
 
 
 
 
 
 
 
 
Full-time equivalent employees
 
1,198

 
1,256

 
1,092

 
715

 
735

Banking branches
 
99

 
102

 
84

 
52

 
53

 __________
(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 cost of operation of other real estate, FDIC clawback liability expense and acquisition related expenses, divided by the sum of net interest income, excluding incremental accretion income on the acquired loan portfolio and prepayment expenses on FHLB advances, and noninterest income on a tax equivalent basis, excluding gain/loss investment securities, gain on bank acquisition, and the change in FDIC loss-sharing asset.

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Table of Contents

Consolidated Five-Year Financial Data (1)
 
 
 
Years ended December 31,
2012
 
2011
 
2010
 
2009
 
2008
(in thousands, except per share amounts)
Interest Income:
 
 
 
 
 
 
 
 
 
 
Loans
 
$
219,433

 
$
218,420

 
$
157,292

 
$
117,062

 
$
147,830

Taxable securities
 
18,276

 
21,870

 
18,276

 
17,300

 
18,852

Tax-exempt securities
 
9,941

 
10,142

 
9,348

 
8,458

 
7,976

Federal funds sold and deposits with banks
 
854

 
839

 
963

 
215

 
402

Total interest income
 
248,504

 
251,271

 
185,879

 
143,035

 
175,060

Interest Expense:
 
 
 
 
 
 
 
 
 
 
Deposits
 
5,887

 
10,478

 
16,733

 
23,250

 
45,307

Federal Home Loan Bank advances
 
2,608

 
2,980

 
2,841

 
2,759

 
7,482

Prepayment charge on Federal Home Loan Bank advances
 
603

 

 

 

 

Long-term obligations
 

 
579

 
1,029

 
1,197

 
1,800

Other borrowings
 
479

 
498

 
489

 
477

 
958

Total interest expense
 
9,577

 
14,535

 
21,092

 
27,683

 
55,547

Net Interest Income
 
238,927

 
236,736

 
164,787

 
115,352

 
119,513

Provision for noncovered loan and lease losses
 
13,475

 
7,400

 
41,291

 
63,500

 
41,176

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

 
(1,648
)
 
6,055

 

 

Net interest income after provision
 
199,560

 
230,984

 
117,441

 
51,852

 
78,337

Noninterest income (loss)
 
27,058

 
(9,283
)
 
52,781

 
29,690

 
14,850

Noninterest expense
 
162,913

 
155,759

 
137,147

 
94,488

 
92,125

Income (loss) before income taxes
 
63,705

 
65,942

 
33,075

 
(12,946
)
 
1,062

Provision (benefit) for income taxes
 
17,562

 
17,905

 
2,291

 
(8,978
)
 
(4,906
)
Net Income (Loss)
 
$
46,143

 
$
48,037

 
$
30,784

 
$
(3,968
)
 
$
5,968

Less: Dividends on preferred stock
 

 

 
4,947

 
4,403

 
470

Net Income (Loss) Applicable to Common Shareholders
 
$
46,143

 
$
48,037

 
$
25,837

 
$
(8,371
)
 
$
5,498

Per Common Share
 
 
 
 
 
 
 
 
 
 
Earnings (loss) basic
 
$
1.16

 
$
1.22

 
$
0.73

 
$
(0.38
)
 
$
0.30

Earnings (loss) diluted
 
$
1.16

 
$
1.21

 
$
0.72

 
$
(0.38
)
 
$
0.30

Average number of common shares outstanding (basic)
 
39,260

 
39,103

 
35,209

 
21,854

 
17,914

Average number of common shares outstanding (diluted)
 
39,263

 
39,180

 
35,392

 
21,854

 
18,010

Total assets at year end
 
$
4,906,335

 
$
4,785,945

 
$
4,256,363

 
$
3,200,930

 
$
3,097,079

Long-term obligations
 
$

 
$

 
$
25,735

 
$
25,669

 
$
25,603

Cash dividends declared per common share
 
$
0.98

 
$
0.27

 
$
0.04

 
$
0.07

 
$
0.58

 __________
(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.


23

Table of Contents

Selected Quarterly Financial Data (1)
The following table presents selected unaudited consolidated quarterly financial data for each quarter of 2012 and 2011. 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)
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

2011
 
 
 
 
 
 
 
 
 
 
Total interest income
 
$
54,611

 
$
53,309

 
$
68,432

 
$
74,919

 
$
251,271

Total interest expense
 
4,162

 
3,934

 
3,644

 
2,795

 
14,535

Net interest income
 
50,449

 
49,375

 
64,788

 
72,124

 
236,736

Provision for noncovered loan and lease losses
 

 
2,150

 
500

 
4,750

 
7,400

Provision (recapture) for losses on covered loans
 
(422
)
 
2,301

 
433

 
(3,960
)
 
(1,648
)
Noninterest income (loss)
 
(5,419
)
 
3,542

 
2,196

 
(9,602
)
 
(9,283
)
Noninterest expense
 
37,346

 
37,164

 
39,935

 
41,314

 
155,759

Income before income taxes
 
8,106

 
11,302

 
26,116

 
20,418

 
65,942

Provision for income taxes
 
2,327

 
2,670

 
7,244

 
5,664

 
17,905

Net income
 
$
5,779

 
$
8,632

 
$
18,872

 
$
14,754

 
$
48,037

Per Common Share (2)
 
 
 
 
 
 
 
 
 
 
Earnings (basic)
 
$
0.15

 
$
0.22

 
$
0.48

 
$
0.37

 
$
1.22

Earnings (diluted)
 
$
0.15

 
$
0.22

 
$
0.48

 
$
0.37

 
$
1.21

 __________
(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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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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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 $115.6 million of our $4.91 billion in total assets and $764.0 million in total shareholders’ equity as of December 31, 2012. 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. We first 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 and our single reporting unit was not at risk of failing step one. As of December 31, 2012 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 2012, additional adverse changes in the operating environment for the financial services industry may result in a future impairment charge.
Please refer to Note 9 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report for further discussion.

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2012 Highlights
Consolidated net income for 2012 was $46.1 million, or $1.16 per diluted common share, compared with a net income of $48.0 million, or $1.21 per diluted common share, in 2011.
Net interest income for 2012 increased 1% to $238.9 million compared to $236.7 million for 2011. Interest income was $248.5 million in 2012, compared to $251.3 million in 2011. The decrease was due to the lower average yield on the noncovered loan portfolio. Interest expense decreased $5.0 million due to the average cost of interest-bearing deposits falling 19 basis points.
Provision expense on noncovered loans was $13.5 million in 2012, compared to $7.4 million in 2011, an increase of 82%. Provision expense on covered loans was $25.9 million in 2012, compared to a provision recapture of $1.6 million in 2011. The noncovered loan provision for the current year approximates current year net charge-offs. The noncovered loan provision in 2011 approximated net charge-offs partially offset by an improvement in credit quality. The increase in the provision on covered loans was due to incremental loan losses incurred in the current period which were in excess of those expected from the remeasurement of cash flows during the prior period.
Noninterest income was $27.1 million for 2012, an increase from a loss of $9.3 million for 2011. The increase was primarily due to the decrease of $25.0 million in the change in the FDIC loss-sharing asset, $6.5 million in additional investment securities gains, and $3.4 million in additional service charges and other fees.
Noninterest expense increased 5% to $162.9 million for 2012 due to increases in staffing and occupancy costs related to the three FDIC-assisted transactions that occurred during mid 2011 as well as additional legal and professional expenses incurred in 2012 related to the pending acquisition of West Coast.
Total assets at December 31, 2012 were $4.91 billion, up 3% from $4.79 billion at the end of 2011. The increase from December 31, 2011 reflects the Company's noncovered loan growth as well as the increase in cash and cash equivalents in anticipation of payment of the cash portion of the West Coast Bancorp acquisition consideration.
Investment securities available for sale totaled $1.00 billion at December 31, 2012 compared to $1.03 billion at December 31, 2011.
Loans, excluding covered loans, were $2.53 billion, up 8% from $2.35 billion at the end of 2011. The increase from December 31, 2011 reflects additional loan volume arising from the Company's organic loan growth. Noncovered loan growth during 2012 was $177.3 million and was centered mainly in commercial business and commercial and multifamily residential loans.
The allowance for noncovered loan and lease losses decreased to $52.2 million at December 31, 2012 from $53.0 million at December 31, 2011 due to improved loan quality. The Company’s allowance amounts to 2.07% of total noncovered loans, compared with 2.26% at the end of 2011.
Nonperforming assets totaled $48.5 million at December 31, 2012, significantly down from $85.4 million at December 31, 2011. Net loan charge-offs were $14.3 million in 2012, compared with $15.4 million in 2011. Nonaccrual loans decreased $16.1 million to $37.4 million and other real estate owned and other personal property owned decreased $20.8 million to $11.1 million.
Deposits totaled $4.04 billion at December 31, 2012 compared to $3.82 billion at December 31, 2011. Core deposits totaled $3.80 billion at December 31, 2012, comprising 94% of total deposits compared to $3.51 billion, or 92%, of total deposits at December 31, 2011.
The Company is well capitalized with a total risk-based capital ratio of 20.62% at December 31, 2012 compared to 21.05% at December 31, 2011.
The number of branches decreased by 3 from December 31, 2011 to December 31, 2012 as part of the Company's ongoing effort to improve efficiencies.

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Table of Contents

Business Combinations
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 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.
On January 29, 2010, the Bank acquired substantially all of the deposits and assets of American Marine Bank from the FDIC, which was appointed receiver of American Marine Bank. The Bank acquired approximately $307.8 million in assets and approximately $254.0 million in deposits located in 11 branches in the western Puget Sound region. American Marine Bank’s loans and other real estate assets acquired of approximately $257.5 million are subject to a loss-sharing agreement with the FDIC. In addition, Columbia State Bank will continue to operate the Trust Division of American Marine Bank. The Bank participated in a competitive bid process in which the accepted bid included a 1% deposit premium on non-brokered deposits and a negative bid of $23.0 million on net assets acquired.
On January 22, 2010, the Bank acquired all of the deposits and certain assets of Columbia River Bank from the FDIC, in an FDIC-assisted transaction. The Bank acquired approximately $912.9 million in assets and approximately $893.4 million in deposits located in 21 branches in Oregon and Washington. Columbia River Bank’s loans and other real estate assets acquired of approximately $696.1 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 1% deposit premium on non-brokered deposits and a negative bid of $43.9 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,
2012
Amount
 
%
 
2011
Amount
 
%
 
2010
 
2009
 
2008
 
 
(dollars in thousands, except per share amounts)
Interest income
 
$
248,504

 
$
(2,767
)
 
(1
)
 
$
251,271

 
$
65,392

 
35

 
$
185,879

 
$
143,035

 
$
175,060

Interest expense
 
9,577

 
(4,958
)
 
(34
)
 
14,535

 
(6,557
)
 
(31
)
 
21,092

 
27,683

 
55,547

Net interest income
 
238,927

 
2,191

 
1

 
236,736

 
71,949

 
44

 
164,787

 
115,352

 
119,513

Provision for loan and lease losses
 
13,475

 
6,075

 
82

 
7,400

 
(33,891
)
 
(82
)
 
41,291

 
63,500

 
41,176

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

 
27,540

 
(1,671
)
 
(1,648
)
 
(7,703
)
 
(127
)
 
6,055

 

 

Noninterest income (loss)
 
27,058

 
36,341

 
(391
)
 
(9,283
)
 
(62,064
)
 
(118
)
 
52,781

 
29,690

 
14,850

Noninterest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation and employee benefits
 
85,434

 
3,882

 
5

 
81,552

 
11,772

 
17

 
69,780

 
47,275

 
49,315

Other expense
 
77,479

 
3,272

 
4

 
74,207

 
6,840

 
10

 
67,367

 
47,213

 
42,810

Total
 
162,913

 
7,154

 
5

 
155,759

 
18,612

 
14

 
137,147

 
94,488

 
92,125

Income (loss) before income taxes
 
63,705

 
(2,237
)
 
(3
)
 
65,942

 
32,867

 
99

 
33,075

 
(12,946
)
 
1,062

Provision (benefit) for income taxes
 
17,562

 
(343
)
 
(2
)
 
17,905

 
15,614

 
682

 
2,291

 
(8,978
)
 
(4,906
)
Net income (loss)
 
$
46,143

 
$
(1,894
)
 
(4
)
 
$
48,037

 
$
17,253

 
56

 
$
30,784

 
$
(3,968
)
 
$
5,968

Less: Dividends on preferred stock
 

 

 

 

 
(4,947
)
 
(100
)
 
4,947

 
4,403

 
470

Net income (loss) applicable to common shareholders
 
$
46,143

 
$
(1,894
)
 
(4
)
 
$
48,037

 
$
22,200

 
86

 
$
25,837

 
$
(8,371
)
 
$
5,498

Earnings (loss) per common share, diluted
 
$
1.16

 
$
(0.05
)
 
(4
)
 
$
1.21

 
$
0.49

 
68

 
$
0.72

 
$
(0.38
)
 
$
0.30

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
 
 
2012
 
2011
 
2010
 
 
Average
Balances (1)
 
Interest
Earned/
Paid
 
Average
Rate
 
Average
Balances (1)(3)
 
Interest
Earned/
Paid (3)
 
Average
Rate
 
Average
Balances (1)(3)
 
Interest
Earned/
Paid (3)
 
Average
Rate
 
 
(dollars in thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans, excluding covered loans, net (1)(2)
 
$
2,413,307

 
$
131,413

 
5.45
%
 
$
2,064,568

 
$
126,520

 
6.13
%
 
$
2,103,964

 
$
109,039

 
5.18
%
Covered loans, net (1)
 
487,213

 
88,785

 
18.22
%
 
542,698

 
92,467

 
17.04
%
 
381,686

 
48,796

 
12.78
%
Taxable securities
 
740,418

 
18,276

 
2.47
%
 
675,010

 
21,870

 
3.24
%
 
491,306

 
18,276

 
3.72
%
Tax exempt securities (2)
 
270,876

 
15,423

 
5.69
%
 
253,881

 
15,736

 
6.20
%
 
228,846

 
14,505

 
6.34
%
Interest-earning deposits with banks and federal funds sold
 
334,910

 
854

 
0.26
%
 
335,267

 
839

 
0.25
%
 
377,926

 
963

 
0.25
%
Total interest-earning assets
 
4,246,724

 
254,751

 
6.00
%
 
3,871,424

 
257,432

 
6.65
%
 
3,583,728

 
191,579

 
5.35
%
Other earning assets
 
76,327

 
 
 
 
 
57,518

 
 
 
 
 
51,446

 
 
 
 
Noninterest-earning assets
 
503,232

 
 
 
 
 
580,068

 
 
 
 
 
613,416

 
 
 
 
Total assets
 
$
4,826,283

 
 
 
 
 
$
4,509,010

 
 
 
 
 
$
4,248,590

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
543,349

 
$
3,257

 
0.60
%
 
$
636,074

 
$
5,093

 
0.80
%
 
$
763,829

 
$
8,705

 
1.14
%
Savings accounts
 
298,223

 
77

 
0.03
%
 
247,073

 
152

 
0.06
%
 
199,117

 
287

 
0.14
%
Interest-bearing demand
 
790,887

 
869

 
0.11
%
 
704,484

 
1,393

 
0.20
%
 
637,983

 
2,157

 
0.34
%
Money market accounts
 
1,051,171

 
1,684

 
0.16
%
 
969,548

 
3,840

 
0.40
%
 
851,673

 
5,584

 
0.66
%
Total interest-bearing deposits
 
2,683,630

 
5,887

 
0.22
%
 
2,557,179

 
10,478

 
0.41
%
 
2,452,602

 
16,733

 
0.68
%
Federal Home Loan Bank advances (4)
 
100,337

 
3,211

 
3.20
%
 
120,419

 
2,980

 
2.47
%
 
122,860

 
2,841

 
2.31
%
Long-term subordinated debt
 

 

 
%
 
14,746

 
579

 
3.93
%
 
25,701

 
1,029

 
4.00
%
Other borrowings and interest-bearing liabilities
 
25,000

 
479

 
1.92
%
 
24,899

 
498

 
2.00
%