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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2004.

For the transition period from              to             .

Commission File Number 0-20288

COLUMBIA BANKING SYSTEM, INC.

(Exact name of issuer as specified in its charter)

(253) 305-1900

(Issuer’s telephone number, including area code)

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

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

Yes x No ¨

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

Yes x No ¨

The number of shares of the issuer’s Common Stock outstanding at April 30, 2004 was 13,561,637.

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CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

Columbia Banking System, Inc.

(Unaudited)

See accompanying notes to consolidated condensed financial statements.

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CONSOLIDATED CONDENSED BALANCE SHEETS

Columbia Banking System, Inc.

(Unaudited)

See accompanying notes to consolidated condensed financial statements.

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CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY

Columbia Banking System, Inc.

(Unaudited)

See accompanying notes to consolidated condensed financial statements.

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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

Columbia Banking System, Inc.

(Unaudited)

See accompanying notes to consolidated condensed financial statements.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Columbia Banking System, Inc.

Columbia Banking System, Inc. (the “Company”) is a registered bank holding company whose wholly owned subsidiary, Columbia State Bank (“Columbia Bank”), conducts a full-service commercial banking business. Headquartered in Tacoma, Washington, the Company provides a full range of banking services to small and medium-sized businesses, professionals and other individuals through 34 banking offices located in the Tacoma metropolitan area and contiguous parts of the Puget Sound region of Washington, as well as the Longview and Woodland communities in southwestern Washington. Substantially all of the Company’s loans, loan commitments and core deposits are geographically concentrated in its service areas.

1. Basis of Presentation

The interim unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for condensed interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments consisting only of normal recurring accruals necessary for a fair presentation of the financial condition and the results of operations for the interim periods included herein have been made. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of results to be anticipated for the year ending December 31, 2004. For additional information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2003.

2. Earnings Per Share

Earnings per share (“EPS”) are computed using the weighted average number of common and diluted common shares outstanding during the period. Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The only reconciling item affecting the calculation of earnings per share are the inclusion of stock options and restricted stock awards increasing the shares outstanding in diluted earnings per share by 244,000 and 117,000 for the three months ended March 31, 2004 and 2003, respectively.

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

3. Dividends

On January 29, 2004, the Company declared a quarterly cash dividend of $0.05 per share, payable on February 25, 2004, to shareholders of record at the close of business February 11, 2004.

Subsequent to quarter end, on April 28, 2004, the Company announced a quarterly cash dividend of $0.07 per share and a 5% stock dividend payable on May 26, 2004, to shareholders of record as of May 12, 2004. Average shares outstanding and net income per share for all periods presented have been retroactively adjusted to give effect to this stock dividend.

4. Business Segment Information

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

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

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

The organizational structure of the Company and its business line financial results are not necessarily comparable across companies. As such, the Company’s business line performance may not be directly comparable with similar information from other financial institutions. Changes in net interest income and total assets for the three month periods ending March 31, 2004 as compared to March 31, 2003 reflect transfers of loans from retail banking to commercial banking.

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Financial highlights by lines of business are as follows:

Condensed Statements of Operations:

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Columbia Banking System, Inc.

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

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

General

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

Business Overview

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

The Company has established a network of 34 branches as of March 31, 2004 from which it intends to grow market share. Twenty-one branches are located in Pierce County, eight in King County, three in Cowlitz County, and one each in Kitsap and Thurston Counties.

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Business Strategy

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

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

The Company intends to effect its growth strategy through a combination of growth at existing branch offices, new branch openings, and strategic business combinations. While the Company has no immediate plans for new branches, new markets and locations are reviewed on an ongoing basis and the Company will take advantage of branching opportunities as they arise.

Products & Services

The Company continuously reviews new products and services to meet its customers’ financial services needs. New technologies and services are reviewed for business development and cost saving purposes. Some of the products and services Columbia offers include tailored loan products, Cash Management Services, Columbia On-Line^™, International Services, Merchant Card Services and Investment Services. Additionally, in an effort to continue to provide exceptional service and to increase market share, the Company has formed a new Equipment Finance division, scheduled to begin operations on May 1.

Market Area

Over 75% of the Company’s market is centered in the South Puget Sound Region (“the South Sound”) of Washington state. Pierce County is located in the South Sound and Tacoma is the largest city in the County. The Company has 21 branch offices located in Pierce County and has the largest deposit market share as of June 30, 2003 according to the annual FDIC “Market Share Report”. The economy of the South Sound and that of the entire state of Washington has been in a recession since 2001, with unemployment rates ranking third in the nation at the end of 2003. Current economic indicators, however, have shown signs that recovery has begun with unemployment levels improving to eighth in the nation during the first quarter of 2004. Pierce County is anticipated to lead the statewide recovery with growth of 3.1% (“Pierce County Economic Index”) during 2004. Regional forecasts call for 11,000 new jobs in the information technology sector, as well as job growth in the health care, teaching, construction and retail sectors. The South Sound is benefiting from major construction projects currently underway such as the new Narrows Bridge and Convention Center located in downtown Tacoma. Additionally, expansion of the Port of Tacoma scheduled to be completed in late 2004, will provide the South Sound with a container terminal capable of handling the largest volume of container traffic north of Los Angeles. With two large military installations (McChord Air Force and Fort Lewis Army bases), government related employment represents approximately 20% of the County’s total employment.

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To the north of Tacoma, King County is Washington’s most populous at 1.8 million residents. In Seattle, located in King County, the Company has a banking office in the downtown business sector. East of Seattle in Bellevue and Redmond, the Company has two banking offices. A large portion of the economy within this area is linked to aerospace, construction, computer software and biotechnology industries. While these industries were severely impacted by the State’s economic recession, signs of recovery have been evident during the first quarter of 2004. Microsoft Corporation, which is headquartered northeast of Bellevue, announced solid earnings for the quarter ended March 31, 2004. After eliminating close to 40,000 positions in 2002 and 2003, The Boeing Company (“Boeing”) is showing signs of improvement in its Commercial Airplanes unit. In late 2003, Boeing announced that it had selected its Everett, Washington facility for the construction of the new “7E7 Dreamliner” commercial jet. Subsequent to March 31, 2004, on April 26th, the 7E7 project was formally launched with the order of 50 jets, and more orders are expected in the coming year. Additionally, Boeing’s Integrated Defense Systems unit with numerous locations in King County has shown considerable growth as a result of increased military spending.

The Company has five branches in south King County, an area of residential communities whose employment base is supported by light industrial, aerospace and forest products industries. With its close proximity to Tacoma, the south King County market area is considered an important natural extension of the Company’s Pierce County market area. The Weyerhaeuser Corporation maintains its world headquarters in Federal Way, which is located in south King County adjacent to the King/Pierce County line. Over the last few years, the forest products industry, in which Weyerhaeuser operates, has been in its worst downturn in half a century. During the first quarter of 2004 Weyerhaeuser has shown signs of recovery, as wood prices continue to improve and demand for packaging and containerboard has increased. The Auburn and Kent Valley areas located east of Federal Way are high residential and commercial growth markets.

CRITICAL ACCOUNTING POLICIES

Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company’s financial statements. These policies relate to the methodology for the determination of the allowance for loan losses and the valuation of real estate owned. These policies and the judgments, estimates and assumptions are described in greater detail in subsequent sections of Management’s Discussion and Analysis and in the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2003. Management believes that the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in the results of operations or financial condition.

RESULTS OF OPERATIONS

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

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Net Income

Net income for the first quarter of 2004 was $5.2 million, or $0.36 per diluted share, an increase of 16% compared to $4.4 million, or $0.31 per diluted share, for the first quarter of 2003. The increase in net income is due primarily to a decreased provision to the loan loss reserve and increased core deposits which lowered the Company’s overall cost of funding.

Total Revenue

During the first quarter of 2004, total revenue (net interest income plus noninterest income), was $22.0 million, an increase of $414,000, or 2% from the first quarter of 2003. The increase in total revenue in the first quarter 2004 compared to 2003 was due to higher net interest income offset in part by lower non-interest income.

Net Interest Income

Net interest income for the first quarter of 2004 increased 5% to $16.9 million, from $16.0 million in the first quarter of 2003. Although there was a decrease in interest income as compared to the first quarter of 2003 it was offset by a significant decrease in interest expense of 26% to $4.3 million, from $5.8 million in the first quarter of 2003. The decrease in interest income was a result of lower interest rates and declining average loan balances. The Company was able to offset this decrease through growth of core deposits resulting in a lower cost of funding.

The net interest margin (net interest income divided by average interest-earning assets) decreased to 4.25% in the first quarter of 2004 from 4.37% in the first quarter of 2003. Average interest-earning assets grew to $1.64 billion, or 8%, during the first quarter of 2004, compared with $1.52 billion for the same period in 2003. The yield on average interest-earning assets decreased 61 basis points to 5.30% during the first quarter of 2004 compared with 5.91% during the same period of 2003. The decrease in yield on earning assets is primarily due to declining loan demand experienced during 2003, which resulted in excess funds from core deposit growth being placed in lower yielding investments and overnight funds. Additionally, the yield on loans was impacted by a 25 basis point decrease in the prime rate at the end of the second quarter of 2003. (A basis point is 1/100^th of 1 percent, alternatively 100 basis points equals 1.00%.) However, during the first quarter of 2004, the Company experienced a $53.2 million, or 5% increase in its loan portfolio from year-end 2003 due to increasing demand for commercial business and five or more family residential commercial property loans. In comparison, average interest-bearing liabilities increased to $1.29 billion or 4% during the first quarter of 2004 compared with $1.24 billion in the same period in 2003. The average cost of interest-bearing liabilities decreased 56 basis points to 1.32% during the first quarter of 2004 from 1.88% in the same period of 2003. The decrease in cost of funds is due to the Company’s focus on core deposit growth, as average core deposits increased 15.9% from the first quarter of 2003 to $1.1 billion at March 31, 2004.

The Company is asset sensitive from an interest-rate risk standpoint over a short-term period of at least 3 months and then becomes slightly liability sensitive over a twelve month period. In the event of a change in interest rates, a larger amount of the Company’s interest-earning assets will reprice faster than its interest-bearing liabilities in the short-term. During a declining interest rate environment, the Company’s net interest margin will be compressed if it is unable to reprice its interest-bearing liabilities as its interest-earning assets reprice. Conversely, in a rising interest rate environment, the Company’s interest-earning assets will reprice faster than its interest-bearing liabilities. Many economists believe that interest rates are at a low point in the current cycle and speculation is that the Federal Reserve may begin increasing the Federal Funds target rate sometime in 2004. In that event, the Company anticipates improvement in its net interest margin as interest-earning assets reprice faster than its deposits and other interest-bearing liabilities.

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CONSOLIDATED AVERAGE BALANCES—NET CHANGES

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Noninterest Income

Noninterest income decreased $439,000, or 8% in the first quarter of 2004 as compared with the same period in 2003. The decrease in noninterest income during the first quarter is due to fewer residential mortgage loan originations resulting from the expected effect of rising long-term interest rates. This lower revenue was partially offset by increases in merchant services income, and service charges and other fees resulting from the growth in core deposits.

The Company has benefited from the historically low interest rate environment through increased mortgage banking activity which provided record non-interest income during 2003. The low rate environment, which began in the third quarter of 2002, stimulated demand for home refinancing, as well as new and existing home sales. During the later half of 2003 rates flattened and began to rise slightly, which resulted in decreased refinance and residential mortgage loan applications. This trend has continued into the first quarter of 2004, as mortgage banking income decreased 53% from the first quarter of 2003 to $503,000 at March 31, 2004. If the level of home refinancing remains low during subsequent quarters, non-interest income is likely to decrease from prior periods. In addition to mortgage banking, the Company has consistently increased its noninterest income in service charges and other fees and merchant services fees. Merchant services fees increased 21% from the first quarter of 2003 to $1.6 million at March 31, 2004, and service charges and other fees increased 6% or $132,000 for the same period.

In accordance with the Company’s investment strategy, management monitors market conditions with a view to realizing gains on its available for sale securities portfolio as market conditions allow. During the first quarter 2004, the Company recorded net losses on sale of investment securities of $6,000. There were no sales of securities during the first quarter of 2003.

Noninterest Expense

Total noninterest expense increased 5% to $14.3 million for the first quarter of 2004 from $13.7 million for the first quarter of 2003. This increase was primarily due to increased employee benefit costs, merchant processing expenses and professional fees.

Consistent with national trends, the Company has experienced increased costs of providing employee benefits, primarily health insurance coverage. Increased health insurance premiums and other benefits have resulted in compensation and employee benefits increasing 9% from the first quarter of 2003 to $7.8 million at March 31, 2004. Merchant processing expenses increased 31% during the first quarter of 2004 as compared to the same period in 2003. These expenses move in direct correlation with merchant services fees and are anticipated to increase in subsequent periods as growth in market share leads to greater merchant services fees.

Professional fees have increased 22% as compared to the first quarter of 2003 to $628,000 for the quarter ended March 31, 2004. This increase is due to additional costs pertaining to compliance with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002. The Company anticipates ongoing expenses related to this matter in subsequent periods.

The Company’s efficiency ratio [noninterest expense divided by the sum of net interest income and noninterest income on a tax equivalent basis, excluding gain (loss) on sale of investment securities and net cost (gain) of OREO] was 63.36% for the first quarter 2004, compared to 61.84% for the first quarter of 2003. This increase was due primarily to decreased revenue from mortgage banking activity and increased employee benefit expenses and expenses related to the Sarbanes-Oxley Act of 2002. The Company is committed to controlling and managing expenses. Economic conditions within its markets and the historically low interest rates during the past three years have adversely impacted the Company’s ability to realize significant improvement of its efficiency ratio. Improvement in the efficiency ratio will depend on the Company’s ability to grow the loan portfolio and fee income and continuing to control expenses while adhering to its core values of customer service.

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Income Taxes

The Company recorded an income tax provision of $2.2 million for the first quarter of 2004, compared with a provision of $1.8 million for the same period in 2003. The effective tax rate was 30% for the first quarter of 2004 and for the year ended December 31, 2003. The Company’s effective tax rate is less than the statutory rate primarily due to earnings on tax-exempt municipal securities and bank owned life insurance. For additional information, refer to the Company’s annual report on Form 10-K for the year ended December 31, 2003.

Credit Risk Management

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

In analyzing its existing portfolio, the Company reviews its consumer and residential loan portfolios by their performance as a pool of loans since no single loan is individually significant or judged by its risk rating, size, or potential risk of loss. In contrast, the monitoring process for the commercial business, private banking, real estate construction, and commercial real estate portfolios includes periodic reviews of individual loans with risk ratings assigned to each loan and performance judged on a loan by loan basis. The Company reviews these loans to assess the ability of the borrower to service all of its interest and principal obligations and, as a result, the risk rating may be adjusted accordingly. In the event that full collection of principal and interest is not reasonably assured, the loan is appropriately downgraded and, if warranted, placed on nonaccrual status even though the loan may be current as to principal and interest payments. Additionally, the Company assesses whether an impairment of a loan warrants specific reserves or a write-down of the loan. See “Provision and Allowance For Loan Losses” on page 17.

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

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Loan Portfolio Analysis

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

Total loans (excluding loans held for sale) at March 31, 2004 increased $53.2 million, to $1.13 billion from $1.08 billion at year-end 2003 largely due to increases in commercial business and commercial and five or more family residential commercial properties loans.

Commercial Loans: As of March 31, 2004, commercial loans increased $18.3 million, or 5%, to $400.0 million from $381.7 million at year-end 2003, representing 35.3% of total loans at March 31, 2004 as compared with 35.4% of total loans at December 31, 2003. The increase in commercial loans is the result of an effective business development initiative and some early indications of an economic recovery in the market area. Declines in commercial loans in prior periods were a result of the economic recession causing business customers to reduce line of credit usage. The Company is committed to providing competitive commercial lending in its market areas. The Company plans to remain competitive yet cautious with its commercial lending products due to the current state of the economy and will continue to emphasize in particular its relationship banking with businesses, and business owners.

Real Estate Loans: Residential one-to-four family loans increased $176,000 to $47.6 million at March 31, 2004, representing 4.2% of total loans, compared with $47.4 million, or 4.4% of total loans at December 31, 2003. These loans are used by the Company to collateralize advances from the FHLB. Generally, the Company’s policy is to originate residential loans for sale to third parties. Those residential loans are secured by properties located within the Company’s primary market areas, and typically have loan-to-value ratios of 80% or lower. However, the loan amounts may exceed 80% with private mortgage insurance.

Commercial and five or more family residential real estate lending increased $23.0 million, or 5%, to $495.9 million at March 31, 2004, representing 43.8% of total loans, from $472.8 million, or 43.8% of total loans at December 31, 2003. Generally, commercial and five or more family residential real estate loans are made to borrowers who have existing banking relationships with the Company. The Company’s underwriting standards generally require that the loan-to-value ratio for these loans not exceed 75% of appraised value, cost, or discounted cash flow value, as appropriate, and that commercial properties maintain debt coverage ratios (net operating income divided by annual debt servicing) of 1.2 or better. However, underwriting standards can be influenced by competition and other factors. The Company endeavors to maintain the highest practical underwriting standards while balancing the need to remain competitive in its lending practices.

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Real Estate Construction Loans: The Company originates a variety of real estate construction loans. One-to-four family residential construction loans are originated for the construction of custom homes (where the home buyer is the borrower) and provide financing to builders for the construction of pre-sold homes and speculative residential construction. Construction loans on one-to-four family residences increased $5.0 million, or 32%, to $20.6 million at March 31, 2004, representing 1.8% of total loans, from $15.6 million, or 1.4% of total loans at December 31, 2003. Commercial and five or more family real estate construction loans increased $2.6 million, or 4%, to $61.6 million at March 31, 2004, representing 5.5% of total loans, from $59.0 million, or 5.5% of total loans at December 31, 2003.