Columbia Banking System

2009 Annual Report & Form 10-K

You’ll notice the difference.

Pacifi c 
Northwest 
Footprint

85 Branches 
Including 6 branches of Bank of Astoria

PORT ANGELES

BAINBRIDGE IS.

SEATTLE

Washington

BELLINGHAM

ENUMCLAW

TACOMA

OLYMPIA

LONGVIEW

ASTORIA

VANCOUVER

PORTLAND

YAKIMA

THE DALLES

TRI-CITIES

BEND

Oregon

To our shareholders

The year 2009 was the most challenging year in our memory, particularly for community banks and other fi nancial institutions.  The 
deepening and long-lasting recession resulted in industry and nation-wide credit quality issues.  Despite a profi table fourth quarter, we 
were very disappointed to report a net loss applicable to common shareholders of $8.4 million for the year, or $0.38 per common share.  
The results for the year refl ected the elevated level of our provision for loan losses, primarily due to the continuing decline in real estate 
values, particularly in the residential land, lots and lot development areas.  

It was also a year that resoundingly confi rmed the value of our business model and our core values.  From the beginning of our 
journey in 1993, we have concentrated on good, fundamental banking, providing a local, customer-focused approach to doing business.  
The result?  Your company has earned the confi dence of our communities, customers, employees and investors.  

•  We continue to be very well-capitalized, with a 19.6% total risk-based capital ratio at December 31, 2009.  A major highlight of the 
year was our $120 million capital raise through a public common stock offering in August; one of the few community banks able 
to do so.  The investment community clearly demonstrated that it believes in what we are doing and in the marketplace here in the 
Pacifi c Northwest.

•  Our liquidity ratio is 51%, or over $1.6 billion of available funding for the loan and deposit needs of our customers, and for general 

bank operations.

•  We have maintained a historically stable net interest margin.

•  Our loan and deposit portfolios are diversifi ed, helping to mitigate the effects of the troubled economy.  

•  Our exceptional level of core deposits is an important reason we have maintained that relatively stable net interest margin.  They 

are over 83% of our total deposits and result from the strong relationships we continue to build with our customers.  

•  We continue to focus on increasing our share of the deposit market in the communities we serve.  To that end, we have added 
experienced teams of bankers and retail locations which give us access to new clients and greater coverage within our 
market areas.

•  We’re very proud and pleased that we have a reputation as a great place to work.  Once again, we were awarded one of the best 
places to work in Washington for 2009 from both the Puget Sound Business Journal and Seattle Business Magazine.  Of course, 
this recognition has helped us to attract excellent bankers who really want to work for us because our fi nancial strength allows 
them to serve their customers.

•  Our retail system is strong and growing strategically, with healthy core deposits built on the relationships our wonderful bankers 

have built with our customers.

Total deposits were $2.48 billion at the end of 2009, up 4% from $2.38 billion in 2008.  A real success story is the increase in our core 
deposits, which are an important factor in the stability of our net interest margin.  Core deposits, which we defi ne as checking, savings, 
money market accounts and certifi cates of deposit under $100,000, rose about 7%, from $1.94 billion at the end of 2008 to $2.07 
billion at December 31, 2009.   

We ended the year with $2.01 billion in total loans, down 10% from $2.23 billion at year-end 2008.  The decrease in loans refl ects the 
soft economy and the resulting lower demand, a decrease in line of credit usage, as well as payoffs in the construction loan portfolio.  
Our emphasis on the diversifi cation of our loan portfolio continues to be a  strength for us.  At the end of 2009, 37% of our total portfolio 
was in commercial business loans, 43% was in commercial real estate loans, 10% in consumer loans, 7% in real estate construction-
related loans, and approximately 3% in the for-sale housing segment.   

 
Our provision for loan losses for the 12 months ending December 31, 2009 was $63.5 million, compared to $41.2 million for the 
same period in 2008.  Our ability to build our loan loss reserve has strengthened our balance sheet. The allowance for loan losses was 
2.66% of total loans at December 31, 2009 compared to 1.91% at the end of 2008. At the end of the year, nonperforming assets were 
$129.5 million, compared to $109.6 million at December 31, 2008, and down from $148.9 million at the end of the third quarter, 2009.  
Residential construction assets continue to be the largest component of nonperforming assets; however, it is also the area where we saw 
the largest reduction in nonperforming assets.  Total residential construction loans at year-end 2009 declined to 5.4% of the total portfolio 
from 9.4% of the portfolio at the end of 2008.

FDIC-assisted transactions increase our strength

Our fi nancial strength has allowed us to take advantage of opportunities in the Pacifi c Northwest.  In January, 2010, we were very pleased 
to successfully bid for and assume the deposits and loans of Columbia River Bank and American Marine Bank, both of which had been 
closed by their state regulator, with the FDIC named as receiver.  Both acquisitions met our criteria of making fi nancial sense, extending 
our geographic footprint, being culturally compatible and bringing strong core deposits.  Both acquisitions also included a credit loss-
sharing agreement with the FDIC, and we anticipate signifi cant cost savings of approximately 25 – 30%.

With the Columbia River Bank acquisition, we acquired about $1 billion in assets and $980 million in deposits, which included about $785 
million in core deposits.  We added 14 branches in Oregon and 7 in Washington, covering the Columbia Gorge region, Central Oregon, 
the Willamette Valley and the Columbia Basin area.  The American Marine Bank transaction increased our assets by approximately $350 
million and our deposits by $270 million, about 80% of which are core deposits.  We added 11 branches in Washington in Kitsap and 
Mason counties, as well as the Olympic Peninsula.

Our assets are now approximately $4.5 billion, and our geographic footprint has expanded from 52 to 85 branches, including 60 branches 
in the state of Washington and 25 in Oregon.  We are confi dent these acquisitions place us in an even stronger strategic position as the 
economy improves.

During 2009, we moved forward with our strategy to increase our resources and presence in markets where we were able to capitalize 
on opportunities to increase market share and fi ll in our geographic footprint.  Two new Washington branches opened in 2009; our new 
Renton location opened in July, and an offi ce in Vancouver in mid-December.  Our Portland offi ce is slated to open in late fi rst quarter of 
2010.  We also brought on board experienced teams of bankers, particularly in our Vancouver, Washington and Portland, Oregon markets, 
who have been able to take advantage of our capacity and willingness to lend. 

We believe your company is one of the strongest franchises in the Pacifi c Northwest.  While we certainly see more challenges ahead in the 
near term as we expect a very slow economic recovery, we have navigated successfully through a diffi cult economy and have a strong 
base from which to operate as the economy improves.  We are confi dent that our long-standing business model and core values will result 
in long-term benefi ts for our shareholders and the ability to take advantage of additional opportunities to come.  

Sincerely,  

William T. Weyerhaeuser 
William T. Weyerhaeuser 

Melanie J. Dressel

Chairman of the Board 
Columbia Banking System 

President and Chief Executive Offi cer
Columbia Banking System and Columbia Bank

 
 
 
 
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009 or
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934

Commission File Number 0-20288

COLUMBIA BANKING SYSTEM, INC.

(Exact name of registrant as specified in its charter)

Washington
(State or other jurisdiction of
incorporation or organization)

91-1422237
(I.R.S. Employer
Identification Number)

1301 “A” Street
Tacoma, Washington 98402
(Address of principal executive offices) (Zip code)
Registrant’s Telephone Number, Including Area Code: (253) 305-1900

Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, No Par Value
(Title of class)
Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act. Yes ‘ No È

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the

Act. Yes ‘ No È

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 È 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 ‘ No ‘

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 C.F.R. 229.405) is

not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. È

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer,

or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the
Exchange Act (check one):

‘ Large Accelerated Filer

È Accelerated Filer

‘ 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 È

The aggregate market value of Common Stock held by non-affiliates of the registrant at June 30, 2009 was

$180,094,720 based on the closing sale price of the Common Stock on that date.

The number of shares of registrant’s Common Stock outstanding at January 31, 2010 was 28,164,749.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant’s definitive 2010 Annual Meeting Proxy Statement.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part III

COLUMBIA BANKING SYSTEM, INC.
FORM 10-K ANNUAL REPORT
DECEMBER 31, 2009

TABLE OF CONTENTS

PART I

Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Reserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer

Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III

Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Item 12.

Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.

PART IV

4
16
24
24
25
25

26
28
31
58
61
98
98
100

101
101

101
101
101

Item 15.

Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

102

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index to Exhibits

103
104

2

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K may contain 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 titled “Risk Factors,” “Business” and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K,
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;

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.

You should take into account that forward-looking statements speak only as of the date of this report. Given

the described uncertainties and risks, we cannot guarantee our future performance or results of operations and
you should not place undue reliance on these forward-looking statements. We undertake no obligation to update
or revise any forward-looking statements, whether as a result of new information, future events or otherwise,
except as required under federal securities laws.

3

ITEM 1. BUSINESS

General

PART I

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

The Company was originally organized in 1988 under the name First Federal Corporation, which was later
named Columbia Savings Bank. In 1990, an investor group acquired a controlling interest in the Company and a
second corporation, Columbia National Bankshares, Inc. (“CNBI”), and CNBI’s sole banking subsidiary,
Columbia National Bank. In 1993, the Company was reorganized to take advantage of commercial banking
business opportunities in our principal market area. The opportunities to capture commercial banking market
share were due to increased consolidations of banks, primarily through acquisitions by out-of-state holding
companies, which created dislocation of customers. As part of the reorganization, CNBI was merged into the
Company and Columbia National Bank was merged into the then newly chartered Columbia Bank. In 1994,
Columbia Savings Bank was merged into Columbia Bank. We have grown from four branch offices at January 1,
1993 to 52 branch offices at December 31, 2009 and 84 branch offices at January 31, 2010 as a result of our
recent acquisitions described below.

At December 31, 2009 Columbia Bank had 52 branch locations in the Seattle/Tacoma metropolitan area and

contiguous parts of the Puget Sound region of Washington State, as well as the Longview, Woodland and
Vancouver communities in southwestern Washington State, the Portland, Oregon metropolitan area, and the
northern Oregon coast. Included in those 52 branch locations are six Columbia Bank branches doing business
under the Bank of Astoria name at the Bank of Astoria’s former branches located in Astoria, Warrenton, Seaside
and Cannon Beach in Clatsop County and in Manzanita and Tillamook in Tillamook County. Substantially all of
Columbia Bank’s loans, loan commitments and core deposits are within its service areas. Columbia Bank is a
Washington state-chartered commercial bank, the deposits of which are insured in whole or in part by the Federal
Deposit Insurance Corporation (“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.

Recent Acquisitions

On July 23, 2007, the Company completed its acquisition of Mountain Bank Holding Company (“Mt.
Rainier”), the parent company of Mt. Rainier National Bank, Enumclaw, Washington. Mt. Rainier was merged
into the Company and Mt. Rainier National Bank was merged into Columbia Bank doing business as Mt. Rainier
Bank. The results of Mt. Rainier Bank’s operations are included in those of Columbia Bank starting on July 23,
2007. On October 1, 2009, branches doing business as Mt. Rainier Bank were renamed Columbia Bank.

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

On January 22, 2010, Columbia State Bank acquired all of the deposits and certain assets of

Columbia River Bank from the FDIC, which was appointed receiver of Columbia River Bank. Columbia
State Bank acquired approximately $903 million in assets and approximately $891 million in deposits
located in 21 branches in Oregon and Washington. Columbia River Bank’s loans and other real estate

4

assets acquired of approximately $696 million are subject to a loss-sharing agreement with the FDIC. The
Company participated in a competitive bid process in which the accepted bid included a 1% deposit
premium on non-brokered deposits and a negative bid of $43.9 million on net assets acquired.

On January 29, 2010 Columbia State Bank acquired substantially all of the deposits and assets of

American Marine Bank from the FDIC, which was appointed receiver of American Marine Bank.
Columbia State Bank acquired approximately $308 million in assets and approximately $253 million in
deposits located in 11 branches on the western Puget Sound. American Marine Bank’s loans and other real
estate assets acquired of approximately $257 million are subject to a loss-sharing agreement with the
FDIC. In addition, Columbia State Bank will continue to operate the Trust and Wealth Management
Division of American Marine Bank. The Company participated in a competitive bid process in which the
accepted bid included a 1% deposit premium on non-brokered deposits and a negative bid of $23.0 million
on net assets acquired.

Company Management

Name

Principal Position

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

Business Overview

Our goal is to be the leading Pacific Northwest regional community banking company while

consistently increasing shareholder value. We continue to build on our reputation for excellent customer
service in order to be recognized in all markets we serve as the bank of choice for retail deposit customers,
small to medium-sized businesses and affluent households.

We have established a network of 52 branches as of December 31, 2009 from which we intend to grow
market share. Western Washington locations consist of twenty-three branches in Pierce County, twelve in King
County, two in Cowlitz County, two in Thurston County and one each in Kitsap and Whatcom Counties. Oregon
locations include three branches in Clackamas County, two branches in Multnomah County, four branches in
Clatsop County and two in Tillamook County.

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

Business Strategy

Our business strategy is to provide our customers with the financial sophistication and breadth of products

of a regional banking company while retaining the appeal and service level of a community bank. We continually
evaluate our existing business processes while focusing on maintaining asset quality and balanced loan and
deposit portfolios, building our strong core deposit base, expanding total revenue and controlling expenses in an
effort to increase our return on average equity and gain operational efficiencies. We believe that, as a result of
our strong commitment to highly personalized, relationship-oriented customer service, our varied products, our
strategic branch locations and the long-standing community presence of our managers, banking officers and
branch personnel, we are well positioned to attract and retain new customers and to increase our market share of

5

loans, deposits, and other financial services in the communities we serve. We are committed to increasing market
share in the communities we serve by continuing to leverage our existing branch network, adding new branch
locations and considering business combinations that are consistent with our expansion strategy throughout the
Pacific Northwest.

Products & Services

We place the highest priority on customer service and assist our customers in making informed decisions

when selecting from the products and services we offer. We continuously review our product and service
offerings to ensure that we provide our customers with the tools to meet their financial needs. A more complete
listing of all the services and products available to our customers can be found on our website:
www.columbiabank.com. Some of the core products and services we offer include:

Personal Banking

Checking and Saving Accounts
Online Banking
Electronic Bill Pay
Consumer Lending
Residential Lending
Visa Card Services
Investment Services
Private Banking

•
•
•
•
•
•
•
•

Business Banking

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

•
•
•
•
•
•
•
•
•
•
•
•
• Merchant Card Services

Personal Banking: We offer our personal banking customers an assortment of account products including
noninterest and interest-bearing checking, savings, money market and certificate of deposit accounts. Overdraft
protection is also available with direct links to the customer’s checking account. Our online banking service,
Columbia Online™, provides our personal banking customers with the ability to safely and securely conduct
their banking business 24 hours a day, 7 days a week. Personal banking customers are also provided with a
variety of borrowing products including fixed and variable rate home equity loans and lines of credit, home
mortgages for purchases and refinances, personal loans, and other consumer loans. Eligible personal banking
customers with checking accounts are provided a Visa® Debit Card which can be used both to make purchases
and as an ATM card. A variety of Visa® Credit Cards are also available to eligible personal banking customers.

Columbia Private Banking offers affluent clientele and their businesses complex financial solutions, such as

deposit and cash management services, credit services, and wealth management strategies. Each private banker
provides advisory services and coordinates a relationship team of experienced financial professionals to meet the
unique needs of each discerning customer.

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

(1) Securities and insurance products are offered through PRIMEVEST Financial Services, Inc., an independent,

registered broker/dealer. Member FINRA/SIPC. CB Financial Services is a marketing name for PRIMEVEST.
Investment products are * Not FDIC insured * No bank guarantee * Not a deposit * Not insured by any
federal government agency * May lose value.

(2) Advisory services may only be offered by Investment Adviser Representatives in connection with an

appropriate PRIMEVEST Advisory Services Agreement and disclosure brochure as provided.

6

Business Banking: We offer our business banking customers an assortment of checking, savings, interest

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

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

We offer our business banking customers a selection of Visa® Cards including the Business Debit Card that
works like a check wherever Visa® is accepted including ATM cash withdrawals 24 hours a day, 7 days a week.
We partner with First National Bank of Omaha to offer Visa® Credit Cards such as the Corporate Card which can
be used all over the world; the Purchasing Card with established purchasing capabilities based on business needs;
as well as the Business Edition® and Business Edition with Maximum Rewards® that earns reward points with
every purchase. Our International Banking Department provides both large and small businesses with the ability
to buy and sell foreign currencies as well as obtain letters of credit and wire funds to their customers and
suppliers in foreign countries.

Business clients that utilize Columbia’s Merchant Card Services have the ability to accept Visa®,

MasterCard® and Discover® sales drafts for deposit directly into their business checking account. Merchants are
provided with a comprehensive accounting system tailored to meet each merchant’s needs, which includes
month-to-date credit card deposit information on a transaction statement. Internet access is available to view
merchant reports that allow business customers to review merchant statements, authorized, captured, cleared and
settled transactions.

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

Competition

Our industry remains highly competitive in spite of challenging economic conditions. Several other

financial institutions with greater resources compete for banking business in our market areas. Among the
advantages of some of these institutions are their ability to make larger loans, finance extensive advertising and

(1) Securities and insurance products are offered through PRIMEVEST Financial Services, Inc., an independent,

registered broker/dealer. Member FINRA/SIPC. CB Financial Services is a marketing name for PRIMEVEST.
Investment products are * Not FDIC insured * No bank guarantee * Not a deposit * Not insured by any
federal government agency * May lose value.

7

promotion campaigns, access international financial markets and allocate their investment assets to regions of
highest yield and demand. In addition to competition from other banking institutions, we continue to experience
competition from non-banking companies such as credit unions, brokerage houses and other financial services
companies. We compete for deposits, loans, and other financial services by offering our customers similar
breadth of products as our larger competitors while delivering a more personalized service level with faster
transaction turnaround time.

Market Areas

Washington: Over half of our total branches within Washington are located in Pierce County, with an

estimated population of 805,000 residents. At June 30, 2009 our Pierce County branch locations’ share of the
county’s total deposit market was 16%(1), ranking first among our competition. Also located in Pierce County is
our Company headquarters in the city of Tacoma and one nearby operational facility. Some of the most
significant contributors to the Pierce County economy are the Port of Tacoma whose activities are related to
more than 43,000 jobs in the county, and well over 100,000 in the state of Washington, McChord Air Force Base
and Fort Lewis Army Base that account for nearly 20% of the County’s total employment and the manufacturing
industry which supplies the Boeing Company.

We operate twelve branch locations in King County, including Seattle, Bellevue and Redmond. King
County, which is Washington’s most highly populated county at approximately 1.9 million residents, is a market
that has significant growth potential for our Company and will play a key role in our expansion strategy in the
future. At June 30, 2009 our share of the King County deposit market was less than 1%(1); however, we have
made inroads within this market through the strategic expansion of our banking team. The north King County
economy is primarily made up of the aerospace, construction, computer software and biotechnology industries.
South King County with its close proximity to Pierce County is considered a natural extension of our primary
market area. The economy of south King County is primarily comprised of residential communities supported by
light industrial, retail, aerospace and distributing and warehousing industries.

Some other market areas served by the Company include Cowlitz County where we operate two branch
locations that account for 8.5%(1) of the deposit market share, Thurston County where we operate two branches
offices, and Kitsap and Whatcom County where we operate one branch in each county.

Oregon: With the acquisition of Town Center Bancorp in July, 2007, we added five branches in Clackamas

and Multnomah counties in the Portland, Oregon area. Our six branches located in the western portions of
Clatsop and Tillamook Counties, in the northern Oregon coastal area account for 28%(1) and 7%(1) of the deposit
market share, respectively. In Clatsop County, we tied for first place among our competition in market share as
of June 30, 2009. Oregon market areas provide a significant opportunity for expansion in the future. Both Clatsop
and Tillamook Counties are comprised primarily of tourism, forestry and commercial fishing related businesses.

Employees

As of December 31, 2009 the Company and its banking subsidiaries employed approximately 715 full-time

equivalent employees down from 735 at December 31, 2008. We value our employees and pride ourselves on
providing a professional work environment accompanied by comprehensive benefit programs. We are committed
to providing flexible and value-added benefits to our employees through a “Total Compensation Philosophy”
which incorporates all compensation and benefits. Our continued commitment to employees contributed to
Columbia Bank being awarded second place in the large employer category by Seattle Business Magazine’s 100
Best Companies to Work For 2009 and designated one of the Puget Sound Business Journal’s “Washington’s
Best Workplaces 2009”.

(1) Source: FDIC Annual Summary of Deposit Report as of June 30, 2009.

8

Available Information

We file annual reports on Form 10-K, quarterly reports on Form 10-Q, periodic reports on Form 8-K, proxy

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

Supervision and Regulation

General

The following discussion provides an overview of certain elements of the extensive regulatory framework

applicable to the Company and Columbia State Bank, which operates under the name Columbia Bank in
Washington, and Columbia State Bank and Bank of Astoria in Oregon (collectively, referred to herein as
“Columbia Bank”). This regulatory framework is primarily designed for the protection of depositors, federal
deposit insurance funds and the banking system as a whole, rather than specifically for the protection of
shareholders. Due to the breadth and growth of this regulatory framework, our costs of compliance continue to
increase in order to monitor and satisfy these requirements.

To the extent that this section describes statutory and regulatory provisions, it is qualified by reference to
those provisions. These statutes and regulations, as well as related policies, are subject to change by Congress,
state legislatures and federal and state regulators. Changes in statutes, regulations or regulatory policies
applicable to us, including the interpretation or implementation thereof, could have a material effect on our
business or operations. Recently, in light of the recent financial crisis, numerous proposals to modify or expand
banking regulation have surfaced. Based on past history, if any are approved, they will add to the complexity and
cost of our business.

Federal Bank Holding Company Regulation

General. The Company is a bank holding company as defined in the Bank Holding Company Act of 1956,

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

Holding Company Bank Ownership. The BHCA requires every bank holding company to obtain the prior

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

Holding Company Control of Nonbanks. With some exceptions, the BHCA also prohibits a bank holding

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

9

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

Tying Arrangements. We are prohibited from engaging in certain tie-in arrangements in connection with

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

Support of Subsidiary Bank. Under Federal Reserve policy, the Company is expected to act as a source of

financial and managerial strength to Columbia Bank. This means that the Company is required to commit, as
necessary, resources to support Columbia Bank. Any capital loans a bank holding company makes to its
subsidiary banks are subordinate to deposits and to certain other indebtedness of those subsidiary banks.

State Law Restrictions. As a Washington corporation, the Company is subject to certain limitations and

restrictions under applicable Washington corporate law. For example, state law restrictions in Washington
include limitations and restrictions relating to indemnification of directors, distributions to shareholders,
transactions involving directors, officers or interested shareholders, maintenance of books, records, and minutes,
and observance of certain corporate formalities.

Federal and State Regulation of Columbia Bank

General. The deposits of Columbia Bank, a Washington chartered commercial bank with branches in

Washington and Oregon, are insured by the FDIC. As a result, Columbia Bank is subject to supervision and
regulation by the Washington Department of Financial Institutions, Division of Banks and the FDIC. With
respect to branches of Columbia Bank in Oregon, the Bank is also subject to supervision and regulation by the
Oregon Department of Consumer and Business Services, as well as the FDIC. These agencies have the authority
to prohibit banks from engaging in what they believe constitute unsafe or unsound banking practices.

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

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

Regulation of Management. Federal law (i) sets forth circumstances under which officers or directors of a
bank may be removed by the institution’s federal supervisory agency; (ii) places restraints on lending by a bank
to its executive officers, directors, principal shareholders, and their related interests; and (iii) prohibits

10

management personnel of a bank from serving as a director or in other management positions of another financial
institution whose assets exceed a specified amount or which has an office within a specified geographic area.

Safety and Soundness Standards. Federal law imposes certain non-capital safety and soundness standards

upon banks. These standards cover internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such
other operational and managerial standards as the agency determines to be appropriate, and standards for asset
quality, earnings and stock valuation. An institution that fails to meet these standards must develop a plan
acceptable to its regulators, specifying the steps that the institution will take to meet the standards. Failure to
submit or implement such a plan may subject the institution to regulatory sanctions.

Interstate Banking and Branching

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Act”) relaxed prior

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

Washington and Oregon have both enacted “opting in” legislation in accordance with the Interstate Act

provisions allowing banks to engage in interstate merger transactions, subject to certain “aging” requirements.
Under Washington law, an out-of-state bank may, subject to Department of Financial Institution approval, open
de novo branches in Washington or acquire an in-state branch so long as the home state of the out-of-state bank
has reciprocal laws with respect to de novo branching or branch acquisitions. In contrast, Oregon restricts an
out-of-state bank from opening de novo branches, and no out-of-state bank may conduct banking business at a
branch located in Oregon unless the out-of-state bank has converted from, has assumed all, or substantially all, of
Oregon deposit liabilities of or has merged with an insured institution that, by itself or together with any
predecessor, has been engaged in banking business in Oregon for at least three years.

Dividends

The principal source of the Company’s cash is from dividends received from Columbia Bank, which are
subject to government regulation and limitations. Regulatory authorities may prohibit banks and bank holding
companies from paying dividends in a manner that would constitute an unsafe or unsound banking practice or
would reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital
requirements. Washington law also limits a bank’s ability to pay dividends that are greater than the bank’s
retained earnings without approval of the applicable banking agency. In addition to the foregoing regulatory
restrictions, we are subject to contractual restrictions that limit us from paying dividends on our common stock,
including those contained in the securities purchase agreement between us and the Treasury, as described in more
detail below. Additionally, current guidance from the Federal Reserve provides, among other things, that
dividends per share on the Company’s common stock generally should not exceed earnings per share, measured
over the previous four fiscal quarters

Capital Adequacy

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

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Tier I and Tier II Capital. Under the guidelines, an institution’s capital is divided into two broad categories,

Tier I capital and Tier II capital. Tier I capital generally consists of common stockholders’ equity, surplus and
undivided profits. Tier II capital generally consists of the allowance for loan losses, hybrid capital instruments
and subordinated debt. The sum of Tier I capital and Tier II capital represents an institution’s total capital. The
guidelines require that at least 50% of an institution’s total capital consist of Tier I capital.

Risk-based Capital Ratios. The adequacy of an institution’s capital is gauged primarily with reference to the

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

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

Prompt Corrective Action. Under the guidelines, an institution is assigned to one of five capital categories

depending on its total risk-based capital ratio, Tier I risk-based capital ratio, and leverage ratio, together with
certain subjective factors. The categories range from “well capitalized” to “critically undercapitalized.”
Institutions that are “undercapitalized” or lower are subject to certain mandatory supervisory corrective actions.
During these challenging economic times, the federal banking regulators have actively enforced these provisions.

Regulatory Oversight and Examination

The Federal Reserve conducts periodic inspections of bank holding companies, which are performed both

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

Banks are subject to periodic examinations by their primary regulators. Bank examinations have evolved

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

Corporate Governance and Accounting Legislation

Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the “Act”) addresses among other things,
corporate governance, auditing and accounting, enhanced and timely disclosure of corporate information, and
penalties for non-compliance. Generally, the Act (i) requires chief executive officers and chief financial officers
to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission (the “SEC”);
(ii) imposes specific and enhanced corporate disclosure requirements; (iii) accelerates the time frame for
reporting of insider transactions and periodic disclosures by public companies; (iv) requires companies to adopt

12

and disclose information about corporate governance practices, including whether or not they have adopted a
code of ethics for senior financial officers and whether the audit committee includes at least one “audit
committee financial expert;” and (v) requires the SEC, based on certain enumerated factors, to regularly and
systematically review corporate filings.

To deter wrongdoing, the Act (i) subjects bonuses issued to top executives to disgorgement if a restatement

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

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

Anti-terrorism Legislation

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

Financial Services Modernization

Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999

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

Recent Legislation

Emergency Economic Stabilization Act of 2008. In response to the recent financial crisis, the United States

government passed the Emergency Economic Stabilization Act of 2008 (the “EESA”) on October 3, 2008, which
provides the United States Department of the Treasury (the “Treasury”) with broad authority to implement
certain actions intended to help restore stability and liquidity to the U.S. financial markets.

13

Insurance of Deposit Accounts. The EESA included a provision for a temporary increase from $100,000 to

$250,000 per depositor in deposit insurance effective October 3, 2008 through December 31, 2013. Deposit
accounts are otherwise insured by the FDIC, generally up to a maximum of $100,000 per separately insured
depositor and up to a maximum of $250,000 for self-directed retirement accounts.

Deposit Insurance Assessments. The FDIC imposes an assessment against institutions for deposit insurance.

This assessment is based on the risk category of the institution and ranges from 5 to 43 basis points of the
institution’s deposits. In December, 2008, the FDIC adopted a rule that raised the current deposit insurance
assessment rates uniformly for all institutions by 7 basis points (to a range from 12 to 50 basis points) for the first
quarter of 2009. In February 2009, the FDIC adopted a final rule modifying the risk-based assessment system and
setting initial base assessment rates April 1, 2009, at 12 to 45 basis points. The rule also gives the FDIC the
authority to, as necessary, implement emergency special assessments to maintain the deposit insurance fund.

Capital Purchase Program

Pursuant to the EESA, the Treasury has the ability to purchase or insure up to $700 billion in troubled assets

held by financial institutions under the Troubled Asset Relief Program (“TARP”). On October 14, 2008, the
Treasury announced it would initially purchase equity stakes in financial institutions under a Capital Purchase
Program (the “CPP”) of up to $350 billion of the $700 billion authorized under the TARP legislation. The CPP
provides direct equity investment of perpetual preferred stock by the Treasury in qualified financial institutions.
The program is voluntary and requires an institution to comply with a number of restrictions and provisions,
including limits on executive compensation, stock redemptions and declaration of dividends. For publicly traded
companies, the CPP also requires the Treasury to receive warrants for common stock equal to 15% of the capital
invested by the Treasury. The Company applied for and received approximately $76 million in the CPP. As a
result, the Company is subject to the restrictions described below. The Treasury made an equity investment in the
Company through its purchase of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the
“Preferred Stock”). The description of the Preferred Stock set forth below is qualified in its entirety by the actual
terms of the Preferred Stock, as are stated in the Certificate of Designation for the Preferred Stock, a copy of
which was attached as Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on November 21, 2008
and incorporated by reference.

General. The Preferred Stock constitutes a single series of our preferred stock, consisting of 76,898 shares,
no par value per share, having a liquidation preference amount of $1,000 per share. The Preferred Stock has no
maturity date. We issued the shares of Preferred Stock to Treasury on November 21, 2008 in connection with the
CPP for a purchase price of $76,898,000.

Dividend Rate. Dividends on the Preferred Stock are payable quarterly in arrears, when, as and if authorized

and declared by our Board of Directors out of legally available funds, on a cumulative basis on the $1,000 per
share liquidation preference amount plus the amount of accrued and unpaid dividends for any prior dividend
periods, at a rate of (i) 5% per annum, from the original issuance date to the fifth anniversary of the issuance
date, and (ii) 9% per annum, thereafter. Dividends on the Preferred Stock will be cumulative. If for any reason
our Board of Directors does not declare a dividend on the Preferred Stock for a particular dividend period, or if
our Board of Directors declares less than a full dividend, we will remain obligated to pay the unpaid portion of
the dividend for that period and the unpaid dividend will compound on each subsequent dividend date (meaning
that dividends for future dividend periods will accrue on any unpaid dividend amounts for prior dividend
periods).

Priority of Dividends. Until the earlier of the third anniversary of Treasury’s investment or our redemption

or the Treasury’s transfer of the Preferred Stock to an unaffiliated third party, we may not declare or pay a
dividend or other distribution on our common stock that exceeds $.07 per share (other than dividends payable
solely in common stock), and we generally may not directly or indirectly purchase, redeem or otherwise acquire
any shares of common stock, including trust preferred securities.

14

Liquidation Rights. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the

affairs of the Company, holders of the Preferred Stock will be entitled to receive for each share of Preferred
Stock, out of the assets of the Company or proceeds available for distribution to our shareholders, subject to any
rights of our creditors, before any distribution of assets or proceeds is made to or set aside for the holders of our
common stock and any other class or series of our stock ranking junior to the Preferred Stock, payment of an
amount equal to the sum of (i) the $1,000 liquidation preference amount per share and (ii) the amount of any
accrued and unpaid dividends on the Preferred Stock (including dividends accrued on any unpaid dividends). To
the extent the assets or proceeds available for distribution to shareholders are not sufficient to fully pay the
liquidation payments owing to the holders of the Preferred Stock and the holders of any other class or series of
our stock ranking equally with the Preferred Stock, the holders of the Preferred Stock and such other stock will
share ratably in the distribution. For purposes of the liquidation rights of the Preferred Stock, neither a merger
nor consolidation of the Company with another entity nor a sale, lease or exchange of all or substantially all of
the Company’s assets will constitute a liquidation, dissolution or winding up of the affairs of the Company.

Compensation and Corporate Governance Standards and Restrictions under the CPP. As a participant in
the CPP, we are subject to compensation and corporate governance standards and restrictions under applicable
legislation and Treasury regulations, which include but are not limited to (1) restrictions on bonus, incentive and
retention awards to our five most highly-compensated employees, (2) restrictions on severance and
change-in-control payments to our executive officers and next five most highly-compensated employees,
(3) ensuring that our compensation programs do not encourage unnecessary and excessive risks, and
(4) requiring the recovery or “clawback” of any incentive compensation paid to our executive officers and next
20 most highly-compensated employees if it is later determined that such payments were based on materially
inaccurate financial or other performance criteria. The applicable regulations and their impact on Columbia will
be discussed more fully in our proxy statement for the 2010 annual meeting of shareholders, incorporated by
reference into Part III of this Form 10-K.

Temporary Liquidity Guarantee Program. In October 2008, the FDIC announced the Temporary Liquidity

Guarantee Program, which has two components—the Debt Guarantee Program and the Transaction Account
Guarantee Program. Under the Transaction Account Guarantee Program any participating depository institution
is able to provide full deposit insurance coverage for non-interest bearing transaction accounts, regardless of the
dollar amount. Under the program, effective November 14, 2008, insured depository institutions that have not
opted out of the FDIC Temporary Liquidity Guarantee Program will be subject to a 10 basis point surcharge
through December 31, 2009, applied to non-interest bearing transaction deposit account balances in excess of
$250,000, which surcharge will be added to the institution’s existing risk-based deposit insurance assessments.
Beginning January 1, 2010, the surcharge will range from 15 to 25 basis points depending on the institution’s risk
category. The Transaction Account Guarantee Program will expire on June 30, 2010. Under the Debt Guarantee
Program, qualifying unsecured senior debt issued by a participating institution can be guaranteed by the FDIC.
The Debt Guarantee Program has been extended for senior unsecured debt issued after April 1, 2009 and before
October 31, 2009 and maturing on or before December 31, 2012. The Company and the Bank chose to participate
in both components of the FDIC Temporary Liquidity Guaranty Program.

American Recovery and Reinvestment Act of 2009. On February 17, 2009 the American Recovery and
Reinvestment Act of 2009 (“ARRA) was signed into law. ARRA is intended to help stimulate the economy and
is a combination of tax cuts and spending provisions applicable to a broad range of areas with an estimated cost
of about $780 billion. The impact that ARRA may have on the US economy, the Company and the Bank cannot
be predicted with certainty.

Proposed Legislation

Proposed legislation is introduced in almost every legislative session. Certain of such legislation could

dramatically affect the regulation of the banking industry. In light of the 2008 financial crisis, legislation
reshaping the regulatory landscape for financial institutions has been proposed. A current proposal includes
measures aimed to prevent another financial crisis like the one in 2008 by forming a federal regulatory body to

15

protect the interests of consumers by preventing abusive and risky lending practices, increasing supervision and
regulation on financial firms deemed too big to fail, giving shareholders an advisory vote on executive pay, and
regulating complex derivatives instruments. We cannot predict if any such legislation will be adopted or if it is
adopted how it would affect the business of Columbia Bank or the Company. Past history has demonstrated that
new legislation or changes to existing laws or regulations usually results in a greater compliance burden and
therefore generally increases the cost of doing business.

Effects of Government Monetary Policy

Our earnings and growth are affected not only by general economic conditions, but also by the fiscal and

monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve implements
national monetary policy for such purposes as curbing inflation and combating recession, but its open market
operations in U.S. government securities, control of the discount rate applicable to borrowings from the Federal
Reserve, and establishment of reserve requirements against certain deposits, influence the growth of bank loans,
investments and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and
impact of future changes in monetary policies and their impact on us cannot be predicted with certainty.

ITEM 1A. RISK FACTORS

Our business exposes us to certain risks. The following is a discussion of what we currently believe are

the most significant risks and uncertainties that may affect our business, financial condition and future
results.

The national economic recession could adversely affect our future results of operations or market price

of our stock.

The national economy and the financial services sector in particular are currently facing challenges of a

scope unprecedented in recent history. We cannot accurately predict the severity or duration of the current
economic recession, which has adversely impacted the markets we serve. The U.S. economy has also
experienced substantial volatility in the financial markets. Any further deterioration in the economies of the
nation as a whole or in our markets would have an adverse effect, which could be material, on our business,
financial condition, results of operations and prospects, and could also cause the market price of our stock to
decline. While it is impossible to predict how long these conditions may exist, the economic recession could
continue to present risks for some time for the industry and our company.

The current economic recession in the market areas we serve may continue to adversely impact our
earnings and could increase our credit risk associated with our loan portfolio and the value of our investment
portfolio.

Substantially all of our loans are to businesses and individuals in Washington and Oregon, and a continuing

decline in the economies of these market areas could have a material adverse effect on our business, financial
condition, results of operations and prospects. A series of large Puget Sound-based businesses have implemented
substantial employee layoffs and scaled back plans for future growth. Additionally, acquisitions and
consolidations have resulted in substantial employee layoffs, along with a significant increase in office space
availability in downtown Seattle. Oregon has also seen a similar pattern of large layoffs in major metropolitan
areas. There has been a decline in housing prices in both Washington and Oregon. A further deterioration in the
market areas we serve could result in the following consequences, any of which could have an adverse impact,
which could be material, on our business, financial condition, results of operations and prospects:

•

•

•

Commercial and consumer loan delinquencies may increase further;

problem assets and foreclosures may increase;

collateral for loans made may decline further in value, in turn reducing customers’ borrowing power,
reducing the value of assets and collateral associated with existing loans;

16

•

•

•

certain securities within our investment portfolio could become other than temporarily impaired,
requiring a write down through earnings to fair value thereby reducing equity;

low cost or non-interest bearing deposits may decrease; and

demand for our loan and other products and services may decrease.

Our loan portfolio mix, which has a concentration of loans secured by real estate, could result in

increased credit risk in an economic recession.

Our loan portfolio is concentrated in commercial real estate and commercial business loans. These types of

loans, as well as real estate construction loans and land development loans, acquisition and development loans
related to the for sale housing industry, generally are viewed as having more risk of default than residential real
estate loans or certain other types of loans or investments. In fact, the FDIC has issued pronouncements alerting
banks of its concern about heavy loan concentrations. Because our loan portfolio contains a significant number of
construction, commercial business and commercial real estate loans with relatively large balances, the
deterioration of one or a few of these loans may cause a significant increase in our nonperforming loans. An
increase in nonperforming loans could result in a loss of earnings from these loans, an increase in the provision
for loan losses, or an increase in loan charge-offs, which could have an adverse impact on our results of
operations and financial condition.

A further downturn in the economies or real estate values in the markets we serve could have a material
adverse effect on both borrowers’ ability to repay their loans and the value of the real property securing such
loans. Our ability to recover on defaulted loans would then be diminished, and we would be more likely to suffer
losses on defaulted loans.

Our Allowance for Loan and Lease Losses (“ALLL”) may not be adequate to cover future loan losses,

which could continue to adversely affect earnings.

We maintain an ALLL in an amount that we believe is adequate to provide for losses inherent in our

portfolio. While we strive to carefully monitor credit quality and to identify loans that may become
nonperforming, at any time there are loans in the portfolio that could result in losses, but that have not been
identified as nonperforming or potential problem loans. We cannot be sure that we will be able to identify
deteriorating loans before they become nonperforming assets, or that we will be able to limit losses on those
loans that have been identified. Additionally, the process for determining the ALLL requires different, subjective
and complex judgments about the future impact from current economic conditions that might impair the ability of
borrowers to repay their loans. As a result, future significant increases to the ALLL may be necessary.
Additionally, future increases to the ALLL may be required based on changes in the composition of the loans
comprising the portfolio, deteriorating values in underlying collateral (most of which consists of real estate) and
changes in the financial condition of borrowers, such as may result from changes in economic conditions, or as a
result of incorrect assumptions by management in determining the ALLL. Additionally, banking regulators, as an
integral part of their supervisory function, periodically review our ALLL. These regulatory agencies may require
us to increase the ALLL which could have a negative effect on our financial condition and results of operation.
Any increase in the ALLL would have an adverse effect, which could be material, on our financial condition and
results of operations.

Our acquisitions and the integration of acquired businesses may not result in all of the benefits

anticipated, and future acquisitions may be dilutive to current shareholders.

We have in the past and may in the future seek to grow our business by acquiring other businesses.

Recently, we acquired assets and deposits of Columbia River Bank and American Marine Bank in FDIC-assisted
transactions. There can be no assurance that our acquisitions will have the anticipated positive results, including
results relating to: correctly assessing the asset quality of the assets being acquired; the total cost of integration

17

including management attention and resources; the time required to complete the integration successfully; the
amount of longer-term cost savings; being able to profitably deploy funds acquired in an acquisition; or the
overall performance of the combined entity.

We also may encounter difficulties in obtaining required regulatory approvals and unexpected contingent

liabilities can arise from the businesses we acquire. Integration of an acquired business can be complex and
costly, sometimes including combining relevant accounting and data processing systems and management
controls, as well as managing relevant relationships with employees, clients, suppliers and other business
partners. Integration efforts could divert management attention and resources, which could adversely affect our
operations or results.

Given the continued economic recession, market volatility and uncertainty, notwithstanding our loss-sharing

arrangements with the FDIC with respect to the assets we recently acquired of Columbia River Bank and
American Marine Bank, we may continue to experience increased credit costs or need to take additional
markdowns and allowances for loan losses on the assets and loans acquired that could adversely affect our
financial condition and results of operations in the future. There is no assurance that as our integration efforts
continue in connection with these transactions, other unanticipated costs, including the diversion of personnel, or
losses, will not be incurred.

Acquisitions may also result in business disruptions that cause us to lose customers or cause customers to

remove their accounts from us and move their business to competing financial institutions. It is possible that the
integration process related to acquisitions could result in the disruption of our ongoing businesses or
inconsistencies in standards, controls, procedures and policies that could adversely affect our ability to maintain
relationships with clients, customers, depositors and employees. The loss of key employees in connection with an
acquisition could adversely affect our ability to successfully conduct our business.

We may engage in future acquisitions involving the issuance of additional common stock and/or cash. Any

such acquisitions and related issuances of stock may have a dilutive effect on earnings per share and the
percentage ownership of current shareholders. The use of cash as consideration in any such acquisitions could
impact our capital position and may require us to raise additional capital.

Furthermore, notwithstanding our recent acquisitions, we cannot provide any assurance as to the extent to
which we can continue to grow through acquisitions as this will depend on the availability of prospective target
opportunities at valuations we find attractive and the competition for such opportunities from other parties.

If the goodwill we have recorded in connection with acquisitions becomes impaired, it could have an

adverse impact on our earnings and capital.

Accounting standards require that we account for acquisitions using the purchase method of accounting.
Under purchase accounting, if the purchase price of an acquired company exceeds the fair value of its net assets,
the excess is carried on the acquirer’s balance sheet as goodwill. In accordance with generally accepted
accounting principles, our goodwill is evaluated for impairment on an annual basis or more frequently if events
or circumstances indicate that a potential impairment exists. Such evaluation is based on a variety of factors,
including the quoted price of our common stock, market prices of common stock of other banking organizations,
common stock trading multiples, discounted cash flows, and data from comparable acquisitions. There can be no
assurance that future evaluations of goodwill will not result in impairment and ensuing write-down, which could
be material, resulting in an adverse impact on our earnings and capital.

We may pursue additional capital, which may not be available on acceptable terms or at all, could dilute
the holders of our outstanding common stock and may adversely affect the market price of our common stock.

In the current economic environment, we believe it is prudent to consider alternatives for raising capital

when opportunities to raise capital at attractive prices present themselves, in order to further strengthen our
capital and better position ourselves to take advantage of opportunities that may arise in the future, including the

18

possible redemption of the Series A Preferred Stock we issued and sold to Treasury under the CPP. Such
alternatives may include issuance and sale of common or preferred stock, trust preferred securities, or borrowings
by the Company, with proceeds contributed to the Bank. Our ability to raise additional capital, if needed, will
depend on, among other things, conditions in the capital markets at the time, which are outside of our control,
and our financial performance. We cannot assure you that such capital will be available to us on acceptable terms
or at all. Any such capital raising alternatives could dilute the holders of our outstanding common stock, and may
adversely affect the market price of our common stock and our performance measures such as earnings per share.

Nonperforming assets take significant time to resolve and adversely affect our results of operations and

financial condition.

Our nonperforming assets adversely affect our net income in various ways. Until economic and market
conditions improve, we expect to continue to incur additional losses relating to an increase in nonperforming
loans. We do not record interest income on non-accrual loans, thereby adversely affecting our income, and
increasing loan administration costs. When we receive collateral through foreclosures and similar proceedings,
we are required to mark the related loan to the then fair market value of the collateral, which may result in a loss.
An increase in the level of nonperforming assets also increases our risk profile and may impact the capital levels
our regulators believe is appropriate in light of such risks. We utilize various techniques such as loan sales,
workouts, and restructurings to manage our problem assets. Decreases in the value of these problem assets, the
underlying collateral, or in the borrowers’ performance or financial condition, could adversely affect our
business, results of operations and financial condition. In addition, the resolution of nonperforming assets
requires significant commitments of time from management and staff, which can be detrimental to performance
of their other responsibilities. There can be no assurance that we will not experience further increases in
nonperforming loans in the future.

Fluctuating interest rates can adversely affect our profitability.

Our profitability is dependent to a large extent upon net interest income, which is the difference (or
“spread”) between the interest earned on loans, securities and other interest-earning assets and the interest paid
on deposits, borrowings, and other interest-bearing liabilities. Because of the differences in maturities and
repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do
not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-
bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect our interest rate spread, and,
in turn, our profitability.

Fluctuations in interest rates on loans could adversely affect our business.

Significant increases in market interest rates on loans, or the perception that an increase may occur, could

adversely affect both our ability to originate new loans and our ability to grow. Conversely, decreases in interest
rates could result in an acceleration of loan prepayments. An increase in market interest rates could also
adversely affect the ability of our floating-rate borrowers to meet their higher payment obligations. If this
occurred, it could cause an increase in nonperforming assets and charge offs, which could adversely affect our
business.

The FDIC has increased insurance premiums to restore and maintain the federal deposit insurance fund,

which has increased our costs and could adversely affect our business.

The FDIC adopted a final rule revising its risk-based assessment system, effective April 1, 2009. The
changes to the assessment system involve adjustments to the risk-based calculation of an institution’s unsecured
debt, secured liabilities and brokered deposits.

The FDIC also recently imposed a special deposit insurance assessment of five basis points on all insured
institutions. This emergency assessment was calculated based on the insured institution’s assets at June 30, 2009,

19

and collected on September 30, 2009. Based on our June 30, 2009 assets subject to the FDIC assessment, the
special assessment was approximately $1.4 million. This special assessment is in addition to the regular quarterly
risk-based assessment.

Additional increases in FDIC insurance premiums could have a significant impact on Columbia Bank.

The FDIC also has recently required insured institutions to prepay estimated quarterly risk-based

assessments for the fourth quarter of 2009 and for 2010, 2011 and 2012, and increased the regular assessment
rate by three basis points effective January 1, 2011, as a means of replenishing the deposit insurance fund. The
prepayment was collected on December 30, 2009, and was accounted for as a prepaid expense amortized over the
prepayment period.

The FDIC deposit insurance fund may suffer additional losses in the future due to bank failures. There can

be no assurance that there will not be additional significant deposit insurance premium increases or special
assessments in order to restore the insurance fund’s reserve ratio. Any significant premium increases or special
assessments could have a material adverse effect on our financial condition and results of operations.

We operate in a highly regulated environment and changes of or increases in, or supervisory

enforcement of, banking or other laws and regulations or governmental fiscal or monetary policies could
adversely affect us.

As discussed more fully in the section entitled “Supervision and Regulation”, we are subject to extensive
regulation, supervision and examination by federal and state banking authorities. In addition, as a publicly-traded
company, we are subject to regulation by the Securities and Exchange Commission. Any change in applicable
regulations or federal, state or local legislation or in policies or interpretations or regulatory approaches to
compliance and enforcement, income tax laws and accounting principles could have a substantial impact on us
and our operations. Changes in laws and regulations may also increase our expenses by imposing additional fees
or taxes or restrictions on our operations. Additional legislation and regulations that could significantly affect our
powers, authority and operations may be enacted or adopted in the future, which could have a material adverse
effect on our financial condition and results of operations. Failure to appropriately comply with any such laws,
regulations or principles could result in sanctions by regulatory agencies or damage to our reputation, all of
which could adversely affect our business, financial condition or results of operations. In that regard, proposals
for legislation restructuring the regulation of the financial services industry are currently under consideration.
Adoption of such proposals could, among other things, increase the overall costs of regulatory compliance.
Further, regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or
violations of laws or regulations by financial institutions and holding companies in the performance of their
supervisory and enforcement duties. Recently, these powers have been utilized more frequently due to the serious
national, regional and local economic conditions we are facing. The exercise of regulatory authority may have a
negative impact on our financial condition and results of operations. Additionally, our business is affected
significantly by the fiscal and monetary policies of the U.S. federal government and its agencies, including the
Federal Reserve Board.

We cannot accurately predict the actual effects of recent legislation or the proposed regulatory reform

measures and various governmental, regulatory, monetary and fiscal initiatives which have been and may be
enacted on the financial markets, on the Company and on the Bank. The terms and costs of these activities, or the
failure of these actions to help stabilize the financial markets, asset prices, market liquidity and a continuation 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.

A continued tightening of the credit markets and credit market volatility may make it difficult to maintain

adequate funding for loan growth, which could adversely affect our earnings.

A continued tightening of the credit markets and the inability to maintain adequate liquidity to fund
continued loan growth may negatively affect asset growth and, therefore, our earnings capability. In addition to

20

deposit growth and payments of principal and interest received on loans and investment securities, we also rely
on borrowing lines with the Federal Home Loan Bank of Seattle (“FHLB”) and the Federal Reserve Bank of San
Francisco to fund loans. However, the FHLB has discontinued the repurchase of its stock and discontinued the
distribution of dividends. Based on the foregoing, there can be no assurance the FHLB will have sufficient
resources to continue to fund our borrowings at their current levels. In the event of a deterioration in our financial
condition or a further downturn in the economy, particularly in the housing market, our ability to access these
funding resources could be negatively affected, which could limit the funds available to us making it difficult for
us to maintain adequate funding for loan growth. In addition, our customers’ ability to raise capital and refinance
maturing obligations could be adversely affected, resulting in a further unfavorable impact on our business,
financial condition and results of operations.

We may be required, in the future, to recognize impairment with respect to investment securities,

including the FHLB stock we hold.

Our securities portfolio currently includes securities with unrecognized losses. We may continue to observe

declines in the fair market value of these securities. We evaluate the securities portfolio for any other than
temporary impairment each reporting period, as required by generally accepted accounting principles in the
United States of America, and as of December 31, 2009, we did not recognize any securities as other-than-
temporarily impaired. There can be no assurance, however, that future evaluations of the securities portfolio will
not require us to recognize an impairment charge with respect to these and other holdings.

In addition, as a condition to membership in the FHLB, we are required to purchase and hold a certain
amount of FHLB stock. Our stock purchase requirement is based, in part, upon the outstanding principal balance
of advances from the FHLB. At December 31, 2009, we had stock in the FHLB totaling $11.6 million. The
FHLB stock held by us is carried at cost and is subject to recoverability testing under applicable accounting
standards. The FHLB has discontinued the repurchase of their stock and discontinued the distribution of
dividends. As of December 31, 2009, we did not recognize an impairment charge related to our FHLB stock
holdings. There can be no assurance, however, that future negative changes to the financial condition of the
FHLB may not require us to recognize an impairment charge with respect to such holdings.

Our ability to access markets for funding and acquire and retain customers could be adversely affected by

negative public opinion, the deterioration of other financial institutions or the further deterioration of the
financial services industry’s reputation.

The financial services industry continues to be featured in negative headlines about the global and national
credit crisis and the resulting stabilization legislation enacted by the U.S. federal government. These reports can
be damaging to the industry’s image and potentially erode consumer confidence in insured financial institutions,
such as our banking subsidiary. In addition, our ability to engage in routine funding and other transactions could
be adversely affected by the actions and financial condition of other financial institutions or negative public
opinion resulting from our actual or alleged conduct in any number of activities, including lending practices,
governmental enforcement actions taken by regulators or community organizations in response to those
activities. Financial services institutions are interrelated as a result of trading, clearing, correspondent,
counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or more
financial services institutions, or the financial services industry in general, could lead to market-wide liquidity
problems, losses of depositor, creditor and counterparty confidence and to losses or defaults by us or by other
institutions. We could experience material changes in the level of deposits as a direct or indirect result of other
banks’ difficulties or failure, which could affect the amount of capital we need. In addition, negative perceptions
associated with our continued participation in the CPP may adversely affect our ability to retain customers,
attract investors and compete for new business opportunities.

Substantial competition in our market areas could adversely affect us.

Commercial banking is a highly competitive business. We compete with other commercial banks, savings

and loan associations, credit unions, finance, insurance and other non-depository companies operating in our

21

market areas. We also experience competition, especially for deposits, from internet-based banking institutions,
which have grown rapidly in recent years. We are subject to substantial competition for loans and deposits from
other financial institutions. Some of our competitors are not subject to the same degree of regulation and
restriction as we are. Some of our competitors have greater financial resources than we do. Some of our
competitors have severe liquidity issues, which could impact the pricing of deposits in our marketplace. If we are
unable to effectively compete in our market areas, our business, results of operations and prospects could be
adversely affected.

The Series A Preferred Stock diminishes the net income available to our common shareholders and

earnings per common share, and the Warrant may be dilutive to holders of our common stock.

The dividends accrued and the accretion on discount on the Series A Preferred Stock reduce the net income

available to common shareholders and our earnings per common share. The Series A Preferred Stock is
cumulative, which means that any dividends not declared or paid will accumulate and will be payable when the
payment of dividends is resumed. The Series A Preferred Stock’s dividend rate will increase to 9% per annum
five years after its original issuance if not earlier redeemed. If we are unable to redeem the Series A Preferred
Stock prior to the date of this increase, the cost of this capital to us will increase substantially on that date, from
5% per annum to 9% per annum. Depending on our financial condition at the time, this increase in the annual
dividend rate on the Series A Preferred Stock could have a material negative effect on our earnings and could
also adversely affect our ability to declare and pay dividends on our common shares. Shares of Series A Preferred
Stock will also receive preferential treatment in the event of the liquidation, dissolution or winding up of
Columbia. Additionally, the ownership interest of the existing holders of our common stock will be diluted to the
extent the Warrant is exercised. The shares of common stock underlying the Warrant represent approximately 2%
of the shares of our common stock outstanding as of December 31, 2009 (including the shares issuable upon
exercise of the Warrant in our total outstanding shares). Although the Treasury has agreed not to vote any of the
shares of common stock acquired upon exercise of the Warrant, a transferee of any portion of the Warrant or of
any shares of common stock acquired upon exercise of the Warrant is not bound by this restriction. For
additional information related to the Series A Preferred Stock, see Note 23 to the Consolidated Financial
Statements in “Item 8. Financial Statements and Supplementary Data” of this report.

The terms of the Series A Preferred Stock pose risks to the holders of our common stock in a variety of

ways.

The terms of the Series A Preferred Stock pose risks to the holders of our common stock in a variety of

ways:

•

•

•

•

The terms of the Series A Preferred Stock allow the Treasury to impose additional restrictions,
including on dividends, and such amendments to the terms of the Series A Preferred Stock as may be
required to comply with changes in applicable federal law.

The holders of Series A Preferred Stock, including the Treasury, may have different interests from the
holders of our common stock, and could exercise their special voting rights to block certain
transactions, including authorizing senior stock, amendments to the Series A Preferred Stock and
approval of certain mergers, share exchanges or similar transactions, even where such transactions may
be considered desirable by, or in the best interests of, the holders of our common stock.

Common stock dividends may not be declared if we are in arrears on the payment of dividends on the
Series A Preferred Stock.

The holder of the Series A Preferred Stock must consent to any repurchase of common stock (other
than in connection with the administration of any employee benefit plan in the ordinary course of
business and consistent with past practice).

22

Changes in accounting standards could materially impact our financial statements.

From time to time the Financial Accounting Standards Board and the SEC change the financial accounting

and reporting standards that govern the preparation of our financial statements. These changes can be very
difficult to predict and can materially impact how we record and report our financial condition and results of
operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our
restating prior period financial statements.

We may not pay dividends on our common stock.

Holders of our common stock are only entitled to receive such dividends as our Board of Directors may
declare out of funds legally available for such payments. Although we have historically declared cash dividends
on our common stock, we are not required to do so and there may be circumstances under which we would
eliminate our common stock dividend in the future. This could adversely affect the market price of our common
stock. Also, our ability to increase our dividend or to make other distributions is restricted due to our
participation in the CPP, which limits (without the consent of the U.S. Treasury) our ability to increase our
quarterly common stock dividend above the amount of the last quarterly cash dividend per share declared prior to
October 14, 2008 or to repurchase our common stock for so long as the Series A Preferred Stock remains
outstanding.

Our ability to receive dividends from our banking subsidiary accounts for most of our revenue and could

affect our liquidity and ability to pay dividends.

We are a separate and distinct legal entity from our banking subsidiary, Columbia State Bank. We receive
substantially all of our revenue from dividends from our banking subsidiary. These dividends are the principal
source of funds to pay dividends on our common and preferred stock and principal and interest on our
outstanding debt. Various federal and/or state laws and regulations limit the amount of dividends that our bank
may pay us. Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or
reorganization is subject to the prior claims of the subsidiary’s creditors. Limitations on our ability to receive
dividends from our subsidiary could have a material adverse effect on our liquidity and on our ability to pay
dividends on common or preferred stock. Additionally, if our subsidiary’s earnings are not sufficient to make
dividend payments to us while maintaining adequate capital levels, we may not be able to make dividend
payments to our common and preferred stockholders or principal and interest payments on our outstanding debt.

Significant legal or regulatory actions could subject us to substantial uninsured liabilities and
reputational harm and have a material adverse effect or on our business and results of operations.

We are from time to time subject to claims and proceedings related to our operations. These claims and
legal actions, which could include supervisory or enforcement actions by our regulators, or criminal proceedings
by prosecutorial authorities, could involve large monetary claims, including civil money penalties or fines
imposed by government authorities, and significant defense costs. To mitigate the cost of some of these claims,
we maintain insurance coverage in amounts and with deductibles that we believe are appropriate for our
operations. However, our insurance coverage does not cover any civil money penalties or fines imposed by
government authorities and may not cover all other claims that might be brought against us or continue to be
available to us at a reasonable cost. As a result, we may be exposed to substantial uninsured liabilities, which
could adversely affect our business, prospects, results of operations and financial condition. Substantial legal
liability or significant regulatory action against us could have material adverse financial effects or cause
significant reputational harm to us, which in turn could seriously harm our business prospects.

23

We are subject to a variety of operational risks, including reputational risk, legal risk and compliance

risk, and the risk of fraud or theft, which may adversely affect our business and results of operations.

We are exposed to many types of operational risks, including reputational risk, legal and compliance risk,
the risk of fraud or theft, and unauthorized transactions or operational errors, including clerical or record-keeping
errors or those resulting from faulty or disabled computer or telecommunications systems.

If personal, non-public, confidential or proprietary information of customers in our possession were to be
mishandled or misused, we could suffer significant regulatory consequences, reputational damage and financial
loss. Such mishandling or misuse could include, for example, if such information were erroneously provided to
parties who are not permitted to have the information, either by fault of our systems, employees, or
counterparties, or where such information is intercepted or otherwise inappropriately taken by third parties.

Because the nature of the financial services business involves a high volume of transactions, certain errors

may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence
upon automated systems to record and process transactions and our large transaction volume may further
increase the risk that technical flaws or tampering or manipulation of those systems will result in losses that are
difficult to detect. We also may be subject to disruptions of our operating systems arising from events that are
wholly or partially beyond our control (for example, computer viruses or electrical or telecommunications
outages, or natural disasters, disease pandemics or other damage to property or physical assets) which may give
rise to disruption of service to customers and to financial loss or liability. We are further exposed to the risk that
our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of
fraud or operational errors by their respective employees as we are) and to the risk that we (or our vendors’)
business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could
result in a diminished ability of us to operate our business (for example, by requiring us to expend significant
resources to correct the defect), as well as potential liability to clients, reputational damage and regulatory
intervention, which could adversely affect our business, financial condition and results of operations, perhaps
materially.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Locations

The Company’s principal Columbia Bank properties include our corporate headquarters which is located at

13th & A Street, Tacoma, Washington, in Pierce County, where we occupy 62 thousand square feet of office
space, 4 thousand square feet of commercial lending space and 750 square feet of branch space under various
operating lease agreements, an operations facility in Lakewood, Washington, where we own 57 thousand square
feet of office space and an office facility in Tacoma, Washington, that includes a branch where we occupy
26 thousand square feet under various operating lease agreements.

In Pierce County we conduct business in twenty-one additional branch locations, sixteen of which are
owned and five of which are leased under various operating lease agreements. In King County we conduct
business in twelve branch locations, nine of which are owned and three of which are leased. In Clark, Kitsap,
Thurston, Cowlitz and Whatcom counties we conduct business in seven branch locations, five of which are
owned and two that are leased under various operating lease agreements. In the Portland metropolitan area,
Columbia Bank conducts business in four branch locations in Clackamas and Multnomah counties. Finally,
Columbia Bank doing business under the Bank of Astoria name conducts business in six branch locations in
Clatsop and Tillamook counties, all of which are owned.

24

For additional information concerning our premises and equipment and lease obligations, see Note 8 and 18,
respectively, to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data”
of this report.

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. RESERVED

25

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Quarterly Common Stock Prices and Dividends

Our common stock is traded on the NASDAQ Global Select Market under the symbol “COLB”. Quarterly

high and low sales prices and dividend information for the last two years are presented in the following table.
The prices shown do not include retail mark-ups, mark-downs or commissions:

2009
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter
For the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2008
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

High
$11.87
$13.52
$17.22
$16.55
$17.22

High
$29.90
$29.57
$29.00
$18.49
$29.90

Low
$ 4.93
$ 6.54
$ 9.78
$13.80
$ 4.93

Low
$21.07
$19.31
$ 8.50
$ 7.64
$ 7.64

Cash Dividend
Declared
$0.04
0.01
0.01
0.01
$0.07

Cash Dividend
Declared
$0.17
0.17
0.17
0.07
$0.58

On December 31, 2009, the last sale price for our stock on the NASDAQ Global Select Market was $16.18.

At January 31, 2010, the number of shareholders of record was 2,202. This figure does not represent the actual
number of beneficial owners of common stock because shares are frequently held in “street name” by securities
dealers and others for the benefit of individual owners who may vote the shares.

At December 31, 2009, a total of 118,191 stock options were outstanding. Additional information about

stock options and other equity compensation plans is included in Note 15 to the Consolidated Financial
Statements in “Item 8. Financial Statements and Supplementary Data” of this report.

The payment of future cash dividends is at the discretion of our Board and subject to a number of factors,
including results of operations, general business conditions, growth, financial condition and other factors deemed
relevant by the Board of Directors. Our ability to pay future cash dividends is subject to the provisions contained
in the agreement that governs our participation in the Treasury Capital Purchase Program. Specifically, the
Company may not declare a dividend that exceeds $0.07 per common share until the earlier of the third
anniversary of Treasury’s investment or our redemption or the transfer of our Preferred Stock to a third party
along with other regulatory requirements and restrictions which are discussed in the “Supervision and
Regulation” section in “Item 1. Business” of this report. In addition, the payment of cash dividends is subject to
Federal regulatory requirements for capital levels and other restrictions. In this regard, current guidance from the
Federal Reserve provides, among other things, that dividends per share on the Company’s common stock
generally should not exceed earnings per share, measured over the previous four fiscal quarters.

Equity Compensation Plan Information

Year Ended December 31, 2009

Number of Shares to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights (1)

Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights

Number of Shares
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (2)

Equity compensation plans approved by security

holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Equity compensation plans not approved by

security holders . . . . . . . . . . . . . . . . . . . . . . . . . .

118,191

—

$19.73

—

1,444,604

—

(1) Consists of shares that are subject to outstanding options.
(2)

Includes 720,906 shares available for future issuance under the stock option and equity compensation plan and 723,698
shares available for purchase under the Employee Stock Purchase Plan as of December 31, 2009.

26

Five-Year Stock Performance Graph

The following graph shows a five-year comparison of the total return to shareholders of Columbia’s

common stock, the Nasdaq Composite Index (which is a broad nationally recognized index of stock performance
by companies listed on the Nasdaq Stock Market) and the Columbia Peer Group (comprised of banks with assets
of $1 billion to $5 billion, all of which are located in the western United States). The definition of total return
includes appreciation in market value of the stock as well as the actual cash and stock dividends paid to
shareholders. The graph assumes that the value of the investment in Columbia’s common stock, the Nasdaq and
the Columbia Peer Group was $100 on December 31, 2004, and that all dividends were reinvested.

Total Return Performance

e
e
u
u
l
l
a
a
V
V
x
x
e
e
d
d
n
n

I
I

160

140

120

100

80

60

40

20

Columbia Banking System, Inc.

NASDAQ Composite

Columbia Peer Group

12/31/04

12/31/05

12/31/06

12/31/07

12/31/08

12/31/09

Index
Columbia Banking System, Inc.
. . . . . . . . . . . . . . . . . .
NASDAQ Composite . . . . . . . . . . . . . . . . . . . . . . . . . . .
Columbia Peer Group . . . . . . . . . . . . . . . . . . . . . . . . . . .

12/31/04
100.00
100.00
100.00

12/31/05
115.99
101.37
107.18

12/31/06
145.21
111.03
129.66

12/31/07
125.71
121.92
93.90

12/31/08
51.91
72.49
58.87

12/31/09
70.87
104.31
49.12

Period Ending

Source: SNL Financial LC, Charlottesville, VA

27

 
 
ITEM 6. SELECTED FINANCIAL DATA

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

For the Year
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) applicable to common shareholders . . . . . . . . . .

Per Common Share (1)
Earnings (loss) (Basic) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings (loss) (Diluted) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Book Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Averages
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Financial Ratios
Net interest margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average common equity . . . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average equity to average assets . . . . . . . . . . . . . . . . . . . . . . . . . . .

At Year End
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Full-time equivalent employees . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Banking offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Nonperforming Assets
Nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructured loans accruing interest . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2009

2006
2007
2008
(in thousands except per share)

2005

$ 145,042
$ 115,352
63,500
$
29,690
$
94,488
$
(3,968)
$
(8,371)
$

$ 134,363
$ 119,513
41,176
$
14,850
$
92,125
$
5,968
$
5,498
$

$ 136,568
$ 108,820
3,605
$
27,748
$
88,829
$
32,381
$
32,381
$

$ 122,435
97,763
$
2,065
$
24,672
$
76,134
$
32,103
$
32,103
$

$ 115,698
90,912
$
1,520
$
24,786
$
72,855
$
29,631
$
29,631
$

$
$
$

(0.38)
(0.38)
16.13

$
$
$

0.30
0.30
18.82

$
$
$

1.91
1.89
19.03

$
$
$

2.00
1.98
15.71

$
$
$

1.89
1.86
14.29

$3,084,421
$2,783,862
$2,124,574
$ 584,028
$2,378,176
$1,945,039
$ 462,127

$3,134,054
$2,851,555
$2,264,486
$ 565,299
$2,382,484
$1,911,897
$ 354,387

$2,837,162
$2,599,379
$1,990,622
$ 581,122
$2,242,134
$1,887,391
$ 289,297

$2,473,404
$2,265,393
$1,629,616
$ 623,631
$1,976,448
$1,664,247
$ 237,843

$2,290,746
$2,102,513
$1,494,567
$ 605,395
$1,923,778
$1,689,270
$ 214,612

4.33%
(0.13)%
(2.16)%
61.53%
14.98%

4.38%
0.19%
1.59%
59.88%
11.31%

4.35%
1.14%
11.19%
61.33%
10.20%

4.49%
1.30%
13.50%
58.95%
9.62%

4.44%
1.29%
13.81%
61.20%
9.37%

$3,200,930
$2,008,884
53,478
$
$ 631,645
$2,482,705
$2,072,821
$ 528,139
715
52

$3,097,079
$2,232,332
42,747
$
$ 540,525
$2,382,151
$1,941,047
$ 415,385
735
53

$3,178,713
$2,282,728
26,599
$
$ 572,973
$2,498,061
$1,996,393
$ 341,731
775
55

$2,553,131
$1,708,962
20,182
$
$ 605,133
$2,023,351
$1,701,528
$ 252,347
657
40

$2,377,322
$1,564,704
20,829
$
$ 585,332
$2,005,489
$1,703,030
$ 226,242
651
40

$ 110,431
60
19,037

$ 106,163
587
2,874

$

14,005
456
181

Total nonperforming assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 129,528

$ 109,624

$

14,642

Nonperforming loans to year end loans . . . . . . . . . . . . . . . . . . . . . .
Nonperforming assets to year end assets . . . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses to year end loans . . . . . . . . . . .
Allowance for loan and lease losses to nonperforming loans . . . . . .
Net loan charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.50%
4.05%
2.66%
48.40%
52,769

$

4.78%
3.54%
1.91%
40.04%
25,028

$

0.63%
0.46%
1.17%
183.94%
380

$

Risk-Based Capital Ratios
Total capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leverage ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19.60%
18.34%
14.33%

14.25%
12.99%
11.27%

10.90%
9.87%
8.54%

$

$

$

$

$

$

2,886
594
—

3,480

0.20%
0.14%
1.18%
579.94%
2,712

13.23%
12.21%
9.86%

4,875
—
18

4,893

0.31%
0.21%
1.33%
428.84%
572

12.97%
11.82%
9.54%

(1) These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with “Item

7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report.

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

28

Consolidated Five-Year Financial Data (1)

Interest Income:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxable securities . . . . . . . . . . . . . . . . . . . . .
Tax-exempt securities . . . . . . . . . . . . . . . . . .
Federal funds sold and deposits with

Years ended December 31,

2009

2008

2007

2006

2005

(in thousands, except per share amounts)

$ 117,062
17,300
8,458

$ 147,830
18,852
7,976

$ 156,253
18,614
7,923

$ 123,998
20,018
7,042

$

99,535
18,135
4,452

banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

215

402

1,427

617

85

Total interest income . . . . . . . . . . . . . . .

143,035

175,060

184,217

151,675

122,207

Interest Expense:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . .
Long-term obligations . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . .

Total interest expense . . . . . . . . . . . . . .

23,250
2,759
1,197
477

27,683

45,307
7,482
1,800
958

55,547

Net Interest Income . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . .

115,352
63,500

119,513
41,176

51,852
29,690
94,488

(12,946)
(8,978)

78,337
14,850
92,125

1,062
(4,906)

(3,968) $
4,403

$

5,968
470

Net interest income after provision for

loan and lease losses . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . .

Income (loss) before income taxes . . . . . . . .
Provision (benefit) for income taxes . . . . . . .

Net Income (Loss) . . . . . . . . . . . . . . . . . . . .
Less: Dividends on preferred stock . . . .

Net Income (Loss) Applicable to Common
Shareholders . . . . . . . . . . . . . . . . . . . . . .

Per Common Share

Earnings (loss) basic . . . . . . . . . . . . . . .
Earnings (loss) diluted . . . . . . . . . . . . . .

Average number of common shares

$

$

$
$

59,930
11,065
2,177
2,225

75,397

108,820
3,605

105,215
27,748
88,829

44,134
11,753

32,381
—

$

40,838
10,944
1,992
138

53,912

97,763
2,065

95,698
24,672
76,134

44,236
12,133

32,103
—

$

25,983
3,515
1,583
214

31,295

90,912
1,520

89,392
24,786
72,855

41,323
11,692

29,631
—

(8,371) $

5,498

$

32,381

$

32,103

$

29,631

(0.38) $
(0.38) $

0.30
0.30

$
$

1.91
1.89

$
$

2.00
1.98

$
$

1.89
1.86

outstanding (basic)

. . . . . . . . . . . . . . . . . .

21,854

17,914

16,802

15,946

15,708

Average number of common shares

outstanding (diluted) . . . . . . . . . . . . . . . . .
Total assets at year end . . . . . . . . . . . . . . . . .
Long-term obligations . . . . . . . . . . . . . . . . . .
Cash dividends declared per common

21,854
$3,200,930
25,669
$

18,010
$3,097,079
25,603
$

16,972
$3,178,713
25,519
$

16,148
$2,553,131
22,378
$

15,885
$2,377,322
22,312
$

share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

0.07

$

0.58

$

0.66

$

0.57

$

0.39

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

29

Selected Quarterly Financial Data (1)

The following table presents selected unaudited consolidated quarterly financial data for each quarter of

2009 and 2008. The information contained in this table reflects all adjustments, which, in the opinion of
management, are necessary for a fair presentation of the results of the interim periods.

2009
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . .

$36,029
8,126

$ 35,530
6,999

$ 35,700
6,582

$35,776
5,976

$143,035
27,683

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Year Ended
December 31,

(in thousands, except per share amounts)

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27,903
11,000
6,974
23,181

28,531
21,000
7,000
25,314

29,118
16,500
7,190
23,146

29,800
15,000
8,526
22,847

Income (loss) before income taxes . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . . . . . . .

696
(816)

(10,783)
(5,253)

(3,338)
(1,836)

479
(1,073)

Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Dividends on preferred stock . . . . . . . . . . . .

$ 1,512
1,093

Net Income (Loss) Applicable to Common

$ (5,530) $ (1,502) $ 1,552
1,105

1,101

1,103

115,352
63,500
29,690
94,488

(12,946)
(8,978)

$ (3,968)
4,403

Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

419

$ (6,631) $ (2,605) $

447

$ (8,371)

Per Common Share (2)

Earnings (loss) (basic) . . . . . . . . . . . . . . . . . . . . . .
Earnings (loss) (diluted) . . . . . . . . . . . . . . . . . . . . .

$
$

0.02
0.02

$
$

(0.37) $
(0.37) $

(0.11) $
(0.11) $

0.02
0.02

$
$

(0.38)
(0.38)

2008
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . .

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income (loss) before income taxes . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . . . . . . .

$48,433
18,106

$ 44,323
14,049

$ 42,337
12,744

$39,967
10,648

$175,060
55,547

30,327
2,076
10,157
23,554

14,854
3,877

30,274
15,350
9,305
23,367

862
(1,074)

29,593
10,500
(10,946)
23,391

(15,244)
(6,485)

29,319
13,250
6,334
21,813

590
(1,224)

119,513
41,176
14,850
92,125

1,062
(4,906)

Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Dividends on preferred stock . . . . . . . . . . . .

$10,977
—

$ 1,936
—

$ (8,759) $ 1,814
470

—

$

5,968
470

Net Income (Loss) Applicable to Common

Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$10,977

$ 1,936

$ (8,759) $ 1,344

$

5,498

Per Common Share (2)

Earnings (loss) (basic) . . . . . . . . . . . . . . . . . . . . . .
Earnings (loss) (diluted) . . . . . . . . . . . . . . . . . . . . .

$
$

0.61
0.61

$
$

0.11
0.11

$
$

(0.49) $
(0.49) $

0.07
0.07

$
$

0.30
0.30

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

(2) Due to averaging of shares, quarterly earnings per share may not add up to the totals reported for the full

year.

30

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATION

This discussion should be read in conjunction with our Consolidated Financial Statements and related notes

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

Critical Accounting Policies

We have established certain accounting policies in preparing our Consolidated Financial Statements that are

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

Allowance for Loan and Lease Losses

The allowance for loan and lease losses (“ALLL”) is established to absorb known and inherent losses in our

loan and lease portfolio. Our methodology in determining the appropriate level of the ALLL includes
components for a general valuation allowance in accordance with the Contingencies topic of the Financial
Accounting Standards Board Accounting Standards Codification (“FASB ASC”), a specific valuation allowance
in accordance with the Receivables topic of the FASB ASC and an unallocated component. Both quantitative and
qualitative factors are considered in determining the appropriate level of the ALLL. Quantitative factors include
historical loss experience, delinquency and charge-off trends, collateral values, past-due and nonperforming loan
trends and the evaluation of specific loss estimates for problem loans. Qualitative factors include existing general
economic and business conditions in our market areas as well as the duration of the current business cycle.
Changes in any of the factors mentioned could have a significant impact on our calculation of the ALLL. Our
ALLL policy and the judgments, estimates and economic assumptions involved are described in greater detail in
the “Allowance for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit” section of
this discussion and in Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and
Supplementary Data” of this report.

Valuation and Recoverability of Goodwill

Goodwill represented $95.5 million of our $3.20 billion in total assets and $528.1 million in total
shareholders’ equity as of December 31, 2009. Goodwill is assigned to reporting units for purposes of
impairment testing. We review our goodwill for impairment annually, during the third quarter. The Company had
three reporting units during the third quarter of 2009: retail banking, commercial banking, and private banking.
All of the Company’s goodwill was assigned to the retail banking reporting unit. Goodwill of a reporting unit is
also tested for impairment between annual tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying amount. Such indicators may include,
among others: a significant adverse change in legal factors or in the general business climate; significant decline
in our stock price and market capitalization; unanticipated competition; the testing for recoverability of a
significant asset group within a reporting unit; and an adverse action or assessment by a regulator. Any adverse
change in these factors could have a significant impact on the recoverability of goodwill and could have a
material impact on our consolidated financial statements.

31

When required, the goodwill impairment test involves a two-step process. We first test goodwill for
impairment by comparing the fair value of the reporting unit with its carrying amount. If the fair value of the
reporting unit exceeds the carrying amount of the reporting unit, goodwill is not deemed to be impaired, and no
further testing would be necessary. If the carrying amount of the reporting unit were to exceed the fair value of
the reporting unit, we would perform a second test to measure the amount of impairment loss, if any. To measure
the amount of any impairment loss, we would determine the implied fair value of goodwill in the same manner as
if the reporting unit were being acquired in a business combination. Specifically, we would allocate the fair value
of the reporting unit to all of the assets and liabilities of the reporting unit in a hypothetical calculation that would
determine the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded
goodwill, we would record an impairment charge for the difference.

The accounting estimates related to our goodwill require us to make considerable assumptions about fair

values. Our assumptions regarding fair values require significant judgment about economic factors, industry
factors and technology considerations, as well as our views regarding the growth and earnings prospects of the
retail banking unit. Changes in these judgments, either individually or collectively, may have a significant effect
on the estimated fair values.

Based on the results of the annual goodwill impairment test, we determined no goodwill impairment charges

were required for the year ended December 31, 2009. Even though we determined that there was no goodwill
impairment during 2009, additional adverse changes in the operating environment for the financial services
industry may result in a future impairment charge. Finally, in conjunction with the analysis of our operating
segments during the fourth quarter (see Note 22 to the Consolidated Financial Statements in “Item 8. Financial
Statements and Supplementary Data” of this report), we concluded that as of December 31, 2009 we had one,
single reporting unit. As of December 31, 2009 we determined there were no events or circumstances which
would more likely than not reduce the fair value of this reporting unit below its carrying amount. We also
determined, had the annual goodwill impairment test been performed based upon one reporting unit as of
September 30, 2009, the fair value of the single, consolidated reporting unit would have been in excess of its
carrying value (including goodwill).

Please refer to Note 9 to the Consolidated Financial Statements in “Item 8. Financial Statements and

Supplementary Data” of this report for further discussion.

2009 Overview

•

•

•

Consolidated net loss applicable to common shareholders for 2009 was $8.4 million, or $0.38 per
diluted common share, compared with net income of $5.5 million, or $0.30 per diluted common share,
in 2008. Net income(loss) applicable to common shareholders reflects net income(loss) less dividends
on preferred stock related to the Company’s participation in the Treasury’s Capital Purchase Program.
The decrease in net income applicable to common shareholders is primarily due to a $63.5 million
provision for loan and lease losses recorded during 2009.

Noninterest income was $29.7 million for 2009, an increase from $14.9 million for 2008. Excluding
securities impairment charges of $19.5 million in 2008, net gains on sales of securities of $1.1 million
in 2009 and $846 thousand in 2008 and proceeds from redemption of Visa and Mastercard stock of $49
thousand in 2009 and $3.0 million in 2008, noninterest income in 2009 was relatively flat when
compared to 2008. Management believes that it is useful for investors to understand the impact of the
impairment charge, nets gains on sales of securities and proceeds from redemption of Visa and
Mastercard stock on the Company’s results of operations. Noninterest income accounted for 20% of the
Company’s revenue in 2009, up from 11% in 2008 due primarily to the $19.5 million impairment
charge in 2008.

Total assets at December 31, 2009 were $3.20 billion, up 3% from $3.10 billion at the end of 2008.
Decreases in the loan portfolio were offset by higher investment securities and interest-earning deposits
with bank balances.

32

•

•

•

•

•

The allowance for loan and lease losses increased to $53.5 million at December 31, 2009 from $42.7
million at December 31, 2008. The Company’s allowance amounts to 2.66% of total loans, compared
with 1.91% at the end of 2008.

Nonperforming loans totaled $110.5 million as of December 31, 2009, compared with $106.8 million
at December 31, 2008. Net loan charge-offs were $52.8 million in 2009, compared with $25.0 million
in 2008. The increase in nonaccruals occurred primarily in the Company’s commercial business
portfolio and commercial real estate portfolio. The increase in net loan charge-offs occurred primarily
in the commercial business and one-to-four family residential construction portfolios.

Investment securities available for sale totaled $620.0 million at December 31, 2009 compared to
$528.9 million at December 31, 2008.

Deposits totaled $2.48 billion at December 31, 2009 compared to $2.38 billion at December 31, 2008.
Core deposits totaled $2.07 billion at December 31, 2009, comprising 83% of total deposits compared
to $1.94 billion, or 81%, of total deposits at December 31, 2008.

The Company is well capitalized with a total risk-based capital ratio of 19.60% at December 31, 2009
compared to 14.25% at December 31, 2008. These ratios reflect the net proceeds to the Company of
$113.5 million from an underwritten public offering of common shares completed in August, 2009 as
well as proceeds of $76.9 million from the issuance of preferred under the Treasury’s Capital Purchase
Program.

Recent Developments

On January 22, 2010, Columbia State Bank acquired all of the deposits and certain assets of Columbia River

Bank from the FDIC, which was appointed receiver of Columbia River Bank. Columbia State Bank acquired
approximately $903 million in assets and approximately $891 million in deposits located in 21 branches in
Oregon and Washington. Columbia River Bank’s loans and other real estate assets acquired of approximately
$696 million are subject to a loss-sharing agreement with the FDIC. The Company participated in a competitive
bid process in which the accepted bid included a 1% deposit premium on non-brokered deposits and a negative
bid of $43.9 million on net assets acquired.

On January 29, 2010 Columbia State Bank acquired substantially all of the deposits and assets of American

Marine Bank from the FDIC, which was appointed receiver of American Marine Bank. Columbia State Bank
acquired approximately $308 million in assets and approximately $253 million in deposits located in 11 branches
on the western Puget Sound. American Marine Bank’s loans and other real estate assets acquired of
approximately $257 million are subject to a loss-sharing agreement with the FDIC. In addition, Columbia State
Bank will continue to operate the Trust and Wealth Management Division of American Marine Bank. The
Company participated in a competitive bid process in which the accepted bid included a 1% deposit premium on
non-brokered deposits and a negative bid of $23.0 million on net assets acquired.

Business Combinations

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

The operating results of Mt. Rainier and Town Center were included in the Company’s operating results
beginning July 23, 2007; consequently, 2009 and 2008 operating results are not directly comparable to the 2007
results for the same periods. For comparison purposes to prior periods, as of July 23, 2007 Mt. Rainier and Town
Center combined contributed $360 million in assets, $287 million in loans and $305 million in deposits.

33

RESULTS OF OPERATIONS

Summary

A summary of the Company’s results of operations on a fully taxable-equivalent basis for each of the last

five years ended December 31 follows:

Year Ended
2009

Increase
(Decrease)

Amount %

Year Ended
2008

Increase
(Decrease)

Years ended December 31,

Amount

%

2007

2006

2005

(in thousands, except per
share amounts)
Interest income (1) . . . . . $148,163 $(32,199)
(27,864)
Interest expense . . . . . . .
27,683
(4,335)
Net interest income . . . . . 120,480
Provision for loan and

(18) $180,362 $ (8,192)
(19,850)
(50)
55,547
11,658
(3) 124,815

(4) $188,554 $155,557 $124,715
31,295
93,420

53,912
101,645

75,397
113,157

(26)
10

lease losses . . . . . . . . .
Noninterest income . . . .
Noninterest expense:

Staff expense . . . . .
Other expense . . . . .
Total . . . . . . . .

Income (loss) before

income taxes . . . . . . . .

Provision (benefit) for

income taxes . . . . . . . .
Less: adjustments (1) . . .

Net income

63,500
29,690

47,275
47,213
94,488

22,324
54
14,840 100

41,176
14,850

37,571 1,042
(46)
(12,898)

3,605
27,748

(2,040)
4,403
2,363

(4)
10
3

49,315
42,810
92,125

2,612
684
3,296

6
2
4

46,703
42,126
88,829

2,065
24,672

38,769
37,365
76,134

1,520
24,786

37,285
35,570
72,855

(7,818)

(14,182) (223)

6,364

(42,107)

(87)

48,471

48,118

43,831

(8,978)
5,128

(4,072)
(174)

83
(3)

(4,906)
5,302

(16,659) (142)
22

965

11,753
4,337

12,133
3,882

11,692
2,508

(loss) . . . . . . . . . . $ (3,968) $ (9,936) (166) $

5,968 $(26,413)

(82) $ 32,381 $ 32,103 $ 29,631

Less:

Dividends on
preferred
stock . . . . . .

4,403

3,933 837

470

470 NM

—

—

—

Net income (loss)
applicable to
common
shareholders . . . . $ (8,371) $(13,869) (252) $

5,498 $(26,883)

(83) $ 32,381 $ 32,103 $ 29,631

Earnings (loss) per
common share,
diluted . . . . . . . . . $

(0.38) $

(0.68) (227) $

0.30 $

(1.59)

(84) $

1.89 $

1.98 $

1.86

(1)

Includes amounts to convert nontaxable income to a fully taxable-equivalent yield. To compare tax-exempt
asset yields to taxable yields, amounts are adjusted to pre-tax equivalents based on the marginal corporate
federal tax rate of 35%.

NM –Not Meaningful

Net Interest Income

Net interest income is the difference between interest income and interest expense. Net interest income on a

fully taxable-equivalent basis expressed as a percentage of average total interest-earning assets is referred to as
the net interest margin, which represents the average net effective yield on interest-earning assets.

34

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

Net Interest Income Summary

2009

Interest
Earned/
Paid

Average
Balances (1)

Average
Rate

Average
Balances (1)

2008

Interest
Earned/
Paid

Average
Rate

Average
Balances (1)

2007

Interest
Earned/
Paid

Average
Rate

(dollars in thousands)

ASSETS
Loans (1)(2) . . . . . . . . . . . . . . . . . . $2,124,574
386,571
Taxable securities . . . . . . . . . . . . .
Tax exempt securities (2)
197,457
. . . . . . .
Interest-earning deposits with

$117,497
17,300
13,151

5.53% $2,264,486
379,052
4.48%
186,246
6.66%

$148,240
18,852
12,868

6.55% $1,990,622
395,512
4.97%
185,610
6.91%

$156,253
18,685
12,189

7.85%
4.72%
6.57%

banks and federal funds sold . . .

75,260

215

0.29%

21,771

402

1.85%

27,635

1,427

5.16%

Total interest-earning

assets . . . . . . . . . . . . . . . . . $2,783,862
49,488
251,071

Other earning assets . . . . . . . . . . . .
Noninterest-earning assets . . . . . . .

$148,163

Total assets . . . . . . . . . . . . . . $3,084,421

LIABILITIES AND

SHAREHOLDERS’ EQUITY

$180,362

5.32% $2,851,555
47,753
234,746

$3,134,054

6.33% $2,599,379
42,334
195,449

$2,837,162

$188,554

7.25%

Certificates of deposit
Savings accounts . . . . . . . . . . . . . .
Interest-bearing demand . . . . . . . .
Money market accounts . . . . . . . . .

. . . . . . . . . . $ 706,799
133,348
458,450
568,320

$ 15,931
352
2,221
4,746

2.25% $ 780,092
118,073
0.26%
445,449
0.48%
578,123
0.84%

$ 28,120
437
6,009
10,741

3.60% $ 698,078
111,265
0.37%
435,807
1.35%
558,510
1.86%

$ 31,274
467
11,026
17,163

4.48%
0.42%
2.53%
3.07%

Total interest-bearing

deposits . . . . . . . . . . . . . . .

1,866,917

23,250

1.25% 1,921,737

45,307

2.36% 1,803,660

59,930

3.32%

Federal Home Loan Bank and

Federal Reserve Bank
borrowings . . . . . . . . . . . . . . . . .
Long-term subordinated debt . . . . .

Other borrowings and interest-

149,416
25,635

2,759
1,197

1.85%
4.67%

297,193
25,558

7,573
1,800

2.55%
7.04%

207,521
23,777

11,065
2,177

5.33%
9.16%

bearing liabilities . . . . . . . . . . . .

25,046

477

1.90%

32,934

867

2.63%

40,606

2,225

5.48%

Total interest-bearing

liabilities . . . . . . . . . . . . . . $2,067,014
511,259

Noninterest-bearing deposits . . . . .
Other noninterest-bearing

liabilities . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . .

44,021
462,127

Total liabilities & shareholders’

$ 27,683

1.34% $2,277,422
460,747

$ 55,547

2.44% $2,075,564
438,474

$ 75,397

3.63%

41,498
354,387

33,827
289,297

equity . . . . . . . . . . . . . . . . . . . . . $3,084,421

$3,134,054

$2,837,162

Net interest income . . . . . . . . . . . .

$120,480

$124,815

$113,157

Net interest spread . . . . . . . . . . . . .

Net interest margin . . . . . . . . . . . .

Average interest-earning assets to

average interest-bearing
liabilities . . . . . . . . . . . . . . . . . .

3.98%

4.33%

3.89%

4.38%

3.62%

4.35%

134.68%

125.21%

125.24%

(1) Nonaccrual loans were included in loans. Amortized net deferred loan fees were included in the interest income calculations. The

amortization of net deferred loan fees was $2.8 million in 2009, $3.5 million in 2008, $3.5 million in 2007.

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

35

Net interest income is impacted by the volume (changes in volume multiplied by prior rate), interest rate
(changes in rate multiplied by prior volume) and the mix of interest-earning assets and interest-bearing liabilities.
The following table shows changes in net interest income on a fully taxable-equivalent basis between 2009 and
2008, as well as between 2008 and 2007 broken down between volume and rate. Changes attributable to the
combined effect of volume and interest rates have been allocated proportionately to the changes due to volume
and the changes due to interest rates:

Changes in Net Interest Income

2009 Compared to 2008
Increase (Decrease) Due to

2008 compared to 2007 (1)
Increase (Decrease) Due to

Volume

Rate

Total

Volume

Rate

Total

(in thousands)

Interest Income
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest earning deposits with banks and

$(8,754) $(21,989) $(30,743) $19,880
(754)

(1,269)

(2,394)

1,125

$(27,893) $ (8,013)
846

1,600

federal funds sold . . . . . . . . . . . . . . . . . . . . .

367

(554)

(187)

(255)

(770)

(1,025)

Interest income . . . . . . . . . . . . . . . . .

$(7,262) $(24,937) $(32,199) $18,871

$(27,063) $ (8,192)

Interest Expense
Deposits:

Certificates of deposit . . . . . . . . . . . . . . . .
Savings accounts . . . . . . . . . . . . . . . . . . . .
Interest-bearing demand . . . . . . . . . . . . . .
Money market accounts . . . . . . . . . . . . . .

Total interest on deposits . . . . . . . . .
FHLB and FRB borrowings . . . . . . . . . . . . . . .
Long-term subordinated debt & trust preferred
obligations . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . .

$(2,444) $ (9,745) $(12,189) $ 3,405
27
239
583

(85)
(3,788)
(5,995)

(136)
(3,958)
(5,816)

51
170
(179)

$ (6,559) $ (3,154)
(30)
(5,017)
(6,422)

(57)
(5,256)
(7,005)

(2,402)
(3,098)

(19,655)
(1,716)

(22,057)
(4,814)

4,254
3,651

(18,877)
(7,143)

(14,623)
(3,492)

5
(181)

(608)
(209)

(603)
(390)

154
(362)

(531)
(996)

(377)
(1,358)

Interest expense . . . . . . . . . . . . . . . .

$(5,676) $(22,188) $(27,864) $ 7,697

$(27,547) $(19,850)

(1) Certain prior period balances have been reclassified to conform to the current period presentation.

Taxable-equivalent net interest income totaled $120.5 million in 2009, compared with $124.8 million for

2008. A reduction in interest rates from 2009 to 2008 contributed to the decline in net interest income, lowering
the yield on earning assets 101 basis points compared to a 110 basis point decrease in the cost of interest-bearing
liabilities. The net effect of these rate changes was a decrease in net interest income of $2.7 million. Net interest
income for 2009 also includes $2.6 million in income from the settlement of interest rate floor contracts
compared with $1.7 million in 2008.

The net interest margin was up slightly in 2008 compared to 2007, increasing 3 basis points to 4.38% from
4.35%. Average loan yields decreased 92 basis points with average deposit costs decreasing 96 basis points from
2007. In addition, average borrowing costs from the Federal Home Loan Bank and Federal Reserve Bank
decreased 278 basis points.

Provision for Loan and Lease Losses

The Company accounts for the credit risk associated with lending activities through its allowance for loan

and lease losses and provision for loan and lease losses. The provision is the expense recognized in the
consolidated statements of income to adjust the allowance to the levels deemed appropriate by management, as

36

determined through its application of the Company’s allowance methodology procedures. For discussion over the
methodology used by management in determining the adequacy of the ALLL see the following “Allowance for
Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit” and “Critical Accounting
Policies” sections of this discussion.

The Company recorded expense of $63.5 million and $41.2 million through the provision for loan and lease

losses in 2009 and 2008, respectively. The provision recorded in 2009 reflects management’s ongoing
assessment of the credit quality of the Company’s loan portfolio, which is impacted by various economic trends,
including continued weakness in the Pacific Northwest economy. Additional factors affecting the provision
include trends in nonperforming loans, size and composition of the loan portfolio and changes in the economic
environment during the period. See “Allowance for Loan and Lease Losses and Unfunded Loan Commitments
and Letters of Credit” section of this discussion for further information on factors considered by the Company in
assessing the credit quality of the loan portfolio and establishing the allowance for loan and lease losses.

For the years ended December 31, 2009, 2008, and 2007, net loan charge-offs amounted to $52.8 million,

$25.0 million and $380 thousand, respectively. Loans in the real estate construction portfolio accounted for 69%
of the 2009 net charge-offs while loans in the commercial business portfolio accounted for an additional 23% of
the 2009 net charge-offs compared to 82% and 10%, respectively, in 2008.

Noninterest Income

Noninterest income for the year totaled $29.7 million, an increase of $14.8 million, from 2008. Noninterest
income represented 20% of total revenues in 2009, compared with 11% and 20% in 2008 and 2007, respectively.
2008 noninterest income was lower than 2009 and 2007 primarily due to the $19.5 million impairment charge on
investment securities described below, partially offset by the $3.0 million gain from the redemption of Visa and
Mastercard shares described below. Excluding securities impairment charges of $19.5 million in 2008, net gains
on sales of securities of $1.1 million in 2009 and $846 thousand in 2008 and proceeds from redemption of Visa
and Mastercard stock of $49 thousand in 2009 and $3.0 million in 2008, noninterest income in 2009 was
relatively flat when compared to 2008. Management believes that it is useful for investors to understand the
impact of the impairment charge, net gains on sales of securities and proceeds from redemption of Visa and
Mastercard stock on the Company’s results of operations.

37

The following table presents the significant components of noninterest income and the related dollar and

percentage change from period to period:

Fees and Other Income

Service charges, loan fees and other
fees . . . . . . . . . . . . . . . . . . . . . . .
Merchant services fees . . . . . . . . . .
Redemption of Visa and

Years ended December 31,

2009

$
Change

%
Change

2008

$
Change

%
Change

2007

(dollars in thousands)

$15,181
7,321

$

368
(719)

2% $ 14,813
8,040
-9%

$ 1,315
(333)

10% $13,498
-4% 8,373

Mastercard shares . . . . . . . . . . . .

49

(2,979)

-98%

3,028

3,028

100%

Gain on sale of investment

securities, net

. . . . . . . . . . . . . . .

1,077

231

27%

846

846

100%

Impairment charge on investment

securities . . . . . . . . . . . . . . . . . . .

—

19,541

-100% (19,541)

(19,541)

-100%

—

—

—

Bank owned life insurance

(BOLI)

. . . . . . . . . . . . . . . . . . . .
Other Income . . . . . . . . . . . . . . . . .

2,023
4,039

(52)
(1,550)

-3%
-28%

2,075
5,589

189
1,598

10% 1,886
40% 3,991

Total noninterest income . . . . . . . .

$29,690

$14,840

100% $ 14,850

$(12,898)

-46% $27,748

Service charges, loan fees and other fees had a slight increase of $368 thousand in 2009 over 2008, or 2%.

Service charges, loan fees and other fees increased $1.3 million in 2008 over 2007, or 10%, due to higher
transaction volumes.

Merchant services fees declined $719 thousand in 2009 over 2008, or 9%. Merchant services fees declined

$333 thousand in 2008 over 2007. These reductions reflect lower volumes of merchant activity.

Proceeds from the redemption of Visa and Mastercard shares totaled $49 thousand and $3.0 million in 2009

and 2008, respectively. There was no redemption of these shares in 2007.

The impairment charge on investment securities was $19.5 million in 2008 due to the impairment charge on

Federal Home Loan Mortgage Corporation (“Freddie Mac”) and Federal National Mortgage Association
(“Fannie Mae”) preferred stock resulting from these government-sponsored enterprises being placed into
conservatorship in a plan announced by the U.S. Treasury Department (“Treasury”) and the Federal Housing
Finance Agency (“FHFA”). There was no impairment charge on investment securities in 2009 or 2007. During
the fourth quarter of 2009, all of the Company’s Freddie Mac and Fannie Mae preferred stock was sold resulting
in a net gain on sale of $166 thousand.

38

Other Noninterest Income: The following table presents selected items of “other noninterest income” and

the related dollar and percentage change from period to period:

Years ended December 31,

2009

$
Change

%
Change

2008

$
Change

%
Change

2007

Gain on disposal of assets . . . . . . . . . . . . . . . . . . . . .
Mortgage banking . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash management 12b-1 fees . . . . . . . . . . . . . . . . . .
Letter of credit fees . . . . . . . . . . . . . . . . . . . . . . . . . .
Late charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency exchange income . . . . . . . . . . . . . . . . . . . .
New Markets Tax Credit dividend . . . . . . . . . . . . . .
Miscellaneous fees on loans . . . . . . . . . . . . . . . . . . .
Interest rate swap income . . . . . . . . . . . . . . . . . . . . .
Credit card fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Life insurance death benefit
. . . . . . . . . . . . . . . . . . .
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . .

$ 114
382
245
528
307
293
66
842
265
127
—
870
$4,039

$ (378)
(246)
(221)
101
(31)
(63)
(8)
(73)
(382)
(15)
(612)
378
$(1,550)

(dollars in thousands)
-77% $ 492
628
-39%
466
-47%
427
24%
338
-9%
356
-18%
74
-11%
915
-8%
647
-59%
142
-11%
612
100%
77%
492
-28% $5,589

$ 227
91
67
28
88
40
(19)
45
422
61
612
(64)
$1,598

86% $ 265
537
17%
399
17%
399
7%
250
35%
316
13%
93
-20%
870
5%
225
188%
81
75%
0
0%
-12%
556
40% $3,991

Included in gain on disposal of assets are amounts related to the sale and lease-back of two buildings which

occurred in September 2004. The resulting $1.3 million gain on the sale was deferred and recognized over the
life of the leases, the unamortized gain balance at December 31, 2009 and 2008 was $400 thousand and
$483 thousand, respectively, and is included in other liabilities on our consolidated balance sheets. During 2009,
2008 and 2007 the Company recognized amortized gains associated with the sale and lease-back transaction of
$83 thousand, $83 thousand and $219 thousand, respectively.

The decrease in other noninterest income was primarily due to the reductions in interest rate swap, mortgage
banking and cash management fee income as well as the receipt in 2008 of life insurance death benefit proceeds.
Interest rate swap and mortgage banking income decreased due to reduced transaction volumes.

Noninterest Expense

Noninterest expense was $94.5 million in 2009, an increase of $2.4 million, or 3%, over 2008. Noninterest

expense increased $3.3 million, or 4%, in 2008 over 2007.

The following table presents the significant components of noninterest expense and the related dollar and

percentage change from period to period:

Years ended December 31,

2009

$
Change

%
Change

2008

$
Change

%
Change

2007

Compensation and employee benefits . . . . . . . .

$47,275

$(2,040)

(dollars in thousands)
-4% $49,315

$ 2,612

6% $46,703

All other noninterest expense:

Occupancy . . . . . . . . . . . . . . . . . . . . . . . . .
Merchant processing . . . . . . . . . . . . . . . . .
Advertising and promotion . . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . .
Legal and professional services . . . . . . . . .
Taxes, license and fees . . . . . . . . . . . . . . .
Regulatory premiums . . . . . . . . . . . . . . . .
Net cost operation of other real estate

owned . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total all other noninterest expense . .
Total noninterest expense . . . . .

12,128
3,449
1,943
4,047
3,871
2,478
5,777

(710)
(109)
(381)
561
1,902
(439)
3,636

-6% 12,838
-3% 3,558
-16% 2,324
16% 3,486
97% 1,969
-15% 2,917
170% 2,141

516
88
(67)
922
(2,943)
35
1,634

4% 12,322
3% 3,470
-3% 2,391
36% 2,564
-60% 4,912
1% 2,882
507

322%

861
12,659
47,213
$94,488

910
(967)
4,403
$ 2,363

-1857%

(49)
-7% 13,626
10% 42,810
3% $92,125

(54)
553
684
$ 3,296

-1080%

5
4% 13,073
2% 42,126
4% $88,829

39

Compensation and employee benefits expense decreased to $47.2 million, or 4% in 2009 from $49.3 million
in 2008 reflecting staffing decreases and reductions in employee benefits from the prior year. Compensation and
employee benefits expense increased 6% in 2008 from 2007 largely due to a full year of employee expenses
related to our two acquisitions. Full-time equivalent staff decreased to 715 at December 31, 2009 from 735 at
December 31, 2008 and 775 at December 31, 2007.

The remaining noninterest expense categories increased $4.4 million or 10%, between 2008 and 2009.
Regulatory premiums expense increased $3.6 million. This increase is due primarily to significantly higher FDIC
premium assessment rates as well as a special assessment imposed by the FDIC on all insured depository
institutions. The increased assessment rate as well as the special assessment is the result of losses incurred by the
Deposit Insurance Fund and not directly related to the Company’s performance. Finally, legal and professional
services expense increased $1.9 million and the net cost of operation of other real estate increased $910
thousand.

The remaining noninterest expense categories increased $684 thousand or 2%, between 2007 and

2008 million largely due to our 2007 acquisitions. The decrease in legal and professional fees between 2007 and
2008 was attributed to the reversal of previously expensed legal costs in the amount of $1.3 million related to our
Visa litigation reserve. In the fourth quarter of 2007 we established a litigation reserve through legal expense in
the amount of $1.8 million. During 2008 we were able to reduce our litigation reserve by $1.3 million due to the
economic benefit resulting from our pro-rata share of the funds Visa placed into an escrow account established to
pay for the settlement of the litigation liabilities. At December 31, 2009 and 2008 our remaining accrual for the
Visa litigation liability was $317 thousand and $485 thousand, respectively.

Other Noninterest Expense: The following table presents selected items of “other noninterest expense” and

the related dollar and percentage change from period to period:

Years ended December 31,

2009

$
Change

%
Change

2008

$
Change

%
Change

2007

CRA partnership investment expense (1)
. . .
Core deposit intangible amortization . . . . . . .
Software support & maintenance . . . . . . . . . .
Federal Reserve Bank processing fees . . . . . .
Telephone & network communications . . . . .
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sponsorships & charitable contributions . . . .
Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investor relations . . . . . . . . . . . . . . . . . . . . . .
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director expenses . . . . . . . . . . . . . . . . . . . . . .
Employee expenses . . . . . . . . . . . . . . . . . . . .
ATM Network . . . . . . . . . . . . . . . . . . . . . . . .
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . .

$

501
1,046
639
326
1,435
889
1,245
598
402
204
500
440
350
595
3,489

$(167)
(96)
(74)
(96)
(92)
(175)
(175)
(44)
(69)
22
(5)
(13)
(249)
(64)
330

(dollars in thousands)

-25% $
-8%
-10%
-23%
-6%
-16%
-12%
-7%
-15%
12%
-1%
-3%
-42%
-10%
10%

668
1,142
713
422
1,527
1,064
1,420
642
471
182
505
453
599
659
3,159

$ (64)
423
(133)
(18)
293
(300)
53
19
18
(46)
57
30
(64)
3
282

-9% $
59%
-16%
-4%
24%
-22%
4%
3%
4%
-20%
13%
7%
-10%
0%
10%

732
719
846
440
1,234
1,364
1,367
623
453
228
448
423
663
656
2,877

Total other noninterest expense . . . . . . .

$12,659

$(967)

-7% $13,626

$ 553

4% $13,073

(1) The amounts shown represent pass-through losses from our interests in certain low-income housing related
limited partnerships. As a result of these interests we receive federal low-income housing tax credits
available under the Internal Revenue Code. For the twelve months ended December 31, 2009, $511
thousand of such credits was taken as a reduction in our current period income tax expense. In addition, our
taxable income was decreased by $178 thousand during the twelve months ended December 31, 2009 as a
result of the tax benefit associated with this investment expense.

40

Income Tax

For the years ended December 31, 2009, 2008, and 2007, we recorded income tax benefits of $9.0 million
and $4.9 million, and an income tax provision of $11.8 million, respectively. The effective tax benefit was 69.3%
in 2009 and 463% in 2008 and the effective tax rate was 26.6% in 2007. Our effective tax rate is less than our
statutory rate of 35.52% and has exhibited a declining trend over the past three years. This decline is primarily
due to a significant increase in the amount of tax-exempt municipal securities held in the investment portfolio,
tax exempt earnings on bank owned life insurance, and tax credits received on investments in affordable housing
partnerships. For additional information, see Note 14 to the Consolidated Financial Statements in “Item 8.
Financial Statements and Supplementary Data” of this report.

Financial Condition

Our total assets increased 3% to $3.20 billion at December 31, 2009 from $3.10 billion at December 31,
2008. Interest-earning deposits with bank balances increased $245.3 million. The inability to prepay advances
from the Federal Home Loan Bank contributed to this increase. Our investment portfolio increased 17% or $91.1
million. This increase was primarily a result of investment security purchases in the third quarter of 2009. The
loan portfolio decreased 10% or $223.4 million to $2.01 billion. The decline in the loan portfolio can be
attributed to a combination of loan payoffs, pay downs, a reduced emphasis on lending in certain sectors of the
loan portfolio, and loan charge-offs. Deposit balances increased $100.6 million or 4% to $2.48 billion and
borrowings decreased 44% to $125.0 million.

Investment Portfolio

We invest in securities to generate revenues for the Company, to manage liquidity while minimizing interest

rate risk, and to provide collateral for certain public deposits and short-term borrowings. The amortized cost
amounts represent the Company’s original cost for the investments, adjusted for accumulated amortization or
accretion of any yield adjustments related to the security. The estimated fair values are the amounts that we
believe the securities could be sold for as of the dates indicated. As of December 31, 2009 we had 34 available
for sale securities in an unrealized loss position. Based on past experience with these types of securities and our
own financial performance, we do 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 before the recovery of
the amortized cost basis. We review these investments for other-than-temporary impairment on an ongoing basis.

Purchases during 2009 totaled $162.4 million while maturities and repayments and sales totaled $67.7
million compared to purchases of $89.1 million and maturities and repayments of $49.7 million during 2008. At
December 31, 2009 U.S. Government agency and government-sponsored enterprise mortgage-backed securities
(“MBS”) and collateralized mortgage obligations (“CMO”) comprised 65% of our investment portfolio and state
and municipal securities were 35%. Our entire investment portfolio is categorized as available for sale and
carried on our balance sheet at their fair values. The average duration of our investment portfolio was
approximately 3 years and 10 months at December 31, 2009. For further information on our investment portfolio
see Note 4 of the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data”
of this report.

41

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

portfolio:

Securities Available for Sale

December 31, 2009

Amortized
Cost

Fair
Value

Yield

(dollars in thousands)

U.S. Government agency and government-sponsored enterprise mortgage-

backed securities & collateralized mortgage obligations (1)

Over 1 through 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 5 through 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 41,884
62,869
285,935

$ 43,254
64,687
292,215

4.63%
4.57%
4.28%

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$390,688

$400,156

4.37%

State and municipal securities (2)
Due through 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 1 through 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 5 through 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

1,385
18,875
42,499
148,228

$

1,402
20,328
45,020
152,161

5.58%
6.70%
6.03%
6.66%

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$210,987

$218,911

6.52%

(1) The maturities reported for mortgage-backed securities collateralized mortgage obligations are based on

contractual maturities and principal amortization.

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

FHLB Stock

As a condition of membership in the Federal Home Loan Bank of Seattle (“FHLB”), the Company is
required to purchase and hold a certain amount of FHLB stock. Our stock purchase requirement is based, in part,
upon the outstanding principal balance of advances from the FHLB and is calculated in accordance with the
Capital Plan of the FHLB. Our FHLB stock has a par value of $100 and is redeemable at par for cash.

FHLB stock is carried at cost and is subject to recoverability testing per the Financial Services—Depository

and Lending topic of the FASB ASC. The FHLB is currently classified as undercapitalized by the Federal
Housing Finance Agency (“Finance Agency”). Under Finance Agency regulations, a Federal Home Loan Bank
that fails to meet any regulatory capital requirement may not declare a dividend or redeem or repurchase capital
stock. However, management believes, despite the undercapitalized classification, the FHLB has adequate capital
to cover the risks reflected on their balance sheet. Accordingly, as of December 31, 2009 we did not recognize an
impairment charge related to our FHLB stock holdings. We will continue to monitor the financial condition of
the FHLB as it relates to, among other things, the recoverability of our investment.

42

Loan Portfolio

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

2009

% of
Total

2008

% of
Total

2007

% of
Total

2006

% of
Total

2005

% of
Total

(dollars in thousands)

December 31,

Commercial business . . . . . . . . .

$ 744,440

37.1% $ 810,922

36.3% $ 762,365

33.4% $ 617,899

36.1% $ 570,974

36.5%

Real estate:
One-to-four family residential . . .
Commercial and five or more

63,364

3.1%

57,237

2.6%

60,991

2.7%

51,277

3.0%

74,930

4.8%

family residential properties . . .

856,260

42.6%

862,595

38.6%

852,139

37.3%

687,635

40.3%

651,393

41.6%

Total real estate . . . . . . . . . . . . . .

919,624

45.7%

919,832

41.2%

913,130

40.0%

738,912

43.3%

726,323

46.4%

Real estate construction:
One-to-four family residential . . .
Commercial and five or more

107,620

5.4%

209,682

9.4%

269,115

11.8%

92,124

5.4%

41,033

2.6%

family residential properties . . .

41,829

Total real estate construction . . . .

149,449

2.1%

7.5%

81,176

3.6%

165,490

7.2%

115,185

6.8%

89,134

290,858

13.0%

434,605

19.0%

207,309

12.2%

130,167

5.7%

8.3%

Consumer . . . . . . . . . . . . . . . . . .

199,987

10.0%

214,753

9.7%

176,559

7.8%

147,782

8.6%

140,110

9.0%

Subtotal
Less deferred loan fees and

. . . . . . . . . . . . . . . . . . . .

2,013,500 100.2% 2,236,365 100.2% 2,286,659 100.2% 1,711,902 100.2% 1,567,574 100.2%

other . . . . . . . . . . . . . . . . . . . . .

(4,616)

-0.2%

(4,033)

-0.2%

(3,931)

-0.2%

(2,940)

-0.2%

(2,870)

-0.2%

Total loans . . . . . . . . . . . . . . . . . .

$2,008,884 100.0% $2,232,332 100.0% $2,282,728 100.0% $1,708,962 100.0% $1,564,704 100.0%

Loans held for sale . . . . . . . . . . . .

$

—

$

1,964

$

4,482

$

933

$

1,850

At December 31, 2009, total loans were $2.01 billion compared with $2.23 billion in the prior year, a
decrease of $223.4 million or 10%. Generally, loan volumes were down across all categories with significant
declines in real estate construction and commercial business loans. Total loans represented 63% and 72% of total
assets at December 31, 2009 and 2008, respectively. Although balances declined during 2009, the compound
annual growth rate of our loan portfolio over the last five years is 8%.

Commercial Business Loans: Commercial loans decreased $66.5 million, or 8%, to $744.4 million from

year-end 2008, representing 37% of total loans at year end. We are committed to providing competitive
commercial banking in our primary market areas. We expect our commercial lending focus to center around
expanding our existing banking relationships with businesses and business owners while continuing to build new
customer relationships.

Real Estate Loans: Residential real estate loans in our portfolio are secured by properties located within our
primary market area, and typically have loan-to-value ratios of 80% or lower at origination. These loans are used
to collateralize outstanding advances from the FHLB and borrowings from the FRB. Previously, we originated
residential loans for sale to third parties. Currently, we generally do not originate purchase money residential
loans but rather refer customers seeking such loans to third parties.

Generally, commercial and five-or-more family residential real estate loans are made to borrowers who have

existing banking relationships with us. Our underwriting standards generally require that the loan-to-value ratio
for these loans not exceed 75% of appraised value, cost, or discounted cash flow value, as appropriate, and that
commercial properties maintain debt coverage ratios (net operating income divided by annual debt servicing) of
1.2 or better. However, underwriting standards can be influenced by competition and other factors. We endeavor
to maintain the highest practical underwriting standards while balancing the need to remain competitive in our
lending practices.

43

Real Estate Construction Loans: Our underwriting guidelines for commercial and five-or-more family

residential real estate construction loans generally require that the loan-to-value ratio not exceed 75% and
stabilized debt coverage ratios (net operating income divided by annual debt servicing) of 1.2 or better. The
recent economic environment has resulted in the Company having a substantially reduced desire to originate
these types of loans. However, when we do originate such loans we endeavor to maintain the highest practical
underwriting standards.

Currently, on a selected basis, we originate a variety of real estate construction loans. One-to-four family

residential construction loans are originated for the construction of custom homes (where the home buyer is the
borrower) and to provide financing to builders for the construction of pre-sold homes and speculative residential
construction. Underwriting guidelines for these loans vary by loan type but include loan-to-value limits, term
limits and loan advance limits, as applicable.

Consumer Loans: Consumer loans made by us include automobile loans, boat and recreational vehicle

financing, home equity and home improvement loans, and miscellaneous personal loans.

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

For additional information on our loan portfolio, including amounts pledged as collateral on borrowings, see

Note 6 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of
this report.

Maturities and Sensitivities of Loans to Changes in Interest Rates

The following table presents the maturity distribution of our commercial and real estate construction loan

portfolios and the sensitivity of these loans due after one year to changes in interest rates as of December 31,
2009:

Maturing

Due
Through
1 Year

Over 1
Through
5 Years

Over
5 Years

Total

(in thousands)

Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$346,818
116,223

$228,791
23,736

$168,831
9,490

$744,440
149,449

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$463,041

$252,527

$178,321

$893,889

Fixed rate loans due after 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable rate loans due after 1 year . . . . . . . . . . . . . . . . . . . . . . . . .

$114,992
137,535

$ 37,899
140,422

$152,891
277,957

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$252,527

$178,321

$430,848

Risk Elements

The extension of credit in the form of loans or other credit substitutes to individuals and businesses is one of

our principal commerce activities. Our policies and applicable laws and regulations require risk analysis as well
as ongoing portfolio and credit management. We manage our credit risk through lending limit constraints, credit
review, approval policies, and extensive, ongoing internal monitoring. We also manage credit risk through
diversification of the loan portfolio by type of loan, type of industry, type of borrower, and by limiting the
aggregation of debt to a single borrower.

In analyzing our existing portfolio, we review our consumer and residential loan portfolios by their

performance as a pool of loans, since no single loan is individually significant or judged by its risk rating, size or
potential risk of loss. In contrast, the monitoring process for the commercial business, private banking, real estate
construction, and commercial real estate portfolios includes periodic reviews of individual loans with risk ratings
assigned to each loan and performance judged on a loan by loan basis.

44

We review these loans to assess the ability of our borrowers to service all interest and principal obligations

and, as a result, the risk rating may be adjusted accordingly. In the event that full collection of principal and
interest is not reasonably assured, the loan is appropriately downgraded and, if warranted, placed on non-accrual
status even though the loan may be current as to principal and interest payments. Additionally, we assess whether
an impairment of a loan warrants specific reserves or a write-down of the loan. For additional discussion on our
methodology in managing credit risk within our loan portfolio see the following “Allowance for Loan and Lease
Losses and Unfunded Loan Commitments and Letters of Credit” section and Note 1 to the Consolidated
Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.

Loan policies, credit quality criteria, portfolio guidelines and other controls are established under the
guidance of our Chief Credit Officer and approved, as appropriate, by the Board. Credit Administration, together
with the loan committee, has the responsibility for administering the credit approval process. As another part of
its control process, we use an independent internal credit review and examination function to provide assurance
that loans and commitments are made and maintained as prescribed by our credit policies. This includes a review
of documentation when the loan is initially extended and subsequent on-site examination to ensure continued
performance and proper risk assessment.

Nonperforming Loans: The Consolidated Financial Statements are prepared according to the accrual basis

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

Nonperforming Assets: Nonperforming assets consist of: (i) nonaccrual loans, which generally are loans
placed on a nonaccrual basis when the loan becomes past due 90 days or when there are otherwise serious doubts
about the collectibility of principal or interest within the existing terms of the loan; (ii) in most cases restructured
loans, for which concessions, including the reduction of interest rates below a rate otherwise available to that
borrower or the deferral of interest or principal, have been granted due to the borrower’s weakened financial
condition (interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of
original principal will occur); (iii) other real estate owned; and (iv) other personal property owned, if applicable.
Nonperforming assets totaled $129.5 million, or 4.05% of year-end assets at December 31, 2009, compared to
$109.6 million or 3.54% of year end assets at December 31, 2008.

45

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

Nonperforming Loans and OREO

December 31,

2009

2008

2007

2006

2005

(dollars in thousands)

$ 18,979

$

2,976

$ 2,170

$ 2,249

$ 4,440

1,860

905

204

Nonaccrual:

Commercial business . . . . . . . . . . . . . . . . . . . . . .
Real Estate:

One-to-four family residential . . . . . . . . . . .
Commercial and five or more family

residential real estate . . . . . . . . . . . . . . . .

24,354

5,710

3,476

Real Estate Construction:

One-to-four family residential . . . . . . . . . . .
Commercial and five or more family

47,653

69,668

7,317

residential real estate . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16,230
1,355

25,752
1,152

—
838

366

217

—

—
54

376

—

—

—
41

Total nonaccrual loans:

. . . . . . . . . . . . . . . .

110,431

106,163

14,005

2,886

4,857

Restructured loans accruing interest:

Commercial business . . . . . . . . . . . . . . . . . . . . . .

60

Total nonperforming loans . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . .

110,491
19,037

587

106,750
2,874

456

14,461
181

594

3,480
—

—

4,857
18

Total nonperforming assets . . . . . . . . . . . . .

$129,528

$109,624

$14,642

$ 3,480

$ 4,875

Accruing loans past-due 90 days or more . . . . . . . . . .
Forgone interest on nonperforming loans . . . . . . . . . .
Interest recognized on nonperforming loans . . . . . . . .
Potential problem loans . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses . . . . . . . . . . . . . . .
Allowance for loan and lease losses to nonperforming
loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming loans to year end loans . . . . . . . . . . . .
Nonperforming assets to year end assets . . . . . . . . . . .

$ — $ — $ — $ — $ —
106
7,637
$
$
45
2,437
$
$
$ 2,269
$ 11,423
$20,829
$ 53,478

4,072
$
4,550
$
$ 17,736
$ 42,747

497
$
202
$
$ 2,288
$20,182

814
$
244
$
$ 2,343
$26,599

48.40%
5.50%
4.05%

40.04% 183.94% 579.94% 428.84%
0.31%
4.78%
0.21%
3.54%

0.63%
0.46%

0.20%
0.14%

At December 31, 2009 nonperforming loans increased to 5.50% of year end loans up from 4.78% of year

end loans at December 31, 2008. Residential construction loans continue to be the primary driver of
nonperforming loans, representing $47.7 million, or 43% of nonperforming loans; however it was also the area
where we saw the largest reduction in nonperforming loans. Commercial real estate loans account for another
$40.6 million, or 37% of nonperforming loans.

We remain aggressive in managing our construction loan portfolio and continue to be successful at reducing

our overall exposure in the 1-4 family residential construction segment as well as in the commercial real estate
construction segment. For the year, total construction loans declined 33.1% due to payoffs and conversions to
permanent loan status. Our 1-4 family residential construction loans now represent less than 6% of our entire
loan portfolio. While we believe both of these segments will remain challenged during 2010, we believe we have
appropriate risk management strategies in place to manage through the current economic cycle.

Other Real Estate Owned: As of December 31, 2009 there was $19.0 million in other real estate owned
which is comprised of property from foreclosed real estate loans, an increase of $16.2 million from $2.9 million
at December 31, 2008. Properties acquired by foreclosure or deed in lieu of foreclosure are transferred to OREO

46

and are recorded at fair value less estimated costs to sell, at the date of transfer of the property. If the carrying value
exceeds the fair value at the time of the transfer, the difference is charged to the allowance for loan and lease losses.
The fair value of the OREO property is based upon current appraisal. Losses that result from the ongoing periodic
valuation of these properties are charged to the net cost of operation of OREO expense in the period in which they
are identified. Improvements to the OREO are capitalized and holding costs are charged to the net cost of operation
of OREO as incurred.

Potential Problem Loans: Potential problem loans are loans which are currently performing and are not on

nonaccrual status, restructured or impaired, but about which there are significant doubts as to the borrower’s
future ability to comply with repayment terms and which may later be included in nonaccrual, past due,
restructured or impaired loans. Potential problem loans totaled $11.4 million at year end 2009, compared to $17.7
million at year end 2008. For additional information on our nonperforming loans see Note 6 to our Consolidated
Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.

The following table summarizes activity in nonperforming loans for the period indicated:

Changes in Nonperforming Loans

Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans placed on nonaccrual or restructured . . . . . . . . . . . . . . . . . . . . . . .
Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans returned to accrual status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Repayments (including interest applied to principal) . . . . . . . . . . . . . . . .
Transfers to OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Twelve months ended
December 31,

2009

2008

(in thousands)

$106,750
111,678
2,248
(47,567)
(2,482)

(36,738)
(23,398)

$ 14,461
134,376
1,254
(23,540)
(5,788)

(10,456)
(3,557)

Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$110,491

$106,750

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, including
scheduled interest payments. 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 thousand and all
non-accrual loans with an outstanding balance greater than $250 thousand are considered impaired and are analyzed
individually, on a quarterly basis, under the guidance of the Receivables topic of the Financial Accounting
Standards Board Accounting Standards Codification (“FASB ASC”). The Company’s policy is to record cash
receipts on impaired loans first as reductions in principal and then as interest income.

The following table summarizes impaired loan financial data at December 31, 2009 and 2008:

in millions

December 31,

2009

2008

Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impaired loans with specific allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount of the specific allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$116.4
$ 18.1
3.8
$

$106.8
8.3
$
1.2
$

Impaired loans with a carrying amount of $51.2 million at December 31, 2009 were subject to specific
allocations of $3.8 million and partial charge-offs of $28.5 million during the year. Collateral dependent impaired
loans without specific allocations at December 31, 2009 and 2008 either had collateral which exceeded the
carrying value of the loans or reflected a partial charge-off to the market value of collateral (less costs to sell), as
of the most recent appraisal date.

47

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. Predominately, the Company uses the fair value of collateral approach based upon a reliable
valuation.

When a loan secured by real estate migrates to nonperforming and impaired status and it does not have a

market valuation less than one year old, the Company secures an updated market valuation by a third party
appraiser that is reviewed by the Company’s on staff appraiser. Subsequently, the asset will be appraised
annually by a third party appraiser or the Company’s on staff appraiser. The evaluation may occur more
frequently if management determines that there has been increased market deterioration within a specific
geographical location. Upon receipt and verification of the market valuation, the Company will record the loan at
the lower of cost or market (less costs to sell) by recording a charge-off to the allowance for loan and lease losses
or by designating a specific reserve in accordance with accounting principles generally accepted in the United
States.

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

We maintain an allowance for loan and lease losses (“ALLL”) to absorb losses inherent in the loan

portfolio. The size of the ALLL is determined through quarterly assessments of the probable estimated losses in
the loan portfolio. Our methodology for making such assessments and determining the adequacy of the ALLL
includes the following key elements:

1. General valuation allowance consistent with the Contingencies topic of the FASB ASC.

2. Criticized/classified loss reserves on specific relationships. Specific allowances for identified problem

loans are determined in accordance with the Receivables topic of the FASB ASC.

3.

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

On a quarterly basis our Chief Credit Officer reviews with Executive Management and the Board of

Directors the various additional factors that management considers when determining the adequacy of the ALLL,
including economic and business condition reviews. Factors which influenced management’s judgment in
determining the amount of the additions to the ALLL charged to operating expense include the following as of
the applicable balance sheet dates:

1.

Existing general economic and business conditions affecting our market place

2. Credit quality trends, including trends in nonperforming loans

3. Collateral values

4.

Seasoning of the loan portfolio

5. Bank regulatory examination results

6.

Findings of internal credit examiners

7. Duration of current business cycle

48

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

In addition to the ALLL, we maintain an allowance for unfunded loan commitments and letters of credit.

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

49

Analysis of the ALLL

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

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

2009

2008

2007

2006

2005

December 31,

Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance established through acquisition . . . . . . . . . . . .
Charge-offs: (1)

Commercial business . . . . . . . . . . . . . . . . . . . . . .
Real Estate:

$

42,747
—

$

26,599
—

(dollars in thousands)
$

$

20,182
3,192

20,829
—

$

19,881
—

(12,930)

(2,819)

(781)

(2,077)

(386)

One-to-four family residential
Commercial and five or more family

. . . . . . . . . . .

residential properties . . . . . . . . . . . . . . . . .

(395)

(1,309)

(46)

(966)

Real Estate Construction:

One-to-four family residential
Commercial and five or more family

. . . . . . . . . . .

(27,711)

(18,340)

—

—

—

residential properties . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(9,297)
(2,879)

(2,169)
(1,647)

—
(432)

Total charge-offs . . . . . . . . . . . . . . . . . . . . . .

(54,521)

(25,987)

(1,213)

—

(9)

—

—
(1,109)

(3,195)

—

—

—

(665)
(221)

(1,272)

Recoveries: (1)

Commercial business . . . . . . . . . . . . . . . . . . . . . .
Real Estate:

One-to-four family residential
Commercial and five or more family

. . . . . . . . . . .

residential properties . . . . . . . . . . . . . . . . .

Real Estate Construction:

One-to-four family residential
Commercial and five or more family

. . . . . . . . . . .

residential properties . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total recoveries . . . . . . . . . . . . . . . . . . . . . .

Net charge-offs . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . . . . . . . . . .

750

68

25

833

—
76

1,752

(52,769)
63,500

272

—

304

16

—
367

959

530

—

12

—

—
291

833

233

218

20

83

7

—
140

483

—

—

—

326
156

700

(25,028)
41,176

(380)
3,605

(2,712)
2,065

(572)
1,520

Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

53,478

$

42,747

$

26,599

$

20,182

$

20,829

Loans outstanding at end of period (2) . . . . . . . . . . . . .

$2,008,884

$2,232,332

$2,282,728

$1,708,962

$1,564,704

Average amount of loans outstanding . . . . . . . . . . . . .

$2,124,574

$2,264,486

$1,990,622

$1,629,616

$1,494,567

Allowance for loan and lease losses to period-end

loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net charge-offs to average loans outstanding . . . . . . . .

Allowance for unfunded commitments and letters

of credit

Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net changes in the allowance for unfunded

commitments and letters of credit . . . . . . . . . . . . . . .

Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

2.66%

2.48%

1.91%

1.11%

1.17%

0.02%

1.18%

0.17%

1.33%

0.04%

$

500

$

349

$

339

$

339

$

275

775

$

151

500

10

—

$

349

$

339

$

289

50

339

(1) Certain prior period balances have been reclassified to conform to the current period presentation.
(2) Excludes loans held for sale.

50

We have used the same methodology for ALLL calculations during 2009, 2008 and 2007. Adjustments to

the percentages of the ALLL allocated to loan categories are made based on trends with respect to delinquencies
and problem loans within each pool of loans. We continually review the ALLL quantitative and qualitative
methodology and make adjustments appropriate to the loan portfolio. We maintain a conservative approach to
credit quality and will continue to prudently add to our ALLL as necessary in order to maintain adequate
reserves. We carefully monitor the loan portfolio and continue to emphasize the importance of credit quality
while continuously strengthening our loan monitoring systems and controls.

Allocation of the ALLL

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

2009

2008

December 31,

2007

2006

2005

Balance at End of
Period Applicable to: (1)

Amount

% of
Total
Loans* Amount

% of
Total
Loans* Amount

% of
Total
Loans* Amount

% of
Total
Loans* Amount

% of
Total
Loans*

Commercial

business . . . . . . . . . .

$21,969

37.1% $12,759

36.3% $ 7,068

33.4% $ 9,628

36.1% $12,060

36.5%

(dollars in thousands)

Real estate and
construction:

. . . .

One-to-four
family
residential
Commercial and
five or more
family
residential
properties . . . .
Consumer . . . . . . . . . .
Unallocated . . . . . . . . .

9,087

8.5% 16,781

12.0% 7,648

14.5% 1,134

8.4%

809

7.4%

19,703
1,282
1,437

44.4% 11,983
935
10.0%
289
0.0%

42.1% 11,170
713
9.6%
—
0.0%

44.3% 8,841
281
298

7.8%
0.0%

46.9% 6,663
677
620

8.6%
0.0%

47.1%
9.0%
0.0%

Total

. . . . . . . . . . . . . .

$53,478

100.0% $42,747

100.0% $26,599

100.0% $20,182

100.0% $20,829

100.0%

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

*
(1) Certain prior period balances have been reclassified to conform to the current period presentation.

Goodwill

During the third quarter of 2009, the Company performed its annual assessment for potential impairment of
goodwill. Goodwill is assigned to reporting units for purposes of impairment testing. The Company had three reporting
units during the third quarter of 2009: retail banking, commercial banking, and private banking. The products and
services of companies previously acquired were comparable to the Company’s retail banking operations. Accordingly,
all of the Company’s goodwill was assigned to the retail banking reporting unit. As part of this assessment, we
considered three generally accepted approaches to measuring fair value: income, cost and market.

•

Income: In the income approach, an economic benefit stream of the Company is selected, usually
based on historical or projected cash flow. The focus is to determine a benefit stream that is reasonably
reflective of the Company’s most likely future operations. This selected benefit stream is then
discounted to present value with an appropriate risk-adjusted discount rate or capitalization rate.
Accurately projecting a benefit stream reflective of the most likely future operations is challenging
since the Company is currently not profitable and a number of uncertainties exist associated with the
current economic environment. In addition, there was no forecast readily available at the retail banking
reporting unit level. Accordingly, the income approach was not utilized to determine fair value.

51

• Cost: The cost approach adjusts the Company’s assets to market value. Since the intangible assets of

the Retail Banking reporting unit are not captured in the cost approach this approach was not utilized to
determine fair value.

• Market: In the market approach, publicly-traded companies with financial and operating

characteristics similar to the Company are identified and selected. Once such companies are selected,
valuation multiples are synthesized and applied to the Company. Reasonable market-pricing data was
available during the quarter and accordingly, the market approach was used to estimate the value of the
Company’s three reporting units.

Screening criteria utilized to identify comparable companies included publicly-traded companies within the

banking industry with total assets ranging between $1.0 billion and $4.0 billion as of June 30, 2009 and located
in the Western region of the United States excluding California. California was excluded due to the severe
market conditions there as well as our lack of presence in that market. Based upon these criteria, 14 guideline
companies were selected for our analysis. The data obtained for the guideline companies was then converted to
various valuation multiples. We focused on the price to tangible book value of equity multiple as this multiple
generally reflects returns on the capital employed within the industry and produces a net-of-debt, marketable
minority value. In addition, the price to tangible book value multiple is generally correlated with the profitability
of each individual company.

Based upon the net interest margin, return on average assets and return on average equity of the Company’s

reporting units compared to the guideline companies, appropriate price to tangible book value multiples were
selected. The following table shows the selected price to tangible book value multiple as well as the indicated
minority fair value for each reporting unit, calculated as of August 31, 2009:

Reporting Unit

Price to Tangible
Book Value Multiple

Indicated Minority
Fair Value

(dollars in thousands)

Retail Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Private Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate & Other

1.4
1.1
1.5
1.0

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$277,480
115,140
47,540
93,070

$533,230

After calculating the indicated minority value a control premium is applied to the minority value. A control
premium was utilized as the value of a company from the perspective of a controlling interest is generally higher than
the widely quoted market price per share. The Company’s control premium assumption was calculated utilizing data
recorded for control acquisitions within the banking industry from December 31, 2007 through September 30, 2009.
The average control premium from this data was approximately 68% and stems from a combination of both pure
control as well as strategic synergies arising from acquisition. Accordingly, the Company discounted the average
control premium to 20% to obtain an approximate, pure control premium.

The following table details the goodwill, carrying value of equity and fair value of equity after applying the

20% control premium to the indicated minority fair values above.

(in thousands)
Tangible book value . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangible . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

REPORTING UNITS

Retail
Banking

Commercial
Banking

Private
Banking

Corp

Total

$198,204
5,197
95,519

$104,670

$31,690

$93,070

—
—

—
—

—
—

$427,634
5,197
95,519

Carrying value of equity . . . . . . . . . . . . . . . . . . . . . . .

$298,920

$104,670

$31,690

$93,070

$528,350

Fair value of equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$332,980

$138,170

$57,050

$96,860

$625,060

52

Based upon the analysis performed, the fair value of the retail reporting unit exceeded its carrying value
(including goodwill) as of September 30, 2009. In conjunction with the analysis of its operating segments during the
fourth quarter (see Note 22 to the Consolidated Financial Statements in “Item 8. Financial Statements and
Supplementary Data” of this report), management concluded that as of December 31, 2009 it had one, single reporting
unit. As of December 31, 2009 management determined there were no events or circumstances which would more
likely than not reduce the fair value of its reporting unit below its carrying amount. Management also determined, had
the goodwill impairment test been performed based upon one reporting unit as of September 30, 2009, the fair value of
the single consolidated reporting unit would have been in excess of its carrying value (including goodwill).

Deposits

The following table sets forth the composition of the Company’s deposits by significant category:

December 31,

2009

2008

2007

Core deposits:

Demand and other noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit less than $100,000 . . . . . . . . . . . . . . . . . . . . .

Total core deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit greater than $100,000 . . . . . . . . . . . . . . . . . .
Wholesale certificates of deposit (CDARS®) . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Wholesale certificates of deposit

$ 574,687
499,922
604,229
139,406
254,577

2,072,821
259,794
96,314
53,776

(in thousands)

$ 466,078
519,124
530,065
122,076
303,704

1,941,047
338,971
39,903
62,230

$ 468,237
478,596
609,502
115,324
324,734

1,996,393
428,885
762
72,021

Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,482,705

$2,382,151

$2,498,061

Deposits totaled $2.48 billion at December 31, 2009 compared to $2.38 billion at December 31, 2008. Core

deposits, which include noninterest-bearing deposits and interest-bearing deposits excluding time deposits of
$100,000 and over, provide a stable source of low cost funding. Core deposits increased to $2.07 billion at
December 31, 2009 compared with $1.94 billion at December 31, 2008. We anticipate continued growth in our
core deposits through both the addition of new customers and our current client base.

At December 31, 2009 brokered and other wholesale deposits (excluding public deposits) totaled $150.1

million or 6% of total deposits compared to $102.1 million or 4% of total deposits, at year-end 2008. The
increase in brokered deposits is attributed to the Company’s participation in the Certificate of Deposit Account
Registry Service (“CDARS®”). CDARS® is a network that allows participating banks to offer extended FDIC
deposit insurance coverage on certificates of deposit. Unlike traditional brokered deposits, the Company
generally makes CDARS® available only to existing customers who desire additional deposit insurance coverage
rather than as a means of generating additional liquidity.

At December 31, 2009 public deposits held by the Company totaled $117.9 million compared to $118.4

million at December 31, 2008. In 2009, the Company’s subsidiary bank was notified by the Washington Public
Deposit Protection Commission (“WPDPC”) that the failure of a bank in Washington state had resulted in loss
exposure to banks with deposits of Washington state public entities. To prevent losses to public entities,
Washington state requires that all financial institutions that accept public deposits must pledge collateral to the
WPDPC and participate in a collateral pool established to protect public deposits that are not covered by FDIC
insurance or the assets of the failed bank. As a result, the Company was assessed $154 thousand out of a total
statewide assessment of just over $11.6 million. Subsequent to the assessment, the WPDPC issued a resolution
that all public depositaries shall by June 30, 2009 take all measures necessary to fully collateralize its uninsured
public deposits at 100%. Uninsured public deposit balances declined from $114.9 million at December 31, 2008
to $33.9 million at December 31, 2009. This reduction was the result of the run-off of uninsured public deposit
balances and the migration of uninsured deposit accounts to insured deposit accounts.

53

The following table sets forth the amount outstanding of time certificates of deposit and other time deposits

in amounts of $100,000 or more by time remaining until maturity and percentage of total deposits:

Amounts maturing in:

December 31, 2009

Time Certificates of Deposit
of $100,000 or More

Other Time Deposits of
$100,000 or More

Percent of
Total
Deposits

Percent of
Total
Deposits

Amount

Amount

Three months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 3 through 6 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 6 through 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$100,026
60,223
65,805
33,740

(dollars in thousands)
4% $47,434
7,756
2%
36,071
3%
—
1%

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$259,794

10% $91,261

2%
0%
2%
0%

4%

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

Borrowings

Borrowed funds provide an additional source of funding for loan growth. Our borrowed funds consist
primarily of borrowings from the Federal Home Loan (“FHLB”) and Federal Reserve Bank (“FRB”) as well as
securities repurchase agreements. FHLB advances are secured by one-to-four family real estate mortgages and
investment securities. Federal Reserve Bank advances and securities repurchase agreements are secured by
investment securities and commercial loans.

The following tables set forth the details of FHLB advances and FRB borrowings:

FHLB Advances
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average balance during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum month-end balance during the year
. . . . . . . . . . . . . . . . . . . . . .
Weighted average rate during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average rate at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Federal Reserve Bank Borrowings
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average balance during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
Maximum month-end balance during the year
Weighted average rate during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average rate at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Years ended December 31,

2009

2008

2007

(dollars in thousands)

$100,000
$111,211
$178,000

$150,000
$282,624
$384,000

$257,670
$207,521
$264,250

2.38%
2.49%

2.53%
1.89%

5.27%
4.59%

Years ended December 31,

2009

2008

2007

(dollars in thousands)

$ —
$ 38,205
$100,000

$ 50,000
$ 14,569
$120,000

$ —
$
54
$ —

0.30%
0.00%

0.62%
0.60%

5.36%
0.00%

Additionally, we had a $20.0 million line of credit with a large commercial bank with an interest rate
indexed to LIBOR. The outstanding balance on the line was $100,000 at December 31, 2008. The line matured
on June 30, 2009 and the Company chose not to renew it.

54

For additional information on our borrowings, including amounts pledged as collateral, see Notes 11 and 12

to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this
report.

Long-term Subordinated Debt

During 2001, we, participated in a pooled trust preferred offering through our subsidiary trust (the “Trust”),
whereby the trust issued $22.0 million of 30 year floating rate capital securities. The capital securities constitute
guaranteed preferred beneficial interests in debentures issued by the trust. The debentures had an initial rate of
7.29% and a rate of 3.86% at December 31, 2009. The floating rate is based on the 3-month LIBOR plus 3.58%
and is adjusted quarterly. Through the Trust we may call the debt at ten years at par, allowing us to retire the debt
early if conditions are favorable. Through the 2007 Town Center Bancorp acquisition, the Company assumed an
additional $3.0 million in floating rate trust preferred obligations; these debentures had a rate of 4.03% at
December 31, 2009. The floating rate is based on the 3-month LIBOR plus 3.75% and is adjusted quarterly.

Contractual Obligations & Commitments

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

Payments due within time period at December 31, 2009

0-12
Months

1-3
Years

4-5
Years

(in thousands)

Operating & equipment leases . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term subordinated debt . . . . . . . . . . . . . . . . . . .

$

3,336
2,374,158
—
86
—

$ 6,133
90,980
—
—
—

$

5,524
17,567
100,000
—
—

Due after
Five
Years

$ 6,981
—
—
25,000
25,669

Total

$

21,974
2,482,705
100,000
25,086
25,669

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,377,580

$97,113

$123,091

$57,650

$2,655,434

At December 31, 2009, we had commitments to extend credit of $587.5 million compared to $703.3 million

at December 31, 2008. For additional information regarding future financial commitments, see Note 18 to our
Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.

Liquidity and Sources of Funds

In general, our primary sources of funds are net income, loan repayments, maturities and principal payments on

investment securities, customer deposits, advances from the FHLB and FRB, securities repurchase agreements and
other borrowings. These funds are used to make loans, purchase investments, meet deposit withdrawals and maturing
liabilities and cover operational expenses. Scheduled loan repayments and core deposits have proved to be a relatively
stable source of funds while other deposit inflows and unscheduled loan prepayments are influenced by interest rate
levels, competition and general economic conditions. We manage liquidity through monitoring sources and uses of
funds on a daily basis and had unused credit lines with the FHLB and the Federal Reserve Bank of $535.0 million and
$335.0 million, respectively, at December 31, 2009, that are available to us as a supplemental funding source. The
holding company’s sources of funds are dividends from its banking subsidiary which are used to fund dividends to
common and preferred shareholders and cover operating expenses.

Capital Expenditures

Capital expenditures, primarily consisting of one additional branch location as well as various information

technology-related expenditures, are anticipated to be approximately $1.9 million during 2010.

55

See the Statement of Cash Flows of the Consolidated Financial Statements in “Item 8. Financial Statements
and Supplementary Data” of this report for additional information regarding our sources and uses of funds during
2009, 2008 and 2007.

Capital

Our shareholders’ equity increased to $528.1 million at December 31, 2009, from $415.4 million at
December 31, 2008. Shareholders’ equity was 16.50% and 13.41% of total assets at December 31, 2009 and
2008. The increase is due primarily to the net proceeds of $113.5 million from a public offering of common stock
completed in August, 2009. On August 11, 2009, the Company issued 9.8 million shares of its common stock at a
price to the public, before underwriting discounts and commissions, of $12.25 per share.

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 preferred stock, common
shareholders’ equity and trust preferred obligations, less goodwill and certain identifiable intangible assets, while
Tier II capital includes the allowance for loan losses and subordinated debt, both subject to certain limitations.
Regulatory minimum risk-based capital guidelines require Tier I capital of 4% of risk-adjusted assets and total
capital (combined Tier I and Tier II) of 8% to be considered “adequately capitalized”.

Federal Deposit Insurance Corporation regulations set forth the qualifications necessary for a bank to be

classified as “well capitalized”, primarily for assignment of FDIC insurance premium rates. To qualify as “well
capitalized,” banks must have a Tier I risk-adjusted capital ratio of at least 6%, a total risk-adjusted capital ratio
of at least 10%, and a leverage ratio of at least 5%. Failure to qualify as “well capitalized” can negatively impact
a bank’s ability to expand and to engage in certain activities. The Company and its banking subsidiary qualify as
“well-capitalized” at December 31, 2009 and 2008.

The following table sets forth the Company’s and its banking subsidiary’s capital ratios at December 31,

2009 and 2008:

Company

Columbia Bank

Requirements

2009

2008

2009

2008

Adequately
capitalized

Well-
Capitalized

Total risk-based capital ratio . . . . . . . . . . . . . . . . .
Tier 1 risk-based capital ratio . . . . . . . . . . . . . . . .
Leverage ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19.60% 14.25% 16.17% 11.21%
18.34% 12.99% 14.91% 9.96%
14.33% 11.27% 11.73% 8.64%

8%
4%
4%

10%
6%
5%

Dividends

The following table sets forth the dividends paid per common share and the dividend payout ratio (dividends

paid per common share divided by basic earnings per share):

Years ended December 31,

2009

2008

2007

Dividends paid per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend payout ratio (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$0.07
NM

$0.58

$0.66

193%

35%

(1) Dividends paid per common share as a percentage of net income per diluted share

NM Not Meaningful

For quarterly detail of dividends declared during 2009 and 2008 see “Item 5. Market for Registrant’s

Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this report.

56

Applicable federal, Washington state and Oregon regulations restrict capital distributions, including

dividends, by the Company’s banking subsidiary. Such restrictions are tied to the institution’s capital levels after
giving effect to distributions. Our ability to pay cash dividends is substantially dependent upon receipt of
dividends from our banking subsidiary. Additionally, due to our participation in the Treasury’s CPP our quarterly
dividend rate is limited to a range to no more than $0.07 per common share. For the duration of our participation
in the CPP, we would first have to obtain the approval of the Treasury prior to paying a quarterly dividend
greater than $0.07 per common share. In addition, the payment of cash dividends is subject to Federal regulatory
requirements for capital levels and other restrictions. In this regard, current guidance from the Federal Reserve
provides, among other things, that dividends per share on the Company’s common stock generally should not
exceed earnings per share, measured over the previous four fiscal quarters.

Reference “Item 6. Selected Financial Data” of this report for our return on average assets, return on average

equity and average equity to average assets ratios for all reported periods.

Non-GAAP Financial Measures

In addition to capital ratios defined by banking regulators, the Company considers various measures when

evaluating capital utilization and adequacy, including:

• Tangible common equity to tangible assets, and

• Tangible common equity to risk-weighted assets.

The Company believes these measures are important because they reflect the level of capital available to
withstand unexpected market conditions. Additionally, presentation of these measures allows readers to compare
certain aspects of the Company’s capitalization to other organizations. These ratios differ from capital measures
defined by banking regulators principally in that the numerator excludes shareholders’ equity associated with preferred
securities, the nature and extent of which varies across organizations. Additionally, these measures present capital
adequacy inclusive and exclusive of accumulated other comprehensive income. These calculations are intended to
complement the capital ratios defined by banking regulators for both absolute and comparative purposes.

Because generally accepted accounting principles (“GAAP”) do not include capital ratio measures, the

Company believes there are no comparable GAAP financial measures to these tangible common equity ratios.
The following table reconciles the Company’s calculation of these measures to amounts reported under GAAP.

Despite the importance of these measures to the Company, there are no standardized definitions for them
and, as a result, the Company’s calculations may not be comparable with other organizations. Also, there may be
limits in the usefulness of these measures to investors. As a result, the Company encourages readers to consider
its consolidated financial statements in their entirety and not to rely on any single financial measure.

in thousands

Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Dec 31
2009

528,139
(74,301)
(95,519)
(4,863)

Dec 31
2008

415,385
(73,743)
(95,519)
(5,908)

Tangible common equity (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

353,456
3,200,930
(95,519)
(4,863)

240,215
3,097,079
(95,519)
(5,908)

Tangible assets (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-weighted assets, determined in accordance with prescribed regulatory

3,100,548

2,995,652

requirements (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,404,185

2,567,346

Ratios
Tangible common equity to tangible assets (a)/(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible common equity to risk-weighted assets (a)/(c) . . . . . . . . . . . . . . . . . . . . . . . . . .

11.40%
14.70%

8.02%
9.36%

57

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

We are exposed to interest rate risk, which is the risk that changes in prevailing interest rates will adversely
affect assets, liabilities, capital, income and expenses at different times or in different amounts. Generally, there
are four sources of interest rate risk as described below:

Repricing risk—Repricing risk is the risk of adverse consequences from a change in interest rates that

arises because of differences in the timing of when those interest rate changes affect an institution’s assets
and liabilities.

Basis risk—Basis risk is the risk of adverse consequence resulting from unequal changes in the spread

between two or more rates for different instruments with the same maturity.

Yield curve risk—Yield curve risk is the risk of adverse consequence resulting from unequal changes

in the spread between two or more rates for different maturities for the same instrument.

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

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

The analysis of an institution’s interest rate gap (the difference between the repricing of interest-earning

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

The table on the following page sets forth the estimated maturity or repricing, and the resulting interest rate
gap of our interest-earning assets and interest-bearing liabilities at December 31, 2009. The amounts in the table
are derived from our internal data and are based upon regulatory reporting formats. Therefore, they may not be
consistent with financial information appearing elsewhere herein that has been prepared in accordance with
accounting principles generally accepted in the United States. The amounts could be significantly affected by
external factors such as changes in prepayment assumptions, early withdrawal of deposits and competition. For
example, although certain assets and liabilities may have similar maturities or periods to repricing, they may
react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while other types may lag changes in
market interest rates.

58

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

December 31. 2009

Interest-Earning Assets

Estimated Maturity or Repricing

0-3
months

4-12
months

Over 1 year
through
5 years

Due after
5 years

Total

Interest-earning deposits . . . . . . . . . . . . . .
Loans, net of deferred fees . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . .

$ 249,272
936,921
31,345

$ — $
180,096
47,884

— $

702,988
306,883

— $ 249,272
2,008,884
631,645

188,879
245,533

Total interest-earning assets . . . . . . . .

$1,217,538

$227,980

$1,009,871

$ 434,412

$2,889,801

Allowance for loan and lease losses . . . . . . . . .
Cash and due from banks . . . . . . . . . . . . . . . . . .
Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total assets . . . . . . . . . . . . . . . . . . . . . . . . .

Interest-Bearing Liabilities

(53,478)
55,802
62,670
246,135

$3,200,930

Interest bearing non-maturity deposits . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term subordinated debt . . . . . . . . . . .

$ 609,629
260,673
86
25,669

$ — $
295,238
—
—

— $ 633,928

108,550
100,000
—

—
25,000
—

$1,243,557
664,461
125,086
25,669

Total interest-bearing liabilities . . . . .

$ 896,057

$295,238

$ 208,550

$ 658,928

2,058,773

Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . .

Total liabilities . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . .

Total liabilities and shareholders’

equity . . . . . . . . . . . . . . . . . . . . . . .

Interest-bearing liabilities as a percent of total

interest-earning assets . . . . . . . . . . . . . . . . . .
Rate sensitivity gap . . . . . . . . . . . . . . . . . . . . . .
Cumulative rate sensitivity gap . . . . . . . . . . . . .
Rate sensitivity gap as a percentage of interest-
earning assets . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative rate sensitivity gap as a percentage
of interest-earning assets . . . . . . . . . . . . . . . .

31.01%

10.22%

7.22%

22.80%

$ 321,481
$ 321,481

$ (67,258) $ 801,321
$1,055,544
$254,223

$(224,516)
$ 831,028

11.12%

-2.33%

27.73%

-7.77%

11.12%

8.80%

36.53%

28.76%

614,018

2,672,791
528,139

$3,200,930

Interest Rate Sensitivity on Net Interest Income

A number of measures are used to monitor and manage interest rate risk, including income simulations and

interest sensitivity (gap) analyses. An income simulation model is the primary tool used to assess the direction
and magnitude of changes in net interest income resulting from changes in interest rates. Key assumptions in the
model include prepayment speeds on mortgage-related assets, cash flows and maturities of other investment
securities, loan and deposit volumes and pricing. These assumptions are inherently uncertain and, as a result, the
model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest
rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and
frequency of interest rate changes and changes in market conditions and management strategies, among other
factors.

59

Based on the results of the simulation model as of December 31, 2009, we would expect a decrease in net
interest income of $1.2 million if interest rates gradually decrease from current rates by 100 basis points and an
increase in net interest income of $198 thousand if interest rates gradually increase from current rates by 200
basis points over a twelve-month period.

Impact of Inflation and Changing Prices

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

60

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of Columbia Banking System, Inc. and its

subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of
income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2009. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, such financial statements present fairly, in all material respects, the financial position of
Columbia Banking Systems, Inc. and its subsidiaries as of December 31, 2009 and 2008, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity
with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board

(United States), the Company’s internal control over financial reporting as of December 31, 2009, based on the
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 4, 2010 expressed an unqualified
opinion on the Company’s internal control over financial reporting.

Seattle, Washington
March 4, 2010

61

COLUMBIA BANKING SYSTEM, INC.

CONSOLIDATED STATEMENTS OF INCOME

Interest Income
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold and deposits in banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Interest Expense
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank and Federal Reserve Bank borrowings . . . . . . . . . .
Long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for loan and lease losses . . . . . . . . . .

Noninterest Income
Service charges and other fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merchant services fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of Visa and Mastercard shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of investment securities, net
Impairment charge on investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance (“BOLI”) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Noninterest Expense
Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merchant processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising and promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal and professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes, licenses and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cost operation of other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Years ended December 31,

2009

2008

2007

(in thousands except per share)

$117,062
17,300
8,458
215
143,035

$147,830
18,852
7,976
402
175,060

$156,253
18,614
7,923
1,427
184,217

23,250
2,759
1,197
477
27,683
115,352
63,500
51,852

15,181
7,321
49
1,077
—
2,023
4,039
29,690

45,307
7,573
1,800
867
55,547
119,513
41,176
78,337

14,813
8,040
3,028
846
(19,541)
2,075
5,589
14,850

59,930
11,065
2,177
2,225
75,397
108,820
3,605
105,215

13,498
8,373
—
—
—
1,886
3,991
27,748

47,275
12,128
3,449
1,943
4,047
3,871
2,478
5,777
861
12,659
94,488
(12,946)
(8,978)
$ (3,968) $

49,315
12,838
3,558
2,324
3,486
1,969
2,917
2,141
(49)
13,626
92,125
1,062
(4,906)
5,968

46,703
12,322
3,470
2,391
2,564
4,912
2,882
507
5
13,073
88,829
44,134
11,753
$ 32,381

Net Income (Loss) Applicable to Common Shareholders . . . . . . . . . . . . . . .

$ (8,371) $

5,498

$ 32,381

Per Common Share

Earnings (loss) basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings (loss) diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average number of common shares outstanding . . . . . . . . . . . . . . . .
Weighted average number of diluted common shares outstanding . . . . . . . . . .

$
$
$

(0.38) $
(0.38) $
0.07
$
21,854
21,854

0.30
0.30
0.58
17,914
18,010

$
$
$

1.91
1.89
0.66
16,802
16,972

See accompanying notes to the Consolidated Financial Statements.

62

COLUMBIA BANKING SYSTEM, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-earning deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Securities available for sale at fair value (amortized cost of $602,675 and $525,110,

respectively)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net of deferred loan fees of ($4,616) and ($4,033), respectively . . . . . . . . . . . .
Less: allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Loans, net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
Core deposit intangible, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2009

2008

(in thousands)

$

$

55,802
249,272

305,074

84,787
3,943

88,730

620,038
11,607
—
2,008,884
53,478

1,955,406
10,335
62,670
19,037
95,519
4,863
116,381

528,918
11,607
1,964
2,232,332
42,747

2,189,585
11,646
61,139
2,874
95,519
5,908
99,189

Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,200,930

$3,097,079

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits:
Non-interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 574,687
1,908,018

$ 466,078
1,916,073

Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank and Federal Reserve Bank borrowings . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term subordinated debt
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,482,705
100,000
25,000
86
25,669
39,331

2,382,151
200,000
25,000
201
25,603
48,739

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,672,791

2,681,694

Commitments and contingent liabilities (note 18)
Shareholders’ equity:

December 31,

2009

2008

Preferred stock (76,898 aggregate liquidation preference)

Authorized shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,000
77

2,000
77

74,301

73,743

Common Stock (no par value)

Authorized shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . .

Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . .

63,033
28,129

63,033
18,151

348,706
93,316
11,816

528,139

233,192
103,061
5,389

415,385

Total Liabilities and Shareholders’ Equity . . . . . . . .

$3,200,930

$3,097,079

See accompanying notes to Consolidated Financial Statements.

63

COLUMBIA BANKING SYSTEM, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Preferred Stock

Common Stock

Number of
Shares

Amount

Number of
Shares

Amount

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Total
Shareholders’
Equity

$ — 16,060

(in thousands)
$166,763 $ 89,037

$ (3,453)

$252,347

—

32,381

—

32,381

Balance at January 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Comprehensive income:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Other comprehensive income, net of tax:

Net unrealized gain from securities, net of reclassification

adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Net change in cash flow hedging instruments . . . . . . . . . . . . . . . . . . —

Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Acquisitions:

Shares issued to the shareholders of Mountain Bank Holding

Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Shares issued to the shareholders of Town Center Bancorp . . . . . . . . . . . —
Issuance of common stock—stock option and other plans . . . . . . . . . . . . . . . . —
Issuance of common stock—restricted stock awards, net of cancelled

awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Purchase and retirement of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Share-based payment
Tax benefit associated with share-based payment
. . . . . . . . . . . . . . . . . . . . . . —
Cash dividends paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Balance at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . . . —
Adjusted balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Comprehensive income:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Other comprehensive income, net of tax:

Net unrealized gain from securities, net of reclassification

adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Net change in cash flow hedging instruments . . . . . . . . . . . . . . . . . . —

Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

77

Issuance of preferred stock and common stock warrant, net
Issuance of common stock—stock option and other plans . . . . . . . . . . . . . . . . —
Issuance of common stock—restricted stock awards, net of cancelled

. . . . . . . . . . . . . .

awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Share-based payment
. . . . . . . . . . . . . . . . . . . . . . —
Tax benefit associated with share-based payment
Preferred dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Cash dividends paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income:

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Other comprehensive income, net of tax:

77

Net unrealized gain from securities, net of reclassification

adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Net change in cash flow hedging instruments . . . . . . . . . . . . . . . . . . —
Pension plan plan liability adjustment, net . . . . . . . . . . . . . . . . . . . . —

Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accretion of preferred stock discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Issuance of common stock, net of offering costs . . . . . . . . . . . . . . . . . . . . . . . —
Issuance of common stock—stock option and other plans . . . . . . . . . . . . . . . . —
Issuance of common stock—restricted stock awards, net of cancelled

awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Share-based payment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Tax benefit deficiency associated with share-based compensation . . . . . . . . . —
Preferred dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Cash dividends paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

77

—

—
—

—
—
—

—
—

—
—
—

5,540
2,925

—
—
—

—
—
—
—
—
5,012
—
5,012

—

993
705
193

31,652
25,467
2,836

—
—
—
—

—
(2,121)
974
979
— (11,249)
110,169
(2,137)
108,032

226,550
—

226,550

5,968

67
—
(65)
—
—
—
—
—
—
—
— 17,953
—
—
— 17,953

—

—
—

—

—
—

—
—

729
(352)

—
—

—

—
—

73,743
—

—
137

3,168
1,906

(43)
—

—
—
—
—
—

$73,743

61

—
—
—
—
18,151

—
22

—
1,327
—
241
—
(427)
— (10,491)
$233,192 $103,061

—
—

—
—
—
—
—

$ 5,389

—

—
—

—

—
—
—

—
9,775
100

103
—
—
—
—
28,129

—
113,537
1,085

(558)
—
—

—
1,038
(146)
—
—

—
—
—
(3,845)
(1,374)
$348,706 $ 93,316

—
—
—

—
—
—
—
—

$11,816

—

—
—
—

558
—
—

—
—
—
—
—

$74,301

5,540
2,925
8,465
40,846

31,652
25,467
2,836

—
(2,121)
974
979
(11,249)
341,731
(2,137)
339,594

5,968

729
(352)
377
6,345

76,868
1,906

—
1,349
241
(427)
(10,491)
$415,385

8,740
(1,657)
(656)
6,427
2,459

—

113,537
1,085

—
1,038
(146)
(3,845)
(1,374)
$528,139

—

(3,968)

—

(3,968)

—
—
—

—
—
—

8,740
(1,657)
(656)

See accompanying notes to Consolidated Financial Statements.

64

COLUMBIA BANKING SYSTEM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Cash Flows From Operating Activities
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities

Provision for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation, amortization and accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gain on sale of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized loss (gain) on sale of other real estate and fixed assets . . . . . . . . .
Gain on terminated cash flow hedging instruments . . . . . . . . . . . . . . . . . . . . . .
Write-down of other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charge on investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in:

Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax benefit
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash Flows From Investing Activities
Purchases of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturities and paydowns of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan originations, net of principal collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposal of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of Mt. Rainier and Town Center, net of cash acquired . . . . . . . . . . . . . .
Sales of Federal Reserve Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Termination of cash flow hedging instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Improvements to other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of other real estate and other personal property owned . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . .

Cash Flows From Financing Activities
Net increase (decrease) in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from Federal Home Loan Bank and Federal Reserve Bank borrowings . . .
Repayments of Federal Home Loan Bank and Federal Reserve Bank borrowings . .
Proceeds from repurchase agreement borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of repurchase agreement borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase in other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of preferred stock, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock, net of offering costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . .
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Supplemental Information:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans foreclosed and transferred to other real estate owned . . . . . . . . . . . . . . . . . . .
Transfer of securities from held to maturity to available for sale . . . . . . . . . . . . . . . .
Share-based consideration issued for acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . .

Years ended December 31,

2009

2008

2007

(in thousands)

$

(3,968) $

5,968

$

32,381

63,500
1,038
7,540
(1,077)
89
(2,570)
119
—

1,964
(85)
1,311
(2,327)
(21,560)
(6,717)
37,257

(162,412)
16,665
67,682
146,698
(6,281)
42
—
—
—
(1,165)
8,098
69,327

100,554
739,000
(839,000)

—
—
(115)
—
(5,155)
939
—
113,537

—

109,760
216,344
88,730
$ 305,074

41,176
1,349
7,046
(846)
(589)
(1,693)
—
19,541

2,518
(14,409)
2,969
(4,536)
(12,698)
(1,431)
44,365

(89,055)
53,512
49,652
21,702
(10,479)
925
—
—
8,100
—
949
35,306

(115,910)
3,287,268
(3,344,938)
25,000
—
(4,860)
76,868
(10,491)
1,906
—
—
241
(84,916)
(5,245)
93,975
88,730

$

3,605
974
6,685
—
(216)
—
—
—

(3,084)
(2,607)
(404)
6,014
2,945
4,306
50,599

(3,742)
29,867
49,224
(288,099)
(5,591)
216
(32,356)
310
—
—
—

(250,171)

170,025
2,992,548
(2,948,678)

—
(20,000)
4,863
—
(11,249)
2,836
(2,121)
—
979
189,203
(10,369)
104,344
93,975

$

$ 30,010
$
500
$ 23,398
$
$

$
$
$
— $
— $

60,083
9,937
3,557

$
$
$
— $
— $

69,383
13,930
—
1,258
57,119

See accompanying notes to Consolidated Financial Statements.

65

COLUMBIA BANKING SYSTEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2009, 2008 and 2007

1.

Summary of Significant Accounting Policies

Organization

Columbia Banking System, Inc. (the “Corporation”) is the holding company for Columbia State Bank (the

“Bank”). Columbia State Bank provides a full range of banking services through 52 offices in western
Washington state and the northern coastal and Portland metropolitan areas of Oregon. The Corporation also has
two unconsolidated subsidiaries, Columbia (WA) Statutory Trust and Town Center Bancorp Statutory Trust.
Because the Bank comprises substantially all of the business of the Corporation, references to the “Company”
mean the Corporation and the Bank together. The Corporation is approved as a financial holding company
pursuant to the Gramm-Leach-Bliley Act of 1999.

The Company’s accounting and reporting policies conform to accounting principles generally accepted in

the United States of America (“GAAP”) and practices in the financial services industry. To prepare the financial
statements in conformity with GAAP, management must make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements, and income and expenses during the
reporting period. Circumstances and events that differ significantly from those underlying our estimates and
assumptions could cause actual financial results to differ from our estimates. The most significant estimates
included in the financial statements relate to the allowance for loan and lease losses and goodwill impairment.

The Company has applied its accounting policies and estimation methods consistently in all periods
presented in these financial statements (to the periods in which they applied). The results of operations reflect
any adjustments, all of which are of a normal recurring nature, and which, in the opinion of management, are
necessary for a fair presentation of the results of the periods presented.

Consolidation

The consolidated financial statements of the Company include the accounts of the Corporation and the

Bank. Intercompany balances and transactions have been eliminated in consolidation.

Cash and cash equivalents

Cash and cash equivalents include cash and due from banks, and interest bearing balances due from

correspondent banks and the Federal Reserve Bank. Cash and cash equivalents have a maturity of 90 days or less
at the time of purchase.

Securities

Securities are classified based on management’s intention on the date of purchase. All securities are
classified as available for sale and are presented at fair value. Unrealized gains or losses on securities available
for sale are excluded from net income but are included as separate components of other comprehensive income,
net of taxes. Purchase premiums or discounts on securities available for sale are amortized or accreted into
income using the interest method over the terms of the individual securities. Realized gains or losses on sales of
securities available for sale are recorded using the specific identification method.

On a quarterly basis, the Company makes an assessment to determine whether a security on which there is

an unrealized loss is other-than-temporarily impaired. In performing this assessment for debt securities,
management considers whether or not the Company expects to recover the entire amortized cost basis of the
security. In addition, management must determine its position with respect to its intent to sell the security and
whether it is more likely than not that it will not have to sell the security before recovery of its cost basis. The
total amount recognized in earnings when there are credit losses associated with an impaired debt security and
management asserts that it does not have the intent to sell the security and it is more likely than not that it will
not have to sell the security before recovery of its cost basis is separated into (a) the amount representing a credit

66

loss and (b) the amount related to non-credit factors. The amount of impairment related to credit losses is
recognized in earnings. The credit loss component of an other-than-temporary impairment, representing and
increase in credit risk, is determined by the Company using its best estimate of the present value of cash flows
expected to be collected from the debt security. The amount of impairment related to non-credit factors is
recognized in other comprehensive income. The previous cost basis less impairment recognized in earnings
becomes the new cost basis of the security and is not adjusted for subsequent recoveries in fair value. However,
the difference between the new amortized cost basis and the cash flows expected to be collected is accreted as
interest income. The total other-than-temporary impairment is presented in the consolidated statements of income
with a reduction for the amount of other-than-temporary impairment that is recognized in other comprehensive
income, if any.

Federal Home Loan Bank Stock

The Company’s investment in Federal Home Loan Bank (“FHLB”) stock is carried at par value because the

shares can only be redeemed with the FHLB at par. The Company is required to maintain a minimum level of
investment in FHLB stock based on specific percentages of its outstanding mortgages and FHLB advances. Stock
redemptions are at the discretion of the FHLB or of the Company, upon five years’ prior notice for FHLB
Class B stock or six months notice for FHLB Class A stock to the FHLB. FHLB stock is carried at cost and is
subject to recoverability testing per the Financial Services—Depository and Lending topic of the FASB ASC.

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 place on nonaccrual status, the accrued and unpaid
interest receivable is reversed and the accretion of net deferred loan fess 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.
Predominately, 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 in accordance with accounting principles generally accepted in the United States. The Company’s policy
is to record cash receipts received on impaired loans first as reductions to principal and then to interest income.

67

Unfunded loan commitments are generally related to providing credit facilities to clients of the Bank, and
are not actively traded financial instruments. These unfunded commitments are disclosed as off-balance sheet
financial instruments in Note 18 in the Notes to Consolidated Financial Statements.

Allowance for Loan and Lease Losses

The Company accounts for the credit risk associated with lending activities through its allowance for loan

and lease losses and provision for loan and lease losses. The provision is the expense recognized in the
consolidated statements of income to adjust the allowance to the levels deemed appropriate by management, as
determined through application of the Company’s allowance methodology procedures. The provision for loan
and lease losses reflects management’s judgment of the adequacy of the allowance for loan and lease losses.
Loan and lease losses are charged against the allowance when management believes the collectibility of a loan
balance is unlikely. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan and lease losses is evaluated on a regular basis by management and is based upon
management’s periodic review of the collectibility of the loans in light of historical experience, the nature and
volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of
any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it
requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of general, specific, and unallocated components. The general component covers

non-classified loans and is based on historical loss experience adjusted for qualitative factors. The specific
component relates to loans that are impaired. For impaired loans an allowance is established when the discounted
cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value
of that loan. The unallocated allowance provides for other credit losses inherent in the Company’s loan portfolio
that may not have been contemplated in the general and specific components of the allowance. This unallocated
amount generally comprises less than 5% of the allowance. The unallocated amount is reviewed periodically
based on trends in credit losses, the results of credit reviews and overall economic trends.

Allowance for Unfunded Loan Commitments and Letters of Credit

The allowance for unfunded loan commitments is maintained at a level believed by management to be
sufficient to absorb estimated probable losses related to these unfunded credit facilities. The determination of the
adequacy of the allowance is based on periodic evaluations of the unfunded credit facilities including an
assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same
customers, and the terms and expiration dates of the unfunded credit facilities. The allowance for unfunded loan
commitments is included in other liabilities on the consolidated balance sheets, with changes to the balance
charged against noninterest expense.

Premises and Equipment

Land, buildings, leasehold improvements and equipment are stated at cost less accumulated depreciation
and amortization. Buildings and equipment are depreciated over their estimated useful lives using the straight-
line method. Leasehold improvements are amortized over the shorter of their useful lives or lease terms. Gains or
losses on dispositions are reflected in current operations. Expenditures for improvements and major renewals are
capitalized, and ordinary maintenance, repairs and small purchases are charged to operating expenses.

Software

Capitalized software is stated at cost, less accumulated amortization. Amortization is computed on a
straight-line basis and charged to expense over the estimated useful life of the software which is generally three
years. Capitalized software is included in Premises and equipment, net in the consolidated balance sheets.

68

Other Real Estate Owned

Other real estate owned is composed of real estate acquired in satisfaction of loans. Properties acquired by
foreclosure or deed in lieu of foreclosure are transferred to OREO and are recorded at fair value less estimated
costs to sell, at the date of transfer of the property. If the carrying value exceeds the fair value at the time of the
transfer, the difference is charged to the allowance for loan and lease losses. The fair value of the OREO property
is based upon current appraisal. Losses that result from the ongoing periodic valuation of these properties are
charged to the net cost of operation of OREO expense in the period in which they are identified. Improvements to
the OREO are capitalized and holding costs are charged to the net cost of operation of OREO as incurred.

Goodwill and Intangibles

Net assets of companies acquired in purchase transactions are recorded at fair value at the date of

acquisition. Identified intangibles are amortized on an accelerated basis over the period benefited. Goodwill is
not amortized but is reviewed for potential impairment during the third quarter on an annual basis or, more
frequently, if events or circumstances indicate a potential impairment, at the reporting unit level. A reporting unit
is an operating segment or one level below an operating segment for which discrete financial information is
available and regularly reviewed by management. If the fair value of the reporting unit, including goodwill, is
determined to be less than the carrying amount of the reporting unit, a further test is required to measure the
amount of impairment. If an impairment loss exists, the carrying amount of goodwill is adjusted to a new cost
basis. Subsequent reversal of a previously recognized goodwill impairment loss is prohibited.

Intangible assets are evaluated for impairment if events and circumstances indicate a possible impairment.

Such evaluation of other intangible assets is based on undiscounted cash flow projections. At December 31,
2009, intangible assets included on the consolidated balance sheets consist of a core deposit intangible that is
amortized using an accelerated method with an original estimated life of approximately 10 years.

Income Taxes

The provision for income taxes includes current and deferred income tax expense on net income adjusted for

permanent and temporary differences such as interest income on state and municipal securities and affordable
housing credits. Deferred tax assets and liabilities are recognized for the expected future tax consequences of
existing temporary differences between the financial reporting and tax reporting basis of assets and liabilities
using enacted tax laws and rates. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. On a quarterly basis, management evaluates
deferred tax assets to determine if these tax benefits are expected to be realized in future periods. This
determination is based on facts and circumstances, including the Company’s current and future tax outlook. To
the extent a deferred tax asset is no longer considered “more likely than not” to be realized, a valuation allowance
is established.

Earnings per Common Share

The Company calculates earnings per common share (“EPS”) using the two-class method in accordance
with the Earnings per Share topic of the FASB Accounting Standards Codification (“ASC”), effective January 1,
2009 with retrospective application to all prior-period earnings per share data presented. Refer to Accounting
Pronouncements below. The two-class method requires the Company to present EPS as if all of the earnings for
the period are distributed to common shareholders and any participating securities, regardless of whether any
actual dividends or distributions are made. Under authoritative guidance, all outstanding unvested share-based
payment awards that contain rights to nonforfeitable dividends are considered participating securities. The
Company grants restricted shares under a share-based compensation plan that qualifies as participating securities.
Restricted shares issued under the Company’s share-based compensation plan are entitled to dividends at the
same rate as common stock.

69

Basic EPS are computed by dividing distributed and undistributed earnings available to common
shareholders by the weighted average number of common shares outstanding for the period. Distributed and
undistributed earnings available to common shareholders represent net income reduced by preferred stock
dividends and distributed and undistributed earnings available to participating securities. Common shares
outstanding include common stock and vested restricted stock awards. Diluted EPS reflect the assumed
conversion of all potential dilutive securities. Prior-period EPS data presented has been restated retrospectively
for comparability.

Share-Based Payment

The Company accounts for stock options and stock awards in accordance with the Compensation—Stock

Compensation topic of the FASB ASC. Authoritative guidance requires the Company to measure the cost of
employee services received in exchange for an award of equity instruments, such as stock options or stock
awards, based on the fair value of the award on the grant date. This cost must be recognized in the consolidated
statements of income over the expected life of the award.

The Company issues restricted stock awards which generally vest over a four- or five-year period during
which time the holder receives dividends and has full voting rights. Restricted stock is valued at the closing price
of the Company’s stock on the date of an award.

Derivatives and Hedging Activities

In accordance with the Derivatives and Hedging topic of the FASB ASC, the Company recognizes

derivatives as assets or liabilities on the consolidated balance sheets at their fair value. The treatment of changes
in the fair value of derivatives depends on the character of the transaction.

The Company enters into derivative contracts to add stability to interest income and to manage its exposure
to changes in interest rates. On the date the Company enters into a derivative contract, the derivative instrument
is designated as: (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm
commitment (a “fair value” hedge); (2) a hedge of the variability in expected future cash flows associated with an
existing recognized asset or liability or a probable forecasted transaction (a “cash flow” hedge); or (3) held for
other economic purposes (an “economic” hedge) and not formally designated as part of qualifying hedging
relationships under authoritative guidance.

In a fair value hedge, changes in the fair value of the hedging derivative are recognized in earnings and

offset by recognizing changes in the fair value of the hedged item attributable to the risk being hedged. To the
extent that the hedge is ineffective, the changes in fair value will not offset and the difference is reflected in
earnings.

In a cash flow hedge, the effective portion of the change in the fair value of the hedging derivative is
recorded in accumulated other comprehensive income and is subsequently reclassified into earnings during the
same period in which the hedged item affects earnings. The change in fair value of any ineffective portion of the
hedging derivative is recognized immediately in earnings. When a cash flow hedge is discontinued, the net
derivative gain or loss continues to be reported in accumulated other comprehensive income unless it is probable
that the forecasted transactions will not occur by the end of the originally specified time period. The net
derivative gain or loss from a discontinued cash flow hedge is reclassified into earnings during the originally
specified time period in which the forecasted transactions were to occur.

The Company formally documents the relationship between the hedging instruments and hedged items, as

well as its risk management objective and strategy before initiating a hedge. To qualify for hedge accounting, the
derivatives and related hedged items must be designated as a hedge. For hedging relationships in which
effectiveness is measured, the correlations between the hedging instruments and hedged items are assessed at
inception of the hedge and on an ongoing basis, which includes determining whether the hedge relationship is
expected to be highly effective in offsetting changes in fair value or cash flows of hedged items.

70

Derivatives used for other economic purposes are used as economic hedges in which the Company has not

attempted to achieve the highly effective hedge accounting standard under authoritative guidance. The changes in
fair value of these instruments are recognized immediately in earnings.

Accounting Pronouncements

During the year ended December 31, 2009, the following accounting pronouncements were issued or

became effective:

On January 1, 2009, the Company adopted the revised guidance in the Business Combinations topic of the
FASB ASC. The revised guidance requires the acquiring entity in a business combination to recognize 100% of
the assets acquired and liabilities assumed in the transaction; establishes acquisition date fair value as the
measurement objective for the assets acquired and liabilities assumed; requires recognition of contingent
consideration arrangements at their acquisition date fair values; and expands required disclosures regarding the
nature and financial effect of the business combination. It also requires that acquisition-related costs be expensed
when incurred. The revised guidance is to be applied for business combinations consummated after January 1,
2009.

Effective January 1, 2009, the Company adopted the authoritative guidance included in the Earning per
Share topic of the FASB ASC which requires that all outstanding unvested share-based payment awards that
contain rights to nonforfeitable dividends are considered to be participating securities, and the issuing entity is
required to apply the two-class method of computing basic and diluted EPS. The Company grants restricted
shares under a share-based compensation plan that qualify as participating securities. Accordingly, the Company
calculates EPS using the two-class method. Prior period EPS and share data presented have been restated for
comparability. The adoption of the authoritative guidance resulted in a $0.01 per share reduction in basic and
diluted EPS for the year ended December 31, 2008 and a $0.02 per share reduction in basic and diluted EPS for
the year ended December 31, 2007.

Effective January 1, 2009, the Company adopted the expanded disclosure requirements for derivative
instruments and hedging activities under the Derivatives and Hedging topic of the FASB ASC. The expanded
disclosures address how derivative instruments are used, how derivatives and the related hedged items are
accounted for, and how derivative instruments and related hedged items affect an entity’s financial position,
financial performance and cash flows. In addition, companies are required to disclose the fair values of derivative
instruments and their gains and losses in a tabular format. The disclosure requirements have been applied for the
current period and retrospectively for prior periods presented.

In April 2009, the FASB revised the guidance in the Investments—Debt and Equity Securities topic of the

FASB ASC to amend the other-than-temporary impairment guidance for debt securities. The “intent and ability”
indicator for recognizing other-than-temporary impairment was modified, and the trigger used to assess the
collectability of cash flows changed from “probable that the investor will be unable to collect all amounts due” to
“the entity does not expect to recover the entire amortized cost basis of the security.” The new guidance changes
the total amount recognized in earnings when there are credit losses associated with an impaired debt security
and management asserts that it does not have the intent to sell the security and it is more likely than not that it
will not have to sell the security before recovery of its cost basis. In those situations, impairment shall be
separated into (a) the amount representing a credit loss and (b) the amount related to non-credit factors. The
amount of impairment related to credit losses shall be recognized in earnings. The credit loss component of an
other-than-temporary impairment, representing an increase in credit risk, shall be determined by the reporting
entity using its best estimate of the present value of cash flows expected to be collected from the debt security.
The amount of impairment related to non-credit factors shall be recognized in other comprehensive income. The
previous cost basis less impairment recognized in earnings becomes the new cost basis of the security and shall
not be adjusted for subsequent recoveries in fair value. However, the difference between the new amortized cost
basis and the cash flows expected to be collected should be accreted as interest income. The total other-than-
temporary impairment is presented in the consolidated statements of income with a reduction for the amount of
the other-than-temporary impairment that is recognized in other comprehensive income, if any.

71

The cumulative effect of initial adoption is recorded as an adjustment to the opening balance of retained
earnings with a corresponding adjustment to accumulated other comprehensive income. The amortized cost basis
of a security for which an other-than-temporary impairment was previously recognized shall be adjusted by the
amount of the cumulative effect adjustment before taxes. The difference between the new amortized cost basis
and the cash flows expected to be collected shall be accreted as interest income. The new guidance became
effective for the Company on April 1, 2009. The Company did not hold any available for sale debt securities on
April 1, 2009 with previously recognized other-than-temporary impairment. Therefore, the Company was not
required to record a cumulative effect adjustment upon adoption.

In April 2009, the FASB revised the guidance in the Financial Instruments topic of the FASB ASC to
require disclosures about fair value of financial instruments in interim financial statements of publicly traded
companies as well as in annual financial statements. Authoritative guidance requires entities to disclose the
methods and significant assumptions used to estimate the fair value of financial instruments in interim financial
statements and any changes in these methods and assumptions from prior periods. The requirement to provide
interim disclosures became effective for the Company for June 30, 2009 reporting. In periods after initial
adoption, the Company is required to provide comparative disclosures only for periods ending after initial
adoption. The disclosure requirements have been applied for the current period.

In April 2009, the FASB revised the guidance in the Fair Value Measurements and Disclosures topic of the
FASB ASC to provide additional guidance for estimating fair value when the volume and level of activity for an
asset or liability have significantly decreased, and identifying transactions that are not orderly. Several factors are
identified that a reporting entity should evaluate to determine whether there has been a significant decrease in the
volume and level of activity for an asset or liability. If the reporting entity concludes there has been a significant
decrease in the volume and level of activity for the asset or liability in relation to normal market activity,
transactions or quoted prices may not be determinative of fair value, further analysis of the transactions or quoted
prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate
fair value. The expanded guidance reiterates that even in circumstances where there has been a significant
decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s)
used, the objective of a fair value measurement remains the same. Fair value is the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date under current market conditions. The new guidance became effective for the Company for the
June 30, 2009 reporting period. Adoption of the new guidance did not have a significant impact on the
consolidated financial statements.

In April 2009, the FASB revised the guidance in the Business Combinations topic of the FASB ASC to
amend the requirements associated with the initial recognition and measurement, subsequent measurement and
accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. Under
the revised guidance, an asset or liability assumed in a business combination that arises from a contingency is to
be initially measured at fair value if fair value can be determined. If fair value cannot be determined, an asset or
liability is to be recognized if it is probable that an asset existed or a liability had been incurred at the acquisition
date and the amount can be reasonably estimated. An acquiring entity should develop a systematic and rational
basis for subsequently measuring and accounting for assets and liabilities arising from contingencies. An acquirer
is required to disclose information that enables users of its financial statements to evaluate the nature and
financial effects of a business combination. The revised guidance is to be applied for business combinations
consummated after January 1, 2009.

In May 2009, the FASB issued the Subsequent Events topic of the FASB ASC. This topic provides
authoritative accounting literature for a topic that was previously addressed only in the auditing literature. This
topic is similar to the current guidance with some modifications that are not intended to result in significant
changes in practice. Under this topic, subsequent events are categorized as recognized (currently type I) or
nonrecognized (currently type II). The definition of subsequent events is modified to refer to events or
transaction that occur after the balance sheet date, but before the financial statements are issued (for public

72

entities) or available to be issued (for nonpublic entities). Entities are required to disclose the date through which
an entity has evaluated subsequent events and the basis for that date. This topic is effective on a prospective basis
for interim or annual financial periods ending after June 15, 2009 and became effective for the Company for the
June 30, 2009 reporting period. Adoption of this topic did not have a significant impact on the Company’s
consolidated financial statements. Subsequent events are disclosed in Note 24 in the Notes to Consolidated
Financial Statements.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05 to provide guidance on

measuring the fair value of liabilities under the Fair Value Measurements and Disclosures topic of the FASB
ASC. ASU 2009-05 reaffirms that fair value measurement of a liability assumes the transfer of a liability to a
market participant as of the measurement date; that is, the liability is presumed to continue and is not settled with
the counterparty. In addition, ASU 2009-05 reemphasizes that a fair value measurement of a liability includes
nonperformance risk and that such risk does not change after the transfer of the liability. The guidance clarifies
that in circumstances in which a quoted price in an active market for the identical liability is not available, a
reporting entity is required to measure fair value using either (1) a valuation technique that uses the quoted price
of the identical liability when traded as an asset, or quoted prices for similar liabilities or similar liabilities when
traded as assets, or (2) another valuation technique that is consistent with the Fair Value Measurement and
Disclosures topic of the FASB ASC such as an income or market approach. ASU 2009-05 also states that a
separate adjustment for the impact of a restriction on the transfer of a liability should not be made in the fair
value measurement of a liability. The effect of a restriction on the transfer of a liability is presumed to be already
factored into the transaction price of the liability at inception. ASU 2009-05 was effective for the Company on
October 1, 2009. Adoption of the new guidance did not have a significant impact on the Company’s consolidated
financial statements.

The following accounting pronouncements were issued during 2009, but are not effective for the Company

until after December 31, 2009:

In June 2009, the FASB revised the Transfers and Servicing topic of the FASB ASC to expand required
disclosures about transfer of financial assets and a transferor’s continuing involvement with transferred assets. It
also removes the concept of “qualifying special-purpose entity” from U.S. GAAP. The new guidance is effective
for financial asset transfers occurring after the beginning of an entity’s first fiscal year that begins after
November 15, 2009. Adoption of the new guidance is not expected to have a material effect on the Company’s
consolidated financial statements.

In June 2009, the FASB revised the Consolidation topic of the FASB ASC. The revised guidance requires,
among other things: that an entity perform a qualitative analysis to determine if it is the primary beneficiary of a
variable interest entity (“VIE”), consideration of related party relationships in the determination of the primary
beneficiary of a VIE, and enhance disclosures about an enterprise’s involvement with a VIE. The new guidance
is effective as of the beginning of the first annual reporting period that begins after November 15, 2009, for
interim reporting periods within that first annual reporting period and for interim and annual periods thereafter.
The Company is evaluating the impact of adoption on its consolidated financial statements.

2. Earnings per Common Share

The Company applies the two-class method of computing basic and diluted EPS. Under the two-class

method, EPS is determined for each class of common stock and participating security according to dividends
declared and participation rights in undistributed earnings. The Company grants restricted shares under a share-
based compensation plan that qualify as participating securities under the Earnings per Share topic of the FASB
Accounting Standards Codification.

73

The following table sets forth the computation of basic and diluted earnings per share for the periods

indicated:

Basic EPS:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Preferred dividends and accretion of issuance discount for preferred

stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Earnings allocated to participating securities . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings (loss) allocated to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31,

2007 (1)
2008 (1)
2009
(in thousands except per share)

$ (3,968) $ 5,968

$32,381

(4,403)

(470)
$ (8,371) $ 5,498
(104)
$ (8,387) $ 5,394

(16)

—
$32,381
(311)
$32,070

Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings (loss) per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21,854
$ (0.38) $

17,914
0.30

16,802
1.91

$

Diluted EPS:
Earnings (loss) allocated to common shareholders (2)

. . . . . . . . . . . . . . . . . . . . . .

$ (8,410) $ 5,394

$32,072

Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dilutive effect of equity awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average diluted common shares outstanding (3) . . . . . . . . . . . . . . . . . . .

21,854
—
21,854

17,914
96
18,010

16,802
170
16,972

Diluted earnings (loss) per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (0.38) $

0.30

$

1.89

Potentially dilutive securities that were not included in the computation of diluted
. . . . . . . . . . . . . . . . . . . . . . . . . . .

EPS because to do so would be anti-dilutive.

754

54

—

(1) The Company adopted authoritative guidance in the Earnings per Share topic of the FASB ASC on

January 1, 2009. All prior periods have been restated to the current period’s presentation.

(2) Earnings allocated to common shareholders for basic and diluted EPS may differ under the two-class
method as a result of adding common stock equivalents for options and warrants to dilutive shares
outstanding, which alters the ratio used to allocate earnings to common shareholders and participating
securities for the purposes of calculating diluted EPS.

(3) Due to the net loss applicable to common shareholders for the year ended December 31, 2009, basic shares
were used to calculate diluted earnings per share. Adding dilutive securities to the denominator would result
in anti-dilution.

3. Cash and Cash Equivalents

The Company is required to maintain an average reserve balance with the Federal Reserve Bank or maintain
such reserve balance in the form of cash. The average required reserve balance for the years ended December 31,
2009 and 2008 was approximately $200 thousand and $225 thousand, respectively, and was met by holding cash
and maintaining an average balance with the Federal Reserve Bank.

4.

Securities

At December 31, 2009, the Company’s securities portfolio primarily consisted of securities issued by U.S.

government agencies, U.S. government-sponsored enterprises and state and municipalities. All of the Company’s
mortgage-backed securities and collateralized mortgage obligations are issued by U.S. government agencies and
U.S. government-sponsored enterprises and are implicitly guaranteed by the U.S. government. The Company did
not have any other issuances in its portfolio which exceeded ten percent of shareholders’ equity.

74

The following table summarizes the amortized cost, gross unrealized gains and losses, and the resulting fair

value of securities available for sale:

December 31, 2009:
U.S. Government agency and government-sponsored enterprise

mortgage-backed securities & collateralized mortgage
obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31, 2008:
U.S. Government sponsored enterprise preferred stock . . . . . . . . . . . . .
U.S. Government agency and government-sponsored enterprise

mortgage-backed securities & collateralized mortgage
obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

(in thousands)

$390,688
210,987
1,000
$602,675

$10,034
8,545
—
$18,579

$ (566)
(621)
(29)
$(1,216)

$400,156
218,911
971
$620,038

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

(in thousands)

$

488

$ —

$ — $

488

335,207
188,415
1,000
$525,110

6,889
2,547
—
$ 9,436

(258)
(5,309)
(61)
$(5,628)

341,838
185,653
939
$528,918

Gross realized losses amounted to $10 thousand, $36 thousand and $0 for the years ended December 31,
2009, 2008 and 2007, respectively. Gross realized gains amounted to $1.1 million, $882 thousand and $0 for the
years ended December 31, 2009, 2008 and 2007, respectively.

The following table summarizes the amortized cost and fair value of securities available for sale by

contractual maturity groups:

U.S. Government agency and government-sponsored enterprise mortgage-

backed securities & collateralized mortgage obligations (1)

Over 1 through 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 5 through 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

State and municipal securities
Due through 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 1 through 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 5 through 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

December 31, 2009

Amortized
Cost

Fair
Value

(in thousands)

$ 41,884
62,869
285,935
$390,688

$

1,385
18,875
42,499
148,228
$210,987

$ 43,254
64,687
292,215
$400,156

$

1,402
20,328
45,020
152,161
$218,911

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

maturities and principal amortization.

At December 31, 2009 and 2008 available for sale securities with a fair value of $370.0 million were
pledged to secure public deposits, Federal Home Loan Bank borrowings, and for other purposes as required or
permitted by law.

75

The following tables summarize information pertaining to securities with gross unrealized losses at
December 31, 2009 and 2008 aggregated by investment category and length of time that individual securities
have been in a continuous loss position:

Less than 12 months

12 Months or More

Total

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

(in thousands)

December 31, 2009
U.S. Government agency and government-
sponsored enterprise mortgage-backed
securities & collateralized mortgage
obligations . . . . . . . . . . . . . . . . . . . . . . . . $ 87,879
14,846
—

State and municipal securities . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . .

$(566)
(42)
—

$

17
16,272
971

$ —
(579)
(29)

$ 87,896
31,118
971

$ (566)
(621)
(29)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $102,725

$(608)

$17,260

$(608)

$119,985

$(1,216)

Less than 12 months

12 Months or More

Total

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

(in thousands)

December 31, 2008
U.S. Government agency and government-
sponsored enterprise mortgage-backed
securities & collateralized mortgage
obligations . . . . . . . . . . . . . . . . . . . . . . . . .
State and municipal securities . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . .

$

562
95,560
—

$

(3) $17,414
6,863
939

(4,744)
—

$(255)
(565)
(61)

$ 17,976
102,423
939

$ (258)
(5,309)
(61)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$96,122

$(4,747) $25,216

$(881)

$121,338

$(5,628)

At December 31, 2009, there were 21 state and municipal government securities in an unrealized loss
position, of which 13 were in a continuous loss position for 12 months or more. The unrealized losses on state
and municipal securities were caused by interest rate changes or widening of market spreads subsequent to the
purchase of the individual securities. Management monitors published credit ratings of these securities for
adverse changes. As of December 31, 2009 none of the rated obligations of state and local government entities
held by the Company had an adverse credit rating. Because the credit quality of these securities remains above
investment grade and the Company does not intend to sell these securities nor does the Company consider it
more likely than not that it will be required to sell these securities before the recovery of amortized cost basis,
which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired
at December 31, 2009.

At December 31, 2009, there were 12 U.S. Government agency and government-sponsored enterprise

mortgage-backed securities & collateralized mortgage obligations securities in an unrealized loss position, of
which 1 was in a continuous loss position for 12 months or more. The decline in fair value is attributable to
changes in interest rates relative to where these investments fall within the yield curve and their individual
characteristics. Because the Company does not intend to sell these securities nor does the Company consider it
more likely than not that it will be required to sell these securities before the recovery of amortized cost basis,
which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired
at December 31, 2009.

At December 31, 2009, there was one other security, a mortgage-backed securities fund, which was in a
continuous loss position for 12 months or more. The decline in fair value is attributable to changes in interest rates
and the additional risk premium investors are demanding for investment securities with these characteristics.

76

The Company does not consider this investment to be other-than-temporarily impaired at December 31, 2009 as it
has the intent and ability to hold the investment for sufficient time to allow for recovery in the market value.

5. Comprehensive Income

The components of comprehensive income are as follows:

Net income (loss) as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain(loss) from securities:

Net unrealized holding gain(loss) from available for sale securities arising

Years Ended December 31,

2009

2008

2007

(in thousands)

$(3,968) $ 5,968

$32,381

during the year, net of tax of $(5,197), $(699) and $(2,985) . . . . . . . . . . . . .

9,435

1,275

5,540

Reclassification adjustment of net gain from sale of available for sale

securities included in income, net of tax of $383, $300 and $0 . . . . . . . . . .

(695)

(546)

—

Net unrealized gain(loss) from securities, net of reclassification

adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,740

729

5,540

Cash flow hedging instruments:

Net unrealized gain from cash flow hedging instruments arising during the

year, net of tax of $0, $410 and $1,552 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment of net (gain)loss included in income, net of tax of
$913, $587 and $43 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in cash flow hedging instruments . . . . . . . . . . . . . . . . . . . . . . . . . .

—

754

2,847

(1,657)
(1,657)

(1,106)
(352)

78
2,925

Pension plan liability adjustment:

Unrecognized net actuarial loss during period, net of tax of $379, $0 and

$0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: amortization of unrecognized net actuarial loss included in net periodic
pension cost, net of tax of ($18), $0 and $0 . . . . . . . . . . . . . . . . . . . . . . . . .
Pension plan liability adjustment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(689)

—

—

33
(656)
$ 2,459

—
—

—
—
$ 6,345 $40,846

6. Loans

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

Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate:

One-to-four family residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and five or more family residential properties . . . . . . . .
Total real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Real estate construction:

December 31,

2009

2008

(in thousands)

$ 744,440

$ 810,922

63,364
856,260
919,624

57,237
862,595
919,832

Consumer

One-to-four family residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and five or more family residential properties . . . . . . . .
Total real estate construction . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less deferred loan fees and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans, net of deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . .

107,620
41,829
149,449
199,987
2,013,500
(4,616)
$2,008,884

209,682
81,176
290,858
214,753
2,236,365
(4,033)
$2,232,332

Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

—

$

1,964

77

Non-accrual loans totaled $110.4 million and $106.2 million at December 31, 2009 and 2008, respectively.
The amount of interest income foregone as a result of these loans being placed on non-accrual status totaled $7.6
million for 2009, $4.1 million for 2008 and $814 thousand for 2007. At December 31, 2009 and 2008, there were
$4.6 million and $0, respectively, of commitments of additional funds for loans accounted for on a non-accrual
basis.

At December 31, 2009 and 2008, the total recorded investment in impaired loans was $116.4 million and
$106.2 million, respectively. At December 31, 2009, $18.1 million of impaired loans had a specific valuation
allowance of $3.8 million. At December 31, 2008, $8.3 million of impaired loans had a specific valuation
allowance of $1.2 million. The average recorded investment in impaired loans for the years ended December 31,
2009, 2008, and 2007, was $94.6 million, $134.1 million, and $11.4 million, respectively. Interest income
recognized on impaired loans was $42 thousand in 2009, $40 thousand in 2008, and $13 thousand in 2007.

At December 31, 2009 and 2008, 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 Washington and Oregon.

The Company and its banking subsidiary have granted loans to officers and directors of the Company and

related interests. These loans are made on the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons and do not involve more than the
normal risk of collectability. The aggregate dollar amount of these loans was $6.8 million and $8.8 million at
December 31, 2009 and 2008, respectively. During 2009, $1.7 million of related party loans were made and
repayments totaled $3.7 million. During 2008, $4.2 million related party loans were made and repayments totaled
$9.0 million.

At December 31, 2009 and 2008, $505.0 million and $467.7 million of commercial and residential real

estate loans were pledged as collateral on FHLB borrowings.

7. Allowances for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit

Changes in the allowance for loan and lease losses are summarized as follows:

Years Ended December 31,

2009

2008

2007

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 42,747
(54,521)
1,752

(in thousands)
$ 26,599
(25,987)
959

Net chargeoffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance established in acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision charged to expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(52,769)
—
63,500

(25,028)
—
41,176

$20,182
(1,213)
833

(380)
3,192
3,605

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 53,478

$ 42,747

$26,599

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

Balance at beginning of year
Net changes in the allowance for unfunded loan commitments and letters of

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(in thousands)
$349

$500

credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

275

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$775

151

$500

$339

10

$349

Years Ended December 31,

2009

2008

2007

78

8.

Premises and Equipment

Land, buildings, and furniture and equipment, less accumulated depreciation and amortization, were as

follows:

December 31,

2009

2008

(in thousands)

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment under capital lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 19,712
46,485
3,216
—
19,389
313
8,310

$ 17,507
44,374
2,833
510
22,671
339
8,716

Total Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . .

97,425
(34,755)

96,950
(35,811)

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 62,670

$ 61,139

Total depreciation and amortization expense was $4.7 million, $5.0 million, and $4.5 million, for the years

ended December 31, 2009, 2008, and 2007, respectively.

9. Goodwill and Other Intangibles

The following table summarizes the changes in the Company’s goodwill and core deposit intangible asset

for the years ended December 31, 2009 and 2008:

Balance at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other

Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Goodwill

CDI

(in thousands)

$96,011
—
—
(492)

95,519
—
—

$ 7,050
—
(1,142)
—

5,908
—
(1,045)

Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$95,519

$ 4,863

Amortization expense on the CDI was $1.0 million in 2009, $1.1 million in 2008 and $719 thousand in
2007. The Company estimates that aggregate amortization expense on the CDI will be $963 thousand for 2010,
$893 thousand for 2011, $832 thousand for 2012, $780 thousand for 2013 and $640 thousand for 2014.

Impairment Assessment

Management completed its annual assessment of goodwill for impairment during the third quarter of 2009.

The goodwill assessment was completed at a reporting unit level, and all goodwill was assigned to the retail
banking unit. Fair value was determined using methods consistent with current industry practices for valuing
similar types of companies, and included a market multiple of tangible book. Based upon the analysis performed,
the fair value of the retail reporting unit exceeded its carrying value (including goodwill) as of September 30,
2009. In conjunction with the analysis of its operating segments (see Note 22) during the fourth quarter,
management concluded that as of December 31, 2009 it had one, single reporting unit. As of December 31, 2009
management determined there were no events or circumstances which would more likely than not reduce the fair

79

value of its reporting unit below its carrying amount. Management also determined, had the annual goodwill
impairment test been performed based upon one reporting unit as of September 30, 2009, the fair value of the
single, consolidated reporting unit would have been in excess of its carrying value (including goodwill).

10. Deposits

Year-end deposits are summarized in the following table:

December 31,

2009

2008

(in thousands)

Deposit Composition

Core deposits:

Demand and other noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit less than $100,000 . . . . . . . . . . . . . . . . . . . . . .

Total core deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit greater than $100,000 . . . . . . . . . . . . . . . . . . . . . . .
Wholesale certificates of deposit (CDARS®) . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wholesale certificates of deposit

$ 574,687
499,922
604,229
139,406
254,577

2,072,821
259,794
96,314
53,776

$ 466,078
519,124
530,065
122,076
303,704

1,941,047
338,971
39,903
62,230

Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,482,705

$2,382,151

The following table shows the amount and maturity of time deposits that had balances of $100,000 or

greater:

Years Ending December 31,

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(in thousands)

$317,315
21,069
6,092
1,936
4,643
—

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$351,055

11. Federal Home Loan Bank and Federal Reserve Bank Borrowings

The Company has entered into borrowing arrangements with the Federal Home Loan Bank of Seattle
(“FHLB”) to borrow funds under a short-term floating rate cash management advance program and fixed-term
loan agreements. All borrowings are secured by stock of the FHLB, certain pledged available for sale investment
securities and a blanket pledge of qualifying loans receivable. At December 31, 2009 FHLB advances were
scheduled to mature as follows:

Federal Home Loan Bank Advances

Adjustable rate
advances

Fixed rate
advances

Total advances

Wtd Avg
Rate

Amount

Wtd Avg
Rate

Amount

Wtd Avg
Rate

Amount

Over 1 through 5 years . . . . . . . . . . . . . . . . . . . . . —

—

(dollars in thousands)
2.49% $100,000

2.49% $100,000

80

The maximum, average outstanding and year-end balances and average interest rates on advances from the

FHLB were as follows for the years ended December 31, 2009, 2008 and 2007:

Years ended December 31,

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average balance during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
Maximum month-end balance during the year
Weighted average rate during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average rate at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

FHLB advances are collateralized by the following:

2009

2007

2008
(dollars in thousands)
$150,000
$282,624
$349,000

$257,670
$207,521
$264,250

$100,000
$111,211
$178,000

2.38%
2.49%

2.53%
1.89%

5.27%
4.59%

December 31,

2009

2008

(in thousands)

Fair value of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recorded value of blanket pledge on loans receivable . . . . . . . . . . . . . . . . . . .

$130,039
504,978

$168,537
467,682

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$635,017

$636,219

FHLB Borrowing Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$535,017

$486,219

The Company is also eligible to borrow under the Federal Reserve Bank’s primary credit program,

including the Term Auction Facility (“TAF”) auctions. All borrowings are secured by certain pledged available
for sale investment securities.

The maximum, average outstanding and year-end balances and average interest rates on advances from the

Federal Reserve Bank were as follows for the years ended December 31, 2009, 2008 and 2007:

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average balance during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum month-end balance during the year
. . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average rate during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average rate at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

N/A—Not applicable

Federal Reserve Bank advances are collateralized by the following:

Years ended December 31,

2009

2008

2007

(dollars in thousands)

$ —
$ 38,205
$100,000

$ 50,000
$ 14,569
$120,000

$ —
$ 54
$ —

0.30%
N/A

0.62% 5.36%
0.60% N/A

December 31,

2009

2008

(in thousands)

Fair value of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recorded value of pledged commercial loans . . . . . . . . . . . . . . . . . . . . . . . . .

$144,253
210,775

$144,754
—

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$355,028

$144,754

Federal Reserve Bank borrowing capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$335,028

$ 94,754

81

12. Other Borrowings

Securities Sold Under Agreements to Repurchase

The Company has entered into wholesale repurchase agreements with certain brokers. At December 31,

2009, the Company held $25.0 million in wholesale repurchase agreements with an interest rate of 1.88%.
Securities available for sale with a carrying amount of $29.9 million were pledged as collateral for the repurchase
agreement borrowings. The broker holds the securities while the Company continues to receive the principal and
interest payments from the securities. Upon maturity of the agreement, the pledged securities will be returned to
the Company.

13. Long-term Subordinated Debt

During 2001, the Company, through its subsidiary 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 3.86% at December 31, 2009. 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 after ten years at par,
allowing the Company to retire the debt early if conditions are favorable. In accordance with the Consolidation
topic of the FASB ASC, the Trust is deconsolidated with the result being that the trust preferred obligations are
classified as long-term subordinated debt on the Company’s Consolidated Balance Sheet and the Company’s
related investment in the Trust of $681,000 is recorded in other assets. At December 31, 2009 and 2008, the
balance of the Company’s investment in the Trust remained at $681,000. The subordinated debt payable to the
Trust is on the same interest and payment terms as the trust preferred obligations issued by the Trust. Through a
2007 acquisition, the Company assumed an additional $3.0 million in floating rate trust preferred obligations
from the Town Center Bancorp Statutory Trust; these debentures had a rate of 4.03% at December 31, 2009. The
floating rate is based on the 3-month LIBOR plus 3.75% and is adjusted quarterly. At December 31, 2009 and
2008, the balance of the Company’s investment in this Town Center Bancorp Statutory Trust was $93,000 which
is recorded in other assets on the Consolidated Balance Sheets.

14. Income Tax

The components of income tax expense (benefit) are as follows:

Current tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(8,893) $ 9,503
(14,409)

(85)

$14,360
(2,607)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(8,978) $ (4,906) $11,753

Years Ended December 31,

2009

2008

2007

(in thousands)

82

Significant components of the Company’s deferred tax assets and liabilities are as follows:

Deferred tax assets:
Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental executive retirement plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on supplemental executive retirement plan . . . . . . . . . . . . . . . .
Stock option and restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Self-funded medical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Litigation reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonaccrual interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other

December 31,

2009

2008

(in thousands)

$ 18,939
5,251
361
1,048
214
85
—
2,829
840

$15,139
4,684
—
873
—
199
6,920
1,455
392

Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29,567

29,662

Deferred tax liabilities:
FHLB stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Section 481 adjustment-deferred fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1,985)
(1,722)
(53)
(707)
(6,167)
(813)

Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(11,447)

(1,985)
(2,093)
(105)
(885)
(1,353)
(753)

(7,174)

Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 18,120

$22,488

A reconciliation of the Company’s effective income tax rate with the federal statutory tax rate is as follows:

Income tax based on statutory rate . . . . . . . . . . . . . . . . .
Reduction resulting from:

Years Ended December 31,

2009

2008

2007

Amount

Percent Amount

Percent

Amount

Percent

$(4,531)

35% $

372

35% $15,447

35%

(in thousands)

Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax exempt instruments . . . . . . . . . . . . . . . . . . . . .
Life insurance proceeds . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net

(687)
(3,072)
(708)
20

5%
(725)
24% (2,810)
(940)
5%
(803)
0%

-68%
(711)
-265% (2,631)
-89%
-76%

—
(352)

-1%
-6%
0%
-1%

Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . .

$(8,978)

69% $(4,906)

-463% $11,753

27%

The Company adopted authoritative guidance in the Income Taxes topic of the FASB ASC on January 1,

2007 related to uncertain tax positions. As of December 31, 2009, we had no unrecognized tax benefits. Our
policy is to recognize interest and penalties on unrecognized tax benefits in “Provision for income taxes” in the
Consolidated Statements of Income. There were no amounts related to interest and penalties recognized for the
years ended December 31, 2009 and 2008. The tax years subject to examination by federal and state taxing
authorities are the years ending December 31, 2008, 2007, and 2006.

83

15. Share-Based Payments

At December 31, 2009, the Company had one equity compensation plan (the “Plan”), which is shareholder

approved, that provides for the granting of share options and shares to eligible employees and directors up to
2,191,482 shares.

Share Awards: Restricted share awards provide for the immediate issuance of shares of Company common

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

A summary of the status of the Company’s nonvested shares as of December 31, 2009, 2008 and 2007 is

presented below:

Nonvested Shares

Weighted
Average
Grant-Date
Fair Value

Shares

Nonvested at January 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

83,175

$32.58

Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

76,250
(6,500)
(9,600)

Nonvested at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

143,325

Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

69,360
(13,065)
(8,300)

Nonvested at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

191,320

Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

122,097
(15,763)
(19,150)

31.63
28.27
31.32

32.36

23.65
30.89
29.72

29.41

9.92
27.67
24.03

Nonvested at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

278,504

$21.34

As of December 31, 2009, there was $3.3 million of total unrecognized compensation cost related to

nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized
over a weighted average period of 2.4 years. The total fair value of shares vested, and the expense recognized,
during the years ended December 31, 2009, 2008, and 2007 was $404 thousand, $404 thousand, and $184
thousand, respectively.

Share Options: Option awards are generally granted with an exercise price equal to the market price of the

Company’s stock at the date of grant; those option awards generally vest based on three years of continual
service and are exercisable for a five-year period after vesting. Option awards granted have a 10-year maximum
term.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option

valuation model. The fair value of all options is amortized on a straight-line basis over the requisite service
periods, which are generally the vesting periods. The expected life of options granted represents the period of
time that they are expected to be outstanding. The expected life is determined based on historical experience with
similar awards, giving consideration to the contractual terms and vesting schedules. Expected volatilities of our
common stock are estimated at the date of grant based on the historical volatility of the stock. The volatility

84

factor is based on historical stock prices over the most recent period commensurate with the estimated expected
life of the award. The risk-free interest rate is based on the U.S. Treasury curve in effect at the time of the award.
The expected dividend yield is based on dividend trends and the market value of the Company’s stock price at
the time of the award.

Assumptions utilized in the Black-Scholes option valuation model and the resulting fair value for options

granted during the years ended December 31, 2009, 2008 and 2007 are summarized as follows:

For The Twelve Months Ended
December 31,

2009

2008

2007

Expected Life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted Average Risk-free Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected Annual Dividend Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted Average Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
—
—
—
$—

—
—
—
—
$—

4.14
29.47%
4.53%
2.01%

$15.61

A summary of option activity under the Plan as of December 31, 2009, and changes during the year then

ended is presented below:

Options

Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted
Average
Remaining
Contractual
Term

Aggregate
Intrinsic
Value
($000)

Weighted
Average
Exercise
Price

$16.49
—
15.39
13.01
10.80

Shares

201,981
—
(8,122)
(25,495)
(50,173)

Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

118,191

$19.73

Total Exercisable at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . .

118,191

$19.73

2.8

2.8

$123

$123

The weighted average grant-date fair value of options granted during the year 2007 was $15.61. No options

were granted in 2009 and 2008. The total intrinsic value of options exercised during the years ended
December 31, 2009, 2008, and 2007 was $123 thousand, $1.2 million, and $3.3 million, respectively.

As of December 31, 2009, outstanding stock options consist of the following:

Ranges of
Exercise Prices

6.18 – 9.25
9.26 – 12.34
12.35 – 15.43
15.44 – 18.51
18.52 – 21.60
21.61 – 24.68
24.69 – 27.77
27.78 – 30.86

Number of
Option
Shares

Weighted Average
Remaining
Contractual Life

Weighted Average
Exercise Price of
Option Shares

Number of
Exercisable
Option Shares

Weighted Average
Exercise Price of
Exercisable Option
Shares

2,326
12,018
21,784
13,749
16,833
15,500
30,310
5,671

118,191

2.9
0.6
3.0
2.5
2.8
2.9
2.9
7.1

2.8

6.31
11.86
13.98
17.29
19.04
22.95
25.77
30.86

2,326
12,018
21,784
13,749
16,833
15,500
30,310
5,671

6.31
11.86
13.98
17.29
19.04
22.95
25.77
30.86

$19.73

118,191

$19.73

85

It is the Company’s policy to issue new shares for share option exercises and share awards. The Company
expenses awards of share options and shares on a straight-line basis over the related vesting term of the award.
For the 12 months ended December 31, 2009 and 2008, the Company recognized pre-tax share-based
compensation expense for nonvested share awards of $1.0 million and $1.3 million, respectively.

16. Regulatory Capital Requirements

The Company (on a consolidated basis) and its banking subsidiary are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Company and its subsidiary’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Company and its banking subsidiaries
must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Company and its
banking subsidiaries to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1
capital to risk-weighted assets (as defined in the regulations) and of Tier 1 capital to average assets (as defined in
the regulations). Management believes, as of December 31, 2009 and 2008, that the Company and Columbia
Bank met all capital adequacy requirements to which they are subject.

As of December 31, 2009, the most recent notification from the Federal Deposit Insurance Corporation
categorized Columbia Bank as well capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk- based, and
Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification
that management believes have changed Columbia Bank’s category. The Company and its banking subsidiary’s
actual capital amounts and ratios as of December 31, 2009 and 2008, are also presented in the following table.

Actual

For Capital
Adequacy
Purposes

To Be Well
Capitalized Under
Prompt
Corrective Action
Provision

Amount

Ratio

Amount

Ratio

Amount

Ratio

(dollars in thousands)

As of December 31, 2009
Total Capital (to risk-weighted assets):

The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Columbia Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$471,292
$388,794

19.60% $192,335
16.17% $192,335

Tier 1 Capital (to risk-weighted assets):

The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Columbia Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$440,941
$358,443

18.34% $ 96,167
14.91% $ 96,167

Tier 1 Capital (to average assets):

The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Columbia Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$440,941
$358,443

14.33% $123,069
11.73% $122,260

As of December 31, 2008
Total Capital (to risk-weighted assets):

The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Columbia Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$365,797
$287,665

14.25% $205,388
11.21% $205,202

Tier 1 Capital (to risk-weighted assets):

The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Columbia Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$333,568
$255,464

12.99% $102,694
9.96% $102,601

Tier 1 Capital (to average assets):

The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Columbia Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$333,568
$255,464

11.27% $118,418
8.64% $118,288

86

8.0%
8.0% $240,419

N/A N/A

10.0%

4.0%
4.0% $144,251

N/A N/A

6.0%

4.0%
4.0% $152,825

N/A N/A

5.0%

8.0%
8.0% $256,503

N/A N/A

10.0%

4.0%
4.0% $153,902

N/A N/A

6.0%

4.0%
4.0% $147,860

N/A N/A

5.0%

17. Employee Benefit Plans

401(k) Plan

The Company maintains defined contribution and profit sharing plans in conformity with the provisions of
section 401(k) of the Internal Revenue Code at Columbia Bank. The Columbia Bank 401(k) and Profit Sharing
Plan (the “401(k) Plan”), permits eligible Columbia Bank employees, those who are at least 18 years of age and
have completed six months of service, to contribute up to 75% of their eligible compensation to the 401(k) Plan.
On a per pay period basis the Company is required to match 50% of employee contributions up to 3% of each
employee’s eligible compensation. Additionally, as determined annually by the Board of Directors of the
Company, the 401(k) Plan provides for a non-matching discretionary profit sharing contribution. The Company
contributed $748 thousand during 2009, $818 thousand during 2008, and $811 thousand during 2007, in
matching funds to the 401(k) Plan. The Company’s discretionary profit sharing contributions were $0 during
2009, $1.0 million during 2008 and $1.6 million during 2007.

Employee Stock Purchase Plan

The Company maintains an “Employee Stock Purchase Plan” (the “ESP Plan”) in which substantially all

employees of the Company are eligible to participate. The ESP Plan provides participants the opportunity to
purchase common stock of the Company at a discounted price. Under the ESP Plan, participants can purchase
common stock of the Company for 90% of the lowest price on either the first or last day in each of two six month
look-back periods. The look-back periods are January 1st through June 30th and July 1st through December 31st of
each calendar year. The 10% discount is recognized by the Company as compensation expense and does not have
a material impact on net income or earnings per common share. Participants of the ESP Plan purchased 55,443
shares for $578 thousand in 2009, 37,179 shares for $568 thousand in 2008 and 21,633 shares for $634 thousand
in 2007. At December 31, 2009 there were 723,698 shares available for purchase under the ESP plan.

Supplemental Compensation Plan

The Company maintains supplemental compensation arrangements (“Unit Plans”) to provide benefits for
certain employees. The Unit Plans generally vest over a 4-10 year period and provide a fixed annual benefit over
a 5-10 year period. At December 31, 2009 and 2008 the liability associated with these plans was $3.5 million and
$2.4 million, respectively. Expense associated with these plans for the years ended December 31, 2009, 2008 and
2007 was $530 thousand, $634 thousand and $466 thousand, respectively.

Supplemental Executive Retirement Plan

The Company maintains a supplemental executive retirement plan (the “SERP”), a nonqualified deferred

compensation plan that provides retirement benefits to certain highly compensated executives. The SERP is
unsecured and unfunded and there are no program assets. The SERP projected benefit obligation, which
represents the vested net present value of future payments to individuals under the plan is accrued over the
estimated remaining term of employment of the participants and has been determined by actuarial valuation
using Income Tax Regulation 1.72-9, “Table 1 Ordinary Life Annuities,” for the mortality assumptions and a
discount rate of 5.75% in 2009 and 2008. Additional assumptions and features of the plan are a normal retirement
age of 65 and a 2% annual cost of living benefit adjustment. The projected benefit obligation is included in other
liabilities on the Consolidated Balance Sheets.

87

The following table reconciles the accumulated liability for the projected benefit obligation:

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer to supplemental compensation plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2009

2008

(in thousands)

$8,541
1,068
(614)
1,299
(347)

$7,912
—
—
917
(288)

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$9,947

$8,541

The benefits expected to be paid in conjunction with the SERP are presented in the following table:

Years Ending December 31,

(in thousands)

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 through 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 300
306
312
318
324
3,024

$4,584

18. Commitments and Contingent Liabilities

Lease Commitments: The Company leases locations as well as equipment under various non-cancellable

operating leases that expire between 2010 and 2045. The majority of the leases contain renewal options and
provisions for increases in rental rates based on an agreed upon index or predetermined escalation schedule. As
of December 31, 2009, minimum future rental payments, exclusive of taxes and other charges, of these leases
were:

Years Ending December 31,

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total minimum payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(in thousands)

$ 3,336
3,160
2,973
2,886
2,638
6,981

$21,974

Total rental expense on buildings and equipment, net of rental income of $602 thousand, $674 thousand, and

$669 thousand, was $3.5 million, $3.7 million, and $3.6 million, for the years ended December 31, 2009, 2008,
and 2007, respectively.

On September 30, 2004, the Company sold its Broadway and Longview locations. The Company maintains
a substantial continuing involvement in the locations through various non-cancellable operating leases that do not
contain renewal options. The resulting gain on sale of $1.3 million was deferred using the financing method in
accordance with the Leases topic of the FASB Accounting Standards Codification and is being amortized over
the life of the respective leases. At December 31, 2009 and 2008, the deferred gain was $400 thousand and $483
thousand, respectively, and is included in “other liabilities” on the Consolidated Balance Sheets.

88

Financial Instruments with Off-Balance Sheet Risk: In the normal course of business, the Company makes

loan commitments (unfunded loans and unused lines of credit) and issues standby letters of credit to
accommodate the financial needs of its customers.

Standby letters of credit commit the Company to make payments on behalf of customers under specified
conditions. Historically, no significant losses have been incurred by the Company under standby letters of credit.
Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are
subject to the Company’s normal credit policies, including collateral requirements, where appropriate. At
December 31, 2009 and 2008, the Company’s loan commitments amounted to $587.5 million and $703.3 million,
respectively. Standby letters of credit were $31.3 million and $41.9 million at December 31, 2009 and 2008,
respectively. In addition, commitments under commercial letters of credit used to facilitate customers’ trade
transactions amounted to $1.5 million and $362 thousand at December 31, 2009 and 2008, respectively.

Legal Proceedings: The Company and its subsidiaries are from time to time defendants in and are
threatened with various legal proceedings arising from their regular business activities. Management, after
consulting with legal counsel, is of the opinion that the ultimate liability, if any, resulting from these pending or
threatened actions and proceedings will not have a material effect on the financial statements of the Company.

19. Fair Value Accounting and Measurement

The Fair Value Measurements and Disclosures topic of the FASB ASC defines fair value, establishes a

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

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

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

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

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

Fair values are determined as follows:

Securities at fair value are priced using 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 swap positions are valued in models, which use as their basis, readily observable market
parameters and are classified within level 2 of the valuation hierarchy.

89

The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair
value on a recurring basis at December 31, 2009 by level within the fair value hierarchy. As required by the Fair
Value Measurements and Disclosures topic of the FASB ASC, 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
December 31,
2009

Fair Value Measurements at
Reporting Date Using

Level 1

Level 2

Level 3

(in thousands)

Assets
Securities available for sale

U.S. Government agency and government sponsored enterprise
mortgage-backed securities and collateralized mortgage
obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and municipal debt securities . . . . . . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets (Interest rate contracts) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities
Other liabilities (Interest rate contracts)

. . . . . . . . . . . . . . . . . . . . . . . .

$400,156
218,911
971

$620,038
9,054
$

$— $400,156

$—
218,911 —
971 —

—
—

$— $620,038
9,054
$— $

$—
$—

$

9,054

$— $

9,054

$—

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.

The following table sets forth the Company’s financial assets that were accounted for at fair value on a

nonrecurring basis at December 31, 2009:

Fair value at
December 31,
2009

Fair Value Measurements at
Reporting Date Using

Level 1 Level 2

Level 3

Losses During the
Year Ended
December 31, 2009

Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . .

$56,337
12,962

(in thousands)
$— $— $56,337
12,962
—

—

$69,299

$— $— $69,299

$(32,247)
(3,069)

$(35,316)

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 other real estate owned disclosed above represent the
writedowns taken at foreclosure that were charged to the allowance for loan and lease losses, as well as
subsequent writedowns from updated appraisals that were charged to earnings.

90

20. 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—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 19, 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 December 31, 2009 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.

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 securities sold under agreement to repurchase 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.

91

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:

December 31,

2009

2008

Carrying
Amount

Fair
Value

Carrying
Amount

Fair
Value

(in thousands)

$

55,802
249,272
620,038
—
1,955,406
9,054

$

55,802
249,272
620,038
—

1,808,256
9,054

$

84,787
3,943
528,918
1,964
2,189,585
14,933

$

84,787
3,943
528,918
1,964
2,023,405
14,933

$2,482,705
100,000
25,000
86
25,669
9,054

$2,486,578
100,037
29,884
86
20,296
9,054

$2,382,151
200,000
25,000
201
25,603
14,933

$2,390,024
203,898
25,055
201
14,813
14,933

Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-earning deposits with banks . . . . . . . . . . . . . . . . . .
Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Liabilities
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB and FRB borrowings . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21. 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 December 31, 2009 and 2008:

As of December 31,

Asset Derivatives

Liability Derivatives

2009

2008

2009

2008

Balance Sheet
Location

Fair Value

Balance Sheet
Location

Fair Value

Balance Sheet
Location

Fair Value

Balance Sheet
Location

Fair Value

(in thousands)

Derivatives not
designated as
hedging
instruments
under
Statement 133

Interest rate

contracts . . . . . . Other assets

$9,054

Other assets

$14,933 Other liabilities

$9,054 Other liabilities

$14,933

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

92

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 year ended December 31, 2009, $2.6 million of the net derivative
gain was reclassified into earnings. For the year ended December 31, 2010, the Company estimates that $1.7
million of the net derivative gain will be reclassified from accumulated other comprehensive income into interest
income.

22. Business Segment Information

The Company is managed by legal entity and not by lines of business. The Company’s banking subsidiary is

a community-oriented commercial bank chartered in the State of Washington. The Company’s primary business
is that of a traditional banking institution, gathering deposits and originating loans for portfolio in its respective
primary market areas. The Company offers a wide variety of deposit products to its consumer and commercial
customers. Lending activities include the origination of real estate, commercial business and consumer loans. In
addition to interest income on loans and investment securities, the Company receives other income from deposit
service charges, merchant services and from the sale of investments. The performance of the Company is
reviewed by executive management and Board of Directors on a monthly basis.

Pursuant to the Segment Reporting topic of the FASB ASC, the Company has historically reported two operating

segments: commercial banking and retail banking. During the fourth quarter, based upon restructuring of its
management processes, the Company concluded that its segments met the aggregation criteria under the Segment
Reporting topic. In arriving at this conclusion, management considered several factors, including the segments’
economic characteristics, nature of their products and services, type of customers, the methods used to distribute
products and services, and the nature of their regulatory environment.

Generally accepted accounting principles establish standards to report information about operating segments

in annual financial statements and require reporting of selected information about operating segments in interim
reports to stockholders. As a result of this the Company’s conclusion regarding the aggregation criteria, only
consolidated financial information for current and prior periods is presented.

23. Preferred Stock and Warrant

On November 21, 2008, the Company entered into a Securities Purchase Agreement-Standard Terms with

the U.S. Department of Treasury (the “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”) as
part of the Treasury’s previously announced Troubled Asset Relief Program Capital Purchase Program.

The Preferred Stock is non-voting, has an aggregate liquidation preference of $76.9 million and an annual
dividend rate of 5% for the first five years, and 9% thereafter. Dividends are cumulative and payable quarterly.
The Preferred Stock may not be redeemed for a period of three years from the date of issue, except with the
proceeds from the issuance of Tier 1-qualifying perpetual preferred or common stock from which the aggregate
gross proceeds to the Company are not less than 25% of the issue price of the Preferred Stock. The Preferred
Stock ranks senior to common shares both as to dividend and liquidation preferences. In addition, the Company
is subject to the following restrictions:

Restrictions on Dividends

For as long as the Preferred Stock is outstanding, the Company may not declare or pay dividends on, or
redeem, repurchase, or otherwise acquire shares of its common stock unless all accrued and unpaid dividends on
the Preferred Stock are fully paid.

93

Increase in Common Dividends

The Treasury’s consent is required for any increase in common dividends per share until the third

anniversary of the issue date unless the Preferred Stock is redeemed in whole prior to the third anniversary or the
Treasury has transferred all of the Preferred Stock to third parties.

Repurchases

The Treasury’s consent is required for any share repurchases, with certain limited exceptions, until the third
anniversary of the date of issue unless the Preferred Stock is redeemed in whole prior to the third anniversary or
the Treasury has transferred all of the Preferred Stock to third parties.

The Warrant has a term of 10 years and is exercisable at any time, in whole or in part, at an exercise price of
$14.49 per share. The number of shares to be delivered upon settlement of 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 $76.9 million in proceeds was allocated to the Preferred Stock and the Warrant based on their relative

fair values at issuance (approximately $73.7 million was allocated to the Preferred Stock and approximately $3.2
million to the Warrant). The difference between the initial value allocated to the Preferred Stock of
approximately $73.7 million and the liquidation value of $76.9 million will be charged to retained earnings over
the first five years of the contract as an adjustment to the dividend yield using the effective yield method. The
amount charged to retained earnings will be deducted from the numerator in calculating basic and diluted
earnings per share during the related reporting period (see Note 2).

24. 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 January 22, 2010, Columbia State Bank acquired all of the deposits and certain assets of Columbia River

Bank from the Federal Deposit Insurance Corporation (“FDIC”), which was appointed receiver of Columbia
River Bank. Columbia State Bank acquired approximately $903 million in assets and approximately $891 million
in deposits located in 21 branches in Oregon and Washington. Columbia River Bank’s loan and other real estate
assets acquired of approximately $696 million are subject to a loss-sharing agreement with the FDIC. The
Company participated in a competitive bid process in which the accepted bid included a 1% deposit premium on
non-brokered deposits and a negative bid of $43.9 million on net assets acquired.

On January 29, 2010 Columbia State Bank acquired substantially all of the deposits and assets of American

Marine Bank from the FDIC, which was appointed receiver of American Marine Bank. Columbia State Bank
acquired approximately $308 million in assets and approximately $253 million in deposits located in 11 branches
on the western Puget Sound. American Marine Bank’s loan and other real estate assets of approximately $257
million are subject to a loss-sharing agreement with the FDIC. In addition, Columbia State Bank will continue to
operate the Trust and Wealth Management Division of American Marine Bank. The Company participated in a
competitive bid process in which the accepted bid included a 1% deposit premium on non-brokered deposits and
a negative bid of $23 million on net assets acquired.

94

25. Parent Company Financial Information

Condensed Statements of Income—Parent Company Only

Income
Dividend from banking subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-earning deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Expense
Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income before income tax benefit and equity in undistributed net income of

subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income before equity in undistributed net income (loss) of subsidiaries . . . . . . . . .
Equity in undistributed net income (loss) of subsidiaries . . . . . . . . . . . . . . . . . . . . .

Years Ended December 31,
2007
2008
2009

(in thousands)

200
1,095
36

1,331

512
1,196
1,104

2,812

$ 3,380
369
54

$ 4,475
590
64

3,803

5,129

754
1,800
1,435

3,989

451
2,177
948

3,576

(1,481)
(580)

(901)
(3,067)

(186)
(1,205)

1,553
(1,031)

1,019
4,949

2,584
29,797

Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(3,968) $ 5,968

$32,381

Condensed Balance Sheets—Parent Company Only

Assets
Cash and due from banking subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-earning deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in banking subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in other subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Liabilities and Shareholders’ Equity
Long-term subordinated debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2009

2008

(in thousands)

$

304
82,702

83,006
470,634
774
2,181
$556,595

$

797
76,068

76,865
362,274
774
2,273
$442,186

$ 25,669
—
2,787

28,456
528,139

$ 25,603
100
1,098

26,801
415,385

Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$556,595

$442,186

95

Condensed Statements of Cash Flows—Parent Company Only

Operating Activities
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating

activities:

Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net changes in other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . .

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . .

Investing Activities
Acquisition of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . .

Financing Activities
Net increase (decrease) in short-term borrowings . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock, net of offering costs . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Downstream stock offering proceeds to the Bank . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from stock-based compensation . . . . . . . . . . . . . . . . . . . . . .
Purchase and retirement of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net cash provided by (used in) financing activities . . . . . . . . . . . . . .

Increase (decrease) in cash and cash equivalents . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . .

Years Ended December 31,

2009

2008

2007

(in thousands)

$

(3,968) $ 5,968

$ 32,381

3,067
1,038
1,783

1,920

—

—

(100)
(5,155)
113,537
939
(105,000)

—
—

4,221

6,141
76,865

(4,949)
399
874

2,292

—

—

(4,900)
(10,491)
76,868
1,906

241
—

63,624

65,916
10,949

(29,797)
94
(27)

2,651

(2,497)

(2,497)

5,000
(11,249)

2,836

979
(2,121)

(4,555)

(4,401)
15,350

Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . .

$ 83,006

$ 76,865

$ 10,949

Supplemental Non-Cash Investing and Financing Activities
Issuance of stock in acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

— $ — $ 57,119

96

26. Summary Of Quarterly Financial Information (Unaudited)

Quarterly financial information for the years ended December 31, 2009 and 2008 is summarized as follows:

2009
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . .

$36,029
8,126

$ 35,530
6,999

$ 35,700
6,582

$35,776
5,976

$143,035
27,683

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Year Ended
December 31,

(in thousands, except per share amounts)

Net interest income . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27,903
11,000
6,974
23,181

28,531
21,000
7,000
25,314

29,118
16,500
7,190
23,146

29,800
15,000
8,526
22,847

Income (loss) before income taxes . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . . . . . . .

696
(816)

(10,783)
(5,253)

(3,338)
(1,836)

479
(1,073)

Net Income (Loss) . . . . . . . . . . . . . . . . . . . . .
Less: Dividends on preferred stock . . . .

$ 1,512
1,093

Net Income (Loss) Applicable to Common

$ (5,530) $ (1,502) $ 1,552
1,105

1,103

1,101

115,352
63,500
29,690
94,488

(12,946)
(8,978)

$ (3,968)
4,403

Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

419

$ (6,631) $ (2,605) $

447

$ (8,371)

Per Common Share (2) . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings (loss) (basic) . . . . . . . . . . . . . . . . . . . . . .
Earnings (loss) (diluted) . . . . . . . . . . . . . . . . . . . . .

2008
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . .

$
$

0.02
0.02

$
$

(0.37) $
(0.37) $

(0.11) $
(0.11) $

0.02
0.02

$
$

(0.38)
(0.38)

$48,433
18,106

$ 44,323
14,049

$ 42,337
12,744

$39,967
10,648

$175,060
55,547

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income (loss) before income taxes . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . . . . . . .

30,327
2,076
10,157
23,554

14,854
3,877

30,274
15,350
9,305
23,367

862
(1,074)

29,593
10,500
(10,946)
23,391

(15,244)
(6,485)

29,319
13,250
6,334
21,813

590
(1,224)

119,513
41,176
14,850
92,125

1,062
(4,906)

Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Dividends on preferred stock . . . . . . . . . . . .

$10,977
—

$ 1,936
—

$ (8,759) $ 1,814
470

—

$

5,968
470

Net Income (Loss) Applicable to Common

Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$10,977

$ 1,936

$ (8,759) $ 1,344

$

5,498

Per Common Share (2)

Earnings (loss) (basic) . . . . . . . . . . . . . . . . . . . . . .
Earnings (loss) (diluted) . . . . . . . . . . . . . . . . . . . . .

$
$

0.61
0.61

$
$

0.11
0.11

$
$

(0.49) $
(0.49) $

0.07
0.07

$
$

0.30
0.30

97

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation was carried out under the supervision and with the participation of the Company’s
management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934). Based on that evaluation, the CEO and CFO have concluded that as of the end
of the period covered by this report, our disclosure controls and procedures are effective in ensuring that the
information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of
1934 is (i) accumulated and communicated to our management (including the CEO and CFO) to allow timely
decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms.

Internal Control Over Financial Reporting

Management’s Annual Report On Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over

financial reporting. The internal control system has been designed to provide reasonable assurance to the
Company’s management and Board of Directors regarding the preparation and fair presentation of the
Company’s published financial statements. Internal control over financial reporting includes maintaining records
that in reasonable detail accurately and fairly reflect the Company’s transactions; providing reasonable assurance
that transactions are recorded as necessary for preparation of the Company’s financial statements; providing
reasonable assurance that receipts and expenditures are made in accordance with management authorization; and
providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could
have a material effect on the Company’s financial statements would be prevented or detected on a timely basis.
Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute
assurance that a misstatement of the Company’s financial statements would be prevented or detected.

Management has evaluated the effectiveness of its internal control over financial reporting as of
December 31, 2009 based on the control criteria established in a report entitled Internal Control-Integrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such
evaluation, management has concluded that the Company’s internal control over financial reporting is effective
as of December 31, 2009.

Our independent registered public accounting firm has issued an attestation report our internal control over

financial reporting, which appears in this annual report on Form 10K.

98

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the internal control over financial reporting of Columbia Banking System, Inc. and its

subsidiaries (the “Company”) as of December 31, 2009, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Because management’s assessment and our audit were conducted to meet the reporting
requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA),
management’s assessment and our audit of the Company’s internal control over financial reporting included
controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the
instructions for the Consolidated Reports of Condition and Income for Schedules RC, RI, and RI-A. The
Company’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Annual Report On Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of,
the company’s principal executive and principal financial officers, or persons performing similar functions, and
effected by the company’s board of directors, management, and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of America (“generally accepted
accounting principles”). A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of

collusion or improper management override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2009, based on the criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have not examined and, accordingly, we do not express an opinion or any other form of assurance on

management’s statement referring to compliance with laws and regulations.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board

(United States), the consolidated financial statements as of and for the year ended December 31, 2009 of the
Company and our report dated March 4, 2010 expressed an unqualified opinion on those financial statements.

Seattle, Washington
March 4, 2010

99

ITEM 9B. OTHER INFORMATION

None.

100

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information regarding “Directors, Executive Officers and Corporate Governance” is set forth under the

headings “Proposal No.1: Election of Directors”, “Management—Executive Officers Who are Not Directors”
and “Corporate Governance” in the Company’s 2010 Annual Proxy Statement (“Proxy Statement”) and is
incorporated herein by reference.

Information regarding “Compliance with Section 16(a) of the Exchange Act” is set forth under the section

“Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s Proxy Statement and is
incorporated herein by reference. Information regarding the Company’s audit committee financial expert is set
forth under the heading “Board Structure and Compensation—What Committees has the Board Established” in
our Proxy Statement and is incorporated by reference.

On February 25, 2004, consistent with the requirements of the Sarbanes-Oxley Act of 2002, the Company

adopted a Code of Ethics applicable to senior financial officers including the principal executive officer. The
Code of Ethics was filed as Exhibit 14 to our 2003 Form 10-K Annual Report and can be accessed electronically
by visiting the Company’s website at www.columbiabank.com.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding “Executive Compensation” is set forth under the headings “Board Structure and
Compensation” and “Executive Compensation” of the Company’s Proxy Statement and is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

Information regarding “Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters” is set forth under the heading “Stock Ownership” of the Company’s Proxy Statement and is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

INDEPENDENCE

Information regarding “Certain Relationships and Related Transactions, and Director Independence” is set

forth under the headings “Interest of Management in Certain Transactions” and “Corporate Governance—
Director Independence” of the Company’s Proxy Statement and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Information regarding “Principal Accounting Fees and Services” is set forth under the heading “Independent

Public Accountants” of the Company’s Proxy Statement and is incorporated herein by reference.

101

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1) Financial Statements:

PART IV

The Consolidated Financial Statements and related documents set forth in “Item 8. Financial Statements and

Supplementary Data” of this report are filed as part of this report.

(2) Financial Statements Schedules:

All other schedules to the Consolidated Financial Statements required by Regulation S-X are omitted
because they are not applicable, not material or because the information is included in the Consolidated Financial
Statements and related notes in “Item 8. Financial Statements and Supplementary Data” of this report.

(3) Exhibits:

The response to this portion of Item 15 is submitted as a separate section of this report appearing

immediately following the signature page and entitled “Index to Exhibits.”

102

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 4th
day of March 2010.

COLUMBIA BANKING SYSTEM, INC.

(Registrant)

By:

/S/ MELANIE J. DRESSEL

Melanie J. Dressel
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities indicated, on the 4th day of March 2010.

Principal Executive Officer:

By:

/S/ MELANIE J. DRESSEL

Melanie J. Dressel
President and Chief Executive Officer

Principal Financial Officer:

By:

/S/ GARY R. SCHMINKEY

Gary R. Schminkey
Executive Vice President and Chief Financial Officer

Principal Accounting Officer:

By:

/S/ CLINT E. STEIN

Clint E. Stein
Senior Vice President and Chief Accounting Officer

Melanie J. Dressel, pursuant to a power of attorney that is being filed with the Annual Report on Form 10-K, has

signed this report on March 4, 2010 as attorney in fact for the following directors who constitute a majority of the
Board.

[John P. Folsom]
[Frederick M. Goldberg]
[Thomas M. Hulbert]
[Thomas L. Matson]
[Daniel C. Regis]

/S/ MELANIE J. DRESSEL

Melanie J. Dressel
Attorney-in-fact

March 4, 2010

[Donald Rodman]
[William T. Weyerhaeuser]
[James M. Will]

103

INDEX TO EXHIBITS

Exhibit No.

2.1

Purchase and Assumption Agreement - Whole Bank - All Deposits, Among Federal Deposit
Insurance Corporation, Receiver of Columbia River Bank, The Dalles, Oregon, Federal Deposit
Insurance Corporation and Columbia State Bank, Tacoma, Washington dated as of January 22,
2010 (1)

3.1

3.2

4.1

4.2

4.3

4.4

10.1

10.2

10.3

10.4

10.5

10.6

10.7

10.8

10.9

10.10

10.11

10.12

10.13

10.14

10.15

Amended and Restated Articles of Incorporation (2)

Amended and Restated Bylaws (3)

Specimen of common stock certificate (4)

Form of Series A Preferred Stock Certificate, together with Certificate of Designations (4)

Pursuant to Item 601(b) (4) (iii) (A) of Regulation S-K, copies of instruments defining the rights
of holders of long-term debt and preferred securities are not filed. The Company agrees to furnish
a copy thereof to the Securities and Exchange Commission upon request

Warrant to Purchase Common Stock of Columbia (5)

Amended and Restated Stock Option and Equity Compensation Plan (6)

Form of Stock Option Agreement (7)

Form of Restricted Stock Agreement (8)

Form of Stock Appreciation Right Agreement (7)

Form of Restricted Stock Unit Agreement (7)

Amended and Restated Employee Stock Purchase Plan (9)

Office Lease, dated as of December 15, 1999, between the Company and Haub Brothers
Enterprises Trust (10)

Employment Agreement between the Bank, the Company and Melanie J. Dressel effective
August 1, 2004 (11)

Severance Agreement between the Company and Mr. Gary R. Schminkey effective November 15,
2005 (12)

Form of Change in Control Agreement between the Bank, and Mr. Mark W. Nelson and
Mr. Andrew McDonald (7)

Form of Long-Term Care Agreement between the Bank, the Company, and each of the following
directors: Mr. Folsom, Mr. Hulbert, Mr. Matson, Mr. Rodman, Mr. Weyerhaeuser and Mr. Will
(13)

Amended and Restated Executive Supplemental Compensation Agreements dated as of May 27,
2009 among the Company, Columbia State Bank and Melanie J. Dressel, Gary R. Schminkey and
Mark W. Nelson, respectively (14)

Deferred Compensation Plan (401 Plus Plan) dated December 17, 2003, as amended effective
April 24, 2009, for directors and key employees (15)

Change in Control Agreement between the Bank and Mr. Kent L. Roberts dated December 4, 2006
(16)

Form of Supplemental Compensation Agreement between the Bank and Mr. Andrew McDonald
(7)

104

Exhibit No.

10.16

10.17

10.18

10.19

10.20

10.21

10.22

10.23

10.24

10.25

10.26

10.27

Town Center Bancorp 2004 Stock Incentive Plan (17)

Town Center Bancorp Form of Restricted Stock Award Agreement (17)

Mountain Bank Holding Company Director Stock Option Plan (18)

Mountain Bank Holding Company Form of Non-employee Director Stock Option Agreement (18)

Mountain Bank Holding Company 1999 Employee Stock Option Plan (18)

Mountain Bank Holding Company Form of Employee Stock Option Agreement (18)

Mt. Rainier National Bank 1990 Stock Option Plan (18)

Letter Agreement with Treasury, including Securities Purchase Agreement (5)

Amendment to Employment Agreement between the Bank, the Company and Melanie J. Dressel
effective February 1, 2009 (19)

Amendment to Employment Agreement effective December 31, 2008 among the Bank, the
Company and Melanie J. Dressel (15)

Form of Amendment to Change in Control Agreement effective December 31, 2008 between the
Bank and each of Mark W. Nelson, Andrew L. McDonald, Gary R. Schminkey and Kent L.
Roberts (15)

Form of Amendment to Supplemental Compensation Agreement effective December 31, 2008
between the Bank and Andrew L. McDonald (15)

10.28

Form of Indemnification Agreement between the Company and its directors (15)

12

14

21

23

24

31.1

31.2

32

99.1

99.2

Computations of Consolidated Ratios of Earnings to Combined Fixed Charges and Preferred Stock
Dividend Requirements

Code of Ethics (20)

Subsidiaries of the Company

Consent of Deloitte & Touche LLP

Power of Attorney

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

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

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

Certification of Chief Executive Officer Pursuant to the Treasury Capital Purchase Program

Certification of Chief Financial Officer Pursuant to the Treasury Capital Purchase Program

(1)

(2)

(3)

(4)

(5)

Incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed the SEC on
January 28, 2010
Incorporated by reference to Exhibit 3.1 of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008
Incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed on February 2,
2010
Incorporated by reference to Exhibit 4.3 and 4.4 of the Company’s S-3 Registration Statement (File
No. 333-156350) filed December 19, 2008
Incorporated by reference to Exhibits 4.1 and 10.2 of the Company’s Current Report on Form 8-K filed
November 21, 2008

105

(6)

(7)

(8)

(9)

Incorporated by reference to Exhibit 99.1 of the Company’s S-8 Registration Statement (File No. 333-
160370) filed July 1, 2009
Incorporated by reference to Exhibits 10.2—10.5, 10,10 and 10.16 of the Company’s Annual Report on
Form 10-K for the year ended December 31, 2007
Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed January 5,
2010
Incorporated by reference to Exhibit 99.1 of the Company’s S-8 Registration Statement (File No. 333-
160371) filed July 1, 2009

(10) Incorporated by reference to Exhibit 10.5 of the Company’s Annual Report on Form 10-K for the year

ended December 31, 2000

(11) Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter

ended June 30, 2004

(12) Incorporated by reference to Exhibit 10.11 of the Company’s Annual Report on Form 10-K for the year

ended December 31, 2005

(13) Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter

ended September 30, 2001

(14) Incorporated by reference to Exhibits 10.1, 10.2 and 10.3 of the Company’s Current Report on Form 8-K

filed on June 2, 2009

(15) Incorporated by reference to Exhibits 10.1—10.5 of the Company’s Quarterly Report on Form 10-Q for the

quarter ended September 30, 2009

(16) Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter

ended March 31, 2007

(17) Incorporated by reference to Exhibits 10.1 and 10.2 of the Company’s S-8 Registration Statement (File

No. 333-145207) filed August 7, 2007

(18) Incorporated by reference to Exhibits 99.1—99.5 of the Company’s S-8 Registration Statement (File

No. 333-144811) filed July 24, 2007

(19) Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed February 16,

2009

(20) Incorporated by reference to Exhibit 14 of the Company’s Annual Report on Form 10-K for the year ended

December 31, 2003

106

[THIS PAGE INTENTIONALLY LEFT BLANK]

[THIS PAGE INTENTIONALLY LEFT BLANK]

EXECUTIVE OFFICERS
Clockwise from left:  Kent L. Roberts, Executive Vice President, Human Resources Director; Mark W. 
Nelson, Executive Vice President, Chief Operating Offi cer;  Andrew McDonald, Executive Vice 
President, Chief Credit Offi cer; Gary R. Schminkey, Executive Vice President, Chief Financial 
Offi cer; Melanie J. Dressel, President & Chief Executive Offi cer, Columbia Banking System Inc. and 
Columbia Bank

BOARD OF DIRECTORS
Clockwise from top:  John P. Folsom, Past President, Brown & Brown of Washington, Inc.; Thomas 
M. Hulbert, President and Chief Executive Offi cer, Hulco, Inc. and Winsor Corporation; James M. Will, 
President, Titus-Will Enterprises; Daniel C. Regis, General Partner, Regis Investments; Melanie J. 
Dressel, President & Chief Executive Offi cer, Columbia Banking System and Columbia Bank; William T. 
Weyerhaeuser, Chairman of the Board, Columbia Banking System; Thomas L. Matson, Owner & President, 
Tom Matson Dodge; Donald Rodman, Owner and Executive Offi cer, Rodman Realty; Frederick M. Goldberg, 
Managing Partner, Goldberg Investments

INDEPENDENT AUDITORS
Deloitte & Touche, LLP

TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Co.

FINANCIAL INFORMATION
Columbia news and fi nancial results are available 
through the Internet and mail.

REGULATORY & SECURITIES COUNSEL
Graham & Dunn PC

STOCK LISTING
The Company’s common stock trades on the 
Nasdaq National market tier of The Nasdaq Stock 
Markets under the symbol: COLB

INTERNET
For information about Columbia Banking System, 
including news and fi nancial results, product 
information, and service locations, access our 
home page on the World Wide Web at 
www.columbiabank.com.  You can also view or 
retrieve copies of Columbia’s fi nancial reports on the 
Internet by connecting to www.sec.gov.  Immediate 
access to the Company’s quarterly earnings news 
releases via the Internet is provided by Company 
News On Call at www.prnewswire.com.

1301 A Street

Tacoma, Washington 98402

253.305.1900 / 800.305.1905

www.columbiabank.com