Columbia Bancorp (CBBO) 10-Q 2006 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, 2006

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

For the transition period from to                                        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)

Not Applicable
(Fomer name, former address and former fiscal year, if changed since last report)

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero           Accelerated filerþ           Non-accelerated filero

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

At November 2, 2006, there were 9,967,883 shares of common stock of Columbia Bancorp, no par value, outstanding.

COLUMBIA BANCORP

FORM 10-Q

September 30, 2006

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	14
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS	14
OVERVIEW	14
MATERIAL CHANGES IN FINANCIAL CONDITION	16
RESULTS OF OPERATIONS	27
LIQUIDITY AND CAPITAL RESOURCES	32
CRITICAL ACCOUNTING POLICIES	34
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	35
ITEM 4. Controls and Procedures	35
PART II. — OTHER INFORMATION	36
ITEM 1.Legal Proceedings	36
ITEM 1A.Risk Factors	36
ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds	36
ITEM 3.Defaults Upon Senior Securities	36
ITEM 4.Submission of Matters to a Vote of Security Holders	36
ITEM 5.Other Information	36
ITEM 6.Exhibits	37
SIGNATURES	38
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, 2005, and the notes and other information included in this report.

ITEM 1. Financial Statements

Consolidated Financial Statements of Columbia Bancorp and Subsidiary

COLUMBIA BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,			December 31,
	2006			2005
ASSETS
CASH AND CASH EQUIVALENTS
Cash and due from banks	$	33,696,943		$	34,631,688
Interest bearing deposits with other banks		59,032,258			23,175,188
Federal funds sold		31,493,039			29,281,599
Total cash and cash equivalents		124,222,240			87,088,475
INVESTMENT SECURITIES
Debt securities available-for-sale, at fair value		21,644,607			17,233,060
Equity securities available-for-sale, at fair value		628,824			611,148
Debt securities held-to-maturity, at amortized cost, estimated fair value $14,893,310 and $16,749,021 at September 30, 2006 and December 31, 2005, respectively		14,734,639			16,497,131
Restricted equity securities		2,439,100			2,439,100
Total investment securities		39,447,170			36,780,439
LOANS
Loans held-for-sale		6,206,763			5,879,320
Loans, net of allowance for loan losses and unearned loan fees		766,576,314			671,806,637
Total loans		772,783,077			677,685,957
OTHER ASSETS
Property and equipment, net of accumulated depreciation		18,087,205			15,783,509
Accrued interest receivable		7,525,340			5,615,098
Goodwill		7,389,094			7,389,094
Other assets		12,988,963			10,896,746
Total other assets		45,990,602			39,684,447
TOTAL ASSETS	$	982,443,089		$	841,239,318
LIABILITIES AND SHAREHOLDERS’ EQUITY
DEPOSITS
Non-interest bearing demand deposits	$	233,942,211		$	220,450,133
Interest bearing demand deposits		275,811,067			278,070,340
Savings accounts		38,744,919			41,127,626
Time certificates		264,500,821			168,174,061
Total deposits		812,999,018			707,822,160
OTHER LIABILITIES
Notes payable		70,588,546			45,690,951
Accrued interest payable and other liabilities		7,307,901			6,109,717
Junior subordinated debentures		4,124,000			4,124,000
Total other liabilities		82,020,447			55,924,668
TOTAL LIABILITIES		895,019,465			763,746,828
SHAREHOLDERS’ EQUITY
Common stock, no par value; 20,000,000 shares authorized, 9,957,339 issued and outstanding (8,965,408 at December 31, 2005)		54,388,952			33,425,084
Retained earnings		33,090,024			44,189,700
Accumulated other comprehensive loss, net of taxes		(55,352	)		(122,294	)
TOTAL SHAREHOLDERS’ EQUITY		87,423,624			77,492,490
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	982,443,089		$	841,239,318

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,
	2006			2005			2006			2005
INTEREST INCOME
Interest and fees on loans	$	18,119,003		$	13,171,396		$	48,650,809		$	36,717,801
Interest on investments:
Taxable investment securities		255,808			201,291			694,504			552,616
Nontaxable investment securities		135,087			147,448			412,904			447,658
Other interest income		409,301			478,056			1,352,754			1,167,665
Total interest income		18,919,199			13,998,191			51,110,971			38,885,740
INTEREST EXPENSE
Interest on interest bearing deposit and savings accounts		1,912,604			1,096,769			5,055,509			2,688,537
Interest on time deposit accounts		2,582,687			1,525,674			6,101,711			4,371,691
Other borrowed funds		512,257			314,006			1,310,796			1,030,634
Total interest expense		5,007,548			2,936,449			12,468,016			8,090,862
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES		13,911,651			11,061,742			38,642,955			30,794,878
PROVISION FOR LOAN LOSSES		330,000			1,230,000			2,150,000			2,080,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		13,581,651			9,831,742			36,492,955			28,714,878
NON-INTEREST INCOME
Service charges and fees		934,804			1,238,637			3,256,724			3,602,126
Mortgage banking revenue		935,304			766,719			2,268,848			2,110,919
Financial services revenue		206,882			174,390			648,579			474,375
Credit card discounts and fees		136,396			136,231			363,202			366,190
Other non-interest income		422,572			223,703			807,337			1,273,372
Total non-interest income		2,635,958			2,539,680			7,344,690			7,826,982
NON-INTEREST EXPENSE
Salaries and employee benefits		5,951,694			4,297,656			15,343,210			12,028,863
Occupancy expense		1,036,436			773,424			2,820,683			2,333,586
Other non-interest expenses		2,352,970			2,069,928			7,080,041			6,326,574
Total non-interest expense		9,341,100			7,141,008			25,243,934			20,689,023
INCOME BEFORE PROVISION FOR INCOME TAXES		6,876,509			5,230,414			18,593,711			15,852,837
PROVISION FOR INCOME TAXES		2,633,871			1,704,371			7,021,964			5,572,138
NET INCOME		4,242,638			3,526,043			11,571,747			10,280,699
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
Unrealized holding gains (losses) arising during the period		131,758			(74,123	)		79,651			(122,239	)
Reclassification adjustment for losses included in net income		—			—			—			901
Decrease in fair value of interest rate swap		(25,658	)		(27,848	)		(12,709	)		(43,148	)
Total other comprehensive income (loss), net of taxes		106,100			(101,971	)		66,942			(164,486	)
COMPREHENSIVE INCOME	$	4,348,738		$	3,424,072		$	11,638,689		$	10,116,213
Earnings per share of common stock(1)
Basic	$	0.43		$	0.36		$	1.17		$	1.05
Diluted	$	0.42		$	0.35		$	1.14		$	1.02
Weighted average common shares outstanding(1)
Basic		9,902,410			9,824,651			9,872,609			9,792,102
Diluted		10,180,091			10,084,133			10,148,602			10,039,652

See accompanying notes.

⁽¹⁾ Prior periods have been adjusted to reflect the 10% stock dividend issued in 2006.

4

COLUMBIA BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	11,571,747		$	10,280,699
Adjustments to reconcile net income to net cash from operating activities:
Loss on sale or write-down of property and equipment		90,871			33,853
Net (accretion) amortization of premiums and discounts on investment securities		(30,607	)		49,598
Depreciation on property and equipment		1,442,252			1,224,232
Amortization of mortgage servicing asset		—			116,972
Federal Home Loan Bank stock dividend		—			(9,900	)
Stock-based compensation expense		225,684			25,538
Deferred income tax benefit		(361,013	)		(1,328,242	)
Provision for loan losses		2,150,000			2,080,000
Provision for losses from off-balance sheet financial instruments		53,000			—
Increase (decrease) in cash due to changes in assets/liabilities:
Accrued interest receivable		(1,910,242	)		(2,213,297	)
Proceeds from the sale of mortgage loans held-for-sale		71,249,631			59,287,065
Production of mortgage loans held-for-sale		(71,577,074	)		(54,550,020	)
Other assets		1,137,424			(7,762,726	)
Accrued interest payable and other liabilities		(2,297,421	)		(22,339	)
NET CASH FROM OPERATING ACTIVITIES		11,744,252			7,211,433
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of available-for-sale securities		—			100,000
Proceeds from the maturity of available-for-sale securities		4,685,000			8,000,000
Proceeds from the maturity of held-to-maturity securities		1,955,782			2,469,051
Purchases of held-to-maturity securities		(205,907	)		(2,422,086	)
Purchases of available-for-sale securities		(8,930,922	)		(1,964,534	)
Purchases of equity securities		(16,922	)		—
Net change in loans made to customers		(96,229,677	)		(71,789,025	)
Proceeds from the sale of mortgage servicing asset		—			1,837,503
Investment in low-income housing tax credits		(105,000	)		(109,750	)
Investment in state energy tax credits		(226,068	)		(56,684	)
Proceeds from the sale of property and equipment		—			5,311
Proceeds from the sale of other real estate owned		—			188,896
Purchases of property and equipment		(3,836,819	)		(915,440	)
NET CASH FROM INVESTING ACTIVITIES		(102,910,533	)		(64,656,758	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in demand deposit and savings accounts		8,850,098			118,256,165
Net change in time deposits		96,326,760			(10,677,212	)
Net borrowings (repayments) of short-term notes payable		29,737,393			(399,377	)
Net repayments of long-term notes payable		(4,839,798	)		(8,586,021	)
Cash paid for dividends and fractional shares		(2,776,320	)		(2,400,630	)
Proceeds from stock options exercised		659,088			717,963
Cash retained from tax deductibility of stock options exercised		342,825			—
NET CASH FROM FINANCING ACTIVITIES		128,300,046			96,910,888
NET INCREASE IN CASH AND CASH EQUIVALENTS		37,133,765			39,465,563
CASH AND CASH EQUIVALENTS, beginning of period		87,088,475			57,978,799
CASH AND CASH EQUIVALENTS, end of period	$	124,222,240		$	97,444,362
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid in cash	$	12,585,537		$	9,637,873
Taxes paid in cash		6,650,000			7,236,000
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Change in unrealized loss on available-for-sale securities, net of taxes	$	79,651		$	(122,339	)
Change in fair value of interest rate swap, net of taxes		(12,709	)		(43,148	)
Cash dividend declared and payable after quarter-end		995,774			804,269
Transfer of loans to other real estate owned		—			84,453

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			Loss			Equity
BALANCE, December 31, 2004		8,839,151		$	32,140,776		$	33,816,489		$	(80,287	)	$	65,876,978
Stock options exercised and stock awards		115,969			936,853			—			—			936,853
Income tax benefit from stock options exercised		—			410,137			—			—			410,137
Restricted stock granted		16,658			77,196			—			—			77,196
Stock repurchase		(6,370	)		(139,878	)		—			—			(139,878	)
Cash dividends paid		—			—			(2,409,376	)		—			(2,409,376	)
Cash dividends declared		—			—			(887,575	)		—			(887,575	)
Net income and comprehensive income		—			—			13,670,162			(42,007	)		13,628,155
BALANCE, December 31, 2005		8,965,408			33,425,084			44,189,700			(122,294	)		77,492,490
Stock-based compensation expense		—			160,093			—			—			160,093
Stock options exercised and stock awards		95,785			674,046			—			—			674,046
Income tax benefit from stock options exercised		—			342,825			—			—			342,825
10% stock dividend and cash paid for fractional shares		896,146			19,786,904			(19,795,632	)		—			(8,728	)
Cash dividends paid		—			—			(1,880,057	)		—			(1,880,057	)
Cash dividends declared		—			—			(995,734	)		—			(995,734	)
Net income and comprehensive income		—			—			11,571,747			66,942			11,638,689
BALANCE, September 30, 2006		9,957,339		$	54,388,952		$	33,090,024		$	(55,352	)	$	87,423,624

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” or the “Bank”), 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 2005 have been reclassified to conform to the 2006 presentation. The results of operations for the three months and nine months ended September 30, 2006, are not necessarily indicative of results to be anticipated for the year ending December 31, 2006.
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 14, 2006.
	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.
3.	Stock-Based Payment
	On January 1, 2006, Columbia adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004) “Share-Based Payment” that requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors. The Company adopted SFAS No. 123(R) using the modified prospective transition method, which requires adoption as of January 1, 2006, the first day of Columbia’s 2006 fiscal year. In accordance with the modified prospective transition method, Columbia’s consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R).
	SFAS No. 123(R) supersedes Columbia’s previous accounting under the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” As permitted by SFAS No. 123, Columbia measured compensation cost for options granted prior to December 31, 2005, in accordance with Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Accordingly, no expense recognition was given to these prior stock options granted at fair market value until they were exercised. Upon exercise, net proceeds, including tax benefits realized, were credited to equity.

7

SFAS No. 123(R) requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in Columbia’s consolidated statement of income.

In 1999, Columbia adopted a stock incentive plan that allows for grants of incentive stock options, nonstatutory stock options and other stock bonuses to both employees and directors. The plan was amended by the Board of Directors and ratified by the shareholders in 2002. Columbia issues new shares when options are exercised or when other stock bonuses are awarded. The plan authorized a total of 977,259 shares for stock awards. Option exercise prices for incentive stock options cannot be less than 100% of the fair market value of the shares on the date of grant and contractual terms cannot exceed ten years. For each stock option grant, the Board of Directors determines and approves option exercise prices, numbers of options granted, vesting periods and expiration periods.

In 2002, Columbia entered into an employment agreement with its chief executive officer (“CEO”) pursuant to which the CEO was granted 17,340 units of phantom stock at $8.15 per unit, retroactively adjusted for stock dividends and splits, and exercisable after December 31, 2002. Columbia accrues or reduces expense based on the difference between the market value of its common stock and the phantom stock exercise price at each period-end measurement date. Columbia’s liability for the phantom stock grant totaled $241,546 at December 31, 2005 based on the fair value of Columbia’s common stock. In September 2006, 17,340 phantom stock units were exercised at $25.00 per unit, resulting in a net cash payment of $292,179. At September 30, 2006, no phantom stock units were outstanding.

In 2005, Columbia established a restricted stock benefit program intended for senior management. The program was approved by the Board of Directors in accordance with the 1999 Stock Option Plan. Restricted shares are granted at the discretion of the Board of Directors. In November 2005, 19,250 shares were awarded, 25% of which vested immediately and were not restricted. The remaining shares are restricted based on continued employment and vest equally over three years. In August 2006, 16,500 shares were awarded, 20% of which vested immediately and were not restricted. The remaining shares are restricted based on continued employment and vest equally over four years. Recipients of restricted stock do not pay cash consideration for the shares. Recipients also have the right to vote and receive dividends on restricted shares. Compensation expense related to restricted stock is recognized over the requisite service period based on the fair value of Columbia stock on the grant date.

8

Stock-based compensation and recognized tax benefits were as follows for the three months and nine months ended September 30, 2006 and 2005:

	Three months ended						Nine months ended
	September 30, 2006						September 30, 2006
	Stock-Based			Recognized
	Compensation			Tax Benefits			Stock-Based		Recognized
	(Benefit)			(Expense)			Compensation		Tax Benefits
Restricted stock awards	$	114,450		$	42,862		$	162,247	$	60,762
Stock options		2,768			1,037			12,804		4,795
Phantom stock		(1,214	)		(455	)		50,633		18,962
	$	116,004		$	43,444		$	225,684	$	84,519

	Three months ended				Nine months ended
	September 30, 2005				September 30, 2005
	Stock-Based		Recognized
	Compensation		Tax Benefits		Stock-Based		Recognized
	(Benefit)		(Expense)		Compensation		Tax Benefits
Phantom stock	$	76,140	$	27,867	$	25,538	$	9,347

At September 30, 2006, unrecognized stock-based compensation totaled $523,762 and will be expensed over a weighted average period of 1.69 years.

Stock option activity during the nine months ended September 30, 2006 was as follows:

						Weighted Average		Aggregate
	Number			Weighted Average		Remaining		Intrinsic Value
	of Shares			Exercise Price		Contractual Term		(in thousands)
Stock options outstanding, December 31, 2005		615,282		$	11.05
Granted		—			—
Exercised		(79,921	)		8.43			$	1,215,712
Canceled		(509	)		16.44
Stock options outstanding, September 30, 2006		534,852		$	11.44		6.07	$	7,031
Stock options exercisable, September 30, 2006		520,772		$	11.32		6.04	$	6,908

9

Unvested restricted stock award activity during the nine months ended September 30, 2006 was as follows:

				Weighted Average
	Number			Grant Date
	of Shares			Fair Value
Unvested restricted stock awards, December 31, 2005		14,432			19.86
Granted		16,500			23.52
Vested		(3,300	)		23.52
Forfeited		—			—
Unvested restricted stock awards, September 30, 2006		27,632			21.61

The following table presents the pro forma effect on net income and earnings per share if Columbia had applied the fair value recognition provisions of SFAS 123 in prior periods:

	Three Months			Nine Months
	Ended			Ended
	September 30,			September 30,
(dollars in thousands)	2005			2005
Net income, as reported	$	3,526		$	10,281
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects		(5	)		(202
Pro forma net income	$	3,521		$	10,079
Earnings per share:(1)
Basic — as reported	$	0.36		$	1.05
Basic — pro forma		0.36			1.03
Diluted — as reported		0.35			1.02
Diluted — pro forma		0.35			1.00

⁽¹⁾ Adjusted to retroactively reflect the 10% stock dividend issued in 2006.

10

Columbia uses the Black-Scholes option-pricing model to value stock options. The Black-Scholes model requires the use of employee exercise behavior data and the use of a number of assumptions including volatility of Columbia’s stock price, dividend yield, weighted average risk-free interest rate, and weighted average expected life of the options.

The expected life of stock options represents the weighted average period that the stock options are expected to remain outstanding. It is based upon an analysis of the historical behavior of options holders, which Management believes is representative of future exercise behavior.

The expected volatility assumption is based on the historical daily price data of Columbia’s stock over a period equivalent to the weighted average expected life of the stock options. Management evaluated whether there were factors during that period which were unusual and which would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors.

The risk-free interest rate assumption is based upon U.S. Treasury rates consistent with the term of Columbia’s stock options.

The estimated fair value of options granted during the three months and nine months ended September 30, 2005 was based on the following assumptions:

Dividend yield		1.82	%
Expected life	6 years
Expected volatilty		40.84	%
Risk-free rate		2.05% - 3.34	%

	There were no options granted during the nine months ended September 30, 2006.
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.
	The Bank 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 90 days or more unless the loan is well-secured and in the process of collection. Non-accrual loans are considered impaired loans. Impaired loans are carried at the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s market price, or the fair value of collateral if the loan is collateral dependent. When the interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received or when the loan is removed from non-accrual status. Large groups of smaller balance, homogeneous loans may be collectively evaluated for impairment. Accordingly, the Bank may not separately identify individual consumer and residential loans for evaluation of impairment.
	Loans on non-accrual status at September 30, 2006 and December 31, 2005, were $4.90 million and $5.69 million, respectively. At September 30, 2006, agricultural loans to a potato industry borrower comprised $3.53 million, or 72%, of non-performing assets.
	The allowance for loan losses represents an estimate of possible losses associated with the Bank’s loan portfolio and deposit account overdrafts. The estimate is based on evaluations of loan collectibility and prior loan loss experience. Evaluations consider factors such 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. Increases to the allowance for loan losses occur when amounts are expensed to the provision for loan losses or previously charged-off loans are recovered; decreases occur when loans are charged-off.

11

	Various regulatory agencies, as a regular part of their examination process, 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.
5.	Earnings Per Share
	Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding for the period, net of unvested restricted shares. Diluted earnings per share reflect the potential dilution that could occur from restricted stock awards and if common shares from stock option grants were issued. Weighted average shares outstanding include common shares outstanding, unvested restricted shares and common share 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.
6.	Recently Issued Accounting Standards
	In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring in fiscal years beginning after September 15, 2006. Earlier adoption is permitted, provided the Company has not yet issued financial statements, including for interim periods, for that fiscal year. Management does not expect the adoption of SFAS 155 to have a material impact on the consolidated financial statements.
	In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” which amends SFAS No. 140. SFAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The statement permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. SFAS 156 is effective for fiscal years beginning after September 15, 2006. Management does not expect the adoption of SFAS 156 to have a material impact on the consolidated financial statements.
	In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting and disclosure for uncertainty in income in a company’s financial statements. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. FIN 48 is effective for fiscal years beginning after December 15, 2006. Management does not expect the adoption of FIN 48 to have a material impact on the consolidated financial statements.
	In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements.” SAB 108 provides guidance on quantifying prior year reversals or carryovers of financial statement misstatements. Management does not expect the adoption of SAB 108 to have a material impact on the consolidated financial statements.

12

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Management does not expect the adoption of SFAS 157 to have a material impact on the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS 158 requires employers to recognize the funded status of defined benefit postretirement plans as an net asset or liability in its statement of financial position and to recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income. SFAS 158 also requires employers to measure the funded status of a plan as of the date of its year-end statement of financial position. The new reporting requirements and related new footnote disclosure rules of SFAS No. 158 are effective for fiscal years ending after December 15, 2006. The new measurement date requirement applies for fiscal years ending after December 15, 2008. Management does not expect SFAS No.158 to have a material impact on the consolidated financial statements.

13

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

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report onForm 10-Q contains various forward-looking statements that are intended to be covered by the safe harbor provided by Section 21D of the Securities Exchange Act of 1933, as amended. These statements include statements about our present plans and intentions, about our strategy, growth, and deployment of resources, and about our expectations for future financial performance. Forward-looking statements use prospective language, 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 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 projected in forward-looking statements. These risks and uncertainties include, without limitation, the risks described in Part II – Other Information Item 1A “Risk Factors.”

Information presented in this report is accurate as of the date the report was filed with the SEC. We do not undertake any duty to update our forward-looking statements or the factors that may cause us to deviate from them, except as required by law.

OVERVIEW

Columbia Bancorp (“Columbia”) is a financial holding company organized in 1996 under Oregon Law. Columbia’s common stock is traded on the NASDAQ Stock Market^TM under the symbol “CBBO”. Columbia’s wholly-owned subsidiary, Columbia River Bank (“CRB” or “the Bank”), is an Oregon state-chartered bank, headquartered in The Dalles, Oregon, through which substantially all business is conducted. CRB is a state chartered bank that offers a broad range of services to its customers, primarily small and medium sized businesses and individuals.

We had a network of 23 branches at September 30, 2006. In Oregon, we operate 14 full-service branch facilities and three limited-service branch facilities that serve the northern and eastern Oregon communities of The Dalles (2), Hood River, Pendleton and Hermiston, the central Oregon communities of Madras, Redmond (2), and Bend (4), and the communities of McMinnville (3), Canby and Newberg in the Willamette Valley. We also operate a loan production office in Lake Oswego, Oregon that focuses on commercial loans to real estate builders and developers and residential mortgage loans in the Portland metropolitan area. In Washington, we operate six full-service branches that serve the communities of Goldendale, White Salmon, Pasco, Yakima, Sunnyside and Richland.

Our goal is to grow our earning assets while maintaining a high return on equity and strong asset quality. We will achieve this goal 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.

14

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)	2006			2005			Change			2006			2005			Change
Return on average assets		1.83	%		1.78	%					1.80	%		1.82	%
Return on average equity		19.63	%		19.14	%					18.75	%		19.51	%
Net interest margin, tax equivalent basis		6.44	%		6.01	%					6.47	%		5.91	%
Efficiency ratio		56.45	%		52.50	%					54.89	%		53.57	%
Net income	$	4,243		$	3,526			20	%	$	11,572		$	10,281			13	%
Earnings per diluted common share(1)	$	0.42		$	0.35			19	%	$	1.14		$	1.02			12	%
Total loans, gross(2)											784,203			659,405			19	%
Total assets											982,443			821,048			20	%
Deposits											812,999			714,523			14	%
Book value per common share										$	8.78		$	7.59			16	%
Tangible book value per common share										$	8.04		$	6.84			18	%

(1)	Adjusted to retroactively reflect the 10% stock dividend issued in 2006.
(2)	Loans include portfolio and loans held for sale and exclude allowance for loan losses and unearned loan fees.

Financial Highlights

Highlights of the three month and nine month periods ended September 30, 2006 were as follows:

• New branches in Richland, Pasco, Yakima and Sunnyside, Washington contributed to loan and deposit growth and increases in net interest income and non-interest expenses.

• Loan growth from our new and existing branches, combined with Federal Reserve interest rate increases, resulted in significant increases in loan interest income.

• Non-accrual loans increased due to the inclusion of agricultural loans to a potato industry borrower.

• Strong net interest margin was maintained in spite of higher interest rates on deposit accounts and expanded use of wholesale liabilities.

• Salaries and benefits increased due to new hiring associated with our expansion efforts, annual merit increases, market salary adjustments, higher incentive compensation, a deferred compensation measurement adjustment and restricted stock awards.

Operational Highlights

In January 2006, we opened our new Meadow Springs Branch in Richland, Washington to replace and expand our prior temporary location in Kennewick, Washington. The 10,000 square foot facility serves as our flagship for the Tri-Cities area, which includes the Washington cities of Richland, Kennewick and Pasco.

15

In February 2006, we completed construction and opened our new Cherry Heights Branch, which is located west of downtown The Dalles, Oregon. The branch replaces our former Westside Branch, which was located in a Safeway supermarket, and provides a freestanding location that offers a more convenient banking alternative for our customers. It features a five lane vehicle drive-up including two drive-up ATMs and space available for lease to a drive-up business.

In May 2006, we opened new branches in Yakima and Sunnyside, Washington. Because the cities are located along the Interstate 82 corridor, the expansion complements our existing presence in the Tri-Cities. The market area also fits our target demographic with populations of approximately 83,000 in Yakima, 15,000 in Sunnyside and 150,000 in the area surrounding both cities. We expect the new locations will continue to increase and diversify our loan and deposit portfolios and provide geographic and economic diversification.

In May 2006, we opened a loan production office in Lake Oswego, Oregon to focus on commercial loans to real estate builders and developers, and residential mortgage loans in the Portland metropolitan area. The operations of our loan production team were formerly housed in our Newberg, Oregon branch.

In June 2006, we completed construction and opened our new Pasco Branch. The 3,700 square foot branch serves the northwestern Tri-Cities area and focuses on small business relationships and expansion of our consumer product base. It features a four lane vehicle drive-up including two drive-up ATMs.

MATERIAL CHANGES IN FINANCIAL CONDITION

ASSETS

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

Investment Securities

Our investment securities portfolio consists of bank-qualified municipal debt securities, debt securities issued by government agencies, mortgage-backed securities, equity securities and restricted equity securities. Investment securities totaled $39.45 million at September 30, 2006, an increase of $2.67 million compared to December 31, 2005. Since December 31, 2005, securities totaling $6.64 million matured, which were offset by $9.15 million of securities purchased.

Qualifying securities may be pledged as collateral for public agency deposits or other borrowings. At September 30, 2006, $24.71 million, or 63%, of the portfolio was pledged, compared to $20.19 million, or 55%, at December 31, 2005.

Net unrealized losses on available-for-sale debt and equity securities totaled $184,728, or $115,546 net of tax, at September 30, 2006, compared to net unrealized losses of $307,883, or $195,197 net of tax, at December 31, 2005. Net unrealized losses decreased as older securities in a net unrealized loss position matured and were replaced with new securities purchased at current market values. The overall net unrealized losses are primarily attributable to market interest rate increases. Generally, as interest rates increase, the fair value of securities earning lower interest rates decreases. We currently have no plans to liquidate our available-for-sale securities.

16

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, real estate, commercial, consumer, agriculture and credit cards.

The following table presents our loan portfolio by loan type:

Loans:

	September 30, 2006						December 31, 2005						September 30, 2005
				Percent of						Percent of						Percent of
(dollars in thousands)	Dollar Amount			Total			Dollar Amount			Total			Dollar Amount			Total
Commercial loans	$	120,990			16	%	$	101,261			15	%	$	101,914			16	%
Agricultural loans		95,584			12	%		84,271			12	%		82,543			13	%
Real estate loans		333,758			43	%		291,285			43	%		293,056			45	%
Real estate loans — construction		206,327			27	%		184,331			27	%		152,931			23	%
Consumer loans		12,701			1	%		13,775			2	%		13,386			2	%
Other loans		8,636			1	%		7,923			1	%		8,321			1	%
		777,996						682,846						652,151
Allowance for loan losses		(9,916	)		-1	%		(9,526	)		-1	%		(9,202	)		-1	%
Unearned loan fees		(1,504	)		0	%		(1,513	)		0	%		(1,716	)		0	%
Loans, net of allowance for loan losses, unearned loan fees and loans held for sale		766,576						671,807						641,233
Loans held for sale		6,207			1	%		5,879			1	%		7,254			1	%
Total loans	$	772,783			100	%	$	677,686			100	%	$	648,487			100	%

At September 30, 2006, our net loan portfolio (excluding loans held for sale) was $766.58 million, an increase of $94.77 million, or 14%, compared to $671.81 million at December 31, 2005. New branches in Yakima, Sunnyside and Pasco, Washington along with our expanded Meadow Springs branch in Kennewick, Washington contributed $39.50 million in net loan growth since December 31, 2005.

Consistent with historical trends, loan growth was flat during the first quarter of 2006. During the first part of the second quarter of 2006, loans grew at a steady pace due to normal seasonal activity of agricultural and real estate borrowers. Loan growth accelerated late in the second quarter due to loans produced at our new branches in Yakima and Sunnyside, and attractive loan pricing offered to select commercial borrowers. During the third quarter of 2006, loan growth continued at a more moderate pace compared to the second quarter of 2006. Real estate loans comprised the majority of third quarter loan growth.

We also present loan totals at September 30, 2005 for comparative purposes because of the seasonal nature of our business. Compared to September 30, 2005, net loans (excluding loans held for sale) increased $125.34 million, or 20%. New and expanded branches contributed $36.90 million in net loan growth since September 30, 2005.

During the fourth quarter of 2006, we expect loan growth will subside due to seasonal slowdowns in the real estate and agricultural sectors.

17

At September 30, 2006, construction, land development and commercial real estate loans comprised 70% of our loan portfolio, compared to 70% at December 31, 2005 and 69% at September 30, 2005. Although this concentration is consistent with our Pacific Northwest community bank peers, we could be subject to losses resulting from declines in real estate development markets and the negative economic effects of fluctuating interest rates. Some borrowers use proceeds from real estate loans for purposes other than real estate development, such as inventory and equipment purchases. In these cases, real estate market declines would represent a more indirect risk of loss because the borrower’s financial condition may not be directly affected by such a decline.

We participate in non-real estate agricultural lending, which comprises approximately 12% of our total loan portfolio. Agricultural lending has unique challenges that require special expertise. We employ experienced agriculture consultants and loan officers with experience in underwriting and monitoring agricultural loans. We also diversify our agricultural loan portfolio across numerous commodity types and maintain 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 14% of our agricultural loans are guaranteed through this program; however, these guarantees are limited and loans under this program are not without credit risk.

We originate and fund single-family mortgage loans that are usually committed for sale to mortgage investors and held for less than 30 days. Mortgage loans held for sale are reported as a component of “Loans held-for-sale” on our balance sheet. At September 30, 2006, mortgage loans held for sale totaled $6.21 million compared to $4.47 million at December 31, 2005. At September 30, 2006, five mortgage loans totaling $1.00 million had been held for sale longer than 30 days; sales of these loans were completed in October 2006.

At December 31, 2005, loans held-for-sale also included one commercial real estate loan totaling $1.41 million that was sold during the second quarter of 2006.

Non-performing Assets

Non-performing assets consist of loans on non-accrual status, delinquent loans past due greater than 90 days, troubled debt 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. Troubled debt restructured loans are those for which the interest rate, principal balance, collateral support or payment schedules were modified from original terms, beyond what is ordinarily available in the marketplace, to accommodate a borrower’s weakened financial condition. OREO represents assets held through loan foreclosure or recovery activities.

18

The following table presents information about our non-performing assets:

Non-performing Assets:

(dollars in thousands)	September 30, 2006			December 31, 2005			September 30, 2005
Loans on non-accrual status	$	4,897		$	5,688		$	1,345
Delinquent loans past due > 90 days on accrual status		—			—			—
Troubled debt restructured loans		28			40			43
Total non-performing loans		4,925			5,728			1,388
Other real estate owned		—			—			—
Total non-performing assets	$	4,925		$	5,728		$	1,388
Allowance for loan losses	$	9,916		$	9,526		$	9,202
Ratio of total non-performing assets to total assets		0.50	%		0.68	%		0.17	%
Ratio of total non-performing loans to total gross loans		0.63	%		0.83	%		0.21	%
Ratio of allowance for loan losses to total non-performing assets		201.34	%		166.31	%		662.97	%

At September 30, 2006, agricultural loans to a potato industry borrower comprised $3.53 million, or 72%, of non-performing assets. We believe the current collateral value is sufficient to support the remaining principal balances of these loans.

Significant changes in non-performing assets since December 31, 2005 were as follows:

• During the first quarter of 2006, we refinanced non-accrual loans totaling $2.38 million for a potato industry agricultural borrower. As a result of the refinance, we improved our collateral position by securing additional real estate and agricultural equipment.

• In response to an updated evaluation of loan collateral during the first quarter of 2006, we charged-off $476,151 of non-accrual commercial loans to a borrower that processed and sold agriculture-related products.

• During the second quarter of 2006, we charged-off $378,573 of agricultural loans to a potato industry borrower. During the third quarter of 2006, $3.53 million of agricultural loans to this same borrower were placed on non-accrual status. Subsequent to quarter-end, we obtained a restructuring agreement with the borrower. If the borrower’s operating projections are met, we expect these loans will return to accrual status by the end of the fourth quarter of 2006.

• During the third quarter of 2006, agricultural and agriculture-related non-accrual loans totaling $1.46 million were paid off.

Last year, at September 30, 2005, four commercial loans and one real estate loan comprised $1.16 million, or 84%, of non-performing assets. Non-performing asset balances can vary significantly from period to period because they do not follow any particular pattern.

19

Allowance for Loan Losses

Our allowance for loan losses represents an estimate of possible 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 consistent with the Interagency Policy Statement issued by the Federal Financial Institutions Examination Council (FFIEC) and with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) Nos. 5 and 114. Our methodology for calculating the allowance for loan losses takes into consideration all loans in our portfolio using the following three factors:

• Loss allocation to groups of loans by internal risk grade

• Loss allocation by loan type

• Loss allocation by historical loss percentage

Adversely classified and impaired loans are assigned a higher loss percentage than non-classified loans. 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. Charge-offs resulting from uncollectible deposit account overdrafts are accounted for in the same manner.

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.

20

The following table presents activity in the allowance for loan losses:

Allowance for Loan and Credit Losses:

	Three Months ended				Nine Months ended
	September 30,				September 30,
(dollars in thousands)	2006		2005		2006			2005
Allowance for loan losses, beginning of period	$	9,671	$	8,681	$	9,526		$	8,184
Charge-offs:
Commercial		53		522		589			599
Real estate		13		160		24			168
Agriculture		14		—		393			156
Consumer loans		6		4		6			104
Credit card and related accounts		28		17		72			60
Demand deposit overdrafts		94		56		204			133
Total charge-offs		208		759		1,288			1,220
Recoveries:
Commercial		65		32		86			71
Real estate		1		—		1			9
Agriculture		1		—		3			4
Consumer loans		7		9		16			23
Credit card and related accounts		—		1		6			4
Demand deposit overdrafts		49		8		106			47
Total recoveries		123		50		218			158
Provision for loan losses		330		1,230		2,150			2,080
Reclassify liability for off-balance-sheet financial instrument credit losses		—		—		(690	)		—
Allowance for loan losses, end of period		9,916		9,202		9,916			9,202
Liability for off-balance sheet financial instrument credit losses		743		—		743			—
Allowance for credit losses	$	10,659	$	9,202	$	10,659		$	9,202
Ratio of net loans charged-off to average loans outstanding						0.15	%		0.17	%
Ratio of allowance for loan losses to gross loans at end of period						1.26	%		1.40	%
Ratio of allowance for credit losses to gross loans at end of period						1.36	%		1.40	%

21

During the first quarter of 2006, we reclassified our liability for credit losses from off-balance-sheet financial instruments. The liability represents our estimate of possible losses associated with off-balance-sheet financial instruments, which consist of commitments to extend credit, commitments under credit card arrangements, and commercial and standby letters of credit. We had previously included the liability as a component of the allowance for loan losses. Following the reclassification, the liability is included as a component of “Accrued interest payable and other liabilities” on our balance sheet.

Charge-offs during the nine months ended September 30, 2006 consisted primarily of commercial and agricultural loans. During the first quarter of 2006, we charged-off $476,151 of commercial loans to a borrower that processed and sold agriculture-related products. During the second quarter of 2006, we charged-off $378,573 of agricultural loans to a potato grower. Although potato prices have improved for the 2006 crop year, the financial condition of certain borrowers has been weakened by the depressed prices over the last several years. As a result, an elevated risk of loss remains in this part of the portfolio. At September 30, 2006, outstanding agricultural loans to potato growers totaled $10.48 million, or 11% of our agricultural loan portfolio and 1% of total gross loans. During the third quarter of 2006, commercial loans and demand deposit overdrafts comprised the majority of charge-offs.

Net charge-offs as a percentage of average gross loans was 0.20% and 0.23% on an annualized basis for the nine months ended September 30, 2006 and 2005, respectively. By year-end December 31, 2006, we expect our annual net charge-offs will not exceed 0.25% of average gross loans.

As a percentage of average gross loans at year-end (including loans held for sale), our allowance for loan losses has ranged between 0.83% and 1.50% over the 10-year period from 1996 to 2005, averaging 1.28% on an annual basis. We expect our allowance for loan losses as a percentage of gross loans will trend downward if credit quality continues to improve.

LIABILITIES

Our liabilities consist primarily of retail and wholesale deposits, interest accrued on deposits, notes payable and obligations to pay interest and principal on junior subordinated debentures. Retail deposits include all deposits obtained within our branch network and represent our primary source for funding loan growth. Wholesale liabilities include wholesale deposits obtained outside of our branch network, correspondent bank borrowings and borrowings from Federal Home Loan Bank (“FHLB”). We utilize wholesale liabilities to manage interest rate risk and to support loan growth at times when loan growth outpaces retail deposit growth.

Deposits

We offer various deposit accounts, including non-interest bearing checking and interest bearing checking, savings, money market and certificates of deposit. 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. In order to minimize our interest expense, our goal is to maximize our non-interest bearing demand deposits relative to other deposits and borrowings.

The following table presents the composition of our deposits:

Deposits:

	September 30, 2006					December 31, 2005					September 30, 2005
			Percent of					Percent of					Percent of
(dollars in thousands)	Dollar Amount		Total			Dollar Amount		Total			Dollar Amount		Total
Non-interest bearing deposits	$	233,942		29	%	$	220,450		31	%	$	228,144		32	%
Interest bearing deposits		275,811		34	%		278,070		39	%		267,321		37	%
Savings deposits		38,745		5	%		41,128		6	%		42,379		6	%
Time certificates		264,501		32	%		168,174		24	%		176,679		25	%
Total deposits	$	812,999		100	%	$	707,822		100	%	$	714,523		100	%

22

We present deposit totals at September 30, 2005 for comparative purposes because of the seasonal nature of our business. Due to the following factors, total deposits increased $105.18 million, or 15%, since December 31, 2005 and $98.48 million, or 14%, since September 30, 2005:

• In order to support loan growth late in the second quarter and third quarter of 2006, brokered certificates of deposit increased $71.44 million since December 31, 2005 and $61.36 million since September 30, 2005.

• Since December 31, 2005, retail deposit growth was flat primarily due to deposit balance decreases of $34.64 million as we reduced the deposit concentration of one customer. Excluding the deposit concentration decrease, retail deposits have increased as a result of gradually increasing deposits interest rates, marketing efforts and expanded relationships with individual customers.

• New branches in Pasco, Yakima and Sunnyside, Washington along with expanded branches in The Dalles, Oregon and Kennewick, Washington contributed $42.60 million and $42.16 million to deposit growth since December 31, 2005 and September 30, 2005, respectively.

• New wholesale liability relationships raised $18.19 million of mutual fund money market deposits and $3.12 million of wholesale public funds since December 31, 2005.

Deposits concentrated in one significant customer totaled $17.20 million, or 2% of total deposits at September 30, 2006 and $51.84 million, or 7% of total deposits at December 31, 2005.

We believe that increasing our retail deposits will be an ongoing challenge. Deposit customers expect innovative banking products tailored to their needs and expect interest rates that are higher than those traditionally offered by banks. In addition, we compete for deposits with brokerage firm money market funds that offer pricing indexed to market interest rates. We will continue to address these challenges by further developing our infrastructure and technologies to focus on customer convenience and efficiency. We have hired several employees to focus on deposit gathering and sales to existing customers and potential customers. We will also continue to provide a superior level of customer service that allows us to expand our banking relationship with individual customers.

The following table presents a comparison of wholesale deposit balances, which are included in total deposits shown above:

Wholesale Deposits:

		September 30,		December 31,		September 30,
(dollars in thousands)		2006		2005		2005
Brokered certificates of deposit		$	103,087	$	31,644	$	41,729
Direct certificates of deposit			2,342		9,715		10,008
Mutual fund money market deposits			18,191		—		—
Wholesale public funds			3,116		—		—
	��	$	126,736	$	41,359	$	51,737

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 or from public entities. Mutual fund money market deposits are obtained from an intermediary that provides cash sweep services to broker-dealers and clearing firms. Wholesale public fund depositors typically have no ongoing banking relationship with us and expect higher interest rates consistent with other wholesale borrowings.

Brokered and direct certificates of deposit are classified as “Time certificates” on our balance sheet. Cash sweep funds and wholesale public fund deposits are classified as “Interest bearing demand deposits” on our balance sheet.

23

At September 30, 2006, maturities of brokered certificates of deposit ranged between one month and four years. Direct certificate of deposit maturities ranged from one month to two years. Mutual fund money market deposits and wholesale public funds are payable on demand, but the balances remained stable during the third quarter of 2006.

During the third quarter of 2006, loan growth continued to outpace retail deposit growth. In order to fund loan growth and supplement retail deposits, we raised $34.81 million of brokered certificates of deposit, net of maturities. During periods when retail deposit growth lags loan growth, we will continue to utilize wholesale liabilities and other borrowings.

Notes Payable

Borrowings from Federal Home Loan Bank (“FHLB”) comprise the majority of our notes payable. At September 30, 2006, FHLB borrowings totaled $70.00 million, an increase of $25.16 million from the December 31, 2005 balance of $44.84 million, and an increase of $44.55 million compared to $25.45 million at September 30, 2005.

The following table presents FHLB balances and interest rates:

FHLB Borrowings:

	September 30,			December 31,			September 30,
(dollars in thousands)	2006			2005			2005
Amount outstanding at end of period	$	70,001		$	44,841		$	25,454
Weighted average interest rate at end of period		5.25	%		4.09	%		3.80	%
Maximum amount outstanding at any month-end and during the year	$	70,001		$	44,841		$	33,836
Average amount outstanding during the period	$	24,993		$	34,380		$	33,020
Average weighted interest rate during the period		4.25	%		3.64	%		3.58	%

We also use lines of credit at correspondent banks to purchase federal funds for short-term funding. Maximum borrowings under these lines of credit totaled $44.40 million and $42.40 million at September 30, 2006 and December 31, 2005, respectively; no line of credit borrowings were outstanding at September 30, 2006 and December 31, 2005. Other notes payable consisted of a Treasury Tax and Loan note payable for $587,392 and $850,000 at September 30, 2006 and December 31, 2005, respectively.

Our borrowings increased late in the third quarter of 2006 in order to meet liquidity requirements. We will continue to supplement our retail and wholesale deposit funds with note payable borrowings in order to support loan growth and liquidity requirements.

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.

24

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 limited to the contractual amount of those instruments. A credit loss would be triggered in the event of nonperformance by the other party. When extending off-balance sheet commitments and conditional obligations, we follow the same credit policies established for our on-balance-sheet instruments.

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

The following table presents a comparison of contract commitment amounts:

Commitments:

	September 30,		December 31,		September 30,
(dollars in thousands)	2006		2005		2005
Financial instruments whose contract amounts contain credit risk:
Commitments to extend credit	$	216,333	$	200,916	$	181,428
Undisbursed credit card lines of credit		21,397		19,582		19,439
Commercial and standby letters of credit		2,391		2,309		2,342
	$	240,121	$	222,807	$	203,209

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. The majority of commitments are secured by real estate or other types of qualifying collateral. Types of collateral vary, 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.

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.

25

Although not a contractual commitment, we offer an overdraft protection product that allows certain deposit accounts to be overdrawn up to a set dollar limit before checks will be returned. At September 30, 2006, commitments to extend credit for overdrafts totaled $10.69 million, which represents our estimated total exposure if virtually every customer utilized the full amount of this protection at one time. Year-to-date average usage outstanding is much lower than this commitment, totaling approximately $238,000, or 2% of the total exposure at September 30, 2006; approximately $248,000, or 3% of the total exposure at December 31, 2005; and approximately $246,000, or 2% of the total exposure at September 30, 2005.

Derivative Instruments-Interest Rate Swap

In January 2003, in connection with the issuance of $4.00 million of floating-rate trust preferred securities by Columbia Bancorp Trust I, we entered into an interest rate swap agreement (“swap”) with an unrelated third party. The swap expires in January 2008. Under the terms of the swap, we pay interest at a rate of 3.27% on a notional amount of $4.00 million and we then receive interest at the 90-day London Inter-Bank Offered Rate (“LIBOR”) on the same amount. The swap effectively converts interest payments on the $4.00 million trust preferred securities from a variable interest rate of 90-day LIBOR plus 3.30% to a fixed interest rate of 6.57% until January 2008. In January 2008, we have the option to prepay the trust preferred securities. We have classified the swap agreement as a cash flow hedge in accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The purpose of the swap was to mitigate variability in our cash flows by establishing a fixed interest payment during the initial five years of the trust preferred securities.

Commitments and Contingencies

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.

26

RESULTS OF OPERATIONS

Net Interest Income

Net interest income, our primary source of operating income, is the difference between interest income, principally from our loan and investment security portfolios, and interest expense, principally on our customer deposits and bank borrowings from other sources, such as trust preferred securities. Like most financial institutions, our net interest income increases as we are able to charge higher interest rates on loans while paying relatively lower interest rates on deposits and other borrowings.

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

Net Interest Income Average Balances and
Rates:

(dollars in thousands)	Three Months Ended September 30,							Three Months Ended September 30,
	Average Balances							Average Yields/Costs Tax Equivalent
	2006		2005		Change			2006			2005			Change
Taxable securities	$	24,093	$	23,960	$	133			4.21	%		3.30	%		0.91	%
Nontaxable securities		11,534		12,659		(1,125	)		7.15	%		7.00	%		0.15	%
Interest bearing deposits		15,481		17,339		(1,858	)		3.97	%		2.96	%		1.01	%
Federal funds sold		22,743		42,091		(19,348	)		4.44	%		3.29	%		1.15	%
Loans		787,128		639,540		147,588			9.13	%		8.17	%		0.96	%
Interest-earning assets		860,979		735,589		125,390			8.75	%		7.59	%		1.16	%
Nonearning assets		60,783		52,374		8,409
Total assets	$	921,762	$	787,963	$	133,799
Savings & interest bearing deposits	$	327,560	$	296,525	$	31,035			2.32	%		1.47	%		0.85	%
Time certificates		242,433		176,857		65,576			4.23	%		3.42	%		0.81	%
Borrowed funds		39,641		31,187		8,454			5.13	%		3.99	%		1.14	%
Interest bearing liabilities		609,634		504,569		105,065			3.26	%		2.31	%		0.95	%
Non-interest bearing demand deposits		223,201		207,512		15,689
Other liabilities		3,186		2,801		385
Shareholders’ equity		85,741		73,081		12,660
Total liabilities and shareholders’ equity	$	921,762	$	787,963	$	133,799

	Nine Months Ended September 30,							Nine Months Ended September 30,
	Average Balances							Average Yields/Costs Tax Equivalent
	2006		2005		Change			2006			2005			Change
Taxable securities	$	23,276	$	24,194	$	(918	)		3.99	%		3.05	%		0.94	%
Nontaxable securities		11,934		12,897		(963	)		7.12	%		7.03	%		0.09	%
Interest bearing deposits		13,969		18,500		(4,531	)		4.27	%		2.63	%		1.64	%
Federal funds sold		26,205		37,623		(11,418	)		4.63	%		2.86	%		1.77	%
Loans		727,526		608,634		118,892			8.94	%		8.07	%		0.87	%
Interest-earning assets		802,910		701,848		101,062			8.55	%		7.45	%		1.10	%
Nonearning assets		57,468		52,078		5,390
Total assets	$	860,378	$	753,926	$	106,452
Savings & interest bearing deposits	$	321,988	$	278,300	$	43,688			2.10	%		1.29	%		0.81	%
Time certificates		201,130		177,084		24,046			4.06	%		3.30	%		0.76	%
Borrowed funds		35,876		34,768		1,108			4.88	%		3.96	%		0.92	%
Interest bearing liabilities		558,994		490,152		68,842			2.98	%		2.21	%		0.77	%
Non-interest bearing demand deposits		215,366		190,684		24,682
Other liabilities		3,524		2,619		905
Shareholders’ equity		82,494		70,470		12,024
Total liabilities and shareholders’ equity	$	860,378	$	753,925	$	106,453

27

Net interest income before provision for loan losses increased $7.85 million, or 25%, for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005. Net interest income before provision for loan losses increased $2. 85 million, or 26%, for the three months ended September 30, 2006 compared to the three months ended September 30, 2005. Increases in net interest income are primarily due to growth of our loan portfolio and interest rate increases on variable rate loans following a series of increases in the Fed Funds rate during 2005 and 2006.

During the three months ended September 30, 2006, we reversed approximately $270,000 of interest income after agricultural loans to a potato industry borrower were placed on non-accrual status. In contrast, during the first quarter of 2005, we collected approximately $336,000 of previously non-accrual interest from 2004.

The following table presents increases in net interest income attributable to volume changes versus rate changes:

Volume vs. Rate Changes

(dollars in thousands)	Three months ended September 30,								Nine months ended September 30,
	2006 over 2005								2006 over 2005
	Increase (Decrease) due to								Increase (Decrease) due to
						Net								Net
(dollars in thousands)	Volume			Rate		Change			Volume			Rate		Change
Interest-earning assets:
Loans	$	2,905		$	2,042	$	4,947		$	7,316		$	4,617	$	11,933
Investment securities
Taxable securities		—			57		57			(21	)		162		141
Nontaxable securities		(90	)		77		(13	)		(39	)		4		(35	)
Balances due from banks		(15	)		40		25			(87	)		170		83
Federal funds sold		(163	)		68		(95	)		(242	)		345		103
Total		2,637			2,284		4,921			6,927			5,298		12,225
Interest bearing liabilities:
Interest bearing checking and savings accounts		107			709		816			426			1,941		2,367
Time deposits		546			510		1,056			606			1,124		1,730
Borrowed funds		81			117		198			35			245		280
Total		734			1,336		2,070			1,067			3,310		4,377
Net increase in net interest income	$	1,903		$	948	$	2,851		$	5,860		$	1,988	$	7,848

During the last several years, we have positioned our balance sheet to be asset sensitive, meaning that the assets re-price, or adjust to market interest rates, more frequently than the liabilities. As a result, at the same time that we have increased our loan volume, our net interest income has also benefited from the series of increases in the Fed Funds rate since August 2004.

Increases in net interest income were partially offset by the rising cost of funds due to increased interest rates on our retail deposits and due to our expanded use of wholesale liabilities. Our relationship pricing strategy, combined with our success at gathering low cost deposits, has reduced increases in our overall cost of funds.

28

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. As a result of several factors, our tax equivalent net interest margin measured 6.44% for the three months ended September 30, 2006 and 6.47% for the nine months ended September 30, 2006. First, our asset sensitive balance sheet has re-priced to higher interest rates as the Fed Funds rate has increased. Second, we have minimized increases in our deposit interest rates by employing a relationship pricing strategy. Finally, we have selectively utilized wholesale liabilities during periods of slow deposit growth. While wholesale liabilities generally carry higher interest rates, this strategy allowed us to avoid across-the-board increases in our deposit portfolio that would have resulted in relatively higher total interest costs.

Because we have positioned our balance sheet to be asset sensitive, a decrease in the Fed Funds rate would negatively impact interest income as our variable rate loans tied to the Prime Rate re-price. In response, we have added interest rate floors to approximately 52% of our variable rate loans, which will mitigate the negative effect of falling interest rates. We expect our net interest margin will decrease due to the continued competitive pressures on our deposit interest rates and resulting increase in our cost of funds. If the Fed Funds rate decreases, our net interest margin may decrease further as the variable rate loans in our portfolio re-price to lower interest rates.

Non-Interest Income

Non-interest income is comprised of service charges and fees, credit card discounts, financial services revenues, mortgage banking revenues and gains from the sale of loans, securities and other assets. Mortgage banking revenues include service release premiums, revenues from the origination and sale of mortgage loans and net revenues from mortgage servicing activities, which we discontinued in 2005. Financial services income is derived from the sale of investments and financial planning services to our customers.

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

Non-Interest Income:

	Three Months Ended September 30,								Nine Months Ended September 30,
(dollars in thousands)	2006			2005		% change			2006			2005			% change
Service charges and fees		935			1,239		-25	%		3,257			3,602			-10	%
Credit card discounts and fees		136			136		0	%		363			366			-1	%
Financial services revenue		207			174		19	%		649			474			37	%
Mortgage servicing, net		—			—		0	%		—			172			-100	%
Mortgage loan origination income		585			434		35	%		1,432			1,151			24	%
Service release premium		319			325		-2	%		792			706			12	%
Gain on mortgage sales		30			6		400	%		44			81			-46	%
Loss sale of securities		—			—		0	%		—			(1	)		-100	%
Loss on sale of assets		(5	)		—		0	%		(91	)		(38	)		139	%
Gain on sale of MSA		—			—		0	%		—			561			-100	%
Gain on sale of loans		126			3		4100	%		126			3			4100	%
Other non-interest Income		303			223		36	%		773			750			3	%
Total non-interest Income	$	2,636		$	2,540		4	%	$	7,345		$	7,827			-6	%

29

Significant factors affecting non-interest income for the three months and nine months ended September 30, 2006 were:

• Service charges and fees decreased as a result of overdraft protection changes we made to comply with new FDIC regulations .

• Mortgage loan origination income, service release premiums and gain on mortgage sales increased primarily due to an increase in the volume of loan originations.

• In order to balance our loans and deposits and add liquidity, we sold $ 6.25 million of commercial real estate loans at a gain of $125,533 during the third quarter of 2006.

• During the third quarter of 2006, we recognized approximately $76,000 of safe deposit box annual renewals.

• During the second quarter of 2005, we recognized $560,588 from gain on the sale of our Mortgage Servicing Asset .

Provision for Loan Losses

Our provision for loan losses represents an expense against current period income that allows us to establish an adequate allowance for loan losses and deposit account overdrafts. Charges to the provision for loan losses result from our ongoing analysis of possible losses in our loan portfolio.

For the three months ended September 30, 2006 compared to the same period in 2005, the provision for loan loss was lower due to relatively lower loan portfolio growth and lower net charge-offs. For the nine months ended September 30, 2006 compared to the same period in 2005, the provision for loan loss was higher due to relatively higher loan portfolio growth.

Non-Interest Expense

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

The following table presents 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)	2006		2005		% change			2006		2005		% change
Salaries and employee benefits	$	5,951	$	4,298		38	%	$	15,343	$	12,029		28	%
Occupancy expense		1,037		774		34	%		2,821		2,334		21	%
Advertising expense		111		100		11	%		431		283		52	%
Electronic connection fees		114		91		25	%		324		217		49	%
Consulting fees		50		68		-26	%		131		241		-46	%
Software licensing		96		88		9	%		272		292		-7	%
Other non-interest expense		1,982		1,722		15	%		5,922		5,293		12	%
Total non-interest expense	$	9,341	$	7,141		31	%	$	25,244	$	20,689		22	%

30

Year-over-year increases in non-interest expense were primarily due to increases in salaries and employee benefits. Salaries and employee benefits increased due to employees hired to staff new branches, additional administration support positions, annual merit increases and market salary adjustments. Salaries and employee benefits also increased due to the following factors:

• Following better than expected financial performance, incentive compensation increased $259,443 and $95,219 for the three months and nine months ended September 30, 2006 compared to the same periods in 2005.

• Deferred compensation measurement adjustment totaling $329,260 during the third quarter of 2006.

• Stock -based compensation expense related to restricted stock awarded in November 2005 and August 2006 totaled $114,450 and $162,247 for the three months and nine months ended September 30, 2006.

Occupancy expense, advertising expense and electronic connection fees increased as a result of increased marketing efforts and branch expansion. These increases were offset by reductions in consulting fees and software licensing expense. During the first quarter of 2005, we incurred significant costs to update our disaster recovery and business continuity plans. Further, costs were incurred to comply with the Community Reinvestment Act and the Sarbanes-Oxley Act of 2002.

The efficiency ratio, which measures overhead costs as a percentage of total revenues, is an important measure of productivity in the banking industry. Because non-interest expense growth outpaced income growth, our efficiency ratio increased from 53.57% to 54.89% for the nine months ended September 30, 2006 compared to the same period in 2005. During the third quarter of 2006, our efficiency ratio increased from 52.50% to 56.45%, compared to the third quarter of 2005. Increases in our efficiency ratio are primarily attributable to our branch expansion and related administrative overhead expenses. We expect our efficiency ratio will stabilize during the fourth quarter of 2006.

Provision for Income Taxes

The following table presents the provision for income taxes and effective tax rates:

	Three Months ended						Nine Months ended
	September 30,						September 30,
(dollars in thousands)	2006			2005			2006			2005
Provision for income taxes	$	2,634		$	1,704		$	7,022		$	5,572
Income before provision for income taxes		6,877			5,230			18,594			15,853
Effective tax rate		38.30	%		32.58	%		37.76	%		35.15	%

During the third quarter of 2005, we recognized $230,000 of tax benefit related to the State of Oregon corporate kicker. The credit is provided by the Oregon Constitution when actual tax revenues exceed forecasted revenues by more than 2%. There is no corporate kicker credit for the 2006 calendar year. Our effective tax rate increased for the three months and nine months ended September 30, 2006 compared to 2005 due to the effect of the corporate kicker credit.

31

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

We have adopted policies to address our liquidity requirements, particularly with respect to customer 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 are often influenced by general interest rate levels, competing interest rates available on alternative investments, market competition, economic conditions and other factors.

Measurable liquid assets include the following: cash and due from banks, excluding vault cash; 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. Measurable liquid assets totaled $119.29 million, or 12% of total assets, at September 30, 2006, compared to $84.04 million, or 10% of total assets, at December 31, 2005.

Our liquidity was relatively stable during the first quarter of 2006, although we did add, net of maturities, $4.23 million of brokered deposits and $5.38 million of public fund deposits, in part, to support anticipated loan growth, and also to replace two matured certificates of deposit totaling $7.50 million.

Liquidity decreased during the second and third quarters of 2006 due to strong loan growth. As a result, during the second and third quarters of 2006 we raised additional brokered deposits of $67.22 million, net of maturities; we also utilized lines of credit at FHLB to borrow $50.00 million at the end of September 2006.

Based on historical patterns, we expect liquidity will increase during the fourth quarter as loan growth subsides. We will continue to rely on retail branch deposit growth and, when necessary, we will utilize wholesale liabilities and other borrowings to meet our liquidity needs.

Our statement of cash flows reports the net changes in our cash and cash equivalents by operating, investing and financing activities. Net cash from operating activities increased $4.53 million, or 63%, for the nine months ended September 30, 2006 compared to the same period in 2005. This was the result of the increase in net income and timing differences in the receipt and payment of accrued income and accrued expenses. Because of these timing differences, comparisons of cash flows from operating activities across different periods is not meaningful.

Net cash from investing activities decreased $38.25 million, or 59%, for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005. The decrease was primarily the result of an increase in loan growth for the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005. To a lesser extent, the decrease was also due to a decrease in total investment maturities, an increase in securities purchases for collateralization of public deposits, an increase in property and equipment purchases related to branch expansion and sale proceeds from our mortgage servicing asset received in 2005.

Net cash from financing activities increased $31.39 million, or 32%, for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005. The increase was the result of an increase in time deposit growth and note payable borrowings, offset by a decrease in the growth of demand and savings deposits.

32

Shareholders’ Equity

At September 30, 2006, shareholders’ equity totaled $87.42 million, compared to $77.49 million at December 31, 2005, an increase of 13%. The 2006 year-to-date change is primarily attributable to year-to-date net income totaling $11.57 million, which was partially offset by dividends declared or paid of $2.88 million.

During the third quarter of 2006, the Board of Directors declared a dividend of $0.10 per share, payable October 31, 2006 to shareholders of record as of October 13, 2006. Based on cash dividends paid and declared in 2006, approximately 26% 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.

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 Columbia’s capital ratios as compared to regulatory minimums:

Capital Ratios:

							September 30, 2006			December 31, 2005
				Well-
	Minimum			Capitalized			Actual Ratio			Actual Ratio
Tier 1 risk-based capital		4.00	%		6.00	%		10.07	%		9.41	%
Total risk-based capital		8.00	%		10.00	%		11.32	%		10.66	%
Leverage ratio		4.00	%		5.00	%		9.87	%		8.91	%

We intend to remain “well-capitalized” by regulatory definition. Regulatory capital levels historically decrease during the second and third quarters as loan demand increases.

We plan to use our excess capital for continued cash dividends, stock repurchases and new branch expansion. We will also consider retiring a portion of, or all of, the trust preferred securities at the first available prepay date in December 2007.

We expect to open two to three new branches during 2007 and 2008. We also plan to construct new branch facilities in Yakima and Sunnyside, Washington to replace our temporary branch locations. New branch openings will require capital resources for the following: construction of branch buildings and/or commitments on leased property, hiring new branch personnel, hiring administrative personnel to support branch operations and costs related to general overhead. We plan to utilize excess capital, resources generated by our continuing operations and other borrowings to fund our anticipated branch expansion.

Stock Repurchase Plan

In June 2006, the Board of Directors renewed a plan to repurchase shares of Columbia’s common stock. The Board 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 $1.50 million until the expiration date, June 30, 2007, 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. During the nine months ended September 30, 2006, we did not repurchase any stock under the stock repurchase plan.

33

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 represents an estimate of possible losses associated with the Bank’s loan portfolio and deposit account overdrafts. On an ongoing basis, we evaluate the adequacy of the allowance based on 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 loan trends, evaluation of specific loss estimates for all significant problem loans, historical charge-off and recovery experience and other pertinent information. Approximately 70% of our loan portfolio is secured by real estate. If there were a significant decrease in real estate values in Oregon and Washington, it may result in an increase to the allowance for loan losses.

At September 30, 2006, our goodwill totaled $7.39 million as a result of business combinations. We follow SFAS No. 142 that 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.

34

ITEM 3. Quantitative and Qualitative Discloures About Market Risk

There have been no material changes to Columbia’s market risk position from the information provided under the caption “Quantitative and Qualitative Disclosures about Market Risk” on page 44 of Columbia’s Form 10-K filed with the SEC on March 14, 2006, covering the fiscal year ended December 31, 2005.

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.

35

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 1A. Risk Factors

There have been no material changes to Columbia’s risk factors previously disclosed under the caption “Risk Factors” on page 14 of Columbia’s Form 10-K filed with the SEC on March 14, 2006, covering the fiscal year ended December 31, 2005.

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.

36

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.*
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, 2005, filed with the Securities and Exchange Commission.

37

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 8, 2006	/s/ Roger L. ChristensenRoger L. Christensen
	President & Chief Executive Officer
Dated: November 8, 2006	/s/ Greg B. SpearGreg B. Spear
	Executive Vice President & Chief
	Financial Officer

38