Columbia Bancorp (CBBO) 10-Q 2005 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2005

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                to

Commission file number: 0-27938

COLUMBIA BANCORP

(Exact name of registrant as specified in its charter)

Oregon
(State of incorporation) 93-1193156
(I.R.S. Employer Identification No.)

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

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

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

YESþ       NOo

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

YESþ       NOo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YESo       NOþ

At October 31, 2005, there were 8,936,507 shares of common stock of Columbia Bancorp outstanding.

COLUMBIA BANCORP

FORM 10-Q

September 30, 2005

Table of Contents

PART I. — FINANCIAL INFORMATION	3
ITEM 1. Financial Statements	3
Consolidated Financial Statements of Columbia Bancorp and Subsidiary	3
CONSOLIDATED BALANCE SHEETS	3
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME	4
CONSOLIDATED STATEMENTS OF CASH FLOWS	5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY	6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	7
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS	11
OVERVIEW	11
MATERIAL CHANGES IN FINANCIAL CONDITION	14
RESULTS OF OPERATIONS	22
LIQUIDITY AND CAPITAL RESOURCES	25
CRITICAL ACCOUNTING POLICIES	27
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	28
ITEM 4.Controls and Procedures	28
PART II. — OTHER INFORMATION	29
ITEM 1.Legal Proceedings	29
ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds	29
ITEM 3.Defaults Upon Senior Securities	29
ITEM 4.Submission of Matters to a Vote of Security Holders	29
ITEM 5.Other Information	29
ITEM 6.Exhibits	29
SIGNATURES	30
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

2

PART I. — FINANCIAL INFORMATION

These consolidated financial statements should be read in conjunction with the financial statements, accompanying notes and other relevant information included in the Company’s report on Form 10-K for the year ended December 31, 2004, and the notes and other textual information included herewith.

ITEM 1. Financial Statements

Consolidated Financial Statements of Columbia Bancorp and Subsidiary

COLUMBIA BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(Unaudited)

	September 30,			December 31,
	2005			2004
ASSETS
Cash and due from banks	$	29,834,820		$	25,527,270
Interest bearing deposits with other banks		14,164,953			12,165,712
Federal funds sold		53,444,589			20,285,817
Total cash and cash equivalents		97,444,362			57,978,799
Investment securities available-for-sale		18,257,527			24,573,394
Investment securities held-to-maturity		17,668,656			17,789,481
Equity securities		607,692			605,594
Restricted equity securities		2,439,100			2,429,200
Total investment securities		38,972,975			45,397,669
Loans held-for-sale		7,254,227			2,517,182
Loans, net of allowance for loan losses and unearned loan fees		641,232,422			571,607,850
Property and equipment, net of accumulated depreciation		14,870,223			15,222,622
Accrued interest receivable		6,321,103			4,107,806
Goodwill		7,389,094			7,389,094
Mortgage servicing asset, net of accumulated amortization and valuation allowance		—			2,162,654
Other assets		7,563,270			8,988,842
Total assets	$	821,047,676		$	715,372,518
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing demand deposits	$	228,143,884		$	172,421,947
Interest bearing demand deposits		267,320,839			211,239,408
Savings accounts		42,378,914			35,926,117
Time certificates		176,678,879			187,356,091
Total deposits		714,522,516			606,943,563
Notes payable		25,904,166			34,889,564
Accrued interest payable and other liabilities		1,858,632			3,538,413
Junior subordinated debentures		4,124,000			4,124,000
Total liabilities		746,409,314			649,495,540
Shareholders’ equity:
Common stock, no par value; 20,000,000 shares authorized, 8,936,317 issued and outstanding (8,839,151 at December 31, 2004)		33,195,321			32,140,776
Retained earnings		41,687,814			33,816,489
Accumulated other comprehensive loss, net of taxes		(244,773	)		(80,287	)
Total shareholders’ equity		74,638,362			65,876,978
Total liabilities and shareholders’ equity	$	821,047,676		$	715,372,518

See accompanying notes.

3

COLUMBIA BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
INTEREST INCOME
Interest and fees on loans	$	13,171,396		$	10,874,727		$	36,717,801		$	30,198,659
Interest on investments:
Taxable investment securities		201,291			100,624			552,616			284,423
Nontaxable investment securities		147,448			154,740			447,658			462,381
Other interest income		478,056			77,998			1,167,665			221,578
Total interest income		13,998,191			11,208,089			38,885,740			31,167,041
INTEREST EXPENSE
Interest on interest bearing deposit and savings accounts		1,096,769			404,809			2,688,537			965,676
Interest on time deposit accounts		1,525,674			1,264,631			4,371,691			3,148,887
Other borrowed funds		314,006			356,774			1,030,634			933,143
Total interest expense		2,936,449			2,026,214			8,090,862			5,047,706
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES		11,061,742			9,181,875			30,794,878			26,119,335
PROVISION FOR LOAN LOSSES		1,230,000			550,000			2,080,000			2,640,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		9,831,742			8,631,875			28,714,878			23,479,335
NON-INTEREST INCOME
Service charges and fees		1,238,637			1,195,933			3,602,126			3,443,238
Mortgage Team revenues, net of expenses		766,719			330,981			2,110,919			761,402
Credit card discounts and fees		136,231			131,468			366,190			349,980
CRB Financial Services Team revenues		174,390			93,130			474,375			394,992
Other non-interest income		223,703			265,003			1,273,372			564,727
Total non-interest income		2,539,680			2,016,515			7,826,982			5,514,339
NON-INTEREST EXPENSE
Salaries and employee benefits		4,297,656			3,468,018			12,028,863			9,776,457
Occupancy expense		773,424			699,670			2,333,586			1,897,963
Credit card processing fees		38,587			27,012			99,534			83,946
Data processing expense		123,115			123,608			345,648			378,327
Other non-interest expenses		1,908,226			1,695,150			5,881,392			5,421,650
Total non-interest expense		7,141,008			6,013,458			20,689,023			17,558,343
INCOME BEFORE PROVISION FOR INCOME TAXES		5,230,414			4,634,932			15,852,837			11,435,331
PROVISION FOR INCOME TAXES		1,704,371			1,736,465			5,572,138			4,205,371
NET INCOME		3,526,043			2,898,467			10,280,699			7,229,960
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
Unrealized holding losses arising during the period		(101,971	)		(92,573	)		(165,387	)		(42,693	)
Reclassification adjustment for (gains) losses included in net income		—			57,588			901			(3,289	)
Total other comprehensive loss, net of taxes		(101,971	)		(34,985	)		(164,486	)		(45,982	)
COMPREHENSIVE INCOME	$	3,424,072		$	2,863,482		$	10,116,213		$	7,183,978
Earnings per share of common stock
Basic	$	0.39		$	0.33		$	1.15		$	0.82
Diluted	$	0.38		$	0.32		$	1.13		$	0.80
Weighted average common shares outstanding
Basic		8,931,501			8,802,850			8,901,911			8,786,385
Diluted		9,167,394			9,037,373			9,126,957			9,026,238

See accompanying notes.

4

COLUMBIA BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Nine Months Ended
	September 30,
	2005			2004
CASH FLOWS RELATED TO OPERATING ACTIVITIES
Net income	$	10,280,699		$	7,229,960
Adjustments to reconcile net income to net cash from operating activities:
Loss on sale or write-down of property and equipment		33,853			129,670
Net (gain) loss on sale or call of investments		1,421			(5,187	)
Depreciation on property and equipment		1,224,232			1,086,621
Amortization of mortgage servicing asset		116,972			1,398,412
Federal Home Loan Bank stock dividend		(9,900	)		(69,800	)
Provision for loan losses		2,080,000			2,640,000
Increase (decrease) in cash due to changes in assets/liabilities:
Accrued interest receivable		(2,213,297	)		(1,620,481	)
Other assets		(2,977,504	)		(536,303	)
Accrued interest payable and other liabilities		(1,325,043	)		(161,389	)
NET CASH FROM OPERATING ACTIVITIES		7,211,433			10,091,503
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of available-for-sale securities		100,000			4,500,000
Proceeds from the maturity of available-for-sale securities		8,000,000			6,100,000
Proceeds from the maturity of held-to-maturity securities		2,469,051			1,139,457
Purchases of held-to-maturity securities		(2,422,086	)		(318,098	)
Purchases of available-for-sale securities		(1,964,534	)		(12,469,338	)
Net change in loans made to customers		(71,789,025	)		(109,306,338	)
Proceeds from the sale of mortgage servicing asset		1,837,503			—
Proceeds from the sale of restricted equity securities		—			483,100
Investment in low-income housing tax credits		(109,750	)		—
Investment in state energy tax credits		(56,684	)		—
Proceeds from the sale of property and equipment		5,311			—
Proceeds from the sale of other real estate owned		188,896			117,770
Purchases of property and equipment		(915,440	)		(3,434,232	)
NET CASH FROM INVESTING ACTIVITIES		(64,656,758	)		(113,187,679	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in demand deposit and savings accounts		118,256,165			49,390,052
Net change in time deposits		(10,677,212	)		69,333,652
Net (decrease) increase in notes payable		(8,985,398	)		12,667,543
Cash paid for dividends and fractional shares		(2,400,630	)		(2,370,011	)
Proceeds from stock options exercised and sales of common stock		717,963			521,612
Repurchase of common stock		—			(226,229	)
NET CASH FROM FINANCING ACTIVITIES		96,910,888			129,316,619
NET INCREASE IN CASH AND CASH EQUIVALENTS		39,465,563			26,220,443
CASH AND CASH EQUIVALENTS, beginning of period		57,978,799			53,866,193
CASH AND CASH EQUIVALENTS, end of period	$	97,444,362		$	80,086,636
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid in cash	$	9,637,873		$	5,996,813
Taxes paid in cash	$	7,236,000		$	4,639,000
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Change in unrealized loss on available-for-sale securities, net of taxes	$	(164,486	)	$	(45,982	)
Cash dividend declared and payable after quarter-end	$	804,269		$	793,008
Transfer of loans to other real estate owned	$	84,453		$	1,418,500

See accompanying notes.

5

COLUMBIA BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)

										Accumulated
										Other				Total
				Common			Retained			Comprehensive				Shareholders’
	Shares			Stock			Earnings			Income (Loss)				Equity
BALANCE, December 31, 2003		8,750,582		$	31,520,099		$	26,252,366		$	31,999			$	57,804,464
Stock options exercised		101,069			725,193			—			—				725,193
Income tax benefit from stock options exercised		—			121,713			—			—				121,713
Stock repurchase		(12,500	)		(226,229	)		—			—				(226,229	)
Cash dividends paid		—			—			(2,375,043	)		—				(2,375,043	)
Cash dividends declared		—			—			(795,524	)		—		��		(795,524	)
Net income and comprehensive income		—			—			10,734,690			(112,286	)			10,622,404
BALANCE, December 31, 2004		8,839,151		$	32,140,776		$	33,816,489		$	(80,287	)		$	65,876,978
Stock options exercised		100,266		$	717,963		$	—		$	—			$	717,963
Income tax benefit from stock options exercised		—			336,582			—			—				336,582
Cash dividends paid		—			—			(1,605,106	)		—				(1,605,106	)
Cash dividends declared		—			—			(804,268	)		—				(804,268	)
Net income and comprehensive income		—			—			10,280,699			(164,486	)			10,116,213
BALANCE, September 30, 2005		8,939,417		$	33,195,321		$	41,687,814		$	(244,773	)		$	74,638,362

See accompanying notes.

6

COLUMBIA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.	Basis of Presentation
	The interim consolidated financial statements include the accounts of Columbia Bancorp (“Columbia” or the “Company”), an Oregon corporation and a registered financial holding company, and its wholly-owned subsidiary Columbia River Bank (“CRB”), after elimination of intercompany transactions and balances. CRB is an Oregon state-chartered bank, headquartered in The Dalles. Substantially all activity of Columbia is conducted through its subsidiary bank, CRB.
	The interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The financial information included in this interim report has been prepared by Management. Columbia’s annual report contains audited financial statements. All adjustments, including normal recurring accruals necessary for the fair presentation of results of operations for the interim periods included herein, have been made. Certain amounts for 2004 have been reclassified to conform to the 2005 presentation. The results of operations for the three and nine months ended September 30, 2005, are not necessarily indicative of results to be anticipated for the year ending December 31, 2005.
2.	Management’s Estimates and Assumptions
	Various elements of Columbia’s accounting policies are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, Management has identified certain policies that due to the judgments, estimates and assumptions inherent in those policies are critical to an understanding of the consolidated financial statements. These policies and judgments, estimates and assumptions are described in greater detail in the Notes to the consolidated financial statements included in Columbia’s annual report on Form 10-K, filed March 15, 2005.
	Management believes the judgments, estimates and assumptions used in the preparation of the consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of the consolidated financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in the results of operations or financial conditions.

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3.

Stock Options

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

FAS 123 Pro Forma Net Income:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollars in thousands)	2005			2004			2005			2004
Net income, as reported	$	3,526		$	2,898		$	10,281		$	7,230
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects		(5	)		(17	)		(202	)		(65	)
Pro forma net income	$	3,521		$	2,881		$	10,079		$	7,165
Earnings per share:
Basic — as reported	$	0.39		$	0.33		$	1.15		$	0.82
Basic — pro forma	$	0.39		$	0.33		$	1.13		$	0.82
Diluted — as reported	$	0.38		$	0.32		$	1.13		$	0.80
Diluted — pro forma	$	0.38		$	0.32		$	1.10		$	0.79

	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 Payments.” The effect of this revision will require Columbia to begin recognizing the fair values of stock options granted as compensation cost on the date of grant or over the vesting period. SFAS 123 (R) will take effect beginning January 1, 2006. 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. The actual 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, Columbia does not believe the future impact on earnings will be materially different than what has historically been reported as the pro forma effect to income included above and in Note 1 to Columbia’s December 31, 2004, consolidated financial statements contained in Form 10-K. 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.
4.	Loans and Allowance for Loan Losses
	Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses and unearned loan fees. Interest on loans is calculated using the simple-interest method on daily balances of the principal amount outstanding. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield over the life of the related loan.

8

	Columbia does not accrue interest on loans for which full payment of principal and interest is not expected, or for which payment of principal or interest has been in default for 90 days or more, unless the loan is well-secured and in the process of collection. Further, Columbia may place on non-accrual status loans that are not contractually past due or that are deemed fully collateralized to promote better oversight and review of loan arrangements. Loans on non-accrual status at September 30, 2005 and December 31, 2004, were $1.35 million and $4.20 million, respectively. A single real estate secured loan in the amount of $3.12 million comprised the majority of loans on non-accrual status as of December 31, 2004. Columbia obtained resolution from the guarantors of this loan during the first quarter of 2005.
	The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when Management believes that the collectibility of the principal is unlikely. The allowance is an amount that Management believes will be adequate to absorb possible losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. Various regulatory agencies, as a regular part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgment of information available to them at the time of the examinations.
	At September 30, 2005, Columbia held no assets acquired through loan foreclosure or recovery activities, known as other real estate owned (“OREO”), a decrease from the $100,000 in this asset category as of December 31, 2004. Proceeds for the sale of OREO were $188,896 and $117,770 for the nine months ended September 30, 2005 and 2004, respectively. Additionally, at September 30, 2005, Columbia had one loan in the amount of $43,248 that was considered a restructured loan upon which the interest rate or payment schedule had been modified from original terms or restructured to accommodate borrowers’ weakened financial positions. Columbia had not identified any restructured loans as of December 31, 2004.
5.	Mortgage Servicing Asset
	The Mortgage Servicing Asset (MSA) represents the estimated net present value of mortgage servicing rights income for mortgage loans originated by the company. Columbia has discontinued selling mortgage loans with servicing retained. During the second quarter of 2005, Columbia sold its MSA resulting in a gain of $560,588, which was the difference between the sales proceeds and the carrying value of the MSA.
6.	Segment Information
	Columbia operates two primary segments: the community banking segment and the mortgage banking segment. The community banking segment consists of Columbia’s subsidiary, CRB, which operates 17 bank branches in Oregon and three bank branches in Washington. CRB offers loan, investment, and deposit products to its customers who range from individuals to companies of varying sizes representing agricultural, real estate development and other commercial industries. The mortgage banking segment consists of the Mortgage Team, headquartered in Bend, Oregon, with dedicated loan officers located in 14 of CRB’s Oregon and Washington branches. The Mortgage Team offers a full range of mortgage lending services and products to its clients.

9

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

Segment Information:

	Community
(dollars in thousands)	Banking		Mortgage Banking			Consolidated
Nine Months Ended September 30, 2005:
Net interest income before provision for loan losses	$	30,751	$	44		$	30,795
Non-interest income		4,983		2,844			7,827
Depreciation on property and equipment		1,177		47			1,224
Mortgage servicing asset amortization		—		117			117
Income before provision for income taxes		14,953		900			15,853
Total assets		812,444		8,604			821,048
Nine Months Ended September 30, 2004:
Net interest income before provision for loan losses	$	25,974	$	145		$	26,119
Non-interest income		3,472		2,042			5,514
Depreciation on property and equipment		1,033		54			1,087
Mortgage servicing asset amortization		—		1,398			1,398
Income (loss) before provision for income taxes		12,249		(814	)		11,435
Total assets		714,336		6,200			720,536

7.	Earnings Per Share
	Basic earnings per share excludes dilution and is calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if common shares were issued pursuant to the exercise of options under stock option plans. Weighted average shares outstanding include common shares outstanding and common stock equivalents attributable to outstanding stock options.
	The weighted average number of shares and common share equivalent figures have been retroactively adjusted for all stock dividends or splits.
8.	Recently Issued Accounting Standards
	In December 2004, the FASB issued Statement No. 123(R) “Share-Based Payment.” This statement replaces existing requirements under SFAS No. 123 “Accounting for Stock-Based Compensation,” and eliminates the ability to account for share-based compensation transactions under APB Opinion No. 25 “Accounting for Stock Issued to Employees.” SFAS No. 123(R) requires stock-based transactions to be recognized as compensation expense in the income statement based on their fair values at the date of grant. The fair value should be estimated using option-pricing models such as the Black-Scholes model or a binomial model. This statement is effective beginning January 1, 2006. At this time, Columbia does not believe the future impact on earnings to be materially different than what has historically been reported as the pro forma effect to income in Note 3 included herein and in Note 1 to Columbia’s December 31, 2004, consolidated financial statements contained in Form 10-K. The impact to operating and financing cash flows is not considered to be material to the consolidated financial statements.

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ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

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

OVERVIEW

Columbia Bancorp is an Oregon corporation and a registered financial holding company. Our common stock is traded on the NASDAQ Stock Market^TM under the symbol “CBBO”. The majority of our income is derived from, and the majority of our assets are held in, our wholly-owned subsidiary, Columbia River Bank (CRB), which is an Oregon state-chartered bank, headquartered in The Dalles, Oregon. When we speak of our financial condition and results of operations, we sometimes use the term “Columbia” to refer to the bank and the holding company on a consolidated basis. Columbia River Bank operates 20 branches in Oregon and Washington. In addition to these community-oriented branches, mortgage lending services are provided through the Columbia River Bank Mortgage Team and brokerage services through the CRB Financial Services Team.

Net income for the nine months ended September 30, 2005 totaled $10.28 million, or $1.13 per diluted common share, an increase of $3.05 million, $0.33 per diluted share, or 42.20%, over the same period in 2004. Significant factors contributing to the net income increase are as follows:

• Loan portfolio growth of 13.13% year-over-year and continued rate increases on variable rate loans, resulted in $6.52 million, or 21.59%, increase in loan interest income, which is partially offset by a $3.04 million, or 60.29%, increase in interest expense.

• Reductions in mortgage servicing expenses and increases in mortgage loan production resulted in $1.35 million, or 177.24%, increase in Mortgage Team revenues during the nine months ended September 30, 2005, compared to the same period in 2004.

• As our deposit growth outpaced loan growth, federal funds sold increased $10.98 million, or 25.86%, and resulted in $804,226, or 1090.29%, increase in federal funds interest, which is included in other interest income.

• Due to improved loan quality and planned loan growth, the provision for loan losses decreased $560,000, or 21.21%, for the nine months ended September 30, 2005, compared to the same period in 2004.

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Net income for the three months ended September 30, 2005 totaled $3.53 million, or $0.38 per diluted common share, an increase of $627,576, $0.06 per diluted share, or 21.65%, over the same period in 2004. The quarterly increase in net income is generally due to the same factors noted above for the nine months ended September 30, 2005.

Net income for the nine months ended September 30, 2005 includes the effects of the following items:

• State of Oregon corporate kicker tax benefit of $230,000 contributed $0.03 per diluted share, recognized during the third quarter

• Gain from sale of Mortgage Servicing Asset of $560,588 contributed $0.04 per diluted share, recognized during the second quarter

• Collection of $336,000 in previously non-accrual interest from 2004 contributed $0.02 per diluted share, recognized during the first quarter

Overall income growth was offset by the following significant non-interest expense increases for the three months and nine months ended September 30, 2005, compared to the same periods in 2004:

• Based upon the achievement of company financial and operational goals, incentive compensation expense increased $411,454 and $1.25 million for the three months and nine months ended September 30, 2005, respectively, compared to the same periods in 2004.

• Salaries and benefits, excluding incentive compensation, increased $514,789 and $932,525 for the three and nine months ended September 30, 2005, respectively, compared to the same periods in 2004. This follows the hiring of personnel to staff our new branches, as well as the addition of several new administrative positions in response to our growth.

• Other non-interest expense increased $213,076 and $459,742 for the three months and nine months ended September 30, 2005, respectively, compared to the same periods in 2004. Overall bank growth and regulatory compliance initiatives led to significant increases in consulting expense, employee recruitment costs and software licensing fees.

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The following table presents an overview of our key financial performance indicators:

Key Financial Performance Indicators:

	As of and for the						As of and for the
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollars in thousands except per share data)	2005			2004			2005			2004
Return on average assets		1.78	%		1.68	%		1.82	%		1.52	%
Return on average equity		19.14	%		18.60	%		19.51	%		16.02	%
Net interest margin, tax equivalent basis		6.01	%		5.86	%		5.91	%		6.08	%
Efficiency ratio		52.50	%		53.70	%		53.57	%		55.51	%
Net income	$	3,526		$	2,898		$	10,281		$	7,230
Total loans, gross(1)								659,405			578,287
Total assets								821,048			720,536
Deposits								714,523			615,082
Book value per common share							$	8.35		$	7.15
Tangible book value per common share								7.53			6.04

⁽¹⁾ Loans include portfolio and loans held for sale and exclude allowance for loan losses and unearned loan fees.

Our goal is to grow our earning assets while maintaining a high return on equity and strong asset quality. We will achieve this by emphasizing personalized, quality banking products and services for our customers; by hiring and retaining high performing, experienced branch and administrative personnel and by responding quickly to customer demand and growth opportunities. We intend to increase penetration in our existing markets and expand into new markets through suitable acquisitions and new branch openings.

We are moving our Kennewick branch to a permanent location in the Tri-Cities area, which includes the Washington cities of Richland, Kennewick and Pasco. Management expects to complete construction of the new 10,000 square foot facility in December 2005. The renamed Meadow Springs Branch will be our flagship branch serving all of the Tri-Cities area. The facility will house a full service bank branch on the first floor and our Tri-Cites Business Banking Team on the second floor. In order to serve our retail customers more conveniently, the branch will feature a five lane vehicle drive-up including two drive-up ATMs.

We began construction of our new Pasco Branch, which is located next to the TRAC Convention Center in Pasco. Management expect to open the new branch during the first quarter of 2006. The 2,900 square foot branch will serve the northwestern Tri-Cities area and will focus on small business relationships and expanding our consumer product base. It will feature a four lane vehicle drive-up including two drive-up ATMs.

We also began construction of our new Cherry Heights Branch, which is located west of downtown The Dalles and expected to open during the first quarter of 2006. The branch will expand our dominant presence in The Dalles by providing a more convenient banking alternative to our customers. It will feature a five lane vehicle drive-up including two drive-up ATMs and space leased to a drive-up coffee stand.

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In September 2005, we signed an agreement with D&L Capital Funding, Inc., an outside commercial real estate loan originator, whose services will be marketed under the name Columbia River Capital Team. Under the agreement, we provide their employees with office space at our branches, the services of a loan processor, and a $10 million dollar warehouse line of credit for loans that we initially authorize. In exchange, we have a right to retain loans originated by the Columbia River Capital Team. If we decline to retain a loan, or we retain only a portion of the loan, it is offered to other investors in their network. We also receive a variable percentage of all loan origination fees, depending on our degree of involvement. The arrangement provides us with greater access to the commercial and multifamily real estate segments. It also allows us the opportunity to participate in loans that are otherwise in excess of our lending limits.

MATERIAL CHANGES IN FINANCIAL CONDITION

ASSETS

Our assets are comprised primarily of loans where we receive interest and principal repayments from our customers, as well as operating cash and various investment securities.

Investment Securities

Investment securities totaled $38.97 million as of September 30, 2005, a decrease of $6.42 million, or 14.15%, compared to December 31, 2004. The decrease in investment securities resulted from the maturity of $8.00 million of short-term agency securities, which was partially offset by the purchase of securities for use as collateral. The investment securities portfolio contains bank-qualified municipal securities, debt issued by government agencies, mortgage-backed securities, equity securities and restricted equity securities. Qualifying available-for-sale securities as well as held-to-maturity securities may be pledged as collateral for public agency deposits. At September 30, 2005, $21.73 million, or 55.75%, of the portfolio was pledged, compared to $17.06 million, or 37.58%, at December 31, 2004, and $16.4 million, or 50.74%, at September 30, 2004.

Unrealized losses on available-for-sale and equity securities at September 30, 2005, were $273,988 or $173,709 net of tax, compared to a loss of $82,602, or $52,370 net of tax, and $5,565, or $3,275 net of tax, at December 31, 2004 and September 30, 2004, respectively. The unrealized loss as of September 30, 2005 is due to an increase in interest rates since the beginning of the year. We currently have no plans to liquidate the available-for-sale securities.

Loans

Our loan portfolio reflects our efforts to diversify risk across a range of loan types and industries, and thereby complement the markets in which we do business. Loan products include construction, land development and real estate, commercial, consumer, agriculture and credit cards.

Our net loan portfolio (excluding loans held for sale) at September 30, 2005 was $641.23 million, an increase of $69.62 million, or 12.18%, over December 31, 2004, and an increase of $74.43 million, or 13.13%, over September 30, 2004.

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As of September 30, 2005, construction, land development and commercial real estate loans comprised 69% of our loan portfolio, compared to 52% as of December 31, 2004 and 67% as of September 30, 2004. We believe this concentration is consistent with our Pacific Northwest community bank peers; however, subject to fluctuations in the real estate development markets, as well as to the more widespread economic effects of mortgage interest rate increases. In the near term, we expect growth in this part of our loan portfolio to slow due to external economic factors. Increased competition for experienced loan officers also impedes our ability to maintain historic growth trends. We believe an increase in loans originated by our Columbia River Capital Team will ensure that we achieve our loan production goals in conjunction with our Portland loan production office.

We also participate in non-real estate agricultural lending, which comprises approximately 13% of our total loan portfolio. We employ loan officers who have developed a high level of expertise in underwriting and monitoring agriculture loans. Traditionally, agriculture lending has been neglected due to its unique challenges. We address these challenges by hiring experienced agricultural lenders and consultants, by diversifying our agricultural loan portfolio across eleven different commodity types and by maintaining Preferred Lender Status with the Farm Service Agency. This status allows us to participate in Farm Loan Government Guarantee Programs, which provide guarantees of up to 90% on qualified loans. Approximately 15% of our agricultural loans are guaranteed through this program; however, these guarantees are limited and these loans are not without credit risk.

The Mortgage Team, a division of CRB, originates and funds single-family mortgage loans. These loans are usually committed for sale to mortgage investors and held for less than thirty days. Mortgage loans held for sale are reported under the caption “Loans-held-for-sale” on our balance sheet. At September 30, 2005, loans held for sale totaled $7.25 million compared to $2.52 million and $1.57 million at December 31, 2004 and September 30, 2004, respectively. At September 30, 2005, loans held for sale for longer than thirty days totaled $1.48 million and consisted of six loans that we expect to sell by the end of October or early November. The increase in loans held for sale resulted from an increase in mortgage production during the first nine months of 2005, during which 617 loans were originated compared to 403 loans during the same period in 2004, a 53.10% increase.

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

Loans:

	September 30, 2005						December 31, 2004						September 30, 2004
				Percent of						Percent of						Percent of
(dollars in thousands)	Dollar Amount			Total			Dollar Amount			Total			Dollar Amount			Total
Commercial loans	$	101,914			16	%	$	93,618			16	%	$	93,643			16	%
Agricultural loans		82,543			13	%		79,224			14	%		80,977			14	%
Real estate loans		293,056			45	%		247,045			44	%		228,463			40	%
Real estate loans — construction		152,931			23	%		139,415			24	%		151,104			27	%
Consumer loans		13,386			2	%		14,386			3	%		15,466			3	%
Other loans		8,321			1	%		7,660			1	%		7,061			1	%
		652,151						581,348						576,714
Allowance for loan losses		(9,202	)		-1	%		(8,184	)		-2	%		(8,150	)		-1	%
Unearned loan fees		(1,716	)		0	%		(1,556	)		0	%		(1,757	)		0	%
Loans, net of allowance for loan losses, unearned loan fees and loans held for sale		641,233						571,608						566,807
Loans held for sale		7,254			1	%		2,517			0	%		1,573			0	%
Total loans	$	648,487			100	%	$	574,125			100	%	$	568,380			100	%

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Non-performing Assets

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

At September 30, 2005, our non-performing assets totaled $1.39 million, as compared to $4.32 million and $5.34 million at December 31, 2004, and September 30, 2004, respectively. Most of the 2005 year-to-date decrease occurred during the first quarter of 2005 after resolution of a $3.12 million loan that had been on non-accrual status. Non-performing assets further decreased to $394,000 during the second quarter of 2005. During the third quarter of 2005, several loans were placed on non-accrual status, resulting in an increase in non-performing assets. Two commercial loans, portions of which were charged-off, comprise $757,501, or 56.31%, of loans on non-accrual status as of September 30, 2005.

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

Non-performing Assets:

(dollars in thousands)	September 30, 2005			December 31, 2004			September 30, 2004
Loans on non-accrual status	$	1,345		$	4,217		$	3,884
Delinquent loans on accrual status		—			—			—
Restructured loans		43			—			—
Total non-performing loans		1,388			4,217			3,884
Other real estate owned		—			100			1,460
Total non-performing assets	$	1,388		$	4,317		$	5,344
Allowance for loan losses	$	9,202		$	8,184		$	8,150
Ratio of total non-performing assets to total assets		0.17	%		0.60	%		0.74	%
Ratio of total non-performing loans to total loans		0.23	%		0.74	%		0.67	%
Ratio of allowance for loan losses to total non-performing assets		662.69	%		189.57	%		152.51	%

Allowance for Loan Losses

Our allowance for loan losses represents an estimate of probable losses associated with our loan portfolio and deposit account overdrafts as of the reporting date. The allowance is calculated based on a systematic approach each quarter. Increases to the allowance occur when we expense amounts to the loan loss provision or when we recover previously charged-off loans. Decreases occur when we charge-off loans that are deemed uncollectible. We determine the appropriateness and amount of these charges by assessing the risk potential in our portfolio on an ongoing basis.

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Our calculation of the allowance for loan losses takes into consideration all loans in our portfolio. Adversely classified and impaired loans are assigned a higher loss percentage than unclassified loans. The percentages applied to a particular class of loans are based on standards established by regulatory agencies and tested against our historic loss experience. We assess deposit overdraft risk based on factors developed from our historical loss experience. Historically, deposit overdraft losses have been minimal. We also review current regional and national economic conditions and trends, economic circumstances that may affect our borrowers individually and collectively, and various other factors that we consider appropriate for allocation to specific loans or loan categories.

When a loan, or a portion of a loan, is determined to be uncollectible, it is “charged-off,” which means it is removed from the balance sheet and the reduction is charged against the allowance for loan losses. Recoveries of amounts previously charged-off are reflected as increases to the allowance for loan losses. Deposit account overdraft charge-offs are accounted for in the same manner.

During the third quarter, we charged-off a portion of two commercial loans after a reevaluation of the borrowers’ collateral. As a result, our provision for loan losses increased $680,000 for the three months ended September 30, 2005, compared to the same period in 2004. However, for the nine months ended September 30, 2005, our provision for loan losses decreased $560,000, compared to same period in 2004. This year-to-date decrease was due to improved loan quality and a lower non-performing loan balance.

As a percentage of average loans outstanding at year-end (including loans held for sale), our allowance for loan losses has ranged between 0.84% and 1.64% over the 10-year period 1995 through 2004, averaging 1.35%, on an annual basis. At September 30, 2005, our allowance was 1.40% of outstanding loans, including loans held for sale.

At September 30, 2005, net charge-offs were approximately 0.18% of average gross loans, or 0.23% on an annualized basis. Our net charge-offs as a percentage of average gross loans at year-end has averaged 0.21% during the last ten years and 0.25% during the last five years. Depending on the final resolution of the two partially charged-off loans noted above, we expect our net charge-offs as a percentage of average gross loans to measure between 0.23% and 0.27% by the end of 2005.

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The following table presents activity in allowance for loan losses:

Allowance for Loan Loss:

	Three Months ended				Nine Months ended
	September 30,				September 30,
(dollars in thousands)	2005		2004		2005		2004
Balance at beginning of period	$	8,681	$	7,940	$	8,184	$	6,612
Charge-offs:
Commercial		522		222		599		682
Real estate		160		—		168		116
Agriculture		—		77		156		78
Consumer loans		4		42		104		164
Credit card and related accounts		17		22		60		123
Demand deposit overdrafts		56		—		133		—
Total charge-offs		759		363		1,220		1,163
Recoveries:
Commercial		32		18		71		44
Real estate		—		—		9		—
Agriculture		—		—		4		3
Consumer loans		9		4		23		9
Credit card and related accounts		1		1		4		5
Demand deposit overdrafts		8		—		47		—
Total recoveries		50		23		158		61
Provision for loan losses		1,230		550		2,080		2,640
Balance at end of period	$	9,202	$	8,150	$	9,202	$	8,150

Mortgage Servicing Asset

In April 2005, we completed an agreement with a buyer for the sale of our mortgage servicing asset. The book value of the mortgage servicing asset at the time of sale was $2.05 million. After adjustments for delinquencies, current month pay-offs and fees, the adjusted sales price was $3.02 million, which resulted in a gain of $560,588 during the second quarter of 2005. The transfer date of the mortgage servicing asset was May 31, 2005.

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LIABILITIES

Our liabilities primarily consist of our obligations to repay customer deposits on demand (for “demand deposits”) or at a stated time in the future (for “time deposits”), interest accrued on customer deposits, and obligations to pay interest and principal on the “junior subordinated debentures”.

Deposits

We offer various deposit accounts, including interest-bearing checking, savings, money market, certificates of deposit and non-interest-bearing checking. The accounts vary as to terms, with principal differences being minimum balances required, length of time the funds must remain on deposit, interest rate and deposit or withdrawal options. Deposits are our primary source for funding loan growth. We strive to fund operations with non-interest-bearing demand deposits, a strategy which will improve the net interest margin, defined as the difference between interest income and interest expense as a percentage of average earning assets.

At September 30, 2005, our deposits totaled $714.52 million, an increase of $107.58 million, or 17.72%, over December 31, 2004 and an increase of $99.44 million, or 16.17%, over September 30, 2004. Deposit account growth in the first nine months of 2005 occurred primarily in non-interest and interest-bearing demand accounts. Since the beginning of the year, non-interest-bearing demand accounts have increased $55.72 million, or 32.32% and interest-bearing demand accounts have increased $56.08 million, or 26.55%. Growth in these accounts is the result of our focus on providing personalized customer service to our commercial customers. Demand deposit growth was partially offset by a $10.68 million, or 5.70%, decrease in time certificates of deposit during the same period. The decrease in time certificates of deposit is primarily the result of $13.41 million of wholesale deposit maturities that we did not renew due to our strong liquidity. Overall, our deposits grew through a combination of pricing strategies, increased marketing and an emphasis on strengthening customer relationships.

The following table presents deposit composition by deposit type:

Deposits:

	September 30, 2005					December 31, 2004					September 30, 2004
			Percent of										Percent of
(dollars in thousands)	Dollar Amount		Total			Dollar Amount		Percent of Total			Dollar Amount		Total
Non-interest bearing deposits	$	228,144		32	%		172,422		28	%	$	184,999		30	%
Interest bearing deposits		267,321		37	%		211,240		35	%		201,127		33	%
Savings deposits		42,379		6	%		35,926		6	%		36,874		6	%
Time certificates		176,679		25	%		187,356		31	%		192,082		31	%
Total deposits	$	714,523		100	%	$	606,944		100	%	$	615,082		100	%

Wholesale liabilities include all funding sources obtained outside the retail branch network and consist of brokered certificates of deposit, direct certificates of deposit and advances from Federal Home Loan Bank. Brokered certificates of deposit are obtained through intermediary brokers that sell the certificates on the open market. Direct certificates of deposit are obtained through a proprietary network that solicits deposits from other financial institutions and public entities.

We utilize wholesale liabilities to manage interest rate risk and as a source of funding for loan growth. At September 30, 2005, brokered certificates of deposit totaled $41.73 million, with maturities ranging from one month to four years; brokered certificates of deposit totaled $46.65 million at December 31, 2004 and $49.66 million at September 30, 2004. Direct certificates of deposit totaled $10.01 million as of September 30, 2005, with maturities ranging from one month to two years; our direct certificates of deposit totaled $24.40 million as of December 31, 2004 and $26.92 million as of September 30, 2004.

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During 2005, we have actively increased deposit gathering efforts at the retail branch level. We believe reliance on wholesale deposits will continue to decline for the remainder of 2005.

Borrowings

The majority of our borrowings are advances from Federal Home Loan Bank (“FHLB”). At September 30, 2005, borrowings from FHLB totaled $25.45 million, a decrease of $8.59 million from $34.04 million previously reported at December 31, 2004, and a decrease of $9.20 million as compared to $34.65 million at September 30, 2004. We also use lines of credit at correspondent banks to purchase federal funds for short-term funding. We had no federal funds purchased as of September 30, 2005, December 31, 2004 and September 30, 2004. Other borrowings consist of a Treasury Tax and Loan note payable for $450,594 as of September 30, 2005, $850,000 as of September 30, 2004, and $849,970 as of December 31, 2004. We will continue to allow borrowings to mature without renewing if deposit growth meets or exceeds loan growth.

The following table presents certain information with respect to our FHLB borrowings:

FHLB Borrowings:

	September 30,			December 31,			September 30,
(dollars in thousands)	2005			2004			2004
Amount outstanding at end of period	$	25,454		$	34,040		$	34,651
Weighted average interest rate at end of period		3.80	%		3.41	%		3.28	%
Maximum amount outstanding at any month-end and during the year	$	33,836		$	46,941		$	46,941
Average amount outstanding during the period	$	33,020		$	30,023		$	18,651
Average weighted interest rate during the period		3.58	%		3.36	%		3.42	%

Off-Balance Sheet Items — Commitments/Letters of Credit

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

Our potential exposure to credit loss for commitments to extend credit and for letters of credit is represented by the contractual amount of those instruments, and would be triggered in the event of nonperformance by the other party. We use the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

We may or may not require collateral or other security to support financial instruments with credit risk, depending on its loan underwriting guidelines.

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The following table presents a comparison of contract commitment amounts:

Commitments:

(dollars in thousands)	September 30, 2005		December 31, 2004		September 30, 2004
Financial instruments whose contract amounts contain credit risk:
Commitments to extend credit	$	181,428	$	168,812	$	160,930
Commitments to extend credit for overdrafts		8,633		10,249		10,003
Undisbursed credit card lines of credit		19,439		18,437		18,320
Commercial and standby letters of credit		2,342		2,227		2,098
	$	211,842	$	199,725	$	191,351

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn, total commitment amounts do not necessarily represent future cash requirements.

The amount of collateral obtained to secure a loan or commitment, if deemed necessary, is based on our credit evaluation of the borrower. A majority of commitments are secured by real estate or other types of qualifying collateral. The type of collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing properties. Less than 10% of our commitments are unsecured. Lending commitments are distributed across all loan categories at levels roughly proportionate to concentrations in the loan portfolio.

We offer an overdraft protection product that allows certain types of deposit products to become overdrawn up to a set dollar limit before checks will be returned. The commitment to extend credit for overdrafts represents our estimated total exposure if virtually every customer utilized the full amount of this protection at one time. However, the annual average usage outstanding is much lower than this commitment, totaling approximately $246,000, or 2.33% as of September 30, 2005 and approximately $304,000, or 3.00%, in 2004.

Letters of credit are conditional commitments that we issue to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit parallels the risk involved in extending loans to customers. When considered necessary, we hold deposits, marketable securities, real estate or other assets as collateral for letters of credit.

Derivative Instruments-Interest Rate Swap

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

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RESULTS OF OPERATIONS

Net Interest Income

Net interest income, our largest source of operating income, equals interest income earned from loans and investment securities, less interest expense paid on deposits and other interest bearing liabilities.

Net interest income increased $4.68 million, or 17.90%, for the nine months ended September 30, 2005, as compared to the same period in 2004 and increased $1.88 million, or 20.47%, for the three months ended September 30, 2005, compared to the same period in 2004. The increases in net interest income are primarily due to growth of our loan portfolio and interest rate increases on variable rate loans. Approximately 54% of our variable rate loan portfolio will re-price during the next three months. As a result, if, as we expect, interest rates continue to rise interest income on these re-priced loans will increase.

During the first quarter of 2005, we recognized approximately $336,000 in previously non-accrual interest from 2004 related to a loan that had been on non-accrual status since the last part of 2004.

Net interest margin (net interest income as a percentage of average earning assets) measures how well a bank manages its asset and liability pricing and duration. Our tax equivalent net interest margin for the first nine months of 2005 was 5.91%, compared to 6.08% for the same period in 2004, and 6.01% for the third quarter of 2005, compared to 5.86% for the third quarter of 2004. Approximately 6 basis points of our net interest margin for the first nine months of 2005 is attributable to the collection of 2004 past due interest .

Net interest margin on a quarterly basis increased to 6.01% from 5.90% and 5.82% at June 30, 2005 and March 31, 2005, respectively. Our relationship pricing strategy, whereby we selectively offer higher rates to certain customers, combined with our success at gathering low cost deposits, has minimized increases in our overall cost of funds. In addition, as our liquidity has improved, we have benefited from increasing interest rates and earnings on our federal funds sold. Federal funds interest contributed 19 basis points to our third quarter 2005 net interest margin, compared to 12 basis points for the second quarter and 15 basis points for the first quarter. For the remainder of the year, we expect our net interest margin to remain stable or compress slightly due to competitive pressures.

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

Net Interest Income Average Balances and Rates:

	Three Months Ended September 30,							Three Months Ended September 30,
	Average Balances							Average Yields/Costs Tax Equivalent
(dollars in thousands)	2005		2004		Change			2005			2004			Change
Taxable securities	$	23,960	$	16,027	$	7,933			3.30	%		2.50	%		0.80	%
Nontaxable securities		12,659		13,242		(583	)		7.00	%		7.33	%		-0.33	%
Interest bearing deposits		17,339		13,059		4,280			2.96	%		1.59	%		1.37	%
Federal funds sold		42,091		9,287		32,804			3.29	%		1.04	%		2.25	%
Loans		639,539		577,945		61,594			8.17	%		7.49	%		0.68	%
Interest-earning assets		735,588		629,560		106,028			7.59	%		7.14	%		0.45	%
Nonearning assets		52,374		56,355		(3,981	)
Total assets	$	787,962	$	685,915	$	102,047
Savings & interest bearing deposits	$	296,524	$	231,622	$	64,902			1.47	%		0.70	%		0.77	%
Time certificates		176,857		179,677		(2,820	)		3.42	%		2.80	%		0.62	%
Borrowed funds		31,187		39,252		(8,065	)		3.99	%		3.60	%		0.39	%
Interest bearing liabilities		504,568		450,551		54,017			2.31	%		1.79	%		0.52	%
Non-interest bearing demand deposits		207,512		169,387		38,125
Other liabilities		2,801		3,992		(1,191	)
Shareholders’ equity		73,081		61,985		11,096
Total liabilities and shareholders’ equity	$	787,962	$	685,915	$	102,047

	Nine Months Ended September 30,							Nine Months Ended September 30,
	Average Balances							Average Yields/Costs Tax Equivalent
	2005		2004		Change			2005			2004			Change
Taxable securities	$	24,194	$	15,433	$	8,761			3.05	%		2.46	%		0.59	%
Nontaxable securities		12,897		13,302		(405	)		7.03	%		7.32	%		-0.29	%
Interest bearing deposits		18,500		10,972		7,528			2.63	%		1.84	%		0.79	%
Federal funds sold		37,623		7,923		29,700			2.86	%		1.14	%		1.72	%
Loans		608,633		532,366		76,267			8.07	%		7.58	%		0.49	%
Interest-earning assets		701,847		579,996		121,851			7.45	%		7.24	%		0.21	%
Nonearning assets		52,078		53,736		(1,658	)
Total assets	$	753,925	$	633,732	$	120,193
Savings & interest bearing deposits	$	278,300	$	226,220	$	52,080			1.29	%		0.57	%		0.72	%
Time certificates		177,084		147,039		30,045			3.30	%		2.86	%		0.44	%
Borrowed funds		34,768		37,764		(2,996	)		3.96	%		3.29	%		0.67	%
Interest bearing liabilities		490,152		411,023		79,129			2.21	%		1.64	%		0.57	%
Non-interest bearing demand deposits		190,684		158,860		31,824
Other liabilities		2,619		3,573		(954	)
Shareholders’ equity		70,470		60,276		10,194
Total liabilities and shareholders’ equity	$	753,925	$	633,732	$	120,193

Non-Interest Income

Non-interest income consists of service charges and fees, Mortgage Team revenues, credit card discounts, CRB Financial Services Team revenues and gains from the sale of loans, securities and other assets. Mortgage Team revenues include service release premiums, revenues from the origination and sale of mortgage loans and net revenues from mortgage servicing activities. CRB Financial Services Team revenues include revenues from the sale of investments and financial planning services to our customers.

Total non-interest income for the quarter ended September 30, 2005, increased $523,165, or 25.94%, as compared to the same period in 2004 and increased $2.31 million, or 41.94% on a year-to-date basis compared to the same time period in 2004. Included in the overall increase in non-interest income for the first nine months of 2005, under the caption “other non-interest income”, is the gain on the sale of the mortgage servicing asset of $560,588, which was recognized during the second quarter of 2005.

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Mortgage Team revenues increased $1.35 million for the first nine months of 2005, over the same period in 2004, and $435,738 for the three months ended September 30, 2005, over the same period in 2004. We no longer perform mortgage servicing activities following the sale of the Mortgage Servicing Asset in the second quarter of 2005. The increase in Mortgage Team revenues is the result of a reduction in mortgage servicing expenses and an increase in loan production.

Revenues from mortgage servicing activities totaled $171,783 for the nine months ended September 30, 2005, an increase of $707,391 from the net expense for the nine months ended September 30, 2004.

Our Mortgage Team produced 617 mortgage loans during the third quarter of 2005, compared to 403 loans in the third quarter of 2004, an increase of 214 loans, or 53.10%. Mortgage loans produced during the third quarter of 2005 totaled 231, compared to 122 loans in the third quarter of 2004, an increase of 109 loans, or 89.34%.

We believe Mortgage Team revenue growth will be moderate through the remainder of 2005. Although the mortgage loan market has slowed during the last several months, we anticipate capturing additional market share because of our focus on hiring experienced loan officers with a significant network of customers.

The following table presents the balances and percentage changes in non-interest income:

Non-Interest Income:

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
(dollars in thousands)	2005		2004			% change			2005			2004			% change
Service charges on deposits	$	1,239	$	1,196			4	%	$	3,602		$	3,443			5	%
Credit card discounts & fees		136		132			3	%		366			350			5	%
CRB Financial Services Team revenues		174		93			87	%		474			395			20	%
Mortgage servicing, net		—		(101	)		—			172			(535	)		-132	%
Gain on sale of mortgage loans		6		136			-96	%		81			216			-63	%
Mortgage loan origination income		434		203			114	%		1,151			714			61	%
Gain/(loss) from called bond		—		(7	)		—			—			(7	)		—
Gain from sale of securities		—		—			—			(1	)		—			—
Gain/(loss) on sale of assets		—		(31	)		—			(38	)		(126	)		-70	%
Gain on sale of MSA		—		—			—			561			—			—
Gain on sale of loans		3		—			—			3			—			—
Other non-interest Income		548		396			38	%		1,456			1,064			37	%
Total non-interest Income	$	2,540	$	2,017			26	%	$	7,827		$	5,514			42	%

Provision for Loan Losses

Charges to provision for loan losses for the nine months ended September 30, 2005 totaled $2.08 million, compared to $2.64 million for the same period in 2004. The year-to-date decrease in the provision for loan losses was primarily the result of more moderate loan growth in the first nine months of 2005 and improved loan quality as compared to the same period in 2004.

Charges to provision for loan losses for the three months ended September 30, 2005 totaled $1.23 million, compared to $550,000 for the same period in 2004. This increase was the result of two commercial loans we partially charged-off after a reevaluation of the borrowers’ collateral.

Our allowance for loan losses was 1.40% of total loans as of September 30, 2005, compared to 1.39% as of June 30, 2005. We believe our allowance for loan losses is adequate based on our ongoing risk analysis of the loan portfolio.

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Non-Interest Expense

Non-interest expense consists of salaries and benefits, occupancy costs, item and statement processing expenses and other non-interest expenses.

Total non-interest expense for the three and nine months ended September 30, 2005, increased $1.13 million, or 18.75%, and $3.13 million, or 17.83%, respectively, as compared to the same periods in 2004.

As a result of the achievement of company financial and operational goals, incentive compensation expense increased $411,454 and $1.25 million for the three months and nine months ended September 30, 2005, respectively, compared to the same periods in 2004.

Salaries and benefits, excluding incentive compensation, increased $514,789 and $932,525 for the three and nine months ended September 30, 2005, respectively, compared to the same periods in 2004. This increase is primarily the result of additional personnel hired to staff our new branches, as well as the addition of several new administrative positions to support our growth.

Other non-interest expense increased $213,076 and $459,742 for the three months and nine months ended September 30, 2005, respectively, compared to the same periods in 2004. Overall bank growth and regulatory compliance initiatives led to significant increases in consulting expense, employee recruitment costs and software licensing fees.

We expect non-interest expenses to trend upward during the last quarter of 2005 due to incentive compensation, costs associated with Sarbanes-Oxley compliance and other general expenses.

The following table presents a schedule of the components of and changes in non-interest expense:

Non-Interest Expense:

	Three Months Ended							Nine Months Ended
	September 30,							September 30,
(dollars in thousands)	2005		2004		% change			2005		2004		% change
Salaries & employee benefits	$	4,298	$	3,468		24	%	$	12,029	$	9,776		23	%
Occupancy expense		774		700		11	%		2,334		1,898		23	%
Data processing		123		124		-1	%		346		378		-8	%
Other non-interest expense		1,946		1,722		13	%		5,980		5,506		9	%
Total non-interest expense	$	7,141	$	6,014		19	%	$	20,689	$	17,558		18	%

LIQUIDITY AND CAPITAL RESOURCES

Shareholders’ Equity

At September 30, 2005, shareholders’ equity totaled $74.64 million, compared to $65.88 million at December 31, 2004, an increase of 13.30%, and $62.97 million at September 30, 2004, an increase of 18.54%. The year-to-date change is primarily the result of net income, totaling $10.28 million for the period, partially offset by dividends declared or paid of $2.41 million.

During the third quarter of 2005, we declared a dividend of $0.09 per share payable October 31, 2005, to shareholders of record as of October 14, 2005. With cash dividends paid and declared in 2005, approximately 23.44% of our year-to-date earnings will have been returned to shareholders, with the remainder being retained in the form of shareholders’ equity for the purpose of leveraging future balance sheet growth. On May 24, 2005, Columbia’s Board of Directors approved a stock repurchase plan with an expiration date of June 30, 2006, and a stock repurchase limit of $1.00 million, to replace the repurchase plan, that expired June 30, 2005. Any repurchase plan will be conducted in the open market pursuant to the Securities Exchange Act Rule 10b-18 at the sole discretion of Management. There were no stock repurchases as of September 30, 2005.

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Liquidity

We have adopted policies to address our liquidity requirements, particularly with respect to customers’ needs for borrowing and deposit withdrawals. Our main sources of liquidity are customer deposits; sales and maturities of investment securities; the use of federal funds; brokered certificates of deposit; and net cash provided by operating activities. Scheduled loan repayments are a relatively stable source of funds, whereas deposit inflows and unscheduled loan prepayments are variable and often influenced by general interest rate levels, competing interest rates available on alternative investments, market competition, economic conditions and other factors.

Liquidity is determined by the aggregate of cash and due from banks; interest bearing deposits with other banks; held-to-maturity securities maturing within three months that are not pledged; and available-for-sale securities not pledged minus vault cash. Measurable liquid assets totaled $94.51 million at September 30, 2005, as compared to $76.00 million at September 30, 2004. Because our deposit growth outpaced loan growth, our liquidity has remained strong during the third quarter of 2005. Historically, our liquidity has decreased during the second and third quarters due to loan growth. During the first nine months of 2005, total deposits grew $107.58 million outpacing an increase in loans of $69.62 million. We will continue to rely on retail branch deposit growth and, when necessary, wholesale deposits to meet our liquidity needs.

The analysis of liquidity also includes a review of the changes that appear in the consolidated statement of cash flows for the first nine months of 2005. The statement of cash flows includes operating, investing and financing categories. Net cash from operating activities decreased $2.88 million during the first nine months of 2005, as compared to the same period in 2004. This figure is adjusted for non-cash items as well as for increases or decreases in cash due to changes in certain assets and liabilities. Cash flows from investing activities increased $48.53 million during the first nine months of 2005, as compared to the same period in 2004. The increase is due to proceeds from sales of securities and the impact of net loan growth. Cash flows from financing activities decreased $32.41 million during the first nine month of 2005, as compared to the same period in 2005. The decrease is due to the maturity of wholesale deposits and time certificates of deposit, as well as repayments of notes payable.

Capital Requirements and Ratios

The Federal Reserve Board (“FRB”) and the Federal Deposit Insurance Corporation (“FDIC”) have established minimum requirements for capital adequacy for bank holding companies and member banks. The requirements address both risk-based capital and leveraged capital. The regulatory agencies may establish higher minimum requirements if, for example, a corporation has previously received special attention or has a high susceptibility to interest rate risk.

The following table presents our various capital ratios as compared to regulatory minimums:

Capital Ratios:

							September 30, 2005			December 31, 2004
				Well-
	Minimum			Capitalized			Actual Ratio			Actual Ratio
Tier 1 risk-based capital		4.00	%		6.00	%		10.02	%		9.80	%
Total risk-based capital		8.00	%		10.00	%		11.26	%		11.05	%
Leverage ratio		4.00	%		5.00	%		9.57	%		8.74	%

We intend to remain “well-capitalized” by regulatory definition. Regulatory capital levels historically increase during the fourth quarter as seasonal loans are repaid. We intend to use our excess capital for stock repurchases and for construction of two to three new branches during the next twelve to eighteen months.

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Stock Repurchase Plan

On May 24, 2005, our Board of Directors renewed a plan to repurchase shares of Columbia common stock. Our Board of Directors believes the repurchases constitute a sound investment and use of our shareholders’ equity to reduce excess capital. Any stock repurchases would be made on the open market pursuant to Securities Exchange Act Rule 10b-18 at the sole discretion of Management. The repurchase plan authorizes us to repurchase common stock in an amount up to $1.00 million until the expiration date, June 30, 2006, or sooner if the maximum authorized amount of shares is repurchased prior to that date. Management determines the timing, price and number of the shares of common stock repurchased. As of September 30, 2005, we have not repurchased any stock under the stock repurchase plan.

Trust Preferred Securities

In December 2002, Columbia formed Columbia Bancorp Trust I (“Trust”), a Delaware statutory business trust, for the purpose of issuing guaranteed undivided beneficial interests in junior subordinated debentures (“trust preferred securities”). In 2002, the Trust issued $4.00 million in trust preferred securities. The $4.00 million in debentures issued through the Trust continue to qualify as Tier 1 capital under guidance issued by the Board of Governors of the Federal Reserve System.

CRITICAL ACCOUNTING POLICIES

The “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as disclosures included elsewhere in this Form 10-Q, are based upon 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 losses, impairment of intangible assets, and 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 losses is established to absorb known and inherent losses attributable to loans outstanding, overdraft charge-offs 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 our loan portfolio is secured by real estate; a significant decrease in real estate values in Oregon and Washington may result in an increase to the allowance for loan losses.

At September 30, 2005, we had approximately $7.39 million in goodwill as a result of business combinations. We adopted Statement of Financial Accounting Standards (“SFAS”) No. 142 on January 1, 2002. SFAS No. 142 requires us to evaluate goodwill for impairment not less than annually and to write down the goodwill if the business unit associated with the goodwill cannot sustain the value attributed to it. Our evaluation of the fair value of goodwill involves a substantial amount of judgment.

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We apply 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.

We 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 the assessment of them. There can also be no assurance that all matters that may be brought against us are known to us at any point in time.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes regarding Columbia’s market risk position from the information provided under the caption “Quantitative and Qualitative Disclosures about Market Risk” on page 41 in Columbia’s Form 10-K filing with the SEC on March 15, 2005, covering the fiscal year ended December 31, 2004.

ITEM 4.Controls and Procedures

Columbia’s Management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, to the best of their knowledge, as of the end of the period covered by this quarterly report, the disclosure controls and procedures are effective in ensuring all material information required to be filed in this quarterly report has been made known to them in a timely fashion.

There were no changes in Columbia’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are likely to materially affect, Columbia’s internal control over financial reporting.

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PART II. — OTHER INFORMATION

ITEM 1.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 no legal proceedings that would have a material adverse impact on Columbia’s business, operations or financial condition.

ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3.Defaults Upon Senior Securities

None.

ITEM 4.Submission of Matters to a Vote of Security Holders

None.

ITEM 5.Other Information

None.

ITEM 6.Exhibits

(a) Exhibits

3.1.1	Articles of Incorporation of Columbia Bancorp (Incorporated herein by reference to Exhibit 3(i) to Columbia’s form 10-Q for the period ended June 30, 1999).
3.1.2	Bylaws of Columbia Bancorp (Incorporated herein by reference to Exhibit 15.5 to Columbia’s Form 10-KSB for the year ended December 31, 1998).
4.1	Indenture dated as of December 19, 2002 between Columbia Bancorp, as Issuer, and Wells Fargo Bank, N.A., as Trustee, relating to Floating Rate Junior Subordinated Debt Securities due 2033.*
4.2	Form of Floating Rate Junior subordinated Debt Security due 2033.*
10.1	Employment agreement of August 3, 2005 between James C. McCall and Columbia River Bank.
31.1	Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).
31.2	Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).
32.1	Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
32.2	Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

* Incorporated by reference to Columbia Bancorp’s Form 10-K for the year ended December 31, 2004, filed with the Securities and Exchange Commission.

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SIGNATURES

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

	COLUMBIA BANCORP
Dated: November 3, 2005	/s/ Roger L. Christensen
	Roger L. Christensen
	President & Chief Executive Officer
Dated: November 3, 2005	/s/ Greg B. Spear
	Greg B. Spear
	Executive Vice President & Chief
	Financial Officer

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