Edgar Filing: COLUMBIA BANKING SYSTEM INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2007.

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

For the transition period from to .

Commission File Number 0-20288

COLUMBIA BANKING SYSTEM, INC.

(Exact name of registrant as specified in its charter)


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

1301 “A” Street Tacoma, Washington		98402-2156
(Address of principal executive offices)		(Zip Code)

(253) 305-1900

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer x 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 number of shares of common stock outstanding at April 30, 2007 was 16,160,709.

TABLE OF CONTENTS


		Page
PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Consolidated Condensed Statements of Income - three months ended March 31, 2007 and 2006	3

	Consolidated Condensed Balance Sheets – March 31, 2007 and December 31, 2006	4

	Consolidated Condensed Statements of Changes in Shareholders’ Equity - three months ended March 31, 2007 and 2006	5

	Consolidated Condensed Statements of Cash Flows - three months ended March 31, 2007 and 2006	6

	Notes to Unaudited Consolidated Condensed Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23

Item 4.	Controls and Procedures	23

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	23

Item 1A.	Risk Factors	23

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 3.	Defaults Upon Senior Securities	23

Item 4.	Submission of Matters to a Vote of Security Holders	23

Item 5.	Other Information	23

Item 6.	Exhibits	24

	Signatures	25

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

Columbia Banking System, Inc.

(Unaudited)


	Three Months Ended March 31,
	2007		2006
	(in thousands except per share)
Interest Income
Loans	$	34,030	$	28,644
Taxable securities		4,774		4,958
Tax-exempt securities		1,960		1,427
Dividends on Federal Home Loan Bank Stock		11		—
Federal funds sold and deposits with banks		371		40

Total interest income		41,146		35,069
Interest Expense
Deposits		12,159		8,491
Federal Home Loan Bank advances		3,179		1,768
Long-term obligations		507		459
Other borrowings		598		45

Total interest expense		16,443		10,763

Net Interest Income		24,703		24,306
Provision for loan and lease losses		638		215

Net interest income after provision for loan and lease losses		24,065		24,091
Noninterest Income
Service charges and other fees		2,959		2,834
Merchant services fees		1,969		2,038
Gain on sale of securities available for sale, net		—		10
Bank owned life insurance (“BOLI”)		426		399
Other		823		692

Total noninterest income		6,177		5,973
Noninterest Expense
Compensation and employee benefits		11,358		9,669
Occupancy		2,837		2,648
Merchant processing		823		784
Advertising and promotion		547		652
Data processing		567		800
Legal and professional services		823		230
Taxes, licenses and fees		613		596
Other		2,834		2,961

Total noninterest expense		20,402		18,340

Income before income taxes		9,840		11,724
Provision for income taxes		2,557		3,536

Net Income	$	7,283	$	8,188

Net Income Per Common Share:
Basic	$	0.45	$	0.52
Diluted	$	0.45	$	0.51
Dividends paid per common share	$	0.15	$	0.13
Weighted average number of common shares outstanding		16,104		15,860
Weighted average number of diluted common shares outstanding		16,262		16,101

See accompanying notes to unaudited consolidated condensed financial statements.

CONSOLIDATED CONDENSED BALANCE SHEETS

Columbia Banking System, Inc.

(Unaudited)


	March 31, 2007		December 31, 2006
	(in thousands)
ASSETS
Cash and due from banks	$	65,496	$	76,365
Interest-earning deposits with banks		15,804		13,979
Federal funds sold		26,250		14,000

Total cash and cash equivalents		107,550		104,344
Securities available for sale at fair value (amortized cost of $588,824 and $598,703, respectively)		587,281		592,858
Securities held to maturity at cost (fair value of $1,620 and $1,871, respectively)		1,572		1,822
Federal Home Loan Bank stock at cost		10,453		10,453
Loans held for sale		2,999		933
Loans, net of deferred loan fees of ($3,285) and ($2,940), respectively		1,833,852		1,708,962
Less: allowance for loan and lease losses		20,819		20,182

Loans, net		1,813,033		1,688,780
Interest receivable		13,837		12,549
Premises and equipment, net		44,152		44,635
Goodwill		29,723		29,723
Other assets		65,604		67,034

Total Assets	$	2,676,204	$	2,553,131

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	447,052	$	432,293
Interest-bearing		1,633,974		1,591,058

Total deposits		2,081,026		2,023,351
Short-term borrowings:
Federal Home Loan Bank advances		212,700		205,800
Securities sold under agreements to repurchase		70,000		20,000
Other borrowings		344		198

Total short-term borrowings		283,044		225,998
Long-term subordinated debt		22,395		22,378
Other liabilities		28,410		29,057

Total liabilities		2,414,875		2,300,784
Commitments and contingent liabilities
Shareholders’ equity:
Preferred stock (no par value)
Authorized, 2 million shares; none outstanding		—		—


	March 31, 2007	December 31, 2006
Common stock (no par value)
Authorized shares	63,034	63,034
Issued and outstanding	16,157	16,060		168,033			166,763
Retained earnings				93,904			89,037
Accumulated other comprehensive loss				(608	)		(3,453	)

Total shareholders’ equity				261,329			252,347

Total Liabilities and Shareholders’ Equity			$	2,676,204		$	2,553,131

See accompanying notes to unaudited consolidated condensed financial statements.

CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Columbia Banking System, Inc.

(Unaudited)


	Common stock										Accumulated Other			Total
	Number of Shares	Amount			Retained Earnings			Deferred Compensation			Comprehensive Income (Loss)			Shareholders’ Equity
	(in thousands)
Balance at January 1, 2006	15,831	$	163,065		$	66,051		$	(92	)	$	(2,782	)	$	226,242
Comprehensive income:
Net income	—		—			8,188			—			—			8,188
Other comprehensive loss net of tax:
Net unrealized investment losses	—		—			—			—			(2,620	)		(2,620	)

Total comprehensive income															5,568
Transition adjustment related to adoption of SFAS 123(R)			(92	)		—			92			—			—
Issuance of stock under equity compensation plan	66		920			—			—			—			920
Equity compensation awards	72		195			—			—			—			195
Tax benefit associated with exercise of stock options	—		275			—			—			—			275
Cash dividends paid on common stock	—		—			(2,063	)		—			—			(2,063	)

Balance at March 31, 2006	15,969	$	164,363		$	72,176		$	—		$	(5,402	)	$	231,137

Balance at January 1, 2007	16,060	$	166,763		$	89,037		$	—		$	(3,453	)	$	252,347
Comprehensive income:
Net income	—		—			7,283			—			—			7,283
Other comprehensive income net of tax:
Net unrealized investment/cash flow hedging instrument gains	—		—			—			—			2,845			2,845

Total comprehensive income															10,128
Issuance of stock under stock option and other plans	57		891			—			—			—			891
Stock award compensation expense	40		194			—			—			—			194
Stock option compensation expense	—		44			—			—			—			44
Tax benefit associated with exercise of stock options	—		141			—			—			—			141
Cash dividends paid on common stock	—		—			(2,416	)		—			—			(2,416	)

Balance at March 31, 2007	16,157	$	168,033		$	93,904		$	—		$	(608	)	$	261,329

See accompanying notes to unaudited consolidated condensed financial statements.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

Columbia Banking System, Inc.

(Unaudited)


	Three Months Ended March 31,
	2007			2006
	(in thousands)
Cash Flows From Operating Activities
Net income	$	7,283		$	8,188
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		638			215
Deferred income tax benefit		(237	)		(138	)
Excess tax benefit from stock-based compensation		(41	)		(49	)
Stock-based compensation expense		238			195
Depreciation, amortization & accretion		1,542			1,402
Net realized gains (losses) on sale of assets		2			(136	)
Decrease (increase) in loans held for sale		(2,066	)		113
Increase in interest receivable		(1,288	)		(318	)
Increase in interest payable		515			414
Net changes in other assets and liabilities		(838	)		(6,031	)

Net cash provided by operating activities		5,748			3,855
Cash Flows From Investing Activities
Purchase of securities available for sale		(800	)		(96,743	)
Proceeds from sales of securities available for sale		—			3,865
Proceeds from principal repayments and maturities of securities available for sale		10,316			38,637
Proceeds from maturities of securities held to maturity		250			38,637
Loans originated and acquired, net of principal collected		(124,961	)		(30,269	)
Purchases of premises and equipment		(772	)		(1,098	)
Proceeds from disposal of premises and equipment		188			22

Net cash used in investing activities		(115,779	)		(85,586	)
Cash Flows From Financing Activities
Net increase (decrease) in deposits		57,675			(12,900	)
Proceeds from Federal Home Loan Bank advances		825,945			512,385
Repayment of Federal Home Loan Bank advances		(819,045	)		(417,935	)
Net increase in repurchase agreement borrowings		50,000			—
Net increase (decrease) in other borrowings		146			(2,500	)
Cash dividends paid on common stock		(2,416	)		(2,063	)
Proceeds from issuance of common stock, net		891			920
Excess tax benefit from stock-based compensation		41			49
Other, net		—			(24	)

Net cash provided by financing activities		113,237			77,932

(Decrease) increase in cash and cash equivalents		3,206			(3,799	)
Cash and cash equivalents at beginning of period		104,344			100,406

Cash and cash equivalents at end of period	$	107,550		$	96,607

Supplemental information:
Cash paid for interest	$	15,155		$	10,439
Cash paid for income taxes	$	880		$	1,250

See accompanying notes to unaudited consolidated condensed financial statements.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Columbia Banking System, Inc.

1. Basis of Presentation and Significant Accounting Policies

(a)

Basis of Presentation

The interim unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for condensed interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain financial information and footnotes have been omitted or condensed. The consolidated condensed financial statements include the accounts of the Company, and its wholly owned banking subsidiaries Columbia Bank and Bank of Astoria (“Astoria”). All intercompany transactions and accounts have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included. The results of operations for the three months ended March 31, 2007 are not necessarily indicative of results to be anticipated for the year ending December 31, 2007. The accompanying interim unaudited consolidated condensed financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s 2006 Annual Report on Form 10-K.

(b)

Significant Accounting Policies

The significant accounting policies used in preparation of our consolidated financial statements are disclosed in our 2006 Annual Report on Form 10-K. There have not been any other material changes in our significant accounting policies compared to those contained in our 2006 10-K disclosure for the year ended December 31, 2006.

2. Recent Developments

Acquisition of Mountain Bank Holding Company: On March 28, 2007, the Company announced the signing of a definitive merger agreement with Mountain Bank Holding Company, the parent company of Mt. Rainier National Bank, Enumclaw, Washington, in a cash-and-stock transaction valued at approximately $60 million (including value to option holders). According to the terms of the definitive agreement Mountain Bank Holding Company shareholders will receive $25.00 per share in a unit of stock and cash within certain parameters described in the merger agreement. The acquisition, which has been approved by the Boards of Directors of both companies, is subject to, among other contingencies, approval by regulators and Mountain Bank Holding Company shareholders. Mt. Rainier National Bank was formed in 1990 to serve the banking needs of the Enumclaw community. Since then, Mt. Rainier has expanded into several adjacent King County communities and into two markets in Pierce County. As of December 31, 2006, Mountain Bank had approximately $229.9 million in total assets, $164.6 million in net loans, $204.3 million in deposits and $22.3 million in shareholders’ equity. Upon closing of the transaction, which is anticipated to take place in the third quarter of 2007, Mt. Rainier National Bank will be merged into Columbia State Bank and will do business as Mt. Rainier Bank.

Acquisition of Town Center Bancorp: On March 28, 2007, the Company announced the signing of a definitive merger agreement with Town Center Bancorp, the parent company of Town Center Bank, Portland, Oregon, in a cash-and-stock transaction valued at approximately $45.1 million (including value to option holders). According to the terms of the definitive agreement Town Center Bancorp shareholders will receive $9.382 in cash and 0.3391 of Columbia Banking System shares for each share of Town Center Bancorp common stock. The actual value of the consideration paid for each share of Town Center Bancorp stock will depend on the stock price of the Company at the time of closing. The acquisition, which as been approved by the Boards of Directors of both companies, is subject to, among other contingencies, approval by regulators and Town Center Bancorp shareholders. Founded in 1997, Town Center Bank offers banking services to individuals, professionals and small business clients throughout the Portland Metropolitan area. As of December 31, 2006, Town Center Bancorp had consolidated total assets of approximately $133.4 million, net loans of $106.6 million, total deposits of $103.2 million and stockholders’ equity of $12.9 million. Upon closing of the transaction, which is anticipated to take place in the third quarter 2007, Town Center Bank will be merged into Columbia State Bank.

Adoption of FIN 48: Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainties in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that it has taken or expects to take on a tax return. As of March 31, 2007 and January 1, 2007, we had no unrecognized tax benefits. Our policy is to recognize interest and penalties on unrecognized tax benefits in “Provision for income taxes” in the Consolidated Statements of Income. There were no amounts related to interest and penalties recognized for the three months ended March 31, 2007. The tax years subject to examination by federal taxing authorities are the years ending December 31, 2006, 2005, 2004 and 2003. The tax years subject to examination by state taxing authorities are the years ending December 31, 2006, 2005, 2004, 2003 and 2002.

3. Share-based Payments

At March 31, 2007, the Company had one equity compensation plan (the “Plan”), which is shareholder approved, that provides for the granting of share options and shares to eligible employees and directors up to 2,191,482 shares. Share option and share awards are made at the discretion of the Board of Directors.

Share Awards: Restricted share awards provide for the immediate issuance of shares of Company common stock to the recipient, with such shares held in escrow until certain service conditions are met, generally five years of continual service. Recipients of restricted shares do not pay any cash consideration to the Company for the shares, have the right to vote all shares subject to such grant, and receive all dividends with respect to such shares, whether or not the shares have vested. The fair value of share awards is equal to the fair market value of the Company’s common stock on the date of grant.

A summary of the status of the Company’s nonvested shares as of March 31, 2007 is presented below:


Nonvested Shares	Shares		Weighted- Average Grant-Date Fair Value
Nonvested at January 1, 2007	83,175		$	32.58

Granted	43,550			33.77
Vested	(500	)		34.69
Forfeited	(3,000	)		33.10

Nonvested at March 31, 2007	123,225		$	32.98

The weighted average grant date fair value of share awards granted during the three months ended March 31, 2006 was $32.84. As of March 31, 2007, there was $3.2 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted average period of 3.9 years. The total fair value of shares vested during the three months ended March 31, 2007 was $17,000; no shares vested during the same period in 2006.

Share Options: Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards generally vest based on three years of continual service and are exercisable for a five-year period after vesting. Option awards granted have a 10-year maximum term.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The fair value of all options is amortized on a straight-line basis over the requisite service periods, which are generally the vesting periods. The expected life of options granted represents the period of time that they are expected to be outstanding. The expected life is determined based on historical experience with similar awards, giving consideration to the contractual terms and vesting schedules. Expected volatilities of our common stock are estimated at the date of grant based on the historical volatility of the stock. The volatility factor is based on historical stock prices over the most recent period commensurate with the estimated expected life of the award. The risk-free interest rate is based on the U.S. Treasury curve in effect at the time of the award. The expected dividend yield is based on dividend trends and the market value of the Company’s stock price at the time of the award.

A summary of option activity under the Plan for the three months ended March 31, 2007 is presented below:


Options	Shares		Weighted-Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value ($000)
Balance at January 1, 2007	335,397		$	15.76
Granted	—			—
Forfeited	(1,000	)		23.29
Exercised	(48,617	)		12.48

Balance at March 31, 2007	285,780		$	16.29	4.0	$	4,656

Total Exercisable at March 31, 2007	216,205		$	13.59	3.4	$	2,938

There were no stock options granted by the Company during the three months ended March 31, 2007 and 2006. The total intrinsic value of options exercised during the three months ended March 31, 2007 and 2006 was $1.1 million for each period.

As of March 31, 2007, outstanding stock options consist of the following:


Ranges of Exercise Prices	Number of Option Shares	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price of Option Shares		Number of Exercisable Option Shares	Weighted-Average Exercise Price of Exercisable Option Shares
$7.73 – 10.29	18,269	1.5	$	9.82	18,269	$	9.82
10.30 – 12.87	108,313	2.6		11.44	108,313		11.44
12.88 – 15.44	42,376	4.6		14.11	42,376		14.11
15.45 – 18.02	7,350	4.5		17.25	7,350		17.25
18.03 – 20.59	26,193	6.9		18.63	26,193		18.63
20.60 – 23.17	20,279	2.5		22.12	13,704		22.37
23.18 – 25.75	63,000	5.7		25.02	—		—

	285,780	4.0 years	$	16.29	216,205	$	13.59

It is the Company’s policy to issue new shares for share option exercises and share awards. The Company expenses awards of share options and shares on a straight-line basis over the related vesting term of the award. For the three months ended March 31, 2007 and 2006, the Company recognized pre-tax compensation expense related to share options and shares of $238,000 and $195,000, respectively.

4. Earnings per share

The following table sets forth the computation of basic and diluted net income per share for the three months ended March 31, 2007 and 2006 (in thousands, except for per share data):


*(dollars in thousands, except per share)*	For The Three Months Ended 3/31/2007		For The Three Months Ended 3/31/2006
Net income	$	7,283	$	8,188

Weighted average common shares outstanding (for basic calculation)		16,104		15,860
Dilutive effect of outstanding common stock options		158		241

Weighted average common stock and common equivalent shares outstanding (for diluted calculation)		16,262		16,101

Net earnings per common share – basic	$	0.45	$	0.52

Net earnings per common share – diluted	$	0.45	$	0.51

Potential dilutive shares are excluded from the computation of earnings per share if their effect is anti-dilutive. For the three month periods ended March 31, 2007 and March 31, 2006 there were no anti-dilutive shares outstanding related to options to acquire common stock.

5. Dividends

On January 25, 2007, the Company declared a quarterly cash dividend of $0.15 per share, payable on February 22, 2007 to shareholders of record as of the close of business on February 7, 2007. Subsequent to quarter end, on April 25, 2007, the Company declared a quarterly cash dividend of $0.17 per share, payable on May 23, 2007, to shareholders of record at the close of business May 9, 2007. The payment of cash dividends is subject to Federal regulatory requirements for capital levels and other restrictions. In addition, the cash dividends paid by Columbia Bank and Bank of Astoria to the Company are subject to both Federal and State regulatory requirements.

6. Business Segment Information

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, included in the “Other” category, although not considered a line of business, is responsible for the management of investments and interest rate risk. The Bank of Astoria banking subsidiary operates as a stand-alone segment of the Company.

The Company generates segment results that include balances directly attributable to business line activities. The financial results of each segment are derived from the Company’s general ledger system. Overhead, including sales and back office support functions and other indirect expenses are not allocated to the major lines of business. Since the Company is not specifically organized around lines of business, most reportable segments comprise more than one operating activity.

The principal activities conducted by commercial banking are the origination of commercial business loans, private banking services and real estate lending. Retail banking includes all deposit products, with their related fee income, and all consumer loan products as well as commercial loan products offered in the Company’s branch offices.

The organizational structure of the Company and its business line financial results are not necessarily comparable with information from other financial institutions. Financial highlights by lines of business are as follows:

Condensed Statements of Income:


	Three Months Ended March 31, 2007
				Columbia Bank
*(in thousands)*	Bank of Astoria			Commercial Banking			Retail Banking			Other			Total
Net interest income after provision for loan and lease loss	$	2,123		$	6,455		$	16,653		$	(1,166	)	$	24,065
Other income		381			635			1,490			3,671			6,177
Other expense		(1,434	)		(2,804	)		(4,762	)		(11,402	)		(20,402	)

Contribution to overhead and profit		1,070			4,286			13,381			(8,897	)		9,840
Income taxes														(2,557	)

Net income													$	7,283

Total assets	$	221,559		$	1,342,496		$	431,067		$	681,082		$	2,676,204


	Three Months Ended March 31, 2006
				Columbia Bank
*(in thousands)*	Bank of Astoria			Commercial Banking			Retail Banking			Other			Total
Net interest income after provision for loan and lease loss	$	2,068		$	5,739		$	17,280		$	(996	)	$	24,091
Other income		368			484			1,540			3,581			5,973
Other expense		(1,394	)		(2,577	)		(4,487	)		(9,882	)		(18,340	)

Contribution to overhead and profit		1,042			3,646			14,333			(7,297	)		11,724
Income taxes														(3,536	)

Net income													$	8,188

Total assets	$	212,130		$	1,094,287		$	460,891		$	693,145		$	2,460,453

7. Securities

The following table presents the composition and carrying value of the Company’s available for sale investment portfolio:


	March 31, 2007		December 31, 2006
	(in thousands)
Securities Available for Sale
U.S. Government agency	$	72,717	$	75,452
U.S. Government agency mortgage-backed securities and collateralized mortgage obligations		321,251		325,096
State and municipal securities		190,159		189,958
Other securities		3,154		2,352

Total	$	587,281	$	592,858

Unrealized losses and fair values of securities available for sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of March 31, 2007 are summarized as follows:


	Less than 12 Months					12 Months or More					Total
*(in thousands)*	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Government agency	$	—	$	—		$	72,717	$	(1,089	)	$	72,717	$	(1,089	)
U.S. Government agency mortgage-backed securities and collateralized mortgage obligations		14,439		(68	)		258,836		(4,779	)		273,275		(4,847	)
State and municipal securities		5,233		(56	)		30,089		(401	)		35,322		(457	)
Other securities		—		—			954		(46	)		954		(46	)

Total	$	19,672	$	(124	)	$	362,596	$	(6,315	)	$	382,268	$	(6,439	)

At March 31, 2007, there were 16 U.S. Government agency securities in an unrealized loss position, all of which were in a continuous loss position for 12 months or more. The unrealized losses on U.S. Government agency securities were caused by interest rate increases subsequent to the purchase of the individual securities. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than par. Because the Company has the ability and intent to hold these investments until a recovery of market value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2007.

At March 31, 2007, there were 62 state and municipal government securities in an unrealized loss position, of which 57 were in a continuous loss position for 12 months or more. The unrealized losses on state and municipal securities were caused by interest rate increases subsequent to the purchase of the individual securities. Management monitors published credit ratings of these securities for adverse changes. As of March 31, 2007 none of the obligations of state and local government entities held by the Company had an adverse credit rating. Because the decline in fair value is attributable to changes in interest rates rather than credit quality, and because the Company has the ability and intent to hold these investments until a recovery of market value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2007.

At March 31, 2007, there were 63 U.S. Government agency mortgage-backed securities & collateralized mortgage obligations securities in an unrealized loss position, of which 62 were in a continuous loss position for 12 months or more. The unrealized losses on U.S. Government agency mortgage-backed securities & collateralized mortgage obligations were caused by interest rate increases subsequent to the purchase of the securities. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates rather than credit quality, and because the Company has the ability and intent to hold these investments until a recovery of market value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2007.

At March 31, 2007, there was one other security, a mortgage-backed securities fund, which was in a continuous loss position for 12 months or more. The unrealized loss on this security was caused by interest rate increases subsequent to the purchase of the security. It is expected that this security would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates rather than credit quality, and because the Company has the ability and intent to hold this investment until a recovery of market value, the Company does not consider this investment to be other-than-temporarily impaired at March 31, 2007.

8. Comprehensive Income

The components of comprehensive income are as follows:


	Three Months Ended March 31,
*(in thousands)*	2007			2006
Net income as reported	$	7,283		$	8,188
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period		4,302			(4,079	)
Tax benefit (expense)		(1,512	)		1,465

Net unrealized gains (losses) on securities available for sale, net of tax		2,790			(2,614	)
Less: reclassification adjustment of realized gains on securities available for sale		—			(10	)
Tax expense		—			4

Net realized gains on sale of securities available for sale, net of tax		—			(6	)
Unrealized gains from cash flow hedging instruments:
Unrealized holding gains arising during the period		85			—
Tax expense		(30	)		—

Net unrealized gains on cash flow hedging instruments, net of tax		55			—

Total comprehensive income	$	10,128		$	5,568

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

The following table presents activity in the allowance for loan and lease losses for the three months ended March 31, 2007 and 2006:


	Three Months Ended March 31,
*(in thousands)*	2007			2006
Beginning balance	$	20,182		$	20,829
Provision charged to expense		638			215
Loans charged-off		(153	)		(441	)
Recoveries		152			88

Ending balance	$	20,819		$	20,691

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


	Three Months Ended March 31,
	2007		2006
	(in thousands)
Beginning balance	$	339	$	339
Net changes in the allowance for unfunded loan commitments and letters of credit		—		—

Ending balance	$	339	$	339

10. Goodwill and Intangible Assets

The Company had $29.7 million in goodwill at March 31, 2007 and December 31, 2006. At March 31, 2007 and December 31, 2006, the Company had a core deposit intangible (“CDI”) asset of $2.8 million and $2.9 million, respectively. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill is not amortized but is reviewed for potential impairment during the third quarter on an annual basis, or if events or circumstances indicate a potential impairment, at the reporting unit level. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The CDI is evaluated for impairment if events and circumstances indicate a possible impairment. The CDI is amortized on an accelerated basis over an estimated life of approximately 10 years. Amortization expense related to the CDI was $96,000 and $113,000 for the three months ended March 31, 2007 and March 31, 2006 respectively. The CDI amortization expense is included in other noninterest expense on the consolidated condensed statements of income.

Item 2.

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

Columbia Banking System, Inc.

This discussion should be read in conjunction with the unaudited consolidated condensed financial statements of Columbia Banking System, Inc. (referred to in this report as “we”, “our”, and “the Company”) and notes thereto presented elsewhere in this report and with the December 31, 2006 audited consolidated financial statements and its accompanying notes included in our recent Annual Report on Form 10-K. In the following discussion, unless otherwise noted, references to increases or decreases in average balances in items of income and expense for a particular period and balances at a particular date refer to the comparison with corresponding amounts for the period or date one year earlier

NOTE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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, national, and international 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) changes in interest rates reduce interest margins more than expected and negatively affect funding sources; (3) projected business increases following strategic expansion or opening or acquiring new branches are lower than expected; (4) costs or difficulties related to the integration of acquisitions are greater than expected; (5) competitive pressure among financial institutions increases significantly; (6) legislation or regulatory requirements or changes adversely affect the businesses in which we’re engaged; and (7) our ability to realize the efficiencies we expect to receive from our investments in personnel and infrastructure.

CRITICAL ACCOUNTING POLICIES

Management has identified the accounting policies related to the allowance for loan and lease losses as critical to an understanding of our financial statements. These policies and related estimates are discussed in “Item 7. Management Discussion and Analysis of Financial Condition and Results of Operation” under the heading “Allowance for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit” in our 2006 Annual Report on Form 10-K. There have not been any material changes in our critical accounting policies relating to the allowance for loan and lease losses as compared to those disclosed in our 2006 Annual Report on Form 10-K.

RESULTS OF OPERATIONS

Our results of operations are dependent to a large degree on our net interest income. We also generate noninterest income through service charges and fees, merchant services fees, and bank owned life insurance. Our operating expenses consist primarily of compensation and employee benefits, occupancy, merchant card processing, data processing and legal and professional fees. Like most financial institutions, our interest income and cost of funds are affected significantly by general economic conditions, particularly changes in market interest rates, and by government policies and actions of regulatory authorities.

Net Interest Income

For the three months ended March 31, 2007, we experienced compression of our net interest margin when compared to the same period in 2006. This compression resulted from an increasing reliance on higher cost deposits and borrowings to fund loan growth. Interest income for the first quarter of 2007 increased 17% over the same period in 2006 while interest expense increased 53%. The increase in interest expense in the current quarter as compared to the same quarter in 2006 is primarily due to rate increases on interest bearing deposits and an increased volume of short-term borrowings, primarily Federal Home Loan Bank (“FHLB”) advances and wholesale repurchase agreements. We began utilizing wholesale repurchase agreements as an additional funding source in the fourth quarter of 2006.

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


	Three months ending March 31,						Three months ending March 31,
	2007						2006
*(in thousands)*	Average Balances (1)		Interest Earned / Paid		Average Rate		Average Balances (1)		Interest Earned / Paid		Average Rate
ASSETS
Loans, net	$	1,765,692	$	34,030	7.82	%	$	1,567,615	$	28,644	7.41	%
Securities (2)		597,952		7,820	5.30	%		619,428		7,178	4.70	%
Interest-earning deposits with banks and federal funds sold		28,728		371	5.24	%		3,829		40	4.24	%

Total interest-earning assets	$	2,392,272	$	42,221	7.16	%	$	2,190,872	$	35,862	6.64	%
Other earning assets		38,776						37,111
Noninterest-earning assets		154,877						160,697

Total assets	$	2,586,025					$	2,388,680

LIABILITIES AND SHAREHOLDERS’ EQUITY
Certificates of deposit	$	556,926	$	5,841	4.25	%	$	530,409	$	4,560	3.49	%
Savings accounts		109,211		109	0.40	%		119,764		111	0.37	%
Interest-bearing demand and money market accounts		921,411		6,209	2.73	%		860,991		3,820	1.80	%

Total interest-bearing deposits		1,587,548		12,159	3.11	%		1,511,164		8,491	2.28	%
Federal Home Loan Bank advances		233,243		3,179	5.53	%		151,613		1,768	4.73	%
Securities sold under agreements to repurchase		44,445		596	5.44	%		—		—	—
Other borrowings and interest-bearing liabilities		353		2	2.63	%		2,674		45	6.77	%
Long-term subordinated debt		22,384		507	9.19	%		22,318		459	8.33	%

Total interest-bearing liabilities	$	1,887,973	$	16,443	3.53	%	$	1,687,769	$	10,763	2.59	%
Noninterest-bearing deposits		413,588						444,687
Other noninterest-bearing liabilities		28,172						25,144
Shareholders’ equity		256,292						231,080

Total liabilities & shareholders’ equity	$	2,586,025					$	2,388,680

Net interest income (2)			$	25,778					$	25,099

Net interest margin					4.37	%					4.65	%

(1)

Nonaccrual loans have been included in the tables as loans carrying a zero yield. Amortized net deferred loan fees were included in the interest income calculations. The amortization of net deferred loan fees was $639,000 and $678,000 for the three months ended March 31, 2007 and 2006, respectively.

(2)	Tax-exempt income is calculated on a tax equivalent basis, based on a marginal tax rate of 35%

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


	Three Months Ended March 31, 2007 Compared to 2006 Increase (Decrease) Due to
*(in thousands)*	Volume			Rate			Total
Interest Income
Loans (1)	$	3,818		$	1,568		$	5,386
Securities (2)		(281	)		923			642
Interest earning deposits with banks and federal funds sold		322			9			331

Interest income (2)	$	3,859		$	2,500		$	6,359

Interest Expense
Deposits:
Certificates of deposit	$	278		$	1,003		$	1,281
Savings accounts		(11	)		9			(2	)
Interest-bearing demand and money market accounts		407			1,982			2,389

Total interest on deposits		674			2,994			3,668
Federal Home Loan Bank advances		1,112			299			1,411
Securities sold under agreements to repurchase		596			—			596
Other borrowings and interest bearing liabilities		(15	)		(28	)		(43	)
Long-term subordinated debt		2			46			48

Interest expense	$	2,369		$	3,311		$	5,680

(1)

(2)	Tax-exempt income is calculated on a tax equivalent basis, based on a marginal tax rate of 35%

Provision for Loan and Lease Losses

During the first quarter of 2007, the Company allocated $638,000 to its provision for loan and lease losses, compared to $215,000 for the same period in 2006. The increased allocation is the result of a substantially higher rate of loan growth for the first three months of 2007 compared to the same period in 2006.

Noninterest Income

Noninterest income increased $204,000 or 3% to $6.2 million for the first quarter of 2007 from $6.0 million for the first quarter of 2006. The increase in noninterest income is primarily due to increased service charges and other fees. Service charges and other fees increased $125,000, or 4%, during the first quarter of 2007 as compared to the same period in 2006. Merchant services revenue of $2.0 million was unchanged from the same period in 2006.

Noninterest Expense

Total noninterest expense increased $2.0 million, or 11%, for the first quarter of 2007 from $18.3 million for the first quarter of 2006. This increase is primarily attributable to increases in compensation and employee benefits, occupancy expenses and legal and professional services. Compensation and employee benefits expenses increased $1.7 million in the first quarter of 2007 primarily as a result of our investment in additional bankers in the retail and lending areas, general wage increases and increased health insurance expenses. Occupancy expenses increased $189,000 from the first quarter of 2006 primarily due to costs incurred in the reconfiguration of our Operations Center in Lakewood, Washington for more efficient use of the space. Legal and professional services increased $593,000 from the first quarter of 2006; however, the 2006 expense included a recovery of $328,000 of previously incurred professional expenses. These increases were partially offset by lower data processing fees which decreased $233,000. The reduced data processing fees reflect cost savings from the conversion of our core banking system in the first quarter of 2006.

Share-Based Payments: Pretax share-based compensation recognized under SFAS 123(R) for the three months ended March 31, 2007 was $238,000 compared to $195,000 for the same period in 2006. These expenses reduced both basic and diluted earnings per share by $0.01 for the quarters ended March 31, 2007 and 2006. Share-based compensation recorded during the quarter related to both stock options and stock awards. We anticipate an additional $3.2 million in pre-tax share-based compensation through 2012 for awards outstanding as of March 31, 2007. For additional information, see Note 3 to the unaudited consolidated condensed financial statements in “Item 1. Financial Statements (unaudited)” of this report.

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


	Three months ended March 31,				Increase (Decrease) Amount
(in thousands)	2007		2006		Increase (Decrease) Amount
Core deposit intangible amortization (“CDI”)	$	96	$	113	$	(17	)
Software support & maintenance		180		159		21
Telephone & network communications		273		300		(27	)
Federal Reserve Bank processing fees		113		203		(90	)
Supplies		288		350		(62	)
Postage		291		352		(61	)
Investor relations		75		45		30
Travel		79		55		24
ATM network		137		154		(17	)
Sponsorships & charitable contributions		87		163		(76	)
Regulatory premiums		42		70		(28	)
Directors fees		110		111		(1	)
Employee expenses		171		144		27
Insurance		110		121		(11	)
Losses on CRA investments (1)		181		—		181
Miscellaneous		601		621		(20	)

Total other non-interest expense	$	2,834	$	2,961	$	(127	)

(1)	A substantial portion, $114,000, of these losses is offset by credits taken as a reduction in our current period income tax expense.

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 and mark-to-market adjustments of interest rate floor instruments] was 63.39% and 58.64% for the first quarter of 2007 and 2006, respectively. The year-to-date change in the efficiency ratio is due to increases in noninterest expense relative to total revenue.

Reconciliation of Financial Data to GAAP Financial Measures


	Three Months Ended March 31,
(in thousands)	2007			2006
Net interest income (1)	$	24,703		$	24,306
Tax equivalent adjustment for non-taxable investment securities interest income (2)		1,075			793

Adjusted net interest income	$	25,778		$	25,099

Noninterest income	$	6,177		$	5,973
Gain on sale of investment securities, net		—			(10	)
Tax equivalent adjustment for BOLI income (2)		229			215

Adjusted noninterest income	$	6,406		$	6,178

Noninterest expense	$	20,402		$	18,340

Efficiency ratio		66.07	%		60.57	%
Efficiency ratio (fully taxable-equivalent)		63.39	%		58.64	%
Tax Rate		35.00	%		35.00	%

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

Income Taxes

We recorded an income tax provision of $2.6 million during the first quarter of 2007 resulting in an effective tax rate of 26% compared to a provision of $3.5 million for the first quarter of 2006 and an effective tax rate of 30%. Our effective tax rate declined over the same period in the prior year due to increased tax-exempt municipal securities. Our effective tax rate is less than the statutory rate primarily due to earnings on tax-exempt municipal securities and bank owned life insurance. For additional information, refer to our annual report on Form 10-K for the year ended December 31, 2006.

Credit Risk Management

The extension of credit in the form of loans or other credit products to individuals and businesses is one of our principal business activities. Our policies and applicable laws and regulations require risk analysis as well as ongoing portfolio and credit management. We manage our credit risk through lending limit constraints, credit review, approval policies, and extensive, ongoing internal monitoring. We also manage credit risk through diversification of the loan portfolio by type of loan, type of industry, type of borrower and by limiting the aggregation of debt limits 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 the borrower to service all of its interest and principal obligations and, as a result, the risk rating may be adjusted accordingly. In the event that full collection of principal and interest is not reasonably assured, the loan is appropriately downgraded and, if warranted, placed on nonaccrual status even though the loan may be current as to principal and interest payments. Additionally, we review these types of loans for impairment in accordance with SFAS No. 114, “Accounting by Creditors for the Impairment of a Loan”. Impaired loans are considered for nonaccrual status and will typically remain as such until all principal and interest payments are brought current and the prospects for future payments in accordance with the loan agreement appear relatively certain.

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 its credit policies. This includes a review of documentation when the loan is initially extended and subsequent monitoring to assess continued performance and proper risk assessment.

Loan Portfolio Analysis

We are a full service commercial bank, originating a wide variety of loans, but concentrating our 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:


*(in thousands)*	March 31, 2007			% of Total		December 31, 2006			% of Total
Commercial business	$	681,534		37.2	%	$	617,899		34.1	%
Real estate:
One-to-four family residential		47,876		2.6			51,277		3.0
Commercial and five or more family residential commercial properties		691,758		37.7			687,635		40.3

Total real estate		739,634		40.3			738,912		43.3
Real estate construction:
One-to-four family residential		139,806		7.6			92,124		5.4
Commercial and five or more family residential commercial properties		128,728		7.0			115,185		6.8

Total real estate construction		268,534		14.6			207,309		12.2
Consumer		147,435		8.1			147,782		8.6

Sub-total loans		1,837,137		100.2			1,711,902		100.2
Less: Deferred loan fees		(3,285	)	(0.2	)		(2,940	)	(0.2	)

Total loans	$	1,833,852		100.0	%	$	1,708,962		100.0	%

Loans held for sale	$	2,999				$	933

Approximately 52% of our loan growth since December 31, 2006 was in commercial business loans, excluding commercial real estate loans. Loan growth of approximately 7% in the first quarter of 2007 was robust compared to growth of approximately 2% in the same period in 2006.

Commercial Loans: We are committed to providing competitive commercial lending in our primary market areas. We believe that increases in commercial lending during the three months of 2007 were due to the confidence of business owners in the stability of our local economy as well as the contribution of our new commercial banking team added late in the fourth quarter of 2006 and the expansion of our Seattle private banking group during the current quarter. Management expects to continue to expand its commercial lending products and to emphasize, in particular, relationship banking with businesses, and business owners.

Real Estate Loans: These loans are used to collateralize outstanding advances from the FHLB. Generally, our policy is to originate residential loans for sale to third parties. Those residential loans are secured by properties located within our primary market areas, and typically have loan-to-value ratios of 80% or lower. However, the loan amounts may exceed 80% with private mortgage insurance.

Generally, commercial and five-or-more family residential real estate 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, cost, or discounted cash flow value, as appropriate, and that commercial properties maintain debt coverage ratios (net operating income divided by annual debt servicing) of 1.2 or better. However, underwriting standards can be influenced by competition and other factors. We endeavor to maintain the highest practical underwriting standards while balancing the need to remain competitive in our lending practices.

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. Growth in this sector of the portfolio is due to an increased emphasis on our Builder Banking program as well as the contribution of our new Builder Banking team added late in the fourth quarter of 2006.

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

Foreign Loans: Our banking subsidiaries are not involved with loans to foreign companies or foreign countries.

Nonperforming Assets

Nonperforming assets consist of: (i) nonaccrual loans; (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. Collectively, nonaccrual and restructured loans are considered nonperforming loans.

Nonaccrual 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 a nonaccrual basis, which occurs when there are serious doubts about the collectibility of principal or interest. Generally our policy is to discontinue the accrual of interest on all loans past due 90 days or more and place them on nonaccrual status.

At March 31, 2007 and December 31, 2006 we had no other real estate owned or other personal property owned. Therefore, total nonperforming assets consisted only of nonperforming loans which decreased 3% to 0.13% of period-end assets at March 31, 2007 down from 0.14% of period-end assets at December 31, 2006.

The following tables set forth, at the dates indicated, information with respect to our nonaccrual loans, restructured loans, total nonperforming loans and total nonperforming assets:


*(in thousands)*	March 31, 2007		December 31, 2006
Nonaccrual:
Commercial business	$	1,776	$	1,777
Real estate:
One-to-four family residential		303		366
Commercial and five or more family residential		211		217
Consumer		290		54

Total nonaccrual loans		2,580		2,414

Restructured:
Commercial business		806		1,066

Total nonperforming loans		3,386		3,480

Total nonperforming assets	$	3,386	$	3,480

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. We will continue our 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 state of Washington.

Allowance for Loan and Lease Losses

At March 31, 2007, our allowance for loan and lease losses (“ALLL”) was $20.8 million, or 1.14% of total loans (excluding loans held for sale) and 615% of both nonperforming loans and nonperforming assets. This compares with an allowance of $20.2 million, or 1.18% of the total loan portfolio (excluding loans held for sale) and 580% of both nonperforming loans and nonperforming assets at December 31, 2006.

There have been no significant changes during the first quarter of 2007 in estimation methods or assumptions that affected our methodology for assessing the appropriateness of the ALLL. Adjustments to the percentages of the allowance allocated to loan categories are made based on trends with respect to delinquencies and problem loans within each pool of loans. The Company maintains a conservative approach to credit quality and will continue to prudently add to its loan and lease loss allowance as necessary in order to maintain adequate reserves. The Company’s credit quality measures remained strong in the first quarter of 2007. Management carefully monitors and evaluates the loan portfolio and continues to emphasize credit quality and strengthening of its loan monitoring systems and controls.

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. At March 31, 2007 and December 31, 2006, our allowance for unfunded loan commitments and letters of credit was $339,000. There was no provision during the first quarter of either 2007 or 2006.

The following table provides an analysis of our allowance for loan and lease losses at the dates and the periods indicated:


	Three Months Ended March 31,
*(in thousands)*	2007			2006
Beginning balance	$	20,182		$	20,829
Charge-offs:
Commercial business		(97	)		(16	)
Commercial real estate		—			—
Consumer		(56	)		(425	)

Total charge-offs		(153	)		(441	)
Recoveries:
Commercial business		98			28
Commercial real estate		9			9
Real estate construction: One-to-four family residential					7
Consumer		45			44

Total recoveries		152			88

Net charge-offs		(1	)		(353	)
Provision charged to expense		638			215

Ending balance	$	20,819		$	20,691

Total loans, net at end of period (1)	$	1,833,852		$	1,595,262

Allowance for loan and lease losses to total loans		1.14	%		1.30	%

(1)	Excludes loans held for sale

During the first quarter of 2007, we had net loan charge-offs of $1,000 compared to net loan charge-offs of $353,000 in the same period of 2006. The decline in losses is primarily the result of good overall credit quality levels and diligent collection efforts. The net charge-offs for all periods were comprised of multiple loans.

Securities

Approximately 99% of our securities are classified as available for sale and carried at fair value. These securities are used by management as part of our asset/liability management strategy and may be sold in response to changes in interest rates or significant prepayment risk. In accordance with our investment strategy, management monitors market conditions with a view to realize gains on its available for sale securities portfolio when prudent. At March 31, 2007 and December 31, 2006, the market value of securities available for sale had an unrealized loss, net of tax, of $1.0 million and $3.8 million, respectively. The change in market value of securities available for sale is due primarily to fluctuations in interest rates. For additional information on the composition of available for sale securities in a loss position and the duration of the time the securities have been in a loss position, see Note 7 to the unaudited consolidated condensed financial statements in “Item 1. Financial Statements (unaudited)” of this report.

The following table sets forth our securities portfolio by type for the dates indicated:


	March 31, 2007		December 31, 2006
	(in thousands)
Securities Available for Sale
U.S. Government agency	$	72,717	$	75,452
U.S. Government agency mortgage-backed securities and collateralized mortgage obligations		321,251		325,096
State and municipal securities		190,159		189,958
Other securities		3,154		2,352

Total	$	587,281	$	592,858

Securities Held to Maturity
State & municipal securities	$	1,572	$	1,822

Liquidity and Sources of Funds

Our primary sources of funds are customer deposits. Additionally, we utilize advances from the Federal Home Loan Bank of Seattle (the “FHLB”) and wholesale repurchase agreements to supplement our funding needs. These funds, together with loan repayments, loan sales, retained earnings, equity and other borrowed funds are used to make loans, to acquire securities and other assets, and to fund continuing operations.

Deposit Activities

Our deposit products include a wide variety of transaction accounts, savings accounts and time deposit accounts. Core deposits (demand deposit, savings, and money market accounts) increased $45.1 million, or 3% during the first quarter of 2007 and certificate of deposit balances increased $13.0 million, or 2% compared to year-end 2006. Average core deposits decreased to $1.44 billion during the first quarter of 2007 from $1.46 billion in the fourth quarter 2006.

With heightened consumer confidence in the equity markets, we recognize that some of the deposit growth which occurred during the past several years is likely migrating to those markets. Competitive pressure from banks in our market areas with a strained liquidity posture may also slow our deposit growth. However, in the long-term we anticipate continued growth in our core deposits through both the addition of new customers and our current client base.

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

The following table sets forth the Company’s deposit base by type of product for the dates indicated:


*Deposit Composition (in thousands)*	March 31, 2007		December 31, 2006		March 31, 2006
Demand and other non interest bearing	$	447,052	$	432,293	$	448,664
Interest bearing demand		430,967		414,198		350,081
Money market		530,542		516,415		535,681
Savings		110,236		110,795		120,965
Certificates of deposit		562,229		549,650		534,972

Total deposits	$	2,081,026	$	2,023,351	$	1,990,363

Borrowings

We rely on FHLB advances as another source of both short and long-term borrowings. FHLB advances are secured by one-to-four family real estate mortgages and certain other assets. At March 31, 2007, we had FHLB advances of $212.7 million, compared to advances of $205.8 million at December 31, 2006.

We also utilize wholesale repurchase agreements as a supplement to our funding sources. Wholesale repurchase agreements are secured by mortgage-backed securities. At March 31, 2007, we had repurchase agreements of $70.0 million, compared to agreements of $20.0 million at December 31, 2006. Management anticipates that we will continue to rely on both FHLB advances and wholesale repurchase agreements in the future, and we will use those funds primarily to make loans and purchase securities.

During 2001, the Company, through a special purpose trust (“the Trust”) participated in a pooled trust preferred offering, 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 8.94% at March 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 debentures at any time for a premium and after ten years at par, allowing us to retire the debt early if market conditions are favorable.

The trust preferred obligations are classified as long-term subordinated debt and our related investment in the Trust is recorded in other assets on the consolidated balance sheets. The balance of the long-term subordinated debt was $22.4 million at March 31, 2007 and December 31, 2006. The subordinated debt payable to the Trust is on the same interest and payment terms as the trust preferred obligations issued by the Trust.

Additionally, we have a $20.0 million line of credit with a large commercial bank with an interest rate indexed to LIBOR. At March 31, 2007 and December 31, 2006 there was no balance outstanding on the line of credit. In the event of discontinuance of the line by either party, we have up to two years to repay any outstanding balance.

Contractual Obligations & Commitments

We are party to many contractual financial obligations, including repayment of borrowings, operating and equipment lease payments, commitments to extend credit and investments in affordable housing partnerships. At March 31, 2007, we had commitments to extend credit of $866.1 million compared to $764.3 million at December 31, 2006.

Capital Resources

Shareholders’ equity at March 31, 2007 was $261.3 million, up 4% from $252.3 million at December 31, 2006. The increase is due primarily to net income of $7.3 million for the first quarter of 2007. Shareholders’ equity was 9.8% and 9.9% of total period-end assets at March 31, 2007, and December 31, 2006, respectively.

Capital Ratios: 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 subsidiaries qualify as “well-capitalized” at March 31, 2007 and December 31, 2006.


	Company				Columbia Bank				Astoria				Requirements
	3/31/2007		12/31/2006		3/31/2007		12/31/2006		3/31/2007		12/31/2006		Adequately capitalized		Well- capitalized
Total risk-based capital ratio	12.70	%	13.23	%	11.89	%	12.50	%	11.47	%	11.98	%	8	%	10	%
Tier 1 risk-based capital ratio	11.71	%	12.21	%	10.90	%	11.48	%	10.41	%	10.93	%	4	%	6	%
Leverage ratio	9.84	%	9.86	%	9.21	%	9.32	%	8.36	%	8.48	%	4	%	5	%

Stock Repurchase Program

In March 2002 the Board of Directors approved a stock repurchase program whereby the Company may systematically repurchase up to 500,000 of its outstanding shares of Common Stock. The Company may repurchase shares from time to time in the open market or in private transactions, under conditions which allow such repurchases to be accretive to earnings while maintaining capital ratios that exceed the guidelines for a well-capitalized financial institution. As of March 31, 2007 we had not repurchased any shares of common stock in this current stock repurchase program.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A number of measures are used to monitor and manage interest rate risk, including income simulations and interest sensitivity (gap) 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. Basic assumptions in the model include prepayment speeds on mortgage-related assets, cash flows and maturities of other investment securities, loan and deposit volumes and pricing. These assumptions are inherently subjective and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. At March 31, 2007, based on the measures used to monitor and manage interest rate risk, there has not been a material change in the Company’s interest rate risk since December 31, 2006. For additional information, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operation” referenced in the Company’s 2006 Annual Report on Form 10-K.

Item 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures as required by Rule 13a-15(b) of the Securities Exchange Act of 1934. Based on that evaluation, the CEO and CFO have concluded that as of the end of the period covered by this report, our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and timely reported as provided in the SEC’s rules and forms.

Changes in Internal Controls over Financial Reporting

There was no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1.

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 1A.

RISK FACTORS

There have been no material changes from risk factors previously disclosed in the Company’s 2006 Annual Report on Form 10-K.

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3.

DEFAULTS UPON SENIOR SECURITIES

None.

Item 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

Item 5.

OTHER INFORMATION

None.

Item 6.

EXHIBITS


10.1		Change in Control Agreement between the Bank and Kent L. Roberts effective December 4, 2006

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	COLUMBIA BANKING SYSTEM, INC.

Date: May 4, 2007	By	/s/ MELANIE J. DRESSEL
		Melanie J. Dressel President and Chief Executive Officer (Principal Executive Officer)

Date: May 4, 2007	By	/s/ GARY R. SCHMINKEY
		Gary R. Schminkey Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Date: May 4, 2007	By	/s/ CLINT E. STEIN
		Clint E. Stein Senior Vice President and Chief Accounting Officer (Principal Accounting Officer)

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents