UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2004

For the transition period from     to    

Commission file number 0-27938

COLUMBIA BANCORP

401 East Third Street, Suite 200
The Dalles, Oregon 97058
(Address of principal executive offices)

(541) 298-6649
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES X    NO ___

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

YES X    NO ___

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

8,814,245 shares of common stock as of October 28, 2004

COLUMBIA BANCORP

FORM 10-Q

September 30, 2004

Table of Contents

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COLUMBIA BANCORP AND SUBSIDIARY

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

See accompanying notes.

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COLUMBIA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)

See accompanying notes.

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COLUMBIA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See accompanying notes.

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COLUMBIA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

See accompanying notes.

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COLUMBIA BANCORP AND SUBSIDIARY

1.		Principles of Consolidation
		The interim consolidated financial statements include the accounts of Columbia Bancorp (“Columbia” or the “Company”), an Oregon corporation and a registered financial holding company, and its wholly-owned subsidiary Columbia River Bank (“CRB”), after elimination of intercompany transactions and balances. CRB is an Oregon state-chartered bank, headquartered in The Dalles, Oregon. Substantially all activity of Columbia is conducted through its subsidiary bank, CRB.
		During the first quarter of 2004, Columbia adopted Financial Accounting Standards Board’s (“FASB”) Interpretation No. 46 (revised December 2003) (“FIN 46R”) “Consolidation of Variable Interest Entities” which provided guidance on how to identify the primary beneficiary of a variable interest entity (“VIE”) and determine when the primary beneficiary of a VIE should include the VIE within its consolidated financial statements. As a result of adoption of FIN 46R Columbia could no longer consolidate Columbia Bancorp Trust I (“Trust”) within its financial statements and was required to recognize $4.1 million as junior subordinated debentures due to the Trust, effective March 31, 2004.
		The interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The financial information included in this interim report has been prepared by Management. Columbia’s annual report contains audited financial statements. All adjustments, including normal recurring accruals necessary for the fair presentation of results of operations for the interim periods included herein, have been made. The results of operations for the nine months ended September 30, 2004, are not necessarily indicative of results to be anticipated for the year ending December 31, 2004.
2.		Management’s Estimates and Assumptions
		Various elements of Columbia’s accounting policies are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, Management has identified certain policies that due to the judgments, estimates and assumptions inherent in those policies are critical to an understanding of the consolidated financial statements. These policies relate primarily to the determination of the allowance for loan losses, the valuation of goodwill, and the valuation of the mortgage servicing asset. There are other complex accounting standards that require the Company to employ significant judgment in interpreting and applying certain principles prescribed by those standards. These judgments include significant estimates and assumptions necessary to determine the disclosure requirements of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-based Compensation” and Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment of SFAS No. 123.” These policies and judgments, estimates and assumptions are described in greater detail in the Notes to the consolidated financial statements included in Columbia’s annual report on Form 10-K.
		Columbia believes the judgments, estimates and assumptions used in the preparation of the consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of the consolidated 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 conditions.

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3.		Stock Options
		Columbia applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock option plan using the intrinsic value-based method. Accordingly, compensation costs are recognized as the difference between the exercise price of each option and the market price of Columbia’s stock at the date of each grant. Had compensation cost for Columbia’s grants under its stock-based compensation plan been determined consistent with the fair value-based method defined in SFAS No. 123, “Accounting for Stock-Based Compensation,” its net income and earnings per common share would approximate the pro forma amounts for the periods shown below:
		FAS 123 Pro Forma Net Income:

4.		Loans and Allowance for Loan Losses
		Columbia does not accrue interest on loans for which payment in full of principal and interest is not expected, or for which payment of principal or interest has been in default for 90 days or more, unless the loan is well-secured and in the process of collection. Further, Columbia may place on non-accrual status loans that are not contractually past due or that are deemed fully collateralized to promote better oversight and review of loan arrangements. Loans on non-accrual status at September 30, 2004, and December 31, 2003, were $3.9 million, and $3.3 million, respectively. A single real estate secured loan in the amount of $3.1 million comprises the majority of loans on non-accrual status as of September 30, 2004. Columbia is currently seeking resolution from the guarantors of this loan and working to obtain a settlement.
		At September 30, 2004, Columbia had $1.5 million in other real estate owned (“OREO”), which represents assets held through loan foreclosure or recovery activities. As of December 31, 2003, Columbia held $41,500 in OREO. The increase in OREO is attributable primarily to a single foreclosed real estate secured loan in the amount of $1.4 million. The carrying value of this asset is based in part on an updated appraisal of the property conducted in 2003. This property is currently listed on the market for sale.
		At September 30, 2004, and December 31, 2003, Columbia had not identified any loans in material amounts upon which the interest rate or payment schedules had been modified from original terms or restructured to accommodate borrowers’ weakened financial positions.

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5.		Mortgage Servicing Asset
		The following table presents an overview of key mortgage servicing balances and ratios as of the dates indicated:
		Mortgage Servicing:

		Columbia’s balance sheet includes an asset representing the estimated net present value of Columbia’s mortgage servicing rights income for mortgage loans originated by Columbia River Bank Mortgage Team (“Mortgage Team”) and subsequently sold to third party investors. The book value of the mortgage servicing asset (“MSA”) as of September 30, 2004, was $2.4 million, which represents $355.2 million in the aggregate of unpaid principal balance of mortgage loans serviced by Columbia, compared to $3.7 million on $455.0 million as of September 30, 2003. The mortgage servicing asset has declined in value by $1.3 million during the last twelve months due to amortization expense, which is recognized in proportion to and over the period of estimated net servicing income. During the twelve months ending September 30, 2004, the unpaid principal amount of mortgage loans serviced declined by $99.8 million as a result of mortgage payoffs in the servicing portfolio. Since the first of 2004, Management has made the strategic decision to discontinue selling mortgage loans with servicing retained. For the nine months ended September 30, 2004, amortization expense related to the MSA totaled $1.4 million with no additional valuation adjustments. During the first nine months of 2003, MSA amortization expense totaled $1.5 million and a valuation adjustment of $1.1 million was also recognized. The MSA as a percentage of total loans serviced as of September 30, 2004, was 0.67%, as compared to 0.83% and 0.82% as of December 31, 2003 and September 30, 2003, respectively.
6.		Segment Information
		Columbia operates two primary segments — the community banking segment and the mortgage banking segment. The community banking segment consists of Columbia’s subsidiary, CRB, which operates 17 bank branches in Oregon and three bank branches in Washington. CRB offers loan, investment, and deposit products to its customers who range from individuals to medium-sized agricultural and commercial companies. The mortgage banking segment consists of the Mortgage Team, headquartered in Bend, Oregon, with dedicated loan officers located in 11 of CRB’s Oregon branches and mortgage servicing, which is located in The Dalles, Oregon. The Mortgage Team offers a full range of mortgage lending services and products to its clients.

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Financial information that Columbia’s Management uses to evaluate its reportable segments and the reconciliation to Columbia’s consolidated financial statements are summarized as follows:

		Segment Information:
		(dollars in thousands)

7.		Earnings Per Share
		Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if common shares were issued pursuant to the exercise of options under stock option plans. Weighted average shares outstanding include common shares outstanding and common stock equivalents attributable to outstanding stock options.
		The weighted average number of shares and common share equivalent figures have been retroactively adjusted for all stock dividends or splits.
8.		Recently Issued Accounting Standards
		In September 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” This statement establishes standards regarding classification and measurement of certain financial instruments with characteristics of both liabilities and equity. It requires financial instruments within the scope of this statement to be classified as liabilities. Many of these financial instruments were previously classified as equity. This statement became effective for financial instruments entered into or modified after May 31, 2003, and was otherwise effective at the beginning of the first interim period beginning after September 15, 2003. For financial instruments created before the issuance date of this statement and still existing at the beginning of the interim period of adoption, transition was achieved by reporting the cumulative effect of a change in an accounting principle by initially measuring the financial instruments at fair value. Application of the provisions of this statement did not have a material impact on Columbia’s consolidated financial statements.
		In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Application of the provisions of this statement did not have a material impact on Columbia’s consolidated financial statements.

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In January 2003, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” This interpretation clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” and requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. This interpretation explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. In December 2003, FASB made revisions and delayed implementation of certain provisions of FIN 46 by issuing FIN 46R. As a public entity that is not a “Small Business Issuer”, Columbia was required to apply FIN 46R to all unconsolidated variable interest entities no later than March 31, 2004, with the exception of unconsolidated special-purpose entities, which had an implementation deadline of December 31, 2003. Special-purpose entities for this provision are expected to include entities whose activities are primarily related to securitizations or other forms of asset-backed financings or single-lessee leasing arrangements. As a result of adoption of FIN 46R, Columbia could no longer consolidate Columbia Bancorp Trust I within its financial statements and had to recognize $4.1 million as junior subordinated debentures due to the Trust effective March 31, 2004. Management does not anticipate adoption of the Interpretation will have further effects on the financial condition or results of operations of Columbia.

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COLUMBIA BANCORP AND SUBSIDIARY
PART I – FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains various forward-looking statements about plans and anticipated results from the operation and financial condition relating to Columbia Bancorp. These statements include statements about Management’s present plans and intentions about our strategy, growth, and deployment of resources, and about Management’s expectations for future financial performance. Readers can sometimes identify forward-looking statements by the use of prospective language and context, including words like “may”, “will”, “should”, “expect”, “anticipate”, “estimate”, “continue”, “plans”, “intends”, or other similar terminology. Because forward-looking statements are, in part, an attempt to project future events and explain Management’s current plans, they are subject to various risks and uncertainties that could cause our actions and our financial and operational results to differ materially from those set forth in such statements. These risks and uncertainties include, without limitation, our ability to estimate accurately the value of certain of our intangible assets, economic and other factors that affect the collectibility of our loans, the impact of competition and fluctuations in market interest rates on Columbia’s revenues and margins, Management’s ability to open and generate growth from new branches, conclude the sale of certain land and achieve resolution on non-performing assets, and other risks and uncertainties that we have in the past, or that we may from time to time in the future, detail in our filings with the Securities and Exchange Commission (“SEC”). Information presented in this report is accurate as of the date the report was filed with the SEC, and we cannot undertake to update our forward-looking statements or the factors that may cause us to deviate from them, except as required by law.

OVERVIEW

Columbia Bancorp (“Columbia” or the “Company”) is an Oregon corporation and a registered financial holding company. Columbia’s common stock is traded on the NASDAQ Stock Market(TM) under the symbol “CBBO.” Columbia’s wholly-owned subsidiary, Columbia River Bank (“CRB”), is an Oregon state-chartered bank, headquartered in The Dalles, Oregon, through which substantially all business is conducted. Until March 31, 2004, Columbia also recognized Columbia Bancorp Trust I (“Trust”), as a wholly-owned subsidiary. The Trust is a Delaware statutory business trust which was used to issue “trust preferred securities” in 2002 for the purpose of repurchasing shares of common stock and to maintain appropriate regulatory capital. In accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46R, “Consolidation of Variable Interest Entities”, Columbia was required to deconsolidate the Trust effective March 31, 2004.

CRB, originally formed in 1977, operates 20 branches in Oregon and Washington. In addition to these community-oriented branches, mortgage lending services are provided through Columbia River Bank Mortgage Team (“Mortgage Team”) and investment services through CRB Financial Services Team (“Financial Services Team”), a registered broker-dealer firm. CRB offers a broad range of financial services to its customers, which primarily are small and medium sized businesses, agricultural based businesses, families and individuals.

Management’s goal is to grow earning assets and achieve a high return on equity while maintaining above average asset quality standards. The key to this, in Columbia’s view, is to emphasize personalized, high-quality banking products and services for its customers, to hire and retain excellent branch and administrative personnel who have a strong customer service

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orientation and solid community ties, and to respond quickly to growth opportunities in areas where Columbia currently does not provide full-service banking products. Columbia also intends to increase its penetration in existing markets, and as opportunities become available, to expand into new markets through further suitable acquisitions and new branch openings.

In January 2004, Columbia opened a Commercial Loan Production Office (“LPO”) to serve the Portland, Oregon market. This is Columbia’s first venture into the Portland area market. The LPO is currently operating out of the Newberg, Oregon branch.

During the second quarter of 2004, Columbia opened a branch in Redmond, Oregon and a branch in Bend, Oregon was opened during the third quarter of 2004. These locations are in Columbia’s existing service area and are expected to benefit from the high growth of new residents and businesses. Deschutes County, where both branches are located, ranks among the top 100 fastest growing counties in the United States. Columbia has experienced significant success with its existing branch in Redmond as well as its two full-service and one limited-service branches in Bend, and Columbia believes that significant opportunity exists for these additional branches to increase convenience for customers and to further penetrate Columbia’s trade area.

In September 2004, Columbia announced the realignment of duties for three of its executive officers. Craig Ortega is the Chief Operating Officer and oversees branch expansion, operations and technology. Shane Correa is the Chief Banking Officer and oversees management of the business banking team, marketing and the customer support team. Jim McCall is the Chief Administrative Officer and oversees community reinvestment activities, human resources, training, project management, and strategic projects. The remaining executive officers retain their existing responsibilities and duties in their capacities; Roger Christensen, Chief Executive Officer, Greg Spear, Chief Financial Officer and Britt Thomas, Chief Credit Officer. Craig Ortega, Shane Correa and Britt Thomas make up the CRB Banking Team, whose focus is quality loan and deposit growth within the parameters of our strategic plan. They also ensure the day-to-day operations of the Bank are aligned with the needs of our customers and employees. Columbia implemented these changes to better meet the needs of a growing and dynamic company.

Columbia’s total assets as of September 30, 2004, were $720.5 million and shareholders’ equity at that date was $63.0 million. For the quarter ended September 30, 2004, net income was $2.9 million, or $0.32 per diluted share, which represents a decrease of $160,682, or 5.25%, over the third quarter of 2003. For the nine months ended September 30, 2004, net income was $7.2 million, or $0.80 per diluted common share, which represents an increase of $309,646, or 4.47%, from the nine months ended September 30, 2003. This year to date increase in net income was the result of several factors. Columbia posted higher loan interest and fee revenue through the third quarter due to substantial loan growth while only reducing the interest expense on deposits and borrowed funds. The resulting $2.4 million increase in net interest income was partially offset by reductions in non-interest income and an increase in non-interest expenses. The reduction in non-interest income was primarily a drop in net revenue from Mortgage Team lending as a result of a slow down in mortgage applications during 2004. The increase in non-interest expense was the result of higher occupancy costs associated with new branches, increased data processing and growth in other general expenses. These expense increases were partially offset by lower overall compensation expenses.

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The following table presents an overview of these and other key financial performance indicators:

Key Financial Performance Indicators:
(dollars in thousands except per share data)

(1)

Loans include portfolio and loans held for sale and exclude allowance for loan losses and unearned loan fees.

MATERIAL CHANGES IN FINANCIAL CONDITION

ASSETS

Columbia’s assets are comprised primarily of loans made to customers, with the expectation of receipt of interest and principal from the customer, in addition to operating cash and various investment securities.

Investment Securities

Investment securities totaled $32.2 million at September 30, 2004, an increase of $559,934, or 1.77%, compared to December 31, 2003. The increase in investment securities resulted from the need for additional securities to be pledged, per state regulations, as collateral for public agency deposits due to an increase in public agency deposit balances. This increase was offset, in part, by the maturity of held-to-maturity securities, which were not replaced due to a need for restoring liquidity from strong loan growth, and the sale of restricted equity securities. The investment securities portfolio contains bank qualified municipal securities, debt issued by government agencies, mortgage backed securities and restricted equity securities. Included in the balance of restricted equity securities is Federal Home Loan Bank stock of $2.4 million, which decreased $413,300 from December 31, 2003, and Farmer Mac stock of $9,400. The decrease in Federal Home Loan Bank stock was the result of the sale of excess stock held for collateral by the Federal Home Loan Bank. At September 30, 2004, the investment securities portfolio consisted of 48.64% available-for-sale securities, 43.83% held-to-maturity securities and 7.53% restricted equity securities. As of December 31, 2003, and September 30, 2003, available-for-sale, held-to-maturity, and restricted equity securities represented, 43.80%, 47.23% and 8.97%, and 55.66%, 37.92% and 6.42%, respectively, of the outstanding investment securities portfolio. Qualifying available-for-sale securities as well as held-to-maturity securities may be pledged as collateral for public agency deposits. At September 30, 2004, $16.4 million, or 50.74%, of the portfolio was pledged, compared to $15.1 million, or 47.81%, at December 31, 2003, and $17.3 million, or 39.26%, at September 30, 2003. Unrealized losses on available-for-sale securities at September 30, 2004, is $5,565, or $3,275 net of tax, compared to a gain of $80,202, or $50,848 net of tax, and a gain $112,309, or $71,204 net of tax, at December 31, 2003, and September 30, 2003, respectively. The unrealized loss as of September 30, 2004, was attributed to an overall increase in interest rates since the first of the year 2004.

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Loans

Columbia’s loan portfolio represents the results of Management’s efforts to diversify risk across a range of loan types and industries, to represent the markets in which Columbia does business. Loan products include construction, land development and real estate loans, commercial loans, consumer loans, agriculture loans and credit cards. Management has emphasized agricultural lending, and developed an expertise in underwriting and monitoring these types of loans. This focus has provided opportunities into markets that traditionally have been neglected due to the perception that these types of loans carry higher risk than more traditional lending. Columbia has taken steps to mitigate these risks by hiring experienced agricultural lenders and consultants, most of whom have more than ten years agriculture experience, by diversifying the loan portfolio across 15 different commodity types, and by maintaining Preferred Lender Status with the Farm Service Agency. This status allows participation in the Farm Loan Government Guarantee Program, which guarantees up to 90% of qualified loans. Approximately ten percent of Columbia’s agricultural loans are guaranteed through this program.

Gross loans, excluding loans held for sale, at September 30, 2004, were $576.7 million, an increase of $107.1 million, or 22.80% over December 31, 2003, and an increase of $122.7 million, or 27.02%, over September 30, 2003. Contributing factors to the stronger than usual loan growth in the first nine months of 2004 came from a combination of a historically low interest rate environment, business optimism about the future, a focused sales effort and improvements in the overall economy. Loan growth came primarily from Central Oregon, Kennewick, Washington, and the Portland, Oregon, Metro area. Columbia’s loan growth continues to be concentrated in construction, land development, and commercial real estate. During the third quarter of 2004, Columbia managed and slowed the pace of loan growth through a reduction in commercial real estate lending and speculative home building and by the sale and participation of loans. Columbia sold and participated $16.6 million in loans during the quarter, which contributed $251,389 to revenue through the combination of premium on the sale of loans and the acceleration of deferred fee income.

The Mortgage Team, a division of CRB, began originating and funding single-family mortgage loans in 1997. These loans, which ordinarily are committed for sale to mortgage investors, generally are held by CRB for less than 30 days in an account titled “Loans held for sale” on the balance sheet. At September 30, 2004, loans held for sale were $1.6 million compared to $2.8 million and $6.2 million at December 31, 2003 and September 30, 2003, respectively. The steady decline in loans held for sale results from a parallel decline in mortgage production and improvements made to more efficiently deliver mortgage loans to investors in a more rapid method.

The following table presents CRB’s loan portfolio composition by loan type:

Loans:
(dollars in thousands)

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Non-performing Assets

Non-performing assets consist of delinquent loans on non-accrual status, delinquent loans past due greater than 90 days, restructured loans and other real estate owned (“OREO”). Columbia does not accrue interest on loans for which payment in full of principal and interest is not expected, or for which payment of principal or interest has been in default 90 days or more, unless the loan is well-secured and in the process of collection. Restructured loans are those for which the interest rate or payment schedules were modified from original terms to accommodate the borrower’s weakened financial condition. OREO represents assets held through loan foreclosure or recovery activities.

At September 30, 2004, Columbia’s total non-performing assets were $5.3 million, as compared to $3.3 million and $2.1 million at December 31, 2003, and September 30, 2003, respectively. The increase in non-performing assets is attributed primarily to one $3.1 million loan secured by commercial real estate that is guaranteed by individuals whom appear in Columbia’s documentation to have assets and income sufficient to repay the loan. Columbia has filed a lawsuit to collect the debt from the guarantors and believes settlement for repayment of the debt will occur before the end of 2004. If a resolution cannot be reached, legal counsel for Columbia is confident of prevailing with the lawsuit for collection. Columbia is also in the process of obtaining a new appraisal for the collateral associated with the loan. If the new value is less than the loan amount, it may be necessary to increase the allowance for loan losses to reflect the shortfall in collateral value if circumstances change with respect to collection efforts against the borrower and guarantors.

Additionally, the $5.3 million balance in total non-performing assets at September 30, 2004, included $1.5 million in OREO, of which $1.4 million is a single real estate secured credit in Central Oregon, which was foreclosed on in the first quarter of 2004. This credit was written down from $2.8 million to $1.4 million, based on an updated appraisal of the real estate collateral, during the third quarter of 2003, due to Management’s concern the net realizable value may be limited to the fair market value of the collateral. Management plans to liquidate the property when an acceptable and fair offer is received for consideration. Management expects to realize an amount on disposition equal to or greater than the current book value of the asset. Columbia has exhausted its collection options on the guaranty related to the loan through the National Appeals Division of the United States Department of Agriculture. Columbia has further appeal options through the federal court system, but has not yet made a decision in regard to pursuit of these options. Management expects to close the sale of this property before the end of 2004. The remaining balance in OREO is a foreclosed property with an estimated recovery value of $100,000.

The following table presents information with respect to non-performing assets:

Non-performing Assets:
(dollars in thousands)

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Allowance for Loan Losses

The allowance for loan losses allows Columbia to establish a reserve on the balance sheet that represents an estimate of potential losses associated with the loan portfolio as of the reporting date. The allowance for loan losses, sometimes known as the “loan loss reserve” is evaluated each quarter. Increases to the allowance are recorded as an expense charged to the provision for loan losses in the income statement; decreases occur when loan losses are recognized. Management determines the appropriateness and amount of these charges by assessing the risk potential in the portfolio on an ongoing basis.

This risk potential is primarily calculated as a percentage of the outstanding balance of loans that are classified or in a troubled state as identified by Columbia’s internal risk rating or grading system. Columbia also establishes a portion of the allowance for loan losses based on the balance of the remaining loans in the portfolio that are not classified. Different percentages are assigned according to industry and collateral type. The percentages used for these calculations are based on standards established by regulatory agencies, and these percentages are also tested against the historic loss experience of Columbia for these different categories of loans. Aside from these general calculations, specific allocations on individual loans may be made based on Management’s assessment of those individual loans. In addition, Management reviews current regional and national economic conditions and trends, specific economic circumstances that affect borrowers’ individually and collectively, and various other factors that Management considers appropriate.

When a loan, or a portion of a loan, is determined to be uncollectible, it is “charged-off” which means it is removed, in whole or in part, from the balance sheet, and the reduction is charged against the allowance for loan losses. Recoveries of amounts previously charged-off are increases to the allowance for loan losses.

As a percentage of average loans outstanding at year-end, Columbia’s allowance for loan losses has ranged between .84% and 1.64% over the last nine years, and has averaged 1.33%, on an annual basis. As of September 30, 2004, Columbia’s allowance for loan losses was 1.41% of outstanding loans. Management believes the allowance for loan losses is adequate based on its assessment of the factors, conditions and calculations described above.

The following table presents activity in allowance for loan losses:

Allowance for Loan Loss:
(dollars in thousands)

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Mortgage Servicing Asset

Columbia’s balance sheet includes a mortgage servicing asset (“MSA”), which represents the estimated present value of fees earned for the collection of mortgage loan payments net of costs involved in providing mortgage services such as collection, collateral maintenance, credit reporting and similar functions, for mortgage loans originated and sold to third party investors. The value of this asset fluctuates from time to time based on the effects of changes in the number of loans serviced, outstanding principal balances, weighted average interest rates and changes in overall market interest rates. As of September 30, 2004, the value of the MSA was $2.4 million and had a MSA multiple of 0.67% (which is the carrying value divided by the total unpaid principal mortgage balances) as compared to September 30, 2003 when the value was $3.7 million with a MSA multiple of 0.82%.

Columbia initiated a strategic shift in the fourth quarter of 2003, and discontinued the practice of acquiring and retaining mortgage servicing. The Mortgage Team now originates mortgage loans, which are sold exclusively on a brokerage basis, with mortgage servicing released. This strategy has continued and will continue into the future, with a focus on producing quality loans, providing competitive loan products and selling servicing released mortgage premiums in the secondary servicing market. Management believes this will reduce interest rate and prepayment risk associated with the MSA. Any future decision to sell the MSA will be dependent upon the movement of interest rates. A rise in interest rates will likely improve the value of the MSA and provide Management with the incentive and ability to examine sale options.

The following table presents a reconciliation for CRB’s mortgage servicing asset for the nine and twelve month periods presented:

Mortgage Servicing Asset Reconciliation:

LIABILITIES

Columbia’s liabilities are comprised primarily of the obligation to repay customers’ deposits on demand (for “demand deposits”) or at a stated time in the future (for “time deposits”), debt and interest accrued thereon, and obligations to pay interest and, at maturity, principal, on the “trust preferred securities” issued by Columbia Bancorp Trust I.

Deposits

Columbia offers various deposit accounts, including interest bearing savings, money market and certificate of deposit accounts and non-interest bearing checking. The accounts vary as to terms, with principal differences being minimum balances required, length of time the funds must remain on deposit, interest rate and deposit or withdrawal options. Deposits are Columbia’s primary source for funding loan growth. Columbia strives to fund operations with non-interest bearing demand deposits, which will improve the net interest spread — the difference between interest income and interest expense.

Total deposits were $615.1 million at September 30, 2004, an increase of $118.7 million, or 23.92%, and $108.8 million, or 21.49%, over December 31, 2003, and September 30, 2003, respectively. The growth in deposit accounts has been primarily in non-interest bearing accounts and time certificates of deposit. Since the beginning of the year, non-interest bearing accounts have increased $34.6 million, or 22.98% and time certificate of deposits have increased $69.3

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million, or 56.48%. The growth in non-interest bearing accounts can be attributed to Columbia’s focus on calling upon commercial customers to attract new deposits as well as to the low rate environment Columbia has seen over the last year. The rise in time certificates of deposits is attributed primarily to an increase in brokered or wholesale certificates of deposit and public certificates of deposit greater than $100,000. Overall, deposits grew due to a combination of pricing strategies, increased marketing and an emphasis on a sales culture within the branches.

The following table presents deposit composition by deposit type:

Deposits:
(dollars in thousands)

Brokered Certificates of Deposit – Wholesale Deposits

Columbia utilizes brokered deposits as a source for funding loan growth. In most cases, brokered deposit accounts are purchased with intermediate to long-term maturities ranging from two to seven years. At September 30, 2004, brokered certificates of deposit total $49.7 million, compared to $26.2 million at December 31, 2003, and $26.2 million at September 30, 2003. During 2004, Columbia has initiated the process to acquire wholesale deposits similar to brokered certificates of deposit through which Columbia posts rates on a certificates of deposit proprietary network, that solicits deposits from other financial institutions. This new source of funding has contributed $21.7 million in deposits, with maturities ranging from 30 days to 2 years. These are classified as either brokered certificates of deposit or public certificates of deposit depending on their source. In total, Columbia has acquired approximately $45.2 million in brokered and wholesale certificates of deposit during 2004 to meet current and future loan growth. During the third quarter of 2004, Columbia saw an increase in deposit gathering efforts at the branch level and began to decrease its reliance on brokered certificate of deposits and wholesale deposits. Columbia expects this decrease to continue for the remainder of 2004 and into the first half of 2005.

Borrowings

The majority of Columbia’s borrowings are through advances from the Federal Home Loan Bank (“FHLB”). At September 30, 2004, borrowings from FHLB totaled $34.7 million, a decrease of $8.7 million from $43.4 million previously reported June 30, 2004, and an increase of $13.6 million and $11.2 million as compared to $21.1 million and $24.0 million at December 31, 2003, and September 30, 2003, respectively. Columbia also uses lines of credit at correspondent banks to purchase Fed Funds as a source for short-term funding. There was no Fed Funds Purchased as of September 30, 2004, December 31, 2003 or September 30, 2003. The remainder of borrowings consists of a Treasury Tax and Loan note payable for $850,000 as of September 30, 2004, December 31, 2003, and September 30, 2003. Although there was an overall increase in borrowings during 2004, Columbia decreased its total amount of borrowings as of September 30, 2004, as compared to the previous quarter of 2004. The following table presents certain information with respect to Columbia’s FHLB borrowings:

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Borrowings:
(dollars in thousands)

Off-Balance Sheet Items – Commitments/Letter of Credit

In the normal course of business to meet the financing needs of its customers, Columbia is a party to financial instruments with off-balance-sheet risk. These financial instruments include commitments to extend credit, the issuance of letters of credit and interest rate swaps. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized on Columbia’s balance sheets.

Columbia’s exposure to credit loss, in the event of nonperformance by the other party for commitments to extend credit and letters of credit written, is represented by the contractual amount of those instruments. Columbia uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Columbia may or may not require collateral or other security to support financial instruments with credit risk, depending on its loan underwriting guidelines. The following table presents a comparison of contract commitment amounts:

Commitments:
(dollars in thousands)

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by Columbia upon an extension of credit, is based on management’s credit evaluation of the counterparty. The type of collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing properties.

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Letters of credit written are conditional commitments issued by Columbia to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Columbia holds cash, marketable securities or real estate as collateral supporting those commitments for which collateral is deemed necessary.

Derivative Instruments-Interest Rate Swap

During January 2003, in connection with the issuance of $4.0 million of floating-rate Trust Preferred Securities, Columbia entered into an interest rate swap agreement with an unrelated third party. Under the terms of the agreement, which expires in January 2008, Columbia will pay 3.27% on a notional amount of $4.0 million and receive 90-day LIBOR on the same amount. The effect of this transaction was the conversion of the $4.0 million trust preferred issuance from a floating rate at 90-day LIBOR plus 330 basis points to a fixed rate of 6.57% for five years, the point at which Columbia has the option to call the Trust Preferred Securities. Columbia has classified the swap agreement as a cash flow hedge in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The effect of this transaction was to mitigate variability in cash flows by establishing a fixed cost for the initial five years of the trust preferred securities.

RESULTS OF OPERATIONS

Net Income

Net income for the quarter ended September 30, 2004 was $2.9 million, or $0.32 per diluted share, a decrease of 5.25% in net income over the same period in 2003. Net income for the nine months ended September 30, 2004, was $7.2 million, or $0.80 per diluted share, representing an increase of 4.47% in net income over the first nine months ended September 30, 2003. The decrease in net income during the third quarter of 2004 is attributed primarily to a decrease in non-interest income, particularly with respect to mortgage team revenues, the sale of investment securities that added more than $457,000, before tax, to third quarter 2003 profits and an increase to non-interest expenses. The increase in net income for the first nine months ending September 30, 2004, reflects an increase in interest and loan fees and a reduction of interest expense on deposits, which was partially offset by the decrease in non-interest income due to the slow down of production in mortgage loans. The increase in diluted earnings per share for the nine months ended September 30, 2004, was due to an increase in net income and, in part, by the effects of Columbia’s stock repurchase program in which 12,500 shares of stock were repurchased and retired during the first quarter of 2004. Additionally, Columbia had no impairment expense associated with the mortgage servicing asset (“MSA”) as compared to $1.1 million in impairment expense for the same period in 2003.

Net Interest Income

The primary component of income for most financial institutions is net interest income, which represents the institution’s interest income from loans and investment securities minus interest expense, ordinarily on deposits and other interest bearing liabilities. Columbia’s total net interest income increased $1.1 million, or 14.29%, for the three months ended September 30, 2004, and increased $2.7 million, or 11.30%, for the nine months ended September 30, 2004, as compared to the same periods in 2003. The increases in net interest income for both the three months and nine months ended September 30, 2004, are due to the increase in loan balances, as compared to the same period in 2003. Additionally, for the nine months ended September 30, 2004, a reduction in deposit rates as compared to the same period in 2003 mitigated the impact to interest expense. The tax equivalent net interest margin for the third quarter 2004 is 5.86% as compared to 5.97% for the same period in 2003, and for the first nine months of 2004 is 6.08% as compared to 6.14% for the same period in 2003. Net interest income on average represents approximately 80.00% of Columbia’s total revenue. It is expected that the net interest margin will continue to

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compress in future periods due to Columbia’s strategy to fund future loan growth with a combination of retail branch generated deposits, which have been priced near the top half of deposit rates amongst local competitors, and from the sale of brokered certificates of deposits and wholesale deposits, a more expensive source of funding.

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The following table presents a comparison of average balances and rates:

Net Interest Income Average Balances and Rates:
(dollars in thousands)

Non-Interest Income

Non-interest income represents earnings on fees, service charges, and gains from the sale of loans, securities and other assets. Total non-interest income for the quarter ended September 30, 2004, decreased $826,426, or 29.07%, and for the nine months ended September 30, 2004, decreased $1.3 million, or 19.07%, as compared to the same periods in 2003. The decrease is primarily attributable to a decrease in the production of mortgage loans, which resulted in a decrease in Mortgage Team revenues of $548,757, or 74.56%, for the quarter ended September 30, 2004, and $1.4 million, or 79.98%, for the nine months ended September 30, 2004, as compared to the same periods in 2003. During the third quarter of 2004, Columbia produced 122 mortgage loans, compared to 494 loans in the third quarter of 2003, resulting in a decline of 372 loans or 75.30%. During the nine month period ending September 30, 2004, Columbia produced

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