Edgar Filing: COLUMBIA BANKING SYSTEM INC

td10q.htm

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, 2010.

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

For the transition period from to .

Commission File Number 0-20288

COLUMBIA BANKING SYSTEM, INC.

(Exact name of issuer as specified in its charter)


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


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

(253) 305-1900

(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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes o Noo

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

The number of shares of common stock outstanding at April 30, 2010 was 28,258,540.

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TABLE OF CONTENTS

		Page

PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Consolidated Condensed Statements of Income - three months ended March 31, 2010 and 2009	1

	Consolidated Condensed Balance Sheets – March 31, 2010 and December 31, 2009	2

	Consolidated Condensed Statements of Changes in Shareholders’ Equity - three months ended March 31, 2010 and 2009	3

	Consolidated Condensed Statements of Cash Flows - three months ended March 31, 2010 and 2009	4

	Notes to Unaudited Consolidated Condensed Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35

Item 4.	Controls and Procedures	35

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 3.	Defaults Upon Senior Securities	43

Item 4.	Submission of Matters to a Vote of Security Holders	43

Item 5.	Other Information	43

Item 6.	Exhibits	44

	Signatures	45

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PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

Columbia Banking System, Inc.

(Unaudited)

	Three Months Ended
	March 31,
(in thousands except per share)	2010			2009
Interest Income
Loans	$	36,947		$	29,801
Taxable securities		4,745			4,208
Tax-exempt securities		2,446			2,013
Federal funds sold and deposits in banks		149			7
Total interest income		44,287			36,029
Interest Expense
Deposits		4,941			6,892
Federal Home Loan Bank and Federal Reserve Bank borrowings		705			765
Long-term obligations		249			351
Other borrowings		118			118
Total interest expense		6,013			8,126
Net Interest Income		38,274			27,903
Provision for loan and lease losses		15,000			11,000
Net interest income after provision for loan and lease losses		23,274			16,903
Noninterest Income
Gain on bank acquisition		9,818			- -
Service charges and other fees		5,424			3,614
Merchant services fees		1,739			1,770
Gain on sale of investment securities, net		58			- -
Bank owned life insurance ("BOLI")		504			501
Other		930			1,089
Total noninterest income		18,473			6,974
Noninterest Expense
Compensation and employee benefits		16,986			11,852
Occupancy		3,969			3,045
Merchant processing		1,100			814
Advertising and promotion		838			692
Data processing		1,296			961
Legal and professional fees		1,498			967
Taxes, licenses and fees		564			796
Regulatory premiums		1,496			1,007
Net cost of operation of other real estate		1,312			47
Other		4,838			3,000
Total noninterest expense		33,897			23,181
Income before income taxes		7,850			696
Income tax benefit		(66	)		(816	)
Net Income	$	7,916		$	1,512
Net Income Applicable to Common Shareholders	$	6,809		$	419
Earnings per common share
Basic	$	0.24		$	0.02
Diluted	$	0.24		$	0.02
Dividends paid per common share	$	0.01		$	0.04
Weighted average number of common shares outstanding		27,886			17,980
Weighted average number of diluted common shares outstanding		28,098			17,987

See accompanying notes to unaudited consolidated condensed financial statements.

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CONSOLIDATED CONDENSED BALANCE SHEETS

Columbia Banking System, Inc.

(Unaudited)

			March 31,		December 31,
(in thousands)			2010		2009
ASSETS
Cash and due from banks			$	73,801	$	55,802
Interest-earning deposits with banks				232,670		249,272
Total cash and cash equivalents				306,471		305,074
Securities available for sale at fair value (amortized cost of $696,220 and $602,675, respectively)				719,031		620,038
Federal Home Loan Bank stock at cost				17,908		11,607
Loans, net of deferred loan fees of ($4,251) and ($4,616), respectively				1,949,609		2,008,884
Less: allowance for loan and lease losses				56,981		53,478
Noncovered loans, net				1,892,628		1,955,406
Loans covered under FDIC loss-sharing agreements				625,331		- -
Total loans, net				2,517,959		1,955,406
FDIC indemnification asset				210,405		- -
Interest receivable				16,236		10,335
Premises and equipment, net				61,537		62,670
Other real estate owned				19,432		19,037
Other real estate owned, covered under FDIC loss-sharing agreements				9,112		- -
Total other real estate owned				28,544		19,037
Goodwill				110,013		95,519
Core deposit intangible, net				21,831		4,863
Other assets				123,877		116,381
Total Assets			$	4,133,812	$	3,200,930
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing			$	756,060	$	574,687
Interest-bearing				2,615,105		1,908,018
Total deposits				3,371,165		2,482,705
Federal Home Loan Bank advances				125,951		100,000
Securities sold under agreements to repurchase				25,000		25,000
Other borrowings				- -		86
Long-term subordinated debt				25,686		25,669
Other liabilities				47,289		39,331
Total liabilities				3,595,091		2,672,791
Commitments and contingent liabilities
Shareholders' equity:
	March 31,	December 31,
	2010	2009
Preferred stock (no par value, $76,898 aggregate liquidation preference)
Authorized shares	2,000	2,000
Issued and outstanding	77	77		74,447		74,301
Common Stock (no par value)
Authorized shares	63,033	63,033
Issued and outstanding	28,242	28,129		349,546		348,706
Retained earnings				99,843		93,316
Accumulated other comprehensive income				14,885		11,816
Total shareholders' equity				538,721		528,139
Total Liabilities and Shareholders' Equity			$	4,133,812	$	3,200,930

See accompanying notes to unaudited consolidated condensed financial statements.

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CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Columbia Banking System, Inc.

(Unaudited)


	Preferred Stock				Common Stock								Accumulated
													Other			Total
	Number of				Number of					Retained			Comprehensive			Shareholders'
(in thousands)	Shares		Amount		Shares		Amount			Earnings			Income (Loss)			Equity
Balance at January 1, 2009		77	$	73,743		18,151	$	233,192		$	103,061		$	5,389		$	415,385
Comprehensive income:
Net income		-		-		-		-			1,512			-			1,512
Other comprehensive loss, net of tax:
Net unrealized gain from securities, net of reclassification adjustments		-		-		-		-			-			1,113			1,113
Net change in cash flow hedging instruments		-		-		-		-			-			(428	)		(428	)
Net pension plan liability adjustment		-		-		-		-			-			(689	)		(689	)
Total comprehensive income																	1,508
Accretion of preferred stock discount		-		132		-		-			(132	)		-			-
Common stock issued - stock option and other plans		-				20		242			-			-			242
Common stock issued - restricted stock awards, net of cancelled awards		-		-		83		-			-			-			-
Share-based payment		-		-		-		302			-			-			302
Tax benefit deficiency associated with share-based compensation		-		-		-		(32	)		-			-			(32	)
Preferred dividends		-		-		-		-			(961	)		-			(961	)
Cash dividends paid on common stock		-		-		-		-			(727	)		-			(727	)
Balance at March 31, 2009		77	$	73,875		18,254	$	233,704		$	102,753		$	5,385		$	415,717

Balance at January 1, 2010		77	$	74,301		28,129	$	348,706		$	93,316		$	11,816		$	528,139
Comprehensive income:
Net income		-		-		-		-			7,916			-			7,916
Other comprehensive income, net of tax:
Net unrealized gain from securities, net of reclassification adjustments		-		-		-		-			-			3,518			3,518
Net change in cash flow hedging instruments		-		-		-		-			-			(479	)		(479	)
Net pension plan liability adjustment		-		-		-		-			-			30			30
Total comprehensive income																	10,985
Accretion of preferred stock discount		-		146		-		-			(146	)		-			-
Common stock issued - stock option and other plans		-		-		41		509			-			-			509
Common stock issued - restricted stock awards, net of cancelled awards		-		-		72		-			-			-			-
Share-based payment		-		-		-		350			-			-			350
Tax benefit deficiency associated with share-based compensation		-		-		-		(19	)		-			-			(19	)
Preferred dividends		-		-		-		-			(961	)		-			(961	)
Cash dividends paid on common stock		-		-		-		-			(282	)		-			(282	)
Balance at March 31, 2010		77	$	74,447		28,242	$	349,546		$	99,843		$	14,885		$	538,721

See accompanying notes to unaudited consolidated condensed financial statements.

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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

Columbia Banking System, Inc.

(Unaudited)

	Three Months Ended March 31,
(in thousands)	2010			2009
Cash Flows From Operating Activities
Net Income	$	7,916		$	1,512
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan and lease losses		15,000			11,000
Deferred income tax benefit		(125	)		(359	)
Stock-based compensation expense		350			302
Depreciation, amortization and accretion		2,903			1,673
Net realized gain on FDIC assisted bank acquisitions		(9,818	)		- -
Net realized gain on sale of securities		(58	)		- -
Net realized gain on sale of other assets		(14	)		(15	)
Net realized loss on sale of other real estate owned		145			- -
Gain on termination of cash flow hedging instruments		(743	)		(663	)
Write-down on other real estate owned		829			- -
Net change in:
Loans held for sale		- -			(1,783	)
Interest receivable		(600	)		258
Interest payable		(145	)		(1,199	)
Other assets		6,493			(5,717	)
Other liabilities		6,289			3,335
Net cash provided by operating activities		28,422			8,344
Cash Flows From Investing Activities
Purchases of securities available for sale		(56,469	)		(27,117	)
Proceeds from sales of securities available for sale		69,328			- -
Proceeds from principal repayments and maturities of securities available for sale		21,911			13,218
Loans originated, net of principal collected		75,505			34,309
Purchases of premises and equipment		(10	)		(1,178	)
Proceeds from disposal of premises and equipment		54			- -
Proceeds from sales of covered other real estate owned		5,950			- -
Proceeds from sales of other real estate and other personal property owned		1,361			1,297
Capital improvements on OREO properties		(329	)		- -
Net cash acquired in business combinations		145,534			- -
Net cash provided by investing activities		262,835			20,529
Cash Flows From Financing Activities
Net decrease in deposits		(258,862	)		(37,745	)
Proceeds from Federal Home Loan Bank and Federal Reserve Bank borrowings		- -			414,000
Repayment from Federal Home Loan Bank and Federal Reserve Bank borrowings		(30,159	)		(431,000	)
Net (decrease) increase in other borrowings		(86	)		74
Cash dividends paid		(1,243	)		(1,624	)
Proceeds from exercise of stock options		490			210
Net cash used in financing activities		(289,860	)		(56,085	)
Increase(decrease) in cash and cash equivalents		1,397			(27,212	)
Cash and cash equivalents at beginning of period		305,074			88,730
Cash and cash equivalents at end of period	$	306,471		$	61,518
Supplemental Information:
Cash paid for interest	$	6,158		$	9,325
Cash paid for income tax	$	- -		$	500
Loans transferred to other real estate owned	$	3,308		$	2,738

See accompanying notes to unaudited consolidated condensed financial statements.

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Columbia Banking System, Inc.

1. Basis of Presentation and Significant Accounting Policies

(a)	Basis of Presentation

The interim unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for condensed interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain financial information and footnotes have been omitted or condensed. The consolidated condensed financial statements include the accounts of the Company, and its wholly owned banking subsidiary Columbia Bank. All intercompany transactions and accounts have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included. The results of operations for the three months ended March 31, 2010 are not necessarily indicative of results to be anticipated for the year ending December 31, 2010. 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 2009 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 2009 Annual Report on Form 10-K. With the exception of the significant accounting policies listed below, there have not been any other changes in our significant accounting policies compared to those contained in our 2009 10-K disclosure for the year ended December 31, 2009.

Loans

The Company’s accounting methods for loans differ depending on whether the loans were originated or were acquired as a result of a business acquisition.

Originated Loans

Loans are generally carried at principal amounts less net deferred loans fees. Net deferred loan fees include deferred unamortized origination fees less direct incremental origination costs. Net deferred loan fees are amortized into interest income over the contractual life of the related loans. Interest income is accrued as earned. Fees related to lending activities other than the origination or purchase of loans are recognized as noninterest income during the period the related services are performed.

Loans are placed on nonaccrual status when a loan becomes contractually past due 90 days with respect to interest or principal unless the loan is both well secured and in the process of collection, or if full collection of interest or principal becomes uncertain. When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is reversed and the accretion of net deferred loan fees ceases. Thereafter, interest collected on the loan is accounted for on the cash collection or cost recovery method until qualifying for return to accrual status. Generally, a loan may be returned to accrual status when the delinquent principal and interest are brought current in accordance with the terms of the loan agreement and future payments are reasonably assured.

Loans are considered impaired when based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The assessment for impairment occurs when and while such loans are designated as criticized/classified per the Company’s internal risk rating system or when and while such loans are on nonaccrual. All criticized/classified loans with an outstanding balance greater than $100,000 and all non-accrual loans with an outstanding balance greater than $250,000 are considered impaired and are analyzed individually, on a quarterly basis.

When a loan with unique risk characteristics has been identified as being impaired, the amount of impairment will be measured by the Company using discounted cash flows, except when it is determined that the primary (remaining) source of repayment for the loan is the operation or liquidation of the underlying collateral. In these cases, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. As a final alternative, the observable market price of the debt may be used to assess impairment. Predominantly, the Company uses the fair value of collateral approach based upon a reliable valuation.

When the measurement of the impaired loan is less than the recorded amount of the loan, an impairment is recognized by recording a charge-off to the allowance for loan and lease losses or by designating a specific reserve. The Company’s policy is to record cash receipts received on impaired loans first as reductions to principal and then to interest income.

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Unfunded loan commitments are generally related to providing credit facilities to clients of the Bank, and are not actively traded financial instruments.

Acquired Loans

Loans acquired in a business acquisition after December 31, 2008 are recorded at their fair value at acquisition date, factoring in credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses is not carried over or recorded as of the acquisition date.

Loans purchased with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, formerly SOP 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer. In situations where such loans have similar risk characteristics, loans are aggregated into pools to estimate cash flows. The Company aggregated all of the loans acquired in FDIC-assisted acquisitions into pools, based on common risk characteristics. A pool is accounted for as a single asset with a single interest rate, cumulative loss rate and cash flow expectation. Expected cash flows at the acquisition date in excess of the fair value of loans are considered to be accretable yield, which is recognized as interest income over the life of the loan pool using a level yield method if the timing and amount of the future cash flows of the pool is reasonably estimable. Subsequent to the acquisition date, any increases in cash flow over those expected at purchase date in excess of fair value are recorded as interest income prospectively. Any subsequent decreases in cash flow over those expected at purchase date are recognized by recording an allowance for loan losses. Any disposals of loans, including sales of loans, payments in full or foreclosures result in the removal of the loan from the loan pool at the carrying amount. The Company elected to account for all acquired loans under ASC 310-30.

Covered Assets and Related FDIC Indemnification Asset

Assets subject to loss-sharing agreements with the Federal Deposit Insurance Corporation (“FDIC”) are labeled “covered” on the Consolidated Condensed Balance Sheet and include certain loans and other real estate owned (“OREO”).

All other real estate owned acquired in FDIC-assisted acquisitions are subject to FDIC loss-sharing agreements and are referred to as covered OREO. Covered OREO is reported exclusive of expected reimbursement cash flows from the FDIC. Upon transferring covered loan collateral to covered OREO status, acquisition date fair value discounts on the related loan are also transferred to covered OREO. Fair value adjustments on covered OREO result in a reduction of the covered other real estate carrying amount and a corresponding increase in the expected FDIC reimbursement, with the estimated net loss to the Company charged against earnings.

The acquisition date fair value of the reimbursement the Company expected to receive from the FDIC under those agreements was recorded in the FDIC indemnification asset on the Consolidated Condensed Balance Sheet. Subsequent to the acquisition the indemnification asset is tied to the loss in the covered loans and covered OREO and is not being accounted for under fair value. The FDIC indemnification asset is accounted for on the same basis as the related covered loans and covered OREO and is the present value of the cash flows the Company expects to collect from the FDIC under the loss-sharing agreements. The difference between the present value and the undiscounted cash flow the Company expects to collect from the FDIC is accreted into noninterest income over the life of the FDIC indemnification asset. The FDIC indemnification asset is adjusted for any changes in expected cash flows based on the loan performance. Any increases in cash flow of the loans over those expected will reduce the FDIC indemnification asset and any decreases in cash flow of the loans over those expected will increase the FDIC indemnification asset. Increase and decreases to the FDIC indemnification asset are recorded as adjustments to noninterest income.

Core Deposit Intangible

Core Deposit Intangible (“CDI”) is a measure of the value of non-interest checking, savings, NOW and money market deposits that are acquired in a business combination. The fair value of the CDI stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit funding, relative to an alternative source of funding. The CDI related to the Columbia River Bank and American Marine Bank acquisitions will be amortized over an estimated useful life of 10 years to approximate the existing deposit relationships acquired. The Company evaluates such identifiable intangibles for impairment when an indication of impairment exists.

2. Accounting Pronouncements Recently Issued

In April 2010, the FASB issued ASU 2010-18, an amendment of Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality (Topic 310-30). ASU 2010-18 attempts to eliminate diversity in practice related to loan

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modifications. Modifications of loans within a pool of loans accounted for as a single asset do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. The entity will continue to be required to consider whether the pool of assets in which the loans are included is impaired if expected cash flows for the pool change. The new guidance will become effective in the first interim or annual period ending on or after July 15, 2010 and is to be applied prospectively. The new guidance will not have an impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820), which focuses on Improving Disclosures about Fair Value Measurement. ASU 2010-06 requires new disclosures about transfers in and out of Level 1 and Level 2 fair value measurements and the activity in Level 3 fair value measurements (i.e. purchases, sales, issuances, and settlements). ASU 2010-06 also amended disclosure requirements related to the level of disaggregation of assets and liabilities, as well as disclosures about input and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements. The new guidance became effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements and did not have a material impact on the Company’s consolidated financial statements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.

3. Earnings per Common Share

Basic EPS is computed by dividing income applicable to common shareholders by the weighted average number of common shares outstanding for the period. Common shares outstanding include common stock and vested restricted stock awards where recipients have satisfied the vesting terms. Diluted EPS reflects the assumed conversion of all dilutive securities, applying the treasury stock method. The Company calculates earnings per share using the two-class method as described in the Earnings per Share topic of the FASB ASC.

The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2010 and 2009:

	Three Months Ended March 31,
(in thousands except per share)	2010			2009
Basic EPS:
Net income	$	7,916		$	1,512
Less: Preferred dividends and accretion of issuance discount for preferred stock		(1,107	)		(1,093	)
Net income applicable to common shareholders	$	6,809		$	419
Less: Earnings allocated to participating securities		(73	)		(8	)
Earnings allocated to common shareholders	$	6,736		$	411
Weighted average common shares outstanding		27,886			17,980
Basic earnings per common share	$	0.24		$	0.02
Diluted EPS:
Earnings allocated to common shareholders	$	6,736		$	411
Weighted average common shares outstanding		27,886			17,980
Dilutive effect of equity awards and warrants		212			7
Weighted average diluted common shares outstanding		28,098			17,987
Diluted earnings per common share	$	0.24		$	0.02

Potentially dilutive share options and warrant that were not included in the computation of diluted EPS because to do so would be anti-dilutive.		54			983

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4. Business Combinations

Columbia River Bank

On January 22, 2010 the Bank acquired certain assets and assumed certain liabilities of Columbia River Bank from the FDIC in an FDIC-assisted transaction. As part of the Purchase and Assumption Agreement, the Bank and the FDIC entered into loss-sharing agreements (each, a “loss-sharing agreement” and collectively, the “loss-sharing agreements”), whereby the FDIC will cover a substantial portion of any future losses on loans (and related unfunded loan commitments), OREO and certain accrued interest on loans. We refer to the acquired loans and OREO subject to the loss-sharing agreements collectively as “covered assets.” Under the terms of the loss-sharing agreements, the FDIC will absorb 80% of losses and share in 80% of loss recoveries on the first $206 million on covered loans and absorb 95% of losses and share in 95% of loss recoveries exceeding $206 million. The loss-sharing agreements for commercial and single family residential mortgage loans are in effect for five years and ten years, respectively, from the January 22, 2010 acquisition date and the loss recovery provisions for such loans are in effect for eight years and ten years, respectively, from the acquisition date.

Columbia State Bank acquired tangible assets with an acquisition date fair value of approximately $884.9 million, including $480.3 million of loans, an FDIC indemnification asset of $143.6 million, $100.7 million of investment securities, $98.1 million of cash and cash equivalents and $62.2 million of other assets. Columbia State Bank assumed liabilities with an acquisition date fair value of approximately $912.9 million, including $893.4 million of insured and uninsured deposits, $18.4 million of Federal Home Loan Bank advances and $1.1 million of other liabilities. Columbia River Bank was a full service commercial bank headquartered in The Dalles, Oregon that operated 21 branch locations, including 14 in the state of Oregon and seven in the State of Washington. We made this acquisition to expand our geographic footprint.

The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting (formerly the purchase method). The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the January 22, 2010 acquisition date. The application of the acquisition method of accounting resulted in the recognition in $14.5 million of goodwill and a core deposit intangible of $13.4 million. The goodwill represents the excess of the estimated fair value of the liabilities assumed over the estimated fair value of the assets acquired and is influenced significantly by the FDIC-assisted transaction process. All of the goodwill and core deposit intangible assets recognized are deductible for income tax purposes.

The operating results of the Company for the quarter ended March 31, 2010 include the operating results produced by the acquired assets and assumed liabilities for the period January 23, 2010 to March 31, 2010. Due primarily to the Company acquiring only certain assets and liabilities of Columbia River Bank, the significant amount of fair value adjustments and the FDIC loss-sharing agreements now in place, historical results of Columbia River Bank are not meaningful to the Company’s results and thus no pro forma information is presented.

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The table below displays the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed:

	January 22, 2010
Assets
Cash and due from banks	$	33,222
Interest-earning deposits with banks		64,921
Investment securities		100,650
Federal Home Loan Bank stock		3,045
Loans covered by loss sharing		480,306
Accrued interest receivable		4,021
FDIC receivable		46,213
Other real estate owned covered by loss sharing		8,340
Goodwill		14,494
Core deposit intangible		13,442
FDIC indemnification asset		143,609
Other assets		615
Total assets acquired	$	912,878
Liabilities
Deposits	$	893,356
Federal Home Loan Bank advances		18,428
Accrued interest payable		524
Other liabilities		570
Total liabilities assumed	$	912,878

American Marine Bank

On January 29, 2010, Columbia State Bank acquired certain assets and assumed certain liabilities of American Marine Bank from the FDIC, which had been appointed receiver of the institution. As part of the Purchase and Assumption Agreement, the Bank and the FDIC entered into loss-sharing agreements whereby the FDIC will cover a substantial portion of any future losses on loans (and related unfunded loan commitments), OREO and certain accrued interest on loans. Under the terms of the loss-sharing agreements, the FDIC will absorb 80% of losses and share in 80% of loss recoveries on the first $66 million on covered loans and absorb 95% of losses and share in 95% of loss recoveries exceeding $66 million. The loss-sharing agreements for commercial and single family residential mortgage loans are in effect for five years and ten years, respectively, from the January 29, 2010 acquisition date and the loss recovery provisions for such loans are in effect for eight years and ten years, respectively, from the acquisition date.

Columbia State Bank acquired tangible assets with an acquisition date fair value of approximately $303.5 million, including $176.3 million of loans, an FDIC indemnification asset of $66.8 million, $28.6 million of investment securities, $14.5 million of cash and cash equivalents and $17.3 million of other assets. Columbia State Bank assumed liabilities with an acquisition date fair value of approximately $292.6 million, including $254.0 million of insured and uninsured deposits, $37.7 million of FHLB advances and $974 thousand of other liabilities. American Marine Bank was a full service commercial bank headquartered on Bainbridge Island, Washington that operated 11 branch locations in western Washington. In addition, as part of this acquisition, Columbia State Bank received regulatory approval to exercise trust powers and intends to continue to operate the Trust and Wealth Management Division of American Marine Bank. We made this acquisition to expand our geographic footprint.

The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the January 29, 2010 acquisition date. The application of the acquisition method of accounting resulted in the recognition of a bargain purchase gain of $9.8 million, which is included in the Gain on bank acquisition line item in the Consolidated Condensed Statements of Income, and a core deposit intangible of $4.3 million. The transaction resulted in a bargain purchase gain as the fair value of assets acquired exceeded the fair value of liabilities assumed.

The operating results of the Company for the quarter ended March 31, 2010 include the operating results produced by the acquired assets and assumed liabilities for the period January 30, 2010 to March 31, 2010. Due primarily to the Company acquiring only certain assets and liabilities of American Marine Bank, the significant amount of fair value adjustments and the FDIC loss-sharing agreements now in place, historical results of American Marine Bank are not meaningful to the Company’s results and thus no pro forma information is presented.

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The table below displays the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed:

	January 29, 2010
Assets
Cash and cash equivalents	$	14,215
Federal funds sold		267
Investment securities		28,592
Federal Home Loan Bank stock		3,257
Loans covered by loss sharing		176,278
Accrued interest receivable		1,280
FDIC receivable		3,646
Other real estate owned covered by loss sharing		8,680
Core deposit intangible		4,313
FDIC indemnification asset		66,796
Other assets		498
Total assets acquired		307,822
Liabilities
Deposits		253,965
Federal Home Loan Bank advances		37,682
Accrued interest payable		337
Deferred tax liability, net		5,383
Other liabilities		637
Total liabilities assumed		298,004
Net assets acquired	$	9,818

The following is a description of the methods used to determine the fair values of the significant assets and liabilities presented above for both the Columbia River Bank and American Marine Bank acquisitions.

Cash and cash equivalents - Cash and cash equivalents include cash and due from banks, interest-earning deposits with banks and the Federal Reserve Bank and federal funds sold. Cash and cash equivalents have a maturity of 90 days or less at the time of purchase. The fair value of financial instruments that are short-term or re-price frequently and that have little or no risk are considered to have a fair value equal to carrying value.

Investment securities - The fair value for each purchased security was the quoted market price at the close of the trading day effective on the acquisition dates.

Federal Home Loan Bank stock - The fair value of acquired Federal Home Loan Bank (“FHLB”) stock was estimated to be its redemption value, which is also the par value. The FHLB requires member banks to purchase its stock as a condition of membership and the amount of FHLB stock owned varies based on the level of FHLB advances outstanding. This stock is generally redeemable and is presented at the par value.

Loans - We refer to the loans acquired in the Columbia River Bank and American Marine Bank acquisitions as “covered loans” as we will be reimbursed for a substantial portion of any future losses on them under the terms of the FDIC loss-sharing agreements. The estimated fair value of the loan portfolios at the acquisition dates represents the discounted expected cash flows from the portfolio. In estimating such fair value, we (a) calculated the contractual amount and timing of undiscounted principal and interest payments (the “undiscounted contractual cash flows”) and (b) estimated the amount and timing of undiscounted expected principal and interest payments (the “undiscounted expected cash flows”). The amount by which the undiscounted expected cash flows exceed the estimated fair value (the “accretable yield”) is accreted into interest income over the life of the loans. The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The nonaccretable difference represents an estimate of the credit risk in the Columbia River Bank and American Marine Bank loan portfolios at the acquisition dates.

In calculating expected cash flows, management made several assumptions regarding prepayments, collateral cash flows, the timing of defaults and the loss severity of defaults. Other factors expected by market participants were considered in determining the fair value of acquired loans, including loan pool level estimated cash flows, type of loan and related

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collateral, risk classification status (i.e. performing or nonperforming), fixed or variable interest rate, term of loan and whether or not the loan was amortizing and current discount rates.

Other real estate owned - Other real estate owned is presented at its estimated fair value based on discounted expected cash flows and is also subject to the FDIC shared-loss agreements. Cash flows were estimated using expected selling price and date, less selling and carrying costs and were discounted to present value.

Goodwill- Goodwill represents the excess of the estimated fair value of the liabilities assumed over the estimated fair value of the assets acquired and is influenced significantly by the FDIC-assisted transaction process.

Core deposit intangible - In determining the estimated life and fair value of the core deposit intangible, deposits were analyzed based on factors such as type of deposit, deposit retention, interest rates, and age of the deposit relationships. Based on this valuation, the core deposit intangible asset will be amortized over the projected useful lives of the related deposits on an accelerated basis over 10 years.

FDIC indemnification asset - The FDIC indemnification asset is measured separately from each of the covered asset categories as it is not contractually embedded in any of the covered asset categories. For example, the FDIC indemnification asset related to estimated future loan losses is not transferable should we sell a loan prior to foreclosure or maturity. The fair value of the FDIC indemnification asset represents the present value of the estimated cash payments (net of amount owed to the FDIC) expected to be received from the FDIC for future losses on covered assets based on the credit adjustment on estimated cash flows for each covered asset pool and the loss-sharing percentages. The ultimate collectability of the FDIC indemnification asset is dependent upon the performance of the underlying covered loans, the passage of time and claims paid by the FDIC.

Deposit liabilities - The fair values used for demand and savings deposits are, by definition, equal to the amount payable on demand at the reporting date. The fair values for time deposits are estimated using a discounted cash flow method that applies interest rates currently being offered on time deposits to a schedule of aggregated contractual maturities of such time deposits.

Borrowings - The fair values for FHLB advances are estimated using a discounted cash flow method based on the current market rates.

5. Securities

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

			Gross		Gross
	Amortized		Unrealized		Unrealized
(in thousands)	Cost		Gains		Losses			Fair Value
March 31, 2010:
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations	$	467,321	$	12,456	$	(547	)	$	479,230
State and municipal securities		225,629		11,469		(533	)		236,565
Other securities		3,270		- -		(34	)		3,236
Total	$	696,220	$	23,925	$	(1,114	)	$	719,031
December 31, 2009:
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations	$	390,688	$	10,034	$	(566	)	$	400,156
State and municipal securities		210,987		8,545		(621	)		218,911
Other securities		1,000		- -		(29	)		971
Total	$	602,675	$	18,579	$	(1,216	)	$	620,038

At March 31, 2010, available for sale securities with a carrying amount of $28.8 million were pledged as collateral for repurchase agreement borrowings. In addition, available for sale securities with a carrying amount of $12.4 million at March 31, 2010 were pledged as collateral for potential obligations under certain interest rate swap agreements.

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The following tables show the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2010 and December 31, 2009:


	Less than 12 Months					12 Months or More					Total
March 31, 2010	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(in thousands)	Value		Losses			Value		Losses			Value		Losses
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations	$	92,188	$	(546	)	$	13,859	$	(455	)	$	106,047	$	(1,001	)
State and municipal securities		4,613		(79	)		19		- -			4,632		(79	)
Other securities		1,752		(8	)		974		(26	)		2,726		(34	)
Total	$	98,553	$	(633	)	$	14,852	$	(481	)	$	113,405	$	(1,114	)

	Less than 12 Months					12 Months or More					Total
December 31, 2009	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(in thousands)	Value		Losses			Value		Losses			Value		Losses
U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations	$	87,879	$	(566	)	$	17	$	- -		$	87,896	$	(566	)
State and municipal securities		14,846		(42	)		16,272		(579	)		31,118		(621	)
Other securities		- -		- -			971		(29	)		971		(29	)
Total	$	102,725	$	(608	)	$	17,260	$	(608	)	$	119,985	$	(1,216	)

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

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6. Loans

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

(in thousands)	March 31, 2010			December 31, 2009
Loans not covered under loss-sharing agreements:
Commercial business	$	736,018		$	744,440
Real Estate:
One-to-four family residential		56,409			63,364
Commercial and five or more family residential properties		839,251			856,260
Total real estate		895,660			919,624
Real estate construction:
One-to-four family residential		93,788			107,620
Commercial and five or more family residential properties		33,422			41,829
Total real estate construction		127,210			149,449
Consumer		194,972			199,987
Less: deferred loan fees and other		(4,251	)		(4,616	)
Total loans not covered under loss-sharing agreements		1,949,609			2,008,884
Net covered loans under loss-sharing agreements		625,331			- -
Total loans, net of deferred loan fees	$	2,574,940		$	2,008,884

At March 31, 2010 and December 31, 2009, the Company had no loans to foreign domiciled businesses or foreign countries, or loans related to highly leveraged transactions. Substantially all of the Company’s loans and loan commitments are geographically concentrated in its service areas within the states of Washington and Oregon.

The following is an analysis of the covered loan portfolio by major types of loans:

	March 31, 2010
(in thousands)	Covered Loans
Loans covered under loss-sharing agreements
Commercial business	$	206,951
Real Estate:
One-to-four family residential		96,543
Commercial and five or more family residential properties		349,577
Total real estate		446,120
Real estate construction:
One-to-four family residential		77,883
Commercial and five or more family residential properties		77,383
Total real estate construction		155,266
Consumer		66,592
Total loans covered under loss-sharing agreements		874,929
Total discount resulting from acquisition date fair value adjustment		(249,598	)
Net covered loans	$	625,331

As of the acquisition dates, we estimated the fair value of the Columbia River Bank and American Marine Bank loan portfolios at $480.3 million and $176.3 million, respectively, which represents the expected cash flows from the portfolio discounted at market-based rates. In estimating such fair value, we (a) calculated the contractual amount and timing of the undiscounted principal and interest payments (the “undiscounted contractual cash flows”); and (b) estimated the amount

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and timing of the undiscounted expected principal and interest payments (the “undiscounted expected cash flows”). The amount by which the undiscounted expected cash flows exceed the estimated fair value (the “accretable yield”) is accreted into interest income over the lives of the loans. The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is referred to as the “non-accretable difference.” The non-accretable difference represents an estimate of credit risk in the covered loan portfolios on the acquisition dates. On the acquisition dates, the preliminary estimate of the undiscounted contractual principal and interest payments for the covered loans acquired in the Columbia River Bank and American Marine Bank acquisitions were $799.8 million and $259.6 million, respectively. The accretable yields were approximately $101.1 million and $21.6 million, respectively, and the non-accretable differences were $217.9 million and $65.5 million, respectively.

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

Changes in accretable yield for acquired loans were as follows for the three months ended March 31, 2010:

	March 31, 2010
(in thousands)	Accretable Yield			Carrying Amount of Loans
Balance at beginning of period	$	- -		$	- -
Additions		122,705			656,584
Accretion		(435	)		435
Transfers to OREO		- -			(1,092	)
Charge-offs		- -			(155	)
Payments received, net		- -			(30,441	)
Balance at end of period	$	122,270		$	625,331

7. 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, 2010 and 2009:

	Three Months Ended March 31,
(in thousands)	2010			2009
Beginning balance	$	53,478		$	42,747
Provision charged to expense		15,000			11,000
Loans charged off		(12,853	)		(9,707	)
Recoveries		1,356			209
Ending balance	$	56,981		$	44,249

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

	Three Months Ended March 31,
(in thousands)	2010		2009
Beginning balance	$	775	$	500
Net changes in the allowance for unfunded commitments and letters of credit		40		50
Ending balance	$	815	$	550

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At March 31, 2010 and December 31, 2009, the total recorded investment in impaired loans was $105.6 million and $116.4 million, respectively. At March 31, 2010, $18.6 million of impaired loans had a specific valuation allowance of $7.7 million. At December 31, 2009, $18.1 million of impaired loans had a specific valuation allowance of $3.8 million.

8. Changes in Other Real Estate Owned

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

	Three Months Ended
(in thousands)	March 31, 2010
Noncovered OREO:
Balance, beginning of period	$	19,037
Transfers in, net of write-downs ($151 thousand)		2,216
OREO improvements		329
Additional OREO write-downs		(799	)
Carrying value of OREO property sold		(1,361	)
Gain on sale of OREO		10
Total non-covered OREO, end of period	$	19,432

At March 31, 2010 OREO was $28.5 million, which included $9.1 million of covered OREO acquired in the FDIC-assisted acquisitions of Columbia River Bank and American Marine Bank. The acquired OREO is covered by loss-sharing agreements with the FDIC in which the FDIC will assume 80% of additional write-downs and losses on covered OREO sales.

9. Goodwill and Intangible Assets

At March 31, 2010 and December 31, 2009, the Company had $110.0 million and $95.5 million in goodwill, respectively. At March 31, 2010 and December 31, 2009, the Company had a core deposit intangible (“CDI”) asset of $21.8 million and $4.9 million, respectively. In accordance with the Intangibles – Goodwill and Other topic of the FASB ASC, goodwill is not amortized but is reviewed for potential impairment at the reporting unit level during the third quarter on an annual basis and between annual tests in certain circumstances such as material adverse changes in legal, business, regulatory and economic factors. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.

The 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 $787 thousand and $270 thousand for the three months ended March 31, 2010 and March 31, 2009, respectively. The CDI amortization expense is included in other noninterest expense on the Consolidated Condensed Statements of Income.

10. Shareholders’ Equity

Preferred Stock. On November 21, 2008, the Company entered into a Securities Purchase Agreement with the United States Department of Treasury (“Treasury”) pursuant to which the Company sold to the Treasury for an aggregate purchase price of $76.9 million, 76,898 shares of Fixed Rate Cumulative Perpetual Preferred Stock Series A (the “Preferred Stock”) and a warrant to purchase 796,046 shares of common stock (the “Warrant”) for a ten-year period at an exercise price of $14.49 per share. The number of shares subject to the Warrant has been reduced by 50% to 398,023 as a result of the Company’s underwritten public offering of common stock in August 2009.

The Preferred Stock pays a cumulative dividend of 5.0% per annum for the first five years and 9.0% per annum thereafter. The Preferred Stock can be redeemed at its liquidation preference (which is $1,000 per share), plus all accrued and unpaid dividends.

Common Stock. On January 28, 2010, the Company declared a quarterly cash dividend of $0.01 per share, payable on February 24, 2010 to shareholders of record as of the close of business on February 10, 2010. The payment of cash dividends is subject to Federal regulatory requirements for capital levels and other restrictions. In addition, the cash dividends paid by Columbia Bank to the Company are subject to both Federal and State regulatory requirements. Subsequent to quarter end, on April 28, 2010 the Company declared a quarterly cash dividend of $0.01 per share, payable on May 26, 2010, to shareholders of record at the close of business May 12, 2010.

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The payment of cash dividends is subject to Federal regulatory requirements for capital levels and other restrictions. In addition, the cash dividends paid by Columbia Bank to the Company are subject to both Federal and State regulatory requirements. Also, for a period of three years after the November 21, 2008 closing date of the Securities Purchase Agreement between the Company and the Treasury, the Company cannot, without the consent of the Treasury, declare or pay regular quarterly cash dividends of more than $0.07 per common share.

11. Comprehensive Income

The components of comprehensive income are as follows:

	Three Months Ended
	March 31,
(in thousands)	2010			2009
Net income as reported	$	7,916		$	1,512
Unrealized gain from securities:
Net unrealized holding gain from available for sale securities arising during the period, net of tax of ($1,956) and ($613)		3,556			1,113
Reclassification adjustment of net gain from sale of available for sale securities included in income, net of tax of $20 and $0		(38	)		- -
Net unrealized gain from securities, net of reclassification adjustment		3,518			1,113
Cash flow hedging instruments:
Reclassification adjustment of net gain included in income, net of tax of $264 and $235		(479	)		(428	)
Net change in cash flow hedging instruments		(479	)		(428	)
Pension plan liability adjustment:
Net unrealized gain (loss) from unfunded defined benefit plan liability arising during the period, net of tax of $(12) and $379		23			(689	)
Less: amortization of unrecognized net actuarial loss included in net periodic pension cost, net of tax of ($4) and $0		7			- -
Pension plan liability adjustment, net		30			(689	)
Total comprehensive income	$	10,985		$	1,508

12. Fair Value Accounting and Measurement

The Fair Value Measurements and Disclosures topic of the FASB ASC defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value. We hold fixed and variable rate interest-bearing securities, investments in marketable equity securities and certain other financial instruments, which are carried at fair value. Fair value is determined based upon quoted prices when available or through the use of alternative approaches, such as matrix or model pricing, when market quotes are not readily accessible or available.

The valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our own market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets that are accessible at the measurement date.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.

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Fair values are determined as follows:

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

Interest rate contract positions are valued in models, which use as their basis, readily observable market parameters and are classified within level 2 of the valuation hierarchy.

The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis at March 31, 2010 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:

	Fair value at		Fair Value Measurements at Reporting Date Using
(in thousands)	March 31, 2010		Level 1		Level 2		Level 3
Assets
Securities available for sale	$	719,031	$	- -	$	719,031	$	- -
Other assets (Interest rate contracts)	$	9,330	$	- -	$	9,330	$	- -
Liabilities
Other liabilities (Interest rate contracts)	$	9,330	$	- -	$	9,330	$	- -

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

Impaired loans - A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Impaired loans are measured by the fair market value of the collateral less estimated costs to sell.

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

The following table sets forth the Company’s financial assets that were accounted for at fair value on a nonrecurring basis at March 31, 2010:

									Losses During the
	Fair value at		Fair Value Measurements at Reporting Date Using						Quarter Ended
(in thousands)	March 31, 2010		Level 1		Level 2		Level 3		March 31, 2010
Impaired loans	$	18,767	$	- -	$	- -	$	18,767	$	12,648
Non-covered OREO		3,780		- -		- -		3,780		950
	$	22,547	$	- -	$	- -	$	22,547	$	13,598

The losses on impaired loans disclosed above represent the amount of the specific reserve and/or charge-offs during the period applicable to loans held at period end. The amount of the specific reserve is included in the allowance for loan and lease losses. The losses on non-covered OREO disclosed above represent the writedowns taken at foreclosure that were

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charged to the allowance for loan and lease losses, as well as subsequent writedowns from updated appraisals that were charged to earnings.

13.	Fair Value of Financial Instruments

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

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

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

Securities available for sale—The fair value of all investment securities are based upon the assumptions market participants would use in pricing the security. Such assumptions include observable and unobservable inputs such as quoted market prices, dealer quotes and discounted cash flows.

Loans — Originated Loans - Loans are not recorded at fair value on a recurring basis. Nonrecurring fair value adjustments are periodically recorded on impaired loans that are measured for impairment based on the fair value of collateral. See Note 12, Fair Value Accounting and Measurement. For most performing loans, fair value is estimated using expected duration and lending rates that would have been offered on March 31, 2010 for loans which mirror the attributes of the loans with similar rate structures and average maturities. Commercial loans and construction loans, which are variable rate and short-term are reflected with fair values equal to carrying value. The fair values resulting from these calculations are reduced by an amount representing the change in estimated fair value attributable to changes in borrowers’ credit quality since the loans were originated. For nonperforming loans, fair value is estimated by applying a valuation discount based upon loan sales data from the Federal Deposit Insurance Corporation. Acquired Loans – Fair value of loans acquired in FDIC-assisted transactions was estimated at the loan pool level by multiplying the whole loan price at acquisition date to the unpaid principal balance at March 31, 2010.

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

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

FHLB and FRB borrowings—The fair value of FHLB advances and FRB borrowings are estimated based on discounting the future cash flows using the market rate currently offered.

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

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

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

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

	March 31,				December 31,
	2010				2009
(in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets
Cash and due from banks	$	73,801	$	73,801	$	55,802	$	55,802
Interest-earning deposits with banks		232,670		232,670		249,272		249,272
Securities available for sale		719,031		719,031		620,038		620,038
Loans		2,517,959		2,345,898		1,955,406		1,808,256
Interest rate contracts		9,330		9,330		9,054		9,054

Liabilities
Deposits	$	3,371,165	$	3,383,320	$	2,482,705	$	2,486,578
Federal Home Loan Bank advances		125,951		126,785		100,000		100,037
Repurchase agreements		25,000		28,751		25,000		29,884
Other borrowings		- -		- -		86		86
Long-term obligations		25,686		22,150		25,669		20,296
Interest rate contracts		9,330		9,330		9,054		9,054

14. Derivatives and Hedging Activities

The Company periodically enters into certain commercial loan interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rates. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to a swap agreement. This swap agreement effectively converts the customer’s variable rate loan into a fixed rate. The Company then enters into a corresponding swap agreement with a third party in order to offset its exposure on the variable and fixed components of the customer agreement. As the interest rate swap agreements with the customers and third parties are not designated as hedges under the Derivatives and Hedging topic of the FASB ASC, the instruments are marked to market in earnings.

The following table presents the fair value of derivative instruments at March 31, 2010 and 2009:

	Asset Derivatives				Liability Derivatives
As of March 31,	2010		2009		2010		2009
(in thousands)	Balance Sheet Location	Fair Value	Balance Sheet Location	Fair Value	Balance Sheet Location	Fair Value	Balance Sheet Location	Fair Value
Derivatives not designated as hedging instruments under Statement 133

Interest rate contracts	Other assets	$9,330	Other assets	$14,558	Other liabilities	$9,330	Other liabilities	$14,558

Termination of Hedging Activities: On January 7, 2008, the Company discontinued its three prime rate floor derivative instruments that were previously utilized to hedge the variable cash flows associated with existing variable-rate loan assets based on the prime rate. The Company received $8.1 million as a result of the termination transaction resulting in a net derivative gain of $6.2 million. The interest rate floors had an original maturity date of April 4, 2011. In accordance with the Derivatives and Hedging topic of the FASB ASC, the net derivative gain related to a discontinued cash flow hedge continues to be reported in accumulated other comprehensive income and is reclassified into earnings in the same periods during which the originally hedged forecasted transactions affect earnings. For the quarter ended March 31, 2010, $743 thousand of the net derivative gain was reclassified into earnings.

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15. Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.

On May 5, 2010, the Company completed an underwritten public offering of 11,040,000 shares of our common stock at a purchase price to the public of $21.75 per share, resulting in gross proceeds of approximately $240.1 million and net proceeds to us of approximately $229.1 million.

On April 22, 2010, the Company notified the FDIC of its intent to purchase fourteen branch buildings from the Columbia River Bank Receivership. The fourteen branch buildings have an aggregate appraised value of $15.8 million. Additionally, the Company accepted leases on nine former branch and administrative locations of Columbia River Bank.

On April 22, 2010, the Company notified the FDIC of its intent to purchase four branch buildings from the American Marine Bank Receivership. The four branch buildings have an aggregate appraised value of $7.4 million. Additionally, the Company accepted leases on six former branch locations of American Marine Bank.

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

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”, “Columbia” and “the Company”) and notes thereto presented elsewhere in this report and with the December 31, 2009 audited consolidated financial statements and its accompanying notes included in our Annual Report on Form 10-K. In the following discussion, unless otherwise noted, references to increases or decreases in average balances in items of income and expense for a particular period and balances at a particular date refer to the comparison with corresponding amounts for the period or date one year earlier.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

·	the risks presented by a continued economic recession, which could adversely affect credit quality, collateral values, including real estate collateral, investment values, liquidity and loan originations and loan portfolio delinquency rates;

·	the integration of our two recent FDIC-assisted acquisitions may present unforeseen challenges;

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

·	we may not be able to effectively deploy the net proceeds from our recent capital raise, including but not limited to, as a result of any unavailability of attractive acquisition targets such as FDIC-assisted acquisitions;

·	changes in FDIC policy may make the terms of future FDIC-assisted transaction opportunities less favorable to bidders such as the Company;

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

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

·	changes in the scope and cost of FDIC insurance and other coverages, and changes in the U.S. Treasury’s Capital Purchase Program;

·	changes in accounting principles, policies and guidelines applicable to bank holding companies and banking;

·	competition among financial institutions could increase significantly;

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

·	the reputation of the financial services industry could deteriorate, which could adversely affect our ability to access markets for funding and to acquire and retain customers;

the terms and costs of the numerous actions taken by the Federal Reserve, the U.S. Congress, the Treasury, the FDIC, the SEC and others in response to the liquidity and credit crisis, or the failure of these actions to help stabilize the financial markets, asset prices, market liquidity or worsening of current financial market and economic conditions could materially and adversely affect our business, financial condition, results of operations and the trading price of our common stock; and

·	our ability to effectively manage credit risk, interest rate risk, market risk, operational risk, legal risk, liquidity risk and regulatory and compliance risk.

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

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CRITICAL ACCOUNTING POLICIES

Management has identified the accounting policies related to the allowance for loan and lease losses and the valuation and recoverability of goodwill as critical to an understanding of our financial statements. These policies and related estimates are discussed in “Item 7. Management Discussion and Analysis of Financial Condition and Results of Operation” under the headings “Allowance for Loan and Lease Losses” and “Valuation and Recoverability of Goodwill” in our 2009 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 or the valuation and recoverability of goodwill as compared to those disclosed in our 2009 Annual Report on Form 10-K.

OVERVIEW

Significant Influences on the Quarter ended March 31, 2010

Acquisition of Columbia River Bank

On January 22, 2010, Columbia State Bank acquired certain assets and assumed certain liabilities of Columbia River Bank from the Federal Deposit Insurance Corporation (“FDIC”), which had been appointed receiver of the institution, including 21 branches located in Oregon and Washington. Columbia State Bank acquired tangible assets with a fair value of approximately $884.9 million, including $480.3 million of loans, an FDIC indemnification asset of $143.6 million, $100.7 million of investment securities, $98.1 million of cash and cash equivalents and $62.2 million of other assets. Columbia State Bank assumed liabilities with a fair value of approximately $912.9 million, including $893.4 million of insured and uninsured deposits, $18.4 million of Federal Home Loan Bank (“FHLB”) advances and $1.1 million of other liabilities. In connection with this acquisition, Columbia State Bank entered into loss-sharing agreements with the FDIC which cover approximately $676.1 million in face value of Columbia River Bank’s loans. The transaction resulted in goodwill of $14.5 million and a core deposit intangible of $13.4 million.

Acquisition of American Marine Bank

On January 29, 2010, Columbia State Bank acquired substantially all of the deposits and assets of American Marine Bank from the FDIC, which had been appointed receiver of the institution, including 11 branches located in western Washington. Columbia State Bank acquired tangible assets with a fair value of approximately $303.5 million, including $176.3 million of loans, an FDIC indemnification asset of $66.8 million, $28.6 million of investment securities, $14.5 million of cash and cash equivalents and $17.3 million of other assets. Columbia State Bank assumed liabilities with a fair value of approximately $292.6 million, including $254.0 million of insured and uninsured deposits, $37.7 million of FHLB advances and $974 thousand of other liabilities. In connection with this acquisition, Columbia State Bank entered into loss-sharing agreements with the FDIC which cover approximately $243.8 million in face value of American Marine Bank’s loans. In addition, as part of this acquisition, Columbia State Bank received regulatory approval to exercise trust powers and intends to continue to operate the Trust and Wealth Management Division of American Marine Bank. The transaction resulted in a bargain purchase gain of $9.8 million, and a core deposit intangible of $4.3 million.

Earnings Summary

The Company reported net income for the first quarter of $7.9 million and $6.8 million in net income applicable to common shareholders or $0.24 per diluted common share, compared to net income of $1.5 million and $419 thousand net income applicable to common shareholders or $0.02 per diluted common share for the first quarter of 2009. Net income applicable to common shareholders for the first quarter of 2010 excludes the preferred stock dividend of $961 thousand and the accretion of the preferred stock discount totaling $146 thousand. The increase in net income from the prior year period was primarily attributable to the $9.8 million pre-tax gain on the acquisition of American Marine Bank in the current quarter. Return on average assets and return on average common equity were 0.81% and 5.93%, respectively, for the first quarter of 2010, compared with returns of 0.20% and 0.49%, respectively for the same period of 2009.

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Revenue (net interest income plus noninterest income) for the three months ended March 31, 2010 was $56.7 million, 63% higher than the same period in 2009. The increase was primarily a result of higher net interest income driven by the accretion of the discount on acquired loans as well higher noninterest income resulting from the $9.8 million pre-tax gain on the acquisition of American Marine Bank.

Total noninterest expense in the quarter ended March 31, 2010 was $33.9 million, a 46% increase from the first quarter of 2009. The increase was primarily due to the addition of operating expenses of Columbia River Bank and American Marine Bank in January 2010.

The provision for loan and lease losses for the first quarter of 2010 was $15.0 million compared with $11.0 million for the first quarter of 2009. The additional provision is due to the continued effects of the broad recession and the related decline in property values in both Washington and Oregon. The provision increased the Company’s total allowance for loan and lease losses to 2.92% of net noncovered loans at March 31, 2010 from 2.66% at year-end 2009 and 2.02% at the end of the first quarter 2009. Net charge-offs for the current quarter were $11.5 million compared to $9.5 million for the first quarter of 2009.

RESULTS OF OPERATIONS

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

Net Interest Income

Net interest income for the first quarter of 2010 was $38.3 million, an increase of 37% from $27.9 million for the same quarter in 2009, primarily due to the impact of the addition of Columbia River Bank and American Marine Bank loan portfolios. The Company’s net interest margin increased to 4.78% in the first quarter of 2010, from 4.26% for the same quarter last year. The net interest margin was negatively impacted by interest reversals for the quarter ended March 31, 2010 related to nonaccrual loans totaling $364 thousand. However, the net interest margin was positively impacted by the accretion of the discount on the loan portfolios acquired in the two FDIC-assisted transactions.

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

	Three months ended March 31,							Three months ended March 31,
	2010							2009

	Average		Interest		Average			Average		Interest		Average
(in thousands)	Balances (1)		Earned / Paid		Rate			Balances (1)		Earned / Paid		Rate
ASSETS
Loans, net (1) (2)	$	2,440,415	$	37,064		6.16	%	$	2,217,909	$	29,908		5.47	%
Securities (2)		710,648		8,541		4.87	%		543,403		7,341		5.48	%
Interest-earning deposits with banks and federal funds sold		217,178		149		0.28	%		12,947		7		0.23	%
Total interest-earning assets		3,368,241	$	45,754		5.51	%		2,774,259	$	37,256		5.45	%
Other earning assets		50,675							48,748
Noninterest-earning assets		526,126							234,854
Total assets	$	3,945,042						$	3,057,861
LIABILITIES AND SHAREHOLDERS' EQUITY
Certificates of deposit	$	858,577	$	2,840		1.34	%	$	749,450	$	4,901		2.65	%
Savings accounts		182,164		82		0.18	%		126,916		114		0.36	%
Interest-bearing demand		594,059		653		0.45	%		469,034		678		0.59	%
Money market accounts		760,762		1,366		0.73	%		523,755		1,199		0.93	%
Total interest-bearing deposits		2,395,562		4,941		0.84	%		1,869,155		6,892		1.50	%
Federal Home Loan Bank and Federal Reserve Bank borrowings		125,350		705		2.28	%		215,033		765		1.44	%
Securities sold under agreements to repurchase		25,000		118		1.91	%		25,000		118		1.91	%
Other borrowings		- -		- -		0.00	%		247		0		0.60	%
Long-term subordinated debt		25,676