COLUMBIA BANKING SYSTEM INC - 10-Q Quarterly Report

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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 June 30, 2004.

¨	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		98401-2156
(Address of principal executive offices)		(Zip Code)

(253) 305-1900

(Issuer’s telephone number, including area code)

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

Indicate by check mark whether the issuer: (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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

The number of shares of the issuer’s Common Stock outstanding at July 31, 2004 was 14,258,080.

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		PART I — FINANCIAL INFORMATION

Item 1.	Consolidated Condensed Unaudited Financial Statements

		Consolidated Condensed Statements of Operations - three months and six months ended June 30, 2004 and 2003	2

		Consolidated Condensed Balance Sheets – June 30, 2004 and December 31, 2003	3

		Consolidated Condensed Statements of Shareholders’ Equity - twelve months ended December 31, 2003, and six months ended June 30, 2004	4

		Consolidated Condensed Statements of Cash Flows - six months ended June 30, 2004 and 2003	5

		Notes to Consolidated Condensed Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		27

Item 4.	Controls and Procedures		27

PART II — OTHER INFORMATION

Item 4.	Submission of Matters to a Vote of Security Holders		28

Item 6.	Exhibits and reports on Form 8-K		28

	Signatures		30

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

Columbia Banking System, Inc.

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands except per share)	2004		2003		2004			2003
*Interest Income*
Loans	$	16,415	$	17,861	$	32,464		$	36,473
Securities available for sale		4,612		3,557		9,651			6,654
Securities held to maturity		26		43		54			87
Deposits with banks		165		18		178			45

Total interest income		21,218		21,479		42,347			43,259

*Interest Expense*
Deposits		3,962		4,770		7,877			9,976
Federal Home Loan Bank advances				323		80			600
Long-term obligations		280		272		542			550

Total interest expense		4,242		5,365		8,499			11,126

*Net Interest Income*		16,976		16,114		33,848			32,133
Provision for loan losses				1,000		300			2,600

Net interest income after provision for loan losses		16,976		15,114		33,548			29,533

*Noninterest Income*
Service charges and other fees		2,745		2,474		5,272			4,981
Mortgage banking		661		1,117		1,164			2,198
Merchant services fees		1,841		1,517		3,403			2,808
Loss on sale of investment securities, net						(6	)
Bank owned life insurance (BOLI)		346		368		596			766
Other		278		259		556			535

Total noninterest income		5,871		5,735		10,985			11,288

*Noninterest Expense*
Compensation and employee benefits		7,875		7,382		15,661			14,554
Occupancy		2,000		2,210		4,086			4,397
Merchant processing		750		638		1,402			1,134
Advertising and promotion		894		545		1,165			1,052
Data processing		563		467		1,078			916
Legal and professional services		668		470		1,296			984
Taxes, licenses and fees		405		362		789			812
Net cost of other real estate owned		62		42		74			37
Other		1,962		1,928		3,977			3,852

Total noninterest expense		15,179		14,044		29,528			27,738

Income before income taxes		7,668		6,805		15,005			13,083
Provision for income taxes		2,254		2,040		4,440			3,887

*Net Income*	$	5,414	$	4,765	$	10,565		$	9,196


Net income per common share:
Basic	$	0.38	$	0.34	$	0.74		$	0.66
Diluted		0.37		0.34		0.73			0.65
Dividends paid per common share	$	0.07	$	0.05	$	0.07		$	0.05
Average number of common shares outstanding		14,241		14,027		14,194			14,009
Average number of diluted common shares outstanding		14,463		14,207		14,425			14,151

See accompanying notes to consolidated condensed financial statements.

CONSOLIDATED CONDENSED BALANCE SHEETS

Columbia Banking System, Inc.

(Unaudited)


(in thousands)			June 30, 2004			December 31, 2003
*Assets*
Cash and due from banks			$	68,392		$	49,685
Interest-earning deposits with banks				78,295			949

Total cash and cash equivalents				146,687			50,634

Securities available for sale at fair value (amortized cost of $482,768 and $509,989, respectively)				472,814			509,200
Securities held to maturity (fair value of $4,454 and $4,708, respectively)				4,354			4,548
Federal Home Loan Bank stock				10,239			10,116
Loans held for sale				12,679			10,640
Loans, net of unearned income of $2,387 and $2,437, respectively				1,130,508			1,078,302
Less: allowance for loan losses				19,769			20,261

Loans, net				1,110,739			1,058,041

Interest receivable				6,685			6,640
Premises and equipment, net				50,188			50,692
Real estate owned				781			1,452
Other				46,457			42,384

Total Assets			$	1,861,623		$	1,744,347

*Liabilities and Shareholders’ Equity*
Deposits:
Noninterest-bearing			$	341,772		$	317,721
Interest-bearing				1,329,773			1,226,905

Total deposits				1,671,545			1,544,626

Federal Home Loan Bank advances							16,500
Other borrowings				1,000
Long-term subordinated debt				22,213			22,180
Other liabilities				11,191			10,669

Total liabilities				1,705,949			1,593,975

Commitments and contingent liabilities
Shareholders’ equity:
Preferred stock (no par value)
Authorized, 2 million shares; none outstanding

Common stock (no par value)	June 30 2004	December 31 2003
Authorized shares	63,034	63,034
Issued and outstanding	14,253	14,105		129,452			112,675
Retained earnings				32,692			38,210
Accumulated other comprehensive loss – Unrealized losses on securities available for sale, net of tax				(6,470	)		(513	)

Total shareholders’ equity				155,674			150,372

Total Liabilities and Shareholders’ Equity			$	1,861,623		$	1,744,347

See accompanying notes to consolidated condensed financial statements.

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY

Columbia Banking System, Inc.

(Unaudited)


	Common stock
(in thousands)	Number Shares	Amount		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
*Balance at January 1, 2003*	13,976	$	111,028	$	20,696		$	660		$	132,384
Comprehensive income:
Net income for 2003					19,522
Reclassification of net gains on securities available for sale included in net income, net of tax of $78								(144	)
Change in unrealized gains (losses) on securities available for sale, net of tax of $554								(1,029	)

Total comprehensive income											18,349
Issuance of stock under stock option and other plans	129		1,647								1,647
Cash dividends paid on common stock					(2,008	)					(2,008	)

*Balance at December 31, 2003*	14,105		112,675		38,210			(513	)		150,372

Comprehensive income:
Net income for 2004					10,565
Reclassification of net losses on securities available for sale included in net income, net of tax of $2								4
Change in unrealized gains (losses) on securities available for sale, net of tax of $3,210								(5,961	)

Total comprehensive income											4,608
Issuance of stock under stock option and other plans	148		2,316								2,316
Issuance of shares of common stock – 5% stock dividend			14,461		(14,461	)
Cash dividends paid on common stock					(1,622	)					(1,622	)

*Balance at June 30, 2004*	14,253	$	129,452	$	32,692		$	(6,470	)	$	155,674

See accompanying notes to consolidated condensed financial statements.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

Columbia Banking System, Inc.

(Unaudited)


	Six Months Ended June 30,
(in thousands)	2004			2003
*Operating Activities*
Net income	$	10,565		$	9,196
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		300			2,600
Deferred income tax (benefit) expense		(3,276	)		1,570
Losses (gains) on sale of real estate owned and other personal property owned		35			(13	)
Depreciation and amortization		4,198			4,846
Net realized loss (gain) on sale of assets		13			(19	)
Increase in loans held for sale		(2,039	)		(10,336	)
(Increase) decrease in interest receivable		(45	)		18
Decrease in interest payable		(20	)		(764	)
Stock dividends from Federal Home Loan Bank stock		(123	)		(229	)
Net changes in other assets and liabilities		2,893			(5,864	)

Net cash provided by operating activities		12,501			1,005

*Investing Activities*
Proceeds from maturities of securities available for sale		522			3,110
Purchases of securities available for sale		(28,550	)		(6,981	)
Proceeds from sales of securities available for sale		13,993
Proceeds from maturities of mortgage-backed securities available for sale		48,243			106,120
Purchases of mortgage-backed securities available for sale		(10,239	)		(150,174	)
Proceeds from maturities of securities held to maturity		195			170
Loans originated and acquired, net of principal collected		(52,157	)		73,518
Purchases of premises and equipment		(1,343	)		(828	)
Proceeds from disposal of premises and equipment		54			51
Proceeds from sales of real estate and other personal property owned		688			908

Net cash (used in) provided by investing activities		(28,594	)		25,894

*Financing Activities*
Net increase in deposits		126,919			55,234
Proceeds from Federal Home Loan Bank advances		56,100			107,400
Repayment of FHLB advances		(72,600	)		(146,737	)
Cash dividends paid on common stock		(1,622	)		(668	)
Proceeds from other borrowings		1,000
Proceeds from issuance of common stock, net		2,316			894
Other, net		33			33

Net cash provided by financing activities		112,146			16,156

Increase in cash and cash equivalents		96,053			43,055
Cash and cash equivalents at beginning of period		50,634			85,483

Cash and cash equivalents at end of period	$	146,687		$	128,538

Supplemental information:
Cash paid for interest	$	8,708		$	11,890
Cash paid for income taxes		3,648			3,929
Loans foreclosed and transferred to real estate owned or other personal property owned					3,165

See accompanying notes to consolidated condensed financial statements.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Columbia Banking System, Inc.

Columbia Banking System, Inc. (the “Company”) is a registered bank holding company whose wholly owned subsidiary, Columbia State Bank (“Columbia Bank”), conducts a full-service commercial banking business. Headquartered in Tacoma, Washington, the Company provides a full range of banking services to small and medium-sized businesses, professionals and other individuals through 34 banking offices located in the Tacoma metropolitan area and contiguous parts of the Puget Sound region of Washington, as well as the Longview and Woodland communities in southwestern Washington. The majority of the Company’s loans, loan commitments and core deposits are geographically concentrated in its service areas.

1. 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. In the opinion of management, all adjustments consisting only of normal recurring accruals necessary for a fair presentation of the financial condition and the results of operations for the interim periods included herein have been made. The results of operations for the six months ended June 30, 2004 are not necessarily indicative of results to be anticipated for the year ending December 31, 2004. Certain reclassifications of prior year amounts have been made to conform to current classification. These reclassifications had no effect on net income. All significant intercompany transactions and accounts have been eliminated in consolidation. 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 2003 Annual Report on Form 10-K.

2. Earnings Per Share

Earnings per share (“EPS”) are computed using the weighted average number of common and diluted common shares outstanding during the period. Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The only reconciling item affecting the calculation of earnings per share are the inclusion of stock options and restricted stock awards increasing the shares outstanding in diluted earnings per share by 222,000 and 180,000 for the three months ended June 30, 2004 and 2003, respectively, and 231,000 and 142,000 for the six months ended June 30, 2004 and 2003, respectively.

On April 28, 2004, the Company announced a 5% stock dividend payable to shareholders of record as of May 12, 2004. Average shares outstanding and net income per share for all periods presented have been retroactively adjusted to give effect to this stock dividend.

The Company has a stock option plan and applies APB Opinion 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for the Plan. The Company’s policy is to recognize compensation expense at the date the options are granted based on the difference, if any, between the then market value of the Company’s common stock and the stated option price. Had compensation cost for the Company’s Plan been determined based on the fair value at the option grant dates consistent with Statement of Financial Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, the Company’s net income and earnings per share would have been reduced to the pro forma amounts listed below:


*(dollars in thousands, except per share)*	For the three months ended June 30, 2004			For the three months ended June 30, 2003			For the six months ended June 30, 2004			For the six months ended June 30, 2003
Net income attributable to common stock:
As reported	$	5,414		$	4,765		$	10,565		$	9,196
Deduct: Total stock based employee compensation expense determined under fair value method for all options, net of related tax effects		(95	)		(113	)		(191	)		(254	)

Pro forma net income	$	5,319		$	4,652		$	10,374		$	8,942

Net income per common share:
Basic:
As reported	$	0.38		$	0.34		$	0.74		$	0.66
Pro forma		0.37			0.33			0.73			0.64

Diluted:
As reported	$	0.37		$	0.34		$	0.73		$	0.65
Pro forma		0.37			0.33			0.72			0.63

3. Recently Issued Accounting Pronouncements

In March 2004, the SEC issued Staff Accounting Bulletin (“SAB”) No. 105 (“SAB 105”), Application of Accounting Principles to Loan Commitments. SAB 105 provides guidance on the accounting for loan commitments accounted for as derivative instruments. The Company adopted SAB 105 in June 2004. The adoption did not have a material impact on the consolidated condensed financial statements.

4. Business Segment Information

The Company is managed along three major lines of business: commercial banking, retail banking, and real estate lending. The treasury function of the Company, although not considered a line of business, is responsible for the management of investments and interest rate risk.

The principal activities conducted by commercial banking are the origination of commercial business loans and private banking services. 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. Real estate lending offers single-family residential, multi-family residential, and commercial real estate loans, with their associated loan servicing activities.

The Company generates segment results that include balances directly attributable to business line activities and may include asset and liability transfers among business lines. 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 organizational structure of the Company and its business line financial results are not necessarily comparable across companies. As such, the Company’s business line performance may not be directly comparable with similar information from other financial institutions. Changes in net interest income and total assets for the three and six month periods ended June 30, 2004, as compared to the same periods in 2003, are a result of internal funds transfer pricing, a decreased loan loss provision, higher investment security balances, loan growth and core deposit growth.

Financial highlights by lines of business are as follows:

Condensed Statements of Operations:


	Three Months Ended June 30, 2004
*(in thousands)*	Commercial Banking			Retail Banking			Real Estate Lending			Other			Total
Net interest income after provision for loan losses	$	4,292		$	7,505		$	2,919		$	2,260		$	16,976
Other income		194			1,673			657			3,347			5,871
Other expense		(865	)		(4,407	)		(634	)		(9,273	)		(15,179	)

Contribution to overhead and profit	$	3,621		$	4,771		$	2,942		$	(3,666	)		7,668
Income taxes														2,254

Net income													$	5,414

Total assets	$	487,465		$	469,818		$	251,332		$	653,008		$	1,861,623


	Three Months Ended June 30, 2003
*(in thousands)*	Commercial Banking			Retail Banking			Real Estate Lending			Other			Total
Net interest income after provision for loan losses	$	4,200		$	6,859		$	3,634		$	421		$	15,114
Other income		203			1,748			1,117			2,667			5,735
Other expense		(992	)		(4,100	)		(636	)		(8,316	)		(14,044	)

Contribution to overhead and profit	$	3,411		$	4,507		$	4,115		$	(5,228	)		6,805
Income taxes														2,040

Net income													$	4,765

Total assets	$	313,726		$	591,115		$	313,364		$	506,593		$	1,724,798


	Six Months Ended June 30, 2004
*(in thousands)*	Commercial Banking			Retail Banking			Real Estate Lending			Other			Total
Net interest income after provision for loan losses	$	8,325		$	14,598		$	5,842		$	4,783		$	33,548
Other income		429			3,381			1,159			6,016			10,985
Other expense		(1,936	)		(8,978	)		(1,128	)		(17,486	)		(29,528	)

Contribution to overhead and profit	$	6,818		$	9,001		$	5,873		$	(6,687	)		15,005
Income taxes														4,440

Net income													$	10,565

Total assets	$	487,465		$	469,818		$	251,332		$	653,008		$	1,861,623


	Six Months Ended June 30, 2003
*(in thousands)*	Commercial Banking			Retail Banking			Real Estate Lending			Other			Total
Net interest income after provision for loan losses	$	7,176		$	14,907		$	7,551		$	(101	)	$	29,533
Other income		413			3,526			2,211			5,138			11,288
Other expense		(1,816	)		(8,679	)		(1,154	)		(16,089	)		(27,738	)

Contribution to overhead and profit	$	5,773		$	9,754		$	8,608		$	(11,052	)		13,083
Income taxes														3,887

Net income													$	9,196

Total assets	$	313,726		$	591,115		$	313,364		$	506,593		$	1,724,798

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. (the “Company”) and notes thereto presented elsewhere in this report. In the following discussion, unless otherwise noted, references to increases or decreases in average balances in items of income and expense for a particular period and balances at a particular date refer to the comparison with corresponding amounts for the period or date one year earlier.

This Form 10-Q may be deemed to include forward looking statements, which management believes are 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 Columbia’s 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 Columbia’s 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 Columbia than expected and adversely affect Columbia’s ability to continue its internal growth at historical rates and maintain the quality of its 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 Columbia is engaged, and (7) the Company’s ability to realize the efficiencies it expects to receive from its investments in personnel and infrastructure.

General

Columbia Banking System, Inc. is a registered bank holding company whose wholly owned subsidiary, Columbia State Bank (“Columbia Bank”), conducts a full-service commercial banking business. Headquartered in Tacoma, Washington, the Company provides a full range of banking services to small and medium-sized businesses, professionals and other individuals through banking offices located in the Tacoma metropolitan area and contiguous parts of the Puget Sound region of Washington, as well as the Longview and Woodland communities in southwestern Washington. Substantially all of the Company’s loans, loan commitments and core deposits are geographically concentrated in its service areas. Columbia Bank is a Washington state-chartered commercial bank, the deposits of which are insured by the Federal Deposit Insurance Corporation (the “FDIC”). Columbia Bank is subject to regulation by the FDIC and the Washington State Department of Financial Institutions Division of Banks. Although Columbia Bank is not a member of the Federal Reserve System, the Board of Governors of the Federal Reserve System has certain supervisory authority over the Company, which can also affect Columbia Bank.

Business Overview

The Company’s goal is to be the leading community bank headquartered in the Pacific Northwest and to consistently increase earnings and shareholder value. The Company continues to build on its reputation for excellent customer service in order to be recognized in all markets it serves as the bank of choice for retail deposit customers, small to medium-sized businesses, and affluent households.

The Company has established a network of 34 branches as of June 30, 2004 from which it intends to grow market share. Twenty-one branches are located in Pierce County, eight in King County, three in Cowlitz County, and one each in Kitsap and Thurston Counties.

Business Strategy

The Company’s strategy to improve earnings and shareholder value is to leverage its branch network to grow market share by meeting the needs of current and prospective customers with its wide range of financial products and services and outstanding customer service. In addition, the Company will continue to focus on asset quality, expanding revenue, and expense control. The Company regularly evaluates its business processes to benefit customers, create cost efficiencies, and increase profitability.

Management believes consolidation among financial institutions in its market area has created significant gaps in the ability of large banks to serve certain customers, particularly the Company’s target customer base of small and medium-sized businesses, professionals and other individuals. The Company’s business strategy is to provide its customers with the financial sophistication and breadth of products of a regional banking company while retaining the appeal and service level of a community bank. Management believes that as a result of the Company’s strong commitment to highly personalized relationship-oriented customer service, its varied products, its strategic branch locations and the long-standing community presence of its managers, lending officers and branch personnel, it is well positioned to attract new customers and to increase its market share of loans, deposits, and other financial services in the markets it now serves.

The Company intends to achieve its growth strategy by continuing to develop existing branch offices and branch locations, and successfully completing strategic business combinations. New branches, markets and locations are reviewed continually. The Company will take advantage of these opportunities as they arise.

Products & Services

The Company continuously reviews new products and services to meet its customers’ financial services needs. New technologies and services are reviewed for business development and cost saving purposes. Some of the products and services Columbia offers include tailored loan products, Cash Management Services, Columbia OnLine^™, International Services, Merchant Card Services and Investment Services. Our newest product, Equipment Finance, which focuses on small business equipment financing, began operations on May 1, 2004 and is now fully operational.

Market Area

Over 75% of the Company’s market is centered in the South Puget Sound Region (“the South Sound”) of Washington state. Pierce County is located in the South Sound and Tacoma is the largest city in the County. The Company has 21 branch offices located in Pierce County and has the largest deposit market share as of June 30, 2003 according to the annual FDIC “Market Share Report”. The South Sound is benefiting from major construction projects currently underway, such as the new Narrows Bridge and Convention Center located in downtown Tacoma. Additionally, expansion of the Port of Tacoma scheduled to be completed in late 2004, will provide the South Sound with a container terminal capable of handling the largest volume of container traffic north of Los Angeles. With two large military installations (McChord Air Force and Fort Lewis Army bases), government related employment represents approximately 20% of the County’s total employment.

To the north of Tacoma, King County is Washington’s most populous at 1.8 million residents. In Seattle, located in King County, the Company has a banking office in the downtown business sector. East of Seattle, the Company has two banking offices, one in Bellevue and one in Redmond. A large portion of the economy within this area is linked to aerospace, construction, computer software and biotechnology industries.

The Company has five branches in south King County, an area of residential communities whose employment base is supported by light industrial, aerospace and forest products industries. With its close proximity to Tacoma, the south King County market area is considered an important natural extension of the Company’s Pierce County market area. The Weyerhaeuser Corporation maintains its world headquarters in Federal Way, which is located in south King County adjacent to the King/Pierce County line. The Auburn and Kent Valley areas located east of Federal Way are high residential and commercial growth markets.

The Company’s market area also includes the Longview and Woodland communities in southwest Washington, the State’s capital of Olympia, and Port Orchard in Kitsap County. Both Olympia and Port Orchard are located in the South Puget Sound Region.

CRITICAL ACCOUNTING POLICIES

Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company’s financial statements. These policies relate to the methodology for the determination of the allowance for loan losses, the valuation of real estate owned and the impairment of investments. These policies and the judgments, estimates and assumptions are described in greater detail in subsequent sections of Management’s Discussion and Analysis and in the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2003. Management believes that the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in the results of operations or financial condition.

HIGHLIGHTS

Net income for the second quarter of 2004 increased to $5.4 million, or $0.37 per diluted share from $4.8 million, or $0.34 per diluted share, for the second quarter of 2003. Net income for the first six months ended June 30, 2004 was $10.6 million, or $0.73 per diluted share, compared to $9.2 million, or $0.65 per diluted share, for the same period in 2003.

Total assets reached $1.86 billion at June 30, 2004, an increase of 7% from December 31, 2003.

Total loans increased $52.2 million, or 5%, from December 31, 2003.

Average core deposits increased 24% to $1.22 billion for the quarter ended June 30, 2004 as compared to the same period in 2003.

After careful analysis, the Company took no provision for loan losses due to improvement in asset quality for the second quarter of 2004, as compared to $1.0 million for the second quarter of 2003.

Total nonperforming assets decreased 55% from December 31, 2003 and the allowance for loan losses to nonperforming assets improved to 285% at June 30, 2004 from 132% at December 31, 2003.

On June 7, 2004, the Company entered into a definitive agreement to acquire Bank of Astoria for cash-and-stock valued at approximately, $45.8 million. Completion of the transaction and share exchange are subject to several conditions, including receipt of applicable regulatory approvals and approval by the shareholders of Bank of Astoria. The transaction is expected to be completed by the end of the third quarter, at which time the Company’s pro forma total assets will approximate $2 billion and total branches will increase to 39. Bank of Astoria will join the Company as a separately operated banking subsidiary in Oregon and will continue to operate under the Bank of Astoria name. Currently, Bank of Astoria operates five branches located in Clatsop and Tillamook counties, where it holds 34.4% and 5.7% deposit share, respectively, in those counties. The five branches are located in Astoria, Cannon Beach, Manzanita, Seaside and Warrenton.

RESULTS OF OPERATIONS

The results of operations of the Company are dependent to a large degree on the Company’s net interest income. The Company also generates noninterest income through service charges and fees, merchant services fees, and income from mortgage banking operations. The Company’s operating expenses consist primarily of compensation and employee benefits expense, and occupancy expense. Like most financial institutions, the Company’s 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 second quarter of 2004 increased 5% to $17.0 million, from $16.1 million in the second quarter of 2003. For the first six months ended June 30, 2004, net interest income increased 5% to $33.8 million from $32.1 million for the same period in 2003. Although interest income on loans decreased, the Company was able to increase net interest income through increased interest income on available for sale investments and decreased funding costs from core deposit growth.

The Company’s net interest margin (net interest income divided by average interest-earning assets) decreased to 4.10% in the second quarter of 2004 from 4.26% in the second quarter of 2003. Average interest-earning assets grew to $1.72 billion, an increase of 10%, during the second quarter of 2004, compared with $1.55 billion during the same period in 2003. The yield on average interest-earning assets decreased 55 basis points (a basis point is 1/100^th of 1 percent, alternatively 100 basis points equals 1.00%) to 5.09% during the second quarter of 2004 compared with 5.64% during the same period of 2003. The decline in yield on average interest-earning assets is primarily due to increased overnight balances from core deposit growth and a low interest rate environment resulting in new loan originations and refinancing of existing loans at lower rates. Additionally, the yield on loans was impacted by a 25 basis point decrease in the prime rate at the end of the second quarter of 2003. Average interest-bearing liabilities increased to $1.36 billion, or 7%, during the second quarter of 2004 compared with $1.27 billion in the same period of 2003. The average cost of interest-bearing liabilities decreased 44 basis points to 1.26% during the second quarter of 2004, from 1.70% in the same period of 2003. The decrease in the Company’s cost of interest-bearing liabilities is due to continued growth in core deposits and declining deposit rates resulting in an $808,000 decrease in interest expense on deposits for the second quarter of 2004, as compared to the same period in 2003. Additionally, deposit growth in the second quarter of 2004 precluded the need for borrowing from the Federal Home Loan Bank. Interest expense on Federal Home Loan Bank advances decreased $323,000 during the second quarter of 2004 as compared to the same period in 2003.

For the first six months of 2004, the Company’s net interest margin decreased to 4.17% from 4.31% for the same period in 2003. Average interest-earning assets grew by 9% to $1.68 billion during the first six months of 2004, compared with $1.54 billion during the same period in 2003. The yield on average-earning assets decreased 58 basis points to 5.19% during the first six months of 2004 compared with 5.77% during the same period in 2003. The decreased yield on average interest-earning assets is due to lower average loan balances during the first six months of 2004 compared to the same period in 2003, coupled with lower interest rates on loans. The decrease in yield on average loans was partially offset by improved yields on average available for sale investments, which increased 19 basis points to 4.27% during the first six months of 2004, from 4.08% during the same period in 2003. Average interest-bearing liabilities grew to $1.32 billion, or 6%, during the first six months of 2004, compared with $1.25 billion in the same period of 2003. The cost of average interest-bearing liabilities decreased 50 basis points to 1.29% during the first six months of 2004 compared to 1.79% for the same period in 2003. The decrease in the Company’s cost of interest-bearing liabilities is due to continued growth in core deposits, which resulted in a decrease in interest expense on deposits of $2.1 million for the the first six months of 2004 as compared to the same period in 2003.

At June 30, 2004, the Company estimates that its balance sheet is asset sensitive over a short-term horizon of three months, which means that interest-earning assets mature or reprice more rapidly than interest-bearing liabilities. Therefore, the Company’s net interest margin may increase during a rising rate environment and may decrease in a declining rate environment. The 25 basis point increase in the prime lending rate, which took effect in late June 2004, should have a positive impact on net interest income at least in the near term, as 43% of the Company’s total loan portfolio is tied to prime or other related indices.

CONSOLIDATED AVERAGE BALANCES—NET CHANGES

Columbia Banking System, Inc.


	Three Months Ended June 30,				Increase (Decrease)			Six Months Ended June 30,				Increase (Decrease)
(in thousands)	2004		2003		Amount			2004		2003		Amount
*ASSETS*
Loans	$	1,150,611	$	1,143,862	$	6,749		$	1,138,487	$	1,159,810	$	(21,323	)
Securities		498,553		404,914		93,639			504,655		370,365		134,290
Interest earnings deposits with banks		67,661		6,160		61,501			36,588		7,778		28,810

Total interest-earning assets		1,716,825		1,554,936		161,889			1,679,730		1,537,953		141,777

Other earning assets		31,923		28,847		3,076			31,767		28,652		3,115
Noninterest-earning assets		109,334		125,685		(16,351	)		105,572		124,753		(19,181	)

Total assets	$	1,858,082	$	1,709,468	$	148,614		$	1,817,069	$	1,691,358	$	125,711

*LIABILITIES AND SHAREHOLDERS’EQUITY*
Interest-bearing deposits	$	1,332,494	$	1,162,602	$	169,892		$	1,287,776	$	1,162,924	$	124,852
Federal Home Loan Bank advances				81,901		(81,901	)		13,807		69,817		(56,010	)
Trust preferred obligations				21,455		(21,455	)				21,447		(21,447	)
Long-term subordinated debt		22,203				22,203			22,194				22,194
Other borrowings		1,000				1,000			709				709

Total interest-bearing liabilities		1,355,697		1,265,958		89,739			1,324,486		1,254,188		70,298

Noninterest-bearing deposits		332,003		292,645		39,358			324,043		288,820		35,223
Other noninterest-bearing liabilities		12,051		10,448		1,603			11,884		10,547		1,337
Shareholders’ equity		158,331		140,417		17,914			156,656		137,803		18,853

Total liabilities and shareholders’ equity	$	1,858,082	$	1,709,468	$	148,614		$	1,817,069	$	1,691,358	$	125,711

Noninterest Income

Noninterest income increased $136,000, or 2%, in the second quarter of 2004 as compared to the same period of 2003. The increase in noninterest income during this period was primarily due to increased fees on credit lines, ATM and check card usage fees and investment services income. Additionally, merchant services income increased $324,000, or 21%, in the second quarter of 2004 as compared to the same period of 2003, due to continued increases in market share. These increases were partially offset by a $456,000 decrease in mortgage banking income.

Noninterest income decreased $303,000, or 3%, for the first six months of 2004 as compared with the same period in 2003. The decrease in noninterest income during this period was primarily due to the effect of rising long-term interest rates, which decreased refinancing activity in the Company’s mortgage banking operation. During the latter half of 2003, long-term interest rates began to increase, which resulted in decreased refinance and residential mortgage loan applications. This trend has continued into the first six months of 2004, as mortgage banking income decreased $1.0 million, or 47%, to $1.2 million from the same period in 2003. As a result, the Company has restructured the mortgage banking operation in an effort to devote resources to more profitable departments within the bank.

In accordance with the Company’s investment strategy, management monitors market conditions with a view to realizing gains on its available for sale securities portfolio as market conditions allow. During the first six months of 2004, the Company recorded net losses on sales of investment securities of $6,000. There were no sales of securities during the same period in 2003.

Noninterest Expense

Total noninterest expense increased 8% to $15.2 million for the second quarter of 2004 from $14.0 million for the second quarter of 2003. Total noninterest expense increased to $29.5 million from $27.7 million for the first six months of 2004 compared to the same period in 2003. This increase was primarily due to increased compensation and employee benefit expenses, advertising and promotion expenses, and legal and professional services expenses related to compliance with the internal control requirements of Section 404 of the Sarbanes-Oxley Act of 2002.

Consistent with national trends, the Company has experienced increased costs of providing employee benefits, primarily health insurance coverage. Traditional wage increases coupled with increased health insurance premiums and other benefits have resulted in compensation and employee benefits increasing 7% or $493,000 in the second quarter of 2004 and 8% or $1.1 million for the first six months of 2004 compared to the same period in 2003. Advertising and promotion expenses, to support the Company’s growth strategy, increased $349,000, or 64%, during the second quarter of 2004 and $113,000, or 11%, for the first six months of 2004 compared to the same period in 2003. This increase is primarily due to higher television production and media costs. Due primarily to implementation of internal control requirements of Section 404 of the Sarbanes-Oxley Act of 2002, legal and professional services increased 42% to $668,000 for the second quarter of 2004 as compared to $470,000 for the second quarter of 2003 and increased 32% to $1.3 million for the first six months of 2004 as compared to $984,000 for the same period in 2003. These expenses were initially incurred during the first quarter of 2004 and are anticipated to carry on into the third and subsequent quarters as we continue to implement requirements.

The Company’s 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 and net cost (gain) of OREO] was 64.18% for the second quarter 2004 and was 63.78% for the first six months of 2004, compared to 62.43% and 62.13% for the second quarter and first six months of 2003, respectively. Improvement in the efficiency ratio will depend on the Company growing the loan portfolio and fee income and continuing to control expenses while adhering to core values of customer service.

Income Taxes

The Company recorded an income tax provision of $2.3 million and $4.4 million for the second quarter and first six months of 2004, respectively, compared with a provision of $2.0 million and $3.9 million for the same periods in 2003. The effective tax rate was 30% for the second quarter of 2004 and for the year ended December 31, 2003. The Company’s 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 the Company’s annual report on Form 10-K for the year ended December 31, 2003.

Credit Risk Management

The extension of credit in the form of loans or other credit products to individuals and businesses is one of the Company’s principal business activities. Company policies and applicable laws and regulations require risk analysis as well as ongoing portfolio and credit management. The Company manages its credit risk through lending limit constraints, credit review, approval policies, and extensive, ongoing internal monitoring. The Company also manages 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 its existing portfolio, the Company reviews its 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. The Company reviews 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, the Company assesses whether an impairment of a loan warrants specific reserves or a write-down of the loan. See “Provision and Allowance For Loan Losses” on page 20.

Loan policies, credit quality criteria, portfolio guidelines and other controls are established under the guidance of the Company’s 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, the Company uses 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 on-site examination to ensure continued performance and proper risk assessment.

Loan Portfolio Analysis

The Company is a full service commercial bank, which originates a wide variety of loans, and concentrates its lending efforts on originating commercial business and commercial real estate loans.

The following table sets forth the Company’s loan portfolio by type of loan for the dates indicated:


(in thousands)	June 30, 2004			% of Total		December 31, 2003			% of Total
Commercial business	$	390,530		34.5	%	$	381,658		35.4	%

Real estate:
One-to-four family residential		48,251		4.3			47,430		4.4
Commercial and five or more family residential commercial properties		504,878		44.7			472,836		43.8

Total real estate		553,129		49.0			520,266		48.2

Real estate construction:
One-to-four family residential		24,327		2.2			15,577		1.4
Commercial and five or more family residential commercial properties		48,009		4.2			58,998		5.5

Total real estate construction		72,336		6.4			74,575		6.9

Consumer		116,900		10.3			104,240		9.7

Sub-total loans		1,132,895		100.2			1,080,739		100.2
Less: Deferred loan fees		(2,387	)	(0.2	)		(2,437	)	(0.2	)

Total loans	$	1,130,508		100.0	%	$	1,078,302		100.0	%

Loans held for sale	$	12,679				$	10,640

Total loans (excluding loans held for sale) at June 30, 2004 increased $52.2 million, to $1.13 billion from $1.08 billion at year-end 2003. This growth is despite unusually high payoffs due to the sale of two large real estate projects and the culmination of several construction projects. Gross loan production through June 30, 2004 was approximately $138 million higher than the same period in 2003.

Commercial Loans: As of June 30, 2004, commercial loans increased $8.9 million, or 2%, to $390.5 million from $381.7 million at year-end 2003, representing 34.5% of total loans at June 30, 2004 as compared with 35.4% of total loans at December 31, 2003. The increase in commercial loans is the result of an effective business development initiative and some early indications of an economic recovery in the Company’s market areas. The Company is committed to providing competitive commercial lending in its market areas. The Company plans to remain competitive yet cautious with its commercial lending products due to the current state of the economy and will continue to emphasize in particular its relationship banking with businesses, and business owners.

Real Estate Loans: Residential one-to-four family loans increased $821,000 to $48.3 million at June 30, 2004, representing 4.3% of total loans, compared with $47.4 million, or 4.4%, of total loans at December 31, 2003. These loans are used by the Company to collateralize outstanding advances from the FHLB. Generally, the Company’s policy is to originate residential loans for sale to third parties. Those residential loans are secured by properties located within the Company’s 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.

Commercial and five-or-more family residential real estate lending increased $32.0 million, or 7%, to $504.9 million at June 30, 2004, representing 44.7% of total loans, from $472.8 million, or 43.8% of total loans at December 31, 2003. Through the first six months of 2004, demand for commercial real estate loans has outpaced commercial business loans due to current economic conditions and a favorable interest rate environment. Generally, commercial and five-or-more family residential real estate loans are made to borrowers who have existing banking relationships with the Company. The Company’s 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. The Company endeavors to maintain the highest practical underwriting standards while balancing the need to remain competitive in its lending practices.

Real Estate Construction Loans: The Company originates 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 provide financing to builders for the construction of pre-sold homes and speculative residential construction. Construction loans on one-to-four family residences increased $8.8 million, or 56%, to $24.3 million at June 30, 2004, representing 2.2% of total loans, from $15.6 million, or 1.4% of total loans at December 31, 2003. This growth is due to the Company placing an increased emphasis on its Builder Banking program. Commercial and five-or-more family real estate construction loans decreased $11.0 million, or 19%, to $48.0 million at June 30, 2004, representing 4.2% of total loans, from $59.0 million, or 5.5% of total loans at December 31, 2003. The decrease in commercial and five-or-more family real estate construction loans is due to the completion of several construction projects.

Consumer Loans: At June 30, 2004, the Company had $116.9 million of consumer loans outstanding, representing 10.3% of total loans, an increase of $12.7 million, or 12%, compared with $104.2 million at December 31, 2003. Consumer loans made by the Company include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans and miscellaneous personal loans.

Foreign Loans: Columbia Bank is not involved with loans to foreign companies or foreign countries.

Nonperforming Assets

Nonperforming assets consist of: (i) nonaccrual loans, which generally are loans placed on a nonaccrual basis when the loan becomes past due 90 days or when there are otherwise serious doubts about the collectibility of principal or interest; (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) real estate owned; and (iv) personal property owned.

Total nonperforming assets decreased 55% to $6.9 million, or 0.37% of period-end assets at June 30, 2004 from $15.4 million, or 0.88% of period-end assets at December 31, 2003.

The following tables set forth, at the dates indicated, information with respect to nonaccrual loans, restructured loans, total nonperforming loans (nonaccrual loans plus restructured loans), real estate owned, other personal property owned, and total nonperforming assets of the Company:


(in thousands)	June 30, 2004		December 31, 2003
Nonaccrual:

Commercial business	$	2,469	$	9,987
Real estate:
One-to-four family residential		406		365
Commercial and five or more family residential real estate		724		1,245
Real estate construction:
One-to-four family residential		664		663
Commercial and five or more family residential real estate		135
Consumer		857		995

Total nonaccrual	$	5,255	$	13,255

Restructured:
Commercial business	$	251

Total restructured		251

Total nonperforming loans	$	5,506	$	13,255

Real estate owned	$	781	$	1,452
Other personal property owned		639		691

Total nonperforming assets	$	6,926	$	15,398

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

Nonperforming loans were $5.5 million, or 0.49% of total loans (excluding loans held for sale) at June 30, 2004, compared to $13.3 million, or 1.23% of total loans at December 31, 2003. Nonaccrual loans decreased $8.0 million, or 60% from year-end 2003 to $5.3 million at June 30, 2004. As reported in the fourth quarter of 2003, a credit was moved to nonaccrual status as a result of adverse changes in the borrower’s financial condition, and subsequently brought back into accrual status in early April 2004. This transaction reduced nonperforming loans by $6.2 million.

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

Real Estate and Other Personal Property Owned. Real estate owned (REO), which is comprised of property from foreclosed real estate loans, decreased $671,000 to $781,000 at June 30, 2004, from $1.5 million at December 31, 2003. During the first six months of 2004, the Company sold three properties for gains of $16,000 and no properties were foreclosed and moved to REO. At June 30, 2004, REO consisted of four properties. Other personal property owned, which is comprised of other, non-real estate property from foreclosed loans, decreased $52,000 during the first six months of 2004 to $639,000 from $691,000 at December 31, 2003. The Company continues to liquidate the other personal property owned as quickly as possible to maximize recovery.

Provision and Allowance for Loan Losses

The Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The size of the allowance is determined through quarterly assessments of the probable estimated losses in the loan portfolio. The Company’s methodology for making such assessments and determining the adequacy of the allowance includes the following key elements:

1.	General Valuation Allowance consistent with SFAS No. 5, “Accounting for Contingencies.”

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

On a quarterly basis the Chief Credit Officer of the Company reviews with Executive Management and the Board of Directors the various additional factors that management considers when determining the adequacy of the allowance, including economic and business condition reviews.

The allowance is increased by provisions charged to expense, and is reduced by loans charged off, net of recoveries. While management believes it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in determining the allowance.

At June 30, 2004, the Company’s allowance for loan losses was $19.8 million, or 1.75% of total loans (excluding loans held for sale), 359% of nonperforming loans, and 285% of nonperforming assets. This compares with an allowance of $20.3 million, or 1.88% of the total loan portfolio, excluding loans held for sale, 153% of nonperforming loans, and 132% of nonperforming assets at December 31, 2003. After careful analysis, the Company took no provision for loan losses due to improvement in asset quality for the second quarter of 2004, compared to $1.0 million for the second quarter of 2003. During the first six months of 2004 the Company contributed $300,000 to its provision for loan losses, compared to $2.6 million in the first six months of 2003, a decrease of $2.3 million. The decrease in loan loss provision during the first six months is due to improved credit quality in the loan portfolio and lower charge-offs.

Management will continue to maintain a prudent approach in establishing the level of the loan loss allowance; the Company manages risk in its loan portfolio through placing emphasis on credit quality over loan growth. A strong monitoring system and internal controls assist management in setting reserve levels that adequately reflect the inherent loss within the loan portfolio. Additionally, environmental factors relevant to the market place, which may affect the condition of the loan portfolio, are taken into account when determining the required level of the loan loss allowance.

The following table provides an analysis of the Company’s allowance for loan losses at the dates and the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2004			2003			2004			2003
Beginning balance	$	19,958		$	19,272		$	20,261		$	19,171
Charge-offs:
Commercial business		(132	)		(487	)		(797	)		(1,936	)
Commercial real estate		(4	)					(4	)
Real estate construction: One-to-four family residential					(26	)					(26	)
Consumer		(80	)		(62	)		(129	)		(168	)

Total charge-offs		(216	)		(575	)		(930	)		(2,130	)
Recoveries:
Commercial business		21			285			43			325
Real estate construction: One-to-four family residential		1			1			1			2
Consumer		5			11			94			26

Total recoveries		27			297			138			353

Net charge-offs		(189	)		(278	)		(792	)		(1,777	)
Provision charged to expense					1,000			300			2,600

Ending balance	$	19,769		$	19,994		$	19,769		$	19,994

Total loans, net at end of period (1)	$	1,130,508		$	1,098,675		$	1,130,508		$	1,098,675

Allowance for loan losses to total loans		1.75	%		1.82	%		1.75	%		1.82	%

(1)	Excludes loans held for sale

In the second quarter and for the first six months of 2004, net loan charge-offs were $189,000 and $792,000, respectively, compared with net loan charge-offs of $278,000 and $1.8 million for the same periods in 2003. The $792,000 in net charge-offs during the first six months of 2004 were comprised of several loans.

Securities

At June 30, 2004, the Company’s securities (securities available for sale and securities held to maturity) decreased $36.6 million, or 7% to $477.2 million from $513.7 million at year-end 2003. In the second quarter of 2004, the Company purchased $25.5 million and received principal payments of $25.7 million. There were no sales of securities during the second quarter of 2003. During the first six months of 2004 the Company purchased $38.8 million, received principal payments of $48.3 million and sold $14.0 million of securities available for sale for net realized losses of $6,000. Approximately 99% of the Company’s securities are classified as available for sale and carried at fair value. These securities are used by management as part of its asset/liability management strategy and may be sold in response to changes in interest rates or significant prepayment risk. In accordance with the Company’s investment strategy, management monitors market conditions with a view to realize gains on its available for sale securities portfolio when prudent. Consistent with this strategy, management increased the Company’s securities portfolio during the later half of 2003 due to deposit growth outpacing loan demand.

At June 30, 2004, the market value of securities available for sale had an unrealized loss of $6.5 million (net of tax) as compared to an unrealized loss of $513,000 (net of tax) at December 31, 2003. The change in the unrealized loss is due to increases in interest rates.

The following table sets forth the Company’s securities portfolio by type for the dates indicated:

Securities Available for Sale


(in thousands)	June 30 2004		December 31 2003
U.S. Government agency	$	49,410	$	29,445
U.S. Government agency mortgage-backed securities		342,412		401,170
State & municipal securities		80,026		77,598
Other securities		966		987

Total	$	472,814	$	509,200


Securities Held to Maturity

(in thousands)	June 30 2004		December 31 2003
State & municipal securities	$	4,354	$	4,548

Securities held to maturity are carried at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized in interest income using the interest method. If the security is determined to be other-than-temporarily impaired, the amount of the impairment is charged to operations.

Securities available for sale are carried at fair value. Premiums and discounts are amortized using the interest method over the remaining period to contractual maturity. Unrealized holding gains and losses, or valuation allowances established for net unrealized losses, are excluded from earnings and reported as a separate component of shareholders’ equity as accumulated other comprehensive income, net of income taxes, unless the security is deemed other-than-temporarily impaired. If the security is determined to be other-than-temporarily impaired, the amount of the impairment is charged to operations.

The Company’s determination of impairment for various types of investments accounted for in accordance with SFAS No. 115 is predicated on the notion of other-than-temporary. The key indicator that an investment may be impaired is that the fair value of the investment is less than its carrying value. Each reporting period the Company reviews those investments for which the fair value is less than their carrying value to determine whether certain indicators are present which negatively impact the fair value of the investment. These indicators include deteriorating financial condition, regulatory, economic or technical changes, downgrade by a rating agency and length of time the fair value has been less than carrying value. If any indicators of impairment are present, management determines the fair value of the investment and compares it to the carrying value. If the fair value of the investment is less than the carrying value, the investment is considered impaired and a determination must be made as to whether the impairment is other-than-temporary.

The Company will deem an impairment other-than-temporary unless positive evidence indicating that an investment’s carrying value is recoverable within a reasonable period of time outweighs negative evidence to the contrary. Evidence that is objectively determinable and verifiable is given greater weight than evidence that is subjective and/or not verifiable. Evidence based on future events will generally be less objective as it is based on future expectations and therefore is generally less verifiable or not verifiable at all. Factors considered in evaluating whether a decline in value is other-than-temporary include, (a) the length of time and the extent to which the fair value has been less than amortized cost, (b) the financial condition and near-term prospects of the issuer and (c) the Company’s intent and ability to retain the investment for a period of time. In situations in which the security’s fair value is below amortized cost but it continues to be probable that all contractual terms of the security will be satisfied, and that the decline is due solely to changes in interest rates (not because of increased credit risk), and the Company asserts that it has positive intent and ability to hold that security to maturity, no other-than-temporary impairment is recognized.

Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of June 30, 2004 are summarized as follows:

Securities Available for Sale


	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	$	49,232	$	(793	)	$	—	$	—		$	49,232	$	(793	)
U.S. Government mortgage-backed securities		225,839		(5,800	)		81,688		(2,828	)		307,527		(8,628	)
State and municipal securities		40,883		(1,874	)							40,883		(1,874	)

Total	$	315,954	$	(8,467	)	$	81,688	$	(2,828	)	$	397,642	$	(11,295	)

For all of the above investment securities, the unrealized losses are due to increases in interest rates and are considered to be temporarily impaired as the Company has the ability and intent to hold the investments for a period of time sufficient for recovery of fair value up to (or beyond) the cost of the investment. There were no securities held to maturity with unrealized losses at June 30, 2004.

Liquidity and Sources of Funds

The Company’s primary sources of funds are customer deposits and advances from the Federal Home Loan Bank of Seattle (the “FHLB”). 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

The Company’s deposit products include a wide variety of transaction accounts, savings accounts and time deposit accounts. Total deposits increased $126.9 million, or 8%, to $1.67 billion at June 30, 2004 from December 31, 2003. Core deposits (demand deposit, savings, and money market accounts) increased $129.7 million, or 12% during the first six months of 2004 and certificate of deposit balances decreased $2.8 million, or 1% compared to year-end 2003. Average core deposits increased to $1.22 billion during the second quarter of 2004, from $1.08 billion in the fourth quarter 2003 and from $982.9 million in the second quarter of 2003.

As equity markets improve, the Company recognizes that some of the deposit growth that occurred during the past couple of years may eventually be deployed elsewhere as customers regain confidence in those markets. At the same time, the Company anticipates growing its deposits through new customers and its current customer base as business and individual prosperity improves during an anticipated economic recovery.

The Company has established a branch system to serve its consumer and business depositors. In addition, management’s strategy for funding growth is to make use of brokered and other wholesale deposits. At June 30, 2004, brokered and other wholesale deposits (excluding public deposits) totaled $11.1 million, less than 1% of total deposits, down from $16.3 million at December 31, 2003. The brokered deposits have varied maturities.

Borrowings

The Company relies on FHLB advances to supplement its funding sources, and the FHLB serves 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 June 30, 2004, the Company had no FHLB advances, compared to advances of $16.5 million at December 31, 2003. Management anticipates that the Company will continue to rely on the same sources of funds in the future, and 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 4.75% at June 30, 2004. The floating rate is based on the 3-month LIBOR plus 3.58% and is adjusted quarterly. The Company through the Trust may call the debt at five years for a premium and at ten years at par, allowing the Company to retire the debt early if conditions are favorable. Prior to December 31, 2003, the Trust was considered a consolidated subsidiary of the Company. At December 31, 2003, the Company adopted Financial Accounting Standards Board Interpretation (FIN) No. 46 (as revised), ”Consolidation of Variable Interest Entities,” whereby the Trust was deconsolidated with the result being that the trust preferred obligations are now classified as long-term subordinated debt and the Company’s related investment in the Trust is recorded in other assets. The balance of the long-term subordinated debt was $22.2 million at June 30, 2004 and December 31, 2003. The subordinated debt payable to the Trust is on the same interest and payment terms as the trust preferred obligations issued by the Trust.

The Company has a $20.0 million line of credit with a large commercial bank. The interest rate on the line is indexed to LIBOR and at June 30, 2004, the Company had a balance outstanding of $1.0 million. There was no balance outstanding at December 31, 2003. In the event of discontinuance of the line by either party, the Company has up to two years to repay any outstanding balance.

Capital

Shareholders’ equity at June 30, 2004 was $155.7 million, up 4% from $150.4 million at December 31, 2003. The increase is due primarily to net income of $10.6 million which was partially offset by unrealized losses on securities available for sale of $6.0 million at June 30, 2004. Shareholders’ equity was 8.36%, and 8.62% of total period-end assets at June 30, 2004, and December 31, 2003, respectively.

Regulatory Capital Requirements

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% of risk-adjusted assets to be considered “adequately capitalized”.

Federal Deposit Insurance Corporation regulations set forth the qualifications necessary to be classified as a “well capitalized” bank, 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. Columbia Bank qualifies as “well-capitalized” at June 30, 2004 and December 31, 2003.


	Columbia Banking System, Inc.				Columbia State Bank				Requirements
	6/30/2004		12/31/2003		6/30/2004		12/31/2003		Adequately capitalized		Well - capitalized
Total risk-based capital ratio	14.55	%	14.49	%	14.10	%	14.02	%	8	%	10	%
Tier 1 risk-based capital ratio	13.30	%	13.24	%	12.85	%	12.77	%	4	%	6	%
Leverage ratio	9.91	%	10.03	%	9.60	%	9.69	%	4	%	5	%

Dividends

On January 29, 2004, the Company declared a quarterly cash dividend of $0.05 per share, payable on February 25, 2004, to shareholders of record at the close of business February 11, 2004. On April 28, 2004, the Company announced a quarterly cash dividend of $0.07 per share and a 5% stock dividend payable on May 26, 2004, to shareholders of record as of May 12, 2004. Average shares outstanding and net income per share for all periods presented have been retroactively adjusted to give effect to this stock dividend.

Subsequent to quarter end, on July 29, 2004, the Company announced a quarterly dividend of $0.07 per share payable on August 25, 2004, to shareholders of record as of August 11, 2004.

Applicable Federal and Washington State regulations restrict cash capital distributions, including dividends, by institutions such as Columbia Bank. Such restrictions are tied to the institution’s capital levels after giving effect to distributions.

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 June 30, 2004 the Company 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 June 30, 2004, 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, 2003. For additional information, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” referenced in the Company’s annual report on Form 10-K for the year ended December 31, 2003.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure 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. 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

Changes in Internal Controls. No changes occurred since the quarter ended March 31, 2004 in our internal controls over financial reporting that have material affected, or are reasonable likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its annual shareholders meeting on April 28, 2004. The following is a brief description and vote count of all proposals voted upon at the annual meeting.

Proposal 1. ELECTION OF DIRECTORS

All nine persons nominated were elected to hold office for the ensuing year.


Nominee	Votes “For”	Votes “Withheld”
Melanie J. Dressel	11,742,100	366,132
John P. Folsom	11,572,237	535,995
Frederick M. Goldberg	11,553,692	554,540
Thomas M. Hulbert	11,366,002	742,230
Thomas L. Matson, Sr.	11,530,135	587,097
Daniel C. Regis	11,547,412	560,820
Donald Rodman	11,385,401	722,831
William T. Weyerhaeuser	11,745,940	362,292
James M. Will	11,616,444	491,788

Proposal 2. AMENDMENT TO 2000 AMENDED AND RESTATED STOCK OPTION PLAN

The amendment did not receive sufficient votes and therefore was not implemented.


Shares Voted “For”	Shares Voted “Against”	Absentions
4,182,246	4,253,671	82,938

Item 6. EXHIBITS AND REPORTS ON FORM 8-K


(a)		Exhibits

10.1		Severance agreement between Columbia State Bank and Evans Q. Whitney dated July 1, 2004.

10.2		Employment agreement between the Company, Columbia State Bank and Melanie J. Dressel dated August 1, 2004.

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

(b)	Reports on Form 8-K

On May 3, 2004, the Company filed an 8-K dated May 3, 2004 announcing quarterly cash and stock dividend. The press release was attached and incorporated in its entirety by reference.

On May 4, 2004, the Company submitted an 8-K dated May 4, 2004 announcing its first quarter 2004 financial results. The press release was attached and incorporated in its entirety by reference.

On June 1, 2004, the Company filed an 8-K dated June 1, 2004 announcing the appointment of Andy McDonald as Chief Credit Officer. The press release was attached and incorporated in its entirety by reference.

On June 9, 2004, the Company filed an 8-K dated June 7, 2004 announcing the signing of a definitive agreement for the Company to acquire Bank of Astoria in a cash-and-stock transaction. The definitive agreement and the press release were attached and incorporated in their entirety by reference.

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 August 9, 2004

/s/ Melanie J. Dressel

Melanie J. Dressel

President and Chief Executive Officer

(Principal Executive Officer)

Date August 9, 2004

/s/ Gary R. Schminkey

Gary R. Schminkey

Executive Vice President and

Chief Financial Officer

(Principal Financial and Accounting Officer)