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Columbia Banking System
COLB
#2143
Rank
$9.41 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$31.49
Share price
0.77%
Change (1 day)
18.03%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Columbia Banking System
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2019 Q3

Columbia Banking System - 10-Q quarterly report FY2019 Q3


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There were no changes to net cash flows from operating, investing or financing activities as a result of this 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________ 
FORM 10-Q
_____________________________________________ 
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019.
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to            
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 98402-2156
(Address of principal executive offices and zip code)
(253) 305-1900
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, No Par Value
 
COLB
 
NASDAQ Global Select Market
(Title of each class)
 
(Trading symbol)
 
(Name of each exchange on which registered)
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 x No ¨ 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 
 
 
 
 
 
Large accelerated filer
 
☒
 
Accelerated filer
 
☐
 
 
 
 
 
 
 
Non-accelerated filer
 
☐
 
Smaller reporting company
 
☐
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes ☐  No x
The number of shares of common stock outstanding at October 31, 2019 was 72,136,242.
 


TABLE OF CONTENTS
 
 
 
Page
 
PART I — FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
 
 
Consolidated Balance Sheets - September 30, 2019 and December 31, 2018
2
 
 
 
 
Consolidated Statements of Income - three and nine months ended September 30, 2019 and 2018
3
 
 
 
 
Consolidated Statements of Comprehensive Income - three and nine months ended September 30, 2019 and 2018
4
 
 
 
 
Consolidated Statements of Changes in Shareholders’ Equity - three and nine months ended September 30, 2019 and 2018
5
 
 
 
 
Consolidated Statements of Cash Flows - nine months ended September 30, 2019 and 2018
7
 
 
 
 
Notes to Unaudited Consolidated Financial Statements
9
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
38
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
58
 
 
 
Item 4.
Controls and Procedures
58
 
 
 
 
PART II — OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
59
 
 
 
Item 1A.
Risk Factors
59
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
59
 
 
 
Item 3.
Defaults Upon Senior Securities
59
 
 
 
Item 4.
Mine Safety Disclosures
59
 
 
 
Item 5.
Other Information
59
 
 
 
Item 6.
Exhibits
60
 
 
 
 
Signatures
61
i


PART I - FINANCIAL INFORMATION

Glossary of Acronyms, Abbreviations, and Terms

The acronyms, abbreviations, and terms listed below are used in various sections of the Form 10-Q, including “Item 1. Financial Statements” and “Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations.”


ALLL
Allowance for Loan and Lease Losses
 
FASB
Financial Accounting Standards Board
ASC
Accounting Standards Codification
 
FDIC
Federal Deposit Insurance Corporation
ASU
Accounting Standards Update
 
FHLB
Federal Home Loan Bank of Des Moines
ATM
Automated Teller Machine
 
FRB
Federal Reserve Bank
BOLI
Bank Owned Life Insurance
 
LIBOR
London Interbank Offering Rate
Basel III
A comprehensive capital framework and rules for U.S. banking organizations approved by the FRB and the FDIC in 2013
 
NIM
Net Interest Margin
B&O
Business and Occupation
 
OPPO
Other Personal Property Owned
CDI
Core Deposit Intangible
 
OREO
Other Real Estate Owned
CECL
Current Expected Credit Loss
 
Pacific Continental
Pacific Continental Corporation
CDARS®
Certificate of Deposit Account Registry Service
 
PCI
Purchased Credit Impaired
CET1
Common Equity Tier 1
 
REASD
Real Estate Appraisal Services Department
CEO
Chief Executive Officer
 
SBA
Small Business Administration
CFO
Chief Financial Officer
 
SEC
Securities and Exchange Commission
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
 
TDRs
Troubled Debt Restructurings
EPS
Earnings Per Share
 
GAAP
Generally Accepted Accounting Principles


1

Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
Columbia Banking System, Inc.
(Unaudited)
 
 
 
 
 
September 30,
2019
 
December 31,
2018
ASSETS
 
(in thousands)
Cash and due from banks
 
$
278,461

 
$
260,180

Interest-earning deposits with banks
 
20,144

 
17,407

Total cash and cash equivalents
 
298,605

 
277,587

Debt securities available for sale at fair value
 
3,367,572

 
3,167,448

FHLB stock at cost
 
29,680

 
25,960

Loans held for sale
 
15,036

 
3,849

Loans, net of unearned income
 
8,756,355

 
8,391,511

Less: ALLL
 
82,660

 
83,369

Loans, net
 
8,673,695

 
8,308,142

Interest receivable
 
48,503

 
45,323

Premises and equipment, net
 
165,431

 
168,788

OREO
 
625

 
6,019

Goodwill
 
765,842

 
765,842

Other intangible assets, net
 
37,908

 
45,937

Other assets
 
354,863

 
280,250

Total assets
 
$
13,757,760

 
$
13,095,145

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Deposits:
 
 
 
 
 
 
 
Noninterest-bearing
 
$
5,320,435

 
$
5,227,216

Interest-bearing
 
5,535,281

 
5,230,910

Total deposits
 
10,855,716

 
10,458,126

FHLB advances
 
492,482

 
399,523

Securities sold under agreements to repurchase
 
24,489

 
61,094

Subordinated debentures
 
35,323

 
35,462

Other liabilities
 
188,173

 
107,291

Total liabilities
 
11,596,183

 
11,061,496

Commitments and contingent liabilities (Note 11)
 


 


Shareholders’ equity:
 
 
 
 
 
 
 
 
September 30,
2019
 
December 31,
2018
 
 
 
 
 
(in thousands)
 
 
 
 
Preferred stock (no par value)
 
 
 
 
 
 
 
Authorized shares
2,000

 
2,000

 
 
 
 
Common stock (no par value)
 
 
 
 
 
 
 
Authorized shares
115,000

 
115,000

 
 
 
 
Issued
73,588

 
73,249

 
1,648,335

 
1,642,246

Outstanding
72,288

 
73,249

 
 
 
 
Retained earnings
 
493,738

 
426,708

Accumulated other comprehensive income (loss)
 
64,884

 
(35,305
)
Treasury stock at cost
1,300

 
—

 
(45,380
)
 
—

Total shareholders’ equity
 
2,161,577

 
2,033,649

Total liabilities and shareholders’ equity
 
$
13,757,760

 
$
13,095,145



 
See accompanying Notes to unaudited Consolidated Financial Statements.

2

CONSOLIDATED STATEMENTS OF INCOME
Columbia Banking System, Inc.
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands except per share amounts)
Interest Income
 
 
 
 
 
 
 
 
Loans
 
$
112,656

 
$
109,748

 
$
337,657

 
$
318,187

Taxable securities
 
16,457

 
14,654

 
49,790

 
39,285

Tax-exempt securities
 
2,556

 
3,069

 
8,237

 
9,196

Deposits in banks
 
864

 
104

 
1,159

 
600

Total interest income
 
132,533

 
127,575

 
396,843

 
367,268

Interest Expense
 
 
 
 
 
 
 
 
Deposits
 
6,863

 
3,193

 
16,337

 
8,274

FHLB advances
 
2,569

 
966

 
9,962

 
2,351

Subordinated debentures
 
468

 
468

 
1,404

 
1,404

Other borrowings
 
183

 
152

 
552

 
288

Total interest expense
 
10,083

 
4,779

 
28,255

 
12,317

Net Interest Income
 
122,450

 
122,796

 
368,588

 
354,951

Provision for loan and lease losses
 
299

 
3,153

 
1,879

 
12,980

Net interest income after provision for loan and lease losses
 
122,151

 
119,643

 
366,709

 
341,971

Noninterest Income
 
 
 
 
 
 
 
 
Deposit account and treasury management fees
 
9,015

 
9,266

 
27,030

 
26,689

Card revenue
 
4,006

 
3,714

 
11,431

 
16,143

Financial services and trust revenue
 
3,226

 
2,975

 
9,608

 
8,924

Loan revenue
 
3,855

 
3,282

 
9,840

 
9,522

Bank owned life insurance
 
1,528

 
1,402

 
4,644

 
4,540

Investment securities gains (losses), net
 
—

 
(62
)
 
2,132

 
(73
)
Other
 
6,400

 
442

 
10,689

 
2,109

Total noninterest income
 
28,030

 
21,019

 
75,374

 
67,854

Noninterest Expense
 
 
 
 
 
 
 
 
Compensation and employee benefits
 
54,459

 
49,419

 
158,559

 
148,938

Occupancy
 
8,645

 
8,321

 
26,166

 
27,718

Data processing
 
5,102

 
4,466

 
14,372

 
14,957

Legal and professional fees
 
5,683

 
4,695

 
16,810

 
12,103

Amortization of intangibles
 
2,632

 
3,070

 
8,029

 
9,346

B&O taxes (1)
 
1,325

 
1,478

 
4,612

 
4,254

Advertising and promotion
 
1,752

 
1,472

 
3,596

 
4,523

Regulatory premiums
 
(38
)
 
904

 
1,902

 
2,778

Net cost (benefit) of operation of OREO
 
(90
)
 
485

 
(682
)
 
1,244

Other (1)
 
7,606

 
8,531

 
25,140

 
27,610

Total noninterest expense
 
87,076

 
82,841

 
258,504

 
253,471

Income before income taxes
 
63,105

 
57,821

 
183,579

 
156,354

Income tax provision
 
12,378

 
11,406

 
35,257

 
28,220

Net Income
 
$
50,727

 
$
46,415

 
$
148,322

 
$
128,134

Earnings per common share
 
 
 
 
 
 
 
 
Basic
 
$
0.70

 
$
0.63

 
$
2.04

 
$
1.75

Diluted
 
$
0.70

 
$
0.63

 
$
2.04

 
$
1.75

Weighted average number of common shares outstanding
 
71,803

 
72,427

 
72,256

 
72,370

Weighted average number of diluted common shares outstanding
 
71,803

 
72,432

 
72,257

 
72,374


__________
(1) Beginning the first quarter of 2019, B&O taxes are reported separately from other taxes, licenses and fees, which are now reported under “other noninterest expense.” Prior periods have been reclassified to conform to current period presentation.

See accompanying Notes to unaudited Consolidated Financial Statements.

3

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Columbia Banking System, Inc.
(Unaudited) 
 
 
Three Months Ended
 
 
September 30,
 
 
2019
 
2018
 
 
(in thousands)
Net income
 
$
50,727

 
$
46,415

Other comprehensive income (loss), net of tax:
 
 
 
 
Unrealized gain (loss) from securities:
 
 
 
 
Net unrealized holding gain (loss) from available for sale debt securities arising during the period, net of tax of ($4,421) and $4,286
 
14,593

 
(14,149
)
Net unrealized gain (loss) from securities, net of reclassification adjustment
 
14,593

 
(14,149
)
Pension plan liability adjustment:
 
 
 
 
Amortization of unrecognized net actuarial loss included in net periodic pension cost, net of tax of ($19) and ($19)
 
62

 
61

Pension plan liability adjustment, net
 
62

 
61

Unrealized gain from cash flow hedging instruments:
 
 
 
 
Net unrealized gain in cash flow hedging instruments arising during the period, net of tax of ($951) and $0
 
3,137

 
—

Reclassification adjustment for net gain in cash flow hedging instruments included in income, net of tax of $18 and $0
 
(58
)
 
—

Net unrealized gain from cash flow hedging instruments, net of reclassification adjustment
 
3,079

 
—

Other comprehensive income (loss)
 
17,734

 
(14,088
)
Total comprehensive income
 
$
68,461

 
$
32,327

 
 
Nine Months Ended
 
 
September 30,
 
 
2019
 
2018
 
 
(in thousands)
Net income
 
$
148,322

 
$
128,134

Other comprehensive income (loss), net of tax:
 
 
 
 
Unrealized gain (loss) from securities:
 
 
 
 
Net unrealized holding gain (loss) from available for sale debt securities arising during the period, net of tax of ($26,209) and $14,554
 
86,519

 
(48,043
)
Reclassification adjustment of net gain from sale of available for sale debt securities included in income, net of tax of $496 and $25
 
(1,636
)
 
(81
)
Net unrealized gain (loss) from securities, net of reclassification adjustment
 
84,883

 
(48,124
)
Pension plan liability adjustment:
 
 
 
 
Amortization of unrecognized net actuarial loss included in net periodic pension cost, net of tax of ($56) and ($56)
 
184

 
183

Pension plan liability adjustment, net
 
184

 
183

Unrealized gain from cash flow hedging instruments:
 
 
 
 
Net unrealized gain in cash flow hedging instruments arising during the period, net of tax of ($4,599) and $0
 
15,180

 
—

Reclassification adjustment for net gain in cash flow hedging instruments included in income, net of tax of $18 and $0
 
(58
)
 
—

Net unrealized gain from cash flow hedging instruments, net of reclassification adjustment
 
15,122

 
—

Other comprehensive income (loss)
 
100,189

 
(47,941
)
Total comprehensive income
 
$
248,511

 
$
80,193

See accompanying Notes to unaudited Consolidated Financial Statements.

4

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Columbia Banking System, Inc.
(Unaudited)
 
 
Common Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury Stock
 
Total
Shareholders’
Equity
 
 
Shares Outstanding
 
Amount
 
For the Three Months Ended September 30, 2019
 
(in thousands except per share amounts)
Balance at July 1, 2019
 
72,924

 
$
1,644,922

 
$
463,429

 
$
47,150

 
$
(21,863
)
 
$
2,133,638

Net income
 
—

 
—

 
50,727

 
—

 
—

 
50,727

Other comprehensive income
 
—

 
—

 
—

 
17,734

 
—

 
17,734

Issuance of common stock - stock option and other plans
 
31

 
1,132

 
—

 
—

 
—

 
1,132

Activity in deferred compensation plan
 
—

 
1

 
—

 
—

 
—

 
1

Issuance of common stock - restricted stock awards, net of canceled awards
 
9

 
2,299

 
—

 
—

 
—

 
2,299

Purchase and retirement of common stock
 
—

 
(19
)
 
—

 
—

 
—

 
(19
)
Cash dividends declared on common stock ($0.28 per share)
 
—

 
—

 
(20,418
)
 
—

 
—

 
(20,418
)
Purchase of treasury stock
 
(676
)
 
—

 
—

 
—

 
(23,517
)
 
(23,517
)
Balance at September 30, 2019
 
72,288

 
$
1,648,335

 
$
493,738

 
$
64,884

 
$
(45,380
)
 
$
2,161,577

For the Nine Months Ended September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2019
 
73,249

 
$
1,642,246

 
$
426,708

 
$
(35,305
)
 
$
—

 
$
2,033,649

Adjustment to opening retained earnings pursuant to adoption of ASU 2016-02
 
—

 
—

 
782

 
—

 
—

 
782

Net income
 
—

 
—

 
148,322

 
—

 
—

 
148,322

Other comprehensive income
 
—

 
—

 
—

 
100,189

 
—

 
100,189

Issuance of common stock - stock option and other plans
 
58

 
2,025

 
—

 
—

 
—

 
2,025

Activity in deferred compensation plan
 
—

 
2

 
—

 
—

 
—

 
2

Issuance of common stock - restricted stock awards, net of canceled awards
 
354

 
6,827

 
—

 
—

 
—

 
6,827

Purchase and retirement of common stock
 
(73
)
 
(2,765
)
 
—

 
—

 
—

 
(2,765
)
Cash dividends declared on common stock ($1.12 per share)
 
—

 
—

 
(82,074
)
 
—

 
—

 
(82,074
)
Purchase of treasury stock
 
(1,300
)
 
—

 
—

 
—

 
(45,380
)
 
(45,380
)
Balance at September 30, 2019
 
72,288

 
$
1,648,335

 
$
493,738

 
$
64,884

 
$
(45,380
)
 
$
2,161,577



See accompanying Notes to unaudited Consolidated Financial Statements.

5

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY, Continued
Columbia Banking System, Inc.
(Unaudited)
 
 
Common Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury Stock
 
Total
Shareholders’
Equity
 
 
Shares Outstanding
 
Amount
 
For the Three Months Ended September 30, 2018
 
(in thousands except per share amounts)
Balance at July 1, 2018
 
73,245

 
$
1,636,903

 
$
383,899

 
$
(55,921
)
 
$
—

 
$
1,964,881

Net income
 
—

 
—

 
46,415

 
—

 
—

 
46,415

Other comprehensive loss
 
—

 
—

 
—

 
(14,088
)
 
—

 
(14,088
)
Issuance of common stock - stock option and other plans
 
26

 
1,121

 
—

 
—

 
—

 
1,121

Activity in deferred compensation plan
 
—

 
1

 
—

 
—

 
—

 
1

Issuance of common stock - restricted stock awards, net of canceled awards
 
(11
)
 
2,148

 
—

 
—

 
—

 
2,148

Purchase and retirement of common stock
 
—

 
(33
)
 
—

 
—

 
—

 
(33
)
Cash dividends declared on common stock ($0.26 per share)
 
—

 
—

 
(19,050
)
 
—

 
—

 
(19,050
)
Balance at September 30, 2018
 
73,260

 
$
1,640,140

 
$
411,264

 
$
(70,009
)
 
$
—

 
$
1,981,395

For the Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
 
73,020

 
$
1,634,705

 
$
337,442

 
$
(22,225
)
 
$
—

 
$
1,949,922

Adjustment to opening retained earnings pursuant to adoption of ASU 2016-01
 
—

 
—

 
(157
)
 
157

 
—

 
—

Net income
 
—

 
—

 
128,134

 
—

 
—

 
128,134

Other comprehensive loss
 
—

 
—

 
—

 
(47,941
)
 
—

 
(47,941
)
Issuance of common stock - stock option and other plans
 
45

 
1,857

 
—

 
—

 
—

 
1,857

Activity in deferred compensation plan
 
—

 
7

 
—

 
—

 
—

 
7

Issuance of common stock - restricted stock awards, net of canceled awards
 
257

 
6,231

 
—

 
—

 
—

 
6,231

Purchase and retirement of common stock
 
(62
)
 
(2,660
)
 
—

 
—

 
—

 
(2,660
)
Cash dividends declared on common stock ($0.74 per share)
 
—

 
—

 
(54,155
)
 
—

 
—

 
(54,155
)
Balance at September 30, 2018
 
73,260

 
$
1,640,140

 
$
411,264

 
$
(70,009
)
 
$
—

 
$
1,981,395


See accompanying Notes to unaudited Consolidated Financial Statements.

6

CONSOLIDATED STATEMENTS OF CASH FLOWS
Columbia Banking System, Inc.
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
 
(in thousands)
Cash Flows From Operating Activities
 
 
 
 
Net income
 
$
148,322

 
$
128,134

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
Provision for loan and lease losses
 
1,879

 
12,980

Stock-based compensation expense
 
6,827

 
6,231

Depreciation, amortization and accretion
 
26,150

 
25,807

Investment securities (gain) loss, net
 
(2,132
)
 
73

Net realized (gain) loss on sale of premises and equipment and loans held for investment
 
(6,787
)
 
142

Net realized (gain) loss on sale and valuation adjustments of OREO
 
(602
)
 
1,299

Gain on bank owned life insurance death benefit
 
(2,975
)
 
—

Originations of loans held for sale
 
(134,634
)
 
(103,614
)
Proceeds from sales of loans held for sale
 
123,447

 
104,105

Net change in:
 
 
 
 
Interest receivable
 
(3,180
)
 
(7,595
)
Interest payable
 
632

 
618

Other assets
 
(31,840
)
 
(2,599
)
Other liabilities
 
29,706

 
5,662

Net cash provided by operating activities
 
154,813

 
171,243

Cash Flows From Investing Activities
 
 
 
 
Loans originated, net of principal collected (1)
 
(305,581
)
 
(121,413
)
Purchases of:
 
 
 
 
Debt securities available for sale
 
(649,133
)
 
(606,052
)
Loans held for investment (1)
 
(57,075
)
 
(46,969
)
Premises and equipment
 
(5,833
)
 
(8,253
)
FHLB stock
 
(190,800
)
 
(136,120
)
Proceeds from:
 
 
 
 
Sales of debt securities available for sale
 
259,554

 
32,330

Principal repayments and maturities of debt securities available for sale
 
287,479

 
311,956

Sales of premises and equipment and loans held for investment
 
7,735

 
14,956

Redemption of FHLB stock
 
187,080

 
129,920

Sales of OREO and OPPO
 
6,433

 
5,868

Bank owned life insurance death benefit
 
—

 
5,074

Net cash used in investing activities
 
(460,141
)
 
(418,703
)
Cash Flows From Financing Activities
 
 
 
 
Net increase in deposits
 
397,893

 
72,151

Net increase (decrease) in sweep repurchase agreements (2)
 
(36,605
)
 
8,138

Proceeds from:
 
 
 
 
FHLB advances
 
4,770,000

 
3,403,000

FRB borrowings
 
36,000

 
5,010

Other borrowings
 
100

 
—

Exercise of stock options
 
2,025

 
1,857

Payments for:
 
 
 
 
Repayment of FHLB advances
 
(4,677,000
)
 
(3,248,000
)
Repayment of FRB borrowings
 
(36,000
)
 
(5,010
)
Repayment of other borrowings
 
(100
)
 
—

Repayment of junior subordinated debentures
 
—

 
(8,248
)
Repayment of term repurchase agreement (2)
 
—

 
(25,000
)
Common stock dividends
 
(81,822
)
 
(54,149
)
Purchase of treasury stock
 
(45,380
)
 
—

Purchase and retirement of common stock
 
(2,765
)
 
(2,660
)
Net cash provided by financing activities
 
326,346

 
147,089

Increase (decrease) in cash and cash equivalents
 
21,018

 
(100,371
)
Cash and cash equivalents at beginning of period
 
277,587

 
342,533

Cash and cash equivalents at end of period
 
$
298,605

 
$
242,162

___________________
 
 
 
 
(1) Revised from amounts previously reported to correct an immaterial misclassification of $47.0 million of purchases of loans held for investment within loans originated, net of principal collected, for the nine months ended September 30, 2018. There were no changes to net cash flows from operating, investing or financing activities as a result of this change.
(2) Revised from amounts previously reported to correct an immaterial misclassification of a $25.0 million repayment of the term repurchase agreement within net increase (decrease) in sweep repurchase agreements for the nine months ended September 30, 2018. There were no changes to net cash flows from operating, investing or financing activities as a result of this change.
                                                                                                                                                                                     


7

CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Columbia Banking System, Inc.
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
 
(in thousands)
Supplemental Information:
 
 
 
 
Interest paid
 
$
27,623

 
$
11,699

Income taxes paid, net of refunds
 
$
33,134

 
$
12,768

Non-cash investing and financing activities
 
 
 
 
Loans transferred to OREO
 
$
386

 
$
1,200

Premises and equipment expenditures incurred but not yet paid
 
$
152

 
$
464

Change in dividends payable on unvested shares included in other liabilities
 
$
252

 
$
6




See accompanying Notes to unaudited Consolidated Financial Statements.

8

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Columbia Banking System, Inc.
1.
Basis of Presentation, Significant Accounting Policies and Reclassifications
Basis of Presentation
The interim unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. The Consolidated Financial Statements include the accounts of Columbia Banking System, Inc. (“we”, “our”, “Columbia” or the “Company”) and its subsidiaries, including its wholly owned banking subsidiary Columbia State Bank (“Columbia Bank” or the “Bank”) and Columbia Trust Company (“Columbia Trust”). All intercompany transactions and accounts have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included. The results of operations for the nine months ended September 30, 2019 are not necessarily indicative of results to be anticipated for the year ending December 31, 2019. The accompanying interim unaudited Consolidated Financial Statements should be read in conjunction with the financial statements and related notes contained in the Company’s 2018 Annual Report on Form 10-K.
Significant Accounting Policies
The significant accounting policies used in preparation of our Consolidated Financial Statements are disclosed in our 2018 Annual Report on Form 10-K. There have not been any changes in our significant accounting policies compared to those contained in our 2018 Form 10-K disclosure for the year ended December 31, 2018.
Reclassifications
Certain amounts reported in prior periods have been reclassified in the Consolidated Financial Statements to conform to the current presentation. The reclassifications have no effect on net income or stockholders’ equity as previously reported.
2.
Accounting Pronouncements Recently Adopted or Issued
Accounting Standards Adopted in 2019
In February 2016, the FASB issued ASU 2016-02, Leases. The amendments included in this ASU create a new accounting model for both lessees and lessors. The new guidance requires lessees to recognize lease liabilities, initially measured as the present value of future lease payments, and corresponding right-of-use assets for all leases with lease terms greater than 12 months. The new lease model differs from the old lease accounting model, as the old model does not require such lease liabilities and corresponding right-of-use assets to be recorded for operating leases. The amendments in ASU 2016-02 must be adopted using the modified retrospective approach and will be effective for the first interim or annual period beginning after December 15, 2018. The FASB subsequently issued ASU 2018-11, which allows for an additional (optional) transition method. The Company adopted the new standard effective January 1, 2019 utilizing the transition method allowed under ASU 2018-11 and did not restate comparative periods. The Company elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classifications and our assessment on whether a contract is or contains a lease. We also elected to keep leases with an initial term of 12 months or less off the balance sheet. The adoption of the new standard resulted in an increase in other assets and an increase in other liabilities of $49.2 million and $48.2 million, respectively. The Company recognized a cumulative effect adjustment of $782 thousand to increase the beginning balance of retained earnings related to previous deferred gains on sale-leaseback transactions.
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the ASC 350 requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments also require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, including reasonably certain renewal periods. The amendments in ASU 2018-15 are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The amendments can be adopted on a prospective or retrospective basis. The Company adopted the new standard effective July 1, 2019 on a prospective basis. The adoption of the new standard resulted in an increase in other assets of $920 thousand.

9

Recently Issued Accounting Standards, Not Yet Adopted
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments in this ASU clarify certain aspects of accounting for credit losses, hedging activities, and financial instruments (addressed by ASUs 2016-01, 2016-13, and 2017-12). Many of the amendments reflect decisions reached at FASB meetings or meetings of the Board’s credit losses transition resource group. Topics covered in this ASU include: accrued interest, transfers between classifications or categories for loans and debt securities, recoveries, reinsurance recoverables, projections of interest rate environments for variable-rate financial instruments, costs to sell when foreclosure is probable, consideration of expected prepayments when determining the effective interest rate, vintage disclosures, extension and renewal options, etc. The amendments in ASU 2019-04 are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The Company is assessing the impact that this guidance will have on its Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The amendments included in this ASU require an entity to reflect its current estimate of all expected credit losses for assets held at an amortized cost basis. For available for sale debt securities, credit losses will be measured in a manner similar to current GAAP, however, this ASU will require that credit losses be presented as an allowance rather than as a write-down. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and are required to be adopted through a modified retrospective approach, with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the ASU is effective.
Unlike the incurred loss models in existing GAAP, the CECL model in ASU 2016-13 does not specify a threshold for the recognition of an impairment allowance. Rather, the Company will recognize an impairment allowance equal to its estimate of lifetime expected credit losses, adjusted for prepayments, for in-scope financial instruments as of the end of the reporting period. Accordingly, the impairment allowance measured under the CECL model could change significantly from the impairment allowance measured under the Company’s existing incurred loss model. The Company has engaged a third-party vendor to assist in the CECL calculation and has developed an internal governance framework to oversee the CECL implementation. Significant CECL implementation matters that have been completed include identifying, sourcing and storing data, addressing data gaps, defining a reasonable and supportable forecast period and selecting historical loss information. Other significant CECL implementation matters being addressed by the Company include selecting loss estimation methodologies, assessing the impact to internal controls over financial reporting, and capital planning.
Upon adoption of the standard on January 1, 2020, the Company expects that, based on current expectations of future economic conditions, its impact on the allowance for credit losses will range from a decrease of 10% to an increase of 5%, with no material impact on capital levels anticipated. The ultimate impact will depend on the characteristics of the Company’s portfolios as well as the macroeconomic conditions and forecasts upon adoption, the ultimate validation of models and methodologies, and other management judgments.

10

3.
Securities
The following table summarizes the amortized cost, gross unrealized gains and losses and the resulting fair value of debt securities available for sale:
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
September 30, 2019
 
(in thousands)
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations (1)
 
$
2,432,873

 
$
61,024

 
$
(11,062
)
 
$
2,482,835

Other asset-backed securities (1)
 
166,482

 
5,149

 
(53
)
 
171,578

State and municipal securities
 
488,273

 
9,471

 
(430
)
 
497,314

U.S. government agency and government-sponsored enterprise securities
 
212,265

 
3,382

 
(52
)
 
215,595

U.S. government securities
 
250

 
—

 
—

 
250

Total
 
$
3,300,143

 
$
79,026

 
$
(11,597
)
 
$
3,367,572

December 31, 2018
 
 
 
 
 
 
 
 
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations (1)
 
$
2,045,728

 
$
8,473

 
$
(40,846
)
 
$
2,013,355

Other asset-backed securities (1)
 
176,793

 
763

 
(2,621
)
 
174,935

State and municipal securities
 
579,755

 
2,328

 
(7,760
)
 
574,323

U.S. government agency and government-sponsored enterprise securities
 
408,088

 
1,235

 
(4,736
)
 
404,587

U.S. government securities
 
251

 
—

 
(3
)
 
248

Total
 
$
3,210,615

 
$
12,799

 
$
(55,966
)
 
$
3,167,448


__________
(1) Beginning July 2019, other asset-backed securities were presented separately in this table. Prior period amounts that were previously reported in U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations have been reclassified to conform to current period presentation.

The following table provides the proceeds and both gross realized gains and losses on sales of debt securities available for sale as well as other securities gains and losses for the periods indicated:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands)
Proceeds from sales of debt securities available for sale
 
$
—

 
$
—

 
$
259,554

 
$
32,330

 
 
 
 
 
 
 
 
 
Gross realized gains from sales of debt securities available for sale
 
$
—

 
$
—

 
$
3,357

 
$
235

Gross realized losses from sales of debt securities available for sale
 
—

 
—

 
(1,225
)
 
(129
)
Other securities losses, net (1)
 
—

 
(62
)
 
—

 
(179
)
Investment securities gains, net
 
$
—

 
$
(62
)
 
$
2,132

 
$
(73
)

__________
(1) Other securities losses, net includes net unrealized loss activity associated with equity securities for the periods ended September 30, 2018. There were no sales of equity securities during the periods presented.

11

The scheduled contractual maturities of debt securities available for sale at September 30, 2019 are presented as follows:
 
 
September 30, 2019
 
 
Amortized Cost
 
Fair Value
 
 
(in thousands)
Due within one year
 
$
112,412

 
$
112,594

Due after one year through five years
 
412,269

 
416,294

Due after five years through ten years
 
1,592,778

 
1,650,631

Due after ten years
 
1,182,684

 
1,188,053

Total debt securities available for sale
 
$
3,300,143

 
$
3,367,572


The following table summarizes the carrying value of securities pledged as collateral to secure public funds, borrowings and other purposes as permitted or required by law:
 
 
September 30, 2019
 
 
(in thousands)
To secure public funds
 
$
443,320

To secure borrowings
 
111,421

Other securities pledged
 
155,727

Total securities pledged as collateral
 
$
710,468


The following table shows the gross unrealized losses and fair value of the Company’s debt securities available for sale with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2019 and December 31, 2018:
 
 
Less than 12 Months
 
12 Months or More
 
Total
 
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
September 30, 2019
 
(in thousands)
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations (1)
 
$
478,690

 
$
(4,017
)
 
$
528,228

 
$
(7,045
)
 
$
1,006,918

 
$
(11,062
)
Other asset-backed securities (1)
 
—

 
—

 
6,926

 
(53
)
 
6,926

 
(53
)
State and municipal securities
 
52,763

 
(255
)
 
23,237

 
(175
)
 
76,000

 
(430
)
U.S. government agency and government-sponsored enterprise securities
 
—

 
—

 
57,448

 
(52
)
 
57,448

 
(52
)
U.S. government securities
 
—

 
—

 
250

 
—

 
250

 
—

Total
 
$
531,453

 
$
(4,272
)
 
$
616,089

 
$
(7,325
)
 
$
1,147,542

 
$
(11,597
)
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations (1)
 
$
114,551

 
$
(750
)
 
$
1,207,020

 
$
(40,096
)
 
$
1,321,571

 
$
(40,846
)
Other asset-backed securities (1)
 
40,071

 
(222
)
 
94,367

 
(2,399
)
 
134,438

 
(2,621
)
State and municipal securities
 
106,292

 
(581
)
 
280,496

 
(7,179
)
 
386,788

 
(7,760
)
U.S. government agency and government-sponsored enterprise securities
 
15,392

 
(45
)
 
291,435

 
(4,691
)
 
306,827

 
(4,736
)
U.S. government securities
 
—

 
—

 
247

 
(3
)
 
247

 
(3
)
Total
 
$
276,306

 
$
(1,598
)
 
$
1,873,565

 
$
(54,368
)
 
$
2,149,871

 
$
(55,966
)

__________
(1) Beginning July 2019, other asset-backed securities were presented separately in this table. Prior period amounts that were previously reported in U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations have been reclassified to conform to current period presentation.

12

At September 30, 2019, there were 211 U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations securities in an unrealized loss position, of which 170 were in a continuous loss position for 12 months or more. The decline in fair value is attributable to changes in interest rates relative to where these investments fall within the yield curve and their individual characteristics. Because the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2019.
At September 30, 2019, there were six other asset-backed securities in an unrealized loss position, all of which were in a continuous loss position for 12 months or more. The decline in fair value is attributable to changes in interest rates relative to where these investments fall within the yield curve and their individual characteristics. Because the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2019.
At September 30, 2019, there were 81 state and municipal government securities in an unrealized loss position, of which 27 were in a continuous loss position for 12 months or more. The unrealized losses on state and municipal securities were caused by interest rate changes or widening of market spreads subsequent to the purchase of the individual securities. Management monitors published credit ratings of these securities for adverse changes. As of September 30, 2019, none of the rated obligations of state and local government entities held by the Company had a below investment grade credit rating. Because the credit quality of these securities are investment grade and the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2019.
At September 30, 2019, there were seven U.S. government agency and government-sponsored enterprise securities in an unrealized loss position, all of which were in a continuous loss position for 12 months or more. The decline in fair value is attributable to changes in interest rates relative to where these investments fall within the yield curve and their individual characteristics. Because the Company does not currently intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2019.
At September 30, 2019, there was one U.S. government security in an unrealized loss position, which was also in a continuous loss position for more than 12 months. The decline in fair value is attributable to changes in interest rates relative to where this investment falls within the yield curve and its individual characteristics. Because the Company does not currently intend to sell this security nor does the Company consider it more likely than not that it will be required to sell this security before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider this investment to be other-than-temporarily impaired at September 30, 2019.
4.
Loans
The Company’s loan portfolio includes originated and purchased loans. Originated loans and purchased loans for which there was no evidence of credit deterioration at their acquisition date and it was probable that we would be able to collect all contractually required payments are referred to collectively as loans, excluding PCI loans. Purchased loans for which there was, at acquisition date, evidence of credit deterioration since their origination and it was probable that we would be unable to collect all contractually required payments are referred to as PCI loans.

13

The following is an analysis of the loan portfolio by segment (net of unearned income):
 
 
September 30, 2019
 
December 31, 2018
 
 
Loans, excluding PCI loans
 
PCI Loans
 
Total
 
Loans, excluding PCI loans
 
PCI Loans
 
Total
 
 
(in thousands)
Commercial business
 
$
3,707,314

 
$
9,004

 
$
3,716,318

 
$
3,438,422

 
$
9,240

 
$
3,447,662

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
273,079

 
7,403

 
280,482

 
238,367

 
8,017

 
246,384

Commercial and multifamily residential
 
3,975,647

 
56,702

 
4,032,349

 
3,846,027

 
62,910

 
3,908,937

Total real estate
 
4,248,726

 
64,105

 
4,312,831

 
4,084,394

 
70,927

 
4,155,321

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
195,198

 
144

 
195,342

 
217,790

 
153

 
217,943

Commercial and multifamily residential
 
261,786

 
486

 
262,272

 
284,394

 
534

 
284,928

Total real estate construction
 
456,984

 
630

 
457,614

 
502,184

 
687

 
502,871

Consumer
 
297,009

 
8,038

 
305,047

 
318,945

 
8,906

 
327,851

Less: Net unearned income
 
(35,455
)
 
—

 
(35,455
)
 
(42,194
)
 
—

 
(42,194
)
Total loans, net of unearned income
 
8,674,578

 
81,777

 
8,756,355

 
8,301,751

 
89,760

 
8,391,511

Less: ALLL
 
(79,602
)
 
(3,058
)
 
(82,660
)
 
(79,758
)
 
(3,611
)
 
(83,369
)
Total loans, net
 
$
8,594,976

 
$
78,719

 
$
8,673,695

 
$
8,221,993

 
$
86,149

 
$
8,308,142

Loans held for sale
 
$
15,036

 
$
—

 
$
15,036

 
$
3,849

 
$
—

 
$
3,849


At September 30, 2019 and December 31, 2018, the Company had no material foreign activities. Substantially all of the Company’s loans and unfunded commitments are geographically concentrated in its service areas within the states of Washington, Oregon and Idaho.
At September 30, 2019 and December 31, 2018, $3.18 billion and $3.22 billion of commercial and residential real estate loans were pledged as collateral on FHLB borrowings and additional borrowing capacity. The Company has also pledged $138.9 million and $82.0 million of commercial loans to the FRB for additional borrowing capacity at September 30, 2019 and December 31, 2018, respectively.
The following is an analysis of nonaccrual loans as of September 30, 2019 and December 31, 2018:
 
 
September 30, 2019
 
December 31, 2018
 
 
Recorded
Investment
Nonaccrual
Loans
 
Unpaid Principal
Balance
Nonaccrual
Loans
 
Recorded
Investment
Nonaccrual
Loans
 
Unpaid Principal
Balance
Nonaccrual
Loans
 
 
(in thousands)
Commercial business:
 
 
 
 
 
 
 
 
Secured
 
$
24,408

 
$
35,033

 
$
35,504

 
$
45,072

Unsecured
 
—

 
—

 
9

 
9

Real estate:
 
 
 
 
 
 
 
 
One-to-four family residential
 
574

 
594

 
1,158

 
1,178

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
Commercial land
 
2,562

 
2,570

 
2,261

 
2,270

Income property
 
997

 
997

 
2,721

 
3,062

Owner occupied
 
6,524

 
6,633

 
9,922

 
10,300

Real estate construction:
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
Land and acquisition
 
—

 
—

 
318

 
318

Consumer
 
1,956

 
2,299

 
2,949

 
3,149

Total
 
$
37,021

 
$
48,126

 
$
54,842

 
$
65,358



14

Loans, excluding PCI loans
The following is an aging of the recorded investment of the loan portfolio as of September 30, 2019 and December 31, 2018:
 
 
Current
Loans
 
30 - 59
Days
Past Due
 
60 - 89
Days
Past Due
 
Greater
than 90
Days Past
Due
 
Total
Past Due
 
Nonaccrual
Loans
 
Total Loans
September 30, 2019
 
(in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
3,525,753

 
$
5,560

 
$
262

 
$
—

 
$
5,822

 
$
24,408

 
$
3,555,983

Unsecured
 
138,947

 
424

 
2

 
—

 
426

 
—

 
139,373

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
269,593

 
2,429

 
437

 
—

 
2,866

 
574

 
273,033

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
292,594

 
140

 
—

 
—

 
140

 
2,562

 
295,296

Income property
 
1,955,634

 
2,038

 
3,266

 
—

 
5,304

 
997

 
1,961,935

Owner occupied
 
1,689,919

 
1,727

 
138

 
—

 
1,865

 
6,524

 
1,698,308

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
1,614

 
—

 
—

 
—

 
—

 
—

 
1,614

Residential construction
 
192,563

 
—

 
—

 
—

 
—

 
—

 
192,563

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
151,362

 
6,038

 
—

 
—

 
6,038

 
—

 
157,400

Owner occupied
 
100,610

 
1,636

 
—

 
—

 
1,636

 
—

 
102,246

Consumer
 
293,861

 
746

 
264

 
—

 
1,010

 
1,956

 
296,827

Total
 
$
8,612,450

 
$
20,738

 
$
4,369

 
$
—

 
$
25,107

 
$
37,021

 
$
8,674,578

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current
Loans
 
30 - 59
Days
Past Due
 
60 - 89
Days
Past Due
 
Greater
than 90
Days Past
Due
 
Total
Past Due
 
Nonaccrual
Loans
 
Total Loans
December 31, 2018
 
(in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
3,267,709

 
$
5,864

 
$
3,624

 
$
—

 
$
9,488

 
$
35,504

 
$
3,312,701

Unsecured
 
111,868

 
240

 
—

 
—

 
240

 
9

 
112,117

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
233,941

 
694

 
233

 
—

 
927

 
1,158

 
236,026

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
283,416

 
—

 
—

 
—

 
—

 
2,261

 
285,677

Income property
 
1,910,505

 
5,009

 
2,241

 
—

 
7,250

 
2,721

 
1,920,476

Owner occupied
 
1,606,085

 
1,744

 
—

 
—

 
1,744

 
9,922

 
1,617,751

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
4,099

 
—

 
—

 
—

 
—

 
318

 
4,417

Residential construction
 
212,303

 
93

 
—

 
—

 
93

 
—

 
212,396

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
194,912

 
—

 
—

 
—

 
—

 
—

 
194,912

Owner occupied
 
79,805

 
7,258

 
—

 
—

 
7,258

 
—

 
87,063

Consumer
 
314,008

 
1,057

 
201

 
—

 
1,258

 
2,949

 
318,215

Total
 
$
8,218,651

 
$
21,959

 
$
6,299

 
$
—

 
$
28,258

 
$
54,842

 
$
8,301,751



15

The following is an analysis of impaired loans as of September 30, 2019 and December 31, 2018:
 
 
Recorded Investment
of Loans
Collectively Measured
for Contingency
Provision
 
Recorded Investment
of Loans
Individually
Measured for
Specific
Impairment
 
Impaired Loans With
Recorded Allowance
 
Impaired Loans Without
Recorded Allowance
 
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
September 30, 2019
 
(in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
3,530,404

 
$
25,579

 
$
9,114

 
$
10,673

 
$
1,879

 
$
16,465

 
$
21,051

Unsecured
 
139,360

 
13

 
13

 
13

 
—

 
—

 
—

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
272,686

 
347

 
347

 
635

 
5

 
—

 
—

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
292,436

 
2,860

 
1,591

 
1,601

 
320

 
1,269

 
1,304

Income property
 
1,961,935

 
—

 
—

 
—

 
—

 
—

 
—

Owner occupied
 
1,688,118

 
10,190

 
3,733

 
5,260

 
105

 
6,457

 
6,599

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
1,614

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
192,563

 
—

 
—

 
—

 
—

 
—

 
—

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
157,400

 
—

 
—

 
—

 
—

 
—

 
—

Owner occupied
 
102,246

 
—

 
—

 
—

 
—

 
—

 
—

Consumer
 
294,599

 
2,228

 
379

 
514

 
17

 
1,849

 
2,006

Total
 
$
8,633,361

 
$
41,217

 
$
15,177

 
$
18,696

 
$
2,326

 
$
26,040

 
$
30,960

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded Investment
of Loans
Collectively Measured
for Contingency
Provision
 
Recorded Investment
of Loans
Individually
Measured for
Specific
Impairment
 
Impaired Loans With
Recorded Allowance
 
Impaired Loans Without
Recorded Allowance
 
 
 
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
December 31, 2018
 
(in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
3,286,416

 
$
26,285

 
$
6,350

 
$
8,460

 
$
2,023

 
$
19,935

 
$
24,404

Unsecured
 
112,097

 
20

 
20

 
20

 
—

 
—

 
—

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
235,138

 
888

 
325

 
798

 
8

 
563

 
575

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
283,451

 
2,226

 
—

 
—

 
—

 
2,226

 
2,272

Income property
 
1,917,522

 
2,954

 
99

 
165

 
1

 
2,855

 
3,011

Owner occupied
 
1,605,042

 
12,709

 
3,231

 
4,666

 
69

 
9,478

 
9,750

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
4,417

 
—

 
—

 
—

 
—

 
—

 
—

Residential construction
 
212,396

 
—

 
—

 
—

 
—

 
—

 
—

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
194,912

 
—

 
—

 
—

 
—

 
—

 
—

Owner occupied
 
87,063

 
—

 
—

 
—

 
—

 
—

 
—

Consumer
 
314,193

 
4,022

 
3,326

 
3,584

 
31

 
696

 
704

Total
 
$
8,252,647

 
$
49,104

 
$
13,351

 
$
17,693

 
$
2,132

 
$
35,753

 
$
40,716


16

The following table provides additional information on impaired loans for the three and nine month periods indicated:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
Average Recorded
Investment
Impaired Loans 
 
Interest Recognized
on
Impaired Loans
 
Average Recorded
Investment
Impaired Loans 
 
Interest Recognized
on
Impaired Loans
 
Average Recorded
Investment
Impaired Loans 
 
Interest Recognized
on
Impaired Loans
 
Average Recorded
Investment
Impaired Loans 
 
Interest Recognized
on
Impaired Loans
 
 
(in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
21,419

 
$
108

 
$
43,805

 
$
2

 
$
24,833

 
$
267

 
$
43,055

 
$
43

Unsecured
 
15

 
—

 
444

 
—

 
17

 
1

 
234

 
1

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
596

 
12

 
545

 
12

 
736

 
29

 
713

 
30

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
2,861

 
8

 
2,246

 
26

 
2,704

 
23

 
2,407

 
26

Income property
 
664

 
—

 
2,443

 
34

 
1,401

 
—

 
3,367

 
96

Owner occupied
 
10,241

 
176

 
9,349

 
124

 
12,435

 
210

 
8,986

 
333

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential construction
 
—

 
—

 
—

 
—

 
—

 
—

 
605

 
—

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
—

 
—

 
4,050

 
72

 
—

 
—

 
4,050

 
174

Consumer
 
2,842

 
10

 
5,646

 
44

 
3,290

 
28

 
6,135

 
110

Total
 
$
38,638

 
$
314

 
$
68,528

 
$
314

 
$
45,416

 
$
558

 
$
69,552

 
$
813



17

The following is an analysis of loans classified as TDR during the three and nine months ended September 30, 2019 and 2018:
 
 
Three Months Ended September 30, 2019
 
Three Months Ended September 30, 2018
 
 
Number of TDR Modifications
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Number of TDR Modifications
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
 
(dollars in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
6

 
$
5,108

 
$
5,108

 
1

 
$
14,511

 
$
14,511

Consumer
 
5

 
276

 
276

 
3

 
123

 
123

Total
 
11

 
$
5,384

 
$
5,384

 
4

 
$
14,634

 
$
14,634

 
 
Nine Months Ended September 30, 2019
 
Nine Months Ended September 30, 2018
 
 
Number of TDR Modifications
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Number of TDR Modifications
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
 
(dollars in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
11

 
$
6,642

 
$
6,642

 
9

 
$
17,605

 
$
17,605

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
1

 
217

 
217

 
1

 
891

 
891

Consumer
 
9

 
394

 
394

 
18

 
2,540

 
2,540

Total
 
21

 
$
7,253

 
$
7,253

 
28

 
$
21,036

 
$
21,036



The Company’s loans classified as TDR are loans that have been modified or the borrower has been granted special concessions due to financial difficulties that, if not for the challenges of the borrower, the Company would not otherwise consider. The TDR modifications or concessions are made to increase the likelihood that these borrowers with financial difficulties will be able to satisfy their debt obligations as amended. The concessions granted in the restructurings, summarized in the table above, largely consisted of maturity extensions, interest rate modifications or a combination of both. In limited circumstances, a reduction in the principal balance of the loan could also be made as a concession. Credit losses for loans classified as TDR are measured on the same basis as impaired loans. For impaired loans, an allowance is established when the collateral value less selling costs (or discounted cash flows or observable market price) of the impaired loan is lower than the recorded investment of that loan.
The Company had commitments to lend $1.5 million of additional funds on loans classified as TDR as of September 30, 2019. The Company had $2.1 million of such commitments at December 31, 2018. The Company did not have any loans modified as TDR that defaulted within 12 months of being modified as TDR during the three months ended September 30, 2019. The Company did have one $26 thousand consumer loan that defaulted within 12 months of being modified as a TDR during the nine months ended September 30, 2019. The defaulted TDR loan is collateralized and was included with the loans individually measured for specific impairment. The Company did not experience any similar defaults during the three and nine months ended September 30, 2018.
PCI Loans
PCI loans are accounted for under ASC 310-30 and initially measured at fair value based on expected future cash flows over the life of the loans. Loans that have common risk characteristics are aggregated into pools. The Company remeasures contractual and expected cash flows, at the pool-level, on a quarterly basis.
Contractual cash flows are calculated based upon the loan pool terms after applying a prepayment factor. Calculation of the applied prepayment factor for contractual cash flows is the same as described below for expected cash flows.

18

Inputs to the determination of expected cash flows include cumulative default and prepayment data as well as loss severity and recovery lag information. Cumulative default and prepayment data are calculated via a transition matrix, which utilizes probability values of a loan pool transitioning into a particular delinquency state (e.g. 0-30 days past due, 31 to 60 days, etc.) given its delinquency state at the remeasurement date. Loss severity factors are based upon either actual charge-off data within the loan pools or industry averages, and recovery lags are based upon the collateral within the loan pools.
The excess of cash flows, expected to be collected over the initial fair value of PCI loans, is referred to as the accretable yield and is accreted into interest income over the estimated life of the acquired loans using the effective yield method. Other adjustments to the accretable yield include changes in the estimated remaining life of the acquired loans, changes in expected cash flows and changes of indices for acquired loans with variable interest rates.
The following is an analysis of our PCI loans, net of related ALLL and remaining valuation discounts as of September 30, 2019 and December 31, 2018:
 
 
September 30, 2019
 
December 31, 2018
 
 
(in thousands)
Commercial business
 
$
9,234

 
$
9,672

Real estate:
 
 
 
 
One-to-four family residential
 
8,764

 
9,848

Commercial and multifamily residential
 
59,383

 
66,340

Total real estate
 
68,147

 
76,188

Real estate construction:
 
 
 
 
One-to-four family residential
 
144

 
153

Commercial and multifamily residential
 
462

 
507

Total real estate construction
 
606

 
660

Consumer
 
8,744

 
9,765

Subtotal of PCI loans
 
86,731

 
96,285

Less:
 
 
 
 
Valuation discount resulting from acquisition accounting
 
4,954

 
6,525

ALLL
 
3,058

 
3,611

PCI loans, net of valuation discounts and allowance for loan losses
 
$
78,719

 
$
86,149


The following table shows the changes in accretable yield for PCI loans for the three and nine months ended September 30, 2019 and 2018:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands)
Balance at beginning of period
 
$
20,989

 
$
25,350

 
$
21,949

 
$
31,176

Accretion
 
(1,289
)
 
(2,233
)
 
(4,865
)
 
(6,435
)
Disposals
 
(45
)
 
(221
)
 
61

 
(387
)
Reclassifications to (from) nonaccretable difference
 
719

 
279

 
3,229

 
(1,179
)
Balance at end of period
 
$
20,374

 
$
23,175

 
$
20,374

 
$
23,175


5.
Allowance for Loan and Lease Losses and Allowance for Unfunded Commitments and Letters of Credit
We record an ALLL to recognize management’s estimate of credit losses incurred in the loan portfolio at each balance sheet date. We have used the same methodology for the ALLL calculation during the three and nine months ended September 30, 2019 and 2018.

19

The following tables show a detailed analysis of the ALLL for the three and nine months ended September 30, 2019 and 2018:
 
 
Beginning
Balance
 
Charge-offs
 
Recoveries
 
Provision (Recapture)
 
Ending
Balance
 
Specific
Reserve
 
General
Allocation
Three Months Ended September 30, 2019
 
(in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
37,862

 
$
(2,365
)
 
$
202

 
$
5,721

 
$
41,420

 
$
1,879

 
$
39,541

Unsecured
 
3,010

 
—

 
156

 
423

 
3,589

 
—

 
3,589

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
645

 
—

 
65

 
(107
)
 
603

 
5

 
598

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
5,409

 
—

 
79

 
560

 
6,048

 
320

 
5,728

Income property
 
5,325

 
—

 
104

 
35

 
5,464

 
—

 
5,464

Owner occupied
 
5,230

 
—

 
1

 
500

 
5,731

 
105

 
5,626

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
153

 
—

 
105

 
(124
)
 
134

 
—

 
134

Residential construction
 
6,103

 
—

 
2,366

 
(2,852
)
 
5,617

 
—

 
5,617

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
4,198

 
—

 
—

 
(505
)
 
3,693

 
—

 
3,693

Owner occupied
 
2,412

 
—

 
—

 
595

 
3,007

 
—

 
3,007

Consumer
 
5,194

 
(285
)
 
326

 
(1,010
)
 
4,225

 
17

 
4,208

PCI
 
3,269

 
(722
)
 
1,812

 
(1,301
)
 
3,058

 
—

 
3,058

Unallocated
 
1,707

 
—

 
—

 
(1,636
)
 
71

 
—

 
71

Total
 
$
80,517

 
$
(3,372
)
 
$
5,216

 
$
299

 
$
82,660

 
$
2,326

 
$
80,334

 
 
Beginning
Balance
 
Charge-offs
 
Recoveries
 
Provision (Recapture)
 
Ending
Balance
 
Specific
Reserve
 
General
Allocation
Nine Months Ended September 30, 2019
 
(in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
43,188

 
$
(7,717
)
 
$
1,040

 
$
4,909

 
$
41,420

 
$
1,879

 
$
39,541

Unsecured
 
2,626

 
(15
)
 
345

 
633

 
3,589

 
—

 
3,589

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
593

 
(2
)
 
102

 
(90
)
 
603

 
5

 
598

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
3,947

 
—

 
93

 
2,008

 
6,048

 
320

 
5,728

Income property
 
4,044

 
—

 
152

 
1,268

 
5,464

 
—

 
5,464

Owner occupied
 
4,533

 
—

 
3

 
1,195

 
5,731

 
105

 
5,626

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
549

 
—

 
236

 
(651
)
 
134

 
—

 
134

Residential construction
 
5,536

 
(170
)
 
2,956

 
(2,705
)
 
5,617

 
—

 
5,617

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
5,784

 
—

 
1

 
(2,092
)
 
3,693

 
—

 
3,693

Owner occupied
 
2,604

 
—

 
—

 
403

 
3,007

 
—

 
3,007

Consumer
 
5,301

 
(1,117
)
 
742

 
(701
)
 
4,225

 
17

 
4,208

PCI
 
3,611

 
(2,626
)
 
3,389

 
(1,316
)
 
3,058

 
—

 
3,058

Unallocated
 
1,053

 
—

 
—

 
(982
)
 
71

 
—

 
71

Total
 
$
83,369

 
$
(11,647
)
 
$
9,059

 
$
1,879

 
$
82,660

 
$
2,326

 
$
80,334



20

 
 
Beginning
Balance
 
Charge-offs
 
Recoveries
 
Provision (Recapture)
 
Ending
Balance
 
Specific
Reserve
 
General
Allocation
Three Months Ended September 30, 2018
 
(in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
40,350

 
$
(576
)
 
$
496

 
$
2,912

 
$
43,182

 
$
1,139

 
$
42,043

Unsecured
 
2,443

 
(30
)
 
51

 
(41
)
 
2,423

 
—

 
2,423

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
461

 
—

 
21

 
(110
)
 
372

 
8

 
364

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
3,278

 
—

 
8

 
(87
)
 
3,199

 
—

 
3,199

Income property
 
4,102

 
—

 
202

 
(292
)
 
4,012

 
1

 
4,011

Owner occupied
 
4,356

 
—

 
3

 
316

 
4,675

 
71

 
4,604

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
848

 
—

 
582

 
(742
)
 
688

 
—

 
688

Residential construction
 
4,572

 
—

 
1

 
660

 
5,233

 
—

 
5,233

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
7,367

 
—

 
—

 
573

 
7,940

 
—

 
7,940

Owner occupied
 
2,299

 
—

 
—

 
138

 
2,437

 
—

 
2,437

Consumer
 
5,292

 
(277
)
 
266

 
(258
)
 
5,023

 
36

 
4,987

PCI
 
4,782

 
(1,208
)
 
945

 
(502
)
 
4,017

 
—

 
4,017

Unallocated
 
—

 
—

 
—

 
586

 
586

 
—

 
586

Total
 
$
80,150

 
$
(2,091
)
 
$
2,575

 
$
3,153

 
$
83,787

 
$
1,255

 
$
82,532

 
 
Beginning
Balance
 
Charge-offs
 
Recoveries
 
Provision (Recapture)
 
Ending
Balance
 
Specific
Reserve
 
General
Allocation
Nine Months Ended September 30, 2018
 
(in thousands)
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
29,341

 
$
(8,741
)
 
$
2,536

 
$
20,046

 
$
43,182

 
$
1,139

 
$
42,043

Unsecured
 
2,000

 
(117
)
 
356

 
184

 
2,423

 
—

 
2,423

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
701

 
—

 
389

 
(718
)
 
372

 
8

 
364

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
4,265

 
—

 
92

 
(1,158
)
 
3,199

 
—

 
3,199

Income property
 
5,672

 
(223
)
 
901

 
(2,338
)
 
4,012

 
1

 
4,011

Owner occupied
 
5,459

 
—

 
19

 
(803
)
 
4,675

 
71

 
4,604

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
963

 
—

 
610

 
(885
)
 
688

 
—

 
688

Residential construction
 
3,709

 
—

 
6

 
1,518

 
5,233

 
—

 
5,233

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
7,053

 
—

 
—

 
887

 
7,940

 
—

 
7,940

Owner occupied
 
4,413

 
—

 
—

 
(1,976
)
 
2,437

 
—

 
2,437

Consumer
 
5,163

 
(773
)
 
796

 
(163
)
 
5,023

 
36

 
4,987

PCI
 
6,907

 
(3,786
)
 
3,096

 
(2,200
)
 
4,017

 
—

 
4,017

Unallocated
 
—

 
—

 
—

 
586

 
586

 
—

 
586

Total
 
$
75,646

 
$
(13,640
)
 
$
8,801

 
$
12,980

 
$
83,787

 
$
1,255

 
$
82,532



21

Changes in the allowance for unfunded commitments and letters of credit, a component of “Other liabilities” in the Consolidated Balance Sheets, are summarized as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands)
Balance at beginning of period
 
$
3,980

 
$
3,680

 
$
4,330

 
$
3,130

Net changes in the allowance for unfunded commitments and letters of credit
 
(400
)
 
275

 
(750
)
 
825

Balance at end of period
 
$
3,580

 
$
3,955

 
$
3,580

 
$
3,955


Risk Elements
The extension of credit in the form of loans or other credit products to individuals and businesses is one of our principal business activities. Our policies and applicable laws and regulations require risk analysis as well as ongoing portfolio and credit management. We manage our credit risk through lending limit constraints, credit review, approval policies and extensive, ongoing internal monitoring. We also manage credit risk through diversification of the loan portfolio by type of loan, type of industry and type of borrower and by limiting the aggregation of debt to a single borrower.
Risk ratings are reviewed and updated whenever appropriate, with more periodic reviews as the risk and dollar value of loss on the loan increases. In the event full collection of principal and interest is not reasonably assured, the loan is appropriately downgraded and, if warranted, placed on nonaccrual status even though the loan may be current as to principal and interest payments. Additionally, we assess whether an impairment of a loan warrants specific reserves or a write-down of the loan.
Pass rated loans are generally considered to have sufficient sources of repayment in order to repay the loan in full in accordance with all terms and conditions. Special Mention rated loans have potential weaknesses that, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Loans with a risk rating of Substandard or worse are reviewed to assess the ability of our borrowers to service all interest and principal obligations and, as a result, the risk rating or accrual status may be adjusted accordingly. Loans risk rated as Substandard reflect loans where a loss is possible if loan weaknesses are not corrected. Doubtful rated loans have a high probability of loss; however, the amount of loss has not yet been determined. Loss rated loans are considered uncollectable and when identified, are charged off.

22

The following is an analysis of the credit quality of our loan portfolio, excluding PCI loans, as of September 30, 2019 and December 31, 2018:
 
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
September 30, 2019
 
(in thousands)
Loans, excluding PCI loans:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
3,433,097

 
$
30,153

 
$
92,731

 
$
2

 
$
—

 
$
3,555,983

Unsecured
 
139,176

 
—

 
197

 
—

 
—

 
139,373

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
272,021

 
—

 
1,012

 
—

 
—

 
273,033

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
277,264

 
4,665

 
13,367

 
—

 
—

 
295,296

Income property
 
1,917,596

 
3,918

 
40,421

 
—

 
—

 
1,961,935

Owner occupied
 
1,642,558

 
8,278

 
47,472

 
—

 
—

 
1,698,308

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
1,614

 
—

 
—

 
—

 
—

 
1,614

Residential construction
 
192,563

 
—

 
—

 
—

 
—

 
192,563

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
157,400

 
—

 
—

 
—

 
—

 
157,400

Owner occupied
 
102,246

 
—

 
—

 
—

 
—

 
102,246

Consumer
 
293,484

 
—

 
3,343

 
—

 
—

 
296,827

Total
 
$
8,429,019

 
$
47,014

 
$
198,543

 
$
2

 
$
—

 
8,674,578

Less:
 
 
 
 
 
 
 
 
 
 
 
 
ALLL
 
79,602

Loans, excluding PCI loans, net
 
$
8,594,976

 
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
December 31, 2018
 
(in thousands)
Loans, excluding PCI loans:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
3,160,910

 
$
48,779

 
$
103,007

 
$
5

 
$
—

 
$
3,312,701

Unsecured
 
112,091

 
21

 
—

 
5

 
—

 
112,117

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
234,416

 
—

 
1,610

 
—

 
—

 
236,026

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
276,348

 
5,082

 
4,247

 
—

 
—

 
285,677

Income property
 
1,876,925

 
36,998

 
6,553

 
—

 
—

 
1,920,476

Owner occupied
 
1,556,852

 
14,964

 
45,935

 
—

 
—

 
1,617,751

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
4,099

 
—

 
318

 
—

 
—

 
4,417

Residential construction
 
212,225

 
—

 
171

 
—

 
—

 
212,396

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
194,912

 
—

 
—

 
—

 
—

 
194,912

Owner occupied
 
87,063

 
—

 
—

 
—

 
—

 
87,063

Consumer
 
313,817

 
—

 
4,398

 
—

 
—

 
318,215

Total
 
$
8,029,658

 
$
105,844

 
$
166,239

 
$
10

 
$
—

 
8,301,751

Less:
 
 
 
 
 
 
 
 
 
 
 
 
ALLL
 
79,758

Loans, excluding PCI loans, net
 
$
8,221,993



23

The following is an analysis of the credit quality of our PCI loan portfolio as of September 30, 2019 and December 31, 2018:
 
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
September 30, 2019
 
(in thousands)
PCI loans:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
7,008

 
$
955

 
$
721

 
$
—

 
$
—

 
$
8,684

Unsecured
 
550

 
—

 
—

 
—

 
—

 
550

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
8,521

 
—

 
243

 
—

 
—

 
8,764

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
8,920

 
642

 
72

 
—

 
—

 
9,634

Income property
 
18,737

 
—

 
—

 
—

 
—

 
18,737

Owner occupied
 
25,059

 
—

 
5,953

 
—

 
—

 
31,012

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
144

 
—

 
—

 
—

 
—

 
144

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
462

 
—

 
—

 
—

 
—

 
462

Consumer
 
8,468

 
—

 
276

 
—

 
—

 
8,744

Total
 
$
77,869

 
$
1,597

 
$
7,265

 
$
—

 
$
—

 
86,731

Less:
 
 
 
 
 
 
 
 
 
 
 
 
Valuation discount resulting from acquisition accounting
 
4,954

ALLL
 
3,058

PCI loans, net
 
$
78,719

 
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
December 31, 2018
 
(in thousands)
PCI loans:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
$
8,041

 
$
—

 
$
840

 
$
—

 
$
—

 
$
8,881

Unsecured
 
692

 
—

 
99

 
—

 
—

 
791

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
 
9,633

 
—

 
215

 
—

 
—

 
9,848

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial land
 
10,363

 
—

 
—

 
—

 
—

 
10,363

Income property
 
19,680

 
—

 
—

 
—

 
—

 
19,680

Owner occupied
 
35,944

 
—

 
353

 
—

 
—

 
36,297

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
 
Land and acquisition
 
151

 
—

 
2

 
—

 
—

 
153

Commercial and multifamily residential:
 
 
 
 
 
 
 
 
 
 
 
 
Income property
 
507

 
—

 
—

 
—

 
—

 
507

Consumer
 
9,326

 
—

 
439

 
—

 
—

 
9,765

Total
 
$
94,337

 
$
—

 
$
1,948

 
$
—

 
$
—

 
96,285

Less:
 
 
 
 
 
 
 
 
 
 
 
 
Valuation discount resulting from acquisition accounting
 
6,525

ALLL
 
3,611

PCI loans, net
 
$
86,149



24

6.
Other Real Estate Owned
The following tables set forth activity in OREO for the three and nine months ended September 30, 2019 and 2018:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands)
Balance, beginning of period
 
$
1,118

 
$
7,080

 
$
6,019

 
$
13,298

Transfers in
 
—

 
794

 
386

 
1,200

Valuation adjustments
 
—

 
(495
)
 
(195
)
 
(697
)
Proceeds from sale of OREO property
 
(588
)
 
(47
)
 
(6,382
)
 
(5,868
)
Gain (loss) on sale of OREO, net
 
95

 
(1
)
 
797

 
(602
)
Balance, end of period
 
$
625

 
$
7,331

 
$
625

 
$
7,331


At September 30, 2019, there were $311 thousand in foreclosed residential real estate properties held as OREO. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process was $1.3 million.
7.
Goodwill and Other Intangible Assets
In accordance with the Intangibles – Goodwill and Other topic of the FASB ASC, goodwill is not amortized but is reviewed for potential impairment at the reporting unit level. Management analyzes its goodwill for impairment on an annual basis on July 31 and between annual tests in certain circumstances such as material adverse changes in legal, business, regulatory and economic factors. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company performed an annual impairment assessment as of July 31, 2019 and concluded that there was no impairment.
The CDI is evaluated for impairment if events and circumstances indicate a possible impairment. The CDI is amortized on an accelerated basis over an estimated life of 10 years.
The following table sets forth activity for goodwill and other intangible assets for the periods indicated:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands)
Goodwill
 
 
 
 
 
 
 
 
Total goodwill
 
$
765,842

 
$
765,842

 
$
765,842

 
$
765,842

Other intangible assets, net
 
 
 
 
 
 
 
 
CDI:
 
 
 
 
 
 
 
 
Gross CDI balance at beginning of period
 
105,473

 
105,473

 
105,473

 
105,473

Accumulated amortization at beginning of period
 
(65,852
)
 
(54,495
)
 
(60,455
)
 
(48,219
)
CDI, net at beginning of period
 
39,621

 
50,978

 
45,018

 
57,254

CDI current period amortization
 
(2,632
)
 
(3,070
)
 
(8,029
)
 
(9,346
)
Total CDI, net at end of period
 
36,989

 
47,908

 
36,989

 
47,908

Intangible assets not subject to amortization
 
919

 
919

 
919

 
919

Other intangible assets, net at end of period
 
37,908

 
48,827

 
37,908

 
48,827

Total goodwill and other intangible assets at end of period
 
$
803,750

 
$
814,669

 
$
803,750

 
$
814,669



25

The following table provides the estimated future amortization expense of our CDI for the remaining three months ending December 31, 2019 and the succeeding four years:
 
 
Year ending December 31,
 
 
(in thousands)
2019
 
$
2,451

2020
 
8,724

2021
 
7,264

2022
 
5,880

2023
 
4,552


8.
Leases
The Company’s lease commitments consist primarily of leased locations under various non-cancellable operating leases that expire between 2019 and 2043. The majority of the leases contain renewal options and provisions for increases in rental rates based on an agreed upon index or predetermined escalation schedule.
The following table shows the details of the Company’s operating lease right-of-use asset and the associated lease liability for the period indicated:
Item
 
Balance Sheet Location
 
September 30, 2019
 
 
 
 
(in thousands)
Operating lease asset
 
Other assets
 
$
51,295

Operating lease liability
 
Other liabilities
 
$
57,196


At September 30, 2019, the Company’s operating leases have a weighted-average remaining lease term of 7.5 years and a weighted average discount rate of 3.1%. Cash paid for amounts included in the measurement of operating lease liabilities was $2.8 million for the nine months ended September 30, 2019. Right-of-use assets obtained in exchange for new operating lease liabilities during the nine months ended September 30, 2019 was $9.2 million.
On September 26, 2019 the Company sold one of its Washington facilities and leased back a portion of the facility utilized for branch operations. The resulting gain on the sale was $5.9 million.
The following table shows the components of net lease costs:
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Item
 
Statement of Income Location
 
2019
 
2019
 
 
 
 
(in thousands)
Operating lease cost (1)
 
Occupancy
 
$
2,700

 
$
8,285

Variable lease cost
 
Occupancy
 
487

 
1,510

Sublease income
 
Occupancy
 
(297
)
 
(918
)
Net lease cost
 
 
 
$
2,890

 
$
8,877


__________
(1) Includes short-term lease costs, which are immaterial.

26

The following table shows future minimum payments for operating leases for the remaining three months of 2019 and subsequent years:
 
 
Year ending December 31,
 
 
(in thousands)
2019
 
$
2,717

2020
 
10,619

2021
 
10,376

2022
 
9,795

2023
 
8,546

Thereafter
 
22,685

Total future minimum lease payments
 
64,738

Amounts representing interest
 
(7,542
)
Present value of minimum lease payments
 
$
57,196


Future minimum lease payments for the Company’s operating leases as of December 31, 2018, prior to the adoption of the new lease guidance were as follows:
 
 
Year Ending December 31,
 
 
(in thousands)
2019
 
$
10,947

2020
 
9,766

2021
 
8,729

2022
 
8,102

2023
 
6,796

Thereafter
 
18,703

Total minimum payments
 
$
63,043


9.
Revolving Line of Credit
During the second quarter of 2019, the Company entered into a $30.0 million short-term credit facility with an unaffiliated bank that matures in May 2020. This facility has a variable interest rate and provides the Company additional liquidity, if needed, for various corporate activities including the repurchase of shares of Columbia Banking System, Inc. common stock. As of September 30, 2019 and December 31, 2018, there was no outstanding balance. The credit agreement requires the Company to comply with certain covenants including those related to asset quality and capital levels. The Company was in compliance with all covenants associated with this facility at September 30, 2019.
10.
Derivatives, Hedging Activities and Balance Sheet Offsetting
The Company is exposed to certain risks arising from both its business and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into interest rate-based derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s loan portfolio.
The Company’s objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate collars as part of its interest rate risk management strategy. Interest rate collars designated as cash flow hedges involve the payments of variable-rate amounts if interest rates rise above the cap strike rate on the contract and receipts of variable-rate amounts if interest rates fall below the floor strike rate on the contract. These derivative contracts are used to hedge the variable cash flows associated with existing variable-rate assets.

27

With respect to derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into interest income in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest income as interest payments are received on the Company’s variable-rate assets. During the next 12 months, the Company estimates that there will be $3.1 million reclassified as an increase to interest income.
In addition, the Company periodically enters into certain commercial loan interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rates. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to a swap agreement. This swap agreement effectively converts the customer’s variable rate loan into a fixed rate. The Company then enters into a corresponding swap agreement with a third-party in order to offset its exposure on the variable and fixed components of the customer agreement. As the interest rate swap agreements with the customers and third parties are not designated as hedges under the Derivatives and Hedging topic of the FASB ASC, the instruments are marked to market in earnings. The notional amount of open interest rate swap agreements at September 30, 2019 and December 31, 2018 was $396.5 million and $366.7 million, respectively. There was no mark-to-market gain or loss recorded in the three months ended September 30, 2019. During the nine months ended September 30, 2019 there was a $2 thousand mark-to-market loss recorded to “Other” noninterest expense. During the three and nine months ended September 30, 2018, mark-to-market gains of $1 thousand and $9 thousand, respectively, were recorded to “Other” noninterest expense.
The following table presents the fair value of derivatives, as well as their classification on the Balance Sheet at September 30, 2019 and December 31, 2018:
 
Asset Derivatives
 
Liability Derivatives
 
September 30, 2019
 
December 31, 2018
 
September 30, 2019
 
December 31, 2018
 
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
 
(in thousands)
Derivatives designated as hedging instruments:
Interest rate collar
Other assets
 
$
19,703

 
Other assets
 
$
—

 
Other liabilities
 
$
—

 
Other liabilities
 
$
—

Derivatives not designated as hedging instruments:
Interest rate swap contracts
Other assets
 
$
25,045

 
Other assets
 
$
7,033

 
Other liabilities
 
$
25,046

 
Other liabilities
 
$
7,033


The table below presents the effect of cash flow hedge accounting on accumulated other comprehensive income (loss) at September 30, 2019 and 2018:
 
Amount of Gain or (Loss) Recognized in Accumulated Other Comprehensive Income on Derivative
 
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
Three Months Ended September 30,
 
 
 
Three Months Ended September 30,
 
2019
 
2018
 
 
 
2019
 
2018
 
(in thousands)
Interest rate collar
$
4,088

 
$
—

 
 Interest income
 
$
76

 
$
—

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
2019
 
2018
 
 
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
Interest rate collar
$
19,779

 
$
—

 
 Interest income
 
$
76

 
$
—



The notional amount of the interest rate collar was $500.0 million at September 30, 2019. The cash flow hedge was determined to be effective during the periods presented and, as a result, qualifies for hedge accounting treatment.

28

The Company is party to interest rate swap contracts, interest rate collar and repurchase agreements that are subject to enforceable master netting arrangements or similar agreements. Under these agreements, the Company may have the right to net settle multiple contracts with the same counterparty. The following tables show the gross interest rate swap contracts, collar agreements and repurchase agreements in the Consolidated Balance Sheets and the respective collateral received or pledged in the form of cash or other financial instruments. The collateral amounts in these tables are limited to the outstanding balances of the related asset or liability. Therefore, instances of overcollateralization are not shown.
 
Gross Amounts of Recognized Assets/Liabilities
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amounts of Assets/Liabilities Presented in the Consolidated Balance Sheets
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
 
 
Collateral Pledged/Received
 
Net Amount
September 30, 2019
(in thousands)
Assets
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
$
25,045

 
$
—

 
$
25,045

 
$
—

 
$
25,045

Interest rate collar
$
19,703

 
$
—

 
$
19,703

 
$
(19,703
)
 
—

Liabilities
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
$
25,046

 
$
—

 
$
25,046

 
$
(25,046
)
 
$
—

Repurchase agreements
$
24,489

 
$
—

 
$
24,489

 
$
(24,489
)
 
$
—

 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
$
7,033

 
$
—

 
$
7,033

 
$
—

 
$
7,033

Liabilities
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
$
7,033

 
$
—

 
$
7,033

 
$
(3,235
)
 
$
3,798

Repurchase agreements
$
61,094

 
$
—

 
$
61,094

 
$
(61,094
)
 
$
—


The Company’s agreements with each of its derivative counterparties provide that if the Company defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.
The following table presents the class of collateral pledged for repurchase agreements as well as the remaining contractual maturity of the repurchase agreements:
 
 
Remaining contractual maturity of the agreements
 
 
Overnight and continuous
 
Up to 30 days
 
30 - 90 days
 
Greater than 90 days
 
Total
September 30, 2019
 
(in thousands)
Class of collateral pledged for repurchase agreements
 
 
 
 
 
 
 
 
 
 
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations
 
$
24,489

 
$
—

 
$
—

 
$
—

 
$
24,489

Gross amount of recognized liabilities for repurchase agreements
 
 
 
 
 
 
 
 
 
24,489

Amounts related to agreements not included in offsetting disclosure
 
 
 
 
 
 
 
 
 
$
—


The collateral utilized for the Company’s repurchase agreements is subject to market fluctuations as well as prepayments of principal. The Company monitors the risk of the fair value of its pledged collateral falling below acceptable amounts based on the type of the underlying repurchase agreement. The pledged collateral related to the Company’s $24.5 million sweep repurchase agreements, which mature on an overnight basis, is monitored on a daily basis as the underlying sweep accounts can have frequent transaction activity and the amount of pledged collateral is adjusted as necessary.

29

11.
Commitments and Contingent Liabilities
Financial Instruments with Off-Balance Sheet Risk: In the normal course of business, the Company makes loan commitments (typically unfunded loans and unused lines of credit) and issues standby letters of credit to accommodate the financial needs of its customers. At September 30, 2019 and December 31, 2018, the Company’s loan commitments amounted to $2.59 billion and $2.62 billion, respectively.
Standby letters of credit commit the Company to make payments on behalf of customers under specified conditions. Historically, no significant losses have been incurred by the Company under standby letters of credit. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Company’s normal credit policies, including collateral requirements, where appropriate. Standby letters of credit were $26.9 million and $28.3 million at September 30, 2019 and December 31, 2018, respectively. In addition, there were $24 thousand commitments under commercial letters of credit used to facilitate customers’ trade transactions and other off-balance sheet liabilities at September 30, 2019 and none at December 31, 2018, respectively.
Legal Proceedings: The Company and its subsidiaries are from time to time defendants in and are threatened with various legal proceedings arising from their regular business activities. Management, after consulting with legal counsel, is of the opinion that the ultimate liability, if any, resulting from these pending or threatened actions and proceedings will not have a material effect on the financial statements of the Company.
12.
Shareholders’ Equity
Dividends:
The following table summarizes year-to-date dividend activity as of September 30, 2019:
Declared
 
Regular Cash Dividends Per Common Share
 
Special Cash Dividends Per Common Share
 
Record Date
 
Paid Date
January 24, 2019
 
$
0.28

 
$
0.14

 
February 6, 2019
 
February 20, 2019
April 25, 2019
 
$
0.28

 
$
0.14

 
May 8, 2019
 
May 22, 2019
July 25, 2019
 
$
0.28

 
$
—

 
August 7, 2019
 
August 21, 2019

Subsequent to quarter end, on October 24, 2019, the Company declared a regular quarterly cash dividend of $0.28 per common share payable on November 20, 2019 to shareholders of record at the close of business on November 6, 2019.
The payment of cash dividends is subject to federal regulatory requirements for capital levels and other restrictions. In addition, the cash dividends paid by Columbia Bank to the Company are subject to both federal and state regulatory requirements.
Share Repurchase Program:
For the three and nine months ended September 30, 2019, the Company repurchased 676 thousand and 1.3 million shares of common stock at an average price of $34.77 and $34.89 per share, respectively. As of September 30, 2019, there are 1.6 million remaining shares authorized to be repurchased under the current Board approved share repurchase program.

30

13.
Accumulated Other Comprehensive Income
The following table shows changes in accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2019 and 2018:
 
 
Unrealized Gains and Losses on Available-for-Sale Securities (1)
 
Unrealized Gains and Losses on Pension Plan Liability (1)
 
Unrealized Gains and Losses on Hedging Instruments (1)
 
Total (1)
Three Months Ended September 30, 2019
 
(in thousands)
Beginning balance
 
$
37,162

 
$
(2,055
)
 
$
12,043

 
$
47,150

Other comprehensive income before reclassifications
 
14,593

 
—

 
3,137

 
17,730

Amounts reclassified from accumulated other comprehensive income (2)
 
—

 
62

 
(58
)
 
4

Net current-period other comprehensive income
 
14,593

 
62

 
3,079

 
17,734

Ending balance
 
$
51,755

 
$
(1,993
)
 
$
15,122

 
$
64,884

Three Months Ended September 30, 2018
 
 
 
 
 
 
 
 
Beginning balance
 
$
(53,597
)
 
$
(2,324
)
 
$
—

 
$
(55,921
)
Other comprehensive loss before reclassifications
 
(14,149
)
 
—

 
—

 
(14,149
)
Amounts reclassified from accumulated other comprehensive loss (2)
 
—

 
61

 
—

 
61

Net current-period other comprehensive income (loss)
 
(14,149
)
 
61

 
—

 
(14,088
)
Ending balance
 
$
(67,746
)
 
$
(2,263
)
 
$
—

 
$
(70,009
)
Nine Months Ended September 30, 2019
 
 
 
 
 
 
 
 
Beginning balance
 
$
(33,128
)
 
$
(2,177
)
 
$
—

 
$
(35,305
)
Other comprehensive income before reclassifications
 
86,519

 
—

 
15,180

 
101,699

Amounts reclassified from accumulated other comprehensive loss (2)
 
(1,636
)
 
184

 
(58
)
 
(1,510
)
Net current-period other comprehensive income
 
84,883

 
184

 
15,122

 
100,189

Ending balance
 
$
51,755

 
$
(1,993
)
 
$
15,122

 
$
64,884

Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
Beginning balance
 
$
(19,779
)
 
$
(2,446
)
 
$
—

 
$
(22,225
)
Adjustment pursuant to adoption of ASU 2016-01
 
157

 
—

 
—

 
157

Other comprehensive loss before reclassifications
 
(48,043
)
 
—

 
—

 
(48,043
)
Amounts reclassified from accumulated other comprehensive loss (2)
 
(81
)
 
183

 
—

 
102

Net current-period other comprehensive income (loss)
 
(48,124
)
 
183

 
—

 
(47,941
)
Ending balance
 
$
(67,746
)
 
$
(2,263
)
 
$
—

 
$
(70,009
)
__________
(1) All amounts are net of tax. Amounts in parenthesis indicate debits.
(2) See following table for details about these reclassifications.

31

The following table shows details regarding the reclassifications from accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2019 and 2018:
 
 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Affected line Item in the Consolidated
 
 
2019
 
2018
 
2019
 
2018
 
Statement of Income
 
 
(in thousands)
 
 
Unrealized gains and losses on available for sale debt securities
 
 
 
 
 
 
 
 
 
 
Investment securities gains, net
 
$
—

 
$
—

 
$
2,132

 
$
106

 
Investment securities gains (losses), net
 
 
—

 
—

 
2,132

 
106

 
Total before tax
 
 
—

 
—

 
(496
)
 
(25
)
 
Income tax provision
 
 
$
—

 
$
—

 
$
1,636

 
$
81

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Amortization of pension plan liability
 
 
 
 
 
 
 
 
 
 
Actuarial losses
 
$
(81
)
 
$
(80
)
 
$
(240
)
 
$
(239
)
 
Compensation and employee benefits
 
 
(81
)
 
(80
)
 
(240
)
 
(239
)
 
Total before tax
 
 
19

 
19

 
56

 
56

 
Income tax provision
 
 
$
(62
)
 
$
(61
)
 
$
(184
)
 
$
(183
)
 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains and losses from hedging instruments
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
76

 
$
—

 
$
76

 
$
—

 
Loans
 
 
76

 
—

 
76

 
—

 
Total before tax
 
 
(18
)
 
—

 
(18
)
 
—

 
Income tax provision
 
 
$
58

 
$
—

 
$
58

 
$
—

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 

14.
Fair Value Accounting and Measurement
The Fair Value Measurements and Disclosures topic of the FASB ASC defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value. We hold fixed and variable rate interest-bearing securities, investments in marketable equity securities and certain other financial instruments, which are carried at fair value. Fair value is determined based upon quoted prices when available or through the use of alternative approaches, such as matrix or model pricing, when market quotes are not readily accessible or available.
The valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our own market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 – Quoted prices for identical instruments in active markets that are accessible at the measurement date.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.
Fair values are determined as follows:
Securities at fair value are priced using a combination of market activity, industry recognized information sources, yield curves, discounted cash flow models and other factors. These fair value calculations are considered a Level 2 input method under the provisions of the Fair Value Measurements and Disclosures topic of the FASB ASC for all securities other than U.S. Treasury Notes and equity securities, which are considered a Level 1 input method.

32

Interest rate contracts and the interest rate collar are valued in models, which use as their basis, readily observable market parameters and are classified within Level 2 of the valuation hierarchy.
The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis at September 30, 2019 and December 31, 2018 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
 
 
Fair Value
 
Fair Value Measurements at Reporting Date Using
 
 
Level 1
 
Level 2
 
Level 3
September 30, 2019
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
Debt securities available for sale:
 
 
 
 
 
 
 
 
U.S. government agency and government-sponsored enterprise mortgage-back securities and collateralized mortgage obligations (1)
 
$
2,482,835

 
$
—

 
$
2,482,835

 
$
—

Other asset-backed securities (1)
 
171,578

 
—

 
171,578

 
—

State and municipal debt securities
 
497,314

 
—

 
497,314

 
—

U.S. government agency and government-sponsored enterprise securities
 
215,595

 
—

 
215,595

 
—

U.S. government securities
 
250

 
250

 
—

 
—

Total debt securities available for sale
 
$
3,367,572

 
$
250

 
$
3,367,322

 
$
—

Other assets:
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
25,045

 
$
—

 
$
25,045

 
$
—

Interest rate collar
 
$
19,703

 
$
—

 
$
19,703

 
$
—

Liabilities
 
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
25,046

 
$
—

 
$
25,046

 
$
—

 
 
Fair Value
 
Fair Value Measurements at Reporting Date Using
 
 
Level 1
 
Level 2
 
Level 3
December 31, 2018
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
Debt securities available for sale:
 
 
 
 
 
 
 
 
U.S. government agency and government-sponsored enterprise mortgage-back securities and collateralized mortgage obligations (1)
 
$
2,013,355

 
$
—

 
$
2,013,355

 
$
—

Other asset-backed securities (1)
 
174,935

 
—

 
174,935

 
—

State and municipal debt securities
 
574,323

 
—

 
574,323

 
—

U.S. government agency and government-sponsored enterprise securities
 
404,587

 
—

 
404,587

 
—

U.S. government securities
 
248

 
248

 
—

 
—

Total debt securities available for sale
 
$
3,167,448

 
$
248

 
$
3,167,200

 
$
—

Other assets:
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
7,033

 
$
—

 
$
7,033

 
$
—

Liabilities
 
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
7,033

 
$
—

 
$
7,033

 
$
—


__________
(1) Beginning July 2019, other asset-backed securities were presented separately in this table. Prior period amounts that were previously reported in U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations have been reclassified to conform to current period presentation.
There were no transfers between Level 1 and Level 2 of the valuation hierarchy during the nine month periods ended September 30, 2019 and 2018. The Company recognizes transfers between levels of the valuation hierarchy based on the valuation level at the end of the reporting period.

33

Nonrecurring Measurements
Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment. The following method was used to estimate the fair value of impaired loans:
Impaired loans—A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, a loan’s observable market price, or the fair market value of the collateral less estimated costs to sell if the loan is a collateral-dependent loan. The impairment evaluations are performed in conjunction with the allowance process on a quarterly basis by officers in the Special Credits group, which reports to the Chief Credit Officer. The REASD, which also reports to the Chief Credit Officer, is responsible for obtaining appraisals from third-parties or performing internal evaluations. If an appraisal is obtained from a third-party, the REASD reviews the appraisal to evaluate the adequacy of the appraisal report, including its scope, methods, accuracy and reasonableness.
OREO—OREO is real property that the Bank has taken ownership of in partial or full satisfaction of a loan or loans. OREO is generally measured based on the property’s fair market value as indicated by an appraisal or a letter of intent to purchase. OREO is initially recorded at the fair value less estimated costs to sell. This amount becomes the property’s new basis. Any fair value adjustments based on the property’s fair value less estimated costs to sell at the date of acquisition are charged to the allowance, or in the event of a write-up without previous losses charged to the allowance, a credit to earnings is recorded. Management periodically reviews OREO in an effort to ensure the property is recorded at its fair value, net of estimated costs to sell. Any fair value adjustments subsequent to acquisition are charged or credited to earnings. The initial and subsequent evaluations are performed by officers in the Special Credits group, which reports to the Chief Credit Officer. The REASD obtains appraisals from third-parties for OREO and performs internal evaluations. If an appraisal is obtained from a third-party, the REASD reviews the appraisal to evaluate the adequacy of the appraisal report, including its scope, methods, accuracy and reasonableness.
The following tables set forth information related to the Company’s assets that were measured using fair value estimates on a nonrecurring basis during the current and prior year quarterly periods:
 
 
Fair value at September 30, 2019
 
Fair Value Measurements at Reporting Date Using
 
Losses During the Three Months Ended September 30, 2019
 
Losses During the Nine Months Ended September 30, 2019
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
(in thousands)
Impaired loans
 
$
8,990

 
$
—

 
$
—

 
$
8,990

 
$
1,722

 
$
3,299

 
 
$
8,990

 
$
—

 
$
—

 
$
8,990

 
$
1,722

 
$
3,299

 
 
Fair value at September 30, 2018
 
Fair Value Measurements at Reporting Date Using
 
Losses During the Three Months Ended September 30, 2018
 
Losses During the Nine Months Ended September 30, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
(in thousands)
Impaired loans
 
$
14,616

 
$
—

 
$
—

 
$
14,616

 
$
1,208

 
$
1,208

OREO
 
1,240

 
—

 
—

 
1,240

 
445

 
445

 
 
$
15,856

 
$
—

 
$
—

 
$
15,856

 
$
1,653

 
$
1,653


The losses on impaired loans disclosed above represent the amount of the specific reserve and/or charge-offs during the period applicable to loans held at period end. The amount of the specific reserve is included in the ALLL. The losses on OREO disclosed above represent the write-downs taken at foreclosure that were charged to the ALLL, as well as subsequent changes in valuation allowances from updated appraisals that were recorded to earnings.

34

Quantitative information about Level 3 fair value measurements
The range and weighted average of the significant unobservable inputs used to fair value our Level 3 nonrecurring assets, along with the valuation techniques used, are shown in the following table:
 
 
Fair value at September 30, 2019
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average) (1)
 
 
(dollars in thousands)
Impaired loans - collateral-dependent (2)
 
$
8,990

 
Fair Market Value of Collateral
 
Adjustment to Stated Value
 
0.00% - 100.00% (42.09%)

__________
(1) Discount applied to appraised value or stated value (in the case of accounts receivable, fixed assets and inventory).
(2) Collateral consists of cash, accounts receivable, fixed assets, inventory and real estate.

 
 
Fair value at September 30, 2018
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average) (1)
 
 
(dollars in thousands)
Impaired loans - collateral-dependent (3)
 
$
14,616

 
Fair Market Value of Collateral
 
Adjustment to Stated Value
 
0.00% - 54.51% (6.66%)
OREO
 
$
1,240

 
Fair Market Value of Collateral
 
Adjustment to Appraisal Value
 
N/A (2)
__________
(1) Discount applied to appraisal value or stated value (in the case of accounts receivable, fixed assets and inventory).
(2) Quantitative disclosures are not provided for OREO because there were no adjustments made to the appraisal values.
(3) Collateral consists of accounts receivable, fixed assets, inventory, cash, real estate, and state guarantee.


35

The following tables summarize carrying amounts and estimated fair values of selected financial instruments by level within the fair value hierarchy at September 30, 2019 and December 31, 2018:
 
 
September 30, 2019
 
 
Carrying
Amount
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
278,461

 
$
278,461

 
$
278,461

 
$
—

 
$
—

Interest-earning deposits with banks
 
20,144

 
20,144

 
20,144

 
—

 
—

Debt securities available for sale
 
3,367,572

 
3,367,572

 
250

 
3,367,322

 
—

FHLB stock
 
29,680

 
29,680

 
—

 
29,680

 
—

Loans held for sale
 
15,036

 
15,036

 
—

 
15,036

 
—

Loans
 
8,673,695

 
8,895,564

 
—

 
—

 
8,895,564

Interest rate contracts
 
25,045

 
24,045

 
—

 
24,045

 
—

Interest rate collar
 
19,703

 
19,703

 
—

 
19,703

 
—

Liabilities
 
 
 
 
 
 
 
 
 
 
Time deposits
 
$
366,773

 
$
361,195

 
$
—

 
$
361,195

 
$
—

FHLB advances
 
492,482

 
493,736

 
—

 
493,736

 
—

Repurchase agreements
 
24,489

 
24,489

 
—

 
24,489

 
—

Subordinated debentures
 
35,323

 
35,255

 
—

 
35,255

 
—

Interest rate contracts
 
25,046

 
25,046

 
—

 
25,046

 
—


 
 
December 31, 2018
 
 
Carrying
Amount
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
260,180

 
$
260,180

 
$
260,180

 
$
—

 
$
—

Interest-earning deposits with banks
 
17,407

 
17,407

 
17,407

 
—

 
—

Debt securities available for sale
 
3,167,448

 
3,167,448

 
248

 
3,167,200

 
—

FHLB stock
 
25,960

 
25,960

 
—

 
25,960

 
—

Loans held for sale
 
3,849

 
3,849

 
—

 
3,849

 
—

Loans
 
8,308,142

 
8,316,946

 
—

 
—

 
8,316,946

Interest rate contracts
 
7,033

 
7,033

 
—

 
7,033

 
—

Liabilities
 
 
 
 
 
 
 
 
 
 
Time deposits
 
$
414,443

 
$
407,659

 
$
—

 
$
407,659

 
$
—

FHLB advances
 
399,523

 
400,085

 
—

 
400,085

 
—

Repurchase agreements
 
61,094

 
61,094

 
—

 
61,094

 
—

Subordinated debentures
 
35,462

 
34,897

 
—

 
34,897

 
—

Interest rate contracts
 
7,033

 
7,033

 
—

 
7,033

 
—



36

15.
Earnings Per Common Share
The Company applies the two-class method of computing basic and diluted EPS. Under the two-class method, EPS is determined for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. The Company issues restricted shares under share-based compensation plans which qualify as participating securities.
The following table sets forth the computation of basic and diluted EPS for the three and nine months ended September 30, 2019 and 2018:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands except per share amounts)
Basic EPS:
 
 
 
 
 
 
 
 
Net income
 
$
50,727

 
$
46,415

 
$
148,322

 
$
128,134

Less: Earnings allocated to participating securities:
 
 
 
 
 
 
 
 
Nonvested restricted shares
 
358

 
504

 
1,204

 
1,413

Earnings allocated to common shareholders
 
$
50,369

 
$
45,911

 
$
147,118

 
$
126,721

Weighted average common shares outstanding
 
71,803

 
72,427

 
72,256

 
72,370

Basic earnings per common share
 
$
0.70

 
$
0.63

 
$
2.04

 
$
1.75

Diluted EPS:
 
 
 
 
 
 
 
 
Earnings allocated to common shareholders
 
$
50,369

 
$
45,911

 
$
147,118

 
$
126,721

Weighted average common shares outstanding
 
71,803

 
72,427

 
72,256

 
72,370

Dilutive effect of equity awards
 
—

 
5

 
1

 
4

Weighted average diluted common shares outstanding
 
71,803

 
72,432

 
72,257

 
72,374

Diluted earnings per common share
 
$
0.70

 
$
0.63

 
$
2.04

 
$
1.75

Potentially dilutive share options that were not included in the computation of diluted EPS because to do so would be anti-dilutive
 
—

 
—

 
—

 
5


16.
Revenue from Contracts with Customers
Revenue in the scope of Topic 606, Revenue from Contracts with Customers is measured based on the consideration specified in the contract with a customer and excludes amounts collected on behalf of third parties. The vast majority of the Company’s revenue is specifically outside the scope of Topic 606. For in-scope revenue, the following is a description of principal activities, separated by the timing of revenue recognition from which the Company generates its revenue from contracts with customers.
a.
Revenue earned at a point in time - Examples of revenue earned at a point in time are ATM transaction fees, wire transfer fees, overdraft fees, interchange fees and foreign exchange transaction fees. Revenue is primarily based on the number and type of transactions and is generally derived from transactional information accumulated by our systems and is recognized immediately as the transactions occur or upon providing the service to complete the customer’s transaction. The Company is the principal in each of these contracts, with the exception of interchange fees, in which case we are acting as the agent and record revenue net of expenses paid to the principal.
b.
Revenue earned over time - The Company earns revenue from contracts with customers in a variety of ways where the revenue is earned over a period of time - generally monthly. Examples of this type of revenue are deposit account maintenance fees, investment advisory fees, merchant revenue and safe deposit box fees. Revenue is generally derived from transactional information accumulated by our systems or those of third-parties and is recognized as the related transactions occur or services are rendered to the customer.

37

The Company recognizes revenue from contracts with customers when it satisfies its performance obligations. The Company’s performance obligations are typically satisfied as services are rendered and our contracts generally do not include multiple performance obligations. As a result, there are no contract balances as payments and services are rendered simultaneously. Payment is generally collected at the time services are rendered, monthly or quarterly. Unsatisfied performance obligations at the report date are not material to our consolidated financial statements.
In certain cases, other parties are involved with providing products and services to our customers. If the Company is principal in the transaction (providing goods or services itself), revenues are reported based on the gross consideration received from the customer and any related expenses are reported gross in noninterest expense. If the Company is an agent in the transaction (arranging for another party to provide goods or services), the Company reports its net fee or commission retained as revenue.
Rebates, waivers and reversals are recorded as a reduction of the transaction price either when the revenue is recognized by the Company or at the time the rebate, waiver or reversal is earned by the customer.
Practical expedients
The Company applies the practical expedient in paragraph 606-10-32-18 and does not adjust the consideration from customers for the effects of a significant financing component if at contract inception the period between when the entity transfers the goods or services and when the customer pays for that good or service will be one year or less.
The Company pays sales commissions to its employees in accordance with certain incentive plans and in connection with obtaining certain contracts with customers. The Company applies the practical expedient in paragraph 340-40-25-4 and expenses such sales commissions when incurred if the amortization period of the asset the Company otherwise would have recognized is one year or less. Sales commissions are included in compensation and employee benefits expense.
For the Company’s contracts that have an original expected duration of one year or less, the Company uses the practical expedient in paragraph 606-10-50-14 and has not disclosed the amount of the transaction price allocated to unsatisfied performance obligations as of the end of each reporting period or when the Company expects to recognize this revenue.
Disaggregation of revenue
The following table shows the disaggregation of revenue from contracts with customers for the three and nine month periods ended September 30, 2019 and 2018:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands)
Noninterest income:
 
 
 
 
 
 
 
 
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
Deposit account and treasury management fees
 
$
9,015

 
$
9,266

 
$
27,030

 
$
26,689

Card revenue
 
4,006

 
3,714

 
11,431

 
16,143

Financial services and trust revenue
 
3,226

 
2,975

 
9,608

 
8,924

Total revenue from contracts with customers
 
16,247

 
15,955

 
48,069

 
51,756

Other sources of noninterest income
 
11,783

 
5,064

 
27,305

 
16,098

Total noninterest income
 
$
28,030

 
$
21,019

 
$
75,374

 
$
67,854


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the unaudited Consolidated Financial Statements of Columbia Banking System, Inc. (referred to in this report as “we”, “our”, “Columbia” and “the Company”) and notes thereto presented elsewhere in this report and with the December 31, 2018 audited Consolidated Financial Statements and its accompanying notes included in our Annual Report on Form 10-K. 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 one year earlier.

38

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions that are not historical facts, and statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. 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, 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 section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and the factors set forth in the section titled “Risk Factors” in the Company’s Form 10-K, the following factors, among others, could cause actual results to differ materially from the anticipated results expressed or implied by forward-looking statements:
•
national and global economic conditions could be less favorable than expected or could have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth and maintain the quality of our earning assets;
•
the markets where we operate and make loans could face challenges;
•
the risks presented by the economy, which could adversely affect credit quality, collateral values, including real estate collateral, investment values, liquidity and loan originations and loan portfolio delinquency rates;
•
the efficiencies and enhanced financial and operating performance we expect to realize from investments in personnel, acquisitions, and infrastructure may not be realized;
•
interest rate changes could significantly reduce net interest income and negatively affect asset yields and funding sources;
•
possible cessation or market replacement of LIBOR and the related effect on our LIBOR-based financial products and contracts, including, but not limited to, hedging products, debt obligations, investments, and loans;
•
projected business increases following strategic expansion could be lower than expected;
•
changes in the scope and cost of FDIC insurance and other coverages;
•
the impact of acquired loans on our earnings;
•
changes in accounting policies or procedures as may be required by the FASB or other regulatory agencies could materially affect our financial statements and how we report those results, and expectations and preliminary analysis relating to how such changes will affect our financial results could prove incorrect;
•
changes in laws and regulations affecting our businesses, including changes in the enforcement and interpretation of such laws and regulations by applicable governmental and regulatory agencies;
•
competition among financial institutions and nontraditional providers of financial services could increase significantly;
•
continued consolidation in the Northwest financial services industry resulting in the creation of larger financial institutions that may have greater resources could change the competitive landscape;
•
the goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings and capital;
•
our ability to identify and address cyber-security risks, including security breaches, “denial of service attacks,” “hacking” and identity theft;
•
any material failure or interruption of our information and communications systems;
•
inability to keep pace with technological changes;
•
our ability to effectively manage credit risk, interest rate risk, market risk, operational risk, legal risk, liquidity risk and regulatory and compliance risk;
•
failure to maintain effective internal controls over financial reporting or disclosure controls and procedures;
•
the effect of geopolitical instability, including wars, conflicts and terrorist attacks;
•
our profitability measures could be adversely affected if we are unable to effectively manage our capital;
•
natural disasters, including earthquakes, tsunamis, flooding, fires and other unexpected events; and
•
the effects of any damage to our reputation resulting from developments related to any of the items identified above.
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 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.


39

CRITICAL ACCOUNTING POLICIES
Management has identified the accounting policies related to the ALLL, business combinations and the valuation and recoverability of goodwill as critical to an understanding of our financial statements. These policies and related estimates are discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings “Allowance for Loan and Lease Losses,” “Business Combinations” and “Valuation and Recoverability of Goodwill” in our 2018 Annual Report on Form 10-K. There have not been any material changes in our critical accounting policies as compared to those disclosed in our 2018 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Our results of operations are dependent to a large degree on our net interest income. We also generate noninterest income from our broad range of products and services including treasury management, wealth management and debit and credit cards. Our operating expenses consist primarily of compensation and employee benefits, occupancy, data processing and legal and professional fees. Like most financial institutions, our interest income and cost of funds are affected significantly by general economic conditions, particularly changes in market interest rates, and by government policies and actions of regulatory authorities.
Earnings Summary
Comparison of current quarter to prior year period
The Company reported net income for the third quarter of $50.7 million or $0.70 per diluted common share, compared to $46.4 million or $0.63 per diluted common share for the third quarter of 2018. Net interest income for the three months ended September 30, 2019 was $122.5 million, a decrease of $346 thousand from the prior year period. The decrease was a result of higher interest expense from higher average balances of FHLB advances and interest-bearing public funds, excluding certificates of deposit, partially offset by the increase in interest income from higher average balances of interest-earning assets.
The provision for loan and lease losses for the third quarter of 2019 was $299 thousand compared to $3.2 million during the third quarter of 2018. The lower provision expense recorded in the third quarter of 2019 compared to one year ago was primarily due to the increase in net recoveries and an improvement in the credit quality of our loan portfolio.
Noninterest income for the current quarter was $28.0 million, an increase of $7.0 million from the prior year period. The increase was primarily due to a $5.9 million gain from the sale-leaseback of owned real estate during the third quarter of 2019.
Total noninterest expense for the quarter ended September 30, 2019 was $87.1 million, an increase of $4.2 million from the prior year period. After removing acquisition-related expenses of $1.1 million from the third quarter of 2018, year over year noninterest expense increased $5.3 million, or 7%. This increase was primarily driven by higher compensation and employee benefits expense which was partially offset by a decrease in regulatory premium expenses. The Bank’s FDIC deposit insurance expense was reduced due to the utilization of a portion of our FDIC Small Bank Assessment Credit.

40

Comparison of current year-to-date to prior year period
The Company reported net income for the nine months ended September 30, 2019 of $148.3 million or $2.04 per diluted common share, compared to $128.1 million, or $1.75 per diluted common share for the same period in 2018. Net interest income for the nine months ended September 30, 2019 was $368.6 million, an increase of $13.6 million from the prior year period. The increase was a result of $4.9 million of loan interest recoveries received in 2019 and higher rates and average balances on interest-earning assets, partially offset by higher rates on interest-bearing liabilities and an increase in average FHLB advances.
The provision for loan and lease losses for the nine months ended September 30, 2019 was $1.9 million compared to a provision of $13.0 million for the first nine months of 2018. The decrease in the provision for the first nine months of 2019 compared to the same period in 2018 was due to a reduction in the net charge-offs for the period and an improvement in the credit quality of our loan portfolio.
Noninterest income for the nine months ended September 30, 2019 was $75.4 million, an increase of $7.5 million from the prior year period. The increase was primarily due to the previously noted $5.9 million gain from a sale-leaseback transaction, BOLI benefits, and a net gain on the sale of securities during the nine months ended September 30, 2019. These increases were partially offset by lower card revenue as a result of the interchange fee cap, which became effective on July 1, 2018.
For the nine months ended September 30, 2019, noninterest expense was $258.5 million, an increase of $5.0 million from $253.5 million a year earlier. After removing the acquisition-related expenses of $8.2 million from the first nine months of 2018, year over year noninterest expense increased $13.2 million, or 5%. The increase from the prior year period was driven by higher compensation and employee benefits expense and higher legal and professional fees, partially offset by decreases in OREO expenses.

41

Net Interest Income
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 cost of interest-bearing liabilities by category and, in total, net interest income and net interest margin:
 
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
 
2019
 
2018
 
 
Average
Balances
 
Interest
Earned / Paid
 
Average
Rate (3)
 
Average
Balances
 
Interest
Earned / Paid
 
Average
Rate (3)
 
 
(dollars in thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Loans, net (1)(2)
 
$
8,694,592

 
$
114,099

 
5.21
%
 
$
8,456,632

 
$
110,925

 
5.20
%
Taxable securities
 
2,654,490

 
16,457

 
2.46
%
 
2,336,405

 
14,654

 
2.49
%
Tax exempt securities (2)
 
447,723

 
3,235

 
2.87
%
 
513,090

 
3,885

 
3.00
%
Interest-earning deposits with banks
 
144,773

 
864

 
2.37
%
 
20,502

 
104

 
2.01
%
Total interest-earning assets
 
11,941,578

 
134,655

 
4.47
%
 
11,326,629

 
129,568

 
4.54
%
Other earning assets
 
230,140

 
 
 
 
 
228,332

 
 
 
 
Noninterest-earning assets
 
1,288,056

 
 
 
 
 
1,250,170

 
 
 
 
Total assets
 
$
13,459,774

 
 
 
 
 
$
12,805,131

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Money market accounts (4)
 
2,589,390

 
2,840

 
0.44
%
 
2,727,928

 
1,671

 
0.24
%
Interest-bearing demand (4)
 
1,049,833

 
438

 
0.17
%
 
1,089,324

 
437

 
0.16
%
Savings accounts (4)
 
893,395

 
49

 
0.02
%
 
888,997

 
31

 
0.01
%
Interest-bearing public funds, other than certificates of deposit (4)
 
602,674

 
2,879

 
1.90
%
 
229,855

 
510

 
0.88
%
Certificates of deposit
 
381,879

 
657

 
0.68
%
 
440,196

 
544

 
0.49
%
Total interest-bearing deposits
 
5,517,171

 
6,863

 
0.49
%
 
5,376,300

 
3,193

 
0.24
%
FHLB advances
 
400,956

 
2,569

 
2.54
%
 
167,531

 
966

 
2.29
%
Subordinated debentures
 
35,346

 
468

 
5.25
%
 
35,530

 
468

 
5.23
%
Other borrowings and interest-bearing liabilities
 
35,569

 
183

 
2.04
%
 
41,636

 
152

 
1.45
%
Total interest-bearing liabilities
 
5,989,042

 
10,083

 
0.67
%
 
5,620,997

 
4,779

 
0.34
%
Noninterest-bearing deposits
 
5,151,596

 
 
 
 
 
5,102,500

 
 
 
 
Other noninterest-bearing liabilities
 
166,220

 
 
 
 
 
98,317

 
 
 
 
Shareholders’ equity
 
2,152,916

 
 
 
 
 
1,983,317

 
 
 
 
Total liabilities & shareholders’ equity
 
$
13,459,774

 
 
 
 
 
$
12,805,131

 
 
 
 
Net interest income (tax equivalent)
 
$
124,572

 
 
 
 
 
$
124,789

 
 
Net interest margin (tax equivalent)
 
4.14
%
 
 
 
 
 
4.37
%
__________
(1)
Nonaccrual loans have been included in the tables as loans carrying a zero yield. Amortized net deferred loan fees and net unearned discounts on acquired loans were included in the interest income calculations. The amortization of net deferred loan fees was $2.0 million and $2.5 million for the three months ended September 30, 2019 and 2018, respectively. The incremental accretion income on acquired loans was $2.1 million and $3.2 million for the three months ended September 30, 2019 and 2018, respectively.
(2)
Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $1.4 million and $1.2 million for the three months ended September 30, 2019 and 2018, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $679 thousand and $816 thousand for the three months ended September 30, 2019 and 2018, respectively.
(3)
Beginning January 2019, average rates were calculated using the actual number of days on an actual/actual basis. This change was done to provide more meaningful trend information for our NIM regardless of the number of days in the period. Prior periods, which were previously reported on a 30/360 basis, have been restated to conform to the current basis.
(4)
Beginning July 2019, interest-bearing public funds, other than certificates of deposit are presented separately in this table. Prior period amounts have been reclassified to conform to current period presentation.

42

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 cost of interest-bearing liabilities by category and, in total, net interest income and net interest margin:
 
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
 
Average
Balances
 
Interest
Earned / Paid
 
Average
Rate (3)
 
Average
Balances
 
Interest
Earned / Paid
 
Average
Rate (3)
 
 
(dollars in thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Loans, net (1)(2)
 
$
8,568,746

 
$
341,798

 
5.33
%
 
$
8,398,596

 
$
321,542

 
5.12
%
Taxable securities
 
2,599,595

 
49,790

 
2.56
%
 
2,202,497

 
39,285

 
2.38
%
Tax exempt securities (2)
 
470,987

 
10,426

 
2.96
%
 
518,128

 
11,640

 
3.00
%
Interest-earning deposits with banks
 
65,374

 
1,159

 
2.37
%
 
48,922

 
600

 
1.64
%
Total interest-earning assets
 
11,704,702

 
$
403,173

 
4.61
%
 
11,168,143

 
$
373,067

 
4.47
%
Other earning assets
 
231,823

 
 
 
 
 
222,570

 
 
 
 
Noninterest-earning assets
 
1,266,392

 
 
 
 
 
1,255,965

 
 
 
 
Total assets
 
$
13,202,917

 
 
 
 
 
$
12,646,678

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Money market accounts (4)
 
2,571,722

 
8,321

 
0.43
%
 
2,704,471

 
4,025

 
0.20
%
Interest-bearing demand (4)
 
1,063,678

 
1,230

 
0.15
%
 
1,097,523

 
1,161

 
0.14
%
Savings accounts (4)
 
893,738

 
136

 
0.02
%
 
880,561

 
102

 
0.02
%
Interest-bearing public funds, other than certificates of deposit (4)
 
380,853

 
4,831

 
1.70
%
 
247,068

 
1,367

 
0.74
%
Certificates of deposit
 
397,221

 
1,819

 
0.61
%
 
461,236

 
1,619

 
0.47
%
Total interest-bearing deposits
 
5,307,212

 
16,337

 
0.41
%
 
5,390,859

 
8,274

 
0.21
%
FHLB advances
 
500,448

 
9,962

 
2.66
%
 
150,054

 
2,351

 
2.09
%
Subordinated debentures
 
35,392

 
1,404

 
5.30
%
 
35,577

 
1,404

 
5.28
%
Other borrowings and interest-bearing liabilities
 
35,440

 
552

 
2.08
%
 
43,453

 
288

 
0.89
%
Total interest-bearing liabilities
 
5,878,492

 
$
28,255

 
0.64
%
 
5,619,943

 
$
12,317

 
0.29
%
Noninterest-bearing deposits
 
5,069,629

 
 
 
 
 
4,969,037

 
 
 
 
Other noninterest-bearing liabilities
 
156,432

 
 
 
 
 
95,192

 
 
 
 
Shareholders’ equity
 
2,098,364

 
 
 
 
 
1,962,506

 
 
 
 
Total liabilities & shareholders’ equity
 
$
13,202,917

 
 
 
 
 
$
12,646,678

 
 
 
 
Net interest income (tax equivalent)
 
$
374,918

 
 
 
 
 
$
360,750

 
 
Net interest margin (tax equivalent)
 
4.28
%
 
 
 
 
 
4.32
%
__________
(1)
Nonaccrual loans have been included in the table as loans carrying a zero yield. Amortized net deferred loan fees and net unearned discounts on acquired loans were included in the interest income calculations. The amortization of net deferred loan fees was $6.3 million and $6.8 million for the nine months ended September 30, 2019 and 2018, respectively. The incremental accretion income on acquired loans was $6.8 million and $9.9 million for the nine months ended September 30, 2019 and 2018, respectively.
(2)
Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $4.1 million and $3.4 million for the nine months ended September 30, 2019 and 2018, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $2.2 million and $2.4 million for the nine months ended September 30, 2019 and 2018, respectively.
(3)
Beginning January 2019, average rates were calculated using the actual number of days to be on an actual/actual basis. This change was done to provide more meaningful trend information for our NIM regardless of the number of days in the period. Prior periods, which were previously reported on a 30/360 basis, have been restated to conform to the current basis.
(4)
Beginning July 2019, interest-bearing public funds, other than certificates of deposit are presented separately in this table. Prior period amounts have been reclassified to conform to current period presentation.

43

The following table sets forth the total dollar amount of change in interest income and interest expense. The changes have been segregated for each major category of interest-earning assets and interest-bearing liabilities into amounts attributable to changes in volume and changes in rates. Changes attributable to the combined effect of volume and interest rates have been allocated proportionately to the changes due to volume and the changes due to interest rates:
 
 
Three Months Ended September 30, 2019 Compared to 2018 Increase (Decrease) Due to
 
 
Volume
 
Rate
 
Total
 
 
(in thousands)
Interest Income
 
 
 
 
 
 
Loans, net
 
$
3,123

 
$
51

 
$
3,174

Taxable securities
 
1,974

 
(171
)
 
1,803

Tax exempt securities
 
(478
)
 
(172
)
 
(650
)
Interest earning deposits with banks
 
738

 
22

 
760

Interest income
 
$
5,357

 
$
(270
)
 
$
5,087

Interest Expense
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
Money market accounts
 
$
(89
)
 
$
1,258

 
$
1,169

Interest-bearing demand
 
(16
)
 
17

 
1

Savings accounts
 
—

 
18

 
18

Interest-bearing public funds, other than certificates of deposit
 
1,385

 
984

 
2,369

Certificates of deposit
 
(79
)
 
192

 
113

Total interest on deposits
 
1,201

 
2,469

 
3,670

FHLB advances
 
1,484

 
119

 
1,603

Other borrowings and interest-bearing liabilities
 
(16
)
 
47

 
31

Interest expense
 
$
2,669

 
$
2,635

 
$
5,304


44

The following table sets forth the total dollar amount of change in interest income and interest expense. The changes have been segregated for each major category of interest-earning assets and interest-bearing liabilities into amounts attributable to changes in volume and changes in rates. Changes attributable to the combined effect of volume and interest rates have been allocated proportionately to the changes due to volume and the changes due to interest rates:
 
 
Nine Months Ended September 30, 2019 Compared to 2018 Increase (Decrease) Due to
 
 
Volume
 
Rate
 
Total
 
 
(in thousands)
Interest Income
 
 
 
 
 
 
Loans, net
 
$
6,604

 
$
13,652

 
$
20,256

Taxable securities
 
7,454

 
3,051

 
10,505

Tax exempt securities
 
(1,046
)
 
(168
)
 
(1,214
)
Interest earning deposits with banks
 
240

 
319

 
559

Interest income
 
$
13,252

 
$
16,854

 
$
30,106

Interest Expense
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
Money market accounts
 
(207
)
 
4,503

 
4,296

Interest-bearing demand
 
(37
)
 
106

 
69

Savings accounts
 
2

 
32

 
34

Interest-bearing public funds, other than certificates of deposit
 
1,023

 
2,441

 
3,464

Certificates of deposit
 
(246
)
 
446

 
200

Total interest on deposits
 
535

 
7,528

 
8,063

FHLB advances
 
6,820

 
791

 
7,611

Other borrowings
 
(42
)
 
306

 
264

Interest expense
 
$
7,313

 
$
8,625

 
$
15,938

The following table shows the impact to interest income of incremental accretion income as well as the net interest margin and operating net interest margin for the periods presented:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(dollars in thousands)
Incremental accretion income due to:
 
 
 
 
 
 
 
 
PCI loans
 
$
113

 
$
585

 
$
980

 
$
1,240

Other acquired loans
 
1,959

 
2,643

 
5,790

 
8,703

Incremental accretion income
 
$
2,072

 
$
3,228

 
$
6,770

 
$
9,943

 
 
 
 
 
 
 
 
 
Net interest margin (tax equivalent) (1)
 
4.14
%
 
4.37
%
 
4.28
%
 
4.32
%
Operating net interest margin (1)(2)
 
4.12
%
 
4.34
%
 
4.28
%
 
4.29
%
__________
(1) Beginning January 2019, net interest margin (tax equivalent) and operating net interest margin (tax equivalent) were calculated using the actual number of days and on an actual/actual basis. This change was done to provide more meaningful trend information for our NIM regardless of the number of days in the period. Prior periods, which were previously reported on a 30/360 basis, have been restated to conform to the current basis.
(2) Operating net interest margin (tax equivalent) is a non-GAAP measurement. See Non-GAAP measures section of Item 2, Management’s Discussion and Analysis.

45

Comparison of current quarter to prior year period
Net interest income for the third quarter of 2019 was $122.5 million, down from $122.8 million for the same quarter in 2018. The decrease was a result of higher interest expense from higher average balances of FHLB advances and interest-bearing public funds, excluding certificates of deposit, partially offset by the increase in interest income from higher average balances of interest-earning assets. During the third quarter of 2019, we utilized interest-bearing public funds, excluding certificates of deposit, as an alternative funding source, with a corresponding increase in our investment securities, as we expanded our interest rate risk strategy to partially mitigate the impact of further interest rate cuts. The Company’s net interest margin (tax equivalent) decreased to 4.14% in the third quarter of 2019, from 4.37% for the prior year period. This decrease was driven by higher rates on our deposits and FHLB advances as well as lower accretion income on acquired loans. The Company’s operating net interest margin (tax equivalent) (see footnote 2 in prior table) decreased to 4.12% from 4.34% during the third quarter of 2018. The decrease was due to the items previously noted for the decrease in the net interest margin, except for the lower accretion income, which is not included in the operating net interest margin.
Comparison of current year-to-date to prior year period
Net interest income for the nine months ended September 30, 2019 was $368.6 million, an increase of 4% from $355.0 million for the prior year period. The increase in net interest income was due to $4.9 million of loan interest recoveries recorded in the current year as well as higher rates and average balances on loans while taxable securities increased due to higher average balances. These increases were partially offset by higher rates on deposits and higher average balances of FHLB advances. The Company’s net interest margin (tax equivalent) decreased to 4.28% for the first nine months of 2019, from 4.32% for the prior year period. The decrease in the Company’s net interest margin (tax equivalent) was a result of a $3.2 million decline in accretion income on acquired loans as well as higher rates on our deposits and borrowings, partially offset by higher rates on the loan portfolio. The Company’s operating net interest margin (tax equivalent) for the nine months ended September 30, 2019 remained relatively stable at 4.28% compared to 4.29% for the nine months ended September 30, 2018.
Provision for Loan and Lease Losses
Comparison of current quarter to prior year period
During the third quarter of 2019, the Company recorded a $299 thousand net provision for loan losses compared to a $3.2 million net provision during the third quarter of 2018. The decrease in the provision for loan losses was due to the increase in net recoveries and an improvement in the credit quality of the loan portfolio. The net provision for loan and lease losses recorded during the current quarter included management’s ongoing assessment of the credit quality of the Company’s loan portfolio. Factors affecting the provision include net charge-offs, credit quality migration, and size and composition of the loan portfolio and changes in the economic environment during the third quarter of 2019. The amount of provision was calculated in accordance with the Company’s methodology for determining the ALLL, discussed in Note 5 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
Comparison of current year-to-date to prior year period
The provision for loan and lease losses for the nine months ended September 30, 2019 was $1.9 million compared to $13.0 million during the same period in 2018. The decrease in the provision for the first nine months of 2019 was primarily due to a reduction in the net charge-offs for the period and the improved credit quality of our loan portfolio. We also recorded a large charge-off in our agricultural loan portfolio during the nine months ended September 30, 2018. The amount of provision was calculated in accordance with the Company’s methodology for determining ALLL, discussed in Note 5 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.

46

Noninterest Income
The following table presents the significant components of noninterest income and the related dollar and percentage change from period to period:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
$ Change
 
% Change
 
2019
 
2018
 
$ Change
 
% Change
 
 
(dollars in thousands)
Deposit account and treasury management fees
 
$
9,015

 
$
9,266

 
$
(251
)
 
(3
)%
 
$
27,030

 
$
26,689

 
$
341

 
1
 %
Card revenue
 
4,006

 
3,714

 
292

 
8
 %
 
11,431

 
16,143

 
(4,712
)
 
(29
)%
Financial services and trust revenue
 
3,226

 
2,975

 
251

 
8
 %
 
9,608

 
8,924

 
684

 
8
 %
Loan revenue
 
3,855

 
3,282

 
573

 
17
 %
 
9,840

 
9,522

 
318

 
3
 %
Bank owned life insurance
 
1,528

 
1,402

 
126

 
9
 %
 
4,644

 
4,540

 
104

 
2
 %
Investment securities gains (losses), net
 
—

 
(62
)
 
62

 
(100
)%
 
2,132

 
(73
)
 
2,205

 
100
 %
Other
 
6,400

 
442

 
5,958

 
100
 %
 
10,689

 
2,109

 
8,580

 
100
 %
Total noninterest income
 
$
28,030

 
$
21,019

 
$
7,011

 
33
 %
 
$
75,374

 
$
67,854

 
$
7,520

 
11
 %

Comparison of current quarter to prior year period
Noninterest income was $28.0 million for the third quarter of 2019, compared to $21.0 million for the same period in 2018. The increase was primarily due to the $5.9 million sale-leaseback gain on owned real estate during the third quarter of 2019, which is included in other noninterest income in the table above.
Comparison of current year-to-date to prior year period
For the nine months ended September 30, 2019, noninterest income was $75.4 million compared to $67.9 million for the same period in 2018, an increase of $7.5 million. The increase was due to the previously noted $5.9 million sale-leaseback gain and the $3.0 million of BOLI benefits, both of which are included in other noninterest income in the table above, and the $2.1 million net gain on sale of securities, partially offset by lower card revenue. The decline in card revenue was due to the interchange fee cap, which became effective on July 1, 2018.
Noninterest Expense
The following table presents the significant components of noninterest expense and the related dollar and percentage change from period to period:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
$ Change
 
% Change
 
2019
 
2018
 
$ Change
 
% Change
 
 
(dollars in thousands)
Compensation and employee benefits
 
$
54,459

 
$
49,419

 
$
5,040

 
10
 %
 
$
158,559

 
$
148,938

 
$
9,621

 
6
 %
Occupancy
 
8,645

 
8,321

 
324

 
4
 %
 
26,166

 
27,718

 
(1,552
)
 
(6
)%
Data processing
 
5,102

 
4,466

 
636

 
14
 %
 
14,372

 
14,957

 
(585
)
 
(4
)%
Legal and professional services
 
5,683

 
4,695

 
988

 
21
 %
 
16,810

 
12,103

 
4,707

 
39
 %
Amortization of intangibles
 
2,632

 
3,070

 
(438
)
 
(14
)%
 
8,029

 
9,346

 
(1,317
)
 
(14
)%
B&O taxes (1)
 
1,325

 
1,478

 
(153
)
 
(10
)%
 
4,612

 
4,254

 
358

 
8
 %
Advertising and promotion
 
1,752

 
1,472

 
280

 
19
 %
 
3,596

 
4,523

 
(927
)
 
(20
)%
Regulatory premiums
 
(38
)
 
904

 
(942
)
 
(104
)%
 
1,902

 
2,778

 
(876
)
 
(32
)%
Net cost (benefit) of operation of OREO
 
(90
)
 
485

 
(575
)
 
(119
)%
 
(682
)
 
1,244

 
(1,926
)
 
(155
)%
Other (1)
 
7,606

 
8,531

 
(925
)
 
(11
)%
 
25,140

 
27,610

 
(2,470
)
 
(9
)%
Total noninterest expense
 
$
87,076

 
$
82,841

 
$
4,235

 
5
 %
 
$
258,504

 
$
253,471

 
$
5,033

 
2
 %
__________
(1) Beginning the first quarter of 2019, B&O taxes are reported separately from other taxes, licenses and fees, which are now reported under “other noninterest expense.” Prior periods have been reclassified to conform to current period presentation.

47

The following table shows the impact of the acquisition-related expenses for the periods indicated to the various components of noninterest expense:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands)
Acquisition-related expenses:
 
 
 
 
 
 
 
 
Compensation and employee benefits
 
$
—

 
$
923

 
$
—

 
$
3,410

Occupancy
 
—

 
29

 
—

 
1,619

Data processing
 
—

 
20

 
—

 
941

Legal and professional fees
 
—

 
102

 
—

 
893

Advertising and promotion
 
—

 
—

 
—

 
534

Other
 
—

 
7

 
—

 
771

Total impact of acquisition-related expense to noninterest expense (1)
 
$
—

 
$
1,081

 
$
—

 
$
8,168

__________
(1) There were no acquisition-related expenses recorded during the three or nine months ended September 30, 2019. All of the acquisition-related expenses in 2018 were related to the 2017 acquisition of Pacific Continental.
Comparison of current quarter to prior year period
Noninterest expense was $87.1 million for the third quarter of 2019, an increase of $4.2 million from $82.8 million for the prior year period. After removing the acquisition-related expenses of $1.1 million from the third quarter of 2018, year over year noninterest expense increased $5.3 million, or 7%. This increase was primarily driven by higher compensation and employee benefits expense, which was partially offset by a decrease in regulatory premium expense. The Bank’s FDIC deposit insurance expense was reduced due to the utilization of $925 thousand of our FDIC Small Bank Assessment Credit. The remaining balance of our credit is $2.2 million but can only be applied towards our future FDIC deposit insurance expense if the fund exceeds its minimum reserve ratio.
Comparison of current year-to-date to prior year period
For the nine months ended September 30, 2019, noninterest expense was $258.5 million, compared to $253.5 million, an increase of $5.0 million from a year earlier. After removing the acquisition-related expenses of $8.2 million from the first nine months of 2018, year over year noninterest expense increased $13.2 million, or 5%. The increase from the prior year period was driven by higher compensation and employee benefits expense and higher legal and professional fees, partially offset by decreases in OREO expenses. Salary expense increased $6.3 million, benefits expense increased $2.6 million and other compensation increased $2.2 million compared to the first nine months of 2018. Professional fees increased $4.3 million due primarily to the digital corporate initiative. These increases in noninterest expense were partially offset by the $682 thousand current year net benefit of OREO resulting from a gain on the sale of OREO, compared to net OREO operating expenses of $1.2 million during the nine months ended September 30, 2019.
Income Taxes
We recorded an income tax provision of $12.4 million for the third quarter of 2019, compared to a provision of $11.4 million for the same period in 2018, with effective tax rates of 20% for both the third quarter of 2019 and 2018. For the nine months ended September 30, 2019 and 2018, we recorded income tax provisions of $35.3 million and $28.2 million, respectively, with effective tax rates of 19% for the current year and 18% for the prior year period. Our effective tax rate remains lower than the statutory tax rate due to tax-exempt income from municipal securities, BOLI and certain loan receivables. For additional information, please refer to the Company’s annual report on Form 10-K for the year ended December 31, 2018.

48


FINANCIAL CONDITION
Total assets were $13.76 billion at September 30, 2019, an increase of $662.6 million from December 31, 2018. Cash and cash equivalents increased $21.0 million. Loans increased $364.8 million during the current year, which was primarily the result of new loan production and increased seasonal line utilization, partially offset by principal pay downs. Debt securities available for sale were $3.37 billion at September 30, 2019, an increase of $200.1 million from December 31, 2018. Total liabilities were $11.60 billion as of September 30, 2019, an increase of $534.7 million from December 31, 2018. The increase was primarily due to increases in deposits and FHLB advances.
Investment Securities
At September 30, 2019, the Company’s investment portfolio primarily consisted of debt securities available for sale totaling $3.37 billion compared to $3.17 billion at December 31, 2018. The increase in the debt securities portfolio from year-end is due to $649.1 million in purchases and $110.6 million in net unrealized gain offset by $544.9 million in maturities, repayments and sales and $14.7 million in premium amortization. The average duration of our debt securities investment portfolio was approximately 4 years and 4 months at September 30, 2019. This duration takes into account calls, where appropriate, and consensus prepayment speeds.
The investment securities are used by the Company as a component of its balance sheet management strategies. From time-to-time, securities may be sold to reposition the portfolio in response to strategies developed by the Company’s asset liability management committee. In accordance with our investment strategy, management monitors market conditions with a view to realize gains on its available for sale securities portfolio when prudent.
The Company performs a quarterly assessment of the debt securities available for sale in its investment portfolio that have an unrealized loss to determine whether the decline in the fair value of these securities below their amortized cost basis is other-than-temporary. Impairment is considered other-than-temporary when it becomes probable that the Company will be unable to recover the entire amortized cost basis of its investment. The Company’s impairment assessment takes into consideration factors such as the length of time and the extent to which the market value has been less than cost, defaults or deferrals of scheduled interest or principal, external credit ratings and recent downgrades, internal assessment of credit quality, and whether the Company intends to sell the security and whether it is more likely than not it will be required to sell the security prior to recovery of its amortized cost basis. If a decline in fair value is judged to be other-than-temporary, the cost basis of the individual security is written down to fair value which then becomes the new cost basis. The new cost basis is not adjusted for subsequent recoveries in fair value.
When there are credit losses associated with an impaired debt security and the Company does not have the intent to sell the security and it is more likely than not that it will not have to sell the security before recovery of its cost basis, the Company will separate the amount of the impairment into the amount that is credit-related and the amount related to non-credit factors. The credit-related impairment is recognized in earnings and the non-credit-related impairment is recognized in accumulated other comprehensive income.
At September 30, 2019, the market value of debt securities available for sale had a net unrealized gain of $67.4 million compared to a net unrealized loss of $43.2 million at December 31, 2018. The change in valuation was the result of fluctuations in market interest rates during the nine months ended September 30, 2019. At September 30, 2019, the Company had $1.15 billion of debt securities available for sale with gross unrealized losses of $11.6 million; however, we did not consider these investment securities to be other-than-temporarily impaired.

49

The following table sets forth our securities portfolio by type for the dates indicated:
 
 
September 30, 2019
 
December 31, 2018
 
 
(in thousands)
Debt securities available for sale:
 
 
 
 
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations (1)
 
$
2,482,835

 
$
2,013,355

Other asset-backed securities (1)
 
171,578

 
174,935

State and municipal securities
 
497,314

 
574,323

U.S. government agency and government-sponsored enterprise securities
 
215,595

 
404,587

U.S. government securities
 
250

 
248

Total debt securities available for sale
 
$
3,367,572

 
$
3,167,448

__________
(1) Beginning July 2019, other asset-backed securities were presented separately in this table. Prior period amounts that were previously reported in U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations have been reclassified to conform to current period presentation.

For further information on our investment portfolio, see Note 3 of the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
Credit Risk Management
The extension of credit in the form of loans or other credit substitutes to individuals and businesses is one of our principal commerce activities. Our policies, applicable laws, and regulations require risk analysis as well as ongoing portfolio and credit management. We manage our credit risk through lending limit constraints, credit review, approval policies, and extensive, ongoing internal monitoring. We also manage credit risk through diversification of the loan portfolio by type of loan, type of industry and type of borrower and by limiting the aggregation of debt to a single borrower.
In analyzing our existing portfolio, we review our consumer and residential loan portfolios by their performance as a pool of loans, since no single loan is individually significant or judged by its risk rating, size or potential risk of loss. In contrast, the monitoring process for the commercial business, real estate construction, and commercial real estate portfolios includes periodic reviews of individual loans with risk ratings assigned to each loan and performance judged on a loan-by-loan basis.
We review these loans to assess the ability of our borrowers to service all interest and principal obligations and, as a result, the risk rating may be adjusted accordingly. In the event that full collection of principal and interest is not reasonably assured, the loan is appropriately downgraded and, if warranted, placed on nonaccrual status even though the loan may be current as to principal and interest payments. Additionally, we assess whether an impairment of a loan warrants specific reserves or a write-down of the loan. For additional discussion on our methodology in managing credit risk within our loan portfolio, see the “Allowance for Loan and Lease Losses” section in this Management’s Discussion and Analysis and Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of the Company’s 2018 Annual Report on Form 10-K.
Loan policies, credit quality criteria, portfolio guidelines and other controls are established under the guidance of our Chief Credit Officer and approved, as appropriate, by the Board of Directors. Credit Administration, together with the management loan committee, has the responsibility for administering the credit approval process. As another part of its control process, we use an internal credit review and examination function to provide reasonable assurance that loans and commitments are made and maintained as prescribed by our credit policies. This includes a review of documentation when the loan is initially extended and subsequent examination to ensure continued performance and proper risk assessment.

50

Loan Portfolio Analysis
Our wholly owned banking subsidiary Columbia State Bank is a full service commercial bank, which originates a wide variety of loans, and focuses its lending efforts on originating commercial business and commercial real estate loans.
The following table sets forth the Company’s loan portfolio by type of loan for the dates indicated:
 
 
September 30, 2019
 
% of Total
 
December 31, 2018
 
% of Total
 
 
(dollars in thousands)
Commercial business
 
$
3,707,314

 
42.3
 %
 
$
3,438,422

 
41.0
 %
Real estate:
 
 
 
 
 
 
 
 
One-to-four family residential
 
273,079

 
3.1
 %
 
238,367

 
2.8
 %
Commercial and multifamily residential
 
3,975,647

 
45.5
 %
 
3,846,027

 
45.8
 %
Total real estate
 
4,248,726

 
48.6
 %
 
4,084,394

 
48.6
 %
Real estate construction:
 
 
 
 
 
 
 
 
One-to-four family residential
 
195,198

 
2.2
 %
 
217,790

 
2.6
 %
Commercial and multifamily residential
 
261,786

 
3.0
 %
 
284,394

 
3.4
 %
Total real estate construction
 
456,984

 
5.2
 %
 
502,184

 
6.0
 %
Consumer
 
297,009

 
3.4
 %
 
318,945

 
3.8
 %
PCI
 
81,777

 
0.9
 %
 
89,760

 
1.1
 %
Subtotal
 
8,791,810

 
100.4
 %
 
8,433,705

 
100.5
 %
Less: Net unearned income
 
(35,455
)
 
(0.4
)%
 
(42,194
)
 
(0.5
)%
Loans, net of unearned income (before ALLL)
 
$
8,756,355

 
100.0
 %
 
$
8,391,511

 
100.0
 %
Loans held for sale
 
$
15,036

 
 
 
$
3,849

 
 
Total loans increased $364.8 million from year-end 2018 primarily the result of organic loan production and increased seasonal line utilization, partially offset by principal pay downs. The loan portfolio continues to be diversified, with the intent to mitigate risk by monitoring concentration in any one sector. The $35.5 million in unearned income recorded at September 30, 2019 was comprised of $17.9 million in net purchase discounts and $17.6 million in net deferred loan fees. The $42.2 million in unearned income recorded at December 31, 2018 consisted of $26.1 million in net purchase discounts and $16.1 million in net deferred loan fees.
The following table provides additional detail related to the net discount of acquired and purchased loans, excluding PCI loans, by acquisition:
 
 
September 30, 2019
 
December 31, 2018
Acquisition:
 
(in thousands)
Pacific Continental
 
$
14,813

 
$
18,526

Intermountain
 
1,794

 
2,303

West Coast
 
3,008

 
4,578

Other
 
(1,684
)
 
725

Total net discount at period end
 
$
17,931

 
$
26,132

Commercial Loans: We are committed to providing competitive commercial lending in our primary market areas. Management expects a continued focus within its commercial lending products and to emphasize, in particular, relationship banking with businesses and business owners.
Real Estate Loans: One-to-four family residential loans are secured by properties located within our primary market areas and, typically, have loan-to-value ratios of 80% or lower at origination. Our underwriting standards for commercial and multifamily residential loans generally require that the loan-to-value ratio for these loans not exceed 75% of appraised value, cost, or discounted cash flow value, as appropriate, and that commercial properties maintain debt coverage ratios (net operating income divided by annual debt servicing) of 1.2 or better. However, underwriting standards can be influenced by competition and other factors. We endeavor to maintain the highest practical underwriting standards while balancing the need to remain competitive in our lending practices.

51

Real Estate Construction Loans: We originate a variety of real estate construction loans. Underwriting guidelines for these loans vary by loan type but include loan-to-value limits, term limits and loan advance limits, as applicable. Our underwriting guidelines for commercial and multifamily residential real estate construction loans generally require that the loan-to-value ratio not exceed 75% and stabilized debt coverage ratios (net operating income divided by annual debt servicing) of 1.2 or better. As noted above, underwriting standards can be influenced by competition and other factors. However, we endeavor to maintain the highest practical underwriting standards while balancing the need to remain competitive in our lending practices.
Consumer Loans: Consumer loans include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans and miscellaneous personal loans.
Foreign Loans: The Company has no material foreign activities. Substantially all of the Company’s loans and unfunded commitments are geographically concentrated in its service areas within the states of Washington, Oregon and Idaho.
PCI Loans: PCI loans are comprised of loans and loan commitments acquired in connection with the 2011 FDIC-assisted acquisitions of First Heritage Bank and Summit Bank, as well as the 2010 FDIC-assisted acquisitions of Columbia River Bank and American Marine Bank. PCI loans are generally accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”).
For additional information on our loan portfolio, including amounts pledged as collateral on borrowings, see Note 4 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
Nonperforming Assets
Nonperforming assets consist of: (i) nonaccrual loans, which generally are loans placed on a nonaccrual basis when the loan becomes past due 90 days or when there are otherwise serious doubts about the collectability of principal or interest within the existing terms of the loan, (ii) OREO and (iii) OPPO, if applicable.
The following table sets forth, at the dates indicated, information with respect to our nonaccrual loans and total nonperforming assets:
 
 
September 30, 2019
 
December 31, 2018
 
 
(dollars in thousands)
Nonperforming assets
 
 
 
 
Nonaccrual loans:
 
 
 
 
Commercial business
 
$
24,408

 
$
35,513

Real estate:
 
 
 
 
One-to-four family residential
 
574

 
1,158

Commercial and multifamily residential
 
10,083

 
14,904

Total real estate
 
10,657

 
16,062

Real estate construction:
 
 
 
 
One-to-four family residential
 
—

 
318

Consumer
 
1,956

 
2,949

Total nonaccrual loans
 
37,021

 
54,842

OREO and OPPO
 
625

 
6,049

Total nonperforming assets
 
$
37,646

 
$
60,891

 
 
 
 
 
Loans, net of unearned income
 
$
8,756,355

 
$
8,391,511

Total assets
 
$
13,757,760

 
$
13,095,145

 
 
 
 
 
Nonperforming loans to period end loans
 
0.42
%
 
0.65
%
Nonperforming assets to period end assets
 
0.27
%
 
0.46
%

52

At September 30, 2019, nonperforming assets were $37.6 million, compared to $60.9 million at December 31, 2018. Nonperforming assets decreased $23.2 million during the nine months ended September 30, 2019, primarily due to pay downs in nonaccrual commercial business loans and sales of OREO. For further information on OREO, see Note 6 of the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
Allowance for Loan and Lease Losses
The ALLL is an accounting estimate of incurred credit losses in our loan portfolio at the balance sheet date. The provision for loan and lease losses is the expense recognized in the Consolidated Statements of Income to adjust the allowance to the levels deemed appropriate by management, as measured by the Company’s credit loss estimation methodologies. The ALLL for unfunded commitments and letters of credit is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to these unfunded credit facilities at the balance sheet date.
At September 30, 2019, our ALLL was $82.7 million, or 0.94% of total loans (excluding loans held for sale). This compares with an ALLL of $83.4 million, or 0.99% of total loans (excluding loans held for sale) at December 31, 2018 and an ALLL of $83.8 million or 0.98% of total loans (excluding loans held for sale) at September 30, 2018.

53

The following table provides an analysis of the Company’s ALLL at the dates and the periods indicated:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(dollars in thousands)
Beginning balance, loans excluding PCI loans
 
$
77,248

 
$
75,368

 
$
79,758

 
$
68,739

Beginning balance, PCI loans
 
3,269

 
4,782

 
3,611

 
6,907

Beginning balance
 
80,517

 
80,150

 
83,369

 
75,646

Charge-offs:
 
 
 
 
 
 
 
 
Commercial business
 
(2,365
)
 
(606
)
 
(7,732
)
 
(8,858
)
One-to-four family residential
 
—

 
—

 
(2
)
 
—

Commercial and multifamily residential
 
—

 
—

 
—

 
(223
)
One-to-four family residential construction
 
—

 
—

 
(170
)
 
—

Consumer
 
(285
)
 
(277
)
 
(1,117
)
 
(773
)
PCI loans
 
(722
)
 
(1,208
)
 
(2,626
)
 
(3,786
)
Total charge-offs
 
(3,372
)
 
(2,091
)
 
(11,647
)
 
(13,640
)
Recoveries:
 
 
 
 
 
 
 
 
Commercial business
 
358

 
547

 
1,385

 
2,892

One-to-four family residential
 
65

 
21

 
102

 
389

Commercial and multifamily residential
 
184

 
213

 
248

 
1,012

One-to-four family residential construction
 
2,471

 
583

 
3,192

 
616

Commercial and multifamily residential construction
 
—

 
—

 
1

 
—

Consumer
 
326

 
266

 
742

 
796

PCI loans
 
1,812

 
945

 
3,389

 
3,096

Total recoveries
 
5,216

 
2,575

 
9,059

 
8,801

Net (charge-offs) recoveries
 
1,844

 
484

 
(2,588
)
 
(4,839
)
Provision for loan and lease losses, loans excluding PCI loans
 
1,600

 
3,655

 
3,195

 
15,180

Provision recapture for loan and lease losses, PCI loans
 
(1,301
)
 
(502
)
 
(1,316
)
 
(2,200
)
Provision for loan and lease losses
 
299

 
3,153

 
1,879

 
12,980

Ending balance, loans excluding PCI loans
 
79,602

 
79,770

 
79,602

 
79,770

Ending balance, PCI loans
 
3,058

 
4,017

 
3,058

 
4,017

Ending balance
 
$
82,660

 
$
83,787

 
$
82,660

 
$
83,787

Total loans, net at end of period, excluding loans held for sale
 
$
8,756,355

 
$
8,514,317

 
$
8,756,355

 
$
8,514,317

ALLL to period-end loans
 
0.94
%
 
0.98
%
 
0.94
%
 
0.98
%
ALLL for unfunded commitments and letters of credit
 
 
 
 
 
 
Beginning balance
 
$
3,980

 
$
3,680

 
$
4,330

 
$
3,130

Net changes in the ALLL for unfunded commitments and letters of credit
 
(400
)
 
275

 
(750
)
 
825

Ending balance
 
$
3,580

 
$
3,955

 
$
3,580

 
$
3,955


54

Liquidity and Sources of Funds
Our primary sources of funds are customer deposits. Additionally, we utilize advances from the FHLB, the FRB, and sweep repurchase agreements to supplement our funding needs. These funds, together with loan repayments, loan sales, retained earnings, equity and other borrowed funds are used to make loans, to acquire securities and other assets and to fund continuing operations.
In addition, we have a shelf registration statement on file with the SEC registering an unspecified amount of any combination of debt or equity securities, depositary shares, purchase contracts, units and warrants in one or more offerings. Specific information regarding the terms of and the securities being offered will be provided at the time of any offering. Proceeds from any future offerings are expected to be used for general corporate purposes, including, but not limited to, the repayment of debt, repurchasing or redeeming outstanding securities, working capital, funding future acquisitions or other purposes identified at the time of any offering.
Deposit Activities
Our deposit products include a wide variety of transaction accounts, savings accounts and time deposit accounts. We have established a branch system to serve our consumer and business depositors. In addition, management’s strategy for funding asset growth is to make use of public funds and brokered and other wholesale deposits on an as-needed basis. The Company participates in the CDARS® program. CDARS® is a network that allows participating banks to offer extended FDIC deposit insurance coverage on time deposits. The Company also participates in a similar program to offer extended FDIC deposit insurance coverage on money market accounts. These extended deposit insurance programs are generally available only to existing customers and are not used as a means of generating additional liquidity. At September 30, 2019, brokered deposits, reciprocal money market accounts and other wholesale deposits (excluding public funds) totaled $327.6 million, or 3.0% of total deposits, compared to $395.2 million or 3.8% at year-end 2018. These deposits have varied maturities.
The following table sets forth the Company’s deposit base by type of product for the dates indicated:
 
 
September 30, 2019
 
December 31, 2018
 
 
Balance
 
% of
Total
 
Balance
 
% of
Total
 
 
(dollars in thousands)
Demand and other noninterest-bearing
 
$
5,320,435

 
49.0
%
 
$
5,227,216

 
50.0
%
Money market (1)
 
2,295,229

 
21.1
%
 
2,294,125

 
21.9
%
Interest-bearing demand (1)
 
1,059,502

 
9.8
%
 
1,084,863

 
10.4
%
Savings (1)
 
892,438

 
8.2
%
 
889,849

 
8.5
%
Interest-bearing public funds, other than certificates of deposit (1)
 
629,797

 
5.8
%
 
233,938

 
2.2
%
Certificates of deposit, less than $250,000
 
223,249

 
2.1
%
 
243,849

 
2.3
%
Certificates of deposit, $250,000 or more
 
107,506

 
1.0
%
 
89,473

 
0.9
%
Certificates of deposit insured by CDARS®
 
17,252

 
0.2
%
 
23,580

 
0.2
%
Brokered certificates of deposit
 
18,852

 
0.2
%
 
57,930

 
0.6
%
Reciprocal money market accounts
 
291,542

 
2.6
%
 
313,692

 
3.0
%
Subtotal
 
10,855,802

 
100.0
%
 
10,458,515

 
100.0
%
Valuation adjustment resulting from acquisition accounting
 
(86
)
 
 
 
(389
)
 
 
Total deposits
 
$
10,855,716

 
 
 
$
10,458,126

 
 
__________
(1) Beginning July 2019, interest-bearing public funds, other than certificates of deposit are presented separately in this table. Prior period amounts have been reclassified to conform to current period presentation.

55

Borrowings
We rely on FHLB advances and FRB borrowings as another source of both short and long-term funding. FHLB advances and FRB borrowings are secured by investment securities, and residential, commercial and commercial real estate loans. At September 30, 2019, we had FHLB advances of $492.5 million compared to $399.5 million at December 31, 2018.
During the second quarter of 2019, the Company entered into a $30.0 million short-term credit facility with an unaffiliated bank. This facility provides the Company additional liquidity, if needed, for various corporate activities including the repurchase of shares of Columbia Banking System, Inc. common stock. The credit agreement requires the Company to comply with certain covenants including those related to asset quality and capital levels.
We also utilize wholesale and retail repurchase agreements to supplement our funding sources. Our wholesale repurchase agreements are secured by mortgage-backed securities. At September 30, 2019 and December 31, 2018, we had deposit customer sweep-related repurchase agreements of $24.5 million and $61.1 million, respectively, which mature on a daily basis. Management anticipates we will continue to rely on FHLB advances, FRB borrowings and wholesale and retail repurchase agreements in the future and we will use those funds primarily to make loans and purchase securities.
Contractual Obligations, Commitments & Off-Balance Sheet Arrangements
We are party to many contractual financial obligations, including repayment of borrowings, operating and equipment lease payments, off-balance sheet commitments to extend credit and investments in affordable housing partnerships. At September 30, 2019, we had commitments to extend credit of $2.62 billion compared to $2.65 billion at December 31, 2018.
Capital Resources
Shareholders’ equity at September 30, 2019 was $2.16 billion, compared to $2.03 billion at December 31, 2018. Shareholders’ equity was 16% of total period-end assets at both September 30, 2019 and December 31, 2018.
Regulatory Capital
In July 2013, the federal bank regulators approved the Capital Rules (as discussed in our 2018 Annual Report on Form 10-K, “Item 1. Business—Supervision and Regulation and —Regulatory Capital Requirements”), which implement the Basel III capital framework and various provisions of the Dodd-Frank Act. We and the Bank were required to comply with these rules as of January 1, 2015, subject to the phase-in of certain provisions, which was completed as of January 1, 2019. We believe that, as of September 30, 2019, we and the Bank meet all capital adequacy requirements under the Capital Rules on a fully phased-in basis.
FDIC regulations set forth the qualifications necessary for a bank to be classified as “well-capitalized,” primarily for assignment of FDIC insurance premium rates. Failure to qualify as “well-capitalized” can negatively impact a bank’s ability to expand and to engage in certain activities. The Company and the Bank qualified as “well-capitalized” at September 30, 2019 and December 31, 2018.
The following table presents the capital ratios and the capital conservation buffer, as applicable, for the Company and its banking subsidiary at September 30, 2019 and December 31, 2018:
 
 
Company
 
Columbia Bank
 
 
September 30, 2019
 
December 31, 2018
 
September 30, 2019
 
December 31, 2018
CET1 risk-based capital ratio
 
12.37
%
 
12.74
%
 
12.52
%
 
12.96
%
Tier 1 risk-based capital ratio
 
12.37
%
 
12.74
%
 
12.52
%
 
12.96
%
Total risk-based capital ratio
 
13.53
%
 
13.99
%
 
13.34
%
 
13.85
%
Leverage ratio
 
10.19
%
 
10.24
%
 
10.35
%
 
10.42
%
Capital conservation buffer
 
5.53
%
 
5.99
%
 
5.34
%
 
5.85
%

56

Stock Repurchase Program
As described in our Annual Report on Form 10-K for the year ended December 31, 2018, our board of directors approved a stock repurchase program to repurchase up to 2.9 million shares, up to a maximum aggregate purchase price of $100.0 million. The Company intends to purchase the shares from time to time in the open market or in private transactions, under conditions which allow such repurchases to be accretive to EPS while maintaining capital ratios that exceed the guidelines for a well-capitalized financial institution. The Company repurchased 676 thousand and 1.3 million shares of common stock totaling$23.5 million and $45.4 million for the three and nine months ended September 30, 2019, respectively.
Non-GAAP Financial Measures
The Company considers operating net interest margin (tax equivalent) to be a useful measurement as it more closely reflects the ongoing operating performance of the Company. Additionally, presentation of the operating net interest margin allows readers to compare certain aspects of the Company’s net interest margin to other organizations that may not have had significant acquisitions. Despite the usefulness of the operating net interest margin (tax equivalent) to the Company, there is no standardized definition for it and, as a result, the Company’s calculations may not be comparable with other organizations. The Company encourages readers to consider its Consolidated Financial Statements in their entirety and not to rely on any single financial measure.
The following table reconciles the Company’s calculation of the operating net interest margin (tax equivalent) to the net interest margin (tax equivalent) for the periods indicated:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Operating net interest margin non-GAAP reconciliation:
 
(dollars in thousands)
Net interest income (tax equivalent) (1)
 
$
124,572

 
$
124,789

 
$
374,918

 
$
360,750

Adjustments to arrive at operating net interest income (tax equivalent):
 
 
 
 
 
 
 
 
Incremental accretion income on PCI loans
 
(113
)
 
(585
)
 
(980
)
 
(1,240
)
Incremental accretion income on other acquired loans
 
(1,959
)
 
(2,643
)
 
(5,790
)
 
(8,703
)
Premium amortization on acquired securities
 
1,386

 
1,859

 
4,816

 
6,065

Interest reversals on nonaccrual loans
 
174

 
477

 
1,462

 
1,147

Operating net interest income (tax equivalent) (1)
 
$
124,060

 
$
123,897

 
$
374,426

 
$
358,019

Average interest earning assets
 
$
11,941,578

 
$
11,326,629

 
$
11,704,702

 
$
11,168,143

Net interest margin (tax equivalent) (1)(2)
 
4.14
%
 
4.37
%
 
4.28
%
 
4.32
%
Operating net interest margin (tax equivalent) (1)(2)
 
4.12
%
 
4.34
%
 
4.28
%
 
4.29
%
__________
(1) Tax-exempt interest income has been adjusted to a tax equivalent basis. The amount of such adjustment was an addition to net interest income of $2.1 million and $2.0 million for the three months ended September 30, 2019 and 2018, respectively, and an addition to net interest income of $6.3 million and $5.8 million for the nine months ended September 30, 2019 and 2018, respectively.
(2) Beginning January 2019, net interest margin (tax equivalent) and operating net interest margin (tax equivalent) were calculated using the actual number of days and on an actual/actual basis. This change was done to provide more meaningful trend information for our NIM regardless of the number of days in the period. Prior periods, which were previously reported on a 30/360 basis, have been restated to conform to the current basis.

57

Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A number of measures are used to monitor and manage interest rate risk, including income simulations and interest sensitivity (gap) analysis. An income simulation model is the primary tool used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Basic assumptions in the model include prepayment speeds on mortgage-related assets, cash flows and maturities of other investment securities, loan and deposit volumes and pricing. These assumptions are inherently subjective and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. At September 30, 2019, based on the measures used to monitor and manage interest rate risk, there has not been a material change in the Company’s interest rate risk since December 31, 2018. For additional information, refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2018 Annual Report on Form 10-K.
Item 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, the CEO and CFO have concluded that as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that the information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is (i) accumulated and communicated to our management (including the CEO and CFO) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Controls Over Financial Reporting
There was no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

58

PART II - OTHER INFORMATION
Item 1.
LEGAL PROCEEDINGS
The Company and its subsidiaries are party to routine litigation arising in the ordinary course of business. Management believes that, based on information currently known to it, any liabilities arising from such litigation will not have a material adverse impact on the Company’s financial conditions, results of operations or cash flows.
Item 1A. RISK FACTORS
Refer to Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 for a discussion of risk factors relating to the Company’s business. The Company believes that there has been no material change in its risk factors as previously disclosed in the Company’s Form 10-K.
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
Not applicable
(b)
Not applicable
(c)
The following table provides information about repurchases of common stock by the Company during the quarter ended September 30, 2019:
Period
 
Total Number of Common Shares Purchased (1)
 
Average Price Paid per Common Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plan (2)
 
Maximum Number of Remaining Shares That May Yet Be Purchased Under the Plan (2)
7/1/2019 - 7/31/2019
 
11,822

 
$
35.32

 
11,822

 
2,264,020

8/1/2019 - 8/31/2019
 
394,202

 
34.31

 
393,631

 
1,870,389

9/1/2019 - 9/30/2019
 
270,928

 
35.41

 
270,928

 
1,599,461

 
 
676,952

 
$
34.77

 
676,381

 
 
__________
(1) Common shares repurchased by the Company during the quarter consisted of cancellation of 571 shares of common stock to pay the shareholders’ withholding taxes and 676,381 shares of common stock purchased under the Company’s stock repurchase program.
(2) As described in our Annual Report on Form 10-K for the year ended December 31, 2018, our board of directors approved a stock repurchase program to repurchase up to 2.9 million shares, up to a maximum aggregate purchase price of $100.0 million.
Item 3.
DEFAULTS UPON SENIOR SECURITIES
None.
Item 4.
MINE SAFETY DISCLOSURES
Not applicable.
Item 5.
OTHER INFORMATION
None.

59

Item 6.
EXHIBITS
10.1**
 
Employment Agreement dated September 30, 2019, by and among Columbia State Bank, Columbia Banking System, Inc. and Clint E. Stein (1)
 
 
 
31.1+
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2+
 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32+
 
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS+
 
XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
 
 
 
101.SCH+
 
XBRL Taxonomy Extension Schema
 
 
 
101.CAL+
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
101.LAB+
 
XBRL Taxonomy Extension Label Linkbase
 
 
 
101.PRE+
 
XBRL Taxonomy Extension Presentation Linkbase
 
 
 
101.DEF+
 
XBRL Taxonomy Extension Definition Linkbase
 
 
 
104+
 
Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document).

(1) Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on October 3, 2019
** Management contract or compensatory plan or arrangement
+ Filed herewith


60

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
 
 
 
 
 
COLUMBIA BANKING SYSTEM, INC.
 
 
 
 
 
 
Date:
November 5, 2019
 
By
 
/s/ HADLEY S. ROBBINS
 
 
 
 
 
Hadley S. Robbins
 
 
 
 
 
President and
Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
 
Date:
November 5, 2019
 
By
 
/s/ GREGORY A. SIGRIST
 
 
 
 
 
Gregory A. Sigrist
 
 
 
 
 
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
 
 
 
 
 
 
Date:
November 5, 2019
 
By
 
/s/ BROCK M. LAKELY
 
 
 
 
 
Brock M. Lakely
 
 
 
 
 
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)


61

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