UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended: December 31, 2004
or

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)

Registrant’s telephone number: (541) 298-6649

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: Common stock, no par value

     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 þ No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

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

     The aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of June 30, 2004, which is the last business day of the registrant’s most recently completed second fiscal quarter, was $121,672,879.

     The number of shares outstanding of each of the issuer’s classes of common equity as of the latest practicable date: 8,865,256 shares of no par value common stock on February 16, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant’s proxy statement dated March 1, 2005 for the 2005 Annual Meeting of Shareholders (“Proxy Statement”) are incorporated by reference in Part III hereof.

COLUMBIA BANCORP
FORM 10-K
TABLE OF CONTENTS

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This report, particularly including but not limited to the section entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains a number of forward-looking statements about our anticipated business, operations, financial performance and cash flows. Statements in this report that relate to future plans, events and circumstances are provided to describe Management’s intentions and expectations based on currently available information, and readers should not construe these statements as assurances or guarantees. As with any predictions, these statements are inherently difficult to make with any degree of assurance, and actual results may differ materially and adversely from Management’s expectations described herein. Likewise, Management’s plans described in this report may not come to pass because unforeseen events may force Management to deviate from its expressed intentions. Forward-looking statements often can be identified by the use of predictive or prospective terms such as “expect,” “anticipate,” “believe,” “plan,” “intend,” and words of similar construction or meaning. Some of the events or circumstances that may cause our actual results to deviate from Management’s expectations include the impact of competition and local and regional economic factors upon our customer base, our deposits and our loan portfolio; economic and regulatory limits on our ability to grow our assets and manage our business; customer acceptance of our products and services; interest rate fluctuations that may adversely impact our revenues and expenses; and, the impact of impairment charges upon our intangible and other assets. We also face risks associated with the geographic concentration of our customers, our ability to maintain or expand our market share or net interest margins, and competitive and economic issues that impact our ability to implement our marketing and growth strategies. Other factors that may adversely impact our performance are discussed in the section entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors that May Affect Future Results of Operations, as well as other disclosures we make from time to time in our other filings with the Securities and Exchange Commission. Readers should be aware that these factors are not an exhaustive list, and should not assume that these are the only factors that may cause our actual results to differ from our expectations. Readers also should note that forward-looking statements expressed in this report are made as of the date this report is filed and Management cannot undertake to update those statements to reflect future events or circumstances.

Part I

ITEM 1. DESCRIPTION OF BUSINESS

General

Columbia Bancorp (“Columbia”) is a financial holding company organized in 1996 under Oregon Law. 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, as a result of this accounting change.

Columbia offers a broad range of financial services to its customers, primarily individuals and small and medium sized businesses, which also includes agricultural related industries. Columbia’s 14 full-service branch facilities and three limited-service branch facilities in Oregon serve the northern and eastern Oregon communities of The Dalles (2), Hood River, Pendleton and Hermiston, the central Oregon communities of Madras, Redmond (2), and Bend (4), and the Willamette Valley communities of McMinnville (3), Canby and Newberg. Columbia’s three south central Washington full-service branches serve the communities of Goldendale, White Salmon and Kennewick.

As of December 31, 2004, Columbia had total assets of $715.37 million, total deposits of $606.94 million, and shareholders’ equity of $65.88 million. Columbia’s net income for the year ended December 31, 2004, was $10.73 million, which was Columbia’s 18^th consecutive year of increasingly higher net income.

From CRB’s establishment in 1977 as a one-branch bank in The Dalles, Oregon, Columbia has grown as a result of merger and acquisition activity, new branch openings, the introduction of new business lines

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and the expansion and cross-marketing of its existing products and community-bank lending expertise. Collectively, these growth activities have enabled Columbia to diversify its loan portfolio and operating risks over several market areas and local economies, which can be defined geographically as Central Oregon, Willamette Valley Oregon, Mid-Columbia Oregon and South Central Washington. This market diversity in which Columbia operates poses both opportunities and challenges to a community bank operating in varied local economies. Columbia’s approach to meeting the challenge is to staff its branches and business groups with managers who are established in their communities and have developed a loyal customer following. Columbia’s senior Management, in conjunction with branch managers, reviews the operations of each branch to determine which products and services are best suited to that geographic region. Management believes geographic diversity across a broad portion of the Pacific Northwest will limit Columbia’s exposure to adverse market conditions in any one geographical region or economic sector.

Columbia provides high quality financial products and services to consumers and businesses. These offerings include a broad range of deposit and loan products and services including retail banking, mortgage loans, broker dealer services and commercial, agricultural and real estate lending.

In 2004, Columbia continued to focus on strengthening market share by opening new branches in Redmond and Bend, Oregon. These locations are in Columbia’s existing service area and are expected to benefit from the high growth of new residents and businesses in those communities. Deschutes County, where both branches are located, ranks among the top 100 fastest growing counties in the United States, according to the US Census Bureau. Columbia has experienced good success with its existing branch in Redmond as well as its two full-service and one limited-service branches in Bend. Columbia believes significant opportunity exists for these additional branches to increase convenience for customers and to further penetrate Columbia’s trade area. During 2004, Columbia purchased land in Pasco, Washington for a future branch site. Additionally, in January 2004, Columbia opened a Loan Production Office (“LPO”) to serve the Portland, Oregon market. The LPO lends primarily to high quality, reputable borrowers for single family residential construction and land development in the Portland area. This is Columbia’s first venture into the Portland area market. The LPO is currently operating out of the Newberg, Oregon branch.

In September 2004, Columbia made a strategic shift in the Executive Management Team (“Management”), realigning the duties for three of its executive officers. Craig Ortega became the Chief Operating Officer and oversees branch expansion, marketing, operations and technology. Shane Correa became the Chief Banking Officer and oversees management of the Business Banking Team, retail branches and the Customer Support Team. Jim McCall became the Chief Administrative Officer and oversees community reinvestment activities, human resources, training, project management and strategic projects. The remaining executive officers retained their existing responsibilities and duties: Roger Christensen, Chief Executive Officer and President, 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 Columbia’s strategic plan. They also ensure the day-to-day operations of the Bank are aligned with the needs of both customers and employees. Columbia implemented these changes to better meet the needs of a growing and dynamic company.

Columbia has two reportable operating business segments, Community Banking and Mortgage Banking. A summary of Columbia’s net revenue, earnings from operations and assets for these business segments is found in Note 23 to the Consolidated Financial Statements, which is incorporated herein by reference. A discussion of various factors potentially affecting operations is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Factors That May Affect Future Results of Operations” which is incorporated herein by reference.

Business Strategy

Columbia’s strategy is to remain a high performing financial institution, which is defined as achieving performance levels in the top quartile of all bank holding companies with assets between $500 million to $1 billion. Performance statistics are presented quarterly in the Bank Holding Company Performance Report as reported by the Federal Reserve Bank. Columbia will continue building on its position as a leading community-based provider of financial services in Oregon and Washington while maintaining a close balance of its goals and priorities with benefits to shareholders, customers and employees. The components of Columbia’s business strategy are outlined below.

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Successfully Operate in Small to Medium Sized Communities. Columbia believes the key to profitability is to maintain and open branches in small to medium sized communities, which are defined by population levels between 20,000 to 150,000 in size. This strategy encompasses the following: (i) provide a high level of service to the customer; (ii) staff branches with employees who have established ties to the community; (iii) attract and retain a highly skilled Management team; and, (iv) allow branch personnel the flexibility to emphasize products and services which best fit their local market. In addition, by decentralizing a portion of the management function to the branch level, Columbia believes it can make business decisions regarding customers more quickly and with more added value than its major banking competitors. Columbia believes it is able to profitably attract and retain customers by providing and delivering products and services tailored to their individual needs, and by delivering them with a high degree of personal attention. Management and the Board of Directors will carefully review any exception to this strategy to ensure it is complementary to Columbia’s current and future strategic initiatives.

Maintain High Asset Quality. Columbia seeks to maintain high asset quality through a program that includes prompt and strict adherence to established credit policies combined with training and supervision of lending officers. Additionally, Columbia uses incentives to maintain high asset quality, including tying a portion of its loan officers’ compensation to the quality of the loans they originate. Columbia also believes its commitment to hire branch managers with established ties to their communities is of significant assistance in determining the quality of loan transactions it receives. The variety of economies in which Columbia’s branches are located increases the diversification and, in Columbia’s opinion, the strength of the overall loan portfolio.

Products and Services - Community Banking Segment

Consumer Distribution Channels

Columbia’s community banking segment offers a broad range of deposit and loan products and other financial services tailored to meet the banking requirements of consumers in Columbia’s market areas. These include:

Retail Bank Products and Services. Columbia’s consumer deposit products include non-interest bearing and interest bearing demand accounts, savings accounts, money market accounts and certificates of deposit. Management generally prices interest bearing accounts based on competitive market factors, the need to manage deposit maturities and liquidity requirements. Columbia strives to establish customer relationships that attract core deposits in non-interest bearing transactional accounts, which reduces its cost of funds. Columbia provides loans to individual borrowers for a variety of purposes, including secured and unsecured personal loans, home equity, personal lines of credit, credit cards and various installment loans.

CRB Financial Services Team Products and Services. Through arrangements with Primevest Financial Services, Inc., (“Primevest”) a registered securities broker-dealer, the CRB Financial Services Team offers a wide range of financial products and services to consumers that are not insured by the Federal Deposit Insurance Corporation (“FDIC”). These include stocks, mutual funds, traditional and Roth Individual Retirement Accounts (“IRA“s), Self-Employed Pension accounts (“SEP“s), tax-sheltered annuities, life insurance, health insurance and other financial products. Representatives also offer financial planning services

Technology-Based Products and Services. Columbia uses both traditional and new technology to support its focus on personal service. These include a VISA credit and check card (debit card) program; ATMs at each of Columbia’s full-service branches, including 17 on-site ATMs and four off-site ATMs; and, a telephone banking service, in both English and Spanish, that allows customers to speak directly with a customer service representative during normal banking hours or with 24-hour telephone access to their accounts. In addition, Columbia, through its web site, offers BankNet, an Internet banking service, which allows access to account information as well as the ability to view checks and use other services in an on-line environment.

5 - Columbia Bancorp

Commercial Distribution Channels

Columbia has an experienced lending staff, which has special expertise in small business, agricultural and real estate lending. Columbia’s loan officers emphasize an on-going relationship with the customer. Columbia believes that its business customers appreciate the ongoing relationship they develop with their local lending officer. Such relationship-based banking is an important aspect of Columbia’s continuous effort to maintain high loan quality.

Commercial Loans. Columbia offers customized loans including equipment and inventory financing, operational lines of credit, SBA loans for qualified businesses and accounts receivable financing. A significant portion of Columbia’s loan portfolio consists of commercial loans. For regulatory reporting purposes, a portion of Columbia’s commercial loans are designated as real estate loans because they are secured by real property, however many of these loans may finance accounts receivable, equipment, inventory, crops and livestock or other commercial activities. Lending decisions are based on careful evaluation of the financial strength, management and credit history of the borrower and the quality and marketability of the collateral securing the loan. Commercial loans secured by real property are generally limited to 75% of the collateral’s value. Columbia often requires personal guarantees for closely held companies and relies on the identification of secondary sources of repayment such as personal guarantees, reserves in other assets or other sources of payment.

Agricultural Loans. Columbia provides loans including production lines of credit, equipment financing and term loans for capital improvements and other business purposes to agricultural businesses. Agricultural loans are generally secured by crops, equipment, inventory and real estate. Agricultural lending can require significant follow-up time, as farmers request budgeting assistance and other financial advice. Columbia employs two agricultural loan consultants with decades of farm lending experience, to assist its loan officers in loan processing and administration. Columbia’s loan officers, many of whom are graduates of the Western Agricultural Banking School in Pullman, Washington, make frequent visits to farming operation sites, regularly attend agricultural lending programs and seminars, and actively participate in growers’ associations and other agricultural-based organizations.

Real Estate Loans. Real estate loans are available for the construction, purchase, or refinance of commercial, single family residential and rental properties. Columbia also provides financing to land developers and speculative and pre-sold financing to contractors. Borrowers can choose from a variety of fixed and adjustable rate options and terms.

Columbia’s real estate loans, in large part, are loans to commercial customers, farmers and ranchers and are secured by the properties used in their businesses. The majority of these loans have a variable rate feature with adjustment periods varying from one to five years. Insofar as payments on real estate loans, it depends on the successful operation and management of the businesses and properties securing the loans. Repayment performance can also be affected by local and national real estate market fluctuations and values, economic conditions or the success or failure of the client’s overall business plan.

Government-Assisted Loan Programs. Columbia’s loan officers make loans to small businesses and to farmers that are supported by guarantees issued by various state and federal government agencies. Columbia is active in the SBA 504 program, and in similar programs offered by the Oregon Economic and Community Development Department. The SBA 504 program is a loan participation arrangement where a borrower may obtain up to 90% funding for owner occupied commercial real estate. Columbia typically provides 60% financing in a first lien position and the Government typically provides 30% in a subordinate lien position through the issue of government guaranteed bonds. Columbia also participates in Government loan guarantee programs offered through the Farm Services Agency (formerly the Farmers Home Administration), the SBA and Oregon Economic and Community Development Department. Participation in these programs reduces credit risk in Columbia’s loan portfolio.

Services to Non-Profits and Public Entities. Columbia offers a general array of loan products to borrowers in the non-profit and public entity sector, including city and county governments, together with special programs, such as jumbo CDs and low-cost loan programs. Columbia also offers consumer services to non-profit and public sector employees, such as Columbia VISA card enrollment and direct deposit services.

For all of its loans, Columbia at all times seeks to maintain sound loan underwriting standards with written loan policies, appropriate individual and branch lending limits, loan administration reviews and an independent loan review function. In the case of large loan commitments or loan participations, loans are

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reviewed by a loan committee of CRB’s Board of Directors. Underwriting standards are designed to achieve a high-quality loan portfolio, compliance with lending regulations and the desired mix of loan maturities and industry concentrations. Management seeks to minimize credit losses by monitoring the financial condition of borrowers and the value of collateral during the life of any given loan.

Cash Management Services. Columbia also offers to business customers an opportunity to meet additional banking needs online through its Internet Business Solutions product. This online product gives business customers the ability to process payroll, collections, wire transfers and Electronic Funds Transfer tax payments.

Deposit and Related Products. Columbia’s business deposit products include basic, regular, and interest bearing deposit accounts, business money market accounts and sweep accounts. Also, Columbia offers a Certificate of Deposit Account Registry System (“CDARS”), which allows customers who invest funds over $100,000 to still be eligible for the security of the FDIC insurance. Columbia also offers check verification services to merchants allowing them the ability to determine, on a 24-hour basis, whether a check drawn on an account has sufficient funds to cover the amount drawn. In addition, Columbia offers VISA merchant program, check recovery service, payroll services and Human Resource support center services for business customers.

Investment Products. Columbia’s affiliation with Primevest allows it to offer non-FDIC insured financial products and services to Columbia’s business customers as well as to consumers through the CRB Financial Services Team. These include insurance and annuity products and employee retirement plan products such as SEPs, IRAs and 401(k) plans.

Products and Services - Mortgage Banking Segment

Consumer Distribution Channels

CRB Mortgage Team Products and Services. Columbia’s mortgage segment offers a complete range of mortgage banking services including loans for single-family owner occupied homes, construction to permanent financing packages, reverse mortgages and mortgages for vacation and rental homes. Customers can choose between fixed, variable, interest only and balloon rate options. Construction loans are available through the conventional two-step process or through a construction to permanent product. Junior lien financing is also offered as a single product or in combination with a first mortgage. An added benefit offered through the Mortgage Team is the ability for customers to access alternative secondary market outlets not normally available from other financial institutions.

Principal Markets of Operation

Columbia accepts deposits at its branches in Wasco, Hood River, Jefferson, Deschutes, Clackamas, Yamhill and Umatilla Counties in Oregon and Klickitat and Benton Counties in Washington. Columbia makes loans in these counties and in adjacent counties including Sherman, Gilliam and Crook counties in Oregon and Skamania County in Washington. Many of its products and services, including investment products through CRB Financial Services Team and mortgages through the CRB Mortgage Team, are offered and sold throughout Oregon and south central Washington. Columbia’s ability to increase its market share in the communities it serves is driven by a marketing plan consisting of several key components. A principal objective is to create and foster a sales culture in each branch and department. Employees are trained to cross-sell, offering appropriate products and services to existing customers and expanding business relationships. Columbia regularly examines the desirability and profitability of adding new products and services to those currently offered. Columbia also promotes specific products through media advertising, but relies primarily on referrals and direct sales calls for new business. Columbia recognizes the importance of community service and supports employee involvement in community activities. This participation allows Columbia to make a contribution to the communities it serves while also increasing Columbia’s visibility and business opportunities.

Columbia does business in many different non-metropolitan communities. Management believes the diverse assortment of customers, communities and economic sectors that Columbia serves are a source of strength. In addition, as a community banking organization Columbia has certain competitive advantages because of its local focus. However, Columbia is also more reliant on the local economies in its market areas than are large banks.

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Columbia includes as an asset on its balance sheet a mortgage servicing asset (“MSA”), which represents the estimated present value of future income relating to service retained premiums from mortgage loans sold. The MSA has been steadily declining in value during the last three years as low mortgage interest rates have encouraged borrowers to pay off or refinance mortgages at a higher–than-expected rate and due to Columbia initiating a strategic shift in 2003 to discontinue retaining servicing on mortgages sold. This trend is illustrated below.

Competition

Columbia’s competitors for deposits are banks, savings and loan associations, credit unions, money market funds, issuers of corporate and government securities, insurance companies, brokerage firms, mutual funds and other financial intermediaries. Columbia’s business model is to compete on the basis of customer service and not solely on price. Columbia competes for deposits by offering a variety of deposit accounts at rates generally competitive with financial institutions in the local markets it serves. Columbia’s competitors include Wells Fargo, US Bank, Bank of the Cascades, Liberty Bank, Washington Mutual, Umpqua Bank, West Coast Bank, Banner Bank and Sterling Bank. Columbia believes it will have continued success against its competitors because Columbia’s mission is to “create the experience” that makes Columbia the bank of choice and focuses on maximizing employee, customer and shareholder wealth.

Columbia’s competition for loans comes principally from banks, savings and loan associations, mortgage companies, finance companies, insurance companies, credit unions and other institutional lenders. A primary competitor for agricultural loans is Farm Credit Services as well as for the many other types of loans by the same competitors listed in the preceding paragraph competing for deposits. Columbia competes for loan originations through the pricing of interest rates and loan fees charged, its array of commercial and mortgage loan products and the efficiency and quality of services provided to borrowers. Lending activity can also be affected by the availability of funding sources, local and national economic conditions, current interest rate levels and loan demand. As described above, Columbia competes with larger commercial banks by emphasizing a community bank orientation of decentralized lending authority and personal service to customers.

A potential new source of competition is the array of on-line banking services offered by traditional commercial banks and other financial service providers and by newly formed companies that use the Internet to advertise and sell competing products. Columbia offers many on-line banking services to its customers, but Management believes that, for the foreseeable future, its customers will continue to prefer the personalized and, locally-based services that Columbia offers.

Employees

As of December 31, 2004, Columbia had 289 full-time equivalent employees. This number of employees, which compares to 272 at December 31, 2003, has remained fairly steady, even though Columbia has grown its branch network and overall size. Efficiencies have been obtained in the retail branches, which have off-set the growth in administrative staff requirements necessary for compliance with the Sarbanes-Oxley Act of 2002. None of the employees are subject to a collective bargaining agreement. Columbia considers its relationships with its employees to be good and has been named one of “The 100 Best Companies to Work For in Oregon” for the past two years according to Oregon Business magazine.

Directors and Executive Officers

Information regarding Columbia’s executive officers and Board of Directors is set forth in “Directors and Executive Officers of the Registrant”, in Item 10, which is incorporated herein by reference.

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Website Access to Reports

Columbia makes available all periodic and current reports, free of charge, on its website as soon as reasonably practicable after such material is electronically filed with, or furnished to the Securities and Exchange Commission (“SEC”). Columbia’s website address is www.columbiabancorp.com. The contents of the website are not incorporated into this report or into Columbia’s other filings with the SEC.

SUPERVISION AND REGULATION

General

Columbia is extensively regulated under federal and state law. These laws and regulations are primarily intended to protect depositors, borrowers and shareholders. The discussion below describes and summarizes certain statutes and regulations. These descriptions and summaries are qualified in their entirety by reference to the particular statute or regulation. Changes in applicable laws or regulations may have a material effect on the business and prospects of Columbia. The operations of Columbia may also be affected by changes in the policies of banking and other government regulators. Columbia cannot accurately predict the nature or extent of the effects on its business and earnings that fiscal or monetary policies, or new federal or state laws, may have in the future.

Gramm-Leach-Bliley Financial Services Modernization Act

In 1999 Congress passed the Gramm-Leach-Bliley Financial Services Modernization Act (the “FSMA”). This new legislation repealed certain provisions of the Glass-Steagall Act that had required the separation of the banking, insurance and securities businesses. It also created a new business structure known as a financial services holding company. Under this law, banks were given broader opportunities to affiliate with insurance and securities companies. Banks could also become tempting acquisition targets, as insurance and securities companies seek such affiliations themselves. The FSMA may also encourage local jurisdictions to enact tighter bank privacy provisions. The enactment and implementation of the FSMA resulted in new competitive challenges and opportunities for community banks.

Columbia is a financial services holding company under the FSMA and is therefore subject to supervision of, and regulation by, the Board of Governors of the Federal Reserve System (“Federal Reserve”). Columbia is examined by, files annual reports with, and provides the Federal Reserve with any additional information as it may require. Financial holding companies are bank holding companies that satisfy certain criteria and are permitted to engage in activities that traditional bank holding companies are not.

Holding Company Bank Ownership. The Bank Holding Company Act of 1956 (“the BHCA”) requires every bank holding company to obtain the prior approval of the Federal Reserve before (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares, (ii) acquiring all or substantially all of the assets of another bank or bank holding company, or (iii) merging or consolidating with another bank or bank holding company.

Holding Company Control of Nonbanks. With some exceptions, the BHCA also prohibits a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing, or controlling banks, or providing services for its subsidiary. The principal exceptions to these prohibitions involve certain nonbank activities which, by statute or by Federal Reserve regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks. In making this determination, the Federal Reserve considers whether the performance of such activities by a bank holding company can be expected to produce benefits to the public such as greater convenience, increased competition, or gains in the efficient use of resources, which can be expected to outweigh the risks of possible adverse effects such as decreased or unfair competition, conflicts of interest, or unsound banking practices. The Economic Growth and Regulatory Reduction Act of 1996 amended the BHCA to eliminate the requirement that bank holding companies seek prior Federal Reserve approval before engaging in certain permissible nonbanking activities if the holding company is well capitalized and meets certain other specific criteria.

9 - Columbia Bancorp

Transactions with Affiliates. Subsidiary banks of a bank holding company are subject to restrictions imposed by the Federal Reserve Act on extensions of credit to the holding company or its subsidiaries, on investments in their securities, and on the use of their securities as collateral for loans to any borrower. These regulations and restrictions may limit Columbia’s ability to obtain funds from CRB for its cash needs, including funds for payment of dividends, interest and operational expenses.

Tying Arrangements. Under the Federal Reserve Act and certain regulations of the Federal Reserve, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services. For example, CRB may not generally require a customer to obtain other services from it or from Columbia, and may not require that the customer promise not to obtain other services from a competitor as a condition to an extension of credit to the customer.

Federal and State Bank Regulation

General. CRB is an Oregon state-chartered bank with deposits insured by the FDIC, and is subject to the supervision and regulation of the Oregon Director of Banks and the FDIC. CRB is also subject to the supervision and regulation of the Washington Department of Financial Institutions. These agencies have the authority to prohibit banks from engaging in what they believe constitute unsafe or unsound banking practices. Oregon’s Division of Finance and Corporate Securities and the FDIC conduct annual joint examinations of Columbia’s safe and sound banking practices.

Community Reinvestment Act (“CRA”). CRA requires that, in connection with examinations of financial institutions within their jurisdiction, the Federal Reserve or the FDIC evaluate the records of financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility.

Insider Credit Transactions. Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders or any related interests of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, and follow credit underwriting procedures that are not less stringent than those prevailing at the time for comparable transactions with persons not covered above and who are not employees; and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to such persons. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the affected bank or any officer, director, employee, agent or other person participating in the conduct of the affairs of that bank; the imposition of a cease and desist order and other regulatory sanctions.

FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), each federal banking agency has prescribed, by regulation, safety and soundness standards for institutions under its authority. These standards cover internal controls, information systems, internal audit systems, loan documentation, credit underwriting, asset growth, compensation, fees and benefits, as well as operational and managerial standards the agency measures; asset quality, earnings, interest rate sensitivity, liquidity and capital. An institution which fails to meet these standards must develop a plan acceptable to the agency, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions. Management believes that CRB meets all such standards and, therefore, does not believe that these regulatory standards materially affect Columbia’s business operations.

Interstate Banking and Branching

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Act”) permits nationwide interstate banking and branching under certain circumstances. This legislation generally authorizes interstate branching and relaxes federal law restrictions on interstate banking. Currently, financial holding companies may purchase banks in any state, and states may not prohibit such purchases. Additionally, banks are permitted to merge with banks in other states as long as the home state of neither merging bank has opted out. The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area.

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Under recent FDIC regulations, banks are prohibited from using their interstate branches primarily for deposit production. The FDIC has accordingly implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition.

Oregon and Washington each enacted “opting in” legislation in accordance with the Interstate Act provisions allowing banks to engage in interstate merger transactions subject to certain “aging” requirements. In both states, branches may not be acquired or opened separately in the home state by an out-of-state bank, but once an out-of-state bank has acquired a bank within the state, either through merger or acquisition of all or substantially all of the bank’s assets, the out-of-state bank may open additional branches within the home state. In 1996, Columbia, an Oregon state-chartered bank, acquired Klickitat Valley Bank (“KVB”) a Washington state-chartered bank, which allows Columbia to now open additional branches in Washington.

Deposit Insurance

The deposits of CRB are currently insured to a maximum of $100,000 per depositor through the Bank Insurance Fund (“BIF”) administered by the FDIC. CRB is required to pay semi-annual deposit insurance premium assessments to the FDIC.

The FDICIA included provisions to reform the Federal Deposit Insurance System, including the implementation of risk-based deposit insurance premiums. The FDICIA also permits the FDIC to make special assessments on insured depository institutions in amounts determined by the FDIC to be necessary to give it adequate assessment income to repay amounts borrowed from the U.S. Treasury and other sources, or for any other purpose the FDIC deems necessary. The FDIC has implemented a risk-based insurance premium system under which banks are assessed insurance premiums based on how much risk they present to the BIF. Banks with higher levels of capital and a low degree of supervisory concern are assessed lower premiums than banks with lower levels of capital or a higher degree of supervisory concern. Columbia is assessed at the lowest risk classification level for premiums.

Dividends

The principal source of Columbia’s cash revenues is dividends received from its subsidiary. The payment of dividends is subject to government regulation, in that regulatory authorities may prohibit banks and financial holding companies from paying dividends which would constitute an unsafe or unsound banking practice. In addition, a bank may not pay cash dividends if that payment could reduce the amount of its capital below the minimum applicable regulatory capital requirements. Also, under the Oregon Bank Act, the Oregon Director of Banks may suspend the payment of dividends if it is determined that the payment would cause a bank’s remaining shareholders’ equity to be inadequate for the safe and sound operation of the bank. Other than the laws and regulations noted above, which apply to all banks and financial holding companies, neither Columbia nor CRB is currently subject to any regulatory restrictions on their dividends.

Capital Adequacy

Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of financial holding companies and banks. If capital falls below minimum guideline levels, the holding company or bank may be denied approval to acquire or establish additional banks or nonbank businesses or to open new facilities.

The FDIC and Federal Reserve use risk-based capital guidelines for banks and financial holding companies. These are designed to make such capital requirements more sensitive to differences in risk profiles among banks and financial holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The guidelines are minimums, and the Federal Reserve has noted that financial holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios well in excess of the minimum. The current guidelines require all financial holding companies and federally regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier I capital. Columbia maintains capital ratios well in excess of the minimum requirements and expects to remain well above the minimums.

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Tier I capital for financial holding companies includes common shareholders’ equity, qualifying perpetual preferred stock (up to 25% of total Tier I capital, if cumulative, although under a Federal Reserve Rule, redeemable perpetual preferred stock may not be counted as Tier I capital unless the redemption is subject to the prior approval of the Federal Reserve), and minority interests in equity accounts of consolidated subsidiaries, less intangibles. Tier II capital includes: (i) the allowance for loan losses of up to 1.25% of risk-weighted assets; (ii) any qualifying perpetual preferred stock which exceeds the amount which may be included in Tier I capital; (iii) hybrid capital instruments; (iv) perpetual debt; (v) mandatory convertible securities; and (vi) subordinated debt and intermediate term preferred stock of up to 50% of Tier I capital. Total capital is the sum of Tier I and Tier II capital, less reciprocal holdings of other banking organizations, capital instruments, and investments in unconsolidated subsidiaries.

The assets of the banks and financial holding companies receive risk-weights of 0%, 20%, 50%, 100% and in some cases 200%. In addition, certain off-balance sheet items are given credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weight will apply. These computations result in total risk-weighted assets.

Most loans are assigned to the 100% risk category, except for first mortgage loans fully secured by residential property which carry a 50% rating. Most investment securities are assigned to the 20% category, except for municipal or state revenue bonds which have a 50% risk-weight, and direct obligations of, or obligations guaranteed by, the United States Treasury or certain agencies of the federal government which have 0% risk-weight. In converting off-balance sheet items, direct credit substitutes, including general guarantees and standby letters of credit backing financial obligations, are given a 100% conversion factor. Transaction related contingencies such as bid bonds, other standby letters of credit and undrawn commitments, including commercial credit lines with an initial maturity of more than one year, have a 50% conversion factor. Short-term, self-liquidating trade contingencies are converted at 20%, and short-term commitments have a 0% factor.

The Federal Reserve also employs a leverage ratio, which is Tier I capital as a percentage of total assets less intangibles, to be used as a supplement to risk-based guidelines. The principal objective of the leverage ratio is to constrain the maximum degree to which a financial holding company may leverage its equity capital base. The Federal Reserve requires a minimum leverage ratio of 4% to be deemed adequately capitalized.

The FDICIA created a statutory framework of supervisory actions indexed to the capital level of the individual institution. Under regulations adopted by the FDIC, an institution is assigned to one of five capital categories depending on its total risk-based capital ratio, Tier I risk-based capital ratio and leverage ratio, together with certain subjective factors. Institutions which are deemed to be “undercapitalized”, depending on the category to which they are assigned, are subject to certain mandatory supervisory corrective actions.

Effects of Government Monetary Policy

The earnings and growth of Columbia are affected not only by general economic conditions but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve can and does implement national monetary policy for such purposes as curbing inflation and combating recession, but its open market operations in U.S. government securities, control of the discount rate applicable to borrowings from the Federal Reserve, and establishment of reserve requirements against certain deposits influence the growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and impact of future changes in monetary policies and their impact on Columbia cannot be predicted with certainty.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley” or “SOX”) establishes a comprehensive framework to modernize and reform the oversight of public company auditing, improves quality and transparency in financial reporting by those companies and strengthens the independence of auditors. The Act also created the Public Company Accounting Oversight Board (“PCAOB”), a regulatory body supervised by the SEC with broad powers to set auditing, quality controls and ethics standards for accounting firms that audit public companies. The impact on Columbia has been significant in costs and resources to insure proper compliance with this new legislation.

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Changes in Banking Laws and Regulations

The laws and regulations that affect banks and financial holding companies frequently undergo significant changes at the federal and state levels. Bills are introduced from time to time in the United States Congress that contain proposals to alter the structure, regulation, and competitive relationships of the nation’s financial institutions. Any changes in laws and regulations could have the effect of increasing or decreasing the cost of doing business, limiting or expanding permissible activities (including activities in the insurance and securities fields), or affecting the competitive balance among banks, savings associations and other financial institutions. Such changes could also reduce the extent of federal deposit insurance, broaden the powers or the geographical range of operations of financial holding companies, alter the extent to which banks could engage in securities activities, alter the taxation of banks, financial holding companies and other financial services organizations, and change the structure and jurisdiction of various financial institution regulatory agencies. Management cannot anticipate or predict specific ongoing changes in laws and regulations or the extent to which they might affect its business.

ITEM 2. PROPERTIES

Nine of Columbia’s facilities in Hood River, The Dalles, Redmond, Bend, McMinnville, Madras, Hermiston and Pendleton, Oregon, as well as its two full-service branch facilities in White Salmon and Goldendale, Washington, are housed in properties owned, free of encumbrances, by Columbia. Columbia leases the space for its Canby, Newberg, South Redmond, Wall Street (Bend) and Kennewick branches, both McMinnville and Bend limited-service branches in retirement communities, its facility in The Dalles Safeway store and the Administration office located in The Dalles. All of Columbia’s branches, except the Kennewick, Washington branch, the Westside branch in The Dalles, Oregon and its limited service branches, have drive-up facilities. The CRB Mortgage Team operates from the second floor of Columbia’s Bend branch; 1701 NE Third Street. The following sets forth certain information regarding Columbia’s branch facilities.

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In 1999, Columbia purchased 156,723 square feet of bare land in the Columbia River Center in The Dalles for future branch or administrative operations expansion. During 2004, Columbia sold a portion of this land, retaining 39,252 square feet with the intent of using this for future branch expansion. Columbia also purchased bare land in 1995, adjacent to the Hood River Branch, for the purpose of future parking expansion. After the completion of parking expansion in 2001, Columbia partitioned the remaining 13,068 square feet of land and sold it in 2004. Additionally, in 2004 Columbia purchased 159,442 square feet of bare land in Pasco, Washington with the intent of future branch expansion.

ITEM 3. LEGAL PROCEEDINGS

During the normal course of its business, Columbia is a party to various debtor-creditor legal actions, which individually or in the aggregate, could be material to Columbia’s business, operations or financial condition. These include cases filed as a plaintiff in collection and foreclosure cases, and the enforcement of creditors’ rights in bankruptcy proceedings. Management is presently aware of two legal proceedings, detailed below, involving Columbia that, if determined adversely to Columbia, would have a material adverse affect on its operations or performance.

Columbia River Bank v. Cascadia Revolving Fund, Wasco, Oregon County, Circuit Court Case No. CC04-217

This litigation arose from a dispute between Columbia and another lender, Cascadia Revolving Fund, over the validity of a subordination agreement relating to loans made to a borrower that ceased doing business in 2004. The issue is whether Cascadia Revolving Fund is entitled to recover from Columbia $150,000 in collateral liquidation proceeds. Columbia denies that it is liable to Cascadia and is contesting the claim. Trial is set for May 3, 2005. Management believes that the potential loss, if any, to Columbia arising from an unfavorable outcome would not exceed $150,000 in principal.

Columbia River Bank v. Anthony Glavin, et al., USDC (OR) Case No. 04-CV-1034-MO

Columbia commenced this action against three guarantors to recover the sum of $3,122,240 following the default of a commercial borrower. Two of the guarantors are individuals, and the third is a trust, and the guaranties provide that the guarantors are jointly and severally liable for the full amount of the debt. The defendants have denied liability, and the two individual guarantors have alleged affirmative defenses and counterclaims against Columbia on various grounds, claiming damages in excess of $1 million. Subsequent to the period covered by this report, on February 18, 2005 the U.S. District Court for the District of Oregon entered summary judgment for Columbia on its claims against the guarantors, and entered summary judgment in favor of Columbia with respect to the guarantors’ counterclaims in this matter. Management believes this enhances the likelihood of a recovery but can offer no assurance that such a recovery will be made, and if made, in what amounts or at what time.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of securities holders of Columbia during the quarter ended December 31, 2004.

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Part II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The common stock of Columbia Bancorp trades on the NASDAQ National Market under the symbol “CBBO”. Trading in Columbia’s stock on NASDAQ commenced on November 6, 1998. The respective high and low sale prices of Columbia’s common stock for the periods indicated are shown below. All prices for the periods shown have been adjusted for subsequent stock splits. Prices do not include retail markups, markdowns, or commissions and may not represent actual transactions. Columbia has paid dividends on its common stock on a quarterly basis. The table below also sets forth dividends declared per share of common stock for the periods indicated. Our principal source of cash for dividends are comprised of dividends paid by our wholly owned operating subsidiary, Columbia River Bank. Federal and state banking laws and regulations impose strict limitations upon a bank’s ability to pay dividends, including requirements to comply with minimum capital requirements and other bank safety and soundness criteria. To the extent CRB fails to comply with these requirements, the bank will be unable to pay dividends to Columbia Bancorp, which will materially restrict the ability to pay dividends to shareholders. As of February 16, 2005 Columbia had 8,865,256 shares issued and outstanding of no par value common stock, which were held by approximately 3,040 shareholders of record.

Sales of Unregistered Securities

Columbia had no sales of unregistered securities during the fourth quarter of 2004.

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ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth certain information concerning the consolidated financial condition, operating results, and key operating ratios for Columbia at the dates and for the periods indicated. This information does not purport to be complete, and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Consolidated Financial Statements of Columbia and Notes thereto.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The following discussion should be read in conjunction with Columbia Bancorp’s (“Columbia”) audited consolidated financial statements and the notes thereto as of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004 included elsewhere in this report.

Columbia is a financial holding company which conducts operations principally through its wholly-owned subsidiary, Columbia River Bank (“CRB”). CRB is a state chartered bank which offers a broad range of services to its customers, primarily small and medium sized businesses, farmers and individuals. CRB has a network of 20 branches. In Oregon, Columbia has 14 full-service branch facilities and three limited-service branch facilities that serve the northern and eastern Oregon communities of The Dalles (2), Hood River, Pendleton and Hermiston, the central Oregon communities of Madras, Redmond (2), and Bend (4), and the communities of McMinnville (3), Canby and Newberg in the Willamette Valley. Columbia’s three south central Washington full-service branches serve the communities of Goldendale, White Salmon and Kennewick.

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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. The Trust issued $4.0 million of trust-preferred securities at a floating rate indexed to the 90 day LIBOR with a margin of 3.30%. These securities are considered to be Tier I for regulatory capital purposes. 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.

Columbia’s Executive Management Team’s (“Management”) goal is to grow Columbia’s earning assets while maintaining a high return on equity and high asset quality. The key to this, in Management’s view, is to emphasize personalized, quality banking products and services for its customers, to hire and retain excellent, high performing branch and administrative personnel, and to respond quickly to customer demand and growth opportunities. Management also intends to increase Columbia’s penetration in existing markets, and to expand into new markets through suitable acquisitions and new branch openings.

As of December 31, 2004, Columbia had total assets of $715.37 million, total deposits of $606.94 million and shareholders’ equity of $65.88 million. As of December 31, 2003 and 2002, total assets were $584.14 million and $544.33 million; total deposits were $496.36 million and $458.62 million, and shareholders’ equity was $57.80 million and $50.19 million, respectively. Columbia’s net income for years ended December 31, 2004, 2003 and 2002, were $10.73 million, $9.83 million and $9.38 million, respectively. Columbia’s year 2004 net income represents the eighteenth consecutive year of increasing net income. For the year ended December 31, 2004, Columbia’s return on average assets was 1.64% and return on average equity was 17.50%, as compared to 2003 and 2002, when returns on average assets were 1.71% and 1.80% and returns on average equity were 18.25% and 18.80%, respectively. Management believes the increase in net income and asset growth was fueled by strong demand for business loans and new initiatives to attract deposits.

Return on average daily assets and equity and certain other ratios for the periods indicated are presented below.

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Critical accounting policies and estimates

The “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as disclosures included elsewhere in this Form 10-K, are based upon Columbia’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires Management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, Management evaluates the estimates used, including the adequacy of the allowance for loan and lease losses, impairment of intangible assets, contingencies and litigation. Estimates are based upon historical experience, current economic conditions and other factors that Management considers reasonable under the circumstances. These estimates result in judgments regarding the carrying values of assets and liabilities when these values are not readily available from other sources as well as assessing and identifying the accounting treatments of commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions. The following critical accounting policies involve the more significant judgments and assumptions used in the preparation of the consolidated financial statements.

The allowance for loan and lease losses is established to absorb known and inherent losses attributable to loans and leases outstanding and related off-balance-sheet commitments. The adequacy of the allowance is monitored on an ongoing basis and is based on Management’s evaluation of numerous factors. These factors include the quality of the current loan portfolio, the trend in the loan portfolio’s risk ratings, current economic conditions, loan concentrations, loan growth rates, past-due and non-performing trends, evaluation of specific loss estimates for all significant problem loans, historical charge-off and recovery experience and other pertinent information. Approximately 68% of Columbia’s gross loan portfolio is secured by real estate and a significant depreciation in real estate values in Oregon and Washington would cause Management to increase the allowance for loan and lease losses.

During 2003 and prior years, Columbia capitalized servicing retained mortgage premiums which resulted in recognition of a mortgage servicing asset (“MSA”) and a corresponding recognition of servicing income. The MSA has been valued on a quarterly basis by a qualified, third party with access and knowledge of current servicing portfolio values in the market place. The techniques used in valuing the MSA incorporate assumptions relative to prevailing conditions in the secondary servicing market. These assumptions have been dependent upon near term transactions and include prepayment speed forecasts, market discount rates, earning rates, servicing costs, acquisition costs and ancillary income. A calculated decrease in the value of the MSA is recorded as a valuation write-down adjustment. However, actual fair values may differ from the measured valuation due to limitations in available third-party market quotations and potential changes in the underlying assumptions. The mortgage servicing asset has been amortized over the expected life of the outstanding net servicing income. The expected life of the outstanding net servicing income that is generated from the MSA can vary from Management’s estimates due to interest rate volatility and changing prepayment speeds. Prepayment speeds in excess of Management’s estimates could negatively impact the recorded value of the MSA.

Columbia initiated a strategic shift in 2003 and discontinued the practice of capitalizing service retained mortgage premiums. CRB Mortgage Team (“Mortgage Team”) now originates mortgage loans which are sold exclusively on a brokerage basis with the mortgage servicing released. This means the existing MSA balance will not increase as a result of additional mortgage loan activity in which mortgage premiums are retained. This strategy continued into 2004 with a focus on producing quality loans, providing competitive loan products, and selling service released mortgage premiums in the secondary servicing market. Management believes this will reduce interest rate 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 in 2005 will likely improve the value of the MSA and provide Management with the ability to examine sale options.

At December 31, 2004, Columbia had approximately $7.4 million in goodwill as a result of business combinations. Columbia adopted Statement of Financial Accounting Standards (“SFAS”) No. 142 on January 1, 2002. Annual and periodic analyses of recorded goodwill for impairment involves, as required by SFAS 142, judgment on the part of Management. Neither the initial or annual assessments have identified impairment of goodwill such that the net book value of the reporting unit exceeded its estimated fair value.

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Columbia applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock option plans. 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 2004, 2003, and 2002 grants for stock-based compensation plans been determined consistent with SFAS No. 123, its net income and earnings per common share for December 31, 2004, 2003, and 2002, would approximate the pro forma amounts shown in Table 4.

(1) Amounts for 2002 have been adjusted to reflect the 10% stock dividend, effective May 1, 2003.

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for December 31, 2004, 2003 and 2002:

The effects of applying SFAS No. 123 in the pro forma disclosure are not indicative of future amounts. Recently, the Financial Accounting Standards Board (FASB) announced the release of SFAS No. 123 (R), “Share-Based Payment.” The effect of this revision will require Columbia to begin recognizing the fair values of stock options granted as compensation cost over the vesting period. SFAS 123 (R) will take effect for interim periods beginning after June 15, 2005. As permitted by SFAS 123, Columbia currently accounts for share-based payments to employees using the intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123 (R)’s fair value method will have a significant impact on our result of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS 123 (R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS 123 (R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to our consolidated financial statements. Statement 123 (R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While Columbia cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were approximately $122,000, $212,000 and $123,000 in 2004, 2003 and 2002, respectively.

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Columbia may become party to various legal proceedings. These matters have a high degree of uncertainty associated with them. There can be no assurance that the ultimate outcome will not differ materially from Columbia’s assessment of them. There can also be no assurance that all matters that may be brought against Columbia are known to them at any point in time.

Results of Operations

Net Interest Income

For Columbia, the primary component of earnings is net interest income. Net interest income is the difference between interest income, principally from loan and investment security portfolios, and interest expense, principally on customer deposits and bank borrowings from other sources, such as trust preferred securities. Changes in net interest income result from changes in volume, spread and margin. Volume refers to the dollar level of interest-earning assets and interest bearing liabilities. Spread refers to the difference between the yield on interest-earning assets and the cost of interest bearing liabilities. Net interest margin is the ratio of net interest income to total average interest-earning assets and is influenced by the relative level of interest-earning assets and interest bearing liabilities.

Average Balances and Average Rates Earned and Paid. The following table shows average balances and interest income or interest expense, with the resulting average yield or rates by category of earning assets or interest bearing liabilities.

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Analysis of Changes in Interest Differential. The following table shows the dollar amount of the increase (decrease) in Columbia’s net interest income and expense and attributes such dollar amounts to changes in volume as well as changes in rates. Rate and volume variances have been allocated proportionally between rate and volume changes.

Net interest income on a tax equivalent basis, before provision for loan losses, for the year ended December 31, 2004, was $35.74 million, which is an increase of 12.31% compared to net interest income of $31.82 million in 2003, where there was an increase of 5.19% compared to net interest income of $30.25 million in 2002. The overall tax equivalent earning asset yield was 7.16% in 2004 compared to 7.37% in 2003 and 8.04% in 2002. For the same years, rates on interest bearing liabilities were 1.72%, 1.81% and 2.19%, respectively. Net interest spread in 2004 was 5.44%, in 2003 it was 5.56% and in 2002 it was 5.85%. The net interest spread for year 2004, decreased 12 basis points over year 2003, due in large part to the effect of falling interest rates lowering yields on earning assets and a rise in deposit costs in the second half of 2004 due to rising short-term interest rates.

Total interest-earning assets averaged $601.06 million for the year ended December 31, 2004, compared to $523.94 million and $472.87 million for the corresponding periods in 2003 and 2002. The majority of the growth in earning assets occurred in the loan category. Increases in the loan portfolio are attributed to favorable interest rates, market conditions and the execution of Columbia’s strategy to provide personal, quality banking products and services, to hire experienced lending and administrative support staff personnel in strategic branch locations and to emphasize marketing strategies.

Average loans, which generally carry a higher yield than investment securities and other earning assets, comprised 90.66% of average earning assets during 2004, compared to 87.06% in 2003 and 88.74% in 2002. During the same periods, average yields on loans were 7.57% in 2004, 8.00% in 2003 and 8.42% in 2002. Average investment securities comprised 5.01% of average earning assets in 2004, which was down from 6.24% in 2003 and 7.62% in 2002. Tax equivalent interest yields on investment securities were 4.67% for 2004, 5.09% in 2003 and 6.31% in 2002.

Interest bearing liabilities averaged $426.77 million for the year ended December 31, 2004, $377.61 million during the same period in 2003 and $353.43 million during the same period in 2002. Interest cost, as a percentage of earning assets, decreased to 1.22% in 2004, compared to 1.30% in 2003 and 1.64% in 2002. The decline in interest cost as a percentage of earning assets resulted from falling interest rates during the previous three years. Deposit rates were near historically low levels during the last few years, but began to gradually rise in the second half of 2004 as the Fed Funds rate was increased and short-term treasury yields rose.

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Provision for Loan Losses

The provision for loan losses represents charges made to earnings to maintain an adequate allowance for loan losses. The allowance is maintained at an amount Management believes to be sufficient to absorb losses in the loan portfolio. Factors considered in establishing an appropriate allowance include a careful assessment of the financial condition of the borrower; a realistic determination of the value and adequacy of underlying collateral; the condition of the local economy and the condition of the specific industry of the borrower; a comprehensive analysis of the levels and trends of loan categories; and a review of delinquent and classified loans. When a provision for loan loss is recorded, the amount is based on past charge-off experience, a careful analysis of the current portfolio, and an evaluation of economic trends in Columbia’s market areas. Management will continue to closely monitor the loan quality of new and existing relationships through stringent review and evaluation procedures and by making loan officers accountable for collection efforts.

Columbia applies a systematic process for determining the adequacy of the allowance for loan losses, including both external and internal loan review functions and a quarterly analysis of the adequacy of the allowance. The quarterly analysis includes determination of specific potential loss factors on individual classified loans, historical potential loss factors derived from actual net charge-off experience and trends in non-performing loans, and potential loss factors for other loan portfolio risks such as loan concentrations, the condition of the local economy, and the nature and volume of loans. For the year ended December 31, 2004, the allowance for loan losses totaled $8.18 million, compared to $6.61 million at December 31, 2003, and $6.42 million at December 31, 2002. This represents an increase of 23.78% between 2003 and 2004 and an increase of 3.05% between 2002 and 2003. The increase in 2004 is due in large part to the 24% growth in the loan portfolio during 2004. A more detailed review of the loan loss provision and allowance for loan losses is presented in Table 13.

The recorded values of loans actually removed from the consolidated balance sheets are referred to as charge-offs and, after netting out recoveries on previously charged-off loans, become net charge-offs. Columbia’s policy is to charge off loans when, in Management’s opinion, the loan or a portion thereof is deemed uncollectible, although concerted efforts are made to maximize recovery after the charge-off. For the year ended December 31, 2004, loan charge-offs exceeded recoveries by $1.19 million as compared to 2003 and 2002, when loan charge-offs exceeded recoveries by $2.38 million and $695,024, respectively. The decrease in loan losses between 2003 and 2004 is primarily attributable to a single write-down of $1.46 million that was taken during 2003. Columbia believes the large write-down in 2003 was an unusual and infrequent occurrence and 2004 loan losses are more reflective of historic levels.

Non-interest Income

Total non-interest income declined 6.86% from year 2003 through year 2004, and increased 4.36% from year 2002 through 2003. During the prior three years, non-interest income was $8.31 million in 2004, $8.92 million in 2003 and $8.55 million in 2002. Non-interest income is primarily comprised of six categories; service charges and fees, Mortgage Team net revenues, credit card discounts and fees, CRB Financial Services Team revenues, net gain on sale or call of investments securities and other non-interest income. Each of the categories increased during 2004, except for Mortgage Team revenues and CRB Financial Services Team revenues. Mortgage Team net revenues increased $238,358 from 2002 to 2003, and decreased $1.84 million from 2003 to 2004. The decrease in Mortgage Team net revenues during 2004 was due to a significant slow down in loans originated. The decrease in CRB Financial Services Team revenues from 2003 to 2004 of $58,961 was attributable to a volatile market environment and cautious investors, resulting in lower volume and revenue. Service charges and fees were $4.66 million for the year 2004, an increase of 8.13% compared to $4.31 million for the year 2003, and $4.09 million for the year 2002. The growth in service charges and fees were attributable to an increase in overdraft protection charges. The remainder of the change in non-interest income is primarily attributable to improved revenues and growth received from credit card discounts and fees, appraisal fee income and a net gain on the sale of land.

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Non-interest Expense

Non-interest expense consists principally of salaries and benefits, occupancy costs, item and statement processing expenses and other non-interest expenses. A measure of Columbia’s ability to control non-interest expenses is the efficiency ratio. For the year ended December 31, 2004, the efficiency ratio was 54.86%, as compared to 55.43% in 2003 and 57.26% in 2002. The efficiency ratio (non-interest expense divided by net interest income and non-interest income) reflects an improving trend due to growth in revenue from net interest income and efforts by Management to monitor and control overhead expenses.

Non-interest expense for 2004 was $23.97 million, as compared to $22.35 million for 2003 and $21.98 million for 2002. The changes in non-interest expense are primarily the result of an increase in salary expense, occupancy expense and other non-interest expenses. The additional increases relate primarily to costs associated with the investment in new branches, commitment to employee training, continued investment in technology and promotion related expenses. Additionally, costs associated with compliance of Sarbanes-Oxley Section 404 (“SOX 404”) legislation totaled approximately $90,000 during the fourth quarter of 2004. Columbia expects to incur approximately $60,000 during the first quarter of 2005 to complete the 2004 compliance with SOX 404.

Income Taxes

The provision for income taxes was $6.23 million in 2004, $5.56 million in 2003 and $5.22 million in 2002. The provision resulted in effective combined federal and state tax rates of 36.71% in 2004, 36.14% in 2003 and 35.77% in 2002. The effective tax rates differ from combined estimated statutory rates of 38.6% principally due to the effects of nontaxable interest income, which is recognized for accounting purposes, but not for tax purposes.

(2) Includes accrued interest payable and other liabilities.

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Financial Condition
Investments

Federal funds sold are short-term investments that mature on a daily basis. Columbia invests in these instruments to provide for additional earnings on excess available cash balances. Because of their short maturities, the balance of federal funds sold fluctuates dramatically on a day-to-day basis. The balance on any one-day is influenced by cash demands, customer deposit levels, loan activity and future expected cash flows. Investments in federal funds sold totaled $20.30 million at December 31, 2004, compared to $14.96 million at December 31, 2003, and $3.74 million at December 31, 2002.

A year-to-year comparison shows that Columbia’s investment securities at December 31, 2004, totaled $45.40 million, compared to $31.68 million at December 31, 2003, and $36.05 million at December 31, 2002. This represents an increase of 43.29% between 2003 and 2004 and a decrease of 12.11% between 2002 and 2003. The increase in the investment portfolio occurred among available-for-sale securities in order to replace many of the investments called from the portfolio due to falling interest rates. For the years ended December 31, 2003 and 2002, no single investment security held by Columbia equaled or exceeded 10% of its consolidated shareholders’ equity. For the year ended December 31, 2004, Columbia had one investment security that totaled 10.61% of its consolidated shareholders’ equity. The investment security is a federal agency backed discount note structured to earn a higher rate of return as compared to the overnight federal funds rate. The investment security matured on January 26, 2005. On December 31, 2004, investments in federal funds sold (an overnight investment) were $20.30 million and investments in restricted stock were $2.43 million. The balance of federal funds sold is influenced by cash demands, customer deposit levels, loan activity, and future expected cash flows.

Columbia follows a financial accounting principle which requires that investment securities be identified as trading, held-to-maturity or available-for-sale. Held-to-maturity securities are those that Columbia has the intent and ability to hold until they mature or are called. Available-for-sale securities are those that Management may sell if liquidity requirements dictate or if alternative investment opportunities arise. Management determines the mix of available-for-sale and held-to-maturity investment securities based on the Board of Director’s approved asset-liability policy, Management’s assessment of Columbia’s need for relative liquidity and other factors.

At December 31, 2004, the investment portfolio, excluding restricted equity securities, consisted of 58.60% available-for-sale securities and 41.40% held-to-maturity securities. At December 31, 2003, the portfolio consisted of 48.11% available-for-sale securities and 51.89% held-to-maturity securities. At December 31, 2002, Columbia’s investment portfolio, excluding restricted equity securities, consisted of 44.23% available-for-sale securities and 55.77% held-to-maturity securities.

At December 31, 2004, Columbia’s investment portfolio had total net unrealized gains of approximately $523,000. This compares to net unrealized gains of approximately $961,000 at December 31, 2003 and net unrealized gains of $1.10 million at December 31, 2002. Unrealized gains and losses reflect changes in market conditions and do not represent the amount of actual profits or losses that may be realized. Actual realized gains and losses occur at the time investment securities are sold or called.

At each financial statement date, Management assesses each investment to determine if impaired investments are temporarily impaired or if the impairment is other-than-temporary based upon the positive and negative evidence available. Evidence evaluated includes, but is not limited to, industry analyst reports, credit market conditions and interest rate trends. A decline in the market value of any security below cost that is deemed other-than-temporary results in a charge to earnings and the corresponding establishment of a new cost basis for the security.

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The following table provides the carrying value of Columbia’s portfolio of investment securities as of December 31, 2003, 2002 and 2001, respectively.

The maturities of investment securities, segmented by amortized cost, estimated fair value, and tax equivalent yields, were as follows as of the dates indicated.