This discussion should be read in conjunction with the unaudited consolidated condensed financial statements of Columbia Banking System, Inc. (referred to in this report as "we", "our", and "the Company") and notes thereto presented elsewhere in this report and with the December 31, 2008 audited consolidated financial statements and its accompanying notes included in our Annual Report on Form 10-K. In the following discussion, unless otherwise noted, references to increases or decreases in average balances in items of income and expense for a particular period and balances at a particular date refer to the comparison with corresponding amounts for the period or date one year earlier.

This quarterly report on Form 10-Q may be deemed to contain forward-looking statements, which management believes to be a benefit to shareholders. These forward looking statements describe management's expectations regarding future events and developments such as future operating results, growth in loans and deposits, continued success of our style of banking and the strength of the local economy. The words "will," "believe," "expect," "should," and "anticipate" and words of similar construction are intended in part to help identify forward looking statements. Future events are difficult to predict, and the expectations described above are necessarily subject to risk and uncertainty that may cause actual results to differ materially and adversely. In addition to discussions about risks and uncertainties set forth from time to time in our filings with the SEC, factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, among others, the following possibilities:

· 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;

· credit markets could continue to tighten which may make it difficult to obtain adequate funding for loan growth, which could adversely affect our earnings;

· the financial services industry's reputation could be damaged which could adversely affect our ability to access markets for funding and acquire and retain customers;

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

· credit quality deterioration that could, among other things, increase defaults and delinquency risks in the Bank's loan portfolio;

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

· competitive pressure 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;

· legislation or changes in regulatory requirements could adversely affect the businesses in which we are engaged; and

· the efficiencies we expect to receive from our investments in personnel, acquisitions and infrastructure could not realized.

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.

CRITICAL ACCOUNTING POLICIES

Management has identified the accounting policies related to the allowance for loan and lease losses and the valuation and recoverability of goodwill as critical to an understanding of our financial statements. These policies and related estimates are discussed in "Item 7. Management Discussion and Analysis of Financial Condition and Results of Operation" under the headings "Allowance for Loan and Lease Losses" and "Valuation and Recoverability of Goodwill" in our 2008 Annual

Report on Form 10-K. There have not been any material changes in our critical accounting policies relating to the allowance for loan and lease losses or the valuation and recoverability of goodwill as compared to those disclosed in our 2008 Annual Report on Form 10-K.

OVERVIEW

Earnings Summary

The Company reported net income for the first quarter of $1.5 million and $419,000 net income applicable to common shareholders or $0.02 per diluted common share, compared to net income of $11.0 million or $0.61 per diluted share for the first quarter of 2008. Net income applicable to common shareholders for 2009 excludes the preferred stock dividend of $961,000 and the accretion of the preferred stock discount totaling $132,000. The decline in net income from the prior year was primarily attributable to the large increase in the provision for loan losses in the first quarter of 2009 reflective of the level of net charge-offs and the continued deterioration in credit quality. Return on average assets and return on average equity were 0.20% and 0.49%, respectively, for the first quarter of 2009, compared with returns of 1.39% and 12.60%, respectively for the same period of 2008. The Company's results for the first quarter of 2009 declined from the same period in 2008, as a result of a provision for loan and lease losses of $11.0 million.

Revenue (net interest income plus noninterest income) for the three months ended March 31, 2009 was $34.9 million, 14% lower than the same period in 2008. The decrease was primarily driven by lower interest earned on our loan portfolio due to the decline in interest rates from the first quarter 2008.

Total noninterest expense in the quarter ended March 31, 2009 was $23.2 million, a 2% decrease from the first quarter of 2008. Regulatory premiums and legal and professional fees increased $505,000 and $1.0 million respectively over the same period in 2008. These increases were offset by a decline in compensation and employee benefits expense of $1.5 million.

The provision for loan and lease losses for the first quarter of 2009 was $11.0 million compared with $2.1 million for the first quarter of 2008. The additional provision is due to the continued weakness in the for-sale housing industry resulting from the slowing economic environment and non-accrual loans of $109.3 million at March 31, 2009 compared to $14.4 million at March 31, 2008. The provision increased the Company's total allowance for loan and lease losses to 2.02% of net loans at March 31, 2009 from 1.91% at year-end 2008 and 1.21% at the end of the first quarter 2008. Net charge-offs for the current quarter were $9.5 million compared to $761,000 for the first quarter of 2008.

RESULTS OF OPERATIONS

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

Net Interest Income

For the three months ended March 31, 2009 we experienced a slight decrease in our net interest margin when compared to the same period in 2008. This decrease resulted primarily from a decline in the yield on earning assets. For the first quarter of 2009 interest income decreased 26% while interest expense decreased 55%, when compared to the same period in 2008. The decrease in interest income and interest expense for the period is primarily due to rate decreases on both interest-earning assets and interest-bearing liabilities. Finally, like most financial institutions, changes in the target Federal Funds rate may affect our net interest margin.

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

                                                  Three months ending March 31,                        Three months ending March 31,
                                                               2009                                                 2008
                                                               Interest                                             Interest
                                            Average                              Average         Average                              Average
(in thousands)                            Balances (1)       Earned / Paid        Rate         Balances (1)       Earned / Paid        Rate
ASSETS
Loans, net (1) (2)                       $    2,217,909     $        29,908          5.47 %   $    2,304,588     $        41,303          7.21 %
Securities (2)                                  543,403               7,341          5.48 %          582,056               8,300          5.74 %
Interest-earning deposits with banks
and federal funds sold                           12,947                   7          0.23 %           19,528                 149          3.07 %
Total interest-earning assets                 2,774,259     $        37,256          5.45 %        2,906,172     $        49,752          6.89 %
Other earning assets                             48,748                                               47,159
Noninterest-earning assets                      234,854                                              232,682
   Total assets                          $    3,057,861                                       $    3,186,013
LIABILITIES AND SHAREHOLDERS' EQUITY
Certificates of deposit                  $      749,450     $         4,901          2.65 %   $      844,845     $         9,087          4.33 %
Savings accounts                                126,916                 114          0.36 %          114,868                 115          0.40 %
Interest-bearing demand                         469,034                 678          0.59 %          458,865               2,120          1.86 %
Money market accounts                           523,755               1,199          0.93 %          585,517               3,513          2.41 %
Total interest-bearing deposits               1,869,155               6,892          1.50 %        2,004,095              14,835          2.98 %
Federal Home Loan Bank and Federal
Reserve Bank borrowings                         215,033                 765          1.44 %          284,054               2,582          3.66 %
Securities sold under agreements to
repurchase                                       25,000                 118          1.91 %           19,231                 142          2.98 %
Other borrowings and interest-bearing
liabilities                                         247                   0          0.60 %            5,252                  60          4.57 %
Long-term subordinated debt                      25,610                 351          5.56 %           25,527                 487          7.67 %
   Total interest-bearing liabilities         2,135,045     $         8,126          1.54 %        2,338,159     $        18,106          3.11 %
Noninterest-bearing deposits                    455,698                                              451,095
Other noninterest-bearing liabilities            47,366                                               46,488
Shareholders' equity                            419,752                                              350,271
Total liabilities & shareholders'
equity                                   $    3,057,861                                       $    3,186,013
Net interest income (2)                                     $        29,130                                      $        31,646
Net interest margin                                                                  4.26 %                                               4.38 %

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

Provision for Loan and Lease Losses

During the first quarter of 2009, the Company recorded $11 million to its provision for loan and lease losses, compared to $2.1 million for the same period in 2008. The elevated provision is principally due to the weakness in the for-sale housing industry resulting from the slowing economic environment and an increase in non-accrual loans. The additional provision increased the Company's total allowance for loan losses to 2.02% of net loans at March 31, 2009. Comparing first quarter 2009 to the fourth quarter of 2008, the provision for loan and lease losses decreased $2.3 million or 17%. See the discussion under "Nonperforming Assets" for details related to the non-accrual loans.

Noninterest Income

Noninterest income for the first quarter of 2009 was $7.0 million, compared to noninterest income of $10.2 million during the same period last year. The change was primarily a result of the $2.0 million gain on the redemption of Visa and Mastercard shares and the $882,000 gain on the sale of investment securities recorded in the first quarter of 2008. Removing the impact of these non-recurring amounts, noninterest income for the first quarter of 2009 decreased $339,000 from the same period in 2008. This decline in noninterest income was the result of a decrease of $146,000 in merchant card services driven primarily by reduced transaction volume. In addition, decreases totaling $235,000 in other income items such as mortgage banking fees, interest rate swap income and miscellaneous loan fees contributed to the decline in noninterest income. These declines were also driven primarily by reduced transaction volumes. Comparing first quarter 2009 to the fourth quarter 2008, noninterest income increased 10% or $640,000. The increase was attributed to an other-than-temporary impairment charge of $1.0 million for Federal National Mortgage Association and Federal Home Loan Mortgage Corporation equity securities recorded in the fourth quarter of 2008. Eliminating the impact of the reduction in noninterest income in the fourth quarter for the impairment charge, noninterest income declined 5% or $384,000. This decrease is due primarily to gains on disposal of assets recorded in the fourth quarter of 2008.

Noninterest Expense

Noninterest expense for the first quarter of 2009 was $23.2 million, a 2% decrease from $23.6 million a year earlier. Despite the overall decrease in noninterest expense, regulatory premiums in the current quarter increased $505,000 from the same period one year ago. This increase is due to significantly higher FDIC premium assessment rates for the Deposit Insurance Fund. The increased assessment rate is the result of losses incurred by the Deposit Insurance Fund and not directly correlated to the Company's performance. Removing the impact of the increase in FDIC premiums noninterest expense declined 4% or $878,000 from the same period in 2008. This decline was due primarily to reduced expenses related to compensation and benefits, occupancy and other expenses such as postage, supplies and employee-related costs. These expense reductions were offset by an increase in legal and professional fees of $1.0 million compared to the same period in 2008. Legal and professional fees expense for the first quarter 2008 were unusually low due to a recovery of $889,200 related to our Visa litigation reserve recorded in a prior period.

                                                  Three months ended          Increase
                                                       March 31,             (Decrease)
 (in thousands)                                    2009          2008          Amount
 Core deposit intangible amortization ("CDI")   $      270      $   296     $        (26 )
 Software support & maintenance                        162          200              (38 )
 Telephone & network communications                    359          399              (40 )
 Federal Reserve Bank processing fees                   82          111              (29 )
 Supplies                                              189          263              (74 )
 Postage                                               311          362              (51 )
 Investor relations                                     83           51               32
 Travel                                                 89           94               (5 )
 ATM Network                                           142          199              (57 )
 Sponsorships and charitable contributions             145          159              (14 )
 Directors fees                                        108          135              (27 )
 Employee expenses                                     102          181              (79 )
 Insurance                                             116          120               (4 )
 CRA partnership investment expense (1)                 87          128              (41 )
 Miscellaneous                                         755          760               (5 )
 Total other noninterest expense                $    3,000      $ 3,458     $       (458 )

In managing our business, we review the efficiency ratio, on a fully taxable-equivalent basis (see definition in table below), which is not defined in accounting principles generally accepted in the United States. Our efficiency ratio [noninterest expense divided by the sum of net interest income and noninterest income on a tax equivalent basis, excluding any gains and losses arising from nonrecurring transactions] was 63.59% for the first quarter 2009, compared to 62.36% for the first quarter of 2008. Due to the low interest rate environment revenues declined faster than expense resulting in an increase in the efficiency ratio.

The following table presents a reconciliation of the financial data utilized to calculate the efficiency ratio (a non-GAAP financial measure) to the same measures calculated and presented in accordance with GAAP:

Reconciliation of Financial Data to GAAP Financial Measures

                                                                      Three Months Ended
                                                                           March 31,
(in thousands)                                                         2009          2008
Net interest income (1)                                             $   27,903     $ 30,327
Tax equivalent adjustment for non-taxable loan and investment
securities interest income (2)                                           1,227        1,319
Adjusted net interest income                                        $   29,130     $ 31,646
Noninterest income                                                  $    6,974     $ 10,157
Gain on sale of investment securities, net                                 - -         (882 )
Redemption of Visa and Mastercard shares                                   - -       (1,962 )
Tax equivalent adjustment for BOLI income (2)                              276          272
Adjusted noninterest income                                         $    7,250     $  7,585
Noninterest expense                                                 $   23,181     $ 23,554
Net gain (loss) on sale of OREO                                            (47 )         23
Reversal of previously accrued Visa litigation expense                     - -          889
Adjusted noninterest expense                                        $   23,134     $ 24,466
Efficiency ratio                                                         66.33 %      65.00 %
Efficiency ratio (fully taxable-equivalent)                              63.59 %      62.36 %
Tax Rate                                                                 35.00 %      35.00 %

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

Income Taxes

We recorded an income tax benefit of $816,000 for the first quarter of 2009, compared with a provision of $3.9 million for the same period in 2008. Our effective tax rate remains lower than the statutory tax rate due to our nontaxable income generated from tax-exempt municipal bonds, investments in bank owned life insurance, and low income housing credits. For additional information, please refer to the Company's annual report on Form 10-K for the year ended December 31, 2008.

Credit Risk Management

The extension of credit in the form of loans or other credit products to individuals and businesses is one of our principal business activities. Our policies and applicable laws and regulations require risk analysis as well as ongoing portfolio and credit management. We manage our credit risk through lending limit constraints, credit review, approval policies, and extensive, ongoing internal monitoring. We also manage credit risk through diversification of the loan portfolio by type of loan, type of industry, type of borrower and by limiting the aggregation of debt limits to a single borrower. In analyzing our existing portfolio, we review our consumer and residential loan portfolios by their performance as a pool of loans since no single loan is individually significant or judged by its risk rating, size, or potential risk of loss. In contrast, the monitoring process for the commercial business, private banking, real estate construction, and commercial real estate portfolios includes periodic reviews of individual loans with risk ratings assigned to each loan and performance judged on a loan by loan basis. We review these loans to assess the ability of the borrower to service all of its interest and principal obligations and, as a result, the risk rating may be adjusted accordingly. In the event that full collection of principal and interest is not reasonably assured, the loan is appropriately downgraded and, if warranted, placed on nonaccrual status even though the loan may be current as to principal and interest payments. Additionally, we review these types of loans for impairment in accordance with SFAS No. 114, "Accounting by Creditors for the Impairment of a Loan". Impaired loans are considered for nonaccrual status and will typically remain as such until all principal and interest payments are brought current and the prospects for future payments in accordance with the loan agreement appear relatively certain.

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

We have diversification of loan types within our portfolio. However, we are not immune to the current instability in the residential real estate markets and mortgage-related industries. Accordingly, we will continue to be diligent in our risk management practices and maintain, what we believe, are adequate reserves for probable loan losses.

Loan Portfolio Analysis

We are a full service commercial bank, originating a wide variety of loans, but
concentrating our lending efforts on originating commercial business and
commercial real estate loans.

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

                                                      March 31,       % of        December 31,       % of
(in thousands)                                          2009          Total           2008           Total
Commercial business                                  $   812,557        37.2 %   $      810,922        36.3 %
Real estate:
One-to-four family residential                            54,831         2.5 %           57,237         2.6 %
Commercial and five or more family residential
properties                                               861,531        39.4 %          862,595        38.7 %
Total real estate                                        916,362        41.9 %          919,832        41.3 %
Real estate construction:
One-to-four family residential                           186,307         8.5 %          209,682         9.4 %
Commercial and five or more family residential
properties                                                64,712         3.0 %           81,176         3.6 %
. . .