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 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 this Form 10-Q, the sections titled "Risk Factors," "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" from our 2008 Annual Report on 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;

· 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;

· 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;

· legislation or changes in regulatory requirements could adversely affect the businesses in which we are engaged, our results of operations and financial condition; and

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

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" in our 2008 Annual Report on Form 10-K. 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 Statement of Financial Accounting Standards ("SFAS") No. 5, Accounting for Contingencies, a specific valuation allowance in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan 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 "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation" of our 2008 Annual Report on Form 10-K.

Valuation and Recoverability of Goodwill

Goodwill represented $95.5 million of our $3.02 billion in total assets and $411.9 million in total shareholders' equity as of June 30, 2009. Goodwill is assigned to reporting units for purposes of impairment testing. The Company has three reporting units: retail banking, commercial banking, and private banking. The products and services of companies previously acquired are comparable to the Company's retail banking operations. Accordingly, all of the Company's goodwill is assigned to the retail banking reporting unit. We review our goodwill for impairment annually, during the third quarter. 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.

When required, the goodwill impairment test involves a two-step process. We first test goodwill for impairment by comparing the fair value of the retail banking reporting unit with its carrying amount. If the fair value of the retail banking 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 retail banking 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 retail banking reporting unit were being acquired in a business combination. Specifically, we would allocate the fair value of the retail banking 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.

During the fourth quarter of 2008, due to the poor overall economic conditions, declines in our stock price as well as financial stocks in general, and a challenging operating environment for the financial services industry, we determined a triggering event had occurred and we conducted an interim impairment test of our goodwill. Based on the results of the test, we determined no goodwill impairment charges were required for the year ended December 31, 2008. Valuation methodologies and material assumptions utilized for our annual and interim impairment tests conducted in 2008 are described in greater detail in the "Goodwill" section of this discussion. At June 30, 2009, management concluded there were no more likely than not indicators of goodwill impairment.

OVERVIEW

Earnings Summary

The Company reported a net loss for the second quarter of $5.5 million and a $6.6 million net loss applicable to common shareholders or $(0.37) per diluted common share, compared to net income of $1.9 million or $0.11 per diluted share for the second quarter of 2008. Net loss applicable to common shareholders for 2009 is net of the preferred stock dividend of $961,000 and the accretion of the preferred stock discount totaling $140,000. The net loss for the period was primarily attributable to the large increase in the provision for loan losses in the second quarter of 2009 reflective of the level of net charge-offs and the continued deterioration in credit quality as evidenced by the elevated level of nonperforming assets. Return on average assets and return on average common equity were (0.73%) and (7.73%), respectively, for the second quarter of 2009, compared with returns of 0.24% and 2.19%, respectively for the same period of 2008.

The Company reported a net loss for the first six months of 2009 of $4.0 million and a $6.2 million net loss applicable to common shareholders or $(0.35) per diluted common share, compared to net income applicable to common shareholders of $12.8 million or $0.71 per diluted share for the first six months of 2008. Net loss applicable to common shareholders for 2009 is net of the preferred stock dividend of $1.9 million and the accretion of the preferred stock discount totaling $272,000. Net income applicable to common shareholders for 2008 includes an allocation of dividends and undistributed earnings of $126,000 resulting from application of the two-class method of calculating earnings per share. 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 six months 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 (0.27%) and (3.63%), respectively, for the first six months of 2009, compared with returns of 0.82% and 7.37%, respectively for the same period of 2008. As stated above, the Company's results for the first six months of 2009 declined from the same period in 2008, primarily as a result of a provision for loan and lease losses of $32.0 million.

Revenue (net interest income plus noninterest income) for the three months ended June 30, 2009 was $35.5 million, 10% 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 and loans outstanding from the second quarter 2008 as well as from the redemption of Visa and Mastercard shares and the receipt of life insurance proceeds in 2008.

Revenue for the first six months ended June 30, 2009 was $70.4 million, reflecting a 12% decrease in noninterest income driven primarily by gains on sales of investment securities, proceeds from the redemption of Visa and Mastercard shares and the receipt of life insurance proceeds in the same period of last year.

Total noninterest expense in the quarter ended June 30, 2009 was $25.3 million, an 8% increase from the second quarter of 2008. Regulatory premiums, legal and professional fees and data processing costs increased $2.1 million, $254,000 and $220,000, respectively over the same period in 2008.

Total noninterest expense in the first six months of 2009 was $48.5 million, or 3% higher than in the first six months of 2008, principally due to higher regulatory premiums and legal and professional fees and data processing costs. These increases were mitigated by reductions in compensations and benefits of $1.6 million.

The provision for loan and lease losses for the second quarter of 2009 was $21.0 million compared with $15.4 million for the second quarter of 2008. The additional provision is due to the continued decline in real estate values stemming from the weakness in the current economy and non-accrual loans of $136.1 million at June 30, 2009 compared to $72.3 million at June 30, 2008. The provision increased the Company's total allowance for loan and lease losses to 2.31% of net loans at June 30, 2009 from 1.91% at year-end 2008 and 1.83% at June 30, 2008. Net charge-offs for the current quarter were $16.4 million compared to $1.5 million for the second quarter of 2008.

The provision for loan and lease losses for the first six months of 2009 was $32.0 million compared with $17.4 million for the first six months of 2008. Net charge-offs for the first six months of 2009 were $25.9 million as compared with $2.3 million for the first six months 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 the actions of regulatory authorities.

Net Interest Income

For the three months ended June 30, 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 second quarter of 2009 interest income decreased 20% while interest expense decreased 50%, 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. For the six months ended June 30, 2009 interest income decreased 23% over the same period in 2008 whereas interest expense decreased 53%.

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

                                                       Three months ended June 30,                         Three months ended June 30,
                                                                  2009                                                2008

                                                Average           Interest          Average         Average           Interest          Average
(in thousands)                               Balances (1)       Earned / Paid        Rate        Balances (1)       Earned / Paid        Rate
ASSETS
Loans, net (1) (2)                           $   2,159,415     $        29,359          5.45 %   $   2,297,661     $        37,437          6.55 %
Securities (2)                                     554,270               7,426          5.37 %         584,780               8,172          5.62 %
Interest-earning deposits with banks and
federal funds sold                                  14,401                   9          0.24 %          20,008                  95          1.91 %
Total interest-earning assets                    2,728,086     $        36,794          5.41 %       2,902,449     $        45,704          6.33 %
Other earning assets                                49,247                                              47,780
Noninterest-earning assets                         247,158                                             232,648
   Total assets                              $   3,024,491                                       $   3,182,877
LIABILITIES AND SHAREHOLDERS' EQUITY
Certificates of deposit                      $     720,458     $         4,118          2.29 %   $     798,844     $         7,369          3.71 %
Savings accounts                                   133,815                  88          0.26 %         115,889                 103          0.36 %
Interest-bearing demand                            462,433                 551          0.48 %         456,298               1,459          1.29 %
Money market accounts                              533,487               1,117          0.84 %         579,093               2,530          1.76 %
Total interest-bearing deposits                  1,850,193               5,874          1.27 %       1,950,124              11,461          2.36 %
Federal Home Loan Bank and Federal Reserve
Bank borrowings                                    172,770                 700          1.63 %         313,763               1,995          2.56 %
Securities sold under agreements to
repurchase                                          25,000                 119          1.91 %          25,000                 118          1.89 %
Other borrowings and interest-bearing
liabilities                                            161                   0          0.50 %           5,122                  46          3.64 %
Long-term subordinated debt                         25,626                 306          4.80 %          25,547                 429          6.76 %
   Total interest-bearing liabilities            2,073,750     $         6,999          1.35 %       2,319,556     $        14,049          2.44 %
Noninterest-bearing deposits                       487,192                                             463,101
Other noninterest-bearing liabilities               45,588                                              45,361
Shareholders' equity                               417,961                                             354,859
Total liabilities & shareholders' equity     $   3,024,491                                       $   3,182,877
Net interest income (2)                                        $        29,795                                     $        31,655
Net interest margin                                                                     4.38 %                                              4.39 %

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

                                                        Six months ended June 30,                            Six months ended June 30,
                                                                   2009                                                 2008

                                                Average            Interest          Average         Average            Interest          Average
(in thousands)                                Balances (1)       Earned / Paid        Rate         Balances (1)       Earned / Paid        Rate
ASSETS
Loans, net (1) (2)                           $    2,188,500     $        59,268          5.48 %   $    2,301,125     $        78,825          6.89 %
Securities (2)                                      548,867              14,767          5.44 %          583,418              16,472          5.68 %
Interest-earning deposits with banks and
federal funds sold                                   13,678                  16          0.23 %           19,767                 244          2.48 %
Total interest-earning assets                     2,751,045     $        74,051          5.44 %        2,904,310     $        95,541          6.62 %
Other earning assets                                 48,999                                               47,470
Noninterest-earning assets                          241,040                                              232,665
   Total assets                              $    3,041,084                                       $    3,184,445
LIABILITIES AND SHAREHOLDERS' EQUITY
Certificates of deposit                      $      734,875     $         9,019          2.48 %   $      821,845     $        16,457          4.03 %
Savings accounts                                    130,384                 202          0.31 %          115,378                 217          0.38 %
Interest-bearing demand                             465,715               1,230          0.53 %          457,581               3,579          1.57 %
Money market accounts                               528,648               2,315          0.89 %          582,305               6,043          2.09 %
Total interest-bearing deposits                   1,859,622              12,766          1.39 %        1,977,109              26,296          2.67 %
Federal Home Loan Bank and Federal Reserve
Bank borrowings                                     193,784               1,465          1.53 %          298,908               4,577          3.08 %
Securities sold under agreements to
repurchase                                           25,000                 236          1.91 %           22,115                 260          2.36 %
Other borrowings and interest-bearing
liabilities                                             204                   1          0.56 %            5,188                 106          4.11 %
Long-term subordinated debt                          25,618                 657          5.18 %           25,537                 916          7.21 %
   Total interest-bearing liabilities             2,104,228     $        15,125          1.45 %        2,328,857     $        32,155          2.78 %
Noninterest-bearing deposits                        471,532                                              457,099
Other noninterest-bearing liabilities                46,472                                               45,906
Shareholders' equity                                418,852                                              352,583
Total liabilities & shareholders' equity     $    3,041,084                                       $    3,184,445
Net interest income (2)                                         $        58,926                                      $        63,386
Net interest margin                                                                      4.32 %                                               4.39 %

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

During the second quarter of 2009, the Company added $21 million to its provision for loan and lease losses, compared to $15.4 million for the same period in 2008. The elevated provision is principally due to the continued decline in real estate values resulting from the current economic environment. The additional provision increased the Company's total allowance for loan losses to 2.31% of net loans at June 30, 2009. Comparing second quarter 2009 to the first quarter of 2009, the provision for loan and lease losses increased $10.0 million or 91%. See the discussion under "Nonperforming Assets" for details related to the non-accrual loans.

Noninterest Income

Noninterest income for the second quarter of 2009 was $7.0 million, compared to noninterest income of $9.3 million for the same period last year. The change was primarily a result of the $1.1 million redemption of Visa and Mastercard shares during the second quarter of 2008 as well as a reduction of $797,000 in other noninterest income items. The reduction in other noninterest income is primarily driven by the receipt of life insurance proceeds in 2008 of $612,000 from the death of a former officer covered by BOLI. Removing the impact of these non-recurring amounts, noninterest income for the second quarter 2009 declined $627,000 over the same period in 2008. This decline in noninterest income was the result of a decrease of $282,000 in merchant card services fees driven primarily by reduced transaction volume. In addition, decreases totaling $208,000 in other noninterest income items such as mortgage banking fees and cash management fees contributed to the decline in noninterest income. These declines were also driven primarily by reduced transaction volumes and reduced values of assets under management.

For the six months ended June 30, 2009, noninterest income decreased $5.5 million, or 28%, compared to the same period in 2008. The decrease in noninterest income is primarily due to the $3.0 million redemption of Visa and Mastercard shares and the $882,000 gain on the sale of investment securities recorded in the first quarter of 2008. In addition, as described above, other . . .