UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003.

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

Commission File Number 0-20288

COLUMBIA BANKING SYSTEM, INC.

(Exact name of issuer as specified in its charter)

Washington	91-1422237
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
1301 “A” Street Tacoma, Washington	98401
(Address of principal executive offices)	(Zip Code)

(253) 305-1900

(Issuer’s telephone number, including area code)

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

Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x     No  ¨

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

The number of shares of the issuer’s Common Stock outstanding at October 31, 2003 was 13,398,041

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1.	Consolidated Condensed Unaudited Financial Statements
	Consolidated Condensed Statements of Operations - three months and nine months ended September 30, 2003 and 2002	1
	Consolidated Condensed Balance Sheets – September 30, 2003 and December 31, 2002	2
	Consolidated Condensed Statements of Shareholders’ Equity - twelve months ended December 31, 2002, and nine months ended September 30, 2003	3
	Consolidated Condensed Statements of Cash Flows - nine months ended September 30, 2003 and 2002	4
	Notes to Consolidated Condensed Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23
Item 4.	Controls and Procedures	23
PART II — OTHER INFORMATION
Item 6.	Exhibits and reports on Form 8-K	24
	Signatures	25

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

Columbia Banking System, Inc.

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands except per share)	2003		2002			2003		2002
Interest Income
Loans	$	16,969	$	19,976		$	53,442	$	60,384
Securities available for sale		2,945		2,814			9,599		8,356
Securities held to maturity		41		52			128		164
Deposits with banks		77		129			122		184
Total interest income		20,032		22,971			63,291		69,088
Interest Expense
Deposits		4,260		6,020			14,236		18,834
Federal Home Loan Bank advances		16		427			616		1,632
Trust preferred obligations		267		305			817		920
Total interest expense		4,543		6,752			15,669		21,386
Net Interest Income		15,489		16,219			47,622		47,702
Provision for loan losses		250		4,035			2,850		13,080
Net interest income after provision for loan losses		15,239		12,184			44,772		34,622
Noninterest Income
Service charges and other fees		2,417		2,347			7,163		6,265
Mortgage banking		1,109		900			3,307		2,059
Merchant services fees		1,687		1,412			4,495		3,691
Gain on sale of investment securities, net				183					417
Bank owned life insurance (BOLI)		385		332			1,151		936
Other		434		334			1,204		824
Total noninterest income		6,032		5,508			17,320		14,192
Noninterest Expense
Compensation and employee benefits		7,591		7,285			22,145		21,984
Occupancy		2,271		2,086			6,668		6,107
Merchant processing		707		584			1,841		1,507
Advertising and promotion		367		313			1,419		1,636
Data processing		509		446			1,425		1,378
Legal and professional services		398		530			1,382		1,339
Taxes, licenses and fees		447		436			1,259		1,287
Net cost (gain) of other real estate owned		61		(1,159	)		98		(1,193	)
Other		1,940		1,952			5,792		6,273
Total noninterest expense		14,291		12,473			42,029		40,318
Income before income taxes		6,980		5,219			20,063		8,496
Provision for income taxes		2,085		1,532			5,972		2,083
Net Income	$	4,895	$	3,687		$	14,091	$	6,413
Net income per common share:
Basic	$	0.37	$	0.28		$	1.05	$	0.49
Diluted		0.36		0.28			1.04		0.48
Dividends paid per common share	$	0.05				$	0.10
Average number of common shares outstanding		13,391		13,172			13,358		13,158
Average number of diluted common shares outstanding		13,581		13,325			13,511		13,307

See accompanying notes to consolidated condensed financial statements.

1

CONSOLIDATED CONDENSED BALANCE SHEETS

Columbia Banking System, Inc.

(Unaudited)

(in thousands)	September 30, 2003			December 31, 2002
Assets
Cash and due from banks	$	60,216		$	67,058
Interest-earning deposits with banks		34,110			18,425
Total cash and cash equivalents		94,326			85,483
Securities available for sale at fair value (amortized cost of $419,964 and $320,499, respectively)		418,114			321,513
Securities held to maturity (fair value of $5,476 and $6,412, respectively)		5,307			6,192
Federal Home Loan Bank stock		10,039			9,707
Loans held for sale		18,227			22,102
Loans, net of unearned income of $2,662 and $2,625, respectively		1,071,201			1,175,853
Less: allowance for loan losses		20,331			19,171
Loans, net		1,050,870			1,156,682
Interest receivable		6,913			6,710
Premises and equipment, net		51,321			52,921
Real estate owned		1,503			130
Other		42,336			38,173
Total Assets	$	1,698,956		$	1,699,613
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing	$	313,994		$	299,862
Interest-bearing		1,204,850			1,187,291
Total deposits		1,518,844			1,487,153
Federal Home Loan Bank advances					46,470
Trust preferred obligations		21,482			21,433
Other liabilities		14,102			12,173
Total liabilities		1,554,428			1,567,229
Shareholders’ equity:
Preferred stock (no par value)
Authorized, 2 million shares; none outstanding
September 30,    December 31,
Common stock (no par value)                2003                2002
Authorized shares                        60,032             60,032
Issued and outstanding                13,394            13,310		112,280			111,028
Retained earnings		33,450			20,696
Accumulated other comprehensive income -
Unrealized (losses) gains on securities available for sale, net of tax		(1,202	)		660
Total shareholders’ equity		144,528			132,384
Total Liabilities and Shareholders’ Equity	$	1,698,956		$	1,699,613

See accompanying notes to consolidated condensed financial statements.

2

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY

Columbia Banking System, Inc.

(Unaudited)

	Common stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
(in thousands)	Number of Shares	Amount
Balance at January 1, 2002	13,207	$	101,892	$	17,779		$	(705	)	$	118,966
Comprehensive income:
Net income for 2002					10,885
Reclassification of net gains on securities available for sale included in net income, net of tax of $213								(397	)
Change in unrealized gains (losses) on securities available for sale, net of tax of $949								1,762
Total comprehensive income											12,250
Issuance of stock under stock option and other plans	103		1,168								1,168
Issuance of shares of common stock—5% stock dividend			7,968		(7,968	)
Balance at December 31, 2002	13,310		111,028		20,696			660			132,384
Comprehensive income:
Net income for 2003					14,091
Change in unrealized gains (losses) on securities available for sale, net of tax of $1,003								(1,862	)
Total comprehensive income											12,229
Issuance of stock under stock option and other plans	84		1,252								1,252
Cash dividends declared on common stock					(1,337	)					(1,337	)
Balance at September 30, 2003	13,394	$	112,280	$	33,450		$	(1,202	)	$	144,528

See accompanying notes to consolidated condensed financial statements.

3

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

Columbia Banking System, Inc.

(Unaudited)

	Nine Months Ended September 30,
(in thousands)	2003			2002
Operating Activities
Net income	$	14,091		$	6,413
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,850			13,080
Deferred income tax (benefit) expense		(1,122	)		426
Gains on sale of real estate owned and other personal property owned		(29	)		(53	)
Depreciation and amortization		7,312			3,261
Net realized gain on sale of assets		(25	)		(419	)
Decrease in loans held for sale		3,875			8,243
Increase in interest receivable		(203	)		(422	)
Decrease in interest payable		(990	)		(2,757	)
Stock dividends from Federal Home Loan Bank stock		(332	)		(416	)
Net changes in other assets and liabilities		655			(12,227	)
Net cash provided by operating activities		26,082			15,129
Investing Activities
Proceeds from sales of securities available for sale					12,733
Proceeds from maturities of securities available for sale		3,121			449
Purchases of securities available for sale		(12,205	)		(20,089	)
Proceeds from maturities of mortgage-backed securities available for sale		177,925			28,674
Purchases of mortgage-backed securities available for sale		(274,623	)		(113,419	)
Proceeds from maturities of securities held to maturity		888			1,068
Loans originated and acquired, net of principal collected		101,340			(13,072	)
Purchases of premises and equipment		(1,389	)		(4,092	)
Proceeds from disposal of premises and equipment		82			38
Proceeds from sale of real estate owned and other personal property owned		2,437			2,520
Net cash used by investing activities		(2,424	)		(105,190	)
Financing Activities
Net increase in deposits		31,691			130,978
Proceeds from Federal Home Loan Bank advances		107,400			110,500
Repayment of FHLB advances		(153,870	)		(84,863	)
Cash dividends paid on common stock		(1,337	)
Proceeds from issuance of common stock, net		1,252			954
Other, net		49			50
Net cash (used) provided by financing activities		(14,815	)		157,619
Increase in cash and cash equivalents		8,843			67,558
Cash and cash equivalents at beginning of period		85,483			66,989
Cash and cash equivalents at end of period	$	94,326		$	134,547
Supplemental information:
Cash paid for interest	$	16,659		$	24,144
Cash paid for income taxes		5,426			2,605
Loans foreclosed and transferred to real estate owned or other personal property owned		3,565			8,099

See accompanying notes to consolidated condensed financial statements.

4

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Columbia Banking System, Inc.

Columbia Banking System, Inc. (the “Company”) is a registered bank holding company whose wholly owned subsidiary, Columbia State Bank (“Columbia Bank”), conducts a full-service commercial banking business. Headquartered in Tacoma, Washington, the Company provides a full range of banking services to small and medium-sized businesses, professionals and other individuals through 35 banking offices located in the Tacoma metropolitan area and contiguous parts of the Puget Sound region of Washington, as well as the Longview and Woodland communities in southwestern Washington. Substantially all of the Company’s loans, loan commitments and core deposits are geographically concentrated in its service areas.

1. Basis of Presentation

The interim unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for condensed interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments consisting only of normal recurring accruals necessary for a fair presentation of the financial condition and the results of operations for the interim periods included herein have been made. The results of operations for the three and nine months ended September 30, 2003 are not necessarily indicative of results to be anticipated for the year ending December 31, 2003. For additional information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2002.

2. Earnings Per Share

Earnings per share (“EPS”) are computed using the weighted average number of common and diluted common shares outstanding during the period. Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The only reconciling item affecting the calculation of earnings per share are the inclusion of stock options and restricted stock awards increasing the shares outstanding in diluted earnings per share by 190,000 and 153,000 for the three months ended September 30, 2003 and 2002, respectively, and 153,000 and 149,000 for the nine months ended September 30, 2003 and 2002, respectively.

5

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

(dollars in thousands, except per share)	For the three months ended Sept 30, 2003		For the three months ended Sept 30, 2002		For the nine months ended Sept 30, 2003		For the nine months ended Sept 30, 2002
Net income attributable to common stock:
As reported	$	4,895	$	3,687	$	14,091	$	6,413
Deduct: Total stock based employee compensation expense determined under fair value method for all options, net of related tax effects		106		139		360		442
Pro forma net income	$	4,789	$	3,548	$	13,731	$	5,971
Net income per common share:
Basic:
As reported	$	0.37	$	0.28	$	1.05	$	0.49
Pro forma		0.36		0.27		1.03		0.45
Diluted:
As reported	$	0.36	$	0.28	$	1.04	$	0.48
Pro forma		0.35		0.27		1.02		0.45

3. Cash Dividend

The Company paid its first cash dividend of $0.05 per share on May 21, 2003 to shareholders of record at the close of business May 7, 2003. On July 23, 2003 the Company declared a cash dividend of $0.05 per share, payable on August 21, 2003 to shareholders of record at the close of business August 7, 2003. On October 23, 2003 the Company declared a cash dividend of $0.05 per share, payable on November 19, 2003 to shareholders of record at the close of business November 5, 2003.

4. New Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations”, which takes effect for fiscal years beginning after June 15, 2002. SFAS No. 143 establishes the initial and subsequent accounting for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of a long-lived asset. The Company adopted SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 did not materially impact the Company’s consolidated results of operations, financial position, or cash flows.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement requires recording costs associated with exit or disposal activities when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred. The new standard is effective for transactions initiated after December 31, 2002. The Company adopted SFAS No. 146 as of January 1, 2003. The adoption of SFAS No. 146 did not materially impact the Company’s consolidated results of operations, financial position, or cash flows.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation clarifies the requirements of SFAS No. 5, “Accounting for Contingencies” relating to a guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. This interpretation requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. The initial recognition and measurement provisions of this interpretation are to be applied on a prospective basis to guarantees issued or modified subsequent to December 31, 2002, and have not had a material impact on the Company’s financial condition or results of operations. The disclosure requirements of this interpretation were effective for financial statements issued for periods that end after December 15, 2002.

6

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Statement also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The new standard is generally effective for fiscal years ending after December 15, 2002. SFAS No. 148 did not impact the Company’s consolidated results of operations, financial position, or cash flows, since the Company continues to account for stock compensation in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.”

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” This interpretation requires a variable interest entity to be consolidated by the primary beneficiary of that entity. The consolidation requirements of this interpretation apply immediately to variable interest entities created after January 31, 2003, and apply to existing entities for the first fiscal year or interim period beginning after June 15, 2003. Certain disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company is currently evaluating the impact of the interpretation on its financial statements and, except for the possible effects related to its trust preferred obligations, and any related regulatory effects, does not currently believe the interpretation will have significant effects. The possible effect of the interpretation on the trust preferred obligations would be to reclassify them as subordinated debt on the Company’s consolidated balance sheet.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement amends SFAS 133 to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires contracts with similar characteristics to be accounted for on a comparable basis. The adoption of SFAS 149, effective for contracts entered into or modified after June 30, 2003, did not have a material effect on the Company’s financial condition or results of operations.

In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with characteristics of both Liabilities and Equity.” The statement establishes standards for classifying and measuring certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity as liabilities. SFAS 150 is effective for instruments entered into or modified after May 31, 2003. The adoption of SFAS No. 150 did not materially impact the Company’s consolidated results of operations, financial position, or cash flows.

5. Business Segment Information

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

The principal activities conducted by commercial banking are the origination of commercial business loans and private banking services. Retail banking includes all deposit products, with their related fee income, and all consumer loan products as well as commercial loan products offered in the Company’s branch offices. Real estate lending offers single-family residential, multi-family residential, and commercial real estate loans, with their associated loan servicing activities.

The Company generates segment results that include balances directly attributable to business line activities. The financial results of each segment are derived from the Company’s general ledger system. Overhead, including sales and back office support functions, and other indirect expenses are not allocated to the major lines of business. Since the Company is not specifically organized around lines of business, most reportable segments comprise more than one operating activity.

7

The organizational structure of the Company and its business line financial results are not necessarily comparable across companies. As such, the Company’s business line performance may not be directly comparable with similar information from other financial institutions. Changes in net interest income and total assets for the three and nine month periods ending September 30, 2003 as compared to September 30, 2002 reflect transfers of loans from retail banking to commercial banking.

Financial highlights by lines of business are as follows:

Condensed Statements of Operations:

	Three Months Ended September 30, 2003
(in thousands)	Commercial Banking			Retail Banking			Real Estate Lending			Other			Total
Net interest income after provision for loan losses	$	4,965		$	5,842		$	3,614		$	818		$	15,239
Other income		239			1,725			1,108			2,960			6,032
Other expense		(1,083	)		(3,775	)		(711	)		(8,722	)		(14,291	)
Contribution to overhead and profit	$	4,121		$	3,792		$	4,011		$	(4,944	)	$	6,980
Income taxes														2,085
Net income													$	4,895
Total assets	$	406,090		$	478,719		$	276,825		$	537,322		$	1,698,956
	Three Months Ended September 30, 2002
(in thousands)	Commercial Banking			Retail Banking			Real Estate Lending			Other			Total
Net interest income after provision for loan losses	$	2,989		$	8,789		$	3,505		$	(3,099	)	$	12,184
Other income		254			1,634			910			2,710			5,508
Other expense		(742	)		(4,768	)		(639	)		(6,324	)		(12,473	)
Contribution to overhead and profit	$	2,501		$	5,655		$	3,776		$	(6,713	)	$	5,219
Income taxes														1,532
Net income (loss)													$	3,687
Total assets	$	344,458		$	599,434		$	327,861		$	389,617		$	1,661,370

8

	Nine Months Ended September 30, 2003
(in thousands)	Commercial Banking			Retail Banking			Real Estate Lending			Other			Total
Net interest income after provision for loan losses	$	10,723		$	22,167		$	11,165		$	717		$	44,772
Other income		650			5,253			3,319			8,098			17,320
Other expense		(2,709	)		(13,032	)		(1,865	)		(24,423	)		(42,029	)
Contribution to overhead and profit	$	8,664		$	14,388		$	12,619		$	(15,608	)	$	20,063
Income taxes														5,972
Net income													$	14,091
Total assets	$	406,090		$	478,719		$	276,825		$	537,322		$	1,698,956
	Nine Months Ended September 30, 2002
(in thousands)	Commercial Banking			Retail Banking			Real Estate Lending			Other			Total
Net interest income after provision for loan losses	$	8,560		$	24,566		$	11,387		$	(9,891	)	$	34,622
Other income		631			4,271			2,072			7,218			14,192
Other expense		(2,150	)		(14,380	)		(2,063	)		(21,725	)		(40,318	)
Contribution to overhead and profit	$	7,041		$	14,457		$	11,396		$	(24,398	)	$	8,496
Income taxes														2,083
Net income													$	6,413
Total assets	$	344,458		$	599,434		$	327,861		$	389,617		$	1,661,370

9

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Columbia Banking System, Inc.

This discussion should be read in conjunction with the unaudited consolidated condensed financial statements of Columbia Banking System, Inc. (the “Company”) and notes thereto presented elsewhere in this report. In the following discussion, unless otherwise noted, references to increases or decreases in average balances in items of income and expense for a particular period and balances at a particular date refer to the comparison with corresponding amounts for the period or date one year earlier.

This Form 10-Q may be deemed to include forward looking statements, which management believes are a benefit to shareholders. These forward looking statements describe management’s expectations regarding future events and developments such as future operating results, growth in loans and deposits, continued success of Columbia’s style of banking and the strength of the local economy. The words “will,” “believe,” “expect,” “should,” and “anticipate” and words of similar construction are intended in part to help identify forward looking statements. Future events are difficult to predict, and the expectations described above are necessarily subject to risk and uncertainty that may cause actual results to differ materially and adversely. In addition to discussions about risks and uncertainties set forth from time to time in Columbia’s filings with the SEC, factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, among others, the following possibilities: (1) local, national and international economic conditions are less favorable than expected or have a more direct and pronounced effect on Columbia than expected and adversely affect Columbia’s ability to continue its internal growth at historical rates and maintain the quality of its earning assets; (2) changes in interest rates reduce interest margins more than expected and negatively affect funding sources; (3) projected business increases following strategic expansion or opening or acquiring new branches are lower than expected; (4) costs or difficulties related to the integration of acquisitions are greater than expected; (5) competitive pressure among financial institutions increases significantly; (6) legislation or regulatory requirements or changes adversely affect the businesses in which Columbia is engaged, and (7) the Company’s ability to realize the efficiencies it expects to receive from its investments in personnel and infrastructure.

General

Columbia Banking System, Inc. is a registered bank holding company whose wholly owned subsidiary, Columbia State Bank (“Columbia Bank”), conducts a full-service commercial banking business. Headquartered in Tacoma, Washington, the Company provides a full range of banking services to small and medium-sized businesses, professionals and other individuals through 35 banking offices located in the Tacoma metropolitan area and contiguous parts of the Puget Sound region of Washington, as well as the Longview and Woodland communities in southwestern Washington. Substantially all of the Company’s loans, loan commitments and core deposits are geographically concentrated in its service areas. Columbia Bank is a Washington state-chartered commercial bank, the deposits of which are insured by the Federal Deposit Insurance Corporation (the “FDIC”). Columbia Bank is subject to regulation by the FDIC and the Washington State Department of Financial Institutions Division of Banks. Although Columbia Bank is not a member of the Federal Reserve System, the Board of Governors of the Federal Reserve System has certain supervisory authority over the Company, which can also affect Columbia Bank.

Business Overview

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

10

The Company has established a network of 35 branches as of September 30, 2003 from which it intends to grow market share. Twenty-one branches are located in Pierce County, nine in King County, three in Cowlitz County, and one each in Kitsap and Thurston Counties. Effective November 21, 2003, the Company will consolidate its Bellevue Plaza operations to its Bellevue Way location, which is approximately three blocks away. Given the current softness in the Pacific Northwest economy, the Company has moderated its physical expansion and does not have any additional branches planned in 2003.

Business Strategy

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

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

Products & Services

The Company continuously reviews new products and services to meet its customers’ financial services needs. New technologies and services are reviewed for business development and cost saving purposes. Some of the products and services Columbia offers include tailored loan products, Cash Management Services, Columbia On-Line^™, International Services, Merchant Card Services and Investment Services.

Market Area

The economy of the Company’s principal market areas, while primarily dependent upon aerospace, foreign trade and natural resources, including agriculture and timber, has become more diversified over the past decade as a result of the success of software companies such as Microsoft and the establishment of numerous research and biotechnology firms. Additionally, several military bases are located in the Company’s market areas. The Washington economy and that of the Puget Sound region continued the slowdown started in 2001 through the third quarter of 2003. Commercial airline and aerospace industries remained slow in the Puget Sound region, as the Boeing Company and many local manufacturing companies that supply the industry reduced their production and employment levels.

Federal military and defense spending is expected to have a positive economic impact on the area in light of the large military bases located in the region. Boeing has won additional defense contracts; however, only limited job creation from these contracts is anticipated. Although unemployment remained stable in August and September 2003, Washington state continues to hold the third highest unemployment level in the nation. Economic indicators signal the region is slowly recovering and the Puget Sound economy is expected to range from flat to slight growth in 2003. The South Sound region, where over 75% of the Company’s market is centered, is predicted to lead the state in economic activity in 2003.

11

RESULTS OF OPERATIONS

The results of operations of the Company are dependent to a large degree on the Company’s net interest income. The Company also generates noninterest income through service charges and fees, merchant services fees, and income from mortgage banking operations. The Company’s operating expenses consist primarily of compensation and employee benefits expense, and occupancy expense. Like most financial institutions, the Company’s interest income and cost of funds are affected significantly by general economic conditions, particularly changes in market interest rates, and by government policies and actions of regulatory authorities.

Critical Accounting Policies

Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company’s financial statements. These policies relate to the methodology for the determination of the allowance for loan losses and the valuation of real estate owned. These policies and the judgments, estimates and assumptions are described in greater detail in subsequent sections of Management’s Discussion and Analysis and in the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2002. Management believes that the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in the results of operations or financial condition.

Net Income

Net income for the third quarter of 2003 was $4.9 million, or $0.36 per diluted share, an increase of 33% compared to $3.7 million, or $0.28 per diluted share, for the third quarter of 2002. Net income for the first nine months ended September 30, 2003 was $14.1 million, or $1.04 per diluted share, compared to $6.4 million, or $0.48 per diluted share, for the same period in 2002. The increase in net income is due primarily to increased noninterest income and significantly lower loan loss provisions than in the prior year. Growth of the Company’s net income is impacted significantly by the Company’s ability to grow its loan portfolio with quality credits, which will be influenced in part by the Pacific Northwest economy.

Total Revenue

During the third quarter of 2003, total revenue (net interest income plus noninterest income), was $21.5 million, a decrease of $206,000, or 1% from the third quarter of 2002. Total revenue for the first nine months of 2003 increased $3.0 million, or 5%, to $64.9 million from $61.9 million for the first nine months of 2002. The decreased total revenue in the third quarter 2003 compared to 2002 was due to lower net interest income, offset in part by improved noninterest income. For the nine month period the increases were primarily due to increased noninterest income compared to the same period a year ago. Noninterest income grew in residential lending, service charges and other fees, and merchant services.

Net Interest Income

Net interest income for the third quarter of 2003 decreased 5% to $15.5 million, from $16.2 million in the third quarter of 2002. For the nine months ended September 30, 2003, net interest income decreased $80,000 to $47.6 million from $47.7 million for the same period in 2002. Interest income decreased in the third quarter and the first nine months of 2003 compared to the same periods in 2002 due to lower interest rates and lower average loan balances. In the third quarter and first nine months of 2003, the Company grew core deposits and continued to manage its deposit costs, resulting in lower interest expense.

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Net interest margin (net interest income divided by average interest-earning assets) decreased to 4.16 % in the third quarter of 2003 from 4.52% in the third quarter of 2002. The net interest margin was impacted by a 50 basis point decrease in the prime rate in the fourth quarter of 2002 and a 25 basis point decrease in June 2003. (A basis point is 1/100^th of 1 percent, alternatively 100 basis points equals 1.00%.) Average interest-earning assets grew to $1.51 billion, or 4%, during the third quarter of 2003, compared with $1.45 billion for the same period in 2002. The yield on average interest-earning assets decreased 101 basis points to 5.35% during the third quarter of 2003 compared with 6.36 % during the same period of 2002. In comparison, average interest-bearing liabilities were unchanged at $1.21 billion compared with the same period in 2002. The average cost of interest-bearing liabilities decreased 73 basis points to 1.49% during the third quarter of 2003 from 2.22% in the same period of 2002.

For the first nine months of 2003, net interest margin decreased to 4.26%, from 4.53% for the same period in 2002. Average interest-earning assets grew to $1.53 billion, or 7%, during the first nine months of 2003, compared with $1.43 billion for the same period in 2002. The yield on average interest-earning assets decreased 90 basis points to 5.63% during the first nine months of 2003 compared with 6.53% during the same period of 2002. In comparison, average interest-bearing liabilities grew to $1.24 billion, or 4%, compared with $1.19 billion for the same period in 2002, and the average cost of interest-bearing liabilities decreased 70 basis points to 1.69% during the first nine months of 2003 from 2.39% in the same period of 2002.

CONSOLIDATED AVERAGE BALANCES—NET CHANGES

  Columbia Banking System, Inc.

	Three Months Ended September 30,				Increase (Decrease) Amount			Nine Months Ended September 30,				Increase (Decrease) Amount
(in thousands)	2003		2002					2003		2002
ASSETS
Loans	$	1,115,637	$	1,178,493	$	(62,856	)	$	1,144,924	$	1,182,924	$	(38,000	)
Securities		367,246		242,844		124,402			369,314		235,751		133,563
Interest-earning deposits with banks		31,701		30,162		1,539			15,840		14,518		1,322
Total interest-earning assets		1,514,584		1,451,499		63,085			1,530,078		1,433,193		96,885
Other earning assets		30,918		27,722		3,196			29,416		24,196		5,220
Noninterest-earning assets		130,690		128,610		2,080			126,753		120,828		5,925
Total assets	$	1,676,192	$	1,607,831	$	68,361		$	1,686,247	$	1,578,217	$	108,030
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits	$	1,183,442	$	1,114,269	$	69,173		$	1,169,838	$	1,078,523	$	91,315
Federal Home Loan Bank advances		4,364		72,375		(68,011	)		47,760		95,080		(47,320	)
Trust preferred obligations		21,472		21,406		66			21,455		21,389		66
Total interest-bearing liabilities		1,209,278		1,208,050		1,228			1,239,053		1,194,992		44,061
Noninterest-bearing deposits		312,674		264,127		48,547			296,859		250,772		46,087
Other noninterest-bearing liabilities		11,032		10,233		799			10,710		10,056		654
Shareholders’ equity		143,208		125,421		17,787			139,625		122,397		17,228
Total liabilities and shareholders’ equity	$	1,676,192	$	1,607,831	$	68,361		$	1,686,247	$	1,578,217	$	108,030

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Noninterest Income

Noninterest income increased $524,000, or 10% in the third quarter of 2003, and $3.1 million or 22% for the first nine months of 2003 as compared with the same periods in 2002. Increases in noninterest income during these periods were in residential mortgage loan originations resulting from the effect of low mortgage interest rates; service charges and other fees from the growth in core deposits; and merchant services income. Income from mortgage banking increased by $209,000 or 23%, compared to third quarter 2002. Service charges and other fees increased $70,000 or 3%, and merchant service fees increased $275,000 or 19%, in the third quarter 2003 compared to third quarter 2002. In accordance with the Company’s investment strategy, management monitors market conditions with a view to realizing gains on its available for sale securities portfolio as market conditions allow. During the first nine months of 2003, there were no sales of securities. In the third quarter 2002 and the first nine months of 2002, the Company recorded net gains on sale of investment securities of $183,000 and $417,000, respectively.

Noninterest Expense

Total noninterest expense increased 15% to $14.3 million for the third quarter of 2003 from $12.5 million for the third quarter of 2002. During the third quarter 2002, the Company received a one-time lease termination payment of $1.2 million from the tenant of a property in OREO. Excluding this payment, total noninterest expense increased 5% to $14.3 million for the third quarter 2003 compared to $13.6 million in the prior year. Total noninterest expense increased 4% to $42.0 million from $40.3 million for the first nine months of 2003 compared to the same period in 2002. Excluding the net gain on OREO, total noninterest expense increased 1% during the first nine months of 2003 compared to 2002.

The Company’s efficiency ratio [noninterest expense divided by the sum of net interest income and noninterest income on a tax equivalent basis, excluding gain on sale of investment securities and net cost (gain) of OREO] was 64.36% for the third quarter 2003 and was 62.87% for the first nine months of 2003, compared to 61.86% and 65.99% for the third quarter and first nine months of 2002, respectively. The third quarter 2003 efficiency ratio was impacted by lower interest income due to lower interest rates and decreased loan balances compared to the prior year. The improvement in the efficiency ratio in the first nine months of 2003 compared to a year ago was due to growth in noninterest income and control of noninterest expenses.

Income Taxes

The Company recorded income tax provisions of $2.1 million and $6.0 million for the third quarter and first nine months of 2003, respectively, compared with provisions of $1.5 million and $2.1 million for the same periods in 2002. The effective tax rate for the third quarter 2003 was 30%, and was 27% for the year-ended December 31, 2002. The Company’s effective tax rate is less than the statutory rate primarily due to earnings on tax-exempt municipal securities and bank owned life insurance. For additional information, refer to the Company’s annual report on Form 10-K for the year ended December 31, 2002.

Credit Risk Management

The extension of credit in the form of loans or other credit products to individuals and businesses is one of the Company’s principal business activities. Company policies and applicable laws and regulations require risk analysis as well as ongoing portfolio and credit management. The Company manages its credit risk through lending limit constraints, credit review, approval policies, and extensive, ongoing internal monitoring. The Company also manages credit risk through diversification of the loan portfolio by type of loan, type of industry, type of borrower and by limiting the aggregation of debt limits to a single borrower.

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In analyzing its existing portfolio, the Company reviews its consumer and residential loan portfolios by their performance as a pool of loans since no single loan is individually significant or judged by its risk rating, size, or potential risk of loss. In contrast, the monitoring process for the commercial business, private banking, real estate construction, and commercial real estate portfolios includes periodic reviews of individual loans with risk ratings assigned to each loan and performance judged on a loan by loan basis. The Company reviews these loans to assess the ability of the borrower to service all of its interest and principal obligations and, as a result, the risk rating may be adjusted accordingly. In the event that full collection of principal and interest is not reasonably assured, the loan is appropriately downgraded and, if warranted, placed on nonaccrual status even though the loan may be current as to principal and interest payments. Additionally, the Company assesses whether an impairment of a loan warrants specific reserves or a write-down of the loan. See “Provision and Allowance For Loan Losses” on page 18.

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

Loan Portfolio Analysis

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

(in thousands)	September 30, 2003			% of Total		December 31, 2002			% of Total
Commercial business	$	380,945		35.6	%	$	460,169		39.1	%
Real estate:
One-to-four family residential		44,336		4.1			50,119		4.3
Commercial and five or more family residential commercial properties		471,553		44.1			447,662		38.1
Total real estate		515,889		48.2			497,781		42.4
Real estate construction:
One-to-four family residential		16,116		1.5			17,968		1.5
Commercial and five or more family residential commercial properties		59,168		5.5			93,490		7.9
Total real estate construction		75,284		7.0			111,458		9.4
Consumer		101,745		9.5			109,070		9.3
Sub-total loans		1,073,863		100.3			1,178,478		100.2
Less: Deferred loan fees		(2,662	)	(0.3	)		(2,625	)	(0.2	)
Total loans	$	1,071,201		100.0	%	$	1,175,853		100.0	%
Loans held for sale	$	18,227				$	22,102

Total loans (excluding loans held for sale) at September 30, 2003 decreased $104.7 million, to $1.07 billion from $1.18 billion at year-end 2002 largely due to decreases in commercial and commercial real estate construction loans.

15

Commercial Loans: As of September 30, 2003, commercial loans decreased $79.2 million, or 17%, to $380.9 million from $460.2 million at year-end 2002, representing 35.6% of total loans at September 30, 2003 as compared with 39.1% of total loans at December 31, 2002. The Company is committed to providing competitive commercial lending in its market areas. Management believes the decline in commercial lending in 2001 and continuing through the third quarter of 2003 was due in part to the slow economy which has resulted in lower line of credit demand and usage as businesses reduced overhead and continued to pay down debt. Additionally, loans have decreased due to problem loan resolutions and the Company’s management of interest rate risk in its loan portfolio by focusing on variable rate and shorter-term loans. The Company plans to remain competitive yet cautious with its commercial lending products due to the current state of the economy and will continue to emphasize in particular its relationship banking with businesses, and business owners.

Real Estate Loans: Residential one-to-four family loans decreased $5.8 million, or 12%, to $44.3 million at September 30, 2003, representing 4.1% of total loans, compared with $50.1 million, or 4.3% of total loans at December 31, 2002. These loans are used by the Company to collateralize advances from the FHLB. Generally, the Company’s policy is to originate residential loans for sale to third parties. Those residential loans are secured by properties located within the Company’s primary market areas, and typically have loan-to-value ratios of 80% or lower. However, the loan amounts may exceed 80% with private mortgage insurance.

Commercial and five or more family residential real estate lending increased $23.9 million, or 5%, to $471.6 million at September 30, 2003, representing 44.1% of total loans, from $447.7 million, or 38.1% of total loans at December 31, 2002. Generally, commercial and five or more family residential real estate loans are made to borrowers who have existing banking relationships with the Company. The Company’s underwriting standards generally require that the loan-to-value ratio for these loans not exceed 75% of appraised value, cost, or discounted cash flow value, as appropriate, and that commercial properties maintain debt coverage ratios (net operating income divided by annual debt servicing) of 1.2 or better. However, underwriting standards can be influenced by competition and other factors. The Company endeavors to maintain the highest practical underwriting standards while balancing the need to remain competitive in its lending practices.

Real Estate Construction Loans: The Company originates a variety of real estate construction loans. One-to-four family residential construction loans are originated for the construction of custom homes (where the home buyer is the borrower) and provide financing to builders for the construction of pre-sold homes and speculative residential construction. Construction loans on one-to-four family residences decreased $1.9 million, or 10%, to $16.1 million at September 30, 2003, representing 1.5% of total loans, from $18.0 million, or 1.5% of total loans at December 31, 2002. Commercial and five or more family real estate construction loans decreased $34.3 million, or 37%, to $59.2 million at September 30, 2003, representing 5.5% of total loans, from $93.5 million, or 7.9% of total loans at December 31, 2002.

In the current rate environment, the strongest demand has been for fixed rate commercial real estate loans. The Company continues to manage its interest rate risk by focusing on assets with relatively short durations. The Company limits its construction lending risk through adherence to sound underwriting and monitoring procedures.

Consumer Loans: At September 30, 2003, the Company had $101.7 million of consumer loans outstanding, representing 9.5% of total loans, a decrease of $7.3 million, or 7%, compared with $109.1 million, at December 31, 2002. Consumer loans made by the Company include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans and miscellaneous personal loans.

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

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Nonperforming Assets

Nonperforming assets consist of: (i) nonaccrual loans, which generally are loans placed on a nonaccrual basis when the loan becomes past due 90 days or when there are otherwise serious doubts about the collectibility of principal or interest; (ii) in most cases restructured loans, for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal, have been granted due to the borrower’s weakened financial condition (interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur); (iii) real estate owned; and (iv) personal property owned.

Total nonperforming assets decreased 50% to $9.0 million, or 0.53% of period-end assets at September 30, 2003 from $18.2 million, or 1.07% of period-end assets at December 31, 2002. Total nonperforming assets have decreased 58% in the past twelve months, from $21.3 million and 1.28% of period-end assets at September 30, 2002.

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

(in thousands)	September 30, 2003		December 31, 2002
Nonaccrual:
Commercial business	$	4,148	$	13,767
Real estate:
One-to-four family residential		445		139
Commercial and five or more family residential real estate		1,065		1,842
Real estate construction:
One-to-four family residential		664		920
Consumer		484		250
Total nonaccrual		6,806		16,918
Restructured:
One-to-four family residential construction				187
Total restructured				187
Total nonperforming loans	$	6,806	$	17,105
Real estate owned	$	1,503	$	130
Other personal property owned		700		916
Total nonperforming assets	$	9,009	$	18,151

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

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Nonperforming loans were $6.8 million, or 0.64% of total loans (excluding loans held for sale) at September 30, 2003, compared to $17.1 million, or 1.45% of total loans at December 31, 2002. Nonaccrual loans decreased $10.1 million, or 60% from year-end 2002 to $6.8 million at September 30, 2003, as several loans were either paid, returned to accrual status, or were uncollectible. Those loans that were uncollectible were written-down or charged-off. Loans placed into nonaccrual during the third quarter 2003 were relatively evenly distributed among commercial business, residential construction, commercial real estate and residential real estate loans. Restructured loans were paid off during the third quarter 2003, resulting in no balance at September 30, 2003 compared to a balance of $187,000 at December 31, 2002.

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

Real Estate and Other Personal Property Owned. Real estate owned (REO), which is comprised of property from foreclosed real estate loans, increased $1.4 million to $1.5 million at September 30, 2003, from $130,000 at December 31, 2002. During the third quarter of 2003, the Company sold two properties and a portion of another property for gains on sales of $16,000, and acquired one property in foreclosure proceedings during the quarter. At September 30, 2003, REO consisted of five properties. Other personal property owned, which is comprised of other, non-real estate property from foreclosed loans, decreased $216,000 during the first nine months of 2003 to $700,000 from $916,000 at December 31, 2002. The Company continues to liquidate the other personal property owned as quickly as possible to maximize recovery.

Provision and Allowance for Loan Losses

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

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

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

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

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

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At September 30, 2003, the Company’s allowance for loan losses was $20.3 million, or 1.90% of total loans (excluding loans held for sale), 299% of nonperforming loans, and 226% of nonperforming assets. This compares with an allowance of $19.2 million, or 1.63% of the total loan portfolio, excluding loans held for sale, 112% of nonperforming loans, and 106% of nonperforming assets at December 31, 2002. In the third quarter 2003 the Company allocated $250,000 to its provision for loan losses, compared to $4.0 million in the third quarter of 2002, a decrease of $3.8 million due to improved credit quality in the loan portfolio and lower charge-offs. During the first nine months of 2003 the Company contributed $2.9 million to its provision for loan losses, compared to $13.1 million in the first nine months of 2002, a decrease of $10.2 million, or 78%, primarily due to lower charge-offs than in the prior year.

Management is carefully monitoring the loan portfolio given the continued softness within the local economy, and will consider changes to the Company’s loan loss allowance if circumstances warrant. Management has continued to emphasize credit quality and strong loan monitoring systems and controls.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2003			2002			2003			2002
Beginning balance	$	19,994		$	15,767		$	19,171		$	14,734
Charge-offs:
Commercial business		(10	)		(1,142	)		(1,946	)		(5,849	)
Real estate: One-to-four family residential					(6	)					(6	)
Real estate: Commercial and five or more family residential properties											(3,500	)
Real estate construction: One-to-four family residential								(26	)		(316	)
Consumer		(38	)		(304	)		(207	)		(425	)
Total charge-offs		(48	)		(1,452	)		(2,179	)		(10,096	)
Recoveries:
Commercial business		118			73			443			154
Real estate: Commercial and five or more family residential properties											3
Real estate construction: One-to-four family residential		1			1			4			537
Consumer		16			2			42			14
Total recoveries		135			76			489			708
Net recoveries (charge-offs)		87			(1,376	)		(1,690	)		(9,388	)
Provision charged to expense		250			4,035			2,850			13,080
Ending balance	$	20,331		$	18,426		$	20,331		$	18,426

In the third quarter 2003, net recoveries were $87,000 while the first nine months of 2003 had net loan charge-offs of $1.7 million. Net loan charge-offs were $1.4 million and $9.4 million for the third quarter and first nine months of 2002, respectively. The $87,000 in net recoveries during the quarter were comprised of several loans, as were the prior period charge-offs. The net charge-offs during the first nine months of 2002 were largely impacted by a single substantial problem credit relationship requiring a significant charge-off during the first quarter of 2002.

19

Securities

At September 30, 2003, the Company’s securities (securities available for sale and securities held to maturity) increased $95.7 million, or 29% to $423.4 million from $327.7 million at year-end 2002. The Company purchased $129.7 million, received principal payments of $72.5 million and did not sell any securities available for sale during the third quarter of 2003. During the first nine months of 2003 the Company purchased $286.8 million, received principal payments of $181.9 million and did not sell any securities available for sale. Approximately 99% of the Company’s securities are classified as available for sale and carried at fair value. These securities are used by management as part of its asset/liability management strategy and may be sold in response to changes in interest rates or significant prepayment risk. In accordance with the Company’s investment strategy, management monitors market conditions with a view to realize gains on its available for sale securities portfolio when prudent.

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

Securities Available for Sale

(in thousands)	September 30 2003		December 31 2002
U.S. Government agency	$	5,225	$	3,524
Corporate securities		3,327		3,200
Mortgage-backed securities		352,372		265,211
State & municipal securities		56,187		48,558
Other securities		1,003		1,020
Total	$	418,114	$	321,513

Securities Held to Maturity

(in thousands)	September 30 2003		December 31 2002
State & municipal securities	$	5,307	$	6,192
Total	$	5,307	$	6,192

Liquidity and Sources of Funds

The Company’s primary sources of funds are customer deposits and advances from the Federal Home Loan Bank of Seattle (the “FHLB”). These funds, together with loan repayments, loan sales, retained earnings, equity and other borrowed funds, are used to make loans, to acquire securities and other assets, and to fund continuing operations.

Deposit Activities

The Company’s deposit products include a wide variety of transaction accounts, savings accounts and time deposit accounts. Total deposits increased $31.7 million, or 2%, to $1.52 billion at September 30, 2003 from December 31, 2002. Core deposits (demand deposit, savings, and money market accounts) increased $89.5 million, or 9% during the first nine months of 2003 and certificate of deposit balances decreased $57.8 million, or 11% compared to year-end 2002. Average core deposits increased to $1.04 billion during the third quarter of 2003, from $951.2 million in the fourth quarter 2002 and from $893.5 million in the third quarter of 2002.

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The Company has established a branch system to serve its consumer and business depositors. In addition, management’s strategy for funding growth is to make use of brokered and other wholesale deposits. At September 30, 2003, brokered and other wholesale deposits (excluding public deposits) totaled $16.4 million, or 1% of total deposits, compared with $45.8 million, or 3.1% of total deposits at December 31, 2002. The brokered deposits have varied maturities.

Borrowings

The Company relies on FHLB advances to supplement its funding sources, and the FHLB serves as another source of both short and long-term borrowings. FHLB advances are secured by one-to-four family real estate mortgages and certain other assets. At September 30, 2003, the Company had no FHLB advances, compared to advances of $46.5 million at December 31, 2002. Management anticipates that the Company will continue to rely on the same sources of funds in the future, and will use those funds primarily to make loans and purchase securities.

Trust preferred obligations

The Company’s $22 million of trust preferred obligations are at a quarterly adjusted floating rate based on the 3-month LIBOR plus 3.58%. At September 30, 2003 the rate on the Company’s trust preferred obligations was 4.69%. The Company can call the debt in 2006 for a premium and in 2011 at par, allowing the Company to retire the debt early if conditions are favorable.

Capital

Shareholders’ equity at September 30, 2003 was $144.5 million, up 9% from $132.4 million at December 31, 2002. The increase is due to net income of $14.1 million during the first nine months of 2003, offset in part by cash dividends of $1.3 million and unrealized losses in its securities available for sale portfolio. Shareholders’ equity was 8.51%, and 7.79% of total period-end assets at September 30, 2003, and December 31, 2002, respectively.

Regulatory Capital Requirements

Banking regulations require bank holding companies to maintain a minimum “leverage” ratio of core capital to adjusted quarterly average total assets of at least 3%. In addition, banking regulators have adopted risk-based capital guidelines, under which risk percentages are assigned to various categories of assets and off-balance sheet items to calculate a risk-adjusted capital ratio. Tier I capital generally consists of common shareholders’ equity and trust preferred obligations, less goodwill and certain identifiable intangible assets, while Tier II capital includes the allowance for loan losses and subordinated debt, both subject to certain limitations. Regulatory minimum risk-based capital guidelines require Tier I capital of 4% of risk-adjusted assets and total capital (combined Tier I and Tier II) of 8% of risk-adjusted assets to be considered “adequately capitalized”.

Federal Deposit Insurance Corporation regulations set forth the qualifications necessary to be classified as a “well capitalized” bank, primarily for assignment of FDIC insurance premium rates. To qualify as “well capitalized,” banks must have a Tier I risk-adjusted capital ratio of at least 6%, a total risk-adjusted capital ratio of at least 10%, and a leverage ratio of at least 5%. Failure to qualify as “well capitalized” can negatively impact a bank’s ability to expand and to engage in certain activities.

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Columbia Bank qualifies as “well-capitalized” at September 30, 2003 and December 31, 2002.

	Columbia Banking System, Inc.				Columbia State Bank				Requirements
	9/30/2003		12/31/2002		9/30/2003		12/31/2002		Adequately capitalized		Well- capitalized
Total risk-based capital ratio	13.94	%	12.32	%	13.60	%	11.78	%	8	%	10	%
Tier 1 risk-based capital ratio	12.69	%	11.07	%	12.35	%	10.53	%	4	%	6	%
Leverage ratio	9.88	%	9.18	%	9.64	%	8.78	%	4	%	5	%

Dividends

The Company paid its first cash dividend of $0.05 per share on May 21, 2003, to shareholders of record as of May 7, 2003. On July 24, 2003, the Company declared a quarterly cash dividend of $0.05 per share, payable on August 21, 2003, to shareholders of record as of August 7, 2003. On October 23, 2003, the Company declared a quarterly cash dividend of $0.05 per share, payable on November 19, 2003, to shareholders of record as of November 5, 2003. Applicable Federal and Washington State regulations restrict cash capital distributions, including dividends, by institutions such as Columbia Bank. Such restrictions are tied to the institution’s capital levels after giving effect to distributions.

Stock Repurchase Program

In March 2002 the Board of Directors approved a stock repurchase program whereby the Company may systematically repurchase up to 500,000 of its outstanding shares of Common Stock. The Company may repurchase shares from time to time in the open market or in private transactions, under conditions which allow such repurchases to be accretive to earnings while maintaining capital ratios that exceed the guidelines for a well-capitalized financial institution. As of September 30, 2003 the Company had not repurchased any shares of common stock in this current stock repurchase program.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A number of measures are used to monitor and manage interest rate risk, including income simulations and interest sensitivity (gap) analyses. An income simulation model is the primary tool used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Basic assumptions in the model include prepayment speeds on mortgage-related assets, cash flows and maturities of other investment securities, loan and deposit volumes and pricing. These assumptions are inherently subjective and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. At September 30, 2003, based on the measures used to monitor and manage interest rate risk, there has not been a material change in the Company’s interest rate risk since December 31, 2002. For additional information, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” referenced in the Company’s annual report on Form 10-K for the year ended December 31, 2002.

Item 4. CONTROLS AND PROCEDURES

Evaluation and Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 240.13a-14(c) and 15d-14(c)) as of a date within 90 days before the filing date of this quarterly report. Based on that evaluation the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective and timely, providing them with material information relating to the Company required to be disclosed in the reports we file or submit under the Exchange Act.

Changes in Internal Controls

There have not been any significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. We are not aware of any significant deficiencies or material weaknesses; therefore no corrective actions were taken.

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PART II - OTHER INFORMATION

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

None.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

COLUMBIA BANKING SYSTEM, INC.

Date November 13, 2003	By	/s/ Melanie J. Dressel
		Melanie J. Dressel
		President and Chief Executive Officer
		(Principal Executive Officer)
Date November 13, 2003	By	/s/ Gary R. Schminkey
		Gary R. Schminkey
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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