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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________
FORM 10-Q
_____________________________________________
(Mark One)

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

For the quarterly period ended September 30, 2019.

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
Commission File Number 0-20288
_________________________________________________________________________
COLUMBIA BANKING SYSTEM, INC.
(Exact name of registrant as specified in its charter)
_______________________________________________________________

Washington |  | 91-1422237
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)

1301 A Street
Tacoma, Washington 98402-2156
(Address of principal executive offices and zip code)
(253) 305-1900
(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, No Par Value |  | COLB |  | NASDAQ Global Select Market
(Title of each class) |  | (Trading symbol) |  | (Name of each exchange on which registered)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer |  | ☒ |  | Accelerated filer |  | ☐
Non-accelerated filer |  | ☐ |  | Smaller reporting company |  | ☐
|  |  |  | Emerging growth company |  | ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No x
The number of shares of common stock outstanding at October 31, 2019 was 72,136,242.

TABLE OF CONTENTS

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

i

Table of Contents
PART I - FINANCIAL INFORMATION
Glossary of Acronyms, Abbreviations, and Terms
The acronyms, abbreviations, and terms listed below are used in various sections of the Form 10-Q, including “Item 1. Financial Statements” and “Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations.”

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

1

Table of Contents
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
Columbia Banking System, Inc.
(Unaudited)

|  |  |  |  | September 30, 2019 |  | December 31, 2018
ASSETS |  | (in thousands)
Cash and due from banks |  | $ | 278,461 |  |  | $ | 260,180 |
Interest-earning deposits with banks |  | 20,144 |  |  | 17,407 |
Total cash and cash equivalents |  | 298,605 |  |  | 277,587 |
Debt securities available for sale at fair value |  | 3,367,572 |  |  | 3,167,448 |
FHLB stock at cost |  | 29,680 |  |  | 25,960 |
Loans held for sale |  | 15,036 |  |  | 3,849 |
Loans, net of unearned income |  | 8,756,355 |  |  | 8,391,511 |
Less: ALLL |  | 82,660 |  |  | 83,369 |
Loans, net |  | 8,673,695 |  |  | 8,308,142 |
Interest receivable |  | 48,503 |  |  | 45,323 |
Premises and equipment, net |  | 165,431 |  |  | 168,788 |
OREO |  | 625 |  |  | 6,019 |
Goodwill |  | 765,842 |  |  | 765,842 |
Other intangible assets, net |  | 37,908 |  |  | 45,937 |
Other assets |  | 354,863 |  |  | 280,250 |
Total assets |  | $ | 13,757,760 |  |  | $ | 13,095,145 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |  |
Deposits: |  |  |  |  |  |  |
Noninterest-bearing |  | $ | 5,320,435 |  |  | $ | 5,227,216 |
Interest-bearing |  | 5,535,281 |  |  | 5,230,910 |
Total deposits |  | 10,855,716 |  |  | 10,458,126 |
FHLB advances |  | 492,482 |  |  | 399,523 |
Securities sold under agreements to repurchase |  | 24,489 |  |  | 61,094 |
Subordinated debentures |  | 35,323 |  |  | 35,462 |
Other liabilities |  | 188,173 |  |  | 107,291 |
Total liabilities |  | 11,596,183 |  |  | 11,061,496 |
Commitments and contingent liabilities (Note 11) |  |  |  |  |  |
Shareholders’ equity: |  |  |  |  |  |  |
| September 30, 2019 |  | December 31, 2018 |  |  |  |
| (in thousands) |  |  |  |
Preferred stock (no par value) |  |  |  |  |  |  |
Authorized shares | 2,000 |  |  | 2,000 |  |  |  |  |
Common stock (no par value) |  |  |  |  |  |  |
Authorized shares | 115,000 |  |  | 115,000 |  |  |  |  |
Issued | 73,588 |  |  | 73,249 |  |  | 1,648,335 |  |  | 1,642,246 |
Outstanding | 72,288 |  |  | 73,249 |  |  |  |  |
Retained earnings |  | 493,738 |  |  | 426,708 |
Accumulated other comprehensive income (loss) |  | 64,884 |  |  | (35,305 | )
Treasury stock at cost | 1,300 |  |  | — |  |  | (45,380 | ) |  | — |
Total shareholders’ equity |  | 2,161,577 |  |  | 2,033,649 |
Total liabilities and shareholders’ equity |  | $ | 13,757,760 |  |  | $ | 13,095,145 |

See accompanying Notes to unaudited Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF INCOME
Columbia Banking System, Inc.
(Unaudited)

|  | Three Months Ended |  | Nine Months Ended
|  | September 30, |  | September 30,
|  | 2019 |  | 2018 |  | 2019 |  | 2018
|  | (in thousands except per share amounts)
Interest Income |  |  |  |  |  |  |  |
Loans |  | $ | 112,656 |  |  | $ | 109,748 |  |  | $ | 337,657 |  |  | $ | 318,187 |
Taxable securities |  | 16,457 |  |  | 14,654 |  |  | 49,790 |  |  | 39,285 |
Tax-exempt securities |  | 2,556 |  |  | 3,069 |  |  | 8,237 |  |  | 9,196 |
Deposits in banks |  | 864 |  |  | 104 |  |  | 1,159 |  |  | 600 |
Total interest income |  | 132,533 |  |  | 127,575 |  |  | 396,843 |  |  | 367,268 |
Interest Expense |  |  |  |  |  |  |  |
Deposits |  | 6,863 |  |  | 3,193 |  |  | 16,337 |  |  | 8,274 |
FHLB advances |  | 2,569 |  |  | 966 |  |  | 9,962 |  |  | 2,351 |
Subordinated debentures |  | 468 |  |  | 468 |  |  | 1,404 |  |  | 1,404 |
Other borrowings |  | 183 |  |  | 152 |  |  | 552 |  |  | 288 |
Total interest expense |  | 10,083 |  |  | 4,779 |  |  | 28,255 |  |  | 12,317 |
Net Interest Income |  | 122,450 |  |  | 122,796 |  |  | 368,588 |  |  | 354,951 |
Provision for loan and lease losses |  | 299 |  |  | 3,153 |  |  | 1,879 |  |  | 12,980 |
Net interest income after provision for loan and lease losses |  | 122,151 |  |  | 119,643 |  |  | 366,709 |  |  | 341,971 |
Noninterest Income |  |  |  |  |  |  |  |
Deposit account and treasury management fees |  | 9,015 |  |  | 9,266 |  |  | 27,030 |  |  | 26,689 |
Card revenue |  | 4,006 |  |  | 3,714 |  |  | 11,431 |  |  | 16,143 |
Financial services and trust revenue |  | 3,226 |  |  | 2,975 |  |  | 9,608 |  |  | 8,924 |
Loan revenue |  | 3,855 |  |  | 3,282 |  |  | 9,840 |  |  | 9,522 |
Bank owned life insurance |  | 1,528 |  |  | 1,402 |  |  | 4,644 |  |  | 4,540 |
Investment securities gains (losses), net |  | — |  |  | (62 | ) |  | 2,132 |  |  | (73 | )
Other |  | 6,400 |  |  | 442 |  |  | 10,689 |  |  | 2,109 |
Total noninterest income |  | 28,030 |  |  | 21,019 |  |  | 75,374 |  |  | 67,854 |
Noninterest Expense |  |  |  |  |  |  |  |
Compensation and employee benefits |  | 54,459 |  |  | 49,419 |  |  | 158,559 |  |  | 148,938 |
Occupancy |  | 8,645 |  |  | 8,321 |  |  | 26,166 |  |  | 27,718 |
Data processing |  | 5,102 |  |  | 4,466 |  |  | 14,372 |  |  | 14,957 |
Legal and professional fees |  | 5,683 |  |  | 4,695 |  |  | 16,810 |  |  | 12,103 |
Amortization of intangibles |  | 2,632 |  |  | 3,070 |  |  | 8,029 |  |  | 9,346 |
B&O taxes (1) |  | 1,325 |  |  | 1,478 |  |  | 4,612 |  |  | 4,254 |
Advertising and promotion |  | 1,752 |  |  | 1,472 |  |  | 3,596 |  |  | 4,523 |
Regulatory premiums |  | (38 | ) |  | 904 |  |  | 1,902 |  |  | 2,778 |
Net cost (benefit) of operation of OREO |  | (90 | ) |  | 485 |  |  | (682 | ) |  | 1,244 |
Other (1) |  | 7,606 |  |  | 8,531 |  |  | 25,140 |  |  | 27,610 |
Total noninterest expense |  | 87,076 |  |  | 82,841 |  |  | 258,504 |  |  | 253,471 |
Income before income taxes |  | 63,105 |  |  | 57,821 |  |  | 183,579 |  |  | 156,354 |
Income tax provision |  | 12,378 |  |  | 11,406 |  |  | 35,257 |  |  | 28,220 |
Net Income |  | $ | 50,727 |  |  | $ | 46,415 |  |  | $ | 148,322 |  |  | $ | 128,134 |
Earnings per common share |  |  |  |  |  |  |  |
Basic |  | $ | 0.70 |  |  | $ | 0.63 |  |  | $ | 2.04 |  |  | $ | 1.75 |
Diluted |  | $ | 0.70 |  |  | $ | 0.63 |  |  | $ | 2.04 |  |  | $ | 1.75 |
Weighted average number of common shares outstanding |  | 71,803 |  |  | 72,427 |  |  | 72,256 |  |  | 72,370 |
Weighted average number of diluted common shares outstanding |  | 71,803 |  |  | 72,432 |  |  | 72,257 |  |  | 72,374 |

__________
(1) Beginning the first quarter of 2019, B&O taxes are reported separately from other taxes, licenses and fees, which are now reported under “other noninterest expense.” Prior periods have been reclassified to conform to current period presentation.
See accompanying Notes to unaudited Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Columbia Banking System, Inc.
(Unaudited)

|  | Three Months Ended
|  | September 30,
|  | 2019 |  | 2018
|  | (in thousands)
Net income |  | $ | 50,727 |  |  | $ | 46,415 |
Other comprehensive income (loss), net of tax: |  |  |  |
Unrealized gain (loss) from securities: |  |  |  |
Net unrealized holding gain (loss) from available for sale debt securities arising during the period, net of tax of ($4,421) and $4,286 |  | 14,593 |  |  | (14,149 | )
Net unrealized gain (loss) from securities, net of reclassification adjustment |  | 14,593 |  |  | (14,149 | )
Pension plan liability adjustment: |  |  |  |
Amortization of unrecognized net actuarial loss included in net periodic pension cost, net of tax of ($19) and ($19) |  | 62 |  |  | 61 |
Pension plan liability adjustment, net |  | 62 |  |  | 61 |
Unrealized gain from cash flow hedging instruments: |  |  |  |
Net unrealized gain in cash flow hedging instruments arising during the period, net of tax of ($951) and $0 |  | 3,137 |  |  | — |
Reclassification adjustment for net gain in cash flow hedging instruments included in income, net of tax of $18 and $0 |  | (58 | ) |  | — |
Net unrealized gain from cash flow hedging instruments, net of reclassification adjustment |  | 3,079 |  |  | — |
Other comprehensive income (loss) |  | 17,734 |  |  | (14,088 | )
Total comprehensive income |  | $ | 68,461 |  |  | $ | 32,327 |

|  | Nine Months Ended
|  | September 30,
|  | 2019 |  | 2018
|  | (in thousands)
Net income |  | $ | 148,322 |  |  | $ | 128,134 |
Other comprehensive income (loss), net of tax: |  |  |  |
Unrealized gain (loss) from securities: |  |  |  |
Net unrealized holding gain (loss) from available for sale debt securities arising during the period, net of tax of ($26,209) and $14,554 |  | 86,519 |  |  | (48,043 | )
Reclassification adjustment of net gain from sale of available for sale debt securities included in income, net of ta x o f $496 and $25 |  | (1,636 | ) |  | (81 | )
Net unrealized gain (loss) from securities, net of reclassification adjustment |  | 84,883 |  |  | (48,124 | )
Pension plan liability adjustment: |  |  |  |
Amortization of unrecognized net actuarial loss included in net periodic pension cost, net of tax of ($56) and ($56) |  | 184 |  |  | 183 |
Pension plan liability adjustment, net |  | 184 |  |  | 183 |
Unrealized gain from cash flow hedging instruments: |  |  |  |
Net unrealized gain in cash flow hedging instruments arising during the period, net of tax of ($4,599) and $0 |  | 15,180 |  |  | — |
Reclassification adjustment for net gain in cash flow hedging instruments included in income, net of tax of $18 and $0 |  | (58 | ) |  | — |
Net unrealized gain from cash flow hedging instruments, net of reclassification adjustment |  | 15,122 |  |  | — |
Other comprehensive income (loss) |  | 100,189 |  |  | (47,941 | )
Total comprehensive income |  | $ | 248,511 |  |  | $ | 80,193 |

See accompanying Notes to unaudited Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Columbia Banking System, Inc.
(Unaudited)

|  | Common Stock |  | Retained Earnings |  | Accumulated Other Comprehensive Income (Loss) |  | Treasury Stock |  | Total Shareholders’ Equity
|  | Shares Outstanding |  | Amount |
For the Three Months Ended September 30, 2019 |  | (in thousands except per share amounts)
Balance at July 1, 2019 |  | 72,924 |  |  | $ | 1,644,922 |  |  | $ | 463,429 |  |  | $ | 47,150 |  |  | $ | (21,863 | ) |  | $ | 2,133,638 |
Net income |  | — |  |  | — |  |  | 50,727 |  |  | — |  |  | — |  |  | 50,727 |
Other comprehensive income |  | — |  |  | — |  |  | — |  |  | 17,734 |  |  | — |  |  | 17,734 |
Issuance of common stock - stock option and other plans |  | 31 |  |  | 1,132 |  |  | — |  |  | — |  |  | — |  |  | 1,132 |
Activity in deferred compensation plan |  | — |  |  | 1 |  |  | — |  |  | — |  |  | — |  |  | 1 |
Issuance of common stock - restricted stock awards, net of canceled awards |  | 9 |  |  | 2,299 |  |  | — |  |  | — |  |  | — |  |  | 2,299 |
Purchase and retirement of common stock |  | — |  |  | (19 | ) |  | — |  |  | — |  |  | — |  |  | (19 | )
Cash dividends declared on common stock ($0.28 per share) |  | — |  |  | — |  |  | (20,418 | ) |  | — |  |  | — |  |  | (20,418 | )
Purchase of treasury stock |  | (676 | ) |  | — |  |  | — |  |  | — |  |  | (23,517 | ) |  | (23,517 | )
Balance at September 30, 2019 |  | 72,288 |  |  | $ | 1,648,335 |  |  | $ | 493,738 |  |  | $ | 64,884 |  |  | $ | (45,380 | ) |  | $ | 2,161,577 |
For the Nine Months Ended September 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |
Balance at January 1, 2019 |  | 73,249 |  |  | $ | 1,642,246 |  |  | $ | 426,708 |  |  | $ | (35,305 | ) |  | $ | — |  |  | $ | 2,033,649 |
Adjustment to opening retained earnings pursuant to adoption of ASU 2016-02 |  | — |  |  | — |  |  | 782 |  |  | — |  |  | — |  |  | 782 |
Net income |  | — |  |  | — |  |  | 148,322 |  |  | — |  |  | — |  |  | 148,322 |
Other comprehensive income |  | — |  |  | — |  |  | — |  |  | 100,189 |  |  | — |  |  | 100,189 |
Issuance of common stock - stock option and other plans |  | 58 |  |  | 2,025 |  |  | — |  |  | — |  |  | — |  |  | 2,025 |
Activity in deferred compensation plan |  | — |  |  | 2 |  |  | — |  |  | — |  |  | — |  |  | 2 |
Issuance of common stock - restricted stock awards, net of canceled awards |  | 354 |  |  | 6,827 |  |  | — |  |  | — |  |  | — |  |  | 6,827 |
Purchase and retirement of common stock |  | (73 | ) |  | (2,765 | ) |  | — |  |  | — |  |  | — |  |  | (2,765 | )
Cash dividends declared on common stock ($1.12 per share) |  | — |  |  | — |  |  | (82,074 | ) |  | — |  |  | — |  |  | (82,074 | )
Purchase of treasury stock |  | (1,300 | ) |  | — |  |  | — |  |  | — |  |  | (45,380 | ) |  | (45,380 | )
Balance at September 30, 2019 |  | 72,288 |  |  | $ | 1,648,335 |  |  | $ | 493,738 |  |  | $ | 64,884 |  |  | $ | (45,380 | ) |  | $ | 2,161,577 |

See accompanying Notes to unaudited Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY, Continued
Columbia Banking System, Inc.
(Unaudited)

|  | Common Stock |  | Retained Earnings |  | Accumulated Other Comprehensive Income (Loss) |  | Treasury Stock |  | Total Shareholders’ Equity
|  | Shares Outstanding |  | Amount |
For the Three Months Ended September 30, 2018 |  | (in thousands except per share amounts)
Balance at July 1, 2018 |  | 73,245 |  |  | $ | 1,636,903 |  |  | $ | 383,899 |  |  | $ | (55,921 | ) |  | $ | — |  |  | $ | 1,964,881 |
Net income |  | — |  |  | — |  |  | 46,415 |  |  | — |  |  | — |  |  | 46,415 |
Other comprehensive loss |  | — |  |  | — |  |  | — |  |  | (14,088 | ) |  | — |  |  | (14,088 | )
Issuance of common stock - stock option and other plans |  | 26 |  |  | 1,121 |  |  | — |  |  | — |  |  | — |  |  | 1,121 |
Activity in deferred compensation plan |  | — |  |  | 1 |  |  | — |  |  | — |  |  | — |  |  | 1 |
Issuance of common stock - restricted stock awards, net of canceled awards |  | (11 | ) |  | 2,148 |  |  | — |  |  | — |  |  | — |  |  | 2,148 |
Purchase and retirement of common stock |  | — |  |  | (33 | ) |  | — |  |  | — |  |  | — |  |  | (33 | )
Cash dividends declared on common stock ($0.26 per share) |  | — |  |  | — |  |  | (19,050 | ) |  | — |  |  | — |  |  | (19,050 | )
Balance at September 30, 2018 |  | 73,260 |  |  | $ | 1,640,140 |  |  | $ | 411,264 |  |  | $ | (70,009 | ) |  | $ | — |  |  | $ | 1,981,395 |
For the Nine Months Ended September 30, 2018 |  |  |  |  |  |  |  |  |  |  |  |
Balance at January 1, 2018 |  | 73,020 |  |  | $ | 1,634,705 |  |  | $ | 337,442 |  |  | $ | (22,225 | ) |  | $ | — |  |  | $ | 1,949,922 |
Adjustment to opening retained earnings pursuant to adoption of ASU 2016-01 |  | — |  |  | — |  |  | (157 | ) |  | 157 |  |  | — |  |  | — |
Net income |  | — |  |  | — |  |  | 128,134 |  |  | — |  |  | — |  |  | 128,134 |
Other comprehensive loss |  | — |  |  | — |  |  | — |  |  | (47,941 | ) |  | — |  |  | (47,941 | )
Issuance of common stock - stock option and other plans |  | 45 |  |  | 1,857 |  |  | — |  |  | — |  |  | — |  |  | 1,857 |
Activity in deferred compensation plan |  | — |  |  | 7 |  |  | — |  |  | — |  |  | — |  |  | 7 |
Issuance of common stock - restricted stock awards, net of canceled awards |  | 257 |  |  | 6,231 |  |  | — |  |  | — |  |  | — |  |  | 6,231 |
Purchase and retirement of common stock |  | (62 | ) |  | (2,660 | ) |  | — |  |  | — |  |  | — |  |  | (2,660 | )
Cash dividends declared on common stock ($0.74 per share) |  | — |  |  | — |  |  | (54,155 | ) |  | — |  |  | — |  |  | (54,155 | )
Balance at September 30, 2018 |  | 73,260 |  |  | $ | 1,640,140 |  |  | $ | 411,264 |  |  | $ | (70,009 | ) |  | $ | — |  |  | $ | 1,981,395 |

See accompanying Notes to unaudited Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS Columbia Banking System, Inc. (Unaudited)
|  | Nine Months Ended September 30,
|  | 2019 |  | 2018
|  | (in thousands)
Cash Flows From Operating Activities |  |  |  |
Net income |  | $ | 148,322 |  |  | $ | 128,134 |
Adjustments to reconcile net income to net cash provided by operating activities |  |  |  |
Provision for loan and lease losses |  | 1,879 |  |  | 12,980 |
Stock-based compensation expense |  | 6,827 |  |  | 6,231 |
Depreciation, amortization and accretion |  | 26,150 |  |  | 25,807 |
Investment securities (gain) loss, net |  | (2,132 | ) |  | 73 |
Net realized (gain) loss on sale of premises and equipment and loans held for investment |  | (6,787 | ) |  | 142 |
Net realized (gain) loss on sale and valuation adjustments of OREO |  | (602 | ) |  | 1,299 |
Gain on bank owned life insurance death benefit |  | (2,975 | ) |  | — |
Originations of loans held for sale |  | (134,634 | ) |  | (103,614 | )
Proceeds from sales of loans held for sale |  | 123,447 |  |  | 104,105 |
Net change in: |  |  |  |
Interest receivable |  | (3,180 | ) |  | (7,595 | )
Interest payable |  | 632 |  |  | 618 |
Other assets |  | (31,840 | ) |  | (2,599 | )
Other liabilities |  | 29,706 |  |  | 5,662 |
Net cash provided by operating activities |  | 154,813 |  |  | 171,243 |
Cash Flows From Investing Activities |  |  |  |
Loans originated, net of principal collected (1) |  | (305,581 | ) |  | (121,413 | )
Purchases of: |  |  |  |
Debt securities available for sale |  | (649,133 | ) |  | (606,052 | )
Loans held for investment (1) |  | (57,075 | ) |  | (46,969 | )
Premises and equipment |  | (5,833 | ) |  | (8,253 | )
FHLB stock |  | (190,800 | ) |  | (136,120 | )
Proceeds from: |  |  |  |
Sales of debt securities available for sale |  | 259,554 |  |  | 32,330 |
Principal repayments and maturities of debt securities available for sale |  | 287,479 |  |  | 311,956 |
Sales of premises and equipment and loans held for investment |  | 7,735 |  |  | 14,956 |
Redemption of FHLB stock |  | 187,080 |  |  | 129,920 |
Sales of OREO and OPPO |  | 6,433 |  |  | 5,868 |
Bank owned life insurance death benefit |  | — |  |  | 5,074 |
Net cash used in investing activities |  | (460,141 | ) |  | (418,703 | )
Cash Flows From Financing Activities |  |  |  |
Net increase in deposits |  | 397,893 |  |  | 72,151 |
Net increase (decrease) in sweep repurchase agreements (2) |  | (36,605 | ) |  | 8,138 |
Proceeds from: |  |  |  |
FHLB advances |  | 4,770,000 |  |  | 3,403,000 |
FRB borrowings |  | 36,000 |  |  | 5,010 |
Other borrowings |  | 100 |  |  | — |
Exercise of stock options |  | 2,025 |  |  | 1,857 |
Payments for: |  |  |  |
Repayment of FHLB advances |  | (4,677,000 | ) |  | (3,248,000 | )
Repayment of FRB borrowings |  | (36,000 | ) |  | (5,010 | )
Repayment of other borrowings |  | (100 | ) |  | — |
Repayment of junior subordinated debentures |  | — |  |  | (8,248 | )
Repayment of term repurchase agreement (2) |  | — |  |  | (25,000 | )
Common stock dividends |  | (81,822 | ) |  | (54,149 | )
Purchase of treasury stock |  | (45,380 | ) |  | — |
Purchase and retirement of common stock |  | (2,765 | ) |  | (2,660 | )
Net cash provided by financing activities |  | 326,346 |  |  | 147,089 |
Increase (decrease) in cash and cash equivalents |  | 21,018 |  |  | (100,371 | )
Cash and cash equivalents at beginning of period |  | 277,587 |  |  | 342,533 |
Cash and cash equivalents at end of period |  | $ | 298,605 |  |  | $ | 242,162 |
___________________ |  |  |  |
(1) Revised from amounts previously reported to correct an immaterial misclassification of $47.0 million of purchases of loans held for investment within loans originated, net of principal collected, for the nine months ended September 30, 2018. There were no changes to net cash flows from operating, investing or financing activities as a result of this change. (2) Revised from amounts previously reported to correct an immaterial misclassification of a $25.0 million repayment of the term repurchase agreement within net increase (decrease) in sweep repurchase agreements for the nine months ended September 30, 2018. There were no changes to net cash flows from operating, investing or financing activities as a result of this change.

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CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued Columbia Banking System, Inc. (Unaudited)
|  | Nine Months Ended September 30,
|  | 2019 |  | 2018
|  | (in thousands)
Supplemental Information: |  |  |  |
Interest paid |  | $ | 27,623 |  |  | $ | 11,699 |
Income taxes paid, net of refunds |  | $ | 33,134 |  |  | $ | 12,768 |
Non-cash investing and financing activities |  |  |  |
Loans transferred to OREO |  | $ | 386 |  |  | $ | 1,200 |
Premises and equipment expenditures incurred but not yet paid |  | $ | 152 |  |  | $ | 464 |
Change in dividends payable on unvested shares included in other liabilities |  | $ | 252 |  |  | $ | 6 |

See accompanying Notes to unaudited Consolidated Financial Statements.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Columbia Banking System, Inc.

1. | Basis of Presentation, Significant Accounting Policies and Reclassifications

Basis of Presentation
The interim unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. The Consolidated Financial Statements include the accounts of Columbia Banking System, Inc. (“we”, “our”, “Columbia” or the “Company”) and its subsidiaries, including its wholly owned banking subsidiary Columbia State Bank (“Columbia Bank” or the “Bank”) and Columbia Trust Company (“Columbia Trust”). All intercompany transactions and accounts have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included. The results of operations for the nine months ended September 30, 2019 are not necessarily indicative of results to be anticipated for the year ending December 31, 2019. The accompanying interim unaudited Consolidated Financial Statements should be read in conjunction with the financial statements and related notes contained in the Company’s 2018 Annual Report on Form 10-K.
Significant Accounting Policies
The significant accounting policies used in preparation of our Consolidated Financial Statements are disclosed in our 2018 Annual Report on Form 10-K. There have not been any changes in our significant accounting policies compared to those contained in our 2018 Form 10-K disclosure for the year ended December 31, 2018.
Reclassifications
Certain amounts reported in prior periods have been reclassified in the Consolidated Financial Statements to conform to the current presentation. The reclassifications have no effect on net income or stockholders’ equity as previously reported.

2. | Accounting Pronouncements Recently Adopted or Issued

Accounting Standards Adopted in 2019
In February 2016, the FASB issued ASU 2016-02, Leases. The amendments included in this ASU create a new accounting model for both lessees and lessors. The new guidance requires lessees to recognize lease liabilities, initially measured as the present value of future lease payments, and corresponding right-of-use assets for all leases with lease terms greater than 12 months. The new lease model differs from the old lease accounting model, as the old model does not require such lease liabilities and corresponding right-of-use assets to be recorded for operating leases. The amendments in ASU 2016-02 must be adopted using the modified retrospective approach and will be effective for the first interim or annual period beginning after December 15, 2018. The FASB subsequently issued ASU 2018-11, which allows for an additional (optional) transition method. The Company adopted the new standard effective January 1, 2019 utilizing the transition method allowed under ASU 2018-11 and did not restate comparative periods. The Company elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classifications and our assessment on whether a contract is or contains a lease. We also elected to keep leases with an initial term of 12 months or less off the balance sheet. The adoption of the new standard resulted in an increase in other assets and an increase in other liabilities of $49.2 million and $48.2 million, respectively. The Company recognized a cumulative effect adjustment of $782 thousand to increase the beginning balance of retained earnings related to previous deferred gains on sale-leaseback transactions.
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the ASC 350 requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments also require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, including reasonably certain renewal periods. The amendments in ASU 2018-15 are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The amendments can be adopted on a prospective or retrospective basis. The Company adopted the new standard effective July 1, 2019 on a prospective basis. The adoption of the new standard resulted in an increase in other assets of $920 thousand.
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Recently Issued Accounting Standards, Not Yet Adopted
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments in this ASU clarify certain aspects of accounting for credit losses, hedging activities, and financial instruments (addressed by ASUs 2016-01, 2016-13, and 2017-12). Many of the amendments reflect decisions reached at FASB meetings or meetings of the Board’s credit losses transition resource group. Topics covered in this ASU include: accrued interest, transfers between classifications or categories for loans and debt securities, recoveries, reinsurance recoverables, projections of interest rate environments for variable-rate financial instruments, costs to sell when foreclosure is probable, consideration of expected prepayments when determining the effective interest rate, vintage disclosures, extension and renewal options, etc. The amendments in ASU 2019-04 are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The Company is assessing the impact that this guidance will have on its Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The amendments included in this ASU require an entity to reflect its current estimate of all expected credit losses for assets held at an amortized cost basis. For available for sale debt securities, credit losses will be measured in a manner similar to current GAAP, however, this ASU will require that credit losses be presented as an allowance rather than as a write-down. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and are required to be adopted through a modified retrospective approach, with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the ASU is effective.
Unlike the incurred loss models in existing GAAP, the CECL model in ASU 2016-13 does not specify a threshold for the recognition of an impairment allowance. Rather, the Company will recognize an impairment allowance equal to its estimate of lifetime expected credit losses, adjusted for prepayments, for in-scope financial instruments as of the end of the reporting period. Accordingly, the impairment allowance measured under the CECL model could change significantly from the impairment allowance measured under the Company’s existing incurred loss model. The Company has engaged a third-party vendor to assist in the CECL calculation and has developed an internal governance framework to oversee the CECL implementation. Significant CECL implementation matters that have been completed include identifying, sourcing and storing data, addressing data gaps, defining a reasonable and supportable forecast period and selecting historical loss information. Other significant CECL implementation matters being addressed by the Company include selecting loss estimation methodologies, assessing the impact to internal controls over financial reporting, and capital planning.
Upon adoption of the standard on January 1, 2020, the Company expects that, based on current expectations of future economic conditions, its impact on the allowance for credit losses will range from a decrease of 10% to an increase of 5%, with no material impact on capital levels anticipated. The ultimate impact will depend on the characteristics of the Company’s portfolios as well as the macroeconomic conditions and forecasts upon adoption, the ultimate validation of models and methodologies, and other management judgments.
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3. | Securities

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

|  | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
September 30, 2019 |  | (in thousands)
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations (1) |  | $ | 2,432,873 |  |  | $ | 61,024 |  |  | $ | (11,062 | ) |  | $ | 2,482,835 |
Other asset-backed securities (1) |  | 166,482 |  |  | 5,149 |  |  | (53 | ) |  | 171,578 |
State and municipal securities |  | 488,273 |  |  | 9,471 |  |  | (430 | ) |  | 497,314 |
U.S. government agency and government-sponsored enterprise securities |  | 212,265 |  |  | 3,382 |  |  | (52 | ) |  | 215,595 |
U.S. government securities |  | 250 |  |  | — |  |  | — |  |  | 250 |
Total |  | $ | 3,300,143 |  |  | $ | 79,026 |  |  | $ | (11,597 | ) |  | $ | 3,367,572 |
December 31, 2018 |  |  |  |  |  |  |  |
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations (1) |  | $ | 2,045,728 |  |  | $ | 8,473 |  |  | $ | (40,846 | ) |  | $ | 2,013,355 |
Other asset-backed securities (1) |  | 176,793 |  |  | 763 |  |  | (2,621 | ) |  | 174,935 |
State and municipal securities |  | 579,755 |  |  | 2,328 |  |  | (7,760 | ) |  | 574,323 |
U.S. government agency and government-sponsored enterprise securities |  | 408,088 |  |  | 1,235 |  |  | (4,736 | ) |  | 404,587 |
U.S. government securities |  | 251 |  |  | — |  |  | (3 | ) |  | 248 |
Total |  | $ | 3,210,615 |  |  | $ | 12,799 |  |  | $ | (55,966 | ) |  | $ | 3,167,448 |

__________
(1) Beginning July 2019, other asset-backed securities were presented separately in this table. Prior period amounts that were previously reported in U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations have been reclassified to conform to current period presentation.
The following table provides the proceeds and both gross realized gains and losses on sales of debt securities available for sale as well as other securities gains and losses for the periods indicated:

|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2019 |  | 2018 |  | 2019 |  | 2018
|  | (in thousands)
Proceeds from sales of debt securities available for sale |  | $ | — |  |  | $ | — |  |  | $ | 259,554 |  |  | $ | 32,330 |
Gross realized gains from sales of debt securities available for sale |  | $ | — |  |  | $ | — |  |  | $ | 3,357 |  |  | $ | 235 |
Gross realized losses from sales of debt securities available for sale |  | — |  |  | — |  |  | (1,225 | ) |  | (129 | )
Other securities losses, net (1) |  | — |  |  | (62 | ) |  | — |  |  | (179 | )
Investment securities gains, net |  | $ | — |  |  | $ | (62 | ) |  | $ | 2,132 |  |  | $ | (73 | )

__________
(1) Other securities losses, net includes net unrealized loss activity associated with equity securities for the periods ended September 30, 2018. There were no sales of equity securities during the periods presented.
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The scheduled contractual maturities of debt securities available for sale at September 30, 2019 are presented as follows:

|  | September 30, 2019
|  | Amortized Cost |  | Fair Value
|  | (in thousands)
Due within one year |  | $ | 112,412 |  |  | $ | 112,594 |
Due after one year through five years |  | 412,269 |  |  | 416,294 |
Due after five years through ten years |  | 1,592,778 |  |  | 1,650,631 |
Due after ten years |  | 1,182,684 |  |  | 1,188,053 |
Total debt securities available for sale |  | $ | 3,300,143 |  |  | $ | 3,367,572 |

The following table summarizes the carrying value of securities pledged as collateral to secure public funds, borrowings and other purposes as permitted or required by law:

|  | September 30, 2019
|  | (in thousands)
To secure public funds |  | $ | 443,320 |
To secure borrowings |  | 111,421 |
Other securities pledged |  | 155,727 |
Total securities pledged as collateral |  | $ | 710,468 |

The following table shows the gross unrealized losses and fair value of the Company’s debt securities available for sale with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2019 and December 31, 2018:

|  | Less than 12 Months |  | 12 Months or More |  | Total
|  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
September 30, 2019 |  | (in thousands)
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations (1) |  | $ | 478,690 |  |  | $ | (4,017 | ) |  | $ | 528,228 |  |  | $ | (7,045 | ) |  | $ | 1,006,918 |  |  | $ | (11,062 | )
Other asset-backed securities (1) |  | — |  |  | — |  |  | 6,926 |  |  | (53 | ) |  | 6,926 |  |  | (53 | )
State and municipal securities |  | 52,763 |  |  | (255 | ) |  | 23,237 |  |  | (175 | ) |  | 76,000 |  |  | (430 | )
U.S. government agency and government-sponsored enterprise securities |  | — |  |  | — |  |  | 57,448 |  |  | (52 | ) |  | 57,448 |  |  | (52 | )
U.S. government securities |  | — |  |  | — |  |  | 250 |  |  | — |  |  | 250 |  |  | — |
Total |  | $ | 531,453 |  |  | $ | (4,272 | ) |  | $ | 616,089 |  |  | $ | (7,325 | ) |  | $ | 1,147,542 |  |  | $ | (11,597 | )
December 31, 2018 |  |  |  |  |  |  |  |  |  |  |  |
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations (1) |  | $ | 114,551 |  |  | $ | (750 | ) |  | $ | 1,207,020 |  |  | $ | (40,096 | ) |  | $ | 1,321,571 |  |  | $ | (40,846 | )
Other asset-backed securities (1) |  | 40,071 |  |  | (222 | ) |  | 94,367 |  |  | (2,399 | ) |  | 134,438 |  |  | (2,621 | )
State and municipal securities |  | 106,292 |  |  | (581 | ) |  | 280,496 |  |  | (7,179 | ) |  | 386,788 |  |  | (7,760 | )
U.S. government agency and government-sponsored enterprise securities |  | 15,392 |  |  | (45 | ) |  | 291,435 |  |  | (4,691 | ) |  | 306,827 |  |  | (4,736 | )
U.S. government securities |  | — |  |  | — |  |  | 247 |  |  | (3 | ) |  | 247 |  |  | (3 | )
Total |  | $ | 276,306 |  |  | $ | (1,598 | ) |  | $ | 1,873,565 |  |  | $ | (54,368 | ) |  | $ | 2,149,871 |  |  | $ | (55,966 | )

__________
(1) Beginning July 2019, other asset-backed securities were presented separately in this table. Prior period amounts that were previously reported in U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations have been reclassified to conform to current period presentation.
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At September 30, 2019, there were 211 U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations securities in an unrealized loss position, of which 170 were in a continuous loss position for 12 months or more. The decline in fair value is attributable to changes in interest rates relative to where these investments fall within the yield curve and their individual characteristics. Because the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2019.
At September 30, 2019, there were six other asset-backed securities in an unrealized loss position, all of which were in a continuous loss position for 12 months or more. The decline in fair value is attributable to changes in interest rates relative to where these investments fall within the yield curve and their individual characteristics. Because the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2019.
At September 30, 2019, there were 81 state and municipal government securities in an unrealized loss position, of which 27 were in a continuous loss position for 12 months or more. The unrealized losses on state and municipal securities were caused by interest rate changes or widening of market spreads subsequent to the purchase of the individual securities. Management monitors published credit ratings of these securities for adverse changes. As of September 30, 2019, none of the rated obligations of state and local government entities held by the Company had a below investment grade credit rating. Because the credit quality of these securities are investment grade and the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2019.
At September 30, 2019, there were seven U.S. government agency and government-sponsored enterprise securities in an unrealized loss position, all of which were in a continuous loss position for 12 months or more. The decline in fair value is attributable to changes in interest rates relative to where these investments fall within the yield curve and their individual characteristics. Because the Company does not currently intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2019.
At September 30, 2019, there was one U.S. government security in an unrealized loss position, which was also in a continuous loss position for more than 12 months. The decline in fair value is attributable to changes in interest rates relative to where this investment falls within the yield curve and its individual characteristics. Because the Company does not currently intend to sell this security nor does the Company consider it more likely than not that it will be required to sell this security before the recovery of amortized cost basis, which may be upon maturity, the Company does not consider this investment to be other-than-temporarily impaired at September 30, 2019.

4. | Loans

The Company’s loan portfolio includes originated and purchased loans. Originated loans and purchased loans for which there was no evidence of credit deterioration at their acquisition date and it was probable that we would be able to collect all contractually required payments are referred to collectively as loans, excluding PCI loans. Purchased loans for which there was, at acquisition date, evidence of credit deterioration since their origination and it was probable that we would be unable to collect all contractually required payments are referred to as PCI loans.
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The following is an analysis of the loan portfolio by segment (net of unearned income):

|  | September 30, 2019 |  | December 31, 2018
|  | Loans, excluding PCI loans |  | PCI Loans |  | Total |  | Loans, excluding PCI loans |  | PCI Loans |  | Total
|  | (in thousands)
Commercial business |  | $ | 3,707,314 |  |  | $ | 9,004 |  |  | $ | 3,716,318 |  |  | $ | 3,438,422 |  |  | $ | 9,240 |  |  | $ | 3,447,662 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential |  | 273,079 |  |  | 7,403 |  |  | 280,482 |  |  | 238,367 |  |  | 8,017 |  |  | 246,384 |
Commercial and multifamily residential |  | 3,975,647 |  |  | 56,702 |  |  | 4,032,349 |  |  | 3,846,027 |  |  | 62,910 |  |  | 3,908,937 |
Total real estate |  | 4,248,726 |  |  | 64,105 |  |  | 4,312,831 |  |  | 4,084,394 |  |  | 70,927 |  |  | 4,155,321 |
Real estate construction: |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential |  | 195,198 |  |  | 144 |  |  | 195,342 |  |  | 217,790 |  |  | 153 |  |  | 217,943 |
Commercial and multifamily residential |  | 261,786 |  |  | 486 |  |  | 262,272 |  |  | 284,394 |  |  | 534 |  |  | 284,928 |
Total real estate construction |  | 456,984 |  |  | 630 |  |  | 457,614 |  |  | 502,184 |  |  | 687 |  |  | 502,871 |
Consumer |  | 297,009 |  |  | 8,038 |  |  | 305,047 |  |  | 318,945 |  |  | 8,906 |  |  | 327,851 |
Less: Net unearned income |  | (35,455 | ) |  | — |  |  | (35,455 | ) |  | (42,194 | ) |  | — |  |  | (42,194 | )
Total loans, net of unearned income |  | 8,674,578 |  |  | 81,777 |  |  | 8,756,355 |  |  | 8,301,751 |  |  | 89,760 |  |  | 8,391,511 |
Less: ALLL |  | (79,602 | ) |  | (3,058 | ) |  | (82,660 | ) |  | (79,758 | ) |  | (3,611 | ) |  | (83,369 | )
Total loans, net |  | $ | 8,594,976 |  |  | $ | 78,719 |  |  | $ | 8,673,695 |  |  | $ | 8,221,993 |  |  | $ | 86,149 |  |  | $ | 8,308,142 |
Loans held for sale |  | $ | 15,036 |  |  | $ | — |  |  | $ | 15,036 |  |  | $ | 3,849 |  |  | $ | — |  |  | $ | 3,849 |

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

|  | September 30, 2019 |  | December 31, 2018
|  | Recorded Investment Nonaccrual Loans |  | Unpaid Principal Balance Nonaccrual Loans |  | Recorded Investment Nonaccrual Loans |  | Unpaid Principal Balance Nonaccrual Loans
|  | (in thousands)
Commercial business: |  |  |  |  |  |  |  |
Secured |  | $ | 24,408 |  |  | $ | 35,033 |  |  | $ | 35,504 |  |  | $ | 45,072 |
Unsecured |  | — |  |  | — |  |  | 9 |  |  | 9 |
Real estate: |  |  |  |  |  |  |  |
One-to-four family residential |  | 574 |  |  | 594 |  |  | 1,158 |  |  | 1,178 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |
Commercial land |  | 2,562 |  |  | 2,570 |  |  | 2,261 |  |  | 2,270 |
Income property |  | 997 |  |  | 997 |  |  | 2,721 |  |  | 3,062 |
Owner occupied |  | 6,524 |  |  | 6,633 |  |  | 9,922 |  |  | 10,300 |
Real estate construction: |  |  |  |  |  |  |  |
One-to-four family residential: |  |  |  |  |  |  |  |
Land and acquisition |  | — |  |  | — |  |  | 318 |  |  | 318 |
Consumer |  | 1,956 |  |  | 2,299 |  |  | 2,949 |  |  | 3,149 |
Total |  | $ | 37,021 |  |  | $ | 48,126 |  |  | $ | 54,842 |  |  | $ | 65,358 |

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Loans, excluding PCI loans
The following is an aging of the recorded investment of the loan portfolio as of September 30, 2019 and December 31, 2018:

|  | Current Loans |  | 30 - 59 Days Past Due |  | 60 - 89 Days Past Due |  | Greater than 90 Days Past Due |  | Total Past Due |  | Nonaccrual Loans |  | Total Loans
September 30, 2019 |  | (in thousands)
Commercial business: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Secured |  | $ | 3,525,753 |  |  | $ | 5,560 |  |  | $ | 262 |  |  | $ | — |  |  | $ | 5,822 |  |  | $ | 24,408 |  |  | $ | 3,555,983 |
Unsecured |  | 138,947 |  |  | 424 |  |  | 2 |  |  | — |  |  | 426 |  |  | — |  |  | 139,373 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential |  | 269,593 |  |  | 2,429 |  |  | 437 |  |  | — |  |  | 2,866 |  |  | 574 |  |  | 273,033 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial land |  | 292,594 |  |  | 140 |  |  | — |  |  | — |  |  | 140 |  |  | 2,562 |  |  | 295,296 |
Income property |  | 1,955,634 |  |  | 2,038 |  |  | 3,266 |  |  | — |  |  | 5,304 |  |  | 997 |  |  | 1,961,935 |
Owner occupied |  | 1,689,919 |  |  | 1,727 |  |  | 138 |  |  | — |  |  | 1,865 |  |  | 6,524 |  |  | 1,698,308 |
Real estate construction: |  |  |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Land and acquisition |  | 1,614 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 1,614 |
Residential construction |  | 192,563 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 192,563 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Income property |  | 151,362 |  |  | 6,038 |  |  | — |  |  | — |  |  | 6,038 |  |  | — |  |  | 157,400 |
Owner occupied |  | 100,610 |  |  | 1,636 |  |  | — |  |  | — |  |  | 1,636 |  |  | — |  |  | 102,246 |
Consumer |  | 293,861 |  |  | 746 |  |  | 264 |  |  | — |  |  | 1,010 |  |  | 1,956 |  |  | 296,827 |
Total |  | $ | 8,612,450 |  |  | $ | 20,738 |  |  | $ | 4,369 |  |  | $ | — |  |  | $ | 25,107 |  |  | $ | 37,021 |  |  | $ | 8,674,578 |
|  | Current Loans |  | 30 - 59 Days Past Due |  | 60 - 89 Days Past Due |  | Greater than 90 Days Past Due |  | Total Past Due |  | Nonaccrual Loans |  | Total Loans
December 31, 2018 |  | (in thousands)
Commercial business: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Secured |  | $ | 3,267,709 |  |  | $ | 5,864 |  |  | $ | 3,624 |  |  | $ | — |  |  | $ | 9,488 |  |  | $ | 35,504 |  |  | $ | 3,312,701 |
Unsecured |  | 111,868 |  |  | 240 |  |  | — |  |  | — |  |  | 240 |  |  | 9 |  |  | 112,117 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential |  | 233,941 |  |  | 694 |  |  | 233 |  |  | — |  |  | 927 |  |  | 1,158 |  |  | 236,026 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial land |  | 283,416 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,261 |  |  | 285,677 |
Income property |  | 1,910,505 |  |  | 5,009 |  |  | 2,241 |  |  | — |  |  | 7,250 |  |  | 2,721 |  |  | 1,920,476 |
Owner occupied |  | 1,606,085 |  |  | 1,744 |  |  | — |  |  | — |  |  | 1,744 |  |  | 9,922 |  |  | 1,617,751 |
Real estate construction: |  |  |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Land and acquisition |  | 4,099 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 318 |  |  | 4,417 |
Residential construction |  | 212,303 |  |  | 93 |  |  | — |  |  | — |  |  | 93 |  |  | — |  |  | 212,396 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Income property |  | 194,912 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 194,912 |
Owner occupied |  | 79,805 |  |  | 7,258 |  |  | — |  |  | — |  |  | 7,258 |  |  | — |  |  | 87,063 |
Consumer |  | 314,008 |  |  | 1,057 |  |  | 201 |  |  | — |  |  | 1,258 |  |  | 2,949 |  |  | 318,215 |
Total |  | $ | 8,218,651 |  |  | $ | 21,959 |  |  | $ | 6,299 |  |  | $ | — |  |  | $ | 28,258 |  |  | $ | 54,842 |  |  | $ | 8,301,751 |

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The following is an analysis of impaired loans as of September 30, 2019 and December 31, 2018:

|  | Recorded Investment of Loans Collectively Measured for Contingency Provision |  | Recorded Investment of Loans Individually Measured for Specific Impairment |  | Impaired Loans With Recorded Allowance |  | Impaired Loans Without Recorded Allowance
|  | Recorded Investment |  | Unpaid Principal Balance |  | Related Allowance |  | Recorded Investment |  | Unpaid Principal Balance
September 30, 2019 |  | (in thousands)
Commercial business: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Secured |  | $ | 3,530,404 |  |  | $ | 25,579 |  |  | $ | 9,114 |  |  | $ | 10,673 |  |  | $ | 1,879 |  |  | $ | 16,465 |  |  | $ | 21,051 |
Unsecured |  | 139,360 |  |  | 13 |  |  | 13 |  |  | 13 |  |  | — |  |  | — |  |  | — |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential |  | 272,686 |  |  | 347 |  |  | 347 |  |  | 635 |  |  | 5 |  |  | — |  |  | — |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial land |  | 292,436 |  |  | 2,860 |  |  | 1,591 |  |  | 1,601 |  |  | 320 |  |  | 1,269 |  |  | 1,304 |
Income property |  | 1,961,935 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Owner occupied |  | 1,688,118 |  |  | 10,190 |  |  | 3,733 |  |  | 5,260 |  |  | 105 |  |  | 6,457 |  |  | 6,599 |
Real estate construction: |  |  |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Land and acquisition |  | 1,614 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Residential construction |  | 192,563 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Income property |  | 157,400 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Owner occupied |  | 102,246 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Consumer |  | 294,599 |  |  | 2,228 |  |  | 379 |  |  | 514 |  |  | 17 |  |  | 1,849 |  |  | 2,006 |
Total |  | $ | 8,633,361 |  |  | $ | 41,217 |  |  | $ | 15,177 |  |  | $ | 18,696 |  |  | $ | 2,326 |  |  | $ | 26,040 |  |  | $ | 30,960 |
|  | Recorded Investment of Loans Collectively Measured for Contingency Provision |  | Recorded Investment of Loans Individually Measured for Specific Impairment |  | Impaired Loans With Recorded Allowance |  | Impaired Loans Without Recorded Allowance
|  |  |  | Recorded Investment |  | Unpaid Principal Balance |  | Related Allowance |  | Recorded Investment |  | Unpaid Principal Balance
December 31, 2018 |  | (in thousands)
Commercial business: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Secured |  | $ | 3,286,416 |  |  | $ | 26,285 |  |  | $ | 6,350 |  |  | $ | 8,460 |  |  | $ | 2,023 |  |  | $ | 19,935 |  |  | $ | 24,404 |
Unsecured |  | 112,097 |  |  | 20 |  |  | 20 |  |  | 20 |  |  | — |  |  | — |  |  | — |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential |  | 235,138 |  |  | 888 |  |  | 325 |  |  | 798 |  |  | 8 |  |  | 563 |  |  | 575 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial land |  | 283,451 |  |  | 2,226 |  |  | — |  |  | — |  |  | — |  |  | 2,226 |  |  | 2,272 |
Income property |  | 1,917,522 |  |  | 2,954 |  |  | 99 |  |  | 165 |  |  | 1 |  |  | 2,855 |  |  | 3,011 |
Owner occupied |  | 1,605,042 |  |  | 12,709 |  |  | 3,231 |  |  | 4,666 |  |  | 69 |  |  | 9,478 |  |  | 9,750 |
Real estate construction: |  |  |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Land and acquisition |  | 4,417 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Residential construction |  | 212,396 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Income property |  | 194,912 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Owner occupied |  | 87,063 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Consumer |  | 314,193 |  |  | 4,022 |  |  | 3,326 |  |  | 3,584 |  |  | 31 |  |  | 696 |  |  | 704 |
Total |  | $ | 8,252,647 |  |  | $ | 49,104 |  |  | $ | 13,351 |  |  | $ | 17,693 |  |  | $ | 2,132 |  |  | $ | 35,753 |  |  | $ | 40,716 |

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The following table provides additional information on impaired loans for the three and nine month periods indicated:

|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2019 |  | 2018 |  | 2019 |  | 2018
|  | Average Recorded Investment Impaired Loans |  | Interest Recognized on Impaired Loans |  | Average Recorded Investment Impaired Loans |  | Interest Recognized on Impaired Loans |  | Average Recorded Investment Impaired Loans |  | Interest Recognized on Impaired Loans |  | Average Recorded Investment Impaired Loans |  | Interest Recognized on Impaired Loans
|  | (in thousands)
Commercial business: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Secured |  | $ | 21,419 |  |  | $ | 108 |  |  | $ | 43,805 |  |  | $ | 2 |  |  | $ | 24,833 |  |  | $ | 267 |  |  | $ | 43,055 |  |  | $ | 43 |
Unsecured |  | 15 |  |  | — |  |  | 444 |  |  | — |  |  | 17 |  |  | 1 |  |  | 234 |  |  | 1 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential |  | 596 |  |  | 12 |  |  | 545 |  |  | 12 |  |  | 736 |  |  | 29 |  |  | 713 |  |  | 30 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial land |  | 2,861 |  |  | 8 |  |  | 2,246 |  |  | 26 |  |  | 2,704 |  |  | 23 |  |  | 2,407 |  |  | 26 |
Income property |  | 664 |  |  | — |  |  | 2,443 |  |  | 34 |  |  | 1,401 |  |  | — |  |  | 3,367 |  |  | 96 |
Owner occupied |  | 10,241 |  |  | 176 |  |  | 9,349 |  |  | 124 |  |  | 12,435 |  |  | 210 |  |  | 8,986 |  |  | 333 |
Real estate construction: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential construction |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 605 |  |  | — |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  | — |  |  | — |  |  | 4,050 |  |  | 72 |  |  | — |  |  | — |  |  | 4,050 |  |  | 174 |
Consumer |  | 2,842 |  |  | 10 |  |  | 5,646 |  |  | 44 |  |  | 3,290 |  |  | 28 |  |  | 6,135 |  |  | 110 |
Total |  | $ | 38,638 |  |  | $ | 314 |  |  | $ | 68,528 |  |  | $ | 314 |  |  | $ | 45,416 |  |  | $ | 558 |  |  | $ | 69,552 |  |  | $ | 813 |

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The following is an analysis of loans classified as TDR during the three and nine months ended September 30, 2019 and 2018:

|  | Three Months Ended September 30, 2019 |  | Three Months Ended September 30, 2018
|  | Number of TDR Modifications |  | Pre-Modification Outstanding Recorded Investment |  | Post-Modification Outstanding Recorded Investment |  | Number of TDR Modifications |  | Pre-Modification Outstanding Recorded Investment |  | Post-Modification Outstanding Recorded Investment
|  | (dollars in thousands)
Commercial business: |  |  |  |  |  |  |  |  |  |  |  |
Secured |  | 6 |  |  | $ | 5,108 |  |  | $ | 5,108 |  |  | 1 |  |  | $ | 14,511 |  |  | $ | 14,511 |
Consumer |  | 5 |  |  | 276 |  |  | 276 |  |  | 3 |  |  | 123 |  |  | 123 |
Total |  | 11 |  |  | $ | 5,384 |  |  | $ | 5,384 |  |  | 4 |  |  | $ | 14,634 |  |  | $ | 14,634 |

|  | Nine Months Ended September 30, 2019 |  | Nine Months Ended September 30, 2018
|  | Number of TDR Modifications |  | Pre-Modification Outstanding Recorded Investment |  | Post-Modification Outstanding Recorded Investment |  | Number of TDR Modifications |  | Pre-Modification Outstanding Recorded Investment |  | Post-Modification Outstanding Recorded Investment
|  | (dollars in thousands)
Commercial business: |  |  |  |  |  |  |  |  |  |  |  |
Secured |  | 11 |  |  | $ | 6,642 |  |  | $ | 6,642 |  |  | 9 |  |  | $ | 17,605 |  |  | $ | 17,605 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |
Income property |  | 1 |  |  | 217 |  |  | 217 |  |  | 1 |  |  | 891 |  |  | 891 |
Consumer |  | 9 |  |  | 394 |  |  | 394 |  |  | 18 |  |  | 2,540 |  |  | 2,540 |
Total |  | 21 |  |  | $ | 7,253 |  |  | $ | 7,253 |  |  | 28 |  |  | $ | 21,036 |  |  | $ | 21,036 |

The Company’s loans classified as TDR are loans that have been modified or the borrower has been granted special concessions due to financial difficulties that, if not for the challenges of the borrower, the Company would not otherwise consider. The TDR modifications or concessions are made to increase the likelihood that these borrowers with financial difficulties will be able to satisfy their debt obligations as amended. The concessions granted in the restructurings, summarized in the table above, largely consisted of maturity extensions, interest rate modifications or a combination of both. In limited circumstances, a reduction in the principal balance of the loan could also be made as a concession. Credit losses for loans classified as TDR are measured on the same basis as impaired loans. For impaired loans, an allowance is established when the collateral value less selling costs (or discounted cash flows or observable market price) of the impaired loan is lower than the recorded investment of that loan.
The Company had commitments to lend $1.5 million of additional funds on loans classified as TDR as of September 30, 2019. The Company had $2.1 million of such commitments at December 31, 2018. The Company did not have any loans modified as TDR that defaulted within 12 months of being modified as TDR during the three months ended September 30, 2019. The Company did have one $26 thousand consumer loan that defaulted within 12 months of being modified as a TDR during the nine months ended September 30, 2019. The defaulted TDR loan is collateralized and was included with the loans individually measured for specific impairment. The Company did not experience any similar defaults during the three and nine months ended September 30, 2018.
PCI Loans
PCI loans are accounted for under ASC 310-30 and initially measured at fair value based on expected future cash flows over the life of the loans. Loans that have common risk characteristics are aggregated into pools. The Company remeasures contractual and expected cash flows, at the pool-level, on a quarterly basis.
Contractual cash flows are calculated based upon the loan pool terms after applying a prepayment factor. Calculation of the applied prepayment factor for contractual cash flows is the same as described below for expected cash flows.
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Inputs to the determination of expected cash flows include cumulative default and prepayment data as well as loss severity and recovery lag information. Cumulative default and prepayment data are calculated via a transition matrix, which utilizes probability values of a loan pool transitioning into a particular delinquency state (e.g. 0-30 days past due, 31 to 60 days, etc.) given its delinquency state at the remeasurement date. Loss severity factors are based upon either actual charge-off data within the loan pools or industry averages, and recovery lags are based upon the collateral within the loan pools.
The excess of cash flows, expected to be collected over the initial fair value of PCI loans, is referred to as the accretable yield and is accreted into interest income over the estimated life of the acquired loans using the effective yield method. Other adjustments to the accretable yield include changes in the estimated remaining life of the acquired loans, changes in expected cash flows and changes of indices for acquired loans with variable interest rates.
The following is an analysis of our PCI loans, net of related ALLL and remaining valuation discounts as of September 30, 2019 and December 31, 2018:

|  | September 30, 2019 |  | December 31, 2018
|  | (in thousands)
Commercial business |  | $ | 9,234 |  |  | $ | 9,672 |
Real estate: |  |  |  |
One-to-four family residential |  | 8,764 |  |  | 9,848 |
Commercial and multifamily residential |  | 59,383 |  |  | 66,340 |
Total real estate |  | 68,147 |  |  | 76,188 |
Real estate construction: |  |  |  |
One-to-four family residential |  | 144 |  |  | 153 |
Commercial and multifamily residential |  | 462 |  |  | 507 |
Total real estate construction |  | 606 |  |  | 660 |
Consumer |  | 8,744 |  |  | 9,765 |
Subtotal of PCI loans |  | 86,731 |  |  | 96,285 |
Less: |  |  |  |
Valuation discount resulting from acquisition accounting |  | 4,954 |  |  | 6,525 |
ALLL |  | 3,058 |  |  | 3,611 |
PCI loans, net of valuation discounts and allowance for loan losses |  | $ | 78,719 |  |  | $ | 86,149 |

The following table shows the changes in accretable yield for PCI loans for the three and nine months ended September 30, 2019 and 2018:

|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2019 |  | 2018 |  | 2019 |  | 2018
|  | (in thousands)
Balance at beginning of period |  | $ | 20,989 |  |  | $ | 25,350 |  |  | $ | 21,949 |  |  | $ | 31,176 |
Accretion |  | (1,289 | ) |  | (2,233 | ) |  | (4,865 | ) |  | (6,435 | )
Disposals |  | (45 | ) |  | (221 | ) |  | 61 |  |  | (387 | )
Reclassifications to (from) nonaccretable difference |  | 719 |  |  | 279 |  |  | 3,229 |  |  | (1,179 | )
Balance at end of period |  | $ | 20,374 |  |  | $ | 23,175 |  |  | $ | 20,374 |  |  | $ | 23,175 |

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

We record an ALLL to recognize management’s estimate of credit losses incurred in the loan portfolio at each balance sheet date. We have used the same methodology for the ALLL calculation during the three and nine months ended September 30, 2019 and 2018.
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The following tables show a detailed analysis of the ALLL for the three and nine months ended September 30, 2019 and 2018:

|  | Beginning Balance |  | Charge-offs |  | Recoveries |  | Provision (Recapture) |  | Ending Balance |  | Specific Reserve |  | General Allocation
Three Months Ended September 30, 2019 |  | (in thousands)
Commercial business: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Secured |  | $ | 37,862 |  |  | $ | (2,365 | ) |  | $ | 202 |  |  | $ | 5,721 |  |  | $ | 41,420 |  |  | $ | 1,879 |  |  | $ | 39,541 |
Unsecured |  | 3,010 |  |  | — |  |  | 156 |  |  | 423 |  |  | 3,589 |  |  | — |  |  | 3,589 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential |  | 645 |  |  | — |  |  | 65 |  |  | (107 | ) |  | 603 |  |  | 5 |  |  | 598 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial land |  | 5,409 |  |  | — |  |  | 79 |  |  | 560 |  |  | 6,048 |  |  | 320 |  |  | 5,728 |
Income property |  | 5,325 |  |  | — |  |  | 104 |  |  | 35 |  |  | 5,464 |  |  | — |  |  | 5,464 |
Owner occupied |  | 5,230 |  |  | — |  |  | 1 |  |  | 500 |  |  | 5,731 |  |  | 105 |  |  | 5,626 |
Real estate construction: |  |  |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Land and acquisition |  | 153 |  |  | — |  |  | 105 |  |  | (124 | ) |  | 134 |  |  | — |  |  | 134 |
Residential construction |  | 6,103 |  |  | — |  |  | 2,366 |  |  | (2,852 | ) |  | 5,617 |  |  | — |  |  | 5,617 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Income property |  | 4,198 |  |  | — |  |  | — |  |  | (505 | ) |  | 3,693 |  |  | — |  |  | 3,693 |
Owner occupied |  | 2,412 |  |  | — |  |  | — |  |  | 595 |  |  | 3,007 |  |  | — |  |  | 3,007 |
Consumer |  | 5,194 |  |  | (285 | ) |  | 326 |  |  | (1,010 | ) |  | 4,225 |  |  | 17 |  |  | 4,208 |
PCI |  | 3,269 |  |  | (722 | ) |  | 1,812 |  |  | (1,301 | ) |  | 3,058 |  |  | — |  |  | 3,058 |
Unallocated |  | 1,707 |  |  | — |  |  | — |  |  | (1,636 | ) |  | 71 |  |  | — |  |  | 71 |
Total |  | $ | 80,517 |  |  | $ | (3,372 | ) |  | $ | 5,216 |  |  | $ | 299 |  |  | $ | 82,660 |  |  | $ | 2,326 |  |  | $ | 80,334 |
|  | Beginning Balance |  | Charge-offs |  | Recoveries |  | Provision (Recapture) |  | Ending Balance |  | Specific Reserve |  | General Allocation
Nine Months Ended September 30, 2019 |  | (in thousands)
Commercial business: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Secured |  | $ | 43,188 |  |  | $ | (7,717 | ) |  | $ | 1,040 |  |  | $ | 4,909 |  |  | $ | 41,420 |  |  | $ | 1,879 |  |  | $ | 39,541 |
Unsecured |  | 2,626 |  |  | (15 | ) |  | 345 |  |  | 633 |  |  | 3,589 |  |  | — |  |  | 3,589 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential |  | 593 |  |  | (2 | ) |  | 102 |  |  | (90 | ) |  | 603 |  |  | 5 |  |  | 598 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial land |  | 3,947 |  |  | — |  |  | 93 |  |  | 2,008 |  |  | 6,048 |  |  | 320 |  |  | 5,728 |
Income property |  | 4,044 |  |  | — |  |  | 152 |  |  | 1,268 |  |  | 5,464 |  |  | — |  |  | 5,464 |
Owner occupied |  | 4,533 |  |  | — |  |  | 3 |  |  | 1,195 |  |  | 5,731 |  |  | 105 |  |  | 5,626 |
Real estate construction: |  |  |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Land and acquisition |  | 549 |  |  | — |  |  | 236 |  |  | (651 | ) |  | 134 |  |  | — |  |  | 134 |
Residential construction |  | 5,536 |  |  | (170 | ) |  | 2,956 |  |  | (2,705 | ) |  | 5,617 |  |  | — |  |  | 5,617 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Income property |  | 5,784 |  |  | — |  |  | 1 |  |  | (2,092 | ) |  | 3,693 |  |  | — |  |  | 3,693 |
Owner occupied |  | 2,604 |  |  | — |  |  | — |  |  | 403 |  |  | 3,007 |  |  | — |  |  | 3,007 |
Consumer |  | 5,301 |  |  | (1,117 | ) |  | 742 |  |  | (701 | ) |  | 4,225 |  |  | 17 |  |  | 4,208 |
PCI |  | 3,611 |  |  | (2,626 | ) |  | 3,389 |  |  | (1,316 | ) |  | 3,058 |  |  | — |  |  | 3,058 |
Unallocated |  | 1,053 |  |  | — |  |  | — |  |  | (982 | ) |  | 71 |  |  | — |  |  | 71 |
Total |  | $ | 83,369 |  |  | $ | (11,647 | ) |  | $ | 9,059 |  |  | $ | 1,879 |  |  | $ | 82,660 |  |  | $ | 2,326 |  |  | $ | 80,334 |

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|  | Beginning Balance |  | Charge-offs |  | Recoveries |  | Provision (Recapture) |  | Ending Balance |  | Specific Reserve |  | General Allocation
Three Months Ended September 30, 2018 |  | (in thousands)
Commercial business: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Secured |  | $ | 40,350 |  |  | $ | (576 | ) |  | $ | 496 |  |  | $ | 2,912 |  |  | $ | 43,182 |  |  | $ | 1,139 |  |  | $ | 42,043 |
Unsecured |  | 2,443 |  |  | (30 | ) |  | 51 |  |  | (41 | ) |  | 2,423 |  |  | — |  |  | 2,423 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential |  | 461 |  |  | — |  |  | 21 |  |  | (110 | ) |  | 372 |  |  | 8 |  |  | 364 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial land |  | 3,278 |  |  | — |  |  | 8 |  |  | (87 | ) |  | 3,199 |  |  | — |  |  | 3,199 |
Income property |  | 4,102 |  |  | — |  |  | 202 |  |  | (292 | ) |  | 4,012 |  |  | 1 |  |  | 4,011 |
Owner occupied |  | 4,356 |  |  | — |  |  | 3 |  |  | 316 |  |  | 4,675 |  |  | 71 |  |  | 4,604 |
Real estate construction: |  |  |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Land and acquisition |  | 848 |  |  | — |  |  | 582 |  |  | (742 | ) |  | 688 |  |  | — |  |  | 688 |
Residential construction |  | 4,572 |  |  | — |  |  | 1 |  |  | 660 |  |  | 5,233 |  |  | — |  |  | 5,233 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Income property |  | 7,367 |  |  | — |  |  | — |  |  | 573 |  |  | 7,940 |  |  | — |  |  | 7,940 |
Owner occupied |  | 2,299 |  |  | — |  |  | — |  |  | 138 |  |  | 2,437 |  |  | — |  |  | 2,437 |
Consumer |  | 5,292 |  |  | (277 | ) |  | 266 |  |  | (258 | ) |  | 5,023 |  |  | 36 |  |  | 4,987 |
PCI |  | 4,782 |  |  | (1,208 | ) |  | 945 |  |  | (502 | ) |  | 4,017 |  |  | — |  |  | 4,017 |
Unallocated |  | — |  |  | — |  |  | — |  |  | 586 |  |  | 586 |  |  | — |  |  | 586 |
Total |  | $ | 80,150 |  |  | $ | (2,091 | ) |  | $ | 2,575 |  |  | $ | 3,153 |  |  | $ | 83,787 |  |  | $ | 1,255 |  |  | $ | 82,532 |
|  | Beginning Balance |  | Charge-offs |  | Recoveries |  | Provision (Recapture) |  | Ending Balance |  | Specific Reserve |  | General Allocation
Nine Months Ended September 30, 2018 |  | (in thousands)
Commercial business: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Secured |  | $ | 29,341 |  |  | $ | (8,741 | ) |  | $ | 2,536 |  |  | $ | 20,046 |  |  | $ | 43,182 |  |  | $ | 1,139 |  |  | $ | 42,043 |
Unsecured |  | 2,000 |  |  | (117 | ) |  | 356 |  |  | 184 |  |  | 2,423 |  |  | — |  |  | 2,423 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential |  | 701 |  |  | — |  |  | 389 |  |  | (718 | ) |  | 372 |  |  | 8 |  |  | 364 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial land |  | 4,265 |  |  | — |  |  | 92 |  |  | (1,158 | ) |  | 3,199 |  |  | — |  |  | 3,199 |
Income property |  | 5,672 |  |  | (223 | ) |  | 901 |  |  | (2,338 | ) |  | 4,012 |  |  | 1 |  |  | 4,011 |
Owner occupied |  | 5,459 |  |  | — |  |  | 19 |  |  | (803 | ) |  | 4,675 |  |  | 71 |  |  | 4,604 |
Real estate construction: |  |  |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Land and acquisition |  | 963 |  |  | — |  |  | 610 |  |  | (885 | ) |  | 688 |  |  | — |  |  | 688 |
Residential construction |  | 3,709 |  |  | — |  |  | 6 |  |  | 1,518 |  |  | 5,233 |  |  | — |  |  | 5,233 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Income property |  | 7,053 |  |  | — |  |  | — |  |  | 887 |  |  | 7,940 |  |  | — |  |  | 7,940 |
Owner occupied |  | 4,413 |  |  | — |  |  | — |  |  | (1,976 | ) |  | 2,437 |  |  | — |  |  | 2,437 |
Consumer |  | 5,163 |  |  | (773 | ) |  | 796 |  |  | (163 | ) |  | 5,023 |  |  | 36 |  |  | 4,987 |
PCI |  | 6,907 |  |  | (3,786 | ) |  | 3,096 |  |  | (2,200 | ) |  | 4,017 |  |  | — |  |  | 4,017 |
Unallocated |  | — |  |  | — |  |  | — |  |  | 586 |  |  | 586 |  |  | — |  |  | 586 |
Total |  | $ | 75,646 |  |  | $ | (13,640 | ) |  | $ | 8,801 |  |  | $ | 12,980 |  |  | $ | 83,787 |  |  | $ | 1,255 |  |  | $ | 82,532 |

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Changes in the allowance for unfunded commitments and letters of credit, a component of “Other liabilities” in the Consolidated Balance Sheets, are summarized as follows:

|  | Three Months Ended |  | Nine Months Ended
|  | September 30, |  | September 30,
|  | 2019 |  | 2018 |  | 2019 |  | 2018
|  | (in thousands)
Balance at beginning of period |  | $ | 3,980 |  |  | $ | 3,680 |  |  | $ | 4,330 |  |  | $ | 3,130 |
Net changes in the allowance for unfunded commitments and letters of credit |  | (400 | ) |  | 275 |  |  | (750 | ) |  | 825 |
Balance at end of period |  | $ | 3,580 |  |  | $ | 3,955 |  |  | $ | 3,580 |  |  | $ | 3,955 |

Risk Elements
The extension of credit in the form of loans or other credit products to individuals and businesses is one of our principal business activities. Our policies and applicable laws and regulations require risk analysis as well as ongoing portfolio and credit management. We manage our credit risk through lending limit constraints, credit review, approval policies and extensive, ongoing internal monitoring. We also manage credit risk through diversification of the loan portfolio by type of loan, type of industry and type of borrower and by limiting the aggregation of debt to a single borrower.
Risk ratings are reviewed and updated whenever appropriate, with more periodic reviews as the risk and dollar value of loss on the loan increases. In the event full collection of principal and interest is not reasonably assured, the loan is appropriately downgraded and, if warranted, placed on nonaccrual status even though the loan may be current as to principal and interest payments. Additionally, we assess whether an impairment of a loan warrants specific reserves or a write-down of the loan.
Pass rated loans are generally considered to have sufficient sources of repayment in order to repay the loan in full in accordance with all terms and conditions. Special Mention rated loans have potential weaknesses that, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Loans with a risk rating of Substandard or worse are reviewed to assess the ability of our borrowers to service all interest and principal obligations and, as a result, the risk rating or accrual status may be adjusted accordingly. Loans risk rated as Substandard reflect loans where a loss is possible if loan weaknesses are not corrected. Doubtful rated loans have a high probability of loss; however, the amount of loss has not yet been determined. Loss rated loans are considered uncollectable and when identified, are charged off.
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The following is an analysis of the credit quality of our loan portfolio, excluding PCI loans, as of September 30, 2019 and December 31, 2018:

|  | Pass |  | Special Mention |  | Substandard |  | Doubtful |  | Loss |  | Total
September 30, 2019 |  | (in thousands)
Loans, excluding PCI loans: |  |  |  |  |  |  |  |  |  |  |  |
Commercial business: |  |  |  |  |  |  |  |  |  |  |  |
Secured |  | $ | 3,433,097 |  |  | $ | 30,153 |  |  | $ | 92,731 |  |  | $ | 2 |  |  | $ | — |  |  | $ | 3,555,983 |
Unsecured |  | 139,176 |  |  | — |  |  | 197 |  |  | — |  |  | — |  |  | 139,373 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential |  | 272,021 |  |  | — |  |  | 1,012 |  |  | — |  |  | — |  |  | 273,033 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |
Commercial land |  | 277,264 |  |  | 4,665 |  |  | 13,367 |  |  | — |  |  | — |  |  | 295,296 |
Income property |  | 1,917,596 |  |  | 3,918 |  |  | 40,421 |  |  | — |  |  | — |  |  | 1,961,935 |
Owner occupied |  | 1,642,558 |  |  | 8,278 |  |  | 47,472 |  |  | — |  |  | — |  |  | 1,698,308 |
Real estate construction: |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential: |  |  |  |  |  |  |  |  |  |  |  |
Land and acquisition |  | 1,614 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 1,614 |
Residential construction |  | 192,563 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 192,563 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |
Income property |  | 157,400 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 157,400 |
Owner occupied |  | 102,246 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 102,246 |
Consumer |  | 293,484 |  |  | — |  |  | 3,343 |  |  | — |  |  | — |  |  | 296,827 |
Total |  | $ | 8,429,019 |  |  | $ | 47,014 |  |  | $ | 198,543 |  |  | $ | 2 |  |  | $ | — |  |  | 8,674,578 |
Less: |  |  |  |  |  |  |  |  |  |  |  |
ALLL |  | 79,602 |
Loans, excluding PCI loans, net |  | $ | 8,594,976 |

|  | Pass |  | Special Mention |  | Substandard |  | Doubtful |  | Loss |  | Total
December 31, 2018 |  | (in thousands)
Loans, excluding PCI loans: |  |  |  |  |  |  |  |  |  |  |  |
Commercial business: |  |  |  |  |  |  |  |  |  |  |  |
Secured |  | $ | 3,160,910 |  |  | $ | 48,779 |  |  | $ | 103,007 |  |  | $ | 5 |  |  | $ | — |  |  | $ | 3,312,701 |
Unsecured |  | 112,091 |  |  | 21 |  |  | — |  |  | 5 |  |  | — |  |  | 112,117 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential |  | 234,416 |  |  | — |  |  | 1,610 |  |  | — |  |  | — |  |  | 236,026 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |
Commercial land |  | 276,348 |  |  | 5,082 |  |  | 4,247 |  |  | — |  |  | — |  |  | 285,677 |
Income property |  | 1,876,925 |  |  | 36,998 |  |  | 6,553 |  |  | — |  |  | — |  |  | 1,920,476 |
Owner occupied |  | 1,556,852 |  |  | 14,964 |  |  | 45,935 |  |  | — |  |  | — |  |  | 1,617,751 |
Real estate construction: |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential: |  |  |  |  |  |  |  |  |  |  |  |
Land and acquisition |  | 4,099 |  |  | — |  |  | 318 |  |  | — |  |  | — |  |  | 4,417 |
Residential construction |  | 212,225 |  |  | — |  |  | 171 |  |  | — |  |  | — |  |  | 212,396 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |
Income property |  | 194,912 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 194,912 |
Owner occupied |  | 87,063 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 87,063 |
Consumer |  | 313,817 |  |  | — |  |  | 4,398 |  |  | — |  |  | — |  |  | 318,215 |
Total |  | $ | 8,029,658 |  |  | $ | 105,844 |  |  | $ | 166,239 |  |  | $ | 10 |  |  | $ | — |  |  | 8,301,751 |
Less: |  |  |  |  |  |  |  |  |  |  |  |
ALLL |  | 79,758 |
Loans, excluding PCI loans, net |  | $ | 8,221,993 |

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The following is an analysis of the credit quality of our PCI loan portfolio as of September 30, 2019 and December 31, 2018:

|  | Pass |  | Special Mention |  | Substandard |  | Doubtful |  | Loss |  | Total
September 30, 2019 |  | (in thousands)
PCI loans: |  |  |  |  |  |  |  |  |  |  |  |
Commercial business: |  |  |  |  |  |  |  |  |  |  |  |
Secured |  | $ | 7,008 |  |  | $ | 955 |  |  | $ | 721 |  |  | $ | — |  |  | $ | — |  |  | $ | 8,684 |
Unsecured |  | 550 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 550 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential |  | 8,521 |  |  | — |  |  | 243 |  |  | — |  |  | — |  |  | 8,764 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |
Commercial land |  | 8,920 |  |  | 642 |  |  | 72 |  |  | — |  |  | — |  |  | 9,634 |
Income property |  | 18,737 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 18,737 |
Owner occupied |  | 25,059 |  |  | — |  |  | 5,953 |  |  | — |  |  | — |  |  | 31,012 |
Real estate construction: |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential: |  |  |  |  |  |  |  |  |  |  |  |
Land and acquisition |  | 144 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 144 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |
Income property |  | 462 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 462 |
Consumer |  | 8,468 |  |  | — |  |  | 276 |  |  | — |  |  | — |  |  | 8,744 |
Total |  | $ | 77,869 |  |  | $ | 1,597 |  |  | $ | 7,265 |  |  | $ | — |  |  | $ | — |  |  | 86,731 |
Less: |  |  |  |  |  |  |  |  |  |  |  |
Valuation discount resulting from acquisition accounting |  | 4,954 |
ALLL |  | 3,058 |
PCI loans, net |  | $ | 78,719 |

|  | Pass |  | Special Mention |  | Substandard |  | Doubtful |  | Loss |  | Total
December 31, 2018 |  | (in thousands)
PCI loans: |  |  |  |  |  |  |  |  |  |  |  |
Commercial business: |  |  |  |  |  |  |  |  |  |  |  |
Secured |  | $ | 8,041 |  |  | $ | — |  |  | $ | 840 |  |  | $ | — |  |  | $ | — |  |  | $ | 8,881 |
Unsecured |  | 692 |  |  | — |  |  | 99 |  |  | — |  |  | — |  |  | 791 |
Real estate: |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential |  | 9,633 |  |  | — |  |  | 215 |  |  | — |  |  | — |  |  | 9,848 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |
Commercial land |  | 10,363 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 10,363 |
Income property |  | 19,680 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 19,680 |
Owner occupied |  | 35,944 |  |  | — |  |  | 353 |  |  | — |  |  | — |  |  | 36,297 |
Real estate construction: |  |  |  |  |  |  |  |  |  |  |  |
One-to-four family residential: |  |  |  |  |  |  |  |  |  |  |  |
Land and acquisition |  | 151 |  |  | — |  |  | 2 |  |  | — |  |  | — |  |  | 153 |
Commercial and multifamily residential: |  |  |  |  |  |  |  |  |  |  |  |
Income property |  | 507 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 507 |
Consumer |  | 9,326 |  |  | — |  |  | 439 |  |  | — |  |  | — |  |  | 9,765 |
Total |  | $ | 94,337 |  |  | $ | — |  |  | $ | 1,948 |  |  | $ | — |  |  | $ | — |  |  | 96,285 |
Less: |  |  |  |  |  |  |  |  |  |  |  |
Valuation discount resulting from acquisition accounting |  | 6,525 |
ALLL |  | 3,611 |
PCI loans, net |  | $ | 86,149 |

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6. | Other Real Estate Owned

The following tables set forth activity in OREO for the three and nine months ended September 30, 2019 and 2018:

|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2019 |  | 2018 |  | 2019 |  | 2018
|  | (in thousands)
Balance, beginning of period |  | $ | 1,118 |  |  | $ | 7,080 |  |  | $ | 6,019 |  |  | $ | 13,298 |
Transfers in |  | — |  |  | 794 |  |  | 386 |  |  | 1,200 |
Valuation adjustments |  | — |  |  | (495 | ) |  | (195 | ) |  | (697 | )
Proceeds from sale of OREO property |  | (588 | ) |  | (47 | ) |  | (6,382 | ) |  | (5,868 | )
Gain (loss) on sale of OREO, net |  | 95 |  |  | (1 | ) |  | 797 |  |  | (602 | )
Balance, end of period |  | $ | 625 |  |  | $ | 7,331 |  |  | $ | 625 |  |  | $ | 7,331 |

At September 30, 2019, there were $311 thousand in foreclosed residential real estate properties held as OREO. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process was $1.3 million.

7. | Goodwill and Other Intangible Assets

In accordance with the Intangibles – Goodwill and Other topic of the FASB ASC, goodwill is not amortized but is reviewed for potential impairment at the reporting unit level. Management analyzes its goodwill for impairment on an annual basis on July 31 and between annual tests in certain circumstances such as material adverse changes in legal, business, regulatory and economic factors. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company performed an annual impairment assessment as of July 31, 2019 and concluded that there was no impairment.
The CDI is evaluated for impairment if events and circumstances indicate a possible impairment. The CDI is amortized on an accelerated basis over an estimated life of 10 years.
The following table sets forth activity for goodwill and other intangible assets for the periods indicated:

|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2019 |  | 2018 |  | 2019 |  | 2018
|  | (in thousands)
Goodwill |  |  |  |  |  |  |  |
Total goodwill |  | $ | 765,842 |  |  | $ | 765,842 |  |  | $ | 765,842 |  |  | $ | 765,842 |
Other intangible assets, net |  |  |  |  |  |  |  |
CDI: |  |  |  |  |  |  |  |
Gross CDI balance at beginning of period |  | 105,473 |  |  | 105,473 |  |  | 105,473 |  |  | 105,473 |
Accumulated amortization at beginning of period |  | (65,852 | ) |  | (54,495 | ) |  | (60,455 | ) |  | (48,219 | )
CDI, net at beginning of period |  | 39,621 |  |  | 50,978 |  |  | 45,018 |  |  | 57,254 |
CDI current period amortization |  | (2,632 | ) |  | (3,070 | ) |  | (8,029 | ) |  | (9,346 | )
Total CDI, net at end of period |  | 36,989 |  |  | 47,908 |  |  | 36,989 |  |  | 47,908 |
Intangible assets not subject to amortization |  | 919 |  |  | 919 |  |  | 919 |  |  | 919 |
Other intangible assets, net at end of period |  | 37,908 |  |  | 48,827 |  |  | 37,908 |  |  | 48,827 |
Total goodwill and other intangible assets at end of period |  | $ | 803,750 |  |  | $ | 814,669 |  |  | $ | 803,750 |  |  | $ | 814,669 |

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The following table provides the estimated future amortization expense of our CDI for the remaining three months ending December 31, 2019 and the succeeding four years:

|  | Year ending December 31,
|  | (in thousands)
2019 |  | $ | 2,451 |
2020 |  | 8,724 |
2021 |  | 7,264 |
2022 |  | 5,880 |
2023 |  | 4,552 |

8. | Leases

The Company’s lease commitments consist primarily of leased locations under various non-cancellable operating leases that expire between 2019 and 2043. The majority of the leases contain renewal options and provisions for increases in rental rates based on an agreed upon index or predetermined escalation schedule.
The following table shows the details of the Company’s operating lease right-of-use asset and the associated lease liability for the period indicated:

Item |  | Balance Sheet Location |  | September 30, 2019
|  |  |  | (in thousands)
Operating lease asset |  | Other assets |  | $ | 51,295 |
Operating lease liability |  | Other liabilities |  | $ | 57,196 |

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

|  |  |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
Item |  | Statement of Income Location |  | 2019 |  | 2019
|  |  |  | (in thousands)
Operating lease cost (1) |  | Occupancy |  | $ | 2,700 |  |  | $ | 8,285 |
Variable lease cost |  | Occupancy |  | 487 |  |  | 1,510 |
Sublease income |  | Occupancy |  | (297 | ) |  | (918 | )
Net lease cost |  |  |  | $ | 2,890 |  |  | $ | 8,877 |

__________
(1) Includes short-term lease costs, which are immaterial.
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The following table shows future minimum payments for operating leases for the remaining three months of 2019 and subsequent years:

|  | Year ending December 31,
|  | (in thousands)
2019 |  | $ | 2,717 |
2020 |  | 10,619 |
2021 |  | 10,376 |
2022 |  | 9,795 |
2023 |  | 8,546 |
Thereafter |  | 22,685 |
Total future minimum lease payments |  | 64,738 |
Amounts representing interest |  | (7,542 | )
Present value of minimum lease payments |  | $ | 57,196 |

Future minimum lease payments for the Company’s operating leases as of December 31, 2018, prior to the adoption of the new lease guidance were as follows:

|  | Year Ending December 31,
|  | (in thousands)
2019 |  | $ | 10,947 |
2020 |  | 9,766 |
2021 |  | 8,729 |
2022 |  | 8,102 |
2023 |  | 6,796 |
Thereafter |  | 18,703 |
Total minimum payments |  | $ | 63,043 |

9. | Revolving Line of Credit

During the second quarter of 2019, the Company entered into a $30.0 million short-term credit facility with an unaffiliated bank that matures in May 2020. This facility has a variable interest rate and provides the Company additional liquidity, if needed, for various corporate activities including the repurchase of shares of Columbia Banking System, Inc. common stock. As of September 30, 2019 and December 31, 2018, there was no outstanding balance. The credit agreement requires the Company to comply with certain covenants including those related to asset quality and capital levels. The Company was in compliance with all covenants associated with this facility at September 30, 2019.

10. | Derivatives, Hedging Activities and Balance Sheet Offsetting

The Company is exposed to certain risks arising from both its business and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into interest rate-based derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s loan portfolio.
The Company’s objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate collars as part of its interest rate risk management strategy. Interest rate collars designated as cash flow hedges involve the payments of variable-rate amounts if interest rates rise above the cap strike rate on the contract and receipts of variable-rate amounts if interest rates fall below the floor strike rate on the contract. These derivative contracts are used to hedge the variable cash flows associated with existing variable-rate assets.
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With respect to derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into interest income in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest income as interest payments are received on the Company’s variable-rate assets. During the next 12 months, the Company estimates that there will be $3.1 million reclassified as an increase to interest income.
In addition, the Company periodically enters into certain commercial loan interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rates. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to a swap agreement. This swap agreement effectively converts the customer’s variable rate loan into a fixed rate. The Company then enters into a corresponding swap agreement with a third-party in order to offset its exposure on the variable and fixed components of the customer agreement. As the interest rate swap agreements with the customers and third parties are not designated as hedges under the Derivatives and Hedging topic of the FASB ASC, the instruments are marked to market in earnings. The notional amount of open interest rate swap agreements at September 30, 2019 and December 31, 2018 was $396.5 million and $366.7 million, respectively. There was no mark-to-market gain or loss recorded in the three months ended September 30, 2019. During the nine months ended September 30, 2019 there was a $2 thousand mark-to-market loss recorded to “Other” noninterest expense. During the three and nine months ended September 30, 2018, mark-to-market gains of $1 thousand and $9 thousand, respectively, were recorded to “Other” noninterest expense.
The following table presents the fair value of derivatives, as well as their classification on the Balance Sheet at September 30, 2019 and December 31, 2018:

| Asset Derivatives |  | Liability Derivatives
| September 30, 2019 |  | December 31, 2018 |  | September 30, 2019 |  | December 31, 2018
| Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
| (in thousands)
Derivatives designated as hedging instruments:
Interest rate collar | Other assets |  | $ | 19,703 |  |  | Other assets |  | $ | — |  |  | Other liabilities |  | $ | — |  |  | Other liabilities |  | $ | — |
Derivatives not designated as hedging instruments:
Interest rate swap contracts | Other assets |  | $ | 25,045 |  |  | Other assets |  | $ | 7,033 |  |  | Other liabilities |  | $ | 25,046 |  |  | Other liabilities |  | $ | 7,033 |

The table below presents the effect of cash flow hedge accounting on accumulated other comprehensive income (loss) at September 30, 2019 and 2018:

| Amount of Gain or (Loss) Recognized in Accumulated Other Comprehensive Income on Derivative |  | Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income |  | Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
| Three Months Ended September 30, |  |  |  | Three Months Ended September 30,
| 2019 |  | 2018 |  |  |  | 2019 |  | 2018
| (in thousands)
Interest rate collar | $ | 4,088 |  |  | $ | — |  |  | Interest income |  | $ | 76 |  |  | $ | — |
| Nine Months Ended September 30, |  |  |  | Nine Months Ended September 30,
| 2019 |  | 2018 |  |  |  | 2019 |  | 2018
Interest rate collar | $ | 19,779 |  |  | $ | — |  |  | Interest income |  | $ | 76 |  |  | $ | — |

The notional amount of the interest rate collar was $500.0 million at September 30, 2019. The cash flow hedge was determined to be effective during the periods presented and, as a result, qualifies for hedge accounting treatment.
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The Company is party to interest rate swap contracts, interest rate collar and repurchase agreements that are subject to enforceable master netting arrangements or similar agreements. Under these agreements, the Company may have the right to net settle multiple contracts with the same counterparty. The following tables show the gross interest rate swap contracts, collar agreements and repurchase agreements in the Consolidated Balance Sheets and the respective collateral received or pledged in the form of cash or other financial instruments. The collateral amounts in these tables are limited to the outstanding balances of the related asset or liability. Therefore, instances of overcollateralization are not shown.

| Gross Amounts of Recognized Assets/Liabilities |  | Gross Amounts Offset in the Consolidated Balance Sheets |  | Net Amounts of Assets/Liabilities Presented in the Consolidated Balance Sheets |  | Gross Amounts Not Offset in the Consolidated Balance Sheets
|  |  |  | Collateral Pledged/Received |  | Net Amount
September 30, 2019 | (in thousands)
Assets |  |  |  |  |  |  |  |  |
Interest rate swap contracts | $ | 25,045 |  |  | $ | — |  |  | $ | 25,045 |  |  | $ | — |  |  | $ | 25,045 |
Interest rate collar | $ | 19,703 |  |  | $ | — |  |  | $ | 19,703 |  |  | $ | (19,703 | ) |  | — |
Liabilities |  |  |  |  |  |  |  |  |
Interest rate swap contracts | $ | 25,046 |  |  | $ | — |  |  | $ | 25,046 |  |  | $ | (25,046 | ) |  | $ | — |
Repurchase agreements | $ | 24,489 |  |  | $ | — |  |  | $ | 24,489 |  |  | $ | (24,489 | ) |  | $ | — |
December 31, 2018 |  |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |
Interest rate swap contracts | $ | 7,033 |  |  | $ | — |  |  | $ | 7,033 |  |  | $ | — |  |  | $ | 7,033 |
Liabilities |  |  |  |  |  |  |  |  |
Interest rate swap contracts | $ | 7,033 |  |  | $ | — |  |  | $ | 7,033 |  |  | $ | (3,235 | ) |  | $ | 3,798 |
Repurchase agreements | $ | 61,094 |  |  | $ | — |  |  | $ | 61,094 |  |  | $ | (61,094 | ) |  | $ | — |

The Company’s agreements with each of its derivative counterparties provide that if the Company defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.
The following table presents the class of collateral pledged for repurchase agreements as well as the remaining contractual maturity of the repurchase agreements:

|  | Remaining contractual maturity of the agreements
|  | Overnight and continuous |  | Up to 30 days |  | 30 - 90 days |  | Greater than 90 days |  | Total
September 30, 2019 |  | (in thousands)
Class of collateral pledged for repurchase agreements |  |  |  |  |  |  |  |  |  |
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations |  | $ | 24,489 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 24,489 |
Gross amount of recognized liabilities for repurchase agreements |  |  |  |  |  |  |  |  |  | 24,489 |
Amounts related to agreements not included in offsetting disclosure |  |  |  |  |  |  |  |  |  | $ | — |

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

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

12. | Shareholders’ Equity

Dividends:
The following table summarizes year-to-date dividend activity as of September 30, 2019:

Declared |  | Regular Cash Dividends Per Common Share |  | Special Cash Dividends Per Common Share |  | Record Date |  | Paid Date
January 24, 2019 |  | $ | 0.28 |  |  | $ | 0.14 |  |  | February 6, 2019 |  | February 20, 2019
April 25, 2019 |  | $ | 0.28 |  |  | $ | 0.14 |  |  | May 8, 2019 |  | May 22, 2019
July 25, 2019 |  | $ | 0.28 |  |  | $ | — |  |  | August 7, 2019 |  | August 21, 2019

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

The following table shows changes in accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2019 and 2018:

|  | Unrealized Gains and Losses on Available-for-Sale Securities (1) |  | Unrealized Gains and Losses on Pension Plan Liability (1) |  | Unrealized Gains and Losses on Hedging Instruments (1) |  | Total (1)
Three Months Ended September 30, 2019 |  | (in thousands)
Beginning balance |  | $ | 37,162 |  |  | $ | (2,055 | ) |  | $ | 12,043 |  |  | $ | 47,150 |
Other comprehensive income before reclassifications |  | 14,593 |  |  | — |  |  | 3,137 |  |  | 17,730 |
Amounts reclassified from accumulated other comprehensive income (2) |  | — |  |  | 62 |  |  | (58 | ) |  | 4 |
Net current-period other comprehensive income |  | 14,593 |  |  | 62 |  |  | 3,079 |  |  | 17,734 |
Ending balance |  | $ | 51,755 |  |  | $ | (1,993 | ) |  | $ | 15,122 |  |  | $ | 64,884 |
Three Months Ended September 30, 2018 |  |  |  |  |  |  |  |
Beginning balance |  | $ | (53,597 | ) |  | $ | (2,324 | ) |  | $ | — |  |  | $ | (55,921 | )
Other comprehensive loss before reclassifications |  | (14,149 | ) |  | — |  |  | — |  |  | (14,149 | )
Amounts reclassified from accumulated other comprehensive loss (2) |  | — |  |  | 61 |  |  | — |  |  | 61 |
Net current-period other comprehensive income (loss) |  | (14,149 | ) |  | 61 |  |  | — |  |  | (14,088 | )
Ending balance |  | $ | (67,746 | ) |  | $ | (2,263 | ) |  | $ | — |  |  | $ | (70,009 | )
Nine Months Ended September 30, 2019 |  |  |  |  |  |  |  |
Beginning balance |  | $ | (33,128 | ) |  | $ | (2,177 | ) |  | $ | — |  |  | $ | (35,305 | )
Other comprehensive income before reclassifications |  | 86,519 |  |  | — |  |  | 15,180 |  |  | 101,699 |
Amounts reclassified from accumulated other comprehensive loss (2) |  | (1,636 | ) |  | 184 |  |  | (58 | ) |  | (1,510 | )
Net current-period other comprehensive income |  | 84,883 |  |  | 184 |  |  | 15,122 |  |  | 100,189 |
Ending balance |  | $ | 51,755 |  |  | $ | (1,993 | ) |  | $ | 15,122 |  |  | $ | 64,884 |
Nine Months Ended September 30, 2018 |  |  |  |  |  |  |  |
Beginning balance |  | $ | (19,779 | ) |  | $ | (2,446 | ) |  | $ | — |  |  | $ | (22,225 | )
Adjustment pursuant to adoption of ASU 2016-01 |  | 157 |  |  | — |  |  | — |  |  | 157 |
Other comprehensive loss before reclassifications |  | (48,043 | ) |  | — |  |  | — |  |  | (48,043 | )
Amounts reclassified from accumulated other comprehensive loss (2) |  | (81 | ) |  | 183 |  |  | — |  |  | 102 |
Net current-period other comprehensive income (loss) |  | (48,124 | ) |  | 183 |  |  | — |  |  | (47,941 | )
Ending balance |  | $ | (67,746 | ) |  | $ | (2,263 | ) |  | $ | — |  |  | $ | (70,009 | )

__________
(1) All amounts are net of tax. Amounts in parenthesis indicate debits.
(2) See following table for details about these reclassifications.
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The following table shows details regarding the reclassifications from accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2019 and 2018:

|  | Amount Reclassified from Accumulated Other Comprehensive Income (Loss) |  |
|  | Three Months Ended September 30, |  | Nine Months Ended September 30, |  | Affected line Item in the Consolidated
|  | 2019 |  | 2018 |  | 2019 |  | 2018 |  | Statement of Income
|  | (in thousands) |  |
Unrealized gains and losses on available for sale debt securities |  |  |  |  |  |  |  |  |  |
Investment securities gains, net |  | $ | — |  |  | $ | — |  |  | $ | 2,132 |  |  | $ | 106 |  |  | Investment securities gains (losses), net
|  | — |  |  | — |  |  | 2,132 |  |  | 106 |  |  | Total before tax
|  | — |  |  | — |  |  | (496 | ) |  | (25 | ) |  | Income tax provision
|  | $ | — |  |  | $ | — |  |  | $ | 1,636 |  |  | $ | 81 |  |  | Net of tax
Amortization of pension plan liability |  |  |  |  |  |  |  |  |  |
Actuarial losses |  | $ | (81 | ) |  | $ | (80 | ) |  | $ | (240 | ) |  | $ | (239 | ) |  | Compensation and employee benefits
|  | (81 | ) |  | (80 | ) |  | (240 | ) |  | (239 | ) |  | Total before tax
|  | 19 |  |  | 19 |  |  | 56 |  |  | 56 |  |  | Income tax provision
|  | $ | (62 | ) |  | $ | (61 | ) |  | $ | (184 | ) |  | $ | (183 | ) |  | Net of tax
Unrealized gains and losses from hedging instruments |  |  |  |  |  |  |  |  |  |
Interest income |  | $ | 76 |  |  | $ | — |  |  | $ | 76 |  |  | $ | — |  |  | Loans
|  | 76 |  |  | — |  |  | 76 |  |  | — |  |  | Total before tax
|  | (18 | ) |  | — |  |  | (18 | ) |  | — |  |  | Income tax provision
|  | $ | 58 |  |  | $ | — |  |  | $ | 58 |  |  | $ | — |  |  | Net of tax

14. | Fair Value Accounting and Measurement

The Fair Value Measurements and Disclosures topic of the FASB ASC defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value. We hold fixed and variable rate interest-bearing securities, investments in marketable equity securities and certain other financial instruments, which are carried at fair value. Fair value is determined based upon quoted prices when available or through the use of alternative approaches, such as matrix or model pricing, when market quotes are not readily accessible or available.
The valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our own market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 – Quoted prices for identical instruments in active markets that are accessible at the measurement date.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.
Fair values are determined as follows:
Securities at fair value are priced using a combination of market activity, industry recognized information sources, yield curves, discounted cash flow models and other factors. These fair value calculations are considered a Level 2 input method under the provisions of the Fair Value Measurements and Disclosures topic of the FASB ASC for all securities other than U.S. Treasury Notes and equity securities, which are considered a Level 1 input method.
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Interest rate contracts and the interest rate collar are valued in models, which use as their basis, readily observable market parameters and are classified within Level 2 of the valuation hierarchy.
The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis at September 30, 2019 and December 31, 2018 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:

|  | Fair Value |  | Fair Value Measurements at Reporting Date Using
|  | Level 1 |  | Level 2 |  | Level 3
September 30, 2019 |  | (in thousands)
Assets |  |  |  |  |  |  |  |
Debt securities available for sale: |  |  |  |  |  |  |  |
U.S. government agency and government-sponsored enterprise mortgage-back securities and collateralized mortgage obligations (1) |  | $ | 2,482,835 |  |  | $ | — |  |  | $ | 2,482,835 |  |  | $ | — |
Other asset-backed securities (1) |  | 171,578 |  |  | — |  |  | 171,578 |  |  | — |
State and municipal debt securities |  | 497,314 |  |  | — |  |  | 497,314 |  |  | — |
U.S. government agency and government-sponsored enterprise securities |  | 215,595 |  |  | — |  |  | 215,595 |  |  | — |
U.S. government securities |  | 250 |  |  | 250 |  |  | — |  |  | — |
Total debt securities available for sale |  | $ | 3,367,572 |  |  | $ | 250 |  |  | $ | 3,367,322 |  |  | $ | — |
Other assets: |  |  |  |  |  |  |  |
Interest rate contracts |  | $ | 25,045 |  |  | $ | — |  |  | $ | 25,045 |  |  | $ | — |
Interest rate collar |  | $ | 19,703 |  |  | $ | — |  |  | $ | 19,703 |  |  | $ | — |
Liabilities |  |  |  |  |  |  |  |
Other liabilities: |  |  |  |  |  |  |  |
Interest rate contracts |  | $ | 25,046 |  |  | $ | — |  |  | $ | 25,046 |  |  | $ | — |

|  | Fair Value |  | Fair Value Measurements at Reporting Date Using
|  | Level 1 |  | Level 2 |  | Level 3
December 31, 2018 |  | (in thousands)
Assets |  |  |  |  |  |  |  |
Debt securities available for sale: |  |  |  |  |  |  |  |
U.S. government agency and government-sponsored enterprise mortgage-back securities and collateralized mortgage obligations (1) |  | $ | 2,013,355 |  |  | $ | — |  |  | $ | 2,013,355 |  |  | $ | — |
Other asset-backed securities (1) |  | 174,935 |  |  | — |  |  | 174,935 |  |  | — |
State and municipal debt securities |  | 574,323 |  |  | — |  |  | 574,323 |  |  | — |
U.S. government agency and government-sponsored enterprise securities |  | 404,587 |  |  | — |  |  | 404,587 |  |  | — |
U.S. government securities |  | 248 |  |  | 248 |  |  | — |  |  | — |
Total debt securities available for sale |  | $ | 3,167,448 |  |  | $ | 248 |  |  | $ | 3,167,200 |  |  | $ | — |
Other assets: |  |  |  |  |  |  |  |
Interest rate contracts |  | $ | 7,033 |  |  | $ | — |  |  | $ | 7,033 |  |  | $ | — |
Liabilities |  |  |  |  |  |  |  |
Other liabilities: |  |  |  |  |  |  |  |
Interest rate contracts |  | $ | 7,033 |  |  | $ | — |  |  | $ | 7,033 |  |  | $ | — |

__________
(1) Beginning July 2019, other asset-backed securities were presented separately in this table. Prior period amounts that were previously reported in U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations have been reclassified to conform to current period presentation.
There were no transfers between Level 1 and Level 2 of the valuation hierarchy during the nine month periods ended September 30, 2019 and 2018. The Company recognizes transfers between levels of the valuation hierarchy based on the valuation level at the end of the reporting period.
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Nonrecurring Measurements
Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment. The following method was used to estimate the fair value of impaired loans:
Impaired loans—A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, a loan’s observable market price, or the fair market value of the collateral less estimated costs to sell if the loan is a collateral-dependent loan. The impairment evaluations are performed in conjunction with the allowance process on a quarterly basis by officers in the Special Credits group, which reports to the Chief Credit Officer. The REASD, which also reports to the Chief Credit Officer, is responsible for obtaining appraisals from third-parties or performing internal evaluations. If an appraisal is obtained from a third-party, the REASD reviews the appraisal to evaluate the adequacy of the appraisal report, including its scope, methods, accuracy and reasonableness.
OREO—OREO is real property that the Bank has taken ownership of in partial or full satisfaction of a loan or loans. OREO is generally measured based on the property’s fair market value as indicated by an appraisal or a letter of intent to purchase. OREO is initially recorded at the fair value less estimated costs to sell. This amount becomes the property’s new basis. Any fair value adjustments based on the property’s fair value less estimated costs to sell at the date of acquisition are charged to the allowance, or in the event of a write-up without previous losses charged to the allowance, a credit to earnings is recorded. Management periodically reviews OREO in an effort to ensure the property is recorded at its fair value, net of estimated costs to sell. Any fair value adjustments subsequent to acquisition are charged or credited to earnings. The initial and subsequent evaluations are performed by officers in the Special Credits group, which reports to the Chief Credit Officer. The REASD obtains appraisals from third-parties for OREO and performs internal evaluations. If an appraisal is obtained from a third-party, the REASD reviews the appraisal to evaluate the adequacy of the appraisal report, including its scope, methods, accuracy and reasonableness.
The following tables set forth information related to the Company’s assets that were measured using fair value estimates on a nonrecurring basis during the current and prior year quarterly periods:

|  | Fair value at September 30, 2019 |  | Fair Value Measurements at Reporting Date Using |  | Losses During the Three Months Ended September 30, 2 019 |  | Losses During the Nine Months Ended September 30, 20 19
|  | Level 1 |  | Level 2 |  | Level 3 |
|  | (in thousands)
Impaired loans |  | $ | 8,990 |  |  | $ | — |  |  | $ | — |  |  | $ | 8,990 |  |  | $ | 1,722 |  |  | $ | 3,299 |
|  | $ | 8,990 |  |  | $ | — |  |  | $ | — |  |  | $ | 8,990 |  |  | $ | 1,722 |  |  | $ | 3,299 |

|  | Fair value at September 30, 2018 |  | Fair Value Measurements at Reporting Date Using |  | Losses During the Three Months Ended September 30, 2 018 |  | Losses During the Nine Months Ended September 30, 2018
|  | Level 1 |  | Level 2 |  | Level 3 |
|  | (in thousands)
Impaired loans |  | $ | 14,616 |  |  | $ | — |  |  | $ | — |  |  | $ | 14,616 |  |  | $ | 1,208 |  |  | $ | 1,208 |
OREO |  | 1,240 |  |  | — |  |  | — |  |  | 1,240 |  |  | 445 |  |  | 445 |
|  | $ | 15,856 |  |  | $ | — |  |  | $ | — |  |  | $ | 15,856 |  |  | $ | 1,653 |  |  | $ | 1,653 |

The losses on impaired loans disclosed above represent the amount of the specific reserve and/or charge-offs during the period applicable to loans held at period end. The amount of the specific reserve is included in the ALLL. The losses on OREO disclosed above represent the write-downs taken at foreclosure that were charged to the ALLL, as well as subsequent changes in valuation allowances from updated appraisals that were recorded to earnings.
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Quantitative information about Level 3 fair value measurements
The range and weighted average of the significant unobservable inputs used to fair value our Level 3 nonrecurring assets, along with the valuation techniques used, are shown in the following table:

|  | Fair value at September 30, 2019 |  | Valuation Technique |  | Unobservable Input |  | Range (Weighted Average) (1)
|  | (dollars in thousands)
Impaired loans - collateral-dependent (2) |  | $ | 8,990 |  |  | Fair Market Value of Collateral |  | Adjustment to Stated Value |  | 0.00% - 100.00% (42.09%)

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

|  | Fair value at September 30, 2018 |  | Valuation Technique |  | Unobservable Input |  | Range (Weighted Average) (1)
|  | (dollars in thousands)
Impaired loans - collateral-dependent (3) |  | $ | 14,616 |  |  | Fair Market Value of Collateral |  | Adjustment to Stated Value |  | 0.00% - 54.51% (6.66%)
OREO |  | $ | 1,240 |  |  | Fair Market Value of Collateral |  | Adjustment to Appraisal Value |  | N/A (2)

__________
(1) Discount applied to appraisal value or stated value (in the case of accounts receivable, fixed assets and inventory).
(2) Quantitative disclosures are not provided for OREO because there were no adjustments made to the appraisal values.
(3) Collateral consists of accounts receivable, fixed assets, inventory, cash, real estate, and state guarantee.
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The following tables summarize carrying amounts and estimated fair values of selected financial instruments by level within the fair value hierarchy at September 30, 2019 and December 31, 2018:

|  | September 30, 2019
|  | Carrying Amount |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
|  | (in thousands)
Assets |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 278,461 |  |  | $ | 278,461 |  |  | $ | 278,461 |  |  | $ | — |  |  | $ | — |
Interest-earning deposits with banks |  | 20,144 |  |  | 20,144 |  |  | 20,144 |  |  | — |  |  | — |
Debt securities available for sale |  | 3,367,572 |  |  | 3,367,572 |  |  | 250 |  |  | 3,367,322 |  |  | — |
FHLB stock |  | 29,680 |  |  | 29,680 |  |  | — |  |  | 29,680 |  |  | — |
Loans held for sale |  | 15,036 |  |  | 15,036 |  |  | — |  |  | 15,036 |  |  | — |
Loans |  | 8,673,695 |  |  | 8,895,564 |  |  | — |  |  | — |  |  | 8,895,564 |
Interest rate contracts |  | 25,045 |  |  | 24,045 |  |  | — |  |  | 24,045 |  |  | — |
Interest rate collar |  | 19,703 |  |  | 19,703 |  |  | — |  |  | 19,703 |  |  | — |
Liabilities |  |  |  |  |  |  |  |  |  |
Time deposits |  | $ | 366,773 |  |  | $ | 361,195 |  |  | $ | — |  |  | $ | 361,195 |  |  | $ | — |
FHLB advances |  | 492,482 |  |  | 493,736 |  |  | — |  |  | 493,736 |  |  | — |
Repurchase agreements |  | 24,489 |  |  | 24,489 |  |  | — |  |  | 24,489 |  |  | — |
Subordinated debentures |  | 35,323 |  |  | 35,255 |  |  | — |  |  | 35,255 |  |  | — |
Interest rate contracts |  | 25,046 |  |  | 25,046 |  |  | — |  |  | 25,046 |  |  | — |

|  | December 31, 2018
|  | Carrying Amount |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
|  | (in thousands)
Assets |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 260,180 |  |  | $ | 260,180 |  |  | $ | 260,180 |  |  | $ | — |  |  | $ | — |
Interest-earning deposits with banks |  | 17,407 |  |  | 17,407 |  |  | 17,407 |  |  | — |  |  | — |
Debt securities available for sale |  | 3,167,448 |  |  | 3,167,448 |  |  | 248 |  |  | 3,167,200 |  |  | — |
FHLB stock |  | 25,960 |  |  | 25,960 |  |  | — |  |  | 25,960 |  |  | — |
Loans held for sale |  | 3,849 |  |  | 3,849 |  |  | — |  |  | 3,849 |  |  | — |
Loans |  | 8,308,142 |  |  | 8,316,946 |  |  | — |  |  | — |  |  | 8,316,946 |
Interest rate contracts |  | 7,033 |  |  | 7,033 |  |  | — |  |  | 7,033 |  |  | — |
Liabilities |  |  |  |  |  |  |  |  |  |
Time deposits |  | $ | 414,443 |  |  | $ | 407,659 |  |  | $ | — |  |  | $ | 407,659 |  |  | $ | — |
FHLB advances |  | 399,523 |  |  | 400,085 |  |  | — |  |  | 400,085 |  |  | — |
Repurchase agreements |  | 61,094 |  |  | 61,094 |  |  | — |  |  | 61,094 |  |  | — |
Subordinated debentures |  | 35,462 |  |  | 34,897 |  |  | — |  |  | 34,897 |  |  | — |
Interest rate contracts |  | 7,033 |  |  | 7,033 |  |  | — |  |  | 7,033 |  |  | — |

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15. | Earnings Per Common Share

The Company applies the two-class method of computing basic and diluted EPS. Under the two-class method, EPS is determined for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. The Company issues restricted shares under share-based compensation plans which qualify as participating securities.
The following table sets forth the computation of basic and diluted EPS for the three and nine months ended September 30, 2019 and 2018:

|  | Three Months Ended |  | Nine Months Ended
|  | September 30, |  | September 30,
|  | 2019 |  | 2018 |  | 2019 |  | 2018
|  | (in thousands except per share amounts)
Basic EPS: |  |  |  |  |  |  |  |
Net income |  | $ | 50,727 |  |  | $ | 46,415 |  |  | $ | 148,322 |  |  | $ | 128,134 |
Less: Earnings allocated to participating securities: |  |  |  |  |  |  |  |
Nonvested restricted shares |  | 358 |  |  | 504 |  |  | 1,204 |  |  | 1,413 |
Earnings allocated to common shareholders |  | $ | 50,369 |  |  | $ | 45,911 |  |  | $ | 147,118 |  |  | $ | 126,721 |
Weighted average common shares outstanding |  | 71,803 |  |  | 72,427 |  |  | 72,256 |  |  | 72,370 |
Basic earnings per common share |  | $ | 0.70 |  |  | $ | 0.63 |  |  | $ | 2.04 |  |  | $ | 1.75 |
Diluted EPS: |  |  |  |  |  |  |  |
Earnings allocated to common shareholders |  | $ | 50,369 |  |  | $ | 45,911 |  |  | $ | 147,118 |  |  | $ | 126,721 |
Weighted average common shares outstanding |  | 71,803 |  |  | 72,427 |  |  | 72,256 |  |  | 72,370 |
Dilutive effect of equity awards |  | — |  |  | 5 |  |  | 1 |  |  | 4 |
Weighted average diluted common shares outstanding |  | 71,803 |  |  | 72,432 |  |  | 72,257 |  |  | 72,374 |
Diluted earnings per common share |  | $ | 0.70 |  |  | $ | 0.63 |  |  | $ | 2.04 |  |  | $ | 1.75 |
Potentially dilutive share options that were not included in the computation of diluted EPS because to do so would be anti-dilutive |  | — |  |  | — |  |  | — |  |  | 5 |

16. | Revenue from Contracts with Customers

Revenue in the scope of Topic 606, Revenue from Contracts with Customers is measured based on the consideration specified in the contract with a customer and excludes amounts collected on behalf of third parties. The vast majority of the Company’s revenue is specifically outside the scope of Topic 606. For in-scope revenue, the following is a description of principal activities, separated by the timing of revenue recognition from which the Company generates its revenue from contracts with customers.

a. | Revenue earned at a point in time - Examples of revenue earned at a point in time are ATM transaction fees, wire transfer fees, overdraft fees, interchange fees and foreign exchange transaction fees. Revenue is primarily based on the number and type of transactions and is generally derived from transactional information accumulated by our systems and is recognized immediately as the transactions occur or upon providing the service to complete the customer’s transaction. The Company is the principal in each of these contracts, with the exception of interchange fees, in which case we are acting as the agent and record revenue net of expenses paid to the principal.

b. | Revenue earned over time - The Company earns revenue from contracts with customers in a variety of ways where the revenue is earned over a period of time - generally monthly. Examples of this type of revenue are deposit account maintenance fees, investment advisory fees, merchant revenue and safe deposit box fees. Revenue is generally derived from transactional information accumulated by our systems or those of third-parties and is recognized as the related transactions occur or services are rendered to the customer.

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

|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2019 |  | 2018 |  | 2019 |  | 2018
|  | (in thousands)
Noninterest income: |  |  |  |  |  |  |  |
Revenue from contracts with customers: |  |  |  |  |  |  |  |
Deposit account and treasury management fees |  | $ | 9,015 |  |  | $ | 9,266 |  |  | $ | 27,030 |  |  | $ | 26,689 |
Card revenue |  | 4,006 |  |  | 3,714 |  |  | 11,431 |  |  | 16,143 |
Financial services and trust revenue |  | 3,226 |  |  | 2,975 |  |  | 9,608 |  |  | 8,924 |
Total revenue from contracts with customers |  | 16,247 |  |  | 15,955 |  |  | 48,069 |  |  | 51,756 |
Other sources of noninterest income |  | 11,783 |  |  | 5,064 |  |  | 27,305 |  |  | 16,098 |
Total noninterest income |  | $ | 28,030 |  |  | $ | 21,019 |  |  | $ | 75,374 |  |  | $ | 67,854 |

Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion should be read in conjunction with the unaudited Consolidated Financial Statements of Columbia Banking System, Inc. (referred to in this report as “we”, “our”, “Columbia” and “the Company”) and notes thereto presented elsewhere in this report and with the December 31, 2018 audited Consolidated Financial Statements and its accompanying notes included in our Annual Report on Form 10-K. In the following discussion, unless otherwise noted, references to increases or decreases in average balances in items of income and expense for a particular period and balances at a particular date refer to the comparison with corresponding amounts for the period or date one year earlier.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions that are not historical facts, and statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. Forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. In addition to the factors set forth in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and the factors set forth in the section titled “Risk Factors” in the Company’s Form 10-K, the following factors, among others, could cause actual results to differ materially from the anticipated results expressed or implied by forward-looking statements:

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

• | the markets where we operate and make loans could face challenges;

• | the risks presented by the economy, which could adversely affect credit quality, collateral values, including real estate collateral, investment values, liquidity and loan originations and loan portfolio delinquency rates;

• | the efficiencies and enhanced financial and operating performance we expect to realize from investments in personnel, acquisitions, and infrastructure may not be realized;

• | interest rate changes could significantly reduce net interest income and negatively affect asset yields and funding sources;

• | possible cessation or market replacement of LIBOR and the related effect on our LIBOR-based financial products and contracts, including, but not limited to, hedging products, debt obligations, investments, and loans;

• | projected business increases following strategic expansion could be lower than expected;

• | changes in the scope and cost of FDIC insurance and other coverages;

• | the impact of acquired loans on our earnings;

• | changes in accounting policies or procedures as may be required by the FASB or other regulatory agencies could materially affect our financial statements and how we report those results, and expectations and preliminary analysis relating to how such changes will affect our financial results could prove incorrect;

• | changes in laws and regulations affecting our businesses, including changes in the enforcement and interpretation of such laws and regulations by applicable governmental and regulatory agencies;

• | competition among financial institutions and nontraditional providers of financial services could increase significantly;

• | continued consolidation in the Northwest financial services industry resulting in the creation of larger financial institutions that may have greater resources could change the competitive landscape;

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

• | our ability to identify and address cyber-security risks, including security breaches, “denial of service attacks,” “hacking” and identity theft;

• | any material failure or interruption of our information and communications systems;

• | inability to keep pace with technological changes;

• | our ability to effectively manage credit risk, interest rate risk, market risk, operational risk, legal risk, liquidity risk and regulatory and compliance risk;

• | failure to maintain effective internal controls over financial reporting or disclosure controls and procedures;

• | the effect of geopolitical instability, including wars, conflicts and terrorist attacks;

• | our profitability measures could be adversely affected if we are unable to effectively manage our capital;

• | natural disasters, including earthquakes, tsunamis, flooding, fires and other unexpected events; and

• | the effects of any damage to our reputation resulting from developments related to any of the items identified above.

You should take into account that forward-looking statements speak only as of the date of this report. Given the described uncertainties and risks, we cannot guarantee our future performance or results of operations and you should not place undue reliance on forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required under federal securities laws.
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CRITICAL ACCOUNTING POLICIES
Management has identified the accounting policies related to the ALLL, business combinations and the valuation and recoverability of goodwill as critical to an understanding of our financial statements. These policies and related estimates are discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings “Allowance for Loan and Lease Losses,” “Business Combinations” and “Valuation and Recoverability of Goodwill” in our 2018 Annual Report on Form 10-K. There have not been any material changes in our critical accounting policies as compared to those disclosed in our 2018 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Our results of operations are dependent to a large degree on our net interest income. We also generate noninterest income from our broad range of products and services including treasury management, wealth management and debit and credit cards. Our operating expenses consist primarily of compensation and employee benefits, occupancy, data processing and legal and professional fees. Like most financial institutions, our interest income and cost of funds are affected significantly by general economic conditions, particularly changes in market interest rates, and by government policies and actions of regulatory authorities.
Earnings Summary
Comparison of current quarter to prior year period
The Company reported net income for the third quarter of $50.7 million or $0.70 per diluted common share, compared to $46.4 million or $0.63 per diluted common share for the third quarter of 2018. Net interest income for the three months ended September 30, 2019 was $122.5 million, a decrease of $346 thousand from the prior year period. The decrease was a result of higher interest expense from higher average balances of FHLB advances and interest-bearing public funds, excluding certificates of deposit, partially offset by the increase in interest income from higher average balances of interest-earning assets.
The provision for loan and lease losses for the third quarter of 2019 was $299 thousand compared to $3.2 million during the third quarter of 2018. The lower provision expense recorded in the third quarter of 2019 compared to one year ago was primarily due to the increase in net recoveries and an improvement in the credit quality of our loan portfolio.
Noninterest income for the current quarter was $28.0 million, an increase of $7.0 million from the prior year period. The increase was primarily due to a $5.9 million gain from the sale-leaseback of owned real estate during the third quarter of 2019.
Total noninterest expense for the quarter ended September 30, 2019 was $87.1 million, an increase of $4.2 million from the prior year period. After removing acquisition-related expenses of $1.1 million from the third quarter of 2018, year over year noninterest expense increased $5.3 million, or 7%. This increase was primarily driven by higher compensation and employee benefits expense which was partially offset by a decrease in regulatory premium expenses. The Bank’s FDIC deposit insurance expense was reduced due to the utilization of a portion of our FDIC Small Bank Assessment Credit.
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Comparison of current year-to-date to prior year period
The Company reported net income for the nine months ended September 30, 2019 of $148.3 million or $2.04 per diluted common share, compared to $128.1 million, or $1.75 per diluted common share for the same period in 2018. Net interest income for the nine months ended September 30, 2019 was $368.6 million, an increase of $13.6 million from the prior year period. The increase was a result of $4.9 million of loan interest recoveries received in 2019 and higher rates and average balances on interest-earning assets, partially offset by higher rates on interest-bearing liabilities and an increase in average FHLB advances.
The provision for loan and lease losses for the nine months ended September 30, 2019 was $1.9 million compared to a provision of $13.0 million for the first nine months of 2018. The decrease in the provision for the first nine months of 2019 compared to the same period in 2018 was due to a reduction in the net charge-offs for the period and an improvement in the credit quality of our loan portfolio.
Noninterest income for the nine months ended September 30, 2019 was $75.4 million, an increase of $7.5 million from the prior year period. The increase was primarily due to the previously noted $5.9 million gain from a sale-leaseback transaction, BOLI benefits, and a net gain on the sale of securities during the nine months ended September 30, 2019. These increases were partially offset by lower card revenue as a result of the interchange fee cap, which became effective on July 1, 2018.
For the nine months ended September 30, 2019, noninterest expense was $258.5 million, an increase of $5.0 million from $253.5 million a year earlier. After removing the acquisition-related expenses of $8.2 million from the first nine months of 2018, year over year noninterest expense increased $13.2 million, or 5%. The increase from the prior year period was driven by higher compensation and employee benefits expense and higher legal and professional fees, partially offset by decreases in OREO expenses.
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Net Interest Income
The following table sets forth the average balances of all major categories of interest-earning assets and interest-bearing liabilities, the total dollar amounts of interest income on interest-earning assets and interest expense on interest-bearing liabilities, the average yield earned on interest-earning assets and average cost of interest-bearing liabilities by category and, in total, net interest income and net interest margin:

|  | Three Months Ended September 30, |  | Three Months Ended September 30,
|  | 2019 |  | 2018
|  | Average Balances |  | Interest Earned / Paid |  | Average Rate (3) |  | Average Balances |  | Interest Earned / Paid |  | Average Rate (3)
|  | (dollars in thousands)
ASSETS |  |  |  |  |  |  |  |  |  |  |  |
Loans, net (1)(2) |  | $ | 8,694,592 |  |  | $ | 114,099 |  |  | 5.21 | % |  | $ | 8,456,632 |  |  | $ | 110,925 |  |  | 5.20 | %
Taxable securities |  | 2,654,490 |  |  | 16,457 |  |  | 2.46 | % |  | 2,336,405 |  |  | 14,654 |  |  | 2.49 | %
Tax exempt securities (2) |  | 447,723 |  |  | 3,235 |  |  | 2.87 | % |  | 513,090 |  |  | 3,885 |  |  | 3.00 | %
Interest-earning deposits with banks |  | 144,773 |  |  | 864 |  |  | 2.37 | % |  | 20,502 |  |  | 104 |  |  | 2.01 | %
Total interest-earning assets |  | 11,941,578 |  |  | 134,655 |  |  | 4.47 | % |  | 11,326,629 |  |  | 129,568 |  |  | 4.54 | %
Other earning assets |  | 230,140 |  |  |  |  |  |  | 228,332 |  |  |  |  |
Noninterest-earning assets |  | 1,288,056 |  |  |  |  |  |  | 1,250,170 |  |  |  |  |
Total assets |  | $ | 13,459,774 |  |  |  |  |  |  | $ | 12,805,131 |  |  |  |  |
LIABILITIES AND SHAREHOLDERS’ EQUITY
Money market accounts (4) |  | 2,589,390 |  |  | 2,840 |  |  | 0.44 | % |  | 2,727,928 |  |  | 1,671 |  |  | 0.24 | %
Interest-bearing demand (4) |  | 1,049,833 |  |  | 438 |  |  | 0.17 | % |  | 1,089,324 |  |  | 437 |  |  | 0.16 | %
Savings accounts (4) |  | 893,395 |  |  | 49 |  |  | 0.02 | % |  | 888,997 |  |  | 31 |  |  | 0.01 | %
Interest-bearing public funds, other than certificates of deposit (4) |  | 602,674 |  |  | 2,879 |  |  | 1.90 | % |  | 229,855 |  |  | 510 |  |  | 0.88 | %
Certificates of deposit |  | 381,879 |  |  | 657 |  |  | 0.68 | % |  | 440,196 |  |  | 544 |  |  | 0.49 | %
Total interest-bearing deposits |  | 5,517,171 |  |  | 6,863 |  |  | 0.49 | % |  | 5,376,300 |  |  | 3,193 |  |  | 0.24 | %
FHLB advances |  | 400,956 |  |  | 2,569 |  |  | 2.54 | % |  | 167,531 |  |  | 966 |  |  | 2.29 | %
Subordinated debentures |  | 35,346 |  |  | 468 |  |  | 5.25 | % |  | 35,530 |  |  | 468 |  |  | 5.23 | %
Other borrowings and interest-bearing liabilities |  | 35,569 |  |  | 183 |  |  | 2.04 | % |  | 41,636 |  |  | 152 |  |  | 1.45 | %
Total interest-bearing liabilities |  | 5,989,042 |  |  | 10,083 |  |  | 0.67 | % |  | 5,620,997 |  |  | 4,779 |  |  | 0.34 | %
Noninterest-bearing deposits |  | 5,151,596 |  |  |  |  |  |  | 5,102,500 |  |  |  |  |
Other noninterest-bearing liabilities |  | 166,220 |  |  |  |  |  |  | 98,317 |  |  |  |  |
Shareholders’ equity |  | 2,152,916 |  |  |  |  |  |  | 1,983,317 |  |  |  |  |
Total liabilities & shareholders’ equity |  | $ | 13,459,774 |  |  |  |  |  |  | $ | 12,805,131 |  |  |  |  |
Net interest income (tax equivalent) |  | $ | 124,572 |  |  |  |  |  |  | $ | 124,789 |  |  |
Net interest margin (tax equivalent) |  | 4.14 | % |  |  |  |  |  | 4.37 | %

__________

(1) | Nonaccrual loans have been included in the tables as loans carrying a zero yield. Amortized net deferred loan fees and net unearned discounts on acquired loans were included in the interest income calculations. The amortization of net deferred loan fees was $2.0 million and $2.5 million for the three months ended September 30, 2019 and 2018, respectively. The incremental accretion income on acquired loans was $2.1 million and $3.2 million for the three months ended September 30, 2019 and 2018, respectively.

(2) | Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $1.4 million and $1.2 million for the three months ended September 30, 2019 and 2018, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $679 thousand and $816 thousand for the three months ended September 30, 2019 and 2018, respectively.

(3) | Beginning January 2019, average rates were calculated using the actual number of days on an actual/actual basis. This change was done to provide more meaningful trend information for our NIM regardless of the number of days in the period. Prior periods, which were previously reported on a 30/360 basis, have been restated to conform to the current basis.

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

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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 cost of interest-bearing liabilities by category and, in total, net interest income and net interest margin:

|  | Nine Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2019 |  | 2018
|  | Average Balances |  | Interest Earned / Paid |  | Average Rate (3) |  | Average Balances |  | Interest Earned / Paid |  | Average Rate (3)
|  | (dollars in thousands)
ASSETS |  |  |  |  |  |  |  |  |  |  |  |
Loans, net (1)(2) |  | $ | 8,568,746 |  |  | $ | 341,798 |  |  | 5.33 | % |  | $ | 8,398,596 |  |  | $ | 321,542 |  |  | 5.12 | %
Taxable securities |  | 2,599,595 |  |  | 49,790 |  |  | 2.56 | % |  | 2,202,497 |  |  | 39,285 |  |  | 2.38 | %
Tax exempt securities (2) |  | 470,987 |  |  | 10,426 |  |  | 2.96 | % |  | 518,128 |  |  | 11,640 |  |  | 3.00 | %
Interest-earning deposits with banks |  | 65,374 |  |  | 1,159 |  |  | 2.37 | % |  | 48,922 |  |  | 600 |  |  | 1.64 | %
Total interest-earning assets |  | 11,704,702 |  |  | $ | 403,173 |  |  | 4.61 | % |  | 11,168,143 |  |  | $ | 373,067 |  |  | 4.47 | %
Other earning assets |  | 231,823 |  |  |  |  |  |  | 222,570 |  |  |  |  |
Noninterest-earning assets |  | 1,266,392 |  |  |  |  |  |  | 1,255,965 |  |  |  |  |
Total assets |  | $ | 13,202,917 |  |  |  |  |  |  | $ | 12,646,678 |  |  |  |  |
LIABILITIES AND SHAREHOLDERS’ EQUITY
Money market accounts (4) |  | 2,571,722 |  |  | 8,321 |  |  | 0.43 | % |  | 2,704,471 |  |  | 4,025 |  |  | 0.20 | %
Interest-bearing demand (4) |  | 1,063,678 |  |  | 1,230 |  |  | 0.15 | % |  | 1,097,523 |  |  | 1,161 |  |  | 0.14 | %
Savings accounts (4) |  | 893,738 |  |  | 136 |  |  | 0.02 | % |  | 880,561 |  |  | 102 |  |  | 0.02 | %
Interest-bearing public funds, other than certificates of deposit (4) |  | 380,853 |  |  | 4,831 |  |  | 1.70 | % |  | 247,068 |  |  | 1,367 |  |  | 0.74 | %
Certificates of deposit |  | 397,221 |  |  | 1,819 |  |  | 0.61 | % |  | 461,236 |  |  | 1,619 |  |  | 0.47 | %
Total interest-bearing deposits |  | 5,307,212 |  |  | 16,337 |  |  | 0.41 | % |  | 5,390,859 |  |  | 8,274 |  |  | 0.21 | %
FHLB advances |  | 500,448 |  |  | 9,962 |  |  | 2.66 | % |  | 150,054 |  |  | 2,351 |  |  | 2.09 | %
Subordinated debentures |  | 35,392 |  |  | 1,404 |  |  | 5.30 | % |  | 35,577 |  |  | 1,404 |  |  | 5.28 | %
Other borrowings and interest-bearing liabilities |  | 35,440 |  |  | 552 |  |  | 2.08 | % |  | 43,453 |  |  | 288 |  |  | 0.89 | %
Total interest-bearing liabilities |  | 5,878,492 |  |  | $ | 28,255 |  |  | 0.64 | % |  | 5,619,943 |  |  | $ | 12,317 |  |  | 0.29 | %
Noninterest-bearing deposits |  | 5,069,629 |  |  |  |  |  |  | 4,969,037 |  |  |  |  |
Other noninterest-bearing liabilities |  | 156,432 |  |  |  |  |  |  | 95,192 |  |  |  |  |
Shareholders’ equity |  | 2,098,364 |  |  |  |  |  |  | 1,962,506 |  |  |  |  |
Total liabilities & shareholders’ equity |  | $ | 13,202,917 |  |  |  |  |  |  | $ | 12,646,678 |  |  |  |  |
Net interest income (tax equivalent) |  | $ | 374,918 |  |  |  |  |  |  | $ | 360,750 |  |  |
Net interest margin (tax equivalent) |  | 4.28 | % |  |  |  |  |  | 4.32 | %

__________

(1) | Nonaccrual loans have been included in the table as loans carrying a zero yield. Amortized net deferred loan fees and net unearned discounts on acquired loans were included in the interest income calculations. The amortization of net deferred loan fees was $6.3 million and $6.8 million for the nine months ended September 30, 2019 and 2018, respectively. The incremental accretion income on acquired loans was $6.8 million and $9.9 million for the nine months ended September 30, 2019 and 2018, respectively.

(2) | Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $4.1 million and $3.4 million for the nine months ended September 30, 2019 and 2018, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $2.2 million and $2.4 million for the nine months ended September 30, 2019 and 2018, respectively.

(3) | Beginning January 2019, average rates were calculated using the actual number of days to be on an actual/actual basis. This change was done to provide more meaningful trend information for our NIM regardless of the number of days in the period. Prior periods, which were previously reported on a 30/360 basis, have been restated to conform to the current basis.

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

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The following table sets forth the total dollar amount of change in interest income and interest expense. The changes have been segregated for each major category of interest-earning assets and interest-bearing liabilities into amounts attributable to changes in volume and changes in rates. Changes attributable to the combined effect of volume and interest rates have been allocated proportionately to the changes due to volume and the changes due to interest rates:

|  | Three Months Ended September 30, 2019 Compared to 2018 Increase (Decrease) Due to
|  | Volume |  | Rate |  | Total
|  | (in thousands)
Interest Income |  |  |  |  |  |
Loans, net |  | $ | 3,123 |  |  | $ | 51 |  |  | $ | 3,174 |
Taxable securities |  | 1,974 |  |  | (171 | ) |  | 1,803 |
Tax exempt securities |  | (478 | ) |  | (172 | ) |  | (650 | )
Interest earning deposits with banks |  | 738 |  |  | 22 |  |  | 760 |
Interest income |  | $ | 5,357 |  |  | $ | (270 | ) |  | $ | 5,087 |
Interest Expense |  |  |  |  |  |
Deposits: |  |  |  |  |  |
Money market accounts |  | $ | (89 | ) |  | $ | 1,258 |  |  | $ | 1,169 |
Interest-bearing demand |  | (16 | ) |  | 17 |  |  | 1 |
Savings accounts |  | — |  |  | 18 |  |  | 18 |
Interest-bearing public funds, other than certificates of deposit |  | 1,385 |  |  | 984 |  |  | 2,369 |
Certificates of deposit |  | (79 | ) |  | 192 |  |  | 113 |
Total interest on deposits |  | 1,201 |  |  | 2,469 |  |  | 3,670 |
FHLB advances |  | 1,484 |  |  | 119 |  |  | 1,603 |
Other borrowings and interest-bearing liabilities |  | (16 | ) |  | 47 |  |  | 31 |
Interest expense |  | $ | 2,669 |  |  | $ | 2,635 |  |  | $ | 5,304 |

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The following table sets forth the total dollar amount of change in interest income and interest expense. The changes have been segregated for each major category of interest-earning assets and interest-bearing liabilities into amounts attributable to changes in volume and changes in rates. Changes attributable to the combined effect of volume and interest rates have been allocated proportionately to the changes due to volume and the changes due to interest rates:

|  | Nine Months Ended September 30, 2019 Compared to 2018 Increase (Decrease) Due to
|  | Volume |  | Rate |  | Total
|  | (in thousands)
Interest Income |  |  |  |  |  |
Loans, net |  | $ | 6,604 |  |  | $ | 13,652 |  |  | $ | 20,256 |
Taxable securities |  | 7,454 |  |  | 3,051 |  |  | 10,505 |
Tax exempt securities |  | (1,046 | ) |  | (168 | ) |  | (1,214 | )
Interest earning deposits with banks |  | 240 |  |  | 319 |  |  | 559 |
Interest income |  | $ | 13,252 |  |  | $ | 16,854 |  |  | $ | 30,106 |
Interest Expense |  |  |  |  |  |
Deposits: |  |  |  |  |  |
Money market accounts |  | (207 | ) |  | 4,503 |  |  | 4,296 |
Interest-bearing demand |  | (37 | ) |  | 106 |  |  | 69 |
Savings accounts |  | 2 |  |  | 32 |  |  | 34 |
Interest-bearing public funds, other than certificates of deposit |  | 1,023 |  |  | 2,441 |  |  | 3,464 |
Certificates of deposit |  | (246 | ) |  | 446 |  |  | 200 |
Total interest on deposits |  | 535 |  |  | 7,528 |  |  | 8,063 |
FHLB advances |  | 6,820 |  |  | 791 |  |  | 7,611 |
Other borrowings |  | (42 | ) |  | 306 |  |  | 264 |
Interest expense |  | $ | 7,313 |  |  | $ | 8,625 |  |  | $ | 15,938 |

The following table shows the impact to interest income of incremental accretion income as well as the net interest margin and operating net interest margin for the periods presented:

|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2019 |  | 2018 |  | 2019 |  | 2018
|  | (dollars in thousands)
Incremental accretion income due to: |  |  |  |  |  |  |  |
PCI loans |  | $ | 113 |  |  | $ | 585 |  |  | $ | 980 |  |  | $ | 1,240 |
Other acquired loans |  | 1,959 |  |  | 2,643 |  |  | 5,790 |  |  | 8,703 |
Incremental accretion income |  | $ | 2,072 |  |  | $ | 3,228 |  |  | $ | 6,770 |  |  | $ | 9,943 |
Net interest margin (tax equivalent) (1) |  | 4.14 | % |  | 4.37 | % |  | 4.28 | % |  | 4.32 | %
Operating net interest margin (1)(2) |  | 4.12 | % |  | 4.34 | % |  | 4.28 | % |  | 4.29 | %

__________
(1) Beginning January 2019, net interest margin (tax equivalent) and operating net interest margin (tax equivalent) were calculated using the actual number of days and on an actual/actual basis. This change was done to provide more meaningful trend information for our NIM regardless of the number of days in the period. Prior periods, which were previously reported on a 30/360 basis, have been restated to conform to the current basis.
(2) Operating net interest margin (tax equivalent) is a non-GAAP measurement. See Non-GAAP measures section of Item 2, Management’s Discussion and Analysis.
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Comparison of current quarter to prior year period
Net interest income for the third quarter of 2019 was $122.5 million, down from $122.8 million for the same quarter in 2018. The decrease was a result of higher interest expense from higher average balances of FHLB advances and interest-bearing public funds, excluding certificates of deposit, partially offset by the increase in interest income from higher average balances of interest-earning assets. During the third quarter of 2019, we utilized interest-bearing public funds, excluding certificates of deposit, as an alternative funding source, with a corresponding increase in our investment securities, as we expanded our interest rate risk strategy to partially mitigate the impact of further interest rate cuts. The Company’s net interest margin (tax equivalent) decreased to 4.14% in the third quarter of 2019, from 4.37% for the prior year period. This decrease was driven by higher rates on our deposits and FHLB advances as well as lower accretion income on acquired loans. The Company’s operating net interest margin (tax equivalent) (see footnote 2 in prior table) decreased to 4.12% from 4.34% during the third quarter of 2018. The decrease was due to the items previously noted for the decrease in the net interest margin, except for the lower accretion income, which is not included in the operating net interest margin.
Comparison of current year-to-date to prior year period
Net interest income for the nine months ended September 30, 2019 was $368.6 million, an increase of 4% from $355.0 million for the prior year period. The increase in net interest income was due to $4.9 million of loan interest recoveries recorded in the current year as well as higher rates and average balances on loans while taxable securities increased due to higher average balances. These increases were partially offset by higher rates on deposits and higher average balances of FHLB advances. The Company’s net interest margin (tax equivalent) decreased to 4.28% for the first nine months of 2019, from 4.32% for the prior year period. The decrease in the Company’s net interest margin (tax equivalent) was a result of a $3.2 million decline in accretion income on acquired loans as well as higher rates on our deposits and borrowings, partially offset by higher rates on the loan portfolio. The Company’s operating net interest margin (tax equivalent) for the nine months ended September 30, 2019 remained relatively stable at 4.28% compared to 4.29% for the nine months ended September 30, 2018.
Provision for Loan and Lease Losses
Comparison of current quarter to prior year period
During the third quarter of 2019, the Company recorded a $299 thousand net provision for loan losses compared to a $3.2 million net provision during the third quarter of 2018. The decrease in the provision for loan losses was due to the increase in net recoveries and an improvement in the credit quality of the loan portfolio. The net provision for loan and lease losses recorded during the current quarter included management’s ongoing assessment of the credit quality of the Company’s loan portfolio. Factors affecting the provision include net charge-offs, credit quality migration, and size and composition of the loan portfolio and changes in the economic environment during the third quarter of 2019. The amount of provision was calculated in accordance with the Company’s methodology for determining the ALLL, discussed in Note 5 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
Comparison of current year-to-date to prior year period
The provision for loan and lease losses for the nine months ended September 30, 2019 was $1.9 million compared to $13.0 million during the same period in 2018. The decrease in the provision for the first nine months of 2019 was primarily due to a reduction in the net charge-offs for the period and the improved credit quality of our loan portfolio. We also recorded a large charge-off in our agricultural loan portfolio during the nine months ended September 30, 2018. The amount of provision was calculated in accordance with the Company’s methodology for determining ALLL, discussed in Note 5 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
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Noninterest Income
The following table presents the significant components of noninterest income and the related dollar and percentage change from period to period:

|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2019 |  | 2018 |  | $ Change |  | % Change |  | 2019 |  | 2018 |  | $ Change |  | % Change
|  | (dollars in thousands)
Deposit account and treasury management fees |  | $ | 9,015 |  |  | $ | 9,266 |  |  | $ | (251 | ) |  | (3 | )% |  | $ | 27,030 |  |  | $ | 26,689 |  |  | $ | 341 |  |  | 1 | %
Card revenue |  | 4,006 |  |  | 3,714 |  |  | 292 |  |  | 8 | % |  | 11,431 |  |  | 16,143 |  |  | (4,712 | ) |  | (29 | )%
Financial services and trust revenue |  | 3,226 |  |  | 2,975 |  |  | 251 |  |  | 8 | % |  | 9,608 |  |  | 8,924 |  |  | 684 |  |  | 8 | %
Loan revenue |  | 3,855 |  |  | 3,282 |  |  | 573 |  |  | 17 | % |  | 9,840 |  |  | 9,522 |  |  | 318 |  |  | 3 | %
Bank owned life insurance |  | 1,528 |  |  | 1,402 |  |  | 126 |  |  | 9 | % |  | 4,644 |  |  | 4,540 |  |  | 104 |  |  | 2 | %
Investment securities gains (losses), net |  | — |  |  | (62 | ) |  | 62 |  |  | (100 | )% |  | 2,132 |  |  | (73 | ) |  | 2,205 |  |  | 100 | %
Other |  | 6,400 |  |  | 442 |  |  | 5,958 |  |  | 100 | % |  | 10,689 |  |  | 2,109 |  |  | 8,580 |  |  | 100 | %
Total noninterest income |  | $ | 28,030 |  |  | $ | 21,019 |  |  | $ | 7,011 |  |  | 33 | % |  | $ | 75,374 |  |  | $ | 67,854 |  |  | $ | 7,520 |  |  | 11 | %

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

|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2019 |  | 2018 |  | $ Change |  | % Change |  | 2019 |  | 2018 |  | $ Change |  | % Change
|  | (dollars in thousands)
Compensation and employee benefits |  | $ | 54,459 |  |  | $ | 49,419 |  |  | $ | 5,040 |  |  | 10 | % |  | $ | 158,559 |  |  | $ | 148,938 |  |  | $ | 9,621 |  |  | 6 | %
Occupancy |  | 8,645 |  |  | 8,321 |  |  | 324 |  |  | 4 | % |  | 26,166 |  |  | 27,718 |  |  | (1,552 | ) |  | (6 | )%
Data processing |  | 5,102 |  |  | 4,466 |  |  | 636 |  |  | 14 | % |  | 14,372 |  |  | 14,957 |  |  | (585 | ) |  | (4 | )%
Legal and professional services |  | 5,683 |  |  | 4,695 |  |  | 988 |  |  | 21 | % |  | 16,810 |  |  | 12,103 |  |  | 4,707 |  |  | 39 | %
Amortization of intangibles |  | 2,632 |  |  | 3,070 |  |  | (438 | ) |  | (14 | )% |  | 8,029 |  |  | 9,346 |  |  | (1,317 | ) |  | (14 | )%
B&O taxes (1) |  | 1,325 |  |  | 1,478 |  |  | (153 | ) |  | (10 | )% |  | 4,612 |  |  | 4,254 |  |  | 358 |  |  | 8 | %
Advertising and promotion |  | 1,752 |  |  | 1,472 |  |  | 280 |  |  | 19 | % |  | 3,596 |  |  | 4,523 |  |  | (927 | ) |  | (20 | )%
Regulatory premiums |  | (38 | ) |  | 904 |  |  | (942 | ) |  | (104 | )% |  | 1,902 |  |  | 2,778 |  |  | (876 | ) |  | (32 | )%
Net cost (benefit) of operation of OREO |  | (90 | ) |  | 485 |  |  | (575 | ) |  | (119 | )% |  | (682 | ) |  | 1,244 |  |  | (1,926 | ) |  | (155 | )%
Other (1) |  | 7,606 |  |  | 8,531 |  |  | (925 | ) |  | (11 | )% |  | 25,140 |  |  | 27,610 |  |  | (2,470 | ) |  | (9 | )%
Total noninterest expense |  | $ | 87,076 |  |  | $ | 82,841 |  |  | $ | 4,235 |  |  | 5 | % |  | $ | 258,504 |  |  | $ | 253,471 |  |  | $ | 5,033 |  |  | 2 | %

__________
(1) Beginning the first quarter of 2019, B&O taxes are reported separately from other taxes, licenses and fees, which are now reported under “other noninterest expense.” Prior periods have been reclassified to conform to current period presentation.
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The following table shows the impact of the acquisition-related expenses for the periods indicated to the various components of noninterest expense:

|  | Three Months Ended |  | Nine Months Ended
|  | September 30, |  | September 30,
|  | 2019 |  | 2018 |  | 2019 |  | 2018
|  | (in thousands)
Acquisition-related expenses: |  |  |  |  |  |  |  |
Compensation and employee benefits |  | $ | — |  |  | $ | 923 |  |  | $ | — |  |  | $ | 3,410 |
Occupancy |  | — |  |  | 29 |  |  | — |  |  | 1,619 |
Data processing |  | — |  |  | 20 |  |  | — |  |  | 941 |
Legal and professional fees |  | — |  |  | 102 |  |  | — |  |  | 893 |
Advertising and promotion |  | — |  |  | — |  |  | — |  |  | 534 |
Other |  | — |  |  | 7 |  |  | — |  |  | 771 |
Total impact of acquisition-related expense to noninterest expense (1) |  | $ | — |  |  | $ | 1,081 |  |  | $ | — |  |  | $ | 8,168 |

__________
(1) There were no acquisition-related expenses recorded during the three or nine months ended September 30, 2019. All of the acquisition-related expenses in 2018 were related to the 2017 acquisition of Pacific Continental.
Comparison of current quarter to prior year period
Noninterest expense was $87.1 million for the third quarter of 2019, an increase of $4.2 million from $82.8 million for the prior year period. After removing the acquisition-related expenses of $1.1 million from the third quarter of 2018, year over year noninterest expense increased $5.3 million, or 7%. This increase was primarily driven by higher compensation and employee benefits expense, which was partially offset by a decrease in regulatory premium expense. The Bank’s FDIC deposit insurance expense was reduced due to the utilization of $925 thousand of our FDIC Small Bank Assessment Credit. The remaining balance of our credit is $2.2 million but can only be applied towards our future FDIC deposit insurance expense if the fund exceeds its minimum reserve ratio.
Comparison of current year-to-date to prior year period
For the nine months ended September 30, 2019, noninterest expense was $258.5 million, compared to $253.5 million, an increase of $5.0 million from a year earlier. After removing the acquisition-related expenses of $8.2 million from the first nine months of 2018, year over year noninterest expense increased $13.2 million, or 5%. The increase from the prior year period was driven by higher compensation and employee benefits expense and higher legal and professional fees, partially offset by decreases in OREO expenses. Salary expense increased $6.3 million, benefits expense increased $2.6 million and other compensation increased $2.2 million compared to the first nine months of 2018. Professional fees increased $4.3 million due primarily to the digital corporate initiative. These increases in noninterest expense were partially offset by the $682 thousand current year net benefit of OREO resulting from a gain on the sale of OREO, compared to net OREO operating expenses of $1.2 million during the nine months ended September 30, 2019.
Income Taxes
We recorded an income tax provision of $12.4 million for the third quarter of 2019, compared to a provision of $11.4 million for the same period in 2018, with effective tax rates of 20% for both the third quarter of 2019 and 2018. For the nine months ended September 30, 2019 and 2018, we recorded income tax provisions of $35.3 million and $28.2 million, respectively, with effective tax rates of 19% for the current year and 18% for the prior year period. Our effective tax rate remains lower than the statutory tax rate due to tax-exempt income from municipal securities, BOLI and certain loan receivables. For additional information, please refer to the Company’s annual report on Form 10-K for the year ended December 31, 2018.
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FINANCIAL CONDITION
Total assets were $13.76 billion at September 30, 2019, an increase of $662.6 million from December 31, 2018. Cash and cash equivalents increased $21.0 million. Loans increased $364.8 million during the current year, which was primarily the result of new loan production and increased seasonal line utilization, partially offset by principal pay downs. Debt securities available for sale were $3.37 billion at September 30, 2019, an increase of $200.1 million from December 31, 2018. Total liabilities were $11.60 billion as of September 30, 2019, an increase of $534.7 million from December 31, 2018. The increase was primarily due to increases in deposits and FHLB advances.
Investment Securities
At September 30, 2019, the Company’s investment portfolio primarily consisted of debt securities available for sale totaling $3.37 billion compared to $3.17 billion at December 31, 2018. The increase in the debt securities portfolio from year-end is due to $649.1 million in purchases and $110.6 million in net unrealized gain offset by $544.9 million in maturities, repayments and sales and $14.7 million in premium amortization. The average duration of our debt securities investment portfolio was approximately 4 years and 4 months at September 30, 2019. This duration takes into account calls, where appropriate, and consensus prepayment speeds.
The investment securities are used by the Company as a component of its balance sheet management strategies. From time-to-time, securities may be sold to reposition the portfolio in response to strategies developed by the Company’s asset liability management committee. In accordance with our investment strategy, management monitors market conditions with a view to realize gains on its available for sale securities portfolio when prudent.
The Company performs a quarterly assessment of the debt securities available for sale in its investment portfolio that have an unrealized loss to determine whether the decline in the fair value of these securities below their amortized cost basis is other-than-temporary. Impairment is considered other-than-temporary when it becomes probable that the Company will be unable to recover the entire amortized cost basis of its investment. The Company’s impairment assessment takes into consideration factors such as the length of time and the extent to which the market value has been less than cost, defaults or deferrals of scheduled interest or principal, external credit ratings and recent downgrades, internal assessment of credit quality, and whether the Company intends to sell the security and whether it is more likely than not it will be required to sell the security prior to recovery of its amortized cost basis. If a decline in fair value is judged to be other-than-temporary, the cost basis of the individual security is written down to fair value which then becomes the new cost basis. The new cost basis is not adjusted for subsequent recoveries in fair value.
When there are credit losses associated with an impaired debt security and the Company does not have the intent to sell the security and it is more likely than not that it will not have to sell the security before recovery of its cost basis, the Company will separate the amount of the impairment into the amount that is credit-related and the amount related to non-credit factors. The credit-related impairment is recognized in earnings and the non-credit-related impairment is recognized in accumulated other comprehensive income.
At September 30, 2019, the market value of debt securities available for sale had a net unrealized gain of $67.4 million compared to a net unrealized loss of $43.2 million at December 31, 2018. The change in valuation was the result of fluctuations in market interest rates during the nine months ended September 30, 2019. At September 30, 2019, the Company had $1.15 billion of debt securities available for sale with gross unrealized losses of $11.6 million; however, we did not consider these investment securities to be other-than-temporarily impaired.
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The following table sets forth our securities portfolio by type for the dates indicated:

|  | September 30, 2019 |  | December 31, 2018
|  | (in thousands)
Debt securities available for sale: |  |  |  |
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations (1) |  | $ | 2,482,835 |  |  | $ | 2,013,355 |
Other asset-backed securities (1) |  | 171,578 |  |  | 174,935 |
State and municipal securities |  | 497,314 |  |  | 574,323 |
U.S. government agency and government-sponsored enterprise securities |  | 215,595 |  |  | 404,587 |
U.S. government securities |  | 250 |  |  | 248 |
Total debt securities available for sale |  | $ | 3,367,572 |  |  | $ | 3,167,448 |

__________
(1) Beginning July 2019, other asset-backed securities were presented separately in this table. Prior period amounts that were previously reported in U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations have been reclassified to conform to current period presentation.
For further information on our investment portfolio, see Note 3 of the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
Credit Risk Management
The extension of credit in the form of loans or other credit substitutes to individuals and businesses is one of our principal commerce activities. Our policies, applicable laws, and regulations require risk analysis as well as ongoing portfolio and credit management. We manage our credit risk through lending limit constraints, credit review, approval policies, and extensive, ongoing internal monitoring. We also manage credit risk through diversification of the loan portfolio by type of loan, type of industry and type of borrower and by limiting the aggregation of debt to a single borrower.
In analyzing our existing portfolio, we review our consumer and residential loan portfolios by their performance as a pool of loans, since no single loan is individually significant or judged by its risk rating, size or potential risk of loss. In contrast, the monitoring process for the commercial business, real estate construction, and commercial real estate portfolios includes periodic reviews of individual loans with risk ratings assigned to each loan and performance judged on a loan-by-loan basis.
We review these loans to assess the ability of our borrowers to service all interest and principal obligations and, as a result, the risk rating may be adjusted accordingly. In the event that full collection of principal and interest is not reasonably assured, the loan is appropriately downgraded and, if warranted, placed on nonaccrual status even though the loan may be current as to principal and interest payments. Additionally, we assess whether an impairment of a loan warrants specific reserves or a write-down of the loan. For additional discussion on our methodology in managing credit risk within our loan portfolio, see the “Allowance for Loan and Lease Losses” section in this Management’s Discussion and Analysis and Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of the Company’s 2018 Annual Report on Form 10-K.
Loan policies, credit quality criteria, portfolio guidelines and other controls are established under the guidance of our Chief Credit Officer and approved, as appropriate, by the Board of Directors. Credit Administration, together with the management loan committee, has the responsibility for administering the credit approval process. As another part of its control process, we use an internal credit review and examination function to provide reasonable assurance that loans and commitments are made and maintained as prescribed by our credit policies. This includes a review of documentation when the loan is initially extended and subsequent examination to ensure continued performance and proper risk assessment.
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Loan Portfolio Analysis
Our wholly owned banking subsidiary Columbia State Bank is a full service commercial bank, which originates a wide variety of loans, and focuses its lending efforts on originating commercial business and commercial real estate loans.
The following table sets forth the Company’s loan portfolio by type of loan for the dates indicated:

|  | September 30, 2019 |  | % of Total |  | December 31, 2018 |  | % of Total
|  | (dollars in thousands)
Commercial business |  | $ | 3,707,314 |  |  | 42.3 | % |  | $ | 3,438,422 |  |  | 41.0 | %
Real estate: |  |  |  |  |  |  |  |
One-to-four family residential |  | 273,079 |  |  | 3.1 | % |  | 238,367 |  |  | 2.8 | %
Commercial and multifamily residential |  | 3,975,647 |  |  | 45.5 | % |  | 3,846,027 |  |  | 45.8 | %
Total real estate |  | 4,248,726 |  |  | 48.6 | % |  | 4,084,394 |  |  | 48.6 | %
Real estate construction: |  |  |  |  |  |  |  |
One-to-four family residential |  | 195,198 |  |  | 2.2 | % |  | 217,790 |  |  | 2.6 | %
Commercial and multifamily residential |  | 261,786 |  |  | 3.0 | % |  | 284,394 |  |  | 3.4 | %
Total real estate construction |  | 456,984 |  |  | 5.2 | % |  | 502,184 |  |  | 6.0 | %
Consumer |  | 297,009 |  |  | 3.4 | % |  | 318,945 |  |  | 3.8 | %
PCI |  | 81,777 |  |  | 0.9 | % |  | 89,760 |  |  | 1.1 | %
Subtotal |  | 8,791,810 |  |  | 100.4 | % |  | 8,433,705 |  |  | 100.5 | %
Less: Net unearned income |  | (35,455 | ) |  | (0.4 | )% |  | (42,194 | ) |  | (0.5 | )%
Loans, net of unearned income (before ALLL) |  | $ | 8,756,355 |  |  | 100.0 | % |  | $ | 8,391,511 |  |  | 100.0 | %
Loans held for sale |  | $ | 15,036 |  |  |  |  | $ | 3,849 |  |  |

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

|  | September 30, 2019 |  | December 31, 2018
Acquisition: |  | (in thousands)
Pacific Continental |  | $ | 14,813 |  |  | $ | 18,526 |
Intermountain |  | 1,794 |  |  | 2,303 |
West Coast |  | 3,008 |  |  | 4,578 |
Other |  | (1,684 | ) |  | 725 |
Total net discount at period end |  | $ | 17,931 |  |  | $ | 26,132 |

Commercial Loans: We are committed to providing competitive commercial lending in our primary market areas. Management expects a continued focus within its commercial lending products and to emphasize, in particular, relationship banking with businesses and business owners.
Real Estate Loans: One-to-four family residential loans are secured by properties located within our primary market areas and, typically, have loan-to-value ratios of 80% or lower at origination. Our underwriting standards for commercial and multifamily residential loans generally require that the loan-to-value ratio for these loans not exceed 75% of appraised value, cost, or discounted cash flow value, as appropriate, and that commercial properties maintain debt coverage ratios (net operating income divided by annual debt servicing) of 1.2 or better. However, underwriting standards can be influenced by competition and other factors. We endeavor to maintain the highest practical underwriting standards while balancing the need to remain competitive in our lending practices.
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Real Estate Construction Loans: We originate a variety of real estate construction loans. Underwriting guidelines for these loans vary by loan type but include loan-to-value limits, term limits and loan advance limits, as applicable. Our underwriting guidelines for commercial and multifamily residential real estate construction loans generally require that the loan-to-value ratio not exceed 75% and stabilized debt coverage ratios (net operating income divided by annual debt servicing) of 1.2 or better. As noted above, underwriting standards can be influenced by competition and other factors. However, we endeavor to maintain the highest practical underwriting standards while balancing the need to remain competitive in our lending practices.
Consumer Loans: Consumer loans include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans and miscellaneous personal loans.
Foreign Loans: The Company has no material foreign activities. Substantially all of the Company’s loans and unfunded commitments are geographically concentrated in its service areas within the states of Washington, Oregon and Idaho.
PCI Loans: PCI loans are comprised of loans and loan commitments acquired in connection with the 2011 FDIC-assisted acquisitions of First Heritage Bank and Summit Bank, as well as the 2010 FDIC-assisted acquisitions of Columbia River Bank and American Marine Bank. PCI loans are generally accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”).
For additional information on our loan portfolio, including amounts pledged as collateral on borrowings, see Note 4 to the Consolidated Financial Statements in “Item 1. Financial Statements (unaudited)” of this report.
Nonperforming Assets
Nonperforming assets consist of: (i) nonaccrual loans, which generally are loans placed on a nonaccrual basis when the loan becomes past due 90 days or when there are otherwise serious doubts about the collectability of principal or interest within the existing terms of the loan, (ii) OREO and (iii) OPPO, if applicable.
The following table sets forth, at the dates indicated, information with respect to our nonaccrual loans and total nonperforming assets:

|  | September 30, 2019 |  | December 31, 2018
|  | (dollars in thousands)
Nonperforming assets |  |  |  |
Nonaccrual loans: |  |  |  |
Commercial business |  | $ | 24,408 |  |  | $ | 35,513 |
Real estate: |  |  |  |
One-to-four family residential |  | 574 |  |  | 1,158 |
Commercial and multifamily residential |  | 10,083 |  |  | 14,904 |
Total real estate |  | 10,657 |  |  | 16,062 |
Real estate construction: |  |  |  |
One-to-four family residential |  | — |  |  | 318 |
Consumer |  | 1,956 |  |  | 2,949 |
Total nonaccrual loans |  | 37,021 |  |  | 54,842 |
OREO and OPPO |  | 625 |  |  | 6,049 |
Total nonperforming assets |  | $ | 37,646 |  |  | $ | 60,891 |
Loans, net of unearned income |  | $ | 8,756,355 |  |  | $ | 8,391,511 |
Total assets |  | $ | 13,757,760 |  |  | $ | 13,095,145 |
Nonperforming loans to period end loans |  | 0.42 | % |  | 0.65 | %
Nonperforming assets to period end assets |  | 0.27 | % |  | 0.46 | %

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

|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2019 |  | 2018 |  | 2019 |  | 2018
|  | (dollars in thousands)
Beginning balance, loans excluding PCI loans |  | $ | 77,248 |  |  | $ | 75,368 |  |  | $ | 79,758 |  |  | $ | 68,739 |
Beginning balance, PCI loans |  | 3,269 |  |  | 4,782 |  |  | 3,611 |  |  | 6,907 |
Beginning balance |  | 80,517 |  |  | 80,150 |  |  | 83,369 |  |  | 75,646 |
Charge-offs: |  |  |  |  |  |  |  |
Commercial business |  | (2,365 | ) |  | (606 | ) |  | (7,732 | ) |  | (8,858 | )
One-to-four family residential |  | — |  |  | — |  |  | (2 | ) |  | — |
Commercial and multifamily residential |  | — |  |  | — |  |  | — |  |  | (223 | )
One-to-four family residential construction |  | — |  |  | — |  |  | (170 | ) |  | — |
Consumer |  | (285 | ) |  | (277 | ) |  | (1,117 | ) |  | (773 | )
PCI loans |  | (722 | ) |  | (1,208 | ) |  | (2,626 | ) |  | (3,786 | )
Total charge-offs |  | (3,372 | ) |  | (2,091 | ) |  | (11,647 | ) |  | (13,640 | )
Recoveries: |  |  |  |  |  |  |  |
Commercial business |  | 358 |  |  | 547 |  |  | 1,385 |  |  | 2,892 |
One-to-four family residential |  | 65 |  |  | 21 |  |  | 102 |  |  | 389 |
Commercial and multifamily residential |  | 184 |  |  | 213 |  |  | 248 |  |  | 1,012 |
One-to-four family residential construction |  | 2,471 |  |  | 583 |  |  | 3,192 |  |  | 616 |
Commercial and multifamily residential construction |  | — |  |  | — |  |  | 1 |  |  | — |
Consumer |  | 326 |  |  | 266 |  |  | 742 |  |  | 796 |
PCI loans |  | 1,812 |  |  | 945 |  |  | 3,389 |  |  | 3,096 |
Total recoveries |  | 5,216 |  |  | 2,575 |  |  | 9,059 |  |  | 8,801 |
Net (charge-offs) recoveries |  | 1,844 |  |  | 484 |  |  | (2,588 | ) |  | (4,839 | )
Provision for loan and lease losses, loans excluding PCI loans |  | 1,600 |  |  | 3,655 |  |  | 3,195 |  |  | 15,180 |
Provision recapture for loan and lease losses, PCI loans |  | (1,301 | ) |  | (502 | ) |  | (1,316 | ) |  | (2,200 | )
Provision for loan and lease losses |  | 299 |  |  | 3,153 |  |  | 1,879 |  |  | 12,980 |
Ending balance, loans excluding PCI loans |  | 79,602 |  |  | 79,770 |  |  | 79,602 |  |  | 79,770 |
Ending balance, PCI loans |  | 3,058 |  |  | 4,017 |  |  | 3,058 |  |  | 4,017 |
Ending balance |  | $ | 82,660 |  |  | $ | 83,787 |  |  | $ | 82,660 |  |  | $ | 83,787 |
Total loans, net at end of period, excluding loans held for sale |  | $ | 8,756,355 |  |  | $ | 8,514,317 |  |  | $ | 8,756,355 |  |  | $ | 8,514,317 |
ALLL to period-end loans |  | 0.94 | % |  | 0.98 | % |  | 0.94 | % |  | 0.98 | %
ALLL for unfunded commitments and letters of credit |  |  |  |  |  |
Beginning balance |  | $ | 3,980 |  |  | $ | 3,680 |  |  | $ | 4,330 |  |  | $ | 3,130 |
Net changes in the ALLL for unfunded commitments and letters of credit |  | (400 | ) |  | 275 |  |  | (750 | ) |  | 825 |
Ending balance |  | $ | 3,580 |  |  | $ | 3,955 |  |  | $ | 3,580 |  |  | $ | 3,955 |

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

|  | September 30, 2019 |  | December 31, 2018
|  | Balance |  | % of Total |  | Balance |  | % of Total
|  | (dollars in thousands)
Demand and other noninterest-bearing |  | $ | 5,320,435 |  |  | 49.0 | % |  | $ | 5,227,216 |  |  | 50.0 | %
Money market (1) |  | 2,295,229 |  |  | 21.1 | % |  | 2,294,125 |  |  | 21.9 | %
Interest-bearing demand (1) |  | 1,059,502 |  |  | 9.8 | % |  | 1,084,863 |  |  | 10.4 | %
Savings (1) |  | 892,438 |  |  | 8.2 | % |  | 889,849 |  |  | 8.5 | %
Interest-bearing public funds, other than certificates of deposit (1) |  | 629,797 |  |  | 5.8 | % |  | 233,938 |  |  | 2.2 | %
Certificates of deposit, less than $250,000 |  | 223,249 |  |  | 2.1 | % |  | 243,849 |  |  | 2.3 | %
Certificates of deposit, $250,000 or more |  | 107,506 |  |  | 1.0 | % |  | 89,473 |  |  | 0.9 | %
Certificates of deposit insured by CDARS® |  | 17,252 |  |  | 0.2 | % |  | 23,580 |  |  | 0.2 | %
Brokered certificates of deposit |  | 18,852 |  |  | 0.2 | % |  | 57,930 |  |  | 0.6 | %
Reciprocal money market accounts |  | 291,542 |  |  | 2.6 | % |  | 313,692 |  |  | 3.0 | %
Subtotal |  | 10,855,802 |  |  | 100.0 | % |  | 10,458,515 |  |  | 100.0 | %
Valuation adjustment resulting from acquisition accounting |  | (86 | ) |  |  |  | (389 | ) |  |
Total deposits |  | $ | 10,855,716 |  |  |  |  | $ | 10,458,126 |  |  |

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

|  | Company |  | Columbia Bank
|  | September 30, 2019 |  | December 31, 2018 |  | September 30, 2019 |  | December 31, 2018
CET1 risk-based capital ratio |  | 12.37 | % |  | 12.74 | % |  | 12.52 | % |  | 12.96 | %
Tier 1 risk-based capital ratio |  | 12.37 | % |  | 12.74 | % |  | 12.52 | % |  | 12.96 | %
Total risk-based capital ratio |  | 13.53 | % |  | 13.99 | % |  | 13.34 | % |  | 13.85 | %
Leverage ratio |  | 10.19 | % |  | 10.24 | % |  | 10.35 | % |  | 10.42 | %
Capital conservation buffer |  | 5.53 | % |  | 5.99 | % |  | 5.34 | % |  | 5.85 | %

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

|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2019 |  | 2018 |  | 2019 |  | 2018
Operating net interest margin non-GAAP reconciliation: |  | (dollars in thousands)
Net interest income (tax equivalent) (1) |  | $ | 124,572 |  |  | $ | 124,789 |  |  | $ | 374,918 |  |  | $ | 360,750 |
Adjustments to arrive at operating net interest income (tax equivalent): |  |  |  |  |  |  |  |
Incremental accretion income on PCI loans |  | (113 | ) |  | (585 | ) |  | (980 | ) |  | (1,240 | )
Incremental accretion income on other acquired loans |  | (1,959 | ) |  | (2,643 | ) |  | (5,790 | ) |  | (8,703 | )
Premium amortization on acquired securities |  | 1,386 |  |  | 1,859 |  |  | 4,816 |  |  | 6,065 |
Interest reversals on nonaccrual loans |  | 174 |  |  | 477 |  |  | 1,462 |  |  | 1,147 |
Operating net interest income (tax equivalent) (1) |  | $ | 124,060 |  |  | $ | 123,897 |  |  | $ | 374,426 |  |  | $ | 358,019 |
Average interest earning assets |  | $ | 11,941,578 |  |  | $ | 11,326,629 |  |  | $ | 11,704,702 |  |  | $ | 11,168,143 |
Net interest margin (tax equivalent) (1)(2) |  | 4.14 | % |  | 4.37 | % |  | 4.28 | % |  | 4.32 | %
Operating net interest margin (tax equivalent) (1)(2) |  | 4.12 | % |  | 4.34 | % |  | 4.28 | % |  | 4.29 | %

__________
(1) Tax-exempt interest income has been adjusted to a tax equivalent basis. The amount of such adjustment was an addition to net interest income of $2.1 million and $2.0 million for the three months ended September 30, 2019 and 2018, respectively, and an addition to net interest income of $6.3 million and $5.8 million for the nine months ended September 30, 2019 and 2018, respectively.
(2) Beginning January 2019, net interest margin (tax equivalent) and operating net interest margin (tax equivalent) were calculated using the actual number of days and on an actual/actual basis. This change was done to provide more meaningful trend information for our NIM regardless of the number of days in the period. Prior periods, which were previously reported on a 30/360 basis, have been restated to conform to the current basis.
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Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A number of measures are used to monitor and manage interest rate risk, including income simulations and interest sensitivity (gap) analysis. An income simulation model is the primary tool used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Basic assumptions in the model include prepayment speeds on mortgage-related assets, cash flows and maturities of other investment securities, loan and deposit volumes and pricing. These assumptions are inherently subjective and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. At September 30, 2019, based on the measures used to monitor and manage interest rate risk, there has not been a material change in the Company’s interest rate risk since December 31, 2018. For additional information, refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2018 Annual Report on Form 10-K.

Item 4. | CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, the CEO and CFO have concluded that as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that the information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is (i) accumulated and communicated to our management (including the CEO and CFO) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Controls Over Financial Reporting
There was no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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PART II - OTHER INFORMATION

Item 1. | LEGAL PROCEEDINGS

The Company and its subsidiaries are party to routine litigation arising in the ordinary course of business. Management believes that, based on information currently known to it, any liabilities arising from such litigation will not have a material adverse impact on the Company’s financial conditions, results of operations or cash flows.
Item 1A. RISK FACTORS
Refer to Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 for a discussion of risk factors relating to the Company’s business. The Company believes that there has been no material change in its risk factors as previously disclosed in the Company’s Form 10-K.

Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) | Not applicable

(b) | Not applicable

(c) | The following table provides information about repurchases of common stock by the Company during the quarter ended September 30, 2019:

Period |  | Total Number of Common Shares Purchased (1) |  | Average Price Paid per Common Share |  | Total Number of Shares Purchased as Part of Publicly Announced Plan (2) |  | Maximum Number of Remaining Shares That May Yet Be Purchased Under the Plan (2)
7/1/2019 - 7/31/2019 |  | 11,822 |  |  | $ | 35.32 |  |  | 11,822 |  |  | 2,264,020 |
8/1/2019 - 8/31/2019 |  | 394,202 |  |  | 34.31 |  |  | 393,631 |  |  | 1,870,389 |
9/1/2019 - 9/30/2019 |  | 270,928 |  |  | 35.41 |  |  | 270,928 |  |  | 1,599,461 |
|  | 676,952 |  |  | $ | 34.77 |  |  | 676,381 |  |  |

__________
(1) Common shares repurchased by the Company during the quarter consisted of cancellation of 571 shares of common stock to pay the shareholders’ withholding taxes and 676,381 shares of common stock purchased under the Company’s stock repurchase program.
(2) As described in our Annual Report on Form 10-K for the year ended December 31, 2018, our board of directors approved a stock repurchase program to repurchase up to 2.9 million shares, up to a maximum aggregate purchase price of $100.0 million.

Item 3. | DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. | MINE SAFETY DISCLOSURES

Not applicable.

Item 5. | OTHER INFORMATION

None.
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Item 6. | EXHIBITS

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

(1) Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on October 3, 2019
** Management contract or compensatory plan or arrangement
+ Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|  |  | COLUMBIA BANKING SYSTEM, INC.
Date: | November 5, 2019 |  | By |  | /s/ HADLEY S. ROBBINS
|  |  |  |  | Hadley S. Robbins
|  |  |  |  | President and Chief Executive Officer (Principal Executive Officer)
Date: | November 5, 2019 |  | By |  | /s/ GREGORY A. SIGRIST
|  |  |  |  | Gregory A. Sigrist
|  |  |  |  | Executive Vice President and Chief Financial Officer (Principal Financial Officer)
Date: | November 5, 2019 |  | By |  | /s/ BROCK M. LAKELY
|  |  |  |  | Brock M. Lakely
|  |  |  |  | Senior Vice President and Chief Accounting Officer (Principal Accounting Officer)

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