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;

• 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

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

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.

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 the Contingencies topic of the FASB Accounting Standards Codification, a specific valuation allowance in accordance with the Receivables topic of the FASB Accounting Standards Codification 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 $3.17 billion in total assets and $527.9 million in total shareholders' equity as of September 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 third quarter of 2009 we conducted our annual impairment test of goodwill. The results of this test indicated the fair value of the retail banking reporting unit exceeded the carrying amount of the reporting unit and, therefore, management concluded goodwill was not impaired as of September 30, 2009. Valuation methodologies and material assumptions utilized for our annual impairment test are described in greater detail in the "Goodwill" section of this discussion.

OVERVIEW

Earnings Summary

For the third quarter 2009, the Company reported a net loss of $1.5 million, a net loss applicable to common shareholders of $2.6 million and a loss per diluted common share of $0.11, compared to a net loss of $8.8 million and a loss per diluted common share of $0.49 for the year-earlier quarter. Net loss applicable to common shareholders for 2009 is net of the preferred stock dividend of $961 thousand and the accretion of the preferred stock discount totaling $142 thousand. The net loss for the period was primarily attributable to the provision for loan and lease losses in the third 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 (0.19%) and (2.56%), respectively, for the third quarter of 2009, compared with returns of (1.12%) and (10.10%), respectively for the same period of 2008.

For the first nine months of 2009, the Company reported a net loss of $5.5 million, a net loss applicable to common shareholders of $8.8 million and a loss per diluted common share of $(0.45), compared to net income applicable to common shareholders of $4.2 million and earnings per diluted common share of $0.23 for the first nine months of 2008. Net loss applicable to common shareholders for the first nine months of 2009 is net of the preferred stock dividend of $2.9 million and the accretion of the preferred stock discount totaling $414 thousand. The decline in net income from the prior year was primarily attributable to the large increase in the provision for loan and lease losses in the first nine 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 (0.24%) and (3.23%), respectively, for the first nine months of 2009, compared with returns of 0.18% and 1.59%, respectively for the same period of 2008. As stated above, the Company's results for the first nine months of 2009 declined from the same period in 2008, primarily as a result of a provision for loan and lease losses of $48.5 million in the current period as compared to $27.9 million in the year-earlier period.

Revenue (net interest income plus noninterest income) for the three months ended September 30, 2009 was $36.3 million, 95% higher than the same period in 2008. The increase was primarily driven by the reduction in noninterest income in the year-earlier quarter resulting from the $18.5 million impairment loss on preferred stock.

Revenue (net interest income plus noninterest income) for the first nine months of 2009 was $106.7 million, 8%, higher than the first nine months of 2008. The increase was primarily driven by an increase in noninterest income from the year-earlier period, which was due primarily to the $18.5 million impairment loss recognized in 2008.

Total noninterest expense in the quarter ended September 30, 2009 was $23.1 million, a 1% decrease from the third quarter of 2008. Increased regulatory premiums and costs of operation of other real estate were offset with reduced employee compensation costs.

Total noninterest expense in the first nine months of 2009 was $71.6 million, a 2% increase from the first nine months of 2008. The increase was due to a $3.3 million increase in regulatory premiums, which included the Company's $1.4 million share of a special assessment levied against all FDIC-insured deposits.

The provision for loan and lease losses for the third quarter of 2009 was $16.5 million compared with $10.5 million for the third quarter of 2008. The increased provision reflects management's continuing assessment of the credit quality of the Company's loan portfolio, which is affected by a broad range of economic factors, including weak valuations in commercial and residential real estate collateral. The provision increased the Company's total allowance for loan and lease losses to 2.50% of net loans at September 30, 2009 from 1.91% at year-end. Net charge-offs for the current quarter were $13.7 million compared to $16.4 million for the third quarter of 2008.

The provision for loan and lease losses for the first nine months of 2009 was $48.5 million compared with $27.9 million for the first nine months of 2008. Net charge-offs for the first nine months of 2009 were $39.6 million as compared to $18.7 million for the first nine months of 2008.

On August 11, 2009, we consummated an underwritten public offering of 9,775,000 shares of our common stock at a purchase price of $12.25 per share, resulting in gross proceeds of $120.0 million and net proceeds to us of approximately $113.8 million after deducting underwriting discounts and commissions and other expenses of the offering. As a result of our completion of a qualifying offering prior to December 31, 2009, the number of shares of our common stock subject to the warrant we issued to the United States Treasury in connection with our participation in Treasury's Capital Purchase Program has been reduced by 50% from 796,046 to 398,023.

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 September 30, 2009 and 2008 our net interest margin was 4.34%. For the third quarter of 2009 interest income decreased 16% while interest expense decreased 48%, 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 nine months ended September 30, 2009 interest income decreased 21% over the same period in 2008 whereas interest expense decreased 52%. The decreases in interest income and interest expense were driven by rate decreases on both interest-earning assets and interest-bearing liabilities.

The following tables set 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                            Three months ending
                                                      September 30,                                  September 30,
                                                          2009                                            2008
                                          Average            Interest      Average         Average         Interest      Average
(in thousands)                          Balances (1)        Earned/Paid     Rate         Balances (1)     Earned/Paid     Rate
ASSETS
Loans, net (2)                         $    2,088,478      $      29,260      5.56 %    $    2,241,574   $      35,696      6.34 %
Securities (2)                                593,516              7,701      5.15 %           558,990           7,806      5.56 %
Interest-earning deposits with banks
and federal funds sold                        101,126                 53      0.21 %            30,330             135      1.78 %

Total interest-earning assets               2,783,120      $      37,014      5.28 %         2,830,894   $      43,637      6.13 %
Other earning assets                           49,696                                           47,795
Noninterest-earning assets                    244,189                                          227,867

Total assets                           $    3,077,005                                   $    3,106,556