Edgar Filing: COLUMBIA BANKING SYSTEM INC

Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2007 or

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-20288

COLUMBIA BANKING SYSTEM, INC.

(Exact name of registrant as specified in its charter)


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

1301 “A” Street

Tacoma, Washington 98402

(Address of principal executive offices) (Zip code)

Registrant’s Telephone Number, Including Area Code: (253) 305-1900

Securities Registered Pursuant to Section 12(b) of the Act:

Common Stock, No Par Value

(Title of class)

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 C.F.R. 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):

¨ Large Accelerated Filer x Accelerated Filer ¨ Non-accelerated Filer

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 aggregate market value of Common Stock held by non-affiliates of the registrant at June 30, 2007 was $454,397,522 based on the closing sale price of the Common Stock on that date.

The number of shares of registrant’s Common Stock outstanding at January 31, 2008 was 17,979,578.

DOCUMENTS INCORPORATED BY REFERENCE:


Portions of the Registrant’s definitive 2008 Annual Meeting Proxy Statement Dated March 17, 2008		Part III

COLUMBIA BANKING SYSTEM, INC.

FORM 10-K ANNUAL REPORT

DECEMBER 31, 2007

TABLE OF CONTENTS


PART I

Item 1.	Business	3
Item 1A.	Risk Factors	14
Item 1B.	Unresolved Staff Comments	15
Item 2.	Properties	15
Item 3.	Legal Proceedings	15
Item 4.	Submission of Matters to a Vote of Security Holders	15

PART II

Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchase of Equity Securities	16
Item 6.	Selected Financial Data	18
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	22
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 8.	Financial Statements and Supplementary Data	48
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	82
Item 9A.	Controls and Procedures	82
Item 9B.	Other Information	85

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	86
Item 11.	Executive Compensation	86
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	86
Item 13.	Certain Relationships and Related Transactions, and Director Independence	86
Item 14.	Principal Accounting Fees and Services	86

PART IV

Item 15.	Exhibits, Financial Statement Schedules	87

Signatures		88
Index to Exhibits		89

NOTE REGARDING FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K may be deemed to include forward looking statements, which management believes to be a benefit to shareholders. These forward looking statements describe management’s expectations regarding future events and developments such as future operating results, growth in loans and deposits, continued success of our style of banking and the strength of the local economy. The words “will,” “believe,” “expect,” “should,” and “anticipate” and words of similar construction are intended in part to help identify forward looking statements. Future events are difficult to predict, and the expectations described above are necessarily subject to risk and uncertainty that may cause actual results to differ materially and adversely. In addition to discussions about risks and uncertainties set forth from time to time in our filings with the SEC, factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, among others, the following possibilities: (1) local and national economic conditions are less favorable than expected or have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth at historical rates and maintain the quality of our earning assets; (2) a continued decline in the housing/real estate market; (3) changes in interest rates significantly reduce interest margins and negatively affect funding sources; (4) deterioration of credit quality that could, among other things, increase defaults and delinquency risks in the Banks’ loan portfolios; (5) projected business increases following strategic expansion or opening or acquiring new branches are lower than expected; (6) competitive pressure among financial institutions increases significantly; (7) legislation or regulatory requirements or changes adversely affect the businesses in which we are engaged; and (8) our ability to realize the efficiencies we expect to receive from our investments in personnel, acquisitions and infrastructure.

PART I

ITEM 1.

BUSINESS

General

Columbia Banking System, Inc. (referred to in this report as “we,” “our,” and “the Company”) is a registered bank holding company whose wholly owned banking subsidiaries, Columbia State Bank (“Columbia Bank”) and Bank of Astoria (“Astoria”), conduct full-service commercial banking business in the states of Washington and Oregon, respectively. Headquartered in Tacoma, Washington, we provide a full range of banking services to small and medium-sized businesses, professionals and other individuals.

The Company was originally organized in 1988 under the name First Federal Corporation, which was later named Columbia Savings Bank. In 1990, an investor group acquired a controlling interest in the Company and a second corporation, Columbia National Bankshares, Inc. (“CNBI”), and CNBI’s sole banking subsidiary, Columbia National Bank. In 1993, the Company was reorganized to take advantage of commercial banking business opportunities in our principal market area. The opportunities to capture commercial banking market share were due to increased consolidations of banks, primarily through acquisitions by out-of-state holding companies, which created dislocation of customers. As part of the reorganization, CNBI was merged into the Company and Columbia National Bank was merged into the then newly chartered Columbia Bank. In 1994, Columbia Savings Bank was merged into Columbia Bank. We have grown from four branch offices at January 1, 1993 to 55 branch offices at December 31, 2007.

Recent Acquisitions

On July 23, 2007, the Company completed its acquisition of Mountain Bank Holding Company (“Mt. Rainier”), the parent company of Mt. Rainier National Bank, Enumclaw, Washington. Mt. Rainier was merged into the Company and Mt. Rainier National Bank was merged into Columbia Bank doing business as Mt. Rainier Bank. The results of Mt. Rainier Bank’s operations are included in those of Columbia Bank starting on July 23, 2007.

On July 23, 2007, the Company completed its acquisition of Town Center Bancorp (“Town Center”), the parent company of Town Center Bank, Portland, Oregon. Town Center was merged into the Company and Town Center Bank was merged into Columbia Bank. The results of Town Center Bank’s operations are included in those of Columbia Bank starting on July 23, 2007.

On October 1, 2004, the Company completed its acquisition of Astoria, an Oregon state-chartered commercial bank headquartered in Astoria, Oregon. The acquisition was accounted for as a purchase and Astoria’s results of operations are included in our results beginning October 1, 2004. Astoria operates as a separate banking subsidiary of the Company and has five full service branch offices located within Clatsop and Tillamook Counties, along the northern Oregon coast. The deposits of Astoria are insured in whole or in part by the FDIC. Astoria is subject to regulation by the FDIC and the State of Oregon Department of Consumer and Business Services Division of Finance and Corporate Securities. Although Astoria is not a member of the Federal Reserve System, the Board of Governors of the Federal Reserve System has certain supervisory authority over the Company, which can also affect Astoria. In February 2008, we filed an application with the Federal Deposit Insurance Corporation (the “FDIC”) to merge Astoria into Columbia Bank, with Astoria continuing to do business as Bank of Astoria subsequent to the merger.

Our largest wholly owned banking subsidiary, Columbia Bank, has 50 banking offices located in the Tacoma metropolitan area and contiguous parts of the Puget Sound region of Washington State, as well as the Longview and Woodland communities in southwestern Washington State and in the Portland, Oregon area. Included in Columbia Bank are former branches of Mt. Rainier National Bank, doing business as Mt. Rainier Bank, with seven branches in King and Pierce counties in Washington State. Substantially all of Columbia Bank’s loans, loan commitments and core deposits are within its service areas. Columbia Bank is a Washington state-chartered commercial bank, the deposits of which are insured in whole or in part by the FDIC. Columbia Bank is subject to regulation by the FDIC and the Washington State Department of Financial Institutions Division of Banks. Although Columbia Bank is not a member of the Federal Reserve System, the Board of Governors of the Federal Reserve System has certain supervisory authority over the Company, which can also affect Columbia Bank.

Company Management


Name		Principal Position
Melanie J. Dressel		President & Chief Executive Officer
Andrew McDonald		Executive Vice President & Chief Credit Officer
Mark W. Nelson		Executive Vice President & Chief Banking Officer
Kent L Roberts		Executive Vice President & Human Resources Director
Gary R. Schminkey		Executive Vice President & Chief Financial Officer

Financial Information about Segments

The Company is managed along two major lines of business within the Columbia Bank banking subsidiary: commercial banking and retail banking. The treasury function of the Company, although not considered a line of business, is responsible for the management of investments and interest rate risk. The Bank of Astoria banking subsidiary currently operates as a stand-alone segment of the Company. Financial information about segments that conform to accounting principles generally accepted in the United States is presented in Note 19 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.

Business Overview

Our goal is to be the leading Pacific Northwest regional community banking company while consistently increasing earnings and shareholder value. We continue to build on our reputation for excellent customer service in order to be recognized in all markets we serve as the bank of choice for retail deposit customers, small to medium-sized businesses and affluent households.

We have established a network of 55 branches as of December 31, 2007 from which we intend to grow market share. Western Washington locations consist of twenty-four branches in Pierce County, fourteen in King County, three in Cowlitz County, two in Thurston County and one each in Kitsap and Whatcom Counties. Oregon locations include three branches in Clackamas County and two branches in Multnomah County. Bank of Astoria locations along the northern coastal area of Oregon state consist of four branches in Clatsop County and one in Tillamook County.

In order to fund our lending activities and to allow for increased contact with customers, we utilize a branch system to better serve retail and business customer depositors. We believe this approach will enable us to expand lending activities while attracting a stable core deposit base. In order to support our strategy of market penetration and increased profitability, while continuing our personalized banking approach and our commitment to asset quality, we have invested in experienced banking and administrative personnel and have incurred related costs in the creation of our branch network.

Business Strategy

Our business strategy is to provide our customers with the financial sophistication and breadth of products of a regional banking company while retaining the appeal and service level of a community bank. We continually evaluate our existing business processes while focusing on maintaining asset quality and balanced loan and deposit portfolios, expanding total revenue and controlling expenses in an effort to increase our return on average equity and gain operational efficiencies. We believe that as a result of our strong commitment to highly personalized, relationship-oriented customer service, our varied products, our strategic branch locations and the long-standing community presence of our managers, banking officers and branch personnel, we are well positioned to attract and retain new customers and to increase our market share of loans, deposits, and other financial services in the communities we serve. We are committed to increasing market share in the communities we serve by continuing to leverage our existing branch network, adding new branch locations and considering business combinations that are consistent with our expansion strategy throughout the Pacific Northwest.

Products & Services

We place the highest priority on customer service and assist our customers in making informed decisions when selecting from the products and services we offer. We continuously review our products and services to ensure that we provide our customers with the tools to meet their financial institution needs. A more complete listing of all the services and products available to our customers can be found on our website: www.columbiabank.com. Some of the core products and services we offer include:


Personal Banking		Business Banking
• Checking and Saving Accounts		• Checking & Saving Accounts
• Online Banking		• Online Banking
• Electronic Bill Pay		• Electronic Bill Pay
• Consumer Lending		• Remote Deposit Capture
• Residential Lending		• Cash Management
• Visa Card Services		• Commercial & Industrial Lending
• Investment Services		• Real Estate and Real Estate Construction Lending
• Private Banking		• Equipment Finance
		• Small Business Services
		• Visa Card Services
		• Investment Services
		• International Banking
		• Merchant Card Services

Personal Banking: We offer our personal banking customers an assortment of checking and saving account products including non-interest and interest bearing checking, savings, money market and certificate of deposit accounts. Overdraft protection is also available with direct links to the customer’s checking account. Our online

banking service, Columbia Online^™, provides our personal banking customers with the ability to safely and securely conduct their banking business 24 hours a day, 7 days a week. Personal banking customers are also provided with a variety of borrowing products including fixed and variable rate home equity loans and lines of credit, home mortgages for purchases and refinances, personal loans, and other consumer loans. Eligible personal banking customers with checking accounts are provided a VISA^® Check Card which can be used to make purchases and also act as an ATM card. A variety of Visa^® Credit Cards are also available to eligible personal banking customers.

Columbia Private Banking offers clientele requiring complex financial solutions and their businesses credit services, deposit and cash management services, and wealth management. Each private banker provides advisory services and coordinates a relationship team of experienced financial professionals to meet the unique needs of each discerning customer.

Through CB Financial Services⁽¹⁾, personal banking customers are provided with a full range of investment options including mutual funds, stocks, bonds, retirement accounts, annuities, tax-favored investments, US Government securities as well as long-term care and life insurance policies. Qualified investment professionals are available to provide advisory services⁽²⁾ and assist customers with retirement and education planning.

Business Banking: We offer our business banking customers an assortment of checking, savings, interest bearing money market and certificate of deposit accounts to satisfy all their banking needs. Our Cash Management professionals are available to customize banking solutions with products such as automatic investment and line of credit sweeps; daily DEPOSIT, our remote deposit product to deposit checks without leaving their place of business; positive pay, to identify fraudulent account activity quickly; and two choices of online banking, Columbia OnLine Business Banking and Streamlined Business Banking. Columbia OnLine Business Banking provides customers with the ability to tailor user access by individual, view balances and transactions, see check images, transfer funds, place stop payments, pay bills electronically, export transaction history in multiple file formats, create wire transfers and originate ACH transactions, such as direct deposit of employees’ payroll. Streamlined Business Banking is our free online solution intended for smaller businesses, or those just starting out. Streamlined Business Banking provides customers with the ability to view balances and transactions, see statements and check images, transfer funds, pay bills electronically and export transaction history in multiple file formats.

We offer a variety of loan products tailored to meet the various needs of business banking customers. Commercial loan products include accounts receivable, inventory and equipment financing as well as Small Business Administration financing. We also offer commercial real estate loan products for construction and development or permanent financing. Historically, lending activities have been primarily directed toward the origination of real estate and commercial loans. Real estate lending activities have been focused on construction and permanent loans for both owner occupants and investor oriented real estate properties. In addition, the bank has pursued construction and first mortgages on owner occupied, one- to four-family residential properties. Commercial banking has been directed toward meeting the credit and related deposit needs of various sized businesses and professional practice organizations operating in our primary market areas.

We offer our business banking customers a selection of Visa^® Cards including the Business Check Card that works like a check wherever VISA^® is accepted including ATM cash withdrawals 24 hours a day, 7 days a week. We partner with First National Bank of Omaha to offer Visa^® Credit Cards such as the Corporate Card which can

⁽¹⁾	Securities and insurance products are offered by Primevest Financial Services, Inc., an independent, registered broker/dealer. Member FINRA/SIPC. Investment products are * Not FDIC insured * May lose value * Not bank guaranteed * Not a deposit * Not insured by any federal government agency.

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

be used all over the world; the Purchasing Card with established purchasing capabilities based on your business needs; as well as the Business Edition^® and Business Edition Plus^® that earns reward points with every purchase. Our International Banking Department provides both large and small businesses with the ability to buy and sell foreign currencies as well as obtain letters of credit and wire funds to their customers and suppliers in foreign countries.

Business clients that utilize Columbia’s Merchant Card Services have the ability to accept both Visa^® and MasterCard^® sales drafts for deposit directly into their business checking account. Merchants are provided with a comprehensive accounting system tailored to meet each merchant’s needs, which includes month-to-date credit card deposit information on a transaction statement. Internet access is available to view merchant reports that allow business customers to review merchant statements, authorized, captured, cleared and settled transactions.

Through CB Financial Services⁽¹⁾, customers are provided with an array of investment options and all the tools and resources necessary to assist them in reaching their investment goals. Some of the investment options available to customers include 401(k), Simple IRA, Simple Employee Pensions, Buy-Sell Agreements, Key-Man Insurance, Business Succession Planning and personal investments.

Competition

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

Market Areas

Washington: Over half of our total branches within Washington are located in Pierce County, with an estimated population of 790,500 residents. At June 30, 2007 our Pierce County branch locations’ share of the county’s total deposit market was 17%⁽³⁾, ranking first amongst our competition. Also located in Pierce County is our Company headquarters in the city of Tacoma and one nearby operational facility. Some of the most significant contributors to the Pierce County economy are the Port of Tacoma which accounts for more than 43,000 jobs, McChord Air Force Base and Fort Lewis Army Base that account for nearly 20% of the County’s total employment and the manufacturing industry which supplies the Boeing Company.

We operate fourteen branch locations in King County, including Seattle, Bellevue and Redmond. King County, which is Washington’s most highly populated county at approximately 1.8 million residents, is a market that has significant growth potential for our Company and will play a key role in our expansion strategy in the future. At June 30, 2007 our share of the King County deposit market was less than 1%⁽³⁾; however, we have made significant inroads within this market through the strategic expansion of our banking team. The north King County economy is primarily made up of the aerospace, construction, computer software and biotechnology industries. South King County with its close proximity to Pierce County is considered a natural extension of our primary market area. The economy of south King County is primarily comprised of residential communities supported by light industrial, retail, aerospace and distributing and warehousing industries.

⁽¹⁾	Securities and insurance products are offered by Primevest Financial Services, Inc., an independent, registered broker/dealer. Member FINRA/SIPC. Investment products are * Not FDIC insured * May lose value * Not bank guaranteed * Not a deposit * Not insured by any federal government agency.

⁽³⁾	Source: FDIC Annual Summary of Deposit Report as of June 30, 2007.

Some other market areas served by the Company include Cowlitz County where we operate three branch locations that account for 11%⁽³⁾ of the deposit market share, Thurston County were we operate two branches offices, and Kitsap and Whatcom County where we operate one branch in each county.

Oregon: With the acquisition of Town Center Bancorp in July, 2007, we added five branches in Clackamas and Multnomah counties in the Portland, Oregon area, which have less than 1%⁽³⁾ of the total deposit market share in each of those counties. Bank of Astoria’s five branches located in the western portions of Clatsop and Tillamook Counties, in the northern Oregon coastal area account for 34%⁽³⁾ and 6%⁽³⁾ of the deposit market share, respectively. Oregon market areas provide a significant opportunity for expansion in the future. Both Clatsop and Tillamook Counties are comprised primarily of tourism, forestry and commercial fishing related businesses.

Employees

As of December 31, 2007 the Company and its banking subsidiaries employed approximately 775 full time equivalent employees. We value our employees and pride ourselves on providing a professional work environment accompanied by comprehensive benefit programs. We are committed to providing flexible and value-added benefits to our employees through a “Total Compensation Philosophy” which incorporates all compensation and benefits. Our continued commitment to employees contributed to Columbia Bank being named one of Washington’s Best Workplaces in 2007 by the Puget Sound Business Journal.

Available Information

We file annual reports on Form 10-K, quarterly reports on Form 10-Q, periodic reports on Form 8-K, proxy statements and other information with the United States Securities and Exchange Commission (“SEC”). The public may obtain copies of these reports and any amendments at the SEC’s Internet site, www.sec.gov. Additionally, reports filed with the SEC can be obtained through our website at www.columbiabank.com. These reports are available through our website as soon as reasonably practicable after they are filed electronically with the SEC. Information contained on our website is not intended to be incorporated by reference into this report.

Supervision and Regulation

General

The following discussion describes elements of the extensive regulatory framework applicable to Columbia Banking System, Inc. (the “Company”), Columbia State Bank and Mt. Rainier Bank, a dba of Columbia State Bank (together referred to herein as “Columbia Bank”), and Bank of Astoria. This regulatory framework is primarily designed for the protection of depositors, federal deposit insurance funds and the banking system as a whole, rather than specifically for the protection of shareholders. Due to the breadth of this regulatory framework, our costs of compliance continue to increase in order to monitor and satisfy these requirements.

To the extent that this section describes statutory and regulatory provisions, it is qualified in its entirety by reference to those provisions. These statutes and regulations, as well as related policies, are subject to change by Congress, state legislatures and federal and state regulators. Changes in statutes, regulations or regulatory policies applicable to us, including interpretation or implementation thereof, could have a material effect on our business or operations.

Federal Bank Holding Company Regulation

General. The Company is a bank holding company as defined in the Bank Holding Company Act of 1956, as amended (“BHCA”), and is therefore subject to regulation, supervision and examination by the Federal

⁽³⁾	Source: FDIC Annual Summary of Deposit Report as of June 30, 2007.

Reserve. In general, the BHCA limits the business of bank holding companies to owning or controlling banks and engaging in other activities closely related to banking. The Company must file reports with and provide the Federal Reserve such additional information as it may require. Under the Financial Services Modernization Act of 1999, a bank holding company may apply to the Federal Reserve to become a financial holding company, and thereby engage (directly or through a subsidiary) in certain expanded activities deemed financial in nature, such as securities brokerage and insurance underwriting.

Holding Company Bank Ownership. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares; (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company.

Holding Company Control of Nonbanks. With some exceptions, the BHCA also prohibits a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities that, by statute or by Federal Reserve regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks.

Transactions with Affiliates. Subsidiary banks of a bank holding company are subject to restrictions imposed by the Federal Reserve Act on extensions of credit to the holding company or its subsidiaries, on investments in their securities and on the use of their securities as collateral for loans to any borrower. These regulations and restrictions may limit the Company’s ability to obtain funds from its subsidiary banks for its cash needs, including funds for payment of dividends, interest and operational expenses.

Tying Arrangements. We are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither the Company nor its subsidiaries may condition an extension of credit to a customer on either (i) a requirement that the customer obtain additional services provided by us; or (ii) an agreement by the customer to refrain from obtaining other services from a competitor.

Support of Subsidiary Banks. Under Federal Reserve policy, the Company is expected to act as a source of financial and managerial strength to its subsidiary banks. This means that the Company is required to commit, as necessary, resources to support Columbia Bank and the Bank of Astoria. Any capital loans a bank holding company makes to its subsidiary banks are subordinate to deposits and to certain other indebtedness of those subsidiary banks.

State Law Restrictions. As a Washington corporation, the Company is subject to certain limitations and restrictions under applicable Washington corporate law. For example, state law restrictions in Washington include limitations and restrictions relating to indemnification of directors, distributions to shareholders, transactions involving directors, officers or interested shareholders, maintenance of books, records, and minutes, and observance of certain corporate formalities.

Federal and State Regulation of Columbia State Bank and Astoria

General. The deposits of Columbia Bank, a Washington chartered commercial bank with branches in Washington and Oregon, and the Bank of Astoria, an Oregon chartered commercial bank, are insured by the FDIC. As a result, Columbia Bank is subject to supervision and regulation by the Washington Department of Financial Institutions, Division of Banks and the FDIC. The Bank of Astoria is primarily regulated by the Oregon Department of Consumer and Business Services and the FDIC. With respect to branches of Columbia Bank in

Oregon, the Bank is also subject to supervision and regulation by, respectively, the Oregon Department of Consumer and Business Services, as well as the FDIC. These agencies have the authority to prohibit banks from engaging in what they believe constitute unsafe or unsound banking practices.

Community Reinvestment. The Community Reinvestment Act of 1977 requires that, in connection with examinations of financial institutions within their jurisdiction, the Federal Reserve or the FDIC evaluate the record of the financial institution in meeting the credit needs of its local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of the institution. A bank’s community reinvestment record is also considered by the applicable banking agencies in evaluating mergers, acquisitions and applications to open a branch or facility.

Insider Credit Transactions. Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders or any related interests of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, and follow credit underwriting procedures that are at least as stringent as those prevailing at the time for comparable transactions with persons not covered above and who are not employees; and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to insiders. A violation of these restrictions may result in the assessment of substantial civil monetary penalties, the imposition of a cease and desist order, and other regulatory sanctions.

Regulation of Management. Federal law (i) sets forth circumstances under which officers or directors of a bank may be removed by the institution’s federal supervisory agency; (ii) places restraints on lending by a bank to its executive officers, directors, principal shareholders, and their related interests; and (iii) prohibits management personnel of a bank from serving as a director or in other management positions of another financial institution whose assets exceed a specified amount or which has an office within a specified geographic area.

Safety and Soundness Standards. Federal law imposes certain non-capital safety and soundness standards upon banks. These standards cover, among other things, internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation and benefits. Additional standards apply to asset quality, earnings and stock valuation. An institution that fails to meet these standards must develop a plan acceptable to its regulators, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions.

Interstate Banking And Branching

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Act”) permits relaxed prior interstate branching restrictions under federal law by permitting nationwide interstate banking and branching under certain circumstances. Generally, bank holding companies may purchase banks in any state, and states may not prohibit these purchases. Additionally, banks are permitted to merge with banks in other states, as long as the home state of neither merging bank has opted out under the legislation. The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area. Federal banking agency regulations prohibit banks from using their interstate branches primarily for deposit production and the federal banking agencies have implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition.

Washington and Oregon have both enacted “opting in” legislation in accordance with the Interstate Act provisions allowing banks to engage in interstate merger transactions, subject to certain “aging” requirements. Under Washington law, an out-of-state bank may, subject to Department of Financial Institution approval, open de novo branches in Washington or acquire an in-state branch so long as the home state of the out-of-state bank has reciprocal laws with respect to de novo branching or branch acquisitions. In contrast, Oregon restricts an

out-of-state bank from opening de novo branches, and no out-of-state bank may conduct banking business at a branch located in Oregon unless the out-of-state bank has converted from, has assumed all, or substantially all, of Oregon deposit liabilities of or has merged with an insured institution that, by itself or together with any predecessor, has been engaged in banking business in Oregon for at least three years.

Deposit Insurance

In 2006, federal deposit insurance reform legislation was enacted that (i) required the FDIC to merge the Bank Insurance Fund and the Savings Association Insurance Fund into a newly created Deposit Insurance Fund; (ii) increases the amount of deposit insurance coverage for retirement accounts; (iii) allows for deposit insurance coverage on individual accounts to be indexed for inflation starting in 2010; (iv) provides the FDIC more flexibility in setting and imposing deposit insurance assessments; and (v) provides eligible institutions credits on future assessments.

The Banks’ deposits are currently insured to a maximum of $100,000 per depositor through the Deposit Insurance Fund. The Banks are each required to pay deposit insurance premiums, which are assessed and paid regularly. The premium amount is based upon a risk classification system established by the FDIC. Banks with higher levels of capital and a low degree of supervisory concern are assessed lower premiums than banks with lower levels of capital or a higher degree of supervisory concern.

Dividends

The principal source of the Company’s cash is from dividends received from its subsidiary banks, which are subject to government regulation and limitations. Regulatory authorities may prohibit banks and bank holding companies from paying dividends in a manner that would constitute an unsafe or unsound banking practice or would reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital requirements. Oregon and Washington law also limit a bank’s ability to pay dividends that are greater than the bank’s retained earnings without approval of the applicable banking agency.

Capital Adequacy

Regulatory Capital Guidelines. Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. The guidelines are “risk-based,” meaning that they are designed to make capital requirements more sensitive to differences in risk profiles among banks and bank holding companies.

Tier I and Tier II Capital. Under the guidelines, an institution’s capital is divided into two broad categories, Tier I capital and Tier II capital. Tier I capital generally consists of common stockholders’ equity, surplus and undivided profits. Tier II capital generally consists of the allowance for loan losses and hybrid capital instruments. The sum of Tier I capital and Tier II capital represents an institution’s total capital. The guidelines require that at least 50% of an institution’s total capital consist of Tier I capital.

Risk-based Capital Ratios. The adequacy of an institution’s capital is gauged primarily with reference to the institution’s risk-weighted assets. The guidelines assign risk weightings to an institution’s assets in an effort to quantify the relative risk of each asset and to determine the minimum capital required to support that risk. An institution’s risk-weighted assets are then compared with its Tier I capital and total capital to arrive at a Tier I risk-based ratio and a total risk-based ratio, respectively. The guidelines provide that an institution must have a minimum Tier I risk-based ratio of 4% and a minimum total risk-based ratio of 8%.

Leverage Ratio. The guidelines also employ a leverage ratio, which is Tier I capital as a percentage of total assets, less intangibles. The principal objective of the leverage ratio is to constrain the maximum degree to which a bank holding company may leverage its equity capital base. The minimum leverage ratio is 3%; however, for all but the most highly rated bank holding companies and for bank holding companies seeking to expand, regulators expect an additional cushion of at least 1% to 2%.

Prompt Corrective Action. Under the guidelines, an institution is assigned to one of five capital categories depending on its total risk-based capital ratio, Tier I risk-based capital ratio, and leverage ratio, together with certain subjective factors. The categories range from “well capitalized” to “critically undercapitalized.” Institutions that are “undercapitalized” or lower are subject to certain mandatory supervisory corrective actions.

In 2007, the federal banking agencies, including the FDIC and the Federal Reserve, approved final rules to implement new risk-based capital requirements. Presently, this new advanced capital adequacy framework, called Basel II, is applicable only to large and internationally active banking organizations. Basel II changes the existing risk-based capital framework by enhancing its risk sensitivity. Whether Basel II will be expanded to apply to banking organizations like ours is unclear at this time, and what effect such regulations would have on us cannot be predicted, but we do not expect our operations would be significantly impacted.

Regulatory Oversight and Examination

The Federal Reserve conducts periodic inspections of bank holding companies, which are performed both onsite and offsite. The supervisory objectives of the inspection program are to ascertain whether the financial strength of the bank holding company is being maintained on an ongoing basis and to determine the effects or consequences of transactions between a holding company or its non-banking subsidiaries and its subsidiary banks. For holding companies under $10 billion in assets, the inspection type and frequency varies depending on asset size, complexity of the organization, and the holding company’s rating at its last inspection.

Banks are subject to periodic examinations by their primary regulators. Bank examinations have evolved from reliance on transaction testing in assessing a bank’s condition to a risk-focused approach. These examinations are extensive and cover the entire breadth of operations of the bank. Generally, safety and soundness examinations occur on an 18-month cycle for banks under $500 million in total assets that are well capitalized and without regulatory issues, and 12-months otherwise. Examinations alternate between the federal and state bank regulatory agency or may occur on a combined schedule. The frequency of consumer compliance and CRA examinations is linked to the size of the institution and its compliance and CRA ratings at its most recent examinations. However, the examination authority of the Federal Reserve and the FDIC allows them to examine supervised banks as frequently as deemed necessary based on the condition of the bank or as a result of certain triggering events.

Corporate Governance and Accounting Legislation

Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the “Act”) addresses among other things, corporate governance, auditing and accounting, enhanced and timely disclosure of corporate information, and penalties for non-compliance. Generally, the Act (i) requires chief executive officers and chief financial officers to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission (the “SEC”); (ii) imposes specific and enhanced corporate disclosure requirements; (iii) accelerates the time frame for reporting of insider transactions and periodic disclosures by public companies; (iv) requires companies to adopt and disclose information about corporate governance practices, including whether or not they have adopted a code of ethics for senior financial officers and whether the audit committee includes at least one “audit committee financial expert;” and (v) requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate filings.

To deter wrongdoing, the Act (i) subjects bonuses issued to top executives to disgorgement if a restatement of a company’s financial statements was due to corporate misconduct; (ii) prohibits an officer or director misleading or coercing an auditor; (iii) prohibits insider trades during pension fund “blackout periods”; (iv) imposes new criminal penalties for fraud and other wrongful acts; and (v) extends the period during which certain securities fraud lawsuits can be brought against a company or its officers.

As a publicly reporting company, we are subject to the requirements of the Act and related rules and regulations issued by the SEC and NASDAQ. After enactment, we updated our policies and procedures to comply with the Act’s requirements and have found that such compliance, including compliance with Section 404 of the Act relating to management control over financial reporting, has resulted in significant additional expense for the Company. We anticipate that we will continue to incur such additional expense in our ongoing compliance.

Anti-terrorism Legislation

USA Patriot Act of 2001. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, intended to combat terrorism, was renewed with certain amendments in 2006 (the “Patriot Act”). Certain provisions of the Patriot Act were made permanent and other sections were made subject to extended “sunset” provisions. The Patriot Act, in relevant part, (i) prohibits banks from providing correspondent accounts directly to foreign shell banks; (ii) imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals; (iii) requires financial institutions to establish an anti-money-laundering compliance program; and (iv) eliminates civil liability for persons who file suspicious activity reports. The Act also includes provisions providing the government with power to investigate terrorism, including expanded government access to bank account records. While the Patriot Act has had minimal affect on our record keeping and reporting expenses, we do not believe that the renewal and amendment will have a material adverse effect on our business or operations.

Financial Services Modernization

Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 brought about significant changes to the laws affecting banks and bank holding companies. Generally, the Act (i) repeals historical restrictions on preventing banks from affiliating with securities firms; (ii) provides a uniform framework for the activities of banks, savings institutions and their holding companies; (iii) broadens the activities that may be conducted by national banks and banking subsidiaries of bank holding companies; (iv) provides an enhanced framework for protecting the privacy of consumer information and requires notification to consumers of bank privacy policies; and (v) addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. Bank holding companies that qualify and elect to become financial holding companies can engage in a wider variety of financial activities than permitted under previous law, particularly with respect to insurance and securities underwriting activities.

Recent Legislation

Financial Services Regulatory Relief Act of 2006. In 2006, the President signed the Financial Services Regulatory Relief Act of 2006 into law (the “Relief Act”). The Relief Act amends several existing banking laws and regulations, eliminates some unnecessary and overly burdensome regulations of depository institutions and clarifies several existing regulations. The Relief Act, among other things, (i) authorizes the Federal Reserve Board to set reserve ratios; (ii) amends regulations of national banks relating to shareholder voting and granting of dividends; (iii) amends several provisions relating to loans to insiders, regulatory applications, privacy notices, and golden parachute payments; and (iv) expands and clarifies the enforcement authority of federal banking regulators. Our business, expenses, and operations have not been significantly impacted by this legislation.

Effects of Government Monetary Policy

Our earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve implements national monetary policy for such purposes as curbing inflation and combating recession, but its open market operations in U.S. government securities, control of the discount rate applicable to borrowings from the Federal Reserve, and establishment of reserve requirements against certain deposits, influence the growth of bank loans,

investments and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and impact of future changes in monetary policies, such as the recent lowering of the Federal Reserve’s discount rate, and their impact on us cannot be predicted with certainty.

ITEM 1A.

RISK FACTORS

Our business exposes us to certain risks. The following is a discussion of what we currently believe are the most significant risks and uncertainties that may affect our business, financial condition and future results.

Economic downturns in the market areas we serve or a rapidly increasing interest rate environment could increase the credit risk within the loan portfolio.

Lending activities are our largest source of credit risk, which is the risk that a borrower will fail to meet their obligations in accordance with agreed upon terms. We manage the credit risk inherent in our loan portfolio through the establishment of sound underwriting policies and procedures. We maintain an allowance for loan and lease losses as well as an allowance for unfunded loan commitments and letters of credit to absorb anticipated future losses. Although we consider our allowance for loan and lease losses and allowance for unfunded loan commitments and letters of credit to be adequate at December 31, 2007, a significant downturn in the economy could result in higher delinquencies and defaults which would negatively impact our financial position. A substantial portion of the loans in our portfolio are variable rate. While recently we have been in a decreasing interest rate environment, a rapidly increasing interest rate environment or inability to access credit or other funding could impair our borrower’s ability to service the interest portion of their obligations to us. This could result in decreased net income from increased provisions to the allowance for loan and lease losses as well as decreased interest income resulting from an increase in nonaccrual loans. For additional discussion see “Risk Elements” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this report.

A rapid change in interest rates could negatively impact net interest income.

We are exposed to interest rate risk, which is the risk that changes in prevailing interest rates will adversely affect assets, liabilities, capital, income and expenses at different times or in different amounts. We utilize a number of measures to monitor and manage interest rate risk, such as income simulations and interest sensitivity (gap) analyses. A number of factors that impact interest rates are beyond our control such as general economic conditions as well as governmental and regulatory policies. The impact of rate changes to our net interest income is determined by the amount of change and the time horizon over which change occurs. For additional discussion see “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” of this report.

Competition.

We face significant competition from other financial institutions for loans and deposits. We believe the most significant competitive factor is customer service, in addition to interest rates offered on loans and paid on deposits, fee structures, branch locations, and the range of banking services and products offered. Failure to maintain our service culture could increase the susceptibility of our customer base to our competitors marketing campaigns and thwart our efforts to expand our existing customer base. For additional discussion see “Competition” in “Item 1. Business” of this report.

Failure to hire or retain management and staff could impede our ability to maintain or grow earnings.

Maintaining our current customer base is reliant upon the retention of key management and personnel across all our business lines. We rely on these talented professionals to manage lines of business which are critical in the generation of operating revenue. In addition, the failure to attract new employees critical to the execution of our expansion plan could result in diminished returns on our investment in these initiatives.

The tightening of available liquidity could limit our ability to meet loan demand.

Some of the markets from which we obtain our wholesale funding have experienced significant volatility and disruption since mid-2007. Additional uncertainty within these markets could limit our access to wholesale funding and impair our ability to grow our loan portfolio consistent with historical trends.

Concentration in real estate loans.

We have a high concentration of loans secured by real estate and a downturn in the real estate market, for any reason, could hurt our business and our prospects. Our business activities and credit exposure are concentrated in loans secured by real estate. A decline in the real estate market could hurt our business because the collateral securing those loans would decrease in value. A downturn in the local economy could have a material adverse effect both on a borrower’s ability to repay these loans, as well as the value of the real property held as collateral. Our ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted loans.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

Locations

Columbia Bank: The Company’s principal Columbia Bank properties include our corporate headquarters which is located at 13th & A Street, Tacoma, Washington, in Pierce County, where we occupy 62,000 square feet of office space, 4,000 square feet of commercial lending space and 750 square feet of branch space under various operating lease agreements, an operations facility in Lakewood, Washington, where we own 58,000 square feet of office space and an office facility in Tacoma, Washington, that includes a branch where we occupy 26,000 square feet under various operating lease agreements.

In Pierce County we conduct business in twenty additional branch locations, fourteen of which are owned and six of which are leased under various operating lease agreements. In King County we conduct business in nine branch locations, six of which are owned and three of which are leased. In Kitsap, Thurston, Cowlitz and Whatcom counties we conduct business in seven branch locations, five of which are owned and two that are leased under various operating lease agreements. In addition, Columbia Bank, dba Mt. Rainier Bank, conducts business in seven branch locations in King and Pierce counties. Finally, in the Portland metropolitan area, Columbia Bank conducts business in five branch locations in Clackamas and Multnomah counties.

Bank of Astoria: The Company’s principal Astoria properties include headquarters in Astoria, Oregon, in Clatsop County, where we own 20,000 square feet of branch and office space. We conduct business in three additional branches in Clatsop County and one branch in Tillamook County, all of which are owned.

For additional information concerning our premises and equipment and lease obligations, see Note 8 and 16, respectively, to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.

ITEM 3.

LEGAL PROCEEDINGS

The Company and its banking subsidiaries are parties to routine litigation arising in the ordinary course of business. Management believes that, based on the information currently known to them, any liabilities arising from such litigation will not have a material adverse impact on the Company’s financial condition, results of operations or cash flows.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Quarterly Common Stock Prices and Dividends

Our common stock is traded on the NASDAQ Global Select Market under the symbol “COLB”. Quarterly high and low closing prices and dividend information for the last two years are presented in the following table. The prices shown do not include retail mark-ups, mark-downs or commissions:


2007	High		Low		Cash Dividend Declared
First quarter	$	35.96	$	32.36	$	0.15
Second quarter	$	34.18	$	28.35		0.17
Third quarter	$	33.41	$	24.71		0.17
Fourth quarter	$	34.00	$	27.19		0.17

For the year	$	35.96	$	24.71	$	0.66


2006	High		Low		Cash Dividend Declared
First quarter	$	35.49	$	27.99	$	0.13
Second quarter	$	37.39	$	31.75		0.14
Third quarter	$	36.67	$	29.91		0.15
Fourth quarter	$	36.20	$	30.90		0.15

For the year	$	37.39	$	27.99	$	0.57

On December 31, 2007, the last sale price for our stock in the over-the-counter market was $29.73. At January 31, 2008, the number of shareholders of record was 2,339. This figure does not represent the actual number of beneficial owners of common stock because shares are frequently held in “street name” by securities dealers and others for the benefit of individual owners who may vote the shares.

At December 31, 2007, a total of 331,868 stock options were outstanding. Additional information about stock options and other equity compensation plans is included in Note 13 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.

The payment of future cash dividends is at the discretion of our Board and subject to a number of factors, including results of operations, general business conditions, growth, financial condition and other factors deemed relevant by the Board of Directors. Our ability to pay future cash dividends is subject to certain regulatory requirements and restrictions which are discussed in the Supervision and Regulation section in “Item 1. Business” of this report.

Equity Compensation Plan Information


	Year Ended December 31, 2007
	Number of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (1)	Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans (2)
Equity compensation plans approved by security holders	331,868	$	14.77	196,414
Equity compensation plans not approved by security holders	—		—	—

(1)	Consists of shares that are subject to outstanding options.

(2)	Includes shares available for future issuance under the stock option plans and 66,320 shares available for purchase under the Employee Stock Purchase Plan as of December 31, 2007.

Five-Year Stock Performance Graph

The following graph shows a five-year comparison of the total return to shareholders of Columbia’s common stock, the Nasdaq Composite Index (which is a broad nationally recognized index of stock performance by companies listed on the Nasdaq Stock Market) and the Columbia Peer Group (comprised of banks with assets of $1 billion to $5 billion, all of which are located in the western United States). The definition of total return includes appreciation in market value of the stock as well as the actual cash and stock dividends paid to shareholders. The graph assumes that the value of the investment in Columbia’s common stock, the Nasdaq and the Columbia Peer Group was $100 on December 31, 2002, and that all dividends were reinvested.

LOGO


	Period Ending
Index	December 31, 2002	December 31, 2003	December 31, 2004	December 31, 2005	December 31, 2006	December 31, 2007
Columbia Banking System, Inc.	100.00	173.20	212.25	246.18	308.21	266.81
NASDAQ Composite	100.00	150.01	162.89	165.13	180.85	198.60
Columbia Peer Group	100.00	148.27	195.14	210.18	250.14	174.80

Source: SNL Financial LC, Charlottesville, VA

ITEM 6.

SELECTED FINANCIAL DATA

Five-Year Summary of Selected Consolidated Financial Data (1)


	2007			2006			2005			2004			2003
	(in thousands, except per share amounts)
For the Year
Total revenue	$	136,568		$	122,435		$	115,698		$	94,187		$	86,651
Net interest income	$	108,820		$	97,763		$	90,912		$	71,943		$	63,867
Provision for loan and lease losses	$	3,605		$	2,065		$	1,520		$	995		$	2,850
Noninterest income	$	27,748		$	24,672		$	24,786		$	22,244		$	22,784
Noninterest expense	$	88,829		$	76,134		$	72,855		$	61,326		$	55,960
Net income	$	32,381		$	32,103		$	29,631		$	22,513		$	19,522

Per Share
Net Income (Basic)	$	1.93		$	2.01		$	1.89		$	1.55		$	1.39
Net Income (Diluted)	$	1.91		$	1.99		$	1.87		$	1.52		$	1.37
Book Value	$	19.03		$	15.71		$	14.29		$	13.03		$	10.66

Averages
Total Assets	$	2,837,162		$	2,473,404		$	2,290,746		$	1,919,134		$	1,696,417
Interest-earning assets	$	2,599,379		$	2,265,393		$	2,102,513		$	1,769,470		$	1,544,869
Loans	$	1,990,622		$	1,629,616		$	1,494,567		$	1,186,506		$	1,128,941
Securities	$	581,122		$	623,631		$	605,395		$	552,742		$	401,594
Deposits	$	2,242,134		$	1,976,448		$	1,923,778		$	1,690,513		$	1,483,173
Core deposits	$	1,544,056		$	1,433,395		$	1,423,862		$	1,238,536		$	1,017,126
Shareholders’ equity	$	289,297		$	237,843		$	214,612		$	169,414		$	141,129

Financial Ratios
Net interest margin		4.35	%		4.49	%		4.44	%		4.19	%		4.23	%
Return on average assets		1.14	%		1.30	%		1.29	%		1.17	%		1.15	%
Return on average equity		11.19	%		13.50	%		13.81	%		13.29	%		13.83	%
Return on average tangible equity (2)		14.53	%		15.88	%		16.63	%		14.02	%		13.83	%
Efficiency ratio (3)		61.33	%		58.95	%		61.20	%		63.20	%		62.86	%
Average equity to average assets		10.20	%		9.62	%		9.37	%		8.83	%		8.32	%

At Year End
Total assets	$	3,178,713		$	2,553,131		$	2,377,322		$	2,176,730		$	1,744,347
Loans	$	2,282,728		$	1,708,962		$	1,564,704		$	1,359,743		$	1,078,302
Allowance for loan and lease losses	$	26,599		$	20,182		$	20,829		$	19,881		$	20,261
Securities	$	572,973		$	605,133		$	585,332		$	642,759		$	523,864
Deposits	$	2,498,061		$	2,023,351		$	2,005,489		$	1,862,866		$	1,544,626
Core deposits	$	1,671,659		$	1,473,701		$	1,478,090		$	1,381,073		$	1,098,237
Shareholders’ equity	$	341,731		$	252,347		$	226,242		$	203,154		$	150,372
Full-time equivalent employees		775			657			651			625			539
Banking offices		55			40			40			39			34

Nonperforming assets
Nonaccrual loans	$	14,005		$	2,414		$	4,733		$	8,222		$	13,255
Restructured loans		456			1,066			124			227			—
Other personal property owned		—			—			—			—			691
Other real estate owned		181			—			18			680			1,452

Total nonperforming assets	$	14,642		$	3,480		$	4,875		$	9,129		$	15,398

Nonperforming loans to year end loans		0.63	%		0.20	%		0.31	%		0.62	%		1.23	%
Nonperforming assets to year end assets		0.46	%		0.14	%		0.21	%		0.42	%		0.88	%
Allowance for loan and lease losses to year end loans		1.17	%		1.18	%		1.33	%		1.46	%		1.88	%
Allowance for loan and lease losses to nonperforming loans		183.94	%		579.94	%		428.84	%		235.31	%		152.86	%
Allowance for loan and lease losses to nonperforming assets		181.66	%		579.94	%		427.26	%		217.78	%		131.58	%
Net loan charge-offs	$	380		$	2,712		$	572		$	2,742		$	1,760

Risk-Based Capital Ratios
Total capital		10.90	%		13.23	%		12.97	%		12.99	%		14.49	%
Tier I capital		9.87	%		12.21	%		11.82	%		11.75	%		13.24	%
Leverage ratio		8.54	%		9.86	%		9.54	%		8.99	%		10.03	%

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

(2)	Annualized net income, excluding core deposit intangible amortization, divided by average daily shareholders’ equity, excluding average goodwill and average core deposit intangible asset.

(3)	Noninterest expense divided by the sum of net interest income and noninterest income on a tax equivalent basis, excluding gains/losses on investment securities, net cost (gain) of OREO, reserve for VISA litigation liability and mark-to-market adjustments of interest rate floor instruments.

In managing our business, we review the efficiency ratio, on a fully taxable-equivalent basis (see definition in table below), which is not defined in accounting principles generally accepted in the United States (“GAAP”).

The efficiency ratio is calculated by dividing noninterest expense by the sum of net interest income and noninterest income on a tax equivalent basis, excluding gains and losses on investment securities, net cost or gain of other real estate owned (“OREO”), reserve for VISA litigation liability and mark-to-market adjustments of interest rate floor instruments. Other companies may define or calculate this data differently. We believe this presentation provides investors with a more accurate picture of our operating efficiency. In this presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis using the federal statutory tax rate of 35 percent for all years presented. Noninterest income and noninterest expense are adjusted for certain items as discussed above. The higher efficiency ratio during 2007 was primarily due to not yet fully realizing operating efficiencies from the mid-year acquisitions of Mountain Bank Holding Company and Town Center Bancorp. Improvement of the efficiency ratio will depend on increases in net interest income, growth of noninterest income and continued expense control. For additional information see the “Noninterest Expense” section in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this report.

Reconciliation of Selected Financial Data to GAAP Financial Measures (3)


	Years ended December 31,
	2007			2006			2005			2004			2003
	(in thousands)
Net interest income (1)	$	108,820		$	97,763		$	90,912		$	71,943		$	63,867
Tax equivalent adjustment for non-taxable investment securities interest income (2)		4,337			3,882			2,508			2,161			1,540

Adjusted net interest income	$	113,157		$	101,645		$	93,420		$	74,104		$	65,407

Noninterest income	$	27,748		$	24,672		$	24,786		$	22,244		$	22,784
(Gain) loss on sale of securities, net		—			(36	)		(6	)		6			(222	)
Tax equivalent adjustment for BOLI income (2)		1,016			908			849			710			829

Adjusted noninterest income	$	28,764		$	25,544		$	25,629		$	22,960		$	23,391

Noninterest expense	$	88,829		$	76,134		$	72,855		$	61,326		$	55,960
Net gain (cost) of OREO		(5	)		11			8			13			(139	)
Interest rate floor valuation adjustment		—			(1,164	)		—			—			—
Reserve for VISA litigation liability		(1,777	)		—			—			—			—

Adjusted noninterest expense	$	87,047		$	74,981		$	72,863		$	61,339		$	55,821

Efficiency ratio		65.04	%		62.18	%		62.97	%		65.11	%		64.58	%
Efficiency ratio (fully taxable-equivalent)		61.33	%		58.95	%		61.20	%		63.19	%		62.86	%
Tax Rate		35.00	%		35.00	%		35.00	%		35.00	%		35.00	%

(1)	Amount represents net interest income before provision for loan and lease losses.

(2)	Fully Taxable-equivalent basis: Non-taxable revenue is increased by the statutory tax rate to recognize the income tax benefit of the income realized.

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

Consolidated Five-Year Statements of Operations (1)


	Years ended December 31,
	2007		2006		2005		2004		2003
	(in thousands, except per share amounts)
Interest Income:
Loans	$	156,253	$	123,998	$	99,535	$	68,908	$	69,427
Taxable securities		18,614		20,018		18,135		17,051		11,753
Tax-exempt securities		7,923		7,042		4,452		3,770		2,575
Federal funds sold and deposits with banks		1,427		617		85		337		145

Total interest income		184,217		151,675		122,207		90,066		83,900
Interest Expense:
Deposits		59,930		40,838		25,983		16,537		18,304
Federal Home Loan Bank advances		11,065		10,944		3,515		370		652
Long-term obligations		2,177		1,992		1,583		1,162		1,077
Other borrowings		2,225		138		214		54		—

Total interest expense		75,397		53,912		31,295		18,123		20,033

Net Interest Income		108,820		97,763		90,912		71,943		63,867
Provision for loan and lease losses		3,605		2,065		1,520		995		2,850

Net interest income after provision for loan and lease losses		105,215		95,698		89,392		70,948		61,017
Noninterest income		27,748		24,672		24,786		22,244		22,784
Noninterest expense		88,829		76,134		72,855		61,326		55,960

Income before income taxes		44,134		44,236		41,323		31,866		27,841
Provision for income taxes		11,753		12,133		11,692		9,353		8,319

Net Income	$	32,381	$	32,103	$	29,631	$	22,513	$	19,522

Net Income Per Common Share:
Basic	$	1.93	$	2.01	$	1.89	$	1.55	$	1.39
Diluted	$	1.91	$	1.99	$	1.87	$	1.52	$	1.37
Average number of common shares outstanding (basic)		16,802		15,946		15,708		14,558		14,039
Average number of common shares outstanding (diluted)		16,972		16,148		15,885		14,816		14,215
Total assets at year end	$	3,178,713	$	2,553,131	$	2,377,322	$	2,176,730	$	1,744,347
Long-term obligations	$	25,519	$	22,378	$	22,312	$	22,246	$	22,180
Cash dividends declared	$	0.66	$	0.57	$	0.39	$	0.26	$	0.15

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

Selected Quarterly Financial Data (1)

The following table presents selected unaudited consolidated quarterly financial data for each quarter of 2007 and 2006. The information contained in this table reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods.


	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Year Ended December 31,
	(in thousands, except per share amounts)
2007
Total interest income	$	41,146	$	43,255	$	49,378	$	50,438	$	184,217
Total interest expense		16,443		17,560		20,518		20,876		75,397

Net interest income		24,703		25,695		28,860		29,562		108,820
Provision for loan and lease losses		638		329		1,231		1,407		3,605
Noninterest income		6,177		6,741		7,631		7,199		27,748
Noninterest expense		20,402		20,266		22,425		25,736		88,829

Income before income tax		9,840		11,841		12,835		9,618		44,134
Provision for income tax		2,557		3,297		3,579		2,320		11,753

Net income	$	7,283	$	8,544	$	9,256	$	7,298	$	32,381

Net income per common share:
Basic	$	0.45	$	0.53	$	0.53	$	0.41	$	1.93
Diluted	$	0.45	$	0.53	$	0.53	$	0.41	$	1.91
2006
Total interest income	$	35,069	$	37,410	$	39,166	$	40,030	$	151,675
Total interest expense		10,763		13,108		14,761		15,280		53,912

Net interest income		24,306		24,302		24,405		24,750		97,763
Provision for loan and lease losses		215		250		650		950		2,065
Noninterest income		5,973		6,267		6,108		6,324		24,672
Noninterest expense		18,340		21,136		18,098		18,560		76,134

Income before income tax		11,724		9,183		11,765		11,564		44,236
Provision for income tax		3,536		1,944		3,430		3,223		12,133

Net income	$	8,188	$	7,239	$	8,335	$	8,341	$	32,103

Net income per common share:
Basic	$	0.52	$	0.45	$	0.52	$	0.52	$	2.01
Diluted	$	0.51	$	0.45	$	0.52	$	0.52	$	1.99

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

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

This discussion should be read in conjunction with our Consolidated Financial Statements and related notes in “Item 8. Financial Statements and Supplementary Data” of this report. In the following discussion, unless otherwise noted, references to increases or decreases in average balances in items of income and expense for a particular period and balances at a particular date refer to the comparison with corresponding amounts for the period or date for the previous year.

NOTE REGARDING FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K may be deemed to include forward looking statements, which management believes to be a benefit to shareholders. These forward looking statements describe management’s expectations regarding future events and developments such as future operating results, growth in loans and deposits, continued success of our style of banking and the strength of the local economy. The words “will,” “believe,” “expect,” “should,” and “anticipate” and words of similar construction are intended in part to help identify forward looking statements. Future events are difficult to predict, and the expectations described above are necessarily subject to risk and uncertainty that may cause actual results to differ materially and adversely. In addition to discussions about risks and uncertainties set forth from time to time in our filings with the SEC, factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, among others, the following possibilities: (1) local and national economic conditions are less favorable than expected or have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth at historical rates and maintain the quality of our earning assets; (2) a continued decline in the housing/real estate market; (3) changes in interest rates significantly reduce interest margins and negatively affect funding sources; (4) deterioration of credit quality that could, among other things, increase defaults and delinquency risks in the Banks’ loan portfolios (5) projected business increases following strategic expansion or opening or acquiring new branches are lower than expected; (6) competitive pressure among financial institutions increases significantly; (7) legislation or regulatory requirements or changes adversely affect the businesses in which we are engaged; and (8) our ability to realize the efficiencies we expect to receive from our investments in personnel, acquisitions and infrastructure.

Critical Accounting Policies

We have established certain accounting policies in preparing our Consolidated Financial Statements that are in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are presented in Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report. Certain of these policies require the use of judgments, estimates and economic assumptions which may prove inaccurate or are subject to variation that may significantly affect our reported results of operations and financial position for the periods presented or in future periods. Management believes that the judgments, estimates and economic assumptions used in the preparation of the Consolidated Financial Statements are appropriate given the factual circumstances at the time.

We have identified the allowance for loan and lease losses (“ALLL”) as our most critical accounting policy. The ALLL is established to absorb known and inherent losses in our loan and lease portfolio. Our methodology in determining the appropriate level of the ALLL includes components for a general valuation allowance in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies, a specific valuation allowance in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan and an unallocated component. Both quantitative and qualitative factors are considered in determining the appropriate level of the ALLL. Quantitative factors include historical loss experience, delinquency and charge-off trends, collateral values, past-due and nonperforming loan trends and the evaluation of specific loss estimates for problem loans. Qualitative factors include existing general economic and business conditions in our

market areas as well as the duration of the current business cycle. Changes in any of the factors mentioned could have a significant impact on our calculation of the ALLL. Our ALLL policy and the judgments, estimates and economic assumptions involved are described in greater detail in the “Allowance for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit” section of this discussion and in Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.

Executive Summary

At December 31, 2007, total loans were $2.28 billion compared with $1.71 billion in the prior year, an increase of $573.8 million or 34%. Our increase in total loans during the year was equally divided between organic growth and the impact of the two acquisitions. Over the past five years, our banking team has generated a compound annual growth rate for year end loans of 14% inclusive of the impact of our three acquisitions during this time period. The growth in our loan portfolio has been achieved while maintaining acceptable overall credit quality as our nonperforming loans represented 0.63% of total loans at December 31, 2007. At year end our allowance for loan and lease losses was $26.6 million compared to $20.2 million a year ago. The allowance for loan and lease losses represented 1.17% of our total loan portfolio and 183.94% of total nonperforming loans at year end compared to 1.18% and 579.94%, respectively, one year ago. Net charge-offs decreased $2.3 million from the prior year to $380,000 during 2007. The growth in our loan portfolio caused us to increase our provision for loan and lease losses to $3.6 million during 2007 from $2.1 million during 2006.

Deposits increased $474.7 million to $2.50 billion on December 31, 2007 compared to $2.02 billion one year earlier. Our increase in deposits during the year was due to $170 million of organic growth coupled with approximately $305 million resulting from the two acquisitions. Core deposits increased $198 million or 13%, to $1.67 billion at year end. Over the past five years core deposits have proven to be a stable source of funds with a compound annual growth rate of 11%. Certificates of deposits increased $276.8 million for 2007. Short-term borrowings increased $36.7 million from the prior year to $262.7 million at December 31, 2007. The increase in borrowings was used to fund growth in the loan portfolio.

Total revenues (net interest income plus noninterest income) increased 12% to $136.6 million during 2007 as compared to $122.4 million during 2006. Net interest income increased $11 million to $108.8 million from $97.8 million in 2006. Noninterest income increased $3.1 million to $27.8 million from $24.7 million in 2006. The increase in noninterest income was attributed primarily to an increase in service charge income of $1.3 million, an increase in mortgage banking income of $342,000 and an increase in miscellaneous loan fees of $563,000.

On October 3, 2007, Visa completed a restructuring and issued shares of Visa Inc. common stock to its financial institution members in contemplation of its initial public offering (“IPO”) presently scheduled to occur in 2008. After the restructuring, member financial institutions became guarantors of Visa’s litigation liabilities based upon their proportionate share of the membership base. On November 7, 2007, Visa announced that it had reached a settlement in the amount of $2.07 billion to resolve certain restraint of trade litigation brought by American Express. For the 4^th quarter 2007, Columbia recognized a pre-tax charge of approximately $1.8 million, or $0.06 per diluted common share, related to the American Express settlement and the remaining unsettled Discover, Interchange, and Attridge litigation. Of this $1.8 million, $612,000 is the Company’s proportionate share of the American Express settlement and $1.16 million is the Company’s estimate of the fair value of potential losses related to the remaining unsettled litigation in accordance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. The $1.8 million charge is included in “Legal and professional services” on the Consolidated Statements of Income in “Item 8. Financial Statements and Supplementary Data” of this report. At this time the Company will not reflect any value for its membership interest in Visa as a result of the restructuring. However, if the anticipated IPO is completed, it is expected that Visa will fund an escrow account with a portion of the proceeds. The escrow account will be for the settlement of Visa’s liabilities associated with

restraint of trade actions brought against them. The fair value of the Company’s proportionate Visa interest will be realized, based upon the value of shares utilized to establish the escrow account (limited to the amount of the obligation recorded) and shares redeemed for cash. The Company anticipates that its proportionate share of the Visa IPO proceeds will more than offset its liabilities related to Visa’s litigation matters.

Our net interest margin decreased 14 basis points to 4.35% during 2007 from 4.49% in the prior year. For the twelve month period, funding costs have increased as our mix of core deposits has shifted within our existing portfolio toward higher cost core and non-core funding products. In addition, deposits from our third quarter acquisitions were comprised of a greater percentage of non-core deposit products. We were able to offset a portion of the increased funding costs with higher yielding assets. The average yield on our loan portfolio increased 24 basis points to 7.85% during 2007 as compared to 7.61% during the prior year. The average cost of interest bearing deposits increased 67 basis points to 3.32% from 2.65% in the prior year while our average borrowing costs increased to 5.69% up from 5.60% in the prior year.

Earnings per diluted share decreased $0.08 to $1.91 during 2007 as compared to $1.99 during 2006. The decrease in earnings per diluted share reflects the additional common shares issued in our two acquisitions during 2007, thereby increasing our average outstanding shares. Over the last five years our compounded growth rate of earnings per diluted share was 20%. Our return on average tangible equity, which removes from equity the impact of goodwill arising from acquisitions, was 14.53% for the year as compared to 15.88% in 2006. Return on average equity declined to 11.19% in 2007 from 13.50% in 2006.

During 2007 our noninterest expense increased 17%, or $12.7 million, to $88.8 million. This increase is primarily attributable to increased employee compensation and benefits expense of $7.9 million, increased occupancy costs of $1.6 million and an increase of $2.8 million in legal and professional services. The increase in compensation costs was primarily due to increases in our lending and retail functions. The increase in lending and retail banking staff reflects our investment in the future growth of the organization. Compensation costs were also increased in excess of $1.9 million due to our two acquisitions. Employee compensation and benefits were also impacted by increased group medical costs, general wage increases, and expenses related to share-based payments. Approximately $1.8 million of the increase in legal expenses was related to the Visa litigation reserve established during the fourth quarter of 2007.

Our efficiency ratio [noninterest expense divided by the sum of net interest income and noninterest income on a tax equivalent basis, excluding gain (loss) on sale of investment securities, net cost (gain) of OREO, reserve for VISA litigation liability, and mark-to-market adjustments of interest rate floor instruments] was 61.33% for 2007 and 58.95% for 2006. The year over year deterioration (increase) in our efficiency ratio is due to a higher growth rate of noninterest expense in proportion to noninterest income. For discussion over the variances in noninterest expense and noninterest income see the following “Noninterest Income” and “Noninterest Expense” sections of this discussion.

A priority for us during 2008 is to continue to focus on actively managing our balance sheet in a manner that minimizes our exposure to potential contraction of our net interest margin in the event of additional declines in short-term interest rates. In addition, we will focus on expense control and pursue opportunities to reduce expenses including measures such as branch consolidation. We will continue in our efforts to increase market share in all the communities we serve through leveraging our strong base of branches in both Washington and Oregon. As strategic opportunities are identified, we will consider new markets and branch locations that fit both our economic model and our corporate culture while balancing the need for fiscal restraint based upon changing general economic conditions.

Results of Operations

Net income for the year increased to $32.4 million compared to $32.1 million in 2006 and $29.6 million in 2005. On a diluted per share basis, net income for the year was $1.91 per share, compared with $1.99 per share in 2006, and $1.87 per share in 2005.

Our results of operations are dependent to a large degree on net interest income. We also generate noninterest income through service charges and fees and merchant services fees. Our operating expenses consist primarily of compensation, employee benefits, and occupancy. 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 the actions of regulatory authorities.

Business Combinations

In July, 2007, the Company acquired all of the outstanding common stock of Mountain Bank Holding Company (“Mt. Rainier”), the parent company of Mt. Rainier National Bank, headquartered in Enumclaw, Washington and Town Center Bancorp (“Town Center”), the parent company of Town Center Bank, headquartered in Portland, Oregon. The acquisitions were consistent with our expansion strategy and added 7 branches in King and Pierce counties and 5 Oregon branches in the North Clackamas and Southeast Portland areas.

The operating results of Mt. Rainier and Town Center were included in the Company’s operating results beginning July 23, 2007; consequently, 2007 quarter-end and year-to-date operating results are not directly comparable to the 2006 results for the same periods. For comparison purposes to prior periods, as of July 23, 2007 Mt. Rainier and Town Center combined contributed $360 million in assets, $287 million in loans and $305 million in deposits.

Net Interest Income

Net interest income is the single largest component of our total revenue. Our net interest income increased 11%, to $108.8 million in 2007 as compared to $97.8 million in 2006 and $90.9 million in 2005. In the current year interest on loans was a key factor in the growth of our interest income, increasing 26% to $156.3 million. This compares to 2006 and 2005 loan interest earnings of $124.0 million and $99.5 million, respectively. The increase in loan interest income during 2007 is primarily due to increased loan volumes, whereas the increase during 2006 was attributable to higher loan rates. Interest expense increased $21.5 million, or 40%, to $75.4 million during 2007 as compared to $53.9 million in 2006 and $31.3 million in 2005. The upward trend in interest expense for 2007 is primarily due to a change in the mix of our core deposits shifting to higher cost core and non-core funding products. The increase in interest expense during 2006 as compared to 2005 was primarily due to growth in deposits, increased use of FHLB borrowings, and 2005 was the first full year that included Astoria’s operating results.

Additionally, declining short-term interest rates impacted the net interest margin in 2007, decreasing 14 basis points to 4.35% from 4.49% in 2006 and 4.44% in 2005. Approximately 43% of our loans are tied to short-term indices such as Prime or LIBOR. This 14 basis point decrease, assuming no other moving parts would equate to a year over year before tax impact of $3.6 million. Also impacting the margin is the above average loan growth accompanied by a lag in gathering deposits to fund these loans. We currently fund the difference using short-term borrowings and wholesale deposits which have higher costs associated with them. Average asset yields increased 38 basis points with average interest liability yields increasing 59 basis points from 2006. Decreases in the target Federal Funds rate, such as those occurring subsequent to year-end, may continue to negatively impact our net interest margin.

In 2006, we began using derivative instruments to add stability to interest income and to manage our exposure to changes in interest rates. One of the initiatives we undertook to accomplish this objective was the purchase of three prime interest rate floors for a combined notional amount of $200 million with strike prices laddered in at 7.25%, 7.50% and 7.75%. We utilized these floors to establish a cash flow hedge with several pools of our prime based loans to assist in diminishing our exposure to margin compression in a falling rate environment. Essentially, when the prime rate fell below the strike rate the Company received payment on the

difference between the two rates. In March 2006 we paid approximately $3.1 million for the floors which had an April 2011 expiration date. In January 2008 we elected to take advantage of what we felt was favorable pricing and sold the floors for $8.1 million. At the time of their sale the floors had a book value of $1.9 million resulting in a deferred gain of $6.2 million to be recognized through interest income as the originally hedged forecasted transactions (interest payments on variable-rate loans) affect earnings. We expect to accrete $1.7 million of the deferred gain through earnings during 2008 and $2.5 million, $1.7 million, and $290,000 in 2009, 2010, and 2011, respectively. Our decision to monetize the gain on these floors removed the uncertainty changing interest rates would have on their realizable value had we held them to maturity. For additional information on our derivatives and hedging activities, see Note 18 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.

Average Balances and Net Interest Revenue

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


	2007						2006						2005
	Average Balances (1)		Interest		Average Rate		Average Balances (1)		Interest		Average Rate		Average Balances (1)		Interest		Average Rate
	(in thousands)
Interest-Earning Assets
Loans:
Commercial business	$	686,617	$	57,393	8.36	%	$	592,118	$	48,958	8.27	%	$	551,337	$	38,534	6.99	%
Real estate (2):
One-to-four family residential		236,960		20,070	8.47	%		110,343		8,736	7.92	%		87,263		5,698	6.53	%
Commercial and five or more family residential properties		905,893		65,737	7.26	%		778,783		54,344	6.98	%		718,601		45,791	6.37	%
Consumer		161,152		13,053	8.10	%		148,372		11,960	8.06	%		137,366		9,512	6.92	%

Total loans		1,990,622		156,253	7.85	%		1,629,616		123,998	7.61	%		1,494,567		99,535	6.66	%
Securities (3)		581,122		30,874	5.31	%		623,631		30,942	4.96	%		605,395		25,095	4.15	%
Interest-earning deposits with banks		27,635		1,427	5.16	%		12,146		617	5.08	%		2,551		85	3.33	%

Total interest-earning assets		2,599,379		188,554	7.25	%		2,265,393		155,557	6.87	%		2,102,513		124,715	5.93	%
Other earning assets		42,334						37,725						36,114
Non-earning assets		195,449						170,286						152,118

Total assets	$	2,837,162					$	2,473,404					$	2,290,745

Interest-Bearing Liabilities
Certificates of deposit	$	698,078	$	31,274	4.48	%	$	543,053	$	20,985	3.86	%	$	499,916	$	14,600	2.92	%
Savings accounts		111,265		467	0.42	%		115,802		436	0.38	%		113,160		409	0.36	%
Interest-bearing demand and money market accounts		994,317		28,189	2.84	%		879,774		19,417	2.21	%		889,457		10,974	1.23	%

Total interest-bearing deposits		1,803,660		59,930	3.32	%		1,538,629		40,838	2.65	%		1,502,533		25,983	1.73	%
Federal Home Loan Bank advances		207,521		11,065	5.33	%		208,593		10,944	5.25	%		107,651		3,515	3.27	%
Long-term obligations		23,777		2,177	9.16	%		22,343		1,992	8.92	%		22,277		1,583	7.11	%
Other borrowings		40,606		2,225	5.48	%		2,413		138	5.72	%		2,847		214	7.52	%

Total interest-bearing liabilities		2,075,564		75,397	3.63	%		1,771,978		53,912	3.04	%		1,635,308		31,295	1.91	%
Demand and other noninterest-bearing deposits		438,474						437,819						421,245
Other noninterest-bearing liabilities		33,827						25,764						19,580
Shareholders’ equity		289,297						237,843						214,612

Total liabilities and shareholders’ equity	$	2,837,162					$	2,473,404					$	2,290,745

Net interest income (3)			$	113,157					$	101,645					$	93,420

Net interest spread					3.62	%					3.83	%					4.02	%

Net interest margin					4.35	%					4.49	%					4.44	%

Average interest-earning assets to average interest-bearing liabilities					125.24	%					127.85	%					128.57	%

(1)	Nonaccrual loans were included in their respective loan categories. Amortized net deferred loan fees were included in the interest income calculations. The amortization of net deferred loan fees was $3.5 million in 2007, $2.1 million in 2006, $1.9 million in 2005.

(2)	Real estate average balances include real estate construction loans.

(3)	Yields on fully taxable equivalent basis, based on a marginal tax rate of 35%

A performance metric that we consistently use to evaluate our success in managing our interest-earning assets and interest-bearing liabilities is the level of our net interest margin. Our net interest margin (net interest income on a fully-taxable equivalent basis divided by average interest-earning assets) remained relatively stable during 2007 and 2006 decreasing only 14 basis points [A basis point is 1/100th of 1%, alternatively 100 basis points equals 1.00]. The decline in our net interest margin during 2007 was primarily due to a shift within our deposit portfolio toward higher cost core

and non-core funding products coupled with an increased reliance on borrowings and other higher cost wholesale funding alternatives. While our net interest margin experienced very modest compression from 2006 to 2007, for comparative purposes one basis point in the margin equates to approximately $260,000 per year in net interest income. Accordingly, the 14 basis point reduction in the margin during 2007 negatively impacted pre-tax earnings by $3.6 million.

Net Interest Income Rate & Volume Analysis

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, changes in rates and changes in rates multiplied by volume. Changes attributable to the combined effect of volume and interest rates have been allocated proportionately to the changes due to volume and the changes due to interest rates:


	2007 Compared to 2006 Increase (Decrease) Due to									2006 Compared to 2005 Increase (Decrease) Due to
	Volume			Rate			Total			Volume			Rate			Total
	(in thousands)
Interest Income
Loans (1)	$	28,337		$	3,918		$	32,255		$	10,276		$	14,187		$	24,463
Securities (TE)		(2,258	)		2,190			(68	)		905			4,942			5,847
Interest-earning deposits with banks		800			10			810			488			44			532

Total interest income (TE)	$	26,879		$	6,118		$	32,997		$	11,669		$	19,173		$	30,842

Interest Expense
Deposits:
Certificates of deposit	$	6,945		$	3,344		$	10,289		$	1,667		$	4,718		$	6,385
Savings accounts		(19	)		50			31			10			17			27
Interest-bearing demand		3,247			5,525			8,772			(214	)		8,657			8,443

Total interest on deposits		10,173			8,919			19,092			1,463			13,392			14,855
FHLB advances		(57	)		178			121			5,296			2,133			7,429
Long-term subordinated debt & trust preferred obligations		131			54			185			6			403			409
Other borrowings		2,093			(6	)		2,087			(25	)		(51	)		(76	)

Total interest expense	$	12,340		$	9,145		$	21,485		$	6,740		$	15,877		$	22,617

TE = Taxable equivalent, based on a marginal tax rate of 35%.

(1)	Nonaccrual loans were included in their respective loan categories. Amortized net deferred loan fees were included in the interest income calculations. The amortization of net deferred loan fees was $3.5 million in 2007, $2.1 million in 2006, $1.9 million in 2005.

As evidenced by the table presented above, the $33 million increase in total interest revenue during 2007 as compared to 2006 was primarily due to the increased volume of loans. The $30.8 million increase in total interest revenue during 2006, as compared to 2005, was primarily due to increased loan rates and volume coupled with increasing rates on securities. The $21.5 million increase in total interest expense in 2007, as compared to 2006, was a result of increased volume and rates on certificates of deposits and interest bearing demand and increased volume in other borrowings. The $22.6 million increase in total interest expense in 2006, as compared to 2005, was a result of increased rates paid on certificate of deposits and interest bearing demand accounts and the increased use of short term borrowings such as Federal Home Loan Bank advances.

Provision for Loan and Lease Losses

Our provision for loan and lease losses (“the provision”) was $3.6 million for 2007, compared with $2.1 million for 2006, and $1.5 million for 2005. For the years ended December 31, 2007, 2006, and 2005, net loan charge-offs amounted to $380,000, $2.7 million and $572,000, respectively. Expressed as a percentage of average loans, net charge-offs for the years ended December 31, 2007, 2006 and 2005 were 2 basis points, 17 basis points, and 4 basis points, respectively. The charge-offs during 2007, 2006 and 2005 were comprised of several loans. The increased provision in 2007 as compared to 2006 was primarily due to growth in our loan portfolio. The high level in net charge offs for 2006 was primarily centered in one “legacy credit” originated in December of 1999, which was classified as non-performing in November of 2003. The provision is based on management’s estimates resulting from ongoing modeling and qualitative analysis of the characteristics and composition of the loan portfolio. For discussion over the methodology used by management in determining the adequacy of the ALLL see the following “Allowance for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit” section of this discussion.

Noninterest Income

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


	Years ended December 31,
	2007		$ change			% change		2006		$ change			% change		2005
	(in thousands)
Fees and other revenue:
Service charges, loan fees and other fees	$	13,498	$	1,847		16	%	$	11,651	$	341		3	%	$	11,310
Merchant services fees		8,373		59		1	%		8,314		(166	)	(2	)%		8,480
Gain (loss) on sale of securities, net		0		(36	)	(100	)%		36		30		500	%		6
Bank owned life insurance (BOLI)		1,886		199		12	%		1,687		110		7	%		1,577
Other income		3,991		1,007		34	%		2,984		(429	)	(13	)%		3,413

Total noninterest income	$	27,748	$	3,076		12	%	$	24,672	$	(114	)	0	%	$	24,786

The increase in noninterest income during 2007 was primarily due to increased service charges, fees and other miscellaneous income earned over a larger customer base. Service charges and other fees increased $1.8 million or 16%. This increase is the result of a change in our deposit account fee structure in conjunction with an increase in the number of deposit accounts. The increase in deposit accounts results from a combination of organic growth and accounts obtained from our two acquisitions which closed early in the third quarter.

Other Noninterest Income: The following table presents selected items of “other noninterest income” and the related dollar and percentage change from period to period:


	Years ended December 31,
	2007		$ change			% change		2006		$ change			% change		2005
	(in thousands)
Gain on disposal of assets	$	265	$	(60	)	(18	)%	$	325	$	26		9	%	$	299
Mortgage banking		537		249		86	%		288		(833	)	(74	)%		1,121
Cash management 12-b1 fees		399		71		22	%		328		41		14	%		287
Letter of credit fees		399		95		31	%		304		(10	)	(3	)%		314
Late charges		250		18		8	%		232		21		10	%		211
Currency exchange income		316		50		19	%		266		43		19	%		223
New Markets Tax Credit dividend		93		1		1	%		92		32		53	%		60
Miscellaneous fees on loans		870		633		267	%		237		135		132	%		102
Interest rate swap income		225		225		100	%		—		—		—			—
Credit card fees		81		(2	)	(2	)%		83		(12	)	(13	)%		95
Miscellaneous		556		(273	)	(33	)%		829		128		18	%		701

Total other noninterest income	$	3,991	$	1,007		34	%	$	2,984	$	(429	)	(13	)%	$	3,413

Much of the gain on the sale of assets during 2007, 2006 and 2005 consists of the amortized gain on the sale and lease-back of two buildings which occurred in September 2004. The resulting $1.3 million gain on the sale was deferred and recognized over the life of the leases, the unamortized gain balance at December 31, 2007 and 2006 was $565,000 and $784,000, respectively, and is included in other liabilities on our consolidated balance sheets. During 2007, 2006 and 2005 the Company recognized amortized gains associated with the sale and lease-back transaction of $219,000, 246,000 and $246,000, respectively. The increase in miscellaneous fees on loans during 2007 is primarily attributable to increased loan prepayment fees.

Noninterest Expense

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


	Years ended December 31,
	2007		$ change			% change		2006			$ change			% change		2005
	(in thousands)
Compensation	$	34,508	$	6,322		22	%	$	28,186		$	479		2	%	$	27,707
Employee benefits		12,195		1,612		15	%		10,583			1,005		10	%		9,578
Occupancy		12,322		1,562		15	%		10,760			653		6	%		10,107
Merchant processing		3,470		109		3	%		3,361			103		3	%		3,258
Advertising and promotion		2,391		(191	)	(7	)%		2,582			604		31	%		1,978
Data processing		2,564		250		11	%		2,314			(590	)	(20	)%		2,904
Legal and professional services		4,912		2,813		134	%		2,099			(1,404	)	(40	)%		3,503
Taxes, licenses and fees		2,882		383		15	%		2,499			481		24	%		2,018
Net (gain) cost of other real estate owned		5		16		145	%		(11	)		(3	)	38	%		(8	)
Other		13,580		(181	)	(1	)%		13,761			1,951		17	%		11,810

Total noninterest expense	$	88,829	$	12,695		17	%	$	76,134		$	3,279		5	%	$	72,855

The current year increase in noninterest expense is primarily attributed to increased employee compensation and benefit costs, higher occupancy expense, legal and professional expense, and taxes, license and fees. The increase in compensation costs was primarily due to increases in our lending and retail functions. Compensation costs were also increased in excess of $1.9 million due to our two acquisitions. The increase in compensation and employee benefits for both periods was also impacted by increased group medical costs, general wage increases, and expenses related to share based payments. The increase in occupancy expense during 2007 was primarily related to a general increase in prevailing rents of existing facilities, our expansion efforts within King, Thurston and Whatcom County markets and our two acquisitions. The increase in legal and professional fees was attributed to the establishment of our Visa litigation reserve, the Bank of Astoria’s core processing software conversion, and indirect costs associated with our acquisitions.

Other Noninterest Expense: The following table presents selected items of “other noninterest expense” and the related dollar and percentage change from period to period:


	Years ended December 31,
	2007		$ change			% change		2006		$ change			% change		2005
	(in thousands)
Losses on investments in affordable housing partnerships (1)	$	732	$	(38	)	(5	)%	$	770	$	55		8	%	$	715
Core deposit intangible amortization (“CDI”)		719		267		59	%		452		(85	)	(16	)%		537
Software support & maintenance		846		126		18	%		720		53		8	%		667
Federal Reserve Bank processing fees		440		(400	)	(48	)%		840		181		27	%		659
Telephone & network communications		1,234		114		10	%		1,120		48		4	%		1,072
Recovery of operational and loan commitment losses		—		—		0	%		—		50		(100	)%		(50	)
Supplies		1,364		166		14	%		1,198		159		15	%		1,039
Postage		1,367		128		10	%		1,239		(12	)	(1	)%		1,251
Sponsorships & charitable contributions		623		(38	)	(6	)%		661		(38	)	(5	)%		699
Travel		453		115		34	%		338		31		10	%		307
Investor relations		228		59		35	%		169		(19	)	(10	)%		188
Insurance		448		(25	)	(5	)%		473		3		1	%		470
Regulatory premiums		507		238		88	%		269		(49	)	(15	)%		318
Director expenses		423		(19	)	(4	)%		442		16		4	%		426
Employee expenses		663		83		14	%		580		58		11	%		522
ATM Network		656		63		11	%		593		88		17	%		505
Miscellaneous		2,877		(1,020	)	(26	)%		3,897		1,412		57	%		2,485

Total other noninterest expense	$	13,580	$	(181	)	(1	)%	$	13,761	$	1,951		17	%	$	11,810

(1)	Losses on investment in affordable housing partnerships. Losses are offset by tax credits which reduce our income tax liability.

Income Tax

For the years ended December 31, 2007, 2006, and 2005, we recorded income tax provisions of $11.8 million, $12.1 million, and $11.7 million, respectively. The effective tax rate was 26.6% in 2007, 27.4% in 2006 and 28.3% in 2005. Our effective tax rate is less than our statutory rate of 35.52% and has exhibited a declining trend over the past three years. This decline is primarily due to a significant increase in the amount of tax-exempt municipal securities held in the investment portfolio, tax exempt earnings on bank owned life insurance, and tax credits received on investments in affordable housing partnerships. For additional information, see Note 12 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.

Financial Condition

Our total assets grew 25% to $3.18 billion at December 31, 2007 from $2.55 billion at December 31, 2006. Our increase in total assets was primarily due to growth in our loan portfolio which increased 34% or $573.8 million to $2.28 billion. Our investment portfolio decreased 5% or $32.2 million. This decrease was primarily a result of investment maturities and scheduled principal reductions and prepayments on mortgage-backed securities. Deposit balances increased $474.7 million or 23% to $2.5 billion. Noninterest bearing deposits increased $35.9 million to $468.2 million while interest bearing deposits increased $438.8 million to $2 billion. Short-term borrowings increased 16% or $36.7 million to $262.7 million. The increased borrowings were used to fund loan growth during 2007. Total equity increased 35% or $89.4 million to $341.7 million due to $32.4 million in net income for 2007 and the issuance of shares related to the two acquisitions.

Investment Portfolio

We invest in securities to generate revenues for the Company, to manage liquidity while minimizing interest rate risk, and to provide collateral for certain public deposits and short-term borrowings. Consistent with our investment strategy, during the upcoming year we may purchase or sell securities in response to changes in interest rates or prepayment characteristics.

The amortized cost amounts represent the Company’s original cost for the investments, adjusted for accumulated amortization or accretion of any yield adjustments related to the security. The estimated fair values are the amounts that we believe the securities could be sold for as of the dates indicated. As of December 31, 2007 we had 108 available for sale securities in an unrealized loss position. Based on past experience with these types of securities and our own financial performance, we have the ability and intent to hold these investments to maturity or until fair value recovers above cost. We review these investments for other-than-temporary impairment on an ongoing basis. While our review did not result in an other-than-temporary impairment adjustment as of December 31, 2007, we will continue to review these investments for possible adjustments in the future.

Purchases during 2007 totaled $3.7 million while maturities and repayments totaled $49.2 million compared to purchases of $177.8 million and maturities and repayments of $110.8 million during 2006. At December 31, 2007 U.S. Government agency and government-sponsored enterprise mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMO”) comprised 54% of our investment portfolio, state and municipal securities were 35%, and U.S. government-sponsored enterprise securities were 11%. There was no impairment charge recognized during 2007, 2006 or 2005. Our entire investment portfolio is categorized as available for sale and carried on our balance sheet at their fair values. The average duration of our investment portfolio was 4 years and 8 months at December 31, 2007. For further information on our investment portfolio see Note 4 of the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.

The following table presents the contractual maturities and weighted average yield of our investment portfolio:

Securities Available for Sale


	December 31, 2007
	Amortized Cost		Fair Value		Yield
	(in thousands)
U.S. Government-sponsored enterprise
Due through 1 year	$	17,731	$	17,678	3.65	%
Over 1 through 5 years		43,406		43,622	4.04	%

Total	$	61,137	$	61,300	3.93	%

U.S. Government agency and government-sponsored enterprise mortgage-backed securities & collateralized mortgage obligations (1)
Due through 1 year	$	560	$	556	3.35	%
Over 1 through 5 years		98		97	4.05	%
Over 5 through 10 years		131,543		130,904	4.63	%
Over 10 years		172,274		172,185	5.20	%

Total	$	304,475	$	303,742	4.95	%

State and municipal securities (2)
Due through 1 year	$	1,099	$	1,094	2.42	%
Over 1 through 5 years		10,407		10,695	6.01	%
Over 5 through 10 years		31,134		31,484	5.39	%
Over 10 years		148,033		150,692	6.19	%

Total	$	190,673	$	193,965	6.03	%

Other securities
Due through 1 year	$	1,400	$	1,400	4.71	%
After 10 years		1,000		959	4.60	%

Total	$	2,400	$	2,359	4.87	%

(1)	The maturities reported for mortgage-backed securities collateralized mortgage obligations are based on contractual maturities and principal amortization.

(2)	Yields on fully taxable equivalent basis, based on a marginal tax rate of 35%.

Loan Portfolio

We are a full service commercial bank, which originates a wide variety of loans, and concentrates its lending efforts on originating commercial business and commercial real estate loans. The following table sets forth our loan portfolio by type of loan for the dates indicated:


	December 31,
	2007			% of Total		2006			% of Total		2005			% of Total		2004			% of Total		2003			% of Total
	(in thousands)
Commercial business	$	762,365		33.4	%	$	617,899		36.1	%	$	570,974		36.5	%	$	488,157		35.9	%	$	381,658		35.4	%

Real estate:
One-to-four family residential		60,991		2.7			51,277		3.0			74,930		4.8			49,580		3.7			47,430		4.4
Commercial and five or more family residential properties		852,139		37.3			687,635		40.3			651,393		41.6			595,775		43.8			472,836		43.8

Total real estate		913,130		40.0			738,912		43.3			726,323		46.4			645,355		47.5			520,266		48.2

Real estate construction:
One-to-four family residential		269,115		11.8			92,124		5.4			41,033		2.6			26,832		2.0			15,577		1.4
Commercial and five or more family residential properties		165,490		7.2			115,185		6.8			89,134		5.7			70,108		5.1			58,998		5.5

Total real estate construction		434,605		19.0			207,309		12.2			130,167		8.3			96,940		7.1			74,575		6.9

Consumer		176,559		7.8			147,782		8.6			140,110		9.0			132,130		9.7			104,240		9.7

Subtotal		2,286,659		100.2			1,711,902		100.2			1,567,574		100.2			1,362,582		100.2			1,080,739		100.2
Less deferred loan fees and other		(3,931	)	(0.2	)		(2,940	)	(0.2	)		(2,870	)	(0.2	)		(2,839	)	(0.2	)		(2,437	)	(0.2	)

Total loans	$	2,282,728		100.0	%	$	1,708,962		100.0	%	$	1,564,704		100.0	%	$	1,359,743		100.0	%	$	1,078,302		100.0	%

Loans held for sale	$	4,482				$	933				$	1,850				$	6,019				$	10,640

At December 31, 2007, total loans were $2.28 billion compared with $1.71 billion in the prior year, an increase of $573.8 million or 34%. We experienced significant growth in commercial business, commercial real estate, and real estate construction loans. Total loans at December 31, 2007 represented 72% of total assets up from 66% at December 31, 2006. The compound annual growth rate of our loan portfolio over the last five years is 14%.

Commercial Business Loans: Commercial loans increased $148.9 million, or 24%, to $757.6 million from year-end 2006, representing 33% of total loans at year end. We are committed to providing competitive commercial banking in our primary market areas. We expect our commercial lending focus to center around expanding our existing banking relationships with businesses and business owners while continuing to build new customer relationships.

Real Estate Loans: Residential one to four family loans are used by us to collateralize advances from the FHLB. Our underwriting standards require that one-to-four family portfolio loans generally be owner-occupied and that loan amounts not exceed 80% (90% with private mortgage insurance) of the appraised value or cost, whichever is lower, of the underlying collateral at origination. We utilize an outsourced residential lending underwriting platform. Residential loans are originated on a pre-sold basis provided they meet the underwriting criteria established by our third party provider. If circumstances warrant, we may originate and retain loans that fall outside the scope of our third party provider’s underwriting guidelines. However, we do not underwrite residential real estate loans for the subprime market.

Commercial and five or more family residential real estate loans reflect a mix of owner occupied and income property transactions. Generally, these loans are made to borrowers who have existing banking relationships with us. Our underwriting standards generally require that the loan-to-value ratio for these loans not exceed 75% of appraised value or cost, whichever is lower, 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, economic conditions, and other factors. We endeavor to maintain the highest practical underwriting standards while balancing the need to remain competitive in our lending practices.

Real Estate Construction Loans: We originate a variety of real estate construction loans. One-to-four family residential construction loans are originated for the construction of custom homes (where the home buyer is the borrower) and to provide financing to builders for the construction of pre-sold homes and speculative residential construction. The increase in real estate construction loans resulted from the contribution of our new Builder Banking team added late in the fourth quarter of 2006 and the addition of construction loans existing at the time of closing within the portfolios of Mt. Rainier National Bank and Town Center Bank. We endeavor to limit our construction lending risk through adherence to strict underwriting procedures. Total real estate and real estate construction loans comprised 59% of our loan portfolio as of December 31, 2007 which is an increase from the 55.5% at December 31, 2006.

Consumer Loans: Consumer loans made by us include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans, and miscellaneous personal loans.

Foreign Outstanding: We are not involved with loans to foreign companies and foreign countries.

For additional information on our loan portfolio, including amounts pledged as collateral on borrowings, see Note 6 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.

Maturities and Sensitivities of Loans to Changes in Interest Rates

The following table presents the maturity distribution of our commercial and real estate construction loan portfolios and the sensitivity of these loans due after one year to changes in interest rates as of December 31, 2007:


	Maturing
(in thousands)	Due Through 1 Year		Over 1 Through 5 Years		Over 5 Years		Total
Commercial business	$	516,112	$	175,810	$	70,443	$	762,365
Real estate construction		360,534		40,547		33,524		434,605

Total	$	876,646	$	216,357	$	103,967	$	1,196,970

Fixed rate loans due after 1 year			$	160,745	$	89,815	$	250,560
Variable rate loans due after 1 year				55,612		14,152		69,764

Total			$	216,357	$	103,967	$	320,324

Risk Elements

The extension of credit in the form of loans or other credit substitutes 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, 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, private banking, 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 non-accrual status even though the loan may be current as to principal and interest payments. Additionally, we assess whether an impairment of a loan warrants specific reserves or a write-down of the loan. For additional discussion on our methodology in managing credit risk within our loan portfolio see the following “Allowance for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit” section and Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.

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. Credit Administration, together with the loan committee, has the responsibility for administering the credit approval process. As another part of its control process, we use an independent internal credit review and examination function to provide 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 on-site examination to ensure continued performance and proper risk assessment.

Nonperforming Loans The Consolidated Financial Statements are prepared according to the accrual basis of accounting. This includes the recognition of interest income on the loan portfolio, unless a loan is placed on nonaccrual status, which occurs when there are serious doubts about the collectibility of principal or interest. Our policy is generally to discontinue the accrual of interest on all loans past due 90 days or more and place them on nonaccrual status.

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 collectibility of principal or interest within the existing terms of the loan; (ii) in most cases restructured loans, for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal, have been granted due to the borrower’s weakened financial condition (interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur); (iii) other real estate owned; and (iv) other personal property owned. Nonperforming assets totaled $14.6 million, or 0.46% of year-end assets at December 31, 2007, compared to $3.5 million or 0.14% of year end assets at December 31, 2006.

The following table sets forth information with respect to our nonaccrual loans, restructured loans, total nonperforming loans (nonaccrual loans plus restructured loans), other real estate owned, other personal property owned, total nonperforming assets, accruing loans past-due 90 days or more, and potential problem loans:


	December 31,
	2007			2006			2005			2004			2003
	(in thousands)
Nonaccrual:
Commercial business	$	2,170		$	1,777		$	4,316		$	6,587		$	9,987
Real Estate
One-to-four family residential		204			366			376			375			365
Commercial and five or more family residential real estate		3,476			217			—			440			1,245
Real Estate Construction
One-to-four family residential		7,317			—			—			—			663
Consumer		838			54			41			820			995

Total nonaccrual loans		14,005			2,414			4,733			8,222			13,255
Restructured:
Commercial business		456			1,066			124			227			—
One-to-four family residential construction		—			—			—			—			—

Total restructured loans		456			1,066			124			227			—

Total nonperforming loans		14,461			3,480			4,857			8,449			13,255
Other real estate owned		181			—			18			680			1,452
Other personal property owned		—			—			—			—			691

Total nonperforming assets	$	14,642		$	3,480		$	4,875		$	9,129		$	15,398

Accruing loans past-due 90 days or more	$	—		$	—		$	—		$	4		$	4
Foregone interest on nonperforming loans	$	814		$	497		$	106		$	920		$	1,338
Interest recognized on nonperforming loans	$	244		$	202		$	45		$	101		$	386
Potential problem loans	$	2,343		$	2,288		$	2,269		$	2,321		$	1,342
Allowance for loan and lease losses	$	26,599		$	20,182		$	20,829		$	19,881		$	20,261
Allowance for loan and lease losses to nonperforming loans		183.94	%		579.94	%		428.84	%		235.31	%		152.86	%
Allowance for loan and lease losses to nonperforming assets		181.66	%		579.94	%		427.26	%		217.78	%		131.58	%
Nonperforming loans to year end loans		0.63	%		0.20	%		0.31	%		0.62	%		1.23	%
Nonperforming assets to year end assets		0.46	%		0.14	%		0.21	%		0.42	%		0.88	%

At December 31, 2007 nonperforming assets increased to 0.46% of period end assets up from 0.14% of period-end assets at December 31, 2006. The increase in nonperforming assets during the year is primarily centered in three lending relationships. The first relationship is a single $4.7 million credit originated in October of 2006 in which Columbia Bank participates with another lender who acts as agent in the transaction. The borrower is engaged in the business of selling residential lots to builders for the purpose of constructing single family residences. The borrower’s inability to obtain final plat approval prior to the expiration of agreements for the sale of lots at a predetermined price combined with softening market conditions resulted in new agreements for the sale of lots at prices reduced from the original agreements. Given these developments, management believes the conservative course of action is to place the loan on nonaccrual until a restructure of the debt is completed. The second relationship is for money we advanced in 2005 for the construction of an office building in Oregon; the building has now been completed with the exception of certain tenant improvements. However, the loans became past due as the borrower encountered operational challenges including delays, cost overruns and the inability to lease up the building as originally anticipated. We are pursuing our remedies in accordance with the loan agreements which evidence this transaction. The final relationship is a single $2.4 million credit which reflected continued stress in real estate-related lending.

The remaining nonperforming assets are centered in a small number of lending relationships which management considers adequately reserved. Generally these relationships are well collateralized, though loss of principal on certain of these loans will remain in question until the loans are paid or collateral is liquidated. The Company will continue its collection efforts and liquidation of collateral to recover as large a portion of the nonaccrual assets as possible. Substantially, all nonperforming loans are to borrowers within the states of Washington and Oregon.

Other Real Estate Owned: As of December 31, 2007 there were two loans in other real estate loans which is comprised of property from foreclosed real estate loans. This reflects a current year increase of $181,000 compared to a decrease of $18,000 at December 31, 2006.

Other Personal Property Owned: Other personal property owned (“OPPO”) is comprised of other, non-real estate property from foreclosed loans. There were no OPPO assets at December 31, 2007 and 2006.

Potential Problem Loans: Potential problem loans are loans which are currently performing and are not on nonaccrual status, restructured or impaired, but about which there are sufficient doubts as to the borrower’s future ability to comply with repayment terms and which may later be included in nonaccrual, past due, restructured or impaired loans. Potential problem loans totaled $2.3 million at year end 2007 and 2006. For additional information on our nonperforming loans see Note 6 to our Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.

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

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

General valuation allowance consistent with SFAS No. 5, “Accounting for Contingencies.”

Criticized/classified loss reserves on specific relationships. Specific allowances for identified problem loans are determined in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.”

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

On a quarterly basis our Chief Credit Officer reviews with Executive Management and the Board of Directors the various additional factors that management considers when determining the adequacy of the ALLL, including economic and business condition reviews. Factors which influenced management’s judgment in determining the amount of the additions to the ALLL charged to operating expense include the following as of the applicable balance sheet dates:

Existing general economic and business conditions affecting our market place

Credit quality trends, including trends in nonperforming loans

Collateral values

Seasoning of the loan portfolio

Bank regulatory examination results

Findings of internal credit examiners

Duration of current business cycle

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

In addition to the ALLL, we maintain an allowance for unfunded loan commitments and letters of credit. We report this allowance as a liability on our Consolidated Balance Sheet. We determine this amount using estimates of the probability of the ultimate funding and losses related to those credit exposures. This methodology is similar to the methodology we use for determining the adequacy of our ALLL. For additional information on our allowance for unfunded loan commitments and letters of credit, see Note 7 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.

Analysis of the ALLL

The following table provides an analysis of our loss experience by loan type for the last five years:


	December 31,
	2007			2006			2005			2004			2003
	(in thousands)
Total loans, net at year end (1)	$	2,282,728		$	1,708,962		$	1,564,704		$	1,359,743		$	1,078,302

Daily average loans	$	1,990,622		$	1,629,616		$	1,494,567		$	1,186,506		$	1,128,941

Balance of ALLL at beginning of period	$	20,182		$	20,829		$	19,881		$	20,261		$	19,171
Balance established through acquisition		3,192			—			—			1,367			—
Charge-offs
Commercial business		(781	)		(2,077	)		(386	)		(2,490	)		(2,210	)
Real Estate:
One-to-four family residential		—			—			—			—			(1	)
Commercial and 5 or more family residential properties		—			(9	)		—			—			—
Real Estate Construction:
One-to-four family residential construction		—			—			—			—			(26	)
Commercial and five or more family residential properties		—			—			(665	)		(260	)		—
Consumer		(432	)		(1,109	)		(221	)		(292	)		(315	)

Total charge-offs		(1,213	)		(3,195	)		(1,272	)		(3,042	)		(2,552	)

Recoveries
Commercial business		530			233			218			124			728
Real Estate:
One-to-four family residential		—			20			—			1			—
Commercial and 5 or more family residential properties		12			83			—			—			—
Real Estate Construction:
One-to-four family residential construction		—			7			—			25			5
Commercial and five or more family residential properties		—			—			326			—			—
Consumer		291			140			156			150			59

Total recoveries		833			483			700			300			792

Net charge-offs		(380	)		(2,712	)		(572	)		(2,742	)		(1,760	)
Provision charged to expense		3,605			2,065			1,520			995			2,850

Balance of ALLL at year end	$	26,599		$	20,182		$	20,829		$	19,881		$	20,261

Net charge-offs to average loans outstanding		0.02	%		0.17	%		0.04	%		0.23	%		0.16	%
Allowance for loan and lease losses to year end loans (1)		1.17	%		1.18	%		1.33	%		1.46	%		1.88	%

(1)	Excludes loans held for sale

The increase in the loan and lease loss provision during 2007 was due primarily to loan growth. The increase in the provision for 2006 was a function of higher net charge-offs and loan growth.

We have used the same methodology for ALLL calculations during 2007, 2006 and 2005. Adjustments to the percentages of the ALLL allocated to loan categories are made based on trends with respect to delinquencies and problem loans within each pool of loans. There were no significant changes during 2007 in estimation methods or assumptions that affected our methodology for assessing the appropriateness of the ALLL. We maintain a conservative approach to credit quality and will continue to prudently add to our ALLL as necessary in order to maintain adequate reserves. Our credit quality measures weakened modestly during 2007, moving closer to historical levels as 2006 results were among the strongest in our history. We carefully monitor the loan portfolio and continue to emphasize the importance of credit quality while continuously strengthening our loan monitoring systems and controls.

Allocation of the ALLL

The table below sets forth the allocation of the ALLL by loan category:


	December 31,
	2007				2006				2005				2004				2003
Balance at End of Period Applicable to:	Amount		% of Total Loans*		Amount		% of Total Loans*		Amount		% of Total Loans*		Amount		% of Total Loans*		Amount		% of Total Loans*
	(in thousands)
Commercial business	$	7,068	33.4	%	$	9,628	36.1	%	$	12,060	36.5	%	$	10,222	35.9	%	$	12,879	35.4	%
Real estate and construction:
One-to-four family residential		7,648	14.5			1,134	8.4			809	7.4			678	5.7			890	5.8
Commercial and five or more family residential properties		11,170	44.3			8,841	46.9			6,663	47.1			7,995	48.7			5,116	49.1
Consumer		713	7.8			281	8.6			677	9.0			985	9.7			1,376	9.7
Unallocated		—	—			298	—			620	—			1	—			—	—

Total	$	26,599	100.0	%	$	20,182	100.0	%	$	20,829	100.0	%	$	19,881	100.0	%	$	20,261	100.0	%

*	Represents the total of all outstanding loans in each category as a percent of total loans outstanding.

Deposits

The following table sets forth the average amount of and the average rate paid on each significant deposit category:


	Years ended December 31,
	2007				2006				2005
	Average Deposits		Rate		Average Deposits		Rate		Average Deposits		Rate
Interest bearing demand (1)	$	994,317	2.84	%	$	879,774	2.21	%	$	889,457	1.23	%
Savings		111,265	0.42	%		115,802	0.38	%		113,160	0.35	%
Certificates of deposit		698,078	4.48	%		543,053	3.86	%		499,916	2.92	%

Total interest-bearing deposits		1,803,660	3.32	%		1,538,629	2.65	%		1,502,533	1.73	%
Demand and other non-interest bearing		438,474				437,819				421,245

Total average deposits	$	2,242,134			$	1,976,448			$	1,923,778

(1)	Interest-bearing demand deposits include interest-bearing checking accounts and money market accounts.

During 2007 our total average deposits increased $265.7 million, or 13% as compared to $52.7 million or 3% during 2006. Our focus in increasing our deposit base is centered on core deposit growth, which includes interest and non-interest bearing demand, money market, and savings accounts. Average core deposits increased $110.7 million during 2007 and $9.5 million during 2006.

Competitive pressure from banks in our market areas with a strained liquidity postures has slowed our deposit growth but, in the long-term, we anticipate continued growth in our core deposits through both the addition of new customers and our current client base. However, as short-term rates decrease our cost of funds may not decline proportionally due to changes in our mix of interest bearing and non-interest bearing accounts, growth in higher yielding deposits, and competitive pressures.

We have established a branch system to serve our customers and business depositors. In addition, management’s strategy for funding asset growth is to make use of brokered and other wholesale deposits on an as-needed basis. At December 31, 2007 brokered and other wholesale deposits (excluding public deposits) totaled $72 million or 3% of total deposits compared to $10.5 million or less than 1% of total deposits, at year-end 2006.

The following table sets forth the amount outstanding of time certificates of deposit and other time deposits in amounts of $100,000 or more by time remaining until maturity and percentage of total deposits:


	December 31, 2007
	Time Certificates of Deposit of $100,000 or More				Other Time Deposits of $100,000 or More
Amounts maturing in:	Amount		Percent of Total Deposits		Amount		Percent of Total Deposits
	(in thousands)
Three months of less	$	221,415	9	%	$	8,684	0	%
Over 3 through 6 months		90,486	4	%		51,395	2	%
Over 6 through 12 months		83,961	3	%		3,488	0	%
Over 12 months		35,002	1	%		8,454	0	%

Total	$	430,864	17	%	$	72,021	3	%

Other time deposits of $100,000 or more set forth in the table above represent brokered and wholesale deposits. We use brokered and other wholesale deposits as part of our strategy for funding growth. In the future, we anticipate continuing the use of such deposits to fund loan demand or treasury functions.

Short-Term Borrowings

Our short-term borrowings consist of FHLB advances and securities repurchase agreements. We utilize these borrowings as a supplement to our funding sources. FHLB advances are secured by one-to-four family real estate mortgages, investment securities, and certain other assets. Securities repurchase agreements are secured by investments. We anticipate we will continue to rely on the same funding sources in the future, and will use those funds primarily to make loans and purchase securities.

The following table sets forth the details of FHLB advances:


	Years ended December 31,
	2007			2006			2005
	(in thousands)
FHLB Advances
Balance at year end	$	257,670		$	205,800		$	94,400
Average balance during the year	$	207,521		$	208,594		$	107,651
Maximum month-end balance during the year	$	264,250		$	303,000		$	194,200
Weighted average rate during the year		5.27	%		5.25	%		3.27	%
Weighted average rate at December 31,		4.59	%		5.56	%		4.33	%

For additional information on our borrowings, including amounts pledged as collateral, see Note 11 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.

Long-Term Borrowings

During 2001, we, participated in a pooled trust preferred offering through our subsidiary trust (the “Trust”), whereby the trust issued $22.0 million of 30 year floating rate capital securities. The capital securities constitute guaranteed preferred beneficial interests in debentures issued by the trust. The debentures had an initial rate of 7.29% and a rate of 8.54% at December 31, 2007. The floating rate is based on the 3-month LIBOR plus 3.58% and is adjusted quarterly. Through the Trust we may call the debt at ten years at par, allowing us to retire the debt early if conditions are favorable. Effective December 31, 2003, we adopted Financial Accounting Standards Board Interpretation No. 46 “Consolidation of Variable Interest Entities” whereby the Trust was deconsolidated with the result being that the trust preferred obligations were reclassified as long-term subordinated debt on our December 31, 2003 Consolidated Balance Sheets and our related investment in the Trust was recorded in “other assets” on the Consolidated Balance Sheets. Through the recent Town Center Bancorp acquisition, the Company assumed an additional $3.0 million in floating rate trust preferred obligations; these debentures had a rate of 8.99% at December 31, 2007. The floating rate is based on the 3-month LIBOR plus 3.75% and is adjusted quarterly.

Additionally, we have a $20.0 million line of credit with a large commercial bank with an interest rate indexed to LIBOR. At December 31, 2007 and 2006, the outstanding balance was $5.0 million and $0, respectively with an interest rate of 6.23% at December 31, 2007. In the event of discontinuance of the line by either party, we have up to two years to repay any outstanding balance. For additional information on our borrowings, see Note 11 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.

Contractual Obligations & Commitments

We are party to many contractual financial obligations, including repayment of borrowings, operating and equipment lease payments, and commitments to extend credit. The table below presents certain future financial obligations of the Company:


	Payments due within time period at December 31, 2007
	0-12 Months		1-3 Years		4-5 Years		Due after Five Years		Total
	(in thousands)
Operating & equipment leases	$	3,575	$	6,518	$	5,953	$	11,698	$	27,744
Capital lease		4		—		—		—		4
FHLB advances		256,670		1,000		—		—		257,670
Other borrowings		5,061		—		—		—		5,061
Long-term subordinated debt		—		—		—		25,519		25,519

Total	$	265,310	$	7,518	$	5,953	$	37,217	$	315,998

At December 31, 2007, we had commitments to extend credit of $857.6 million compared to $764.3 million at December 31, 2006. For additional information regarding future financial commitments, see Note 16 to our Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.

Liquidity and Sources of Funds

Our primary sources of funds are net income, loan repayments, maturities and principal payments on available for sale investments, customer deposits, advances from the FHLB, securities repurchase agreements and other borrowings. These funds are used to make loans, purchase investments, meet deposit withdrawals and maturing liabilities and cover operational expenses. Scheduled loan repayments and core deposits have proved to be a relatively stable source of funds while other deposit inflows and unscheduled loan prepayments are

influenced by interest rate levels, competition and general economic conditions. We manage liquidity through monitoring sources and uses of funds on a daily basis and had unused credit lines with the FHLB and a large commercial bank of $51.0 million and $15.0 million, respectively, at December 31, 2007, that are available to us as a supplemental funding source. The holding company’s sources of funds are dividends from its banking subsidiaries which are used to fund dividends to shareholders and cover operating expenses.

Capital Expenditures

Capital expenditures, primarily consisting of an additional branch location as well as ATM network and information technology-related expenditures, are anticipated to be approximately $8.9 million during 2008.

See the Statement of Cash Flows of the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report for additional information regarding our sources and uses of funds during 2007 and 2006.

Capital

Our shareholders’ equity increased to $341.7 million at December 31, 2007, from $252.3 million at December 31, 2006. The increase is due primarily to net income for the year of $32.4 million and the issuance of additional shares related to the two third quarter acquisitions. Shareholders’ equity was 10.75% and 9.88% of total assets at December 31, 2007 and 2006.

Banking regulations require bank holding companies to maintain a minimum “leverage” ratio of core capital to adjusted quarterly average total assets of at least 3%. In addition, banking regulators have adopted risk-based capital guidelines, under which risk percentages are assigned to various categories of assets and off-balance sheet items to calculate a risk-adjusted capital ratio. Tier I capital generally consists of common shareholders’ equity and trust preferred obligations, less goodwill and certain identifiable intangible assets, while Tier II capital includes the allowance for loan losses and subordinated debt, both subject to certain limitations. Regulatory minimum risk-based capital guidelines require Tier I capital of 4% of risk-adjusted assets and total capital (combined Tier I and Tier II) of 8% to be considered “adequately capitalized”.

Federal Deposit Insurance Corporation regulations set forth the qualifications necessary for a bank to be classified as “well capitalized”, primarily for assignment of FDIC insurance premium rates. To qualify as “well capitalized,” banks must have a Tier I risk-adjusted capital ratio of at least 6%, a total risk-adjusted capital ratio of at least 10%, and a leverage ratio of at least 5%. Failure to qualify as “well capitalized” can negatively impact a bank’s ability to expand and to engage in certain activities. The Company and its banking subsidiaries qualify as “well-capitalized” at December 31, 2007 and 2006.

The following table sets forth the Company’s and its banking subsidiaries capital ratios at December 31, 2007 and 2006:


	Company				Columbia Bank				Astoria				Requirements
	2007		2006		2007		2006		2007		2006		Adequately capitalized		Well- capitalized
Total risk-based capital ratio	10.90	%	12.97	%	10.49	%	12.52	%	12.61	%	14.79	%	8	%	10	%
Tier 1 risk-based capital ratio	9.87	%	11.82	%	9.47	%	11.38	%	11.42	%	13.61	%	4	%	6	%
Leverage ratio	8.54	%	9.54	%	8.23	%	9.32	%	9.50	%	10.23	%	4	%	5	%

Dividends

The following table sets forth the dividends paid per common share and the dividend payout ratio (dividends paid per common share divided by basic earnings per share):


	Years ended December 31,
	2007			2006			2005
Dividends paid per common share	$	0.66		$	0.57		$	0.39
Dividend payout ratio		0.34	%		0.28	%		0.21	%

For quarterly detail of dividends declared during 2007 and 2006 see “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this report.

Applicable federal, Washington state and Oregon regulations restrict capital distributions, including dividends, by the Company’s banking subsidiaries. Such restrictions are tied to the institution’s capital levels after giving effect to distributions. Our ability to pay cash dividends is substantially dependent upon receipt of dividends from our banking subsidiaries.

Reference “Item 6. Selected Financial Data” of this report for our return on average assets, return on average equity and average equity to average assets ratios for all reported periods.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

Repricing risk—Repricing risk is the risk of adverse consequences from a change in interest rates that arises because of differences in the timing of when those interest rate changes affect an institution’s assets and liabilities.

Basis risk—Basis risk is the risk of adverse consequence resulting from unequal changes in the spread between two or more rates for different instruments with the same maturity.

Yield curve risk—Yield curve risk is the risk of adverse consequence resulting from unequal changes in the spread between two or more rates for different maturities for the same instrument.

Option risk—In banking, option risks are known as borrower options to prepay loans and depositor options to make deposits, withdrawals, and early redemptions. Option risk arises whenever bank products give customers the right, but not the obligation, to alter the quantity or the timing of cash flows.

We maintain an asset/liability management policy that provides guidelines for controlling exposure to interest rate risk. The guidelines direct management to assess the impact of changes in interest rates upon both earnings and capital. The guidelines further provide that in the event of an increase in interest rate risk beyond pre-established limits, management will consider steps to reduce interest rate risk to acceptable levels.

The analysis of an institution’s interest rate gap (the difference between the repricing of interest-earning assets and interest-bearing liabilities during a given period of time) is one standard tool for the measurement of the exposure to interest rate risk. We believe that because interest rate gap analysis does not address all factors that can affect earnings performance, it should be used in conjunction with other methods of evaluating interest rate risk.

The table on the following page sets forth the estimated maturity or repricing, and the resulting interest rate gap of our interest-earning assets and interest-bearing liabilities at December 31, 2007. The amounts in the table are derived from our internal data and are based upon regulatory reporting formats. Therefore, they may not be consistent with financial information appearing elsewhere herein that has been prepared in accordance with accounting principles generally accepted in the United States. The amounts could be significantly affected by external factors such as changes in prepayment assumptions, early withdrawal of deposits and competition. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while other types may lag changes in market interest rates.

Additionally, certain assets, such as adjustable-rate mortgages, have features that restrict changes in the interest rates of such assets both on a short-term basis and over the lives of such assets. Further, in the event of a change in market interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of a substantial increase in market interest rates.


	Estimated Maturity or Repricing
December 31, 2007	0-3 months			4-12 months			Over 1 year through 5 years			Due after 5 years			Total
Interest-Earning Assets
Interest-earning deposits	$	11,240		$	—		$	—		$	—		$	11,240
Loans, net of deferred fees		1,127,564			296,697			694,286			164,181			2,282,728
Loans held for sale		4,482			—			—			—			4,482
Investments		25,418			52,966			226,013			268,576			572,973

Total interest-earning assets	$	1,168,704		$	349,663		$	920,299		$	432,757			2,871,423

Allowance for loan and lease losses														(26,599	)
Cash and due from banks														82,735
Premises														56,122
Other assets														195,032

Noninterest-earning assets														307,290

Total assets													$	3,178,713

Interest-Bearing Liabilities
Interest bearing non-maturity deposits	$	609,503		$	—		$	—		$	593,919		$	1,203,422
Time deposits		382,256			362,409			81,737			—			826,402
Borrowings		260,731			1,000			1,000			—			262,731
Long-term subordinated debt		25,519			—			—			—			25,519

Total interest-bearing liabilities	$	1,278,009		$	363,409		$	82,737		$	593,919			2,318,074

Other liabilities														518,908

Total liabilities														2,836,982
Shareholders’ equity														341,731

Total liabilities and shareholders’ equity													$	3,178,713

Interest-bearing liabilities as a percent of total interest-earning assets		44.51	%		12.66	%		2.88	%		20.68	%
Rate sensitivity gap	$	(109,305	)	$	(13,746	)	$	837,562		$	(161,162	)	$	553,349
Cumulative rate sensitivity gap	$	(109,305	)	$	(123,051	)	$	714,511		$	553,349
Rate sensitivity gap as a percentage of interest-earning assets		(3.81	)%		(0.48	)%		29.17	%		(5.61	)%
Cumulative rate sensitivity gap as a percentage of interest-earning assets		(3.81	)%		(4.29	)%		24.88	%		19.27	%

Interest Rate Sensitivity on Net Interest Income

A number of measures are used to monitor and manage interest rate risk, including income simulations and interest sensitivity (gap) analyses. 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. Key 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 uncertain 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.

Based on the results of the simulation model as of December 31, 2007, we would expect an increase in net interest income of $763,000 and $470,000 if interest rates gradually increase or decrease, respectively, from current rates by 200 basis points over a twelve-month period. The simulation analysis assumes rates on core deposits lag changes in loan rates by 3 months.

Impact of Inflation and Changing Prices

The impact of inflation on our operations is increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than the effect of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Columbia Banking System, Inc.

Tacoma, Washington

We have audited the accompanying consolidated balance sheets of Columbia Banking System, Inc. and its subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of Columbia Banking Systems, Inc. and its subsidiaries as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 5, 2008 expressed an unqualified opinion on the Company’s internal control over financial reporting.

LOGO

Seattle, Washington

March 5, 2008

COLUMBIA BANKING SYSTEM, INC.

CONSOLIDATED STATEMENTS OF INCOME


	Years ended December 31,
	2007		2006			2005
	(in thousands except per share)
Interest Income
Loans	$	156,253	$	123,998		$	99,535
Taxable securities		18,614		20,018			18,135
Tax-exempt securities		7,923		7,042			4,452
Federal funds sold and deposits with banks		1,427		617			85

Total interest income		184,217		151,675			122,207
Interest Expense
Deposits		59,930		40,838			25,983
Federal Home Loan Bank advances		11,065		10,944			3,515
Long-term obligations		2,177		1,992			1,583
Other borrowings		2,225		138			214

Total interest expense		75,397		53,912			31,295

Net Interest Income		108,820		97,763			90,912
Provision for loan and lease losses		3,605		2,065			1,520

Net interest income after provision for loan and lease losses		105,215		95,698			89,392
Noninterest Income
Service charges and other fees		13,498		11,651			11,310
Merchant services fees		8,373		8,314			8,480
Gain on sale of investment securities, net		—		36			6
Bank owned life insurance (“BOLI”)		1,886		1,687			1,577
Other		3,991		2,984			3,413

Total noninterest income		27,748		24,672			24,786
Noninterest Expense
Compensation and employee benefits		46,703		38,769			37,285
Occupancy		12,322		10,760			10,107
Merchant processing		3,470		3,361			3,258
Advertising and promotion		2,391		2,582			1,978
Data processing		2,564		2,314			2,904
Legal and professional services		4,912		2,099			3,503
Taxes, licenses and fees		2,882		2,499			2,018
Net (gain) cost of other real estate owned		5		(11	)		(8	)
Other		13,580		13,761			11,810

Total noninterest expense		88,829		76,134			72,855

Income before income taxes		44,134		44,236			41,323
Provision for income taxes		11,753		12,133			11,692

Net Income	$	32,381	$	32,103		$	29,631

Net Income Per Common Share:
Basic	$	1.93	$	2.01		$	1.89
Diluted	$	1.91	$	1.99		$	1.87
Dividends paid per common share	$