Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011.

 

¨ 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 issuer 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)   (Zip Code)

(253) 305-1900

(Issuer’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of common stock outstanding at April 30, 2011 was 39,482,955.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page  
PART I — FINANCIAL INFORMATION   
Item 1.   Financial Statements (unaudited)   
  Consolidated Condensed Statements of Income - three months ended March 31, 2011 and 2010      1   
  Consolidated Condensed Balance Sheets – March 31, 2011 and December 31, 2010      2   
 

Consolidated Condensed Statements of Changes in Shareholders’ Equity - three months ended March 31, 2011 and 2010

     3   
  Consolidated Condensed Statements of Cash Flows - three months ended March 31, 2011 and 2010      4   
  Notes to Unaudited Consolidated Condensed Financial Statements      5   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      22   
Item 3.   Quantitative and Qualitative Disclosures about Market Risk      36   
Item 4.   Controls and Procedures      36   
PART II — OTHER INFORMATION   
Item 1.   Legal Proceedings      37   
Item 1A.   Risk Factors      37   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      43   
Item 3.   Defaults Upon Senior Securities      43   
Item 4.   [Removed and Reserved]      43   
Item 5.   Other Information      43   
Item 6.   Exhibits      44   
  Signatures      45   

 

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Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

Columbia Banking System, Inc.

(Unaudited)

 

     Three Months Ended
March 31,
 

(in thousands except per share)

   2011     2010  

Interest Income

    

Loans

   $ 47,429      $ 36,947   

Taxable securities

     4,417        4,745   

Tax-exempt securities

     2,467        2,446   

Federal funds sold and deposits in banks

     298        149   
                

Total interest income

     54,611        44,287   

Interest Expense

    

Deposits

     3,079        4,941   

Federal Home Loan Bank advances

     694        705   

Long-term obligations

     251        249   

Other borrowings

     138        118   
                

Total interest expense

     4,162        6,013   
                

Net Interest Income

     50,449        38,274   

Provision for loan and lease losses

     0        15,000   

Provision for losses on covered loans

     (422     0   
                

Net interest income after provision for loan and lease losses

     50,871        23,274   

Noninterest Income (Loss)

    

Service charges and other fees

     6,288        5,424   

Gain on bank acquisitions

     0        9,818   

Merchant services fees

     1,633        1,739   

Gain on sale of investment securities, net

     0        58   

Bank owned life insurance

     505        504   

Change in FDIC loss sharing asset

     (14,774     0   

Other

     929        930   
                

Total noninterest income (loss)

     (5,419     18,473   

Noninterest Expense

    

Compensation and employee benefits

     18,921        16,986   

Occupancy

     4,397        3,969   

Merchant processing

     883        1,100   

Advertising and promotion

     901        838   

Data processing and communications

     1,924        1,879   

Legal and professional fees

     1,413        1,498   

Taxes, licenses and fees

     865        564   

Regulatory premiums

     2,195        1,496   

Net cost of operation of other real estate owned

     (442     1,312   

Amortization of intangibles

     984        787   

Other

     5,305        3,468   
                

Total noninterest expense

     37,346        33,897   
                

Income before income taxes

     8,106        7,850   

Income tax provision (benefit)

     2,327        (66
                

Net Income

   $ 5,779      $ 7,916   
                

Net Income Applicable to Common Shareholders

   $ 5,779      $ 6,809   
                

Earnings per common share

    

Basic

   $ 0.15      $ 0.24   

Diluted

   $ 0.15      $ 0.24   

Dividends paid per common share

   $ 0.03      $ 0.01   

Weighted average number of common shares outstanding

     39,043        27,886   

Weighted average number of diluted common shares outstanding

     39,156        28,098   

See accompanying notes to unaudited consolidated condensed financial statements.

 

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CONSOLIDATED CONDENSED BALANCE SHEETS

Columbia Banking System, Inc.

(Unaudited)

 

(in thousands)

                 March 31,
2011
     December 31,
2010
 
ASSETS            

Cash and due from banks

         $ 74,973       $ 55,492   

Interest-earning deposits with banks

           401,355         458,638   
                       

Total cash and cash equivalents

           476,328         514,130   

Securities available for sale at fair value (amortized cost of $864,653 and $743,928, respectively)

           888,188         763,866   

Federal Home Loan Bank stock at cost

           17,908         17,908   

Loans held for sale

           542         754   

Loans, excluding covered loans, net of deferred loan fees of ($3,161) and ($3,490), respectively

           1,884,206         1,915,754   

Less: allowance for loan and lease losses

           55,315         60,993   
                       

Loans, excluding covered loans, net

           1,828,891         1,854,761   

Covered loans, net of allowance for loan losses of ($5,633) and ($6,055), respectively

           486,345         517,061   
                       

Total loans, net

           2,315,236         2,371,822   

FDIC loss sharing asset

           193,053         205,991   

Interest receivable

           12,889         11,164   

Premises and equipment, net

           94,131         93,108   

Other real estate owned ($13,527 and $14,443 covered by FDIC loss share, respectively)

           39,608         45,434   

Goodwill

           109,639         109,639   

Core deposit intangible, net

           17,712         18,696   

Other assets

           99,085         103,851   
                       

Total Assets

         $ 4,264,319       $ 4,256,363   
                       
LIABILITIES AND SHAREHOLDERS’ EQUITY            

Deposits:

           

Noninterest-bearing

         $ 892,751       $ 895,671   

Interest-bearing

           2,443,462         2,431,598   
                       

Total deposits

           3,336,213         3,327,269   

Federal Home Loan Bank advances

           115,265         119,405   

Securities sold under agreements to repurchase

           25,000         25,000   

Other borrowings

           84         642   

Long-term subordinated debt

           25,752         25,735   

Other liabilities

           47,922         51,434   
                       

Total liabilities

           3,550,236         3,549,485   

Commitments and contingent liabilities

           

Shareholders’ equity:

           
      March 31,
2011
     December 31,
2010
               

Common Stock (no par value)

           

Authorized shares

     63,033         63,033         

Issued and outstanding

     39,481         39,338         577,588         576,905   

Retained earnings

           122,290         117,692   

Accumulated other comprehensive income

           14,205         12,281   
                       

Total shareholders’ equity

           714,083         706,878   
                       

Total Liabilities and Shareholders’ Equity

         $ 4,264,319       $ 4,256,363   
                       

See accompanying notes to unaudited consolidated condensed financial statements.

 

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CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Columbia Banking System, Inc.

(Unaudited)

 

(in thousands)

   Preferred Stock      Common Stock     Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Total
Shareholders’
Equity
 
   Number of
Shares
     Amount      Number of
Shares
    Amount        

Balance at January 1, 2010

     77       $ 74,301         28,129      $ 348,706      $ 93,316      $ 11,816      $ 528,139   

Comprehensive income:

                

Net income

               7,916          7,916   

Other comprehensive income, net of tax:

                

Net unrealized gain from securities, net of reclassification adjustments

                 3,518        3,518   

Net change in cash flow hedging instruments

                 (479     (479

Net pension plan liability adjustment

                 30        30   
                      

Other comprehensive income

                   3,069   
                      

Comprehensive income

                   10,985   
                      

Accretion of preferred stock discount

        146             (146       0   

Issuance of common stock - stock option and other plans

           41        509            509   

Issuance of common stock - restricted stock awards, net of cancelled awards

           72        350            350   

Tax benefit deficiency associated with share-based compensation

             (19         (19

Preferred dividends

               (961       (961

Cash dividends paid on common stock

               (282       (282
                                                          

Balance at March 31, 2010

     77       $ 74,447         28,242      $ 349,546      $ 99,843      $ 14,885      $ 538,721   
                                                          

Balance at January 1, 2011

     0       $ 0         39,338      $ 576,905      $ 117,692      $ 12,281      $ 706,878   

Comprehensive income:

                

Net income

               5,779          5,779   

Other comprehensive income, net of tax:

                

Net unrealized gain from securities, net of reclassification adjustments

                 2,313        2,313   

Net change in cash flow hedging instruments

                 (142     (142

Net pension plan liability adjustment

                 (247     (247
                      

Other comprehensive income

                   1,924   
                      

Comprehensive income

                   7,703   
                      

Issuance of common stock - stock option and other plans

           23        380            380   

Issuance of common stock - restricted stock awards, net of cancelled awards

           122        335            335   

Repurchase of shares

           (2     (32         (32

Cash dividends paid on common stock

               (1,181       (1,181
                                                          

Balance at March 31, 2011

     0       $ 0         39,481      $ 577,588      $ 122,290      $ 14,205      $ 714,083   
                                                          

See accompanying notes to unaudited consolidated condensed financial statements.

 

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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

Columbia Banking System, Inc.

(Unaudited)

 

      Three Months Ended
March 31,
 

(in thousands)

   2011     2010  

Cash Flows From Operating Activities

    

Net Income

   $ 5,779      $ 7,916   

Adjustments to reconcile net income to net cash provided by operating activities

    

Provision for loan and lease losses

     (422     15,000   

Stock-based compensation expense

     335        350   

Depreciation, amortization and accretion

     3,774        2,903   

Net realized gain on FDIC assisted bank acquisitions

     0        (9,818

Net realized gain on sale of securities

     0        (58

Net realized gain on sale of other assets

     (3     (14

Net realized (gain) loss on sale of other real estate owned

     (2,712     145   

Gain on termination of cash flow hedging instruments

     (222     (743

Write-down on other real estate owned

     1,925        829   

Deferred income tax benefit

     0        (125

Net change in:

    

Loans held for sale

     212        0   

Interest receivable

     (1,725     (600

Interest payable

     (251     (145

Other assets

     13,736        6,493   

Other liabilities

     (766     6,289   
                

Net cash provided by operating activities

     19,660        28,422   

Cash Flows From Investing Activities

    

Loans originated and acquired, net of principal collected

     51,870        75,505   

Purchases of:

    

Securities available for sale

     (149,799     (56,469

Premises and equipment

     (2,461     (10

Proceeds from:

    

Sales of securities available for sale

     0        69,328   

Principal repayments and maturities of securities available for sale

     27,315        21,911   

Disposal of premises and equipment

     20        54   

Sales of covered other real estate owned

     6,959        5,950   

Sales of other real estate and other personal property owned

     5,372        1,361   

Capital improvements on other real estate properties

     (251     (329

Decrease in Small Business Administration secured borrowings

     (558     0   

Net cash acquired in business combinations

     0        145,534   
                

Net cash (used in) provided by investing activities

     (61,533     262,835   

Cash Flows From Financing Activities

    

Net increase (decrease) in deposits

     8,944        (258,862

Proceeds from:

    

Federal Home Loan Bank advances

     100        0   

Federal Reserve Bank borrowings

     100        0   

Exercise of stock options

     380        490   

Payment for:

    

Repayment of Federal Home Loan Bank advances

     (4,140     (30,159

Repayment of Federal Reserve Bank borrowings

     (100     0   

Preferred stock dividends

     0        (961

Common stock dividends

     (1,181     (282

Repurchase of common stock

     (32     0   

Net decrease in other borrowings

     0        (86
                

Net cash provided by (used in) financing activities

     4,071        (289,860

(Decrease) Increase in cash and cash equivalents

     (37,802     1,397   

Cash and cash equivalents at beginning of period

     514,130        305,074   
                

Cash and cash equivalents at end of period

   $ 476,328      $ 306,471   
                

Supplemental Information:

    

Cash paid during the year for:

    

Cash paid for interest

   $ 4,413      $ 6,158   

Non-cash investing activities

    

Assets acquired in FDIC assisted acquisitions (excluding cash and cash equivalents)

   $ 0      $ 1,075,166   

Liabilities assumed in FDIC assisted acquisitions

   $ 0      $ 1,210,882   

Loans transferred to other real estate owned

   $ 5,467      $ 3,308   

See accompanying notes to unaudited consolidated condensed financial statements.

 

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Columbia Banking System, Inc.

1. Basis of Presentation and Significant Accounting Policies

 

(a) Basis of Presentation

The interim unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for condensed interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain financial information and footnotes have been omitted or condensed. The consolidated condensed financial statements include the accounts of the Company, and its wholly owned banking subsidiary Columbia Bank. 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 three months ended March 31, 2011 are not necessarily indicative of results to be anticipated for the year ending December 31, 2011. The accompanying interim unaudited consolidated condensed financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s 2010 Annual Report on Form 10-K.

 

(b) Significant Accounting Policies

The significant accounting policies used in preparation of our consolidated financial statements are disclosed in our 2010 Annual Report on Form 10-K. There have not been any changes in our significant accounting policies compared to those contained in our 2010 10-K disclosure for the year ended December 31, 2010.

2. Accounting Pronouncements Recently Issued

In April 2011, the Financial Accounting Standards Board (“the FASB”) issued Accounting Standards Update (“ASU”) 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (Topic 310). ASU 2011-02 clarifies the criteria for a restructuring to be classified as a TDR. The effective date of ASU 2011-02 will be the first interim or annual period beginning after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. The Company is evaluating the impact this ASU will have on its financial condition and results of operations.

 

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3. Earnings per Common Share

Basic Earnings Per Share (“EPS”) is computed by dividing income applicable to common shareholders by the weighted average number of common shares outstanding for the period. Common shares outstanding include common stock and vested restricted stock awards where recipients have satisfied the vesting terms. Diluted EPS reflects the assumed conversion of all dilutive securities, applying the treasury stock method. The Company calculates earnings per share using the two-class method as described in the Earnings per Share topic of the FASB Accounting Standards Codification (“ASC”). The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2011 and 2010:

 

      Three Months Ended
March 31,
 

(in thousands except per share)

   2011     2010  

Basic EPS:

    

Net income

   $ 5,779      $ 7,916   

Less: Preferred dividends and accretion of issuance discount for preferred stock

     0        (1,107
                

Net income applicable to common shareholders

   $ 5,779      $ 6,809   

Less: Earnings allocated to participating securities

     (53     (73
                

Earnings allocated to common shareholders

   $ 5,726      $ 6,736   
                

Weighted average common shares outstanding

     39,043        27,886   

Basic earnings per common share

   $ 0.15      $ 0.24   
                

Diluted EPS:

    

Earnings allocated to common shareholders

   $ 5,726      $ 6,736   
                

Weighted average common shares outstanding

     39,043        27,886   

Dilutive effect of equity awards and warrants

     113        212   
                

Weighted average diluted common shares outstanding

     39,156        28,098   
                

Diluted earnings per common share

   $ 0.15      $ 0.24   
                

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

     54        54   

4. Securities

The following table summarizes the amortized cost, gross unrealized gains and losses and the resulting fair value of securities available for sale:

 

(in thousands)

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

March 31, 2011:

          

U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations

   $ 612,379       $ 15,739       ($ 1,198   $ 626,920   

State and municipal securities

     246,979         10,327         (1,288     256,018   

U.S. government agency securities

     2,014         10         0        2,024   

Other securities

     3,281         0         (55     3,226   
                                  

Total

   $ 864,653       $ 26,076       ($ 2,541   $ 888,188   
                                  

December 31, 2010:

          

U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations

   $ 491,530       $ 16,139       ($ 1,027   $ 506,642   

State and municipal securities

     249,117         7,247         (2,383     253,981   

Other securities

     3,281         0         (38     3,243   
                                  

Total

   $ 743,928       $ 23,386       ($ 3,448   $ 763,866   
                                  

 

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The scheduled contractual maturities of investment securities available for sale at March 31, 2011 are presented as follows:

 

     March 31, 2011  
     Amortized
Cost
     Fair Value  
     (in thousands)  

Due within one year

   $ 6,565       $ 6,694   

Due after one year through five years

     59,801         62,138   

Due after five years through ten years

     163,004         168,245   

Due after ten years

     632,002         647,885   
                 

Total investment securities available-for-sale

   $ 861,372       $ 884,962   
                 

The following table summarizes the carrying value of securities pledged as collateral at March 31, 2011:

 

(in thousands)

   Carrying
Amount
 

Washington and Oregon State public deposits

   $ 178,718   

Federal Reserve Bank borrowings

     144,881   

Federal Home Loan Bank advances

     97,162   

Repurchase agreement

     26,734   

Interest rate contracts

     12,407   

Other

     1,427   
        

Total securities pledged as collateral

   $ 461,329   
        

The following tables show the gross unrealized losses and fair value of the Company’s investments 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 March 31, 2011 and December 31, 2010:

March 31, 2011

 

      Less than 12 Months     12 Months or More     Total  

(in thousands)

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations

   $ 201,951       ($ 1,196   $ 493       ($ 2   $ 202,444       ($ 1,198

State and municipal securities

     31,039         (1,051     2,840         (237     33,879         (1,288

Other securities

     2,267         (14     959         (41     3,226         (55
                                                   

Total

   $ 235,257       ($ 2,261   $ 4,292       ($ 280   $ 239,549       ($ 2,541
                                                   

December 31, 2010

               
      Less than 12 Months     12 Months or More     Total  

(in thousands)

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations

   $ 86,529       ($ 1,025   $ 588       ($ 2   $ 87,117       ($ 1,027

State and municipal securities

     74,755         (2,099     2,792         (284     77,547         (2,383

Other securities

     2,275         (6     968         (32     3,243         (38
                                                   

Total

   $ 163,559       ($ 3,130   $ 4,348       ($ 318   $ 167,907       ($ 3,448
                                                   

The unrealized losses on the above securities are primarily attributable to increases in market interest rates subsequent to their purchase by the Company. Management does not intend to sell any impaired securities nor does available evidence suggest it is more likely than not that management will be required to sell any impaired securities. The Company’s securities portfolio does not include any private label mortgage backed securities or investments in trust preferred securities. Management believes the nature of securities in the Company’s investment portfolio present a very high probability of collecting all contractual amounts due, as the majority of the securities held are backed by government agencies or government-sponsored enterprises. However, this recovery in value may not occur for some time, perhaps greater than the one-year time horizon or perhaps even at maturity.

 

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5. Loans

The following is an analysis of the loan portfolio by major types of loans (net of deferred loan fees):

 

(in thousands)

   March 31,
2011
    December 31,
2010
 

Noncovered loans:

    

Commercial business

   $ 782,565      $ 795,369   

Real Estate:

    

One-to-four family residential

     50,545        49,383   

Commercial and five or more family residential properties

     785,870        794,329   
                

Total real estate

     836,415        843,712   

Real estate construction:

    

One-to-four family residential

     61,097        67,961   

Commercial and five or more family residential properties

     30,072        30,185   
                

Total real estate construction

     91,169        98,146   

Consumer

     177,218        182,017   

Less: deferred loan fees

     (3,161     (3,490
                

Total noncovered loans, net of deferred fees

     1,884,206        1,915,754   

Less: Allowance for loan and lease losses

     (55,315     (60,993
                

Noncovered loans, net

     1,828,891        1,854,761   

Covered loans, net of allowance for loan losses of ($5,633) and ($6,055), respectively

     486,345        517,061   
                

Total loans, net

   $ 2,315,236      $ 2,371,822   
                

Loans held for sale

   $ 542      $ 754   
                

Noncovered Loans

At March 31, 2011 and December 31, 2010, the Company had no loans to foreign domiciled businesses or foreign countries, or loans related to highly leveraged transactions. Substantially all of the Company’s loans and unfunded commitments are geographically concentrated in its service areas within the states of Washington and Oregon.

The Company and its banking subsidiary have granted loans to officers and directors of the Company and related interests. These loans are made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectability. The aggregate dollar amount of these loans was $11.0 million and $12.9 million at March 31, 2011 and December 31, 2010, respectively. During the first three months of 2011, advances on related party loans were $1.8 million and repayments totaled $3.7 million.

At March 31, 2011 and December 31, 2010, $414.1 million and $426.6 million of commercial and residential real estate loans were pledged as collateral on FHLB borrowings. Additionally, at March 31, 2011, the Company had $84 thousand in Small Business Administration (“SBA”) loans pledged as collateral for SBA-secured borrowings.

 

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Table of Contents

The following is an analysis of nonaccrual loans as of March 31, 2011 and December 31, 2010:

 

      March 31, 2011      December 31, 2010  

(in thousands)

   Recorded
Investment (1)
Nonaccrual
Loans
     Unpaid Principal
Balance
Nonaccrual
Loans
     Recorded
Investment (1)
Nonaccrual
Loans
     Unpaid Principal
Balance
Nonaccrual
Loans
 

Commercial Business

           

Secured

   $ 23,689       $ 32,171       $ 32,368       $ 44,316   

Unsecured

     230         231         0         327   

Real Estate 1-4 Family

           

Residential RE Perm

     3,187         3,558         2,999         3,353   

Real Estate Commercial & Multifamily

           

Commercial RE Land

     6,160         8,945         4,093         6,279   

Income Property Multifamily Perm

     9,384         11,188         11,716         12,737   

Owner Occupied RE Perm

     10,318         10,574         7,407         8,990   

Construction 1-4 Family

           

Land & Acquisition

     9,369         19,275         11,608         21,344   

Residential Construction

     3,663         9,238         6,503         11,547   

Construction Commercial & Multifamily

           

Income Property Multifamily Construction

     7,074         12,892         7,585         12,916   

Owner Occupied RE Construction

     0         0         0         0   

Consumer

     5,713         6,147         5,022         5,192   
                                   

Total

   $ 78,787       $ 114,219       $ 89,301       $ 127,001   
                                   

 

(1) Recorded investment includes unpaid principal balance, net of charge-offs, unamortized deferred loan fees or costs, unamortized premiums or discounts and accrued interest.

 

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Table of Contents

The following is an analysis of the aged loan portfolio as of March 31, 2011 and December 31, 2010:

 

(in thousands)

   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  

March 31, 2011

                    

Commercial Business

                    

Secured

   $ 716,030       $ 2,839       $ 113       $ 0       $ 2,952       $ 23,671       $ 742,653   

Unsecured

     39,499         136         50         0         186         228         39,913   

Real Estate 1-4 Family

                    

Residential RE Perm

     47,311         50         0         0         50         3,184         50,545   

Real Estate Commercial & Multifamily

                    

Commercial RE Land

     18,052         210         0         0         210         6,155         24,417   

Income Property Multifamily Perm

     420,772         1,026         452         0         1,478         9,370         431,620   

Owner Occupied RE Perm

     317,008         2,513         0         0         2,513         10,312         329,833   

Construction 1-4 Family

                    

Land & Acquisition

     23,574         0         0         0         0         9,365         32,939   

Residential Construction

     22,870         1,665         0         0         1,665         3,622         28,157   

Construction Commercial & Multifamily

                    

Income Property Multifamily Construction

     11,166         0         0         0         0         7,073         18,239   

Owner Occupied RE Construction

     11,832         0         0         0         0         0         11,832   

Consumer

     170,692         609         206         0         815         5,712         177,219   
                                                              

Total

   $ 1,798,806       $ 9,048       $ 821       $ 0       $ 9,869       $ 78,692       $ 1,887,367   
                                                              

(in thousands)

   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, 2010

                    

Commercial Business

                    

Secured

   $ 720,926       $ 919       $ 692       $ 1       $ 1,612       $ 31,919       $ 754,457   

Unsecured

     40,455         9         0         0         9         448         40,912   

Real Estate 1-4 Family

                    

Residential RE Perm

     46,167         220         0         0         220         2,996         49,383   

Real Estate Commercial & Multifamily

                    

Commercial RE Land

     18,979         0         1,752         0         1,752         4,091         24,822   

Income Property Multifamily Perm

     426,320         1,208         121         0         1,329         10,745         438,394   

Owner Occupied RE Perm

     318,508         497         3,752         0         4,249         8,356         331,113   

Construction 1-4 Family

                    

Land & Acquisition

     24,883         214         205         0         419         11,604         36,906   

Residential Construction

     24,655         0         0         0         0         6,400         31,055   

Construction Commercial & Multifamily

                    

Income Property Multifamily Construction

     10,666         0         0         0         0         7,584         18,250   

Owner Occupied RE Construction

     11,935         0         0         0         0         0         11,935   

Consumer

     176,005         397         595         0         992         5,020         182,017   
                                                              

Total

   $ 1,819,499       $ 3,464       $ 7,117       $ 1       $ 10,582       $ 89,163       $ 1,919,244   
                                                              

 

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Table of Contents

The following is an analysis of noncovered impaired loans as of March 31, 2011 and December 31, 2010:

 

(in thousands)

  Balance  of
Loans
Collectively

Measured for
Contingency
Provision
    Balance of
Loans
Individually
Measured for
Specific
Impairment
    Impaired Loans With
Recorded Allowance
    Impaired Loans Without
Recorded Allowance
    Average
Recorded
Investment

Impaired
Loans (1)
    Interest
Recognized on
Impaired Loans
 
      Recorded
Investment (1)
    Unpaid
Principal
Balance
    Related
Allowance
    Recorded
Investment (1)
    Unpaid
Principal
Balance
     

March 31, 2011

                 

Commercial Business

                 

Secured

  $ 720,865      $ 21,787      $ 12,059      $ 13,247      $ 247      $ 10,345      $ 16,782      $ 26,101      $ 145   

Unsecured

    39,812        102        73        75        73        29        30        103        2   

Real Estate 1-4 Family

                 

Residential RE Perm

    47,687        2,858        70        74        1        2,790        3,083        2,759        4   

Real Estate Commercial & Multifamily

                 

Commercial RE Land

    18,350        6,067        4,713        6,908        58        1,360        1,444        4,970        648   

Income Property Multifamily Perm

    422,156        9,465        311        321        51        9,170        10,866        11,434        10   

Owner Occupied RE Perm

    313,917        15,915        0        0        0        15,959        18,539        15,056        0   

Construction 1-4 Family

                 

Land & Acquisition

    23,421        9,518        5,141        7,915        355        4,380        9,063        10,534        945   

Residential Construction

    24,536        3,622        329        327        34        3,334        8,911        5,082        14   

Construction Commercial & Multifamily

                 

Income Property Multifamily Construction

    11,166        7,073        0        0        0        7,074        12,892        7,329        0   

Owner Occupied RE Construction

    11,832        0        0        0        0        0        0        0        0   

Consumer

    172,295        4,923        0        0        0        4,924        5,228        4,729        0   
                                                                       

Total

  $ 1,806,037      $ 81,330      $ 22,696      $ 28,867      $ 819      $ 59,365      $ 86,838      $ 88,094      $ 1,768   
                                                                       

 

(in thousands)

   Balance  of
Loans
Collectively

Measured for
Contingency
Provision
     Balance of
Loans
Individually
Measured for
Specific
Impairment
     Impaired Loans With
Recorded Allowance
     Impaired Loans Without
Recorded Allowance
 
         Recorded
Investment (1)
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment (1)
     Unpaid
Principal
Balance
 

December 31, 2010

                    

Commercial Business

                    

Secured

   $ 724,665       $ 29,793       $ 2,717       $ 2,758       $ 600       $ 27,081       $ 26,913   

Unsecured

     40,808         104         75         75         75         29         30   

Real Estate 1-4 Family

                    

Residential RE Perm

     46,728         2,655         0         0         0         2,658         2,949   

Real Estate Commercial & Multifamily

                    

Commercial RE Land

     20,959         3,863         3,062         5,225         0         804         826   

Income Property Multifamily Perm

     427,799         10,595         3,094         3,139         59         10,292         12,253   

Owner Occupied RE Perm

     317,010         14,103         0         0         0         14,152         17,099   

Construction 1-4 Family

                    

Land & Acquisition

     25,362         11,543         533         549         3         11,013         20,718   

Residential Construction

     24,655         6,400         915         1,723         62         5,585         9,824   

Construction Commercial & Multifamily

                    

Income Property Multifamily Construction

     10,666         7,584         6,792         10,515         175         792         2,401   

Owner Occupied RE Construction

     11,935         0         0         0         0         0         0   

Consumer

     177,484         4,533         0         0         0         4,533         4,691   
                                                              

Total

   $ 1,828,071       $ 91,173       $ 17,188       $ 23,984       $ 974       $ 76,939       $ 97,704   
                                                              

 

(1) Recorded investment includes unpaid principal balance, net of charge-offs, unamortized deferred loan fees or costs, unamortized premiums or discounts and accrued interest.

Acquired Loans

Acquired loans accounted for under ASC Topic 310-30, are comprised primarily of covered loans acquired in the Federal Deposit Insurance Corporation (the “FDIC”) assisted acquisitions of Columbia River Bank and American Marine Bank and are subject to loss-sharing agreements with the FDIC. Acquired loans subject to loss-sharing agreements with the FDIC are referred to as covered loans. The balance of covered loans, net of allowance for loan losses, was $486.3 million at March 31, 2011.

Under ASC Topic 310-30, purchasers are permitted to aggregate acquired loans into one or more pools, provided the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.

Changes in accretable yield for acquired loans were as follows for the three months ended March 31, 2011:

 

      Three months ended
March 31, 2011
 

(in thousands)

   Accretable Yield  

Balance at beginning of period

   $ 256,572   

Accretion

     (21,303

Cash receipts, disposals and change in cash flows

     (17,918
        

Balance at end of period

   $ 217,351   
        

 

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Table of Contents

6. Allowance for Loan and Lease Losses and Unfunded Commitments and Letters of Credit

We maintain an allowance for loan and lease losses (“ALLL”) to absorb losses inherent in the loan portfolio. The size of the ALLL is determined through quarterly assessments of the probable estimated losses in the loan portfolio. Our methodology for making such assessments and determining the adequacy of the ALLL includes the following key elements:

 

  1. General valuation allowance consistent with the Contingencies topic of the FASB ASC.

 

  2. Classified loss reserves on specific relationships. Specific allowances for identified problem loans are determined in accordance with the Receivables topic of the FASB ASC.

 

  3. The unallocated allowance provides for other factors inherent in our loan portfolio that may not have been contemplated in the general and specific components of the allowance. This unallocated amount generally comprises less than 5% of the allowance. The unallocated amount is reviewed quarterly based on trends in credit losses, the results of credit reviews and overall economic trends.

The general valuation allowance is systematically calculated quarterly using quantitative and qualitative information about specific loan classes. The minimum required level in which an entity develops a systematic methodology to determine its allowance for loan and lease losses is at the segment level. However, the Company’s systematic methodology in determining its allowance for loan and lease losses is prepared at the class level, which is more detailed than the segment level. The quantitative information uses historical losses from a specific loan class and incorporates the loan’s risk rating migration from origination to the point of loss. A loan’s risk rating is primarily determined based upon the borrower’s ability to fulfill its debt obligation from a cash flow perspective. In the event there is financial deterioration of the borrower, the borrower’s other sources of income or repayment are also considered, including recent appraisal values for collateral dependent loans. The qualitative information takes into account general economic and business conditions affecting our market place, seasoning of the loan portfolio, duration of the business cycle, etc. to ensure our methodologies reflect the current economic environment and other factors as using historical loss information exclusively may not give an accurate estimate of inherent losses within the Company’s loan portfolio.

The specific valuation allowance is a reserve for each loan determined to be impaired and the value of the impaired loan is less than its recorded investment. The Company measures the impairment based on the discounted expected future cash flows, observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependant or if foreclosure is probable. The specific reserve for each loan is equal to the difference between the recorded investment in the loan and its determined impairment value.

The ALLL is increased by provisions for loan and lease losses (“provision”) charged to expense, and is reduced by loans charged off, net of recoveries. While the Company’s management believes the best information available is used to determine the ALLL, changes in market conditions could result in adjustments to the ALLL, affecting net income, if circumstances differ from the assumptions used in determining the ALLL.

We have used the same methodology for ALLL calculations during the three months ended March 31, 2011 and 2010. Adjustments to the percentages of the ALLL allocated to loan categories are made based on trends with respect to delinquencies and problem loans within each pool of loans. The Company reviews the ALLL quantitative and qualitative methodology on a quarterly basis and makes adjustments when appropriate. The Company continues to strive towards maintaining a conservative approach to credit quality and will continue to prudently add to our ALLL as necessary in order to maintain adequate reserves. The Company carefully monitors the loan portfolio and continues to emphasize the importance of credit quality while continuously strengthening loan monitoring systems and controls.

 

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Table of Contents

The following table shows a detailed analysis of the allowance for loan and lease losses for noncovered loans as of the three months ended March 31, 2011 and the year ended December 31, 2010:

 

(in thousands)

   Beginning
Balance
     Charge-offs     Recoveries      Provision     Ending
Balance
     Specific
Reserve
     General
Allocation
 

March 31, 2011

                  

Commercial Business

                  

Secured

   $ 21,811       ($ 3,287   $ 96       $ 3,687      $ 22,307       $ 247       $ 22,060   

Unsecured

     738         (84     9         (45     618         73         545   

Real Estate 1-4 Family

                  

Residential RE Perm

     1,100         (448     0         448        1,100         1         1,099   

Real Estate Commercial & Multifamily

                  

Commercial RE Land

     634         0        0         (79     555         58         497   

Income Property Multifamily Perm

     15,210         (365     42         (2,591     12,296         51         12,245   

Owner Occupied RE Perm

     9,692         0        31         689        10,412         0         10,412   

Construction 1-4 Family

                  

Land & Acquisition

     3,769         (768     1,068         (773     3,296         355         2,941   

Residential Construction

     2,292         (659     36         449        2,118         34         2,084   

Construction Commercial & Multifamily

                  

Income Property Multifamily Construction

     274         (487     0         340        127         0         127   

Owner Occupied RE Construction

     70         0        0         (2     68         0         68   

Consumer

     2,120         (925     63         1,160        2,418         0         2,418   

Unallocated

     3,283         0        0         (3,283     0         0         0   
                                                            

Total

   $ 60,993       ($ 7,023   $ 1,345       $ 0      $ 55,315       $ 819       $ 54,496   
                                                            

(in thousands)

   Beginning
Balance
     Charge-offs     Recoveries      Provision      Ending
Balance
     Specific
Reserve
     General
Allocation
 

December 31, 2010

                   

Commercial Business

                   

Secured

   $ 20,409       ($ 12,779   $ 1,218       $ 12,963       $ 21,811       $ 600       $ 21,211   

Unsecured

     1,560         (2,100     1,171         107         738         75         663   

Real Estate 1-4 Family

                   

Residential RE Perm

     1,072         (406     15         419         1,100         0         1,100   

Real Estate Commercial & Multifamily

                   

Commercial RE Land

     664         (2,165     0         2,135         634         0         634   

Income Property Multifamily Perm

     9,860         (1,969     124         7,195         15,210         59         15,151   

Owner Occupied RE Perm

     6,690         (2,039     2         5,039         9,692         0         9,692   

Construction 1-4 Family

                   

Land & Acquisition

     5,711         (8,409     1,199         5,268         3,769         3         3,766   

Residential Construction

     2,304         (2,447     474         1,961         2,292         62         2,230   

Construction Commercial & Multifamily

                   

Income Property Multifamily Construction

     2,453         (3,107     775         153         274         175         99   

Owner Occupied RE Construction

     36         0        0         34         70         0         70   

Consumer

     1,282         (3,982     649         4,171         2,120         0         2,120   

Unallocated

     1,437         0        0         1,846         3,283         0         3,283   
                                                             

Total

   $ 53,478       ($ 39,403   $ 5,627       $ 41,291       $ 60,993       $ 974       $ 60,019   
                                                             

Changes in the allowance for unfunded commitments and letters of credit are summarized as follows:

 

      Three Months Ended
March  31,
 

(in thousands)

   2011      2010  

Beginning balance

   $ 1,165       $ 775   

Net changes in the allowance for unfunded commitments and letters of credit

     495         40   
                 

Ending balance

   $ 1,660       $ 815   
                 

Risk Elements

The extension of credit in the form of loans to individuals and businesses is one of our principal commerce 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, type of borrower and by limiting the aggregation of debt to a single borrower.

 

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Table of Contents

The monitoring process for the loan portfolio includes periodic reviews of individual loans with risk ratings assigned to each loan. Based on the analysis, loans are given a risk rating of 1-10 based on the following criteria:

 

  1) ratings of 1-3 indicate minimal to low credit risk,

 

  2) ratings of 4-5 indicate an average to above average credit risk with adequate repayment capacity when prolonged periods of adversity do not exist,

 

  3) ratings of 6-7 indicate potential weaknesses and higher credit risk requiring greater attention by bank personnel and management to help prevent further deterioration,

 

  4) rating of 8 indicates a loss is possible if loan weaknesses are not corrected,

 

  5) rating of 9 indicates loss is highly probable; however, the amount of loss has not yet been determined,

 

  6) and a rating of 10 indicates the loan is uncollectable, and when identified is charged-off.

Loans with a risk rating of 1-6 are considered Pass loans and loans with risk ratings of 7, 8, 9 and 10 are considered Special Mention, Substandard, Doubtful and Loss, respectively. Loans with a risk rating of Substandard or worse are reported as classified loans in our allowance for loan and lease losses analysis. 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. 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 non-accrual 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.

The following is an analysis of the credit quality of our noncovered loan portfolio as of March 31, 2011 and December 31, 2010:

 

     March 31, 2011      December 31, 2010  

(dollars in thousands)

   Weighted-
Average
Risk Rating
     Recorded
Investment
Noncovered
Loans (1)
     Weighted-
Average
Risk Rating
     Recorded
Investment
Noncovered
Loans (1)
 

Commercial Business

           

Secured

     4.98       $ 745,141         4.96       $ 757,372   

Unsecured

     4.46         37,536         4.23         41,175   

Real Estate 1-4 Family

           

Residential RE Perm

     4.93         50,720         4.96         49,436   

Real Estate Commercial & Multifamily

           

Commercial RE Land

     5.90         24,545         5.75         24,956   

Income Property Multifamily Perm

     5.03         433,411         5.07         406,711   

Owner Occupied RE Perm

     5.14         331,245         5.12         366,284   

Construction 1-4 Family

           

Land & Acquisition

     6.71         33,065         6.79         37,054   

Residential Construction

     6.48         28,334         6.63         31,293   

Construction Commercial & Multifamily

           

Income Property Multifamily Construction

     5.72         18,290         6.38         18,296   

Owner Occupied RE Construction

     4.87         11,898         4.93         11,990   

Consumer

     4.41         177,465         4.31         182,624   
                       

Total recorded investment of noncovered loans

      $ 1,891,650          $ 1,927,191   
                       

 

(1) Recorded investment includes unpaid principal balance, net of charge-offs, unamortized deferred loan fees or costs, unamortized premiums or discounts and accrued interest.

 

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The following is an analysis of our covered loans, net of related allowance for losses on covered loans as of March 31, 2011 and December 31, 2010:

 

(dollars in thousands)

   Covered Loans
March 31, 2011
     Weighted-
Average
Risk Rating
     Allowance
for Loan
Losses
 

Commercial Business

   $ 144,388         5.76       $ 861   

Real Estate 1-4 Family

     62,281         4.75         327   

Real Estate Commercial & Multifamily

     329,192         5.68         2,731   

Construction 1-4 Family

     37,283         7.42         937   

Construction Commercial & Multifamily

     32,290         6.68         628   

Consumer

     53,976         4.52         149   
                    

Subtotal of covered loans

     659,410          $ 5,633   
              

Less:

        

Valuation discount resulting from acquisition accounting

     167,432         

Allowance for loan losses

     5,633         
              

Covered loans, net of allowance for loan losses

   $ 486,345         
              

(dollars in thousands)

   Covered Loans
December 31, 2010
     Weighted-
Average
Risk Rating
     Allowance
for Loan
Losses
 

Commercial Business

   $ 165,255         5.74       $ 2,903   

Real Estate 1-4 Family

     68,700         4.77         1,013   

Real Estate Commercial & Multifamily

     341,063         5.70         821   

Construction 1-4 Family

     39,754         7.29         98   

Construction Commercial & Multifamily

     41,624         6.79         469   

Consumer

     58,337         4.49         751   
                    

Subtotal of covered loans

     714,733          $ 6,055   
              

Less:

        

Valuation discount resulting from acquisition accounting

     191,617         

Allowance for loan losses

     6,055         
              

Covered loans, net of allowance for loan losses

   $ 517,061         
              

Acquired 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. Management monitors and estimates expected future cash flows of acquired loans on a quarterly basis. Acquired loans are also subject to the Company’s internal and external credit review and are risk rated using the same criteria as loans originated by the Company. However, risk ratings are not a clear indicator of losses on acquired loans as a majority of the losses are recoverable from the FDIC under the loss sharing agreements.

Draws on acquired loans, advanced subsequent to the loan acquisition date, are accounted for under ASC 450-20 and those amounts are also subject to the Company’s internal and external credit review. An allowance for loan losses is estimated in a similar manner as the originated loan portfolio, and a provision for loan losses is charged to earnings as necessary.

During the quarter ended March 31, 2011, the Company recorded a $422 thousand provision expense recapture for losses on covered loans. Of this amount, $482 thousand was impairment expense calculated in accordance with ASC 310-30 and $904 thousand was negative provision to adjust the allowance for loss calculated under ASC 450-20 for draws on acquired loans. The impact to earnings of the $422 thousand of provision expense recapture for covered loans was offset through noninterest income by a $338 thousand decrease in the FDIC loss sharing asset.

 

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7. Changes in Other Real Estate Owned

The following table sets forth activity in noncovered OREO for the period:

 

(in thousands)

   March 31,
2011
 

Noncovered OREO:

  

Balance, beginning of period

   $ 30,991   

Transfers in, net of write-downs ($91 and $193, respectively)

     2,042   

OREO improvements

     251   

Additional OREO write-downs

     (1,910

Proceeds from sale of OREO property

     (5,372

Gain on sale of OREO

     79   
        

Total noncovered OREO, end of period

   $ 26,081   
        

The following table sets forth activity in covered OREO at carrying value for the period:

 

(in thousands)

   March 31,
2011
 

Covered OREO:

  

Balance, beginning of period

   $ 14,443   

Established through acquisitions

     0   

Transfers in, net of write-downs ($418 and $2,087, respectively)

     3,425   

OREO improvements

     0   

Additional OREO write-downs

     (15

Proceeds from sale of OREO property

     (6,959

Gain on sale of OREO

     2,633   
        

Total covered OREO, end of period

   $ 13,527   
        

The covered OREO is covered by loss-sharing agreements with the FDIC in which the FDIC will assume 80% of additional write-downs and losses on covered OREO sales, or 95% of additional write-downs and losses on covered OREO sales if the minimum loss share thresholds are met.

8. Goodwill and 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 during the third quarter on an annual basis 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 completed its annual goodwill impairment test during the third quarter of 2010 and determined the fair value of the Company’s single reporting unit exceeded its carrying value.

The core deposit intangible (“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 approximately 10 years.

 

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The following table sets forth activity for goodwill and intangible assets for the period:

 

     Three Months Ended
March 31,
 

(in thousands)

   2011     2010  

Total goodwill, beginning of period

   $ 109,639      $ 95,519   

Established through acquisitions

     0        14,120   
                

Total goodwill, end of period

     109,639        109,639   
                

Gross core deposit intangible balance, beginning of period

     26,651        8,896   

Accumulated amortization, beginning of period

     (7,955     (4,033
                

Core deposit intangible, net, beginning of period

     18,696        4,863   

Established through acquisitions

     0        17,755   

CDI current period amortization

     (984     (787
                

Total core deposit intangible, end of period

     17,712        21,831   
                

Total goodwill and intangible assets, end of period

   $ 127,351      $ 131,470   
                

The following table provides the estimated future amortization expense of core deposit intangibles for the remaining nine months ending December 31, 2011 and the succeeding four years:

 

(in thousands)

   Amount  

Year ending December 31,

  

2011

   $ 2,842   

2012

     3,441   

2013

     3,066   

2014

     2,604   

2015

     1,958   

9. Shareholders’ Equity

Common Stock. On February 3, 2011, the Company declared a quarterly cash dividend of $0.03 per share, payable on March 3, 2011 to shareholders of record as of the close of business on February 17, 2011. 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. Subsequent to quarter end, on April 27 the Company declared a quarterly cash dividend of $0.05 per share, payable on May 25, 2011 to shareholders of record at the close of business May 11, 2011.

 

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10. Comprehensive Income

The components of comprehensive income are as follows:

 

      Three Months Ended
March 31,
 

(in thousands)

   2011     2010  

Net income as reported

   $ 5,779      $ 7,916   

Unrealized gain from securities:

    

Net unrealized holding gain from available for sale securities arising during the period, net of tax of ($1,284) and ($1,956)

     2,313        3,556   

Reclassification adjustment of net gain from sale of available for sale securities included in income, net of tax of $0 and $20

     0        (38
                

Net unrealized gain from securities, net of reclassification adjustment

     2,313        3,518   

Cash flow hedging instruments:

    

Reclassification adjustment of net gain included in income, net of tax of $79 and $264

     (142     (479
                

Net change in cash flow hedging instruments

     (142     (479

Pension plan liability adjustment:

    

Net unrealized gain (loss) from unfunded defined benefit plan liability arising during the period, net of tax of $154 and $(12)

     (261     23   

Less: amortization of unrecognized net actuarial loss included in net periodic pension cost, net of tax of ($8) and $(4)

     14        7   
                

Pension plan liability adjustment, net

     (247     30   
                

Total comprehensive income

   $ 7,703      $ 10,985   
                

11. 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.

 

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Fair values are determined as follows:

Securities at fair value are priced using matrix pricing based on the securities’ relationship to other benchmark quoted prices, and under the provisions of the Fair Value Measurements and Disclosures topic of the FASB ASC are considered a Level 2 input method.

Interest rate contract positions 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 March 31, 2011 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:

 

(in thousands)

   Fair value  at
March 31, 2011
     Fair Value Measurements at Reporting Date Using  
      Level 1      Level 2      Level 3  

Assets

           

Securities available for sale

           

U.S. government agency

   $ 2,024       $ 0       $ 2,024       $ 0   

U.S. government agency and sponsored enterprise mortgage-back securities and collateralized mortgage obligations

     626,920         0         626,920         0   

State and municipal debt securities

     256,018         0         256,018         0   

Other securities

     3,226         0         3,226         0   
                                   

Total securities available for sale

   $ 888,188       $ 0       $ 888,188       $ 0   

Other assets (Interest rate contracts)

   $ 9,050       $ 0       $ 9,050       $ 0   

Liabilities

           

Other liabilities (Interest rate contracts)

   $ 9,050       $ 0       $ 9,050       $ 0   

Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment and OREO. The following methods were used to estimate the fair value of each such class of financial instrument:

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 by the fair market value of the collateral less estimated costs to sell.

Other real estate owned - OREO is real property that the Bank has taken ownership of in partial or full satisfaction of a loan or loans. OREO is recorded at the lower of the carrying amount of the loan or fair value less estimated costs to sell. This amount becomes the property’s new basis. Any write-downs based on the property fair value less estimated cost to sell at the date of acquisition are charged to the allowance for loan and lease losses. Management periodically reviews OREO in an effort to ensure the property is carried at the lower of its new basis or fair value, net of estimated costs to sell. Any write-downs subsequent to acquisition are charged to earnings.

The following table presents information about the Company’s assets measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting period. The amounts disclosed below represent the fair values at the time the nonrecurring fair value measurements were made and not necessarily the fair value at the reporting date.

 

     Fair value  at
March 31, 2011
     Fair Value Measurements at
Reporting Date Using
     Losses During  the
Three Months Ended
March 31, 2011
 

(in thousands)

      Level 1      Level2      Level 3     

Impaired loans

   $ 31,712       $ 0       $ 0       $ 31,712       $ 4,908   

Non-covered OREO

     4,490         0         0         4,490         2,001   
                                            
   $ 36,202       $ 0       $ 0       $ 36,202       $ 6,909   
                                            

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 allowance for loan and lease losses. The losses on non-covered OREO disclosed above represent the writedowns taken at foreclosure that were charged to the allowance for loan and lease losses, as well as subsequent writedowns from updated appraisals that were charged to earnings.

 

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Table of Contents

12. Fair Value of Financial Instruments

Because broadly traded markets do not exist for most of the Company’s financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and due from banks and interest-earning deposits with banks—The fair value of financial instruments that are short-term or reprice frequently and that have little or no risk are considered to have a fair value that approximates carrying value.

Securities available for sale—Securities at fair value are priced using matrix pricing based on the securities’ relationship to other benchmark quoted prices.

Loans —Loans are not recorded at fair value on a recurring basis. Nonrecurring fair value adjustments are periodically recorded on impaired loans that are measured for impairment based on the fair value of collateral. For most performing loans, fair value is estimated using expected duration and lending rates that would have been offered on March 31, 2011 for loans which mirror the attributes of the loans with similar rate structures and average maturities. Commercial loans and construction loans, which are variable rate and short-term are reflected with fair values equal to carrying value. The fair values resulting from these calculations are reduced by an amount representing the change in estimated fair value attributable to changes in borrowers’ credit quality since the loans were originated. For nonperforming loans, fair value is estimated by applying a valuation discount based upon loan sales data from the FDIC.

FDIC loss sharing asset - The FDIC loss sharing asset is considered to have a fair value that approximates carrying value.

Interest rate contracts—Interest rate swap positions are valued in models, which use as their basis, readily observable market parameters.

Deposits —For deposits with no contractual maturity, the fair value is equal to the carrying value. The fair value of fixed maturity deposits is based on discounted cash flows using the difference between the deposit rate and current market rates for deposits of similar remaining maturities.

FHLB and FRB borrowings—The fair value of Federal Home Loan Bank of Seattle (the “FHLB”) advances and Federal Reserve Bank of San Francisco (the “FRB”) borrowings are estimated based on discounting the future cash flows using the market rate currently offered.

Repurchase Agreements—The fair value of securities sold under agreement to repurchase are estimated based on discounting the future cash flows using the market rate currently offered.

Long-term subordinated debt—The fair value of long-term subordinated debt are estimated based on discounting the future cash flows using an estimated market rate.

Other Financial Instruments—The majority of our commitments to extend credit and standby letters of credit carry current market interest rates if converted to loans, as such, carrying value is assumed to equal fair value.

 

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The following table summarizes carrying amounts and estimated fair values of selected financial instruments as well as assumptions used by the Company in estimating fair value:

 

      March 31, 2011      December 31, 2010  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 
     (in thousands)  

Assets

           

Cash and due from banks

   $ 74,973       $ 74,973       $ 55,492       $ 55,492   

Interest-earning deposits with banks

     401,355         401,355         458,638         458,638   

Securities available for sale

     888,188         888,188         763,866         763,866   

FHLB stock

     17,908         17,908         17,908         17,908   

Loans held for sale

     542         542         754         754   

Loans

     2,315,236         2,440,528         2,371,822         2,525,113   

FDIC loss sharing asset

     193,053         193,053         205,991         205,991   

Interest rate contracts

     9,050         9,050         10,167         10,167   

Liabilities

           

Deposits

   $ 3,336,213       $ 3,336,809       $ 3,327,269       $ 3,330,616   

FHLB Advances

     115,265         117,725         119,405         122,722   

Repurchase agreements

     25,000         27,175         25,000         27,251   

Other borrowings

     84         84         642         642   

Long-term subordinated debt

     25,752         23,455         25,735         20,156   

Interest rate contracts

     9,050         9,050         10,167         10,167   

13. Derivatives and Hedging Activities

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 following table presents the fair value of derivative instruments at March 31, 2011 and 2010:

 

     Asset Derivatives      Liability Derivatives  
As of March 31,    2011      2010      2011      2010  
(in thousands)    Balance Sheet
Location
     Fair
Value
     Balance Sheet
Location
     Fair
Value
     Balance Sheet
Location
     Fair
Value
     Balance Sheet
Location
     Fair
Value
 

Derivatives not designated as hedging instruments

                       

Interest rate contracts

     Other assets       $ 9,050         Other assets       $ 13,623         Other liabilities       $ 9,050         Other liabilities       $ 13,623   

 

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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 condensed financial statements of Columbia Banking System, Inc. (referred to in this report as “we”, “our”, and “the Company”) and notes thereto presented elsewhere in this report and with the December 31, 2010 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.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

 

   

local and national economic conditions could be less favorable than expected or could have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth at historical rates and maintain the quality of our earning assets;

 

   

the local housing/real estate market could continue to decline;

 

   

the risks presented by a continued challenging 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 could not be realized;

 

   

interest rate changes could significantly reduce net interest income and negatively affect funding sources;

 

   

projected business increases following strategic expansion or opening of new branches could be lower than expected;

 

   

the scope and cost of FDIC insurance and other coverages could increase;

 

   

changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking could increase costs or adversely affect our financial results;

 

   

competition among financial institutions could increase significantly;

 

   

the goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings and capital;

 

   

we may not be able to effectively manage credit risk, interest rate risk, market risk, operational risk, legal risk, liquidity risk and regulatory and compliance risk; and

 

   

our profitability measures could be adversely affected if we are unable to effectively deploy the capital we raised in 2010.

Please take into account that forward-looking statements speak only as of the date of this report. We do not undertake any obligation to publicly correct or update any forward-looking statement whether as a result of new information, future events or otherwise.

 

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CRITICAL ACCOUNTING POLICIES

Management has identified the accounting policies related to the allowance for loan and lease losses, business combinations, acquired impaired loans, FDIC loss sharing asset 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 Discussion and Analysis of Financial Condition and Results of Operation” under the headings “Allowance for Loan and Lease Losses”, “Business Combinations”, “Acquired Impaired Loans”, FDIC Loss Sharing Asset” and “Valuation and Recoverability of Goodwill” in our 2010 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 2010 Annual Report on Form 10-K.

Significant Influences on the Quarter Ended March 31, 2011

Earnings Summary

The Company reported net income for the first quarter of $5.8 million applicable to common shareholders or $0.15 per diluted common share, compared to $6.8 million or $0.24 per diluted common share for the first quarter of 2010. The decrease in net income from the prior year period was attributable to a decline in noninterest income and an increase in noninterest expense. These reductions, however, were partially offset by an increase in net interest income. Return on average assets and return on average common equity were 0.55% and 3.30%, respectively, for the first quarter of 2011, compared with returns of 0.81% and 5.93%, respectively for the same period of 2010.

Revenue (net interest income plus noninterest income) for the three months ended March 31, 2011 was $45.0 million, 21% less than the same period in 2010. The decrease was primarily a result of a decline in noninterest income due to the gain recorded on the acquisition of American Marine Bank during the first quarter of 2010, as well as the $14.8 million loss recorded during the first three months of 2011 as a result of a change in the FDIC loss sharing asset. The noninterest income decline was partially offset by an increase in net interest income as a result of recording incremental accretion income of $12.4 million on the acquired loan portfolios. The incremental accretion income represents the amount of income recorded on the acquired loans above the contractual rate stated in the individual loan notes.

Total noninterest expense in the quarter ended March 31, 2011 was $37.3 million, a 10% increase from the first quarter of 2010. The increase was primarily due to the additional operating expenses of the two FDIC assisted acquisitions for the entire first quarter of 2011, compared to only the last two months of the first quarter in 2010.

The provision for loan and lease losses for the first quarter of 2011 was $0 for the noncovered loan portfolio and a negative $422 thousand for the covered loan portfolio compared with $15.0 million for the noncovered loan portfolio and $0 for the covered loan portfolio during first quarter of 2010. As discussed in more detail elsewhere in this report, the provision decision is made quarterly, based on a detailed process to determine the adequacy and appropriateness of the Company’s allowance for loan losses. Accordingly, the level of provisioning in the first quarter of 2011 does not necessarily signal a trend. As a result of not recording a provision, the Company’s total allowance for loan and lease losses was 2.94% of net noncovered loans at March 31, 2011 compared to 3.18% at year-end 2010 and 2.92% at the end of the first quarter 2010. Net charge-offs for the current quarter were $5.7 million compared to $11.5 million for the first quarter of 2010.

RESULTS OF OPERATIONS

Our results of operations are dependent to a large degree on our net interest income. We also generate noninterest income through service charges and fees, merchant services fees, and bank owned life insurance. Our operating expenses consist primarily of compensation and employee benefits, occupancy, merchant card processing, 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.

Net Interest Income

Net interest income for the first quarter of 2011 was $50.4 million, an increase of 32% from $38.3 million for the same quarter in 2010. The Company’s net interest margin increased to 5.80% in the first quarter of 2011, from 4.78% for the same quarter last year. The increases in net interest income and margin were primarily due to the impact of income accretion on the acquired loan portfolios. The incremental accretion income represents the amount of income recorded on the acquired loans above the contractual rate stated in the individual loan notes. The additional income stems from the discount established at the time these loan portfolios were acquired, and increases net interest income and the net interest margin. The incremental accretion income had a positive impact of approximately 1.38% on the first quarter’s net interest margin. For the same period last year, the incremental accretion income had a positive impact of approximately 0.05% on the net interest margin.

 

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The following table sets forth the average balances of all major categories of interest-earning assets and interest-bearing liabilities, the total dollar amounts of interest income on interest-earning assets and interest expense on interest- bearing liabilities, the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities by category and in total net interest income and net interest margin.

 

     Three months ended March 31,     Three months ended March 31,  
     2011     2010  

(in thousands)

   Average
Balances (1)
     Interest
Earned / Paid
     Average
Rate
    Average
Balances (1)
     Interest
Earned / Paid
     Average
Rate
 

ASSETS

                

Loans, net (1) (2)

   $ 2,388,076       $ 47,569         8.08   $ 2,440,415       $ 37,064         6.16

Taxable securities

     526,817         4,417         3.40     487,959         4,745         3.94

Tax exempt securities(2)

     240,543         3,828         6.45     222,689         3,796         6.91

Interest-earning deposits with banks and federal funds sold

     477,227         298         0.25     217,178         149         0.28
                                                    

Total interest-earning assets

     3,632,663       $ 56,112         6.26     3,368,241       $ 45,754         5.51

Other earning assets

     52,709              50,675         

Noninterest-earning assets

     582,976              526,126         
                            

Total assets

   $ 4,268,348            $ 3,945,042         
                            

LIABILITIES AND SHAREHOLDERS’ EQUITY

                

Certificates of deposit

   $ 608,154       $ 1,447         0.96   $ 858,577       $ 2,840         1.34

Savings accounts

     215,034         46         0.09     182,164         82         0.18

Interest-bearing demand

     682,746         411         0.24     594,059         653         0.45

Money market accounts

     923,887         1,175         0.52     760,762         1,366         0.73
                                                    

Total interest-bearing deposits

     2,429,821         3,079         0.51     2,395,562         4,941         0.84

Federal Home Loan Bank and Federal Reserve Bank borrowings

     115,193         694         2.44     125,350         705         2.28

Long-term obligations

     25,742         251         3.96     25,676         249         3.93

Other borrowings

     26,077         138         2.15     25,000         118         1.91
                                                    

Total interest-bearing liabilities

     2,596,833       $ 4,162         0.65     2,571,588       $ 6,013         0.95

Noninterest-bearing deposits

     876,347              740,387         

Other noninterest-bearing liabilities

     84,886              93,211         

Shareholders’ equity

     710,282              539,856         
                            

Total liabilities & shareholders’ equity

   $ 4,268,348            $ 3,945,042         
                            

Net interest income (2)

      $ 51,950            $ 39,741      
                            

Net interest margin

           5.80           4.78
                            

 

(1) Nonaccrual loans have been included in the tables as loans carrying a zero yield. Amortized net deferred loan fees were included in the interest income calculations. The amortization of net deferred loan fees was $224 thousand and $590 thousand for the three months ended March 31, 2011 and 2010, respectively.
(2) Tax-exempt income is calculated on a tax equivalent basis, based on a marginal tax rate of 35%.

 

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The following tables set 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, changes in rates and changes in rates multiplied by volume. 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:

 

(in thousands)

   Three Months Ended March 31,
2011 Compared to 2010
Increase (Decrease) Due to
 
     Volume     Rate     Total  

Interest earning assets

      

Loans (1)(2)

   $ (811   $ 11,316      $ 10,505   

Taxable securities

     359        (687     (328

Tax exempt securities (2)

     293        (261     32   

Interest earning deposits with banks and federal funds sold

     163        (14     149   
                        

Interest income (2)

   $ 4      $ 10,354      $ 10,358   
                        

Interest bearing liabilities

      

Deposits:

      

Certificates of deposit

   $ (710   $ (683   $ (1,393

Savings accounts

     13        (49     (36

Interest-bearing demand

     87        (329     (242

Money market accounts

     257        (448     (191
                        

Total interest on deposits

     (353     (1,509     (1,862

FHLB and Federal Reserve Bank borrowings

     (59     48        (11

Long-term obligations

     (0     2        2   

Other borrowings

     5        15        20   
                        

Interest expense

   $ (407   $ (1,444   $ (1,851
                        

 

(1) Nonaccrual loans have been included in the tables as loans carrying a zero yield. Amortized net deferred loan fees were included in the interest income calculations. The amortization of net deferred loan fees was $224 thousand and $590 thousand for the three months ended March 31, 2011 and 2010, respectively.
(2) Tax-exempt income is calculated on a tax equivalent basis, based on a marginal tax rate of 35%.

Provision for Loan and Lease Losses

During the first quarter of 2011, the Company recorded no provision for loan and lease losses on noncovered loans, compared to $15.0 million for the same period in 2010. The decision to record no provision was made in accordance with the Company’s methodology for determining the ALLL, discussed in Note 6 to the Company’s consolidated condensed financial statements presented elsewhere in this report, and was based upon improving credit metrics in the noncovered loan portfolio and contraction of the portfolio. The Company’s total allowance for loan losses was 2.94% of noncovered loans at March 31, 2011 compared to 3.18% of noncovered loans at December 31, 2010. For the covered loan portfolio, the Company recorded a negative provision for loan losses of $422 thousand for the quarter ended March 31, 2011.

 

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Table of Contents

Noninterest Income (Loss)

Noninterest loss was $5.4 million for the first quarter of 2011, compared to income of $18.5 million for the prior-year period. The decrease was primarily due to the $14.8 million change in the FDIC loss sharing asset recorded in the current quarter. The change in the FDIC loss sharing asset recognizes the decreased amount that Columbia expects to collect from the FDIC under the terms of its loss sharing agreements due to loan prepayments and removals activity during the quarter. The decrease in noninterest income was also due to the fact that the first quarter of 2010 included the $9.8 million bargain purchase gain from the American Marine Bank transaction. The current quarter includes no such bargain purchase gain.

Noninterest Expense

Total noninterest expense for the first quarter of 2011 was $37.3 million, an increase of 10% from $33.9 million a year earlier. The addition of operating expenses for the two 2010 FDIC-assisted transactions was the primary reason for the increase. The most significant increases were in compensation and employee benefits, occupancy and regulatory premiums. The increase in compensation and employee benefits resulted from two FDIC assisted transactions and the addition of two new banking teams. Occupancy expenses increased due to the Company actively remediating deferred maintenance issues at branches acquired through the FDIC-assisted transactions. The increase in regulatory premiums is a result of the increase in the Company’s deposit base through both acquisition and organic growth. Finally, other noninterest expense increased $1.8 million from the first quarter of 2010. The increase was primarily due to the Company recording a clawback liability of $1.7 million. The Company’s Purchase & Assumption agreement with the FDIC requires the Company to reimburse the FDIC at the conclusion of the loss share agreement period, February 2020, a calculated amount if total losses on the acquired loan portfolios fail to reach a minimum threshold level. The $1.7 million liability recorded in the first quarter represents the net present value of management’s clawback liability estimate of $2.7 million. The clawback liability is evaluated at the individual portfolio level each quarter and adjusted upward or downward according to the total expected losses over the loss share period.

The following table presents the significant components of noninterest expense and the related dollar and percentage change from period to period:

 

     Three months ended March 31,  
     2011     $ Change     % Change     2010  
     (dollars in thousands)  

Compensation

   $ 15,587      $ 3,819        32   $ 11,768   

Employee benefits

     3,269        754        30     2,515   

Contract labor

     65        (2,638     -98     2,703   
                                
     18,921        1,935        11     16,986   

All other noninterest expense:

        

Occupancy

     4,397        428        11     3,969   

Merchant processing

     883        (217     -20     1,100   

Advertising and promotion

     901        63        8     838   

Data processing and communications

     1,924        45        2     1,879   

Legal and professional fees

     1,413        (85     -6     1,498   

Taxes, license and fees

     865        301        53     564   

Regulatory premiums

     2,195        699        47     1,496   

Net cost of operation of other real estate owned

     (442     (1,754     -134     1,312   

Amortization of intangibles

     984        197        25     787   

Other

     5,305        1,837        53     3,468   
                                

Total all other noninterest expense

     18,425        1,514        9     16,911   
                                

Total noninterest expense

   $ 37,346      $ 3,449        10   $ 33,897   
                                

 

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The following table presents selected items included in other noninterest expense and the associated change from period to period:

 

     Three months ended
March  31,
     Increase
(Decrease)
Amount
 

(in thousands)

   2011      2010     

FDIC clawback expenses

   $ 1,700       $ —         $ 1,700   

Postage

     529         476         53   

Software support & maintenance

     310         246         64   

Supplies

     267         309         (42

Insurance

     222         234         (12

ATM Network

     222         177         45   

Travel

     215         164         51   

Employee expenses

     171         133         38   

Sponsorships and charitable contributions

     130         191         (61

Directors fees

     115         111         4   

Federal Reserve Bank processing fees

     79         68         11   

CRA partnership investment expense

     54         66         (12

Investor relations

     25         20         5   

Miscellaneous

     1,266