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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended: December 31, 2004
or o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to Commission file number: 0-27938 COLUMBIA BANCORP  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) Registrants telephone number: (541) 298-6649 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common stock, no par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes þ No o The aggregate market value of the voting stock held by non-affiliates computed by reference to
the price at which the stock was sold, or the average bid and asked prices of such stock, as of
June 30, 2004, which is the last business day of the registrants most recently completed second
fiscal quarter, was $121,672,879. The number of shares outstanding of each of the issuers classes of common equity as of the
latest practicable date: 8,865,256 shares of no par value common stock on February 16, 2005. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrants proxy statement dated March 1, 2005 for the 2005 Annual Meeting
of Shareholders (Proxy Statement) are incorporated by reference in Part III hereof.




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COLUMBIA BANCORP
FORM 10-KTABLE OF CONTENTS PAGEDisclosure
Regarding Forward Looking Statements
    
    
    3PART IItem 1. Description of Business
    
    
    3-13Item 2. Properties
    
    
    13-14Item 3. Legal Proceedings
    
    
    14Item 4. Submission of Matters to a Vote of Security Holders
    
    
    14PART IIItem 5. Market for Registrants Common Equity and Related Shareholder Matters
    
    
    15Item 6. Selected Financial Data
    
    
    16Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    16-41Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    41-42Item 8. Financial Statements and Supplementary Data
    
    
    43-74Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    
    75Item 9A. Controls and Procedures
    
    
    75-76Item 9B. Other Information
    
    
    77PART III(Items 11 through 14 are incorporated by reference from Columbia Bancorps definitive
proxy statement for the Annual Meeting of Shareholders to be held on April 28, 2005)Item 10. Directors and Executive Officers of the Registrant
    
    
    77-78Item 11 Executive Compensation and Report of Compensation Committee
    
    
    78Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
    
    
    78Item 13. Certain Relationships and Related Transactions
    
    
    78Item 14. Principal Accountant Fees and Services
    
    
    78PART IVItem 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    78-80SIGNATURES
    
    
    81EXHIBIT 4.1EXHIBIT 10.3EXHIBIT 10.26EXHIBIT 13.1EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  Columbia Bancorp - 2




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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This report, particularly including but not limited to the section entitled Managements Discussion
and Analysis of Financial Condition and Results of Operations, contains a number of forward-looking
statements about our anticipated business, operations, financial performance and cash flows.
Statements in this report that relate to future plans, events and circumstances are provided to
describe Managements intentions and expectations based on currently available information, and
readers should not construe these statements as assurances or guarantees. As with any predictions,
these statements are inherently difficult to make with any degree of assurance, and actual results
may differ materially and adversely from Managements expectations described herein. Likewise,
Managements plans described in this report may not come to pass because unforeseen events may
force Management to deviate from its expressed intentions. Forward-looking statements often can be
identified by the use of predictive or prospective terms such as expect, anticipate, believe,
plan, intend, and words of similar construction or meaning. Some of the events or
circumstances that may cause our actual results to deviate from Managements expectations include
the impact of competition and local and regional economic factors upon our customer base, our
deposits and our loan portfolio; economic and regulatory limits on our ability to grow our assets
and manage our business; customer acceptance of our products and services; interest rate
fluctuations that may adversely impact our revenues and expenses; and, the impact of impairment
charges upon our intangible and other assets. We also face risks associated with the geographic
concentration of our customers, our ability to maintain or expand our market share or net interest
margins, and competitive and economic issues that impact our ability to implement our marketing and
growth strategies. Other factors that may adversely impact our performance are discussed in the
section entitled Managements Discussion and Analysis of Financial Condition and Results of
Operations  Factors that May Affect Future Results of Operations, as well as other disclosures we
make from time to time in our other filings with the Securities and Exchange Commission. Readers
should be aware that these factors are not an exhaustive list, and should not assume that these are
the only factors that may cause our actual results to differ from our expectations. Readers also
should note that forward-looking statements expressed in this report are made as of the date this
report is filed and Management cannot undertake to update those statements to reflect future events
or circumstances. 
 Part I 
 ITEM 1. DESCRIPTION OF BUSINESS General Columbia Bancorp (Columbia) is a financial holding company organized in 1996 under Oregon Law.
Columbias wholly-owned subsidiary, Columbia River Bank (CRB), is an Oregon state-chartered bank,
headquartered in The Dalles, Oregon, through which substantially all business is conducted. Until
March 31, 2004, Columbia also recognized Columbia Bancorp Trust I (Trust), as a wholly-owned
subsidiary. The Trust is a Delaware statutory business trust which was used to issue trust
preferred securities in 2002 for the purpose of repurchasing shares of common stock and to
maintain appropriate regulatory capital. In accordance with Financial Accounting Standards Board
(FASB) Interpretation No. 46R, Consolidation of Variable Interest Entities, Columbia was
required to deconsolidate the Trust effective March 31, 2004, as a result of this accounting
change. Columbia offers a broad range of financial services to its customers, primarily individuals and
small and medium sized businesses, which also includes agricultural related industries. Columbias
14 full-service branch facilities and three limited-service branch facilities in Oregon serve the
northern and eastern Oregon communities of The Dalles (2), Hood River, Pendleton and Hermiston, the
central Oregon communities of Madras, Redmond (2), and Bend (4), and the Willamette Valley
communities of McMinnville (3), Canby and Newberg. Columbias three south central Washington
full-service branches serve the communities of Goldendale, White Salmon and Kennewick. As of December 31, 2004, Columbia had total assets of $715.37 million, total deposits of $606.94
million, and shareholders equity of $65.88 million. Columbias net income for the year ended
December 31, 2004, was $10.73 million, which was Columbias 18th consecutive year of
increasingly higher net income. From CRBs establishment in 1977 as a one-branch bank in The Dalles, Oregon, Columbia has grown as
a result of merger and acquisition activity, new branch openings, the introduction of new business
lines 3 - Columbia Bancorp




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and the expansion and cross-marketing of its existing products and community-bank lending
expertise. Collectively, these growth activities have enabled Columbia to diversify its loan
portfolio and operating risks over several market areas and local economies, which can be defined
geographically as Central Oregon, Willamette Valley Oregon, Mid-Columbia Oregon and South Central
Washington. This market diversity in which Columbia operates poses both opportunities and
challenges to a community bank operating in varied local economies. Columbias approach to meeting
the challenge is to staff its branches and business groups with managers who are established in
their communities and have developed a loyal customer following. Columbias senior Management, in
conjunction with branch managers, reviews the operations of each branch to determine which products
and services are best suited to that geographic region. Management believes geographic diversity
across a broad portion of the Pacific Northwest will limit Columbias exposure to adverse market
conditions in any one geographical region or economic sector. Columbia provides high quality financial products and services to consumers and businesses. These
offerings include a broad range of deposit and loan products and services including retail banking,
mortgage loans, broker dealer services and commercial, agricultural and real estate lending. In 2004, Columbia continued to focus on strengthening market share by opening new branches in
Redmond and Bend, Oregon. These locations are in Columbias existing service area and are expected
to benefit from the high growth of new residents and businesses in those communities. Deschutes
County, where both branches are located, ranks among the top 100 fastest growing counties in the
United States, according to the US Census Bureau. Columbia has experienced good success with its
existing branch in Redmond as well as its two full-service and one limited-service branches in
Bend. Columbia believes significant opportunity exists for these additional branches to increase
convenience for customers and to further penetrate Columbias trade area. During 2004, Columbia
purchased land in Pasco, Washington for a future branch site. Additionally, in January 2004,
Columbia opened a Loan Production Office (LPO) to serve the Portland, Oregon market. The LPO
lends primarily to high quality, reputable borrowers for single family residential construction and
land development in the Portland area. This is Columbias first venture into the Portland area
market. The LPO is currently operating out of the Newberg, Oregon branch. In September 2004, Columbia made a strategic shift in the Executive Management Team (Management),
realigning the duties for three of its executive officers. Craig Ortega became the Chief Operating
Officer and oversees branch expansion, marketing, operations and technology. Shane Correa became
the Chief Banking Officer and oversees management of the Business Banking Team, retail branches and
the Customer Support Team. Jim McCall became the Chief Administrative Officer and oversees
community reinvestment activities, human resources, training, project management and strategic
projects. The remaining executive officers retained their existing responsibilities and duties:
Roger Christensen, Chief Executive Officer and President, Greg Spear, Chief Financial Officer and
Britt Thomas, Chief Credit Officer. Craig Ortega, Shane Correa and Britt Thomas make up the CRB
Banking Team, whose focus is quality loan and deposit growth within the parameters of Columbias
strategic plan. They also ensure the day-to-day operations of the Bank are aligned with the needs
of both customers and employees. Columbia implemented these changes to better meet the needs of a
growing and dynamic company. Columbia has two reportable operating business segments, Community Banking and Mortgage Banking. A
summary of Columbias net revenue, earnings from operations and assets for these business segments
is found in Note 23 to the Consolidated Financial Statements, which is incorporated herein by
reference. A discussion of various factors potentially affecting operations is set forth in
Managements Discussion and Analysis of Financial Condition and Results of Operations-Factors That
May Affect Future Results of Operations which is incorporated herein by reference. Business Strategy Columbias strategy is to remain a high performing financial institution, which is defined as
achieving performance levels in the top quartile of all bank holding companies with assets between
$500 million to $1 billion. Performance statistics are presented quarterly in the Bank Holding
Company Performance Report as reported by the Federal Reserve Bank. Columbia will continue
building on its position as a leading community-based provider of financial services in Oregon and
Washington while maintaining a close balance of its goals and priorities with benefits to
shareholders, customers and employees. The components of Columbias business strategy are outlined
below. Columbia Bancorp -4




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Successfully Operate in Small to Medium Sized Communities.Columbia believes the key to
profitability is to maintain and open branches in small to medium sized communities, which are
defined by population levels between 20,000 to 150,000 in size. This strategy encompasses the
following: (i) provide a high level of service to the customer; (ii) staff branches with employees
who have established ties to the community; (iii) attract and retain a highly skilled Management
team; and, (iv) allow branch personnel the flexibility to emphasize products and services which
best fit their local market. In addition, by decentralizing a portion of the management function
to the branch level, Columbia believes it can make business decisions regarding customers more
quickly and with more added value than its major banking competitors. Columbia believes it is able
to profitably attract and retain customers by providing and delivering products and services
tailored to their individual needs, and by delivering them with a high degree of personal
attention. Management and the Board of Directors will carefully review any exception to this
strategy to ensure it is complementary to Columbias current and future strategic initiatives. Maintain High Asset Quality.Columbia seeks to maintain high asset quality through a program that
includes prompt and strict adherence to established credit policies combined with training and
supervision of lending officers. Additionally, Columbia uses incentives to maintain high asset
quality, including tying a portion of its loan officers compensation to the quality of the loans
they originate. Columbia also believes its commitment to hire branch managers with established
ties to their communities is of significant assistance in determining the quality of loan
transactions it receives. The variety of economies in which Columbias branches are located
increases the diversification and, in Columbias opinion, the strength of the overall loan
portfolio. Products and Services- Community Banking Segment Consumer Distribution Channels Columbias community banking segment offers a broad range of deposit and loan products and other
financial services tailored to meet the banking requirements of consumers in Columbias market
areas. These include: Retail Bank Products and Services.Columbias consumer deposit products include non-interest
bearing and interest bearing demand accounts, savings accounts, money market accounts and
certificates of deposit. Management generally prices interest bearing accounts based on
competitive market factors, the need to manage deposit maturities and liquidity requirements.
Columbia strives to establish customer relationships that attract core deposits in non-interest
bearing transactional accounts, which reduces its cost of funds. Columbia provides loans to
individual borrowers for a variety of purposes, including secured and unsecured personal loans,
home equity, personal lines of credit, credit cards and various installment loans. CRB Financial Services Team Products and Services.Through arrangements with Primevest Financial
Services, Inc., (Primevest) a registered securities broker-dealer, the CRB Financial Services
Team offers a wide range of financial products and services to consumers that are not insured by
the Federal Deposit Insurance Corporation (FDIC). These include stocks, mutual funds, traditional
and Roth Individual Retirement Accounts (IRAs), Self-Employed Pension accounts (SEPs),
tax-sheltered annuities, life insurance, health insurance and other financial products.
Representatives also offer financial planning services Technology-Based Products and Services. Columbia uses both traditional and new technology to
support its focus on personal service. These include a VISA credit and check card (debit card)
program; ATMs at each of Columbias full-service branches, including 17 on-site ATMs and four
off-site ATMs; and, a telephone banking service, in both English and Spanish, that allows customers
to speak directly with a customer service representative during normal banking hours or with
24-hour telephone access to their accounts. In addition, Columbia, through its web site, offers
BankNet, an Internet banking service, which allows access to account information as well as the
ability to view checks and use other services in an on-line environment. 5 - Columbia Bancorp




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Commercial Distribution Channels Columbia has an experienced lending staff, which has special expertise in small business,
agricultural and real estate lending. Columbias loan officers emphasize an on-going relationship
with the customer. Columbia believes that its business customers appreciate the ongoing
relationship they develop with their local lending officer. Such relationship-based banking is an
important aspect of Columbias continuous effort to maintain high loan quality. Commercial Loans. Columbia offers customized loans including equipment and inventory financing,
operational lines of credit, SBA loans for qualified businesses and accounts receivable financing.
A significant portion of Columbias loan portfolio consists of commercial loans. For regulatory
reporting purposes, a portion of Columbias commercial loans are designated as real estate loans
because they are secured by real property, however many of these loans may finance accounts
receivable, equipment, inventory, crops and livestock or other commercial activities. Lending
decisions are based on careful evaluation of the financial strength, management and credit history
of the borrower and the quality and marketability of the collateral securing the loan. Commercial
loans secured by real property are generally limited to 75% of the collaterals value. Columbia
often requires personal guarantees for closely held companies and relies on the identification of
secondary sources of repayment such as personal guarantees, reserves in other assets or other
sources of payment. Agricultural Loans. Columbia provides loans including production lines of credit, equipment
financing and term loans for capital improvements and other business purposes to agricultural
businesses. Agricultural loans are generally secured by crops, equipment, inventory and real
estate. Agricultural lending can require significant follow-up time, as farmers request budgeting
assistance and other financial advice. Columbia employs two agricultural loan consultants with
decades of farm lending experience, to assist its loan officers in loan processing and
administration. Columbias loan officers, many of whom are graduates of the Western Agricultural
Banking School in Pullman, Washington, make frequent visits to farming operation sites, regularly
attend agricultural lending programs and seminars, and actively participate in growers
associations and other agricultural-based organizations. Real Estate Loans. Real estate loans are available for the construction, purchase, or refinance of
commercial, single family residential and rental properties. Columbia also provides financing to
land developers and speculative and pre-sold financing to contractors. Borrowers can choose from a
variety of fixed and adjustable rate options and terms. Columbias real estate loans, in large part, are loans to commercial customers, farmers and
ranchers and are secured by the properties used in their businesses. The majority of these loans
have a variable rate feature with adjustment periods varying from one to five years. Insofar as
payments on real estate loans, it depends on the successful operation and management of the
businesses and properties securing the loans. Repayment performance can also be affected by local
and national real estate market fluctuations and values, economic conditions or the success or
failure of the clients overall business plan. Government-Assisted Loan Programs.Columbias loan officers make loans to small businesses and to
farmers that are supported by guarantees issued by various state and federal government agencies.
Columbia is active in the SBA 504 program, and in similar programs offered by the Oregon Economic
and Community Development Department. The SBA 504 program is a loan participation arrangement where
a borrower may obtain up to 90% funding for owner occupied commercial real estate. Columbia
typically provides 60% financing in a first lien position and the Government typically provides 30%
in a subordinate lien position through the issue of government guaranteed bonds. Columbia also
participates in Government loan guarantee programs offered through the Farm Services Agency
(formerly the Farmers Home Administration), the SBA and Oregon Economic and Community Development
Department. Participation in these programs reduces credit risk in Columbias loan portfolio. Services to Non-Profits and Public Entities.Columbia offers a general array of loan products to
borrowers in the non-profit and public entity sector, including city and county governments,
together with special programs, such as jumbo CDs and low-cost loan programs. Columbia also offers
consumer services to non-profit and public sector employees, such as Columbia VISA card enrollment
and direct deposit services. For all of its loans, Columbia at all times seeks to maintain sound loan underwriting standards
with written loan policies, appropriate individual and branch lending limits, loan administration
reviews and an independent loan review function. In the case of large loan commitments or loan
participations, loans are Columbia Bancorp -6




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reviewed by a loan committee of CRBs Board of Directors. Underwriting standards are designed to
achieve a high-quality loan portfolio, compliance with lending regulations and the desired mix of
loan maturities and industry concentrations. Management seeks to minimize credit losses by
monitoring the financial condition of borrowers and the value of collateral during the life of any
given loan. Cash Management Services.Columbia also offers to business customers an opportunity to meet
additional banking needs online through its Internet Business Solutions product. This online
product gives business customers the ability to process payroll, collections, wire transfers and
Electronic Funds Transfer tax payments. Deposit and Related Products.Columbias business deposit products include basic, regular, and
interest bearing deposit accounts, business money market accounts and sweep accounts. Also,
Columbia offers a Certificate of Deposit Account Registry System (CDARS), which allows customers
who invest funds over $100,000 to still be eligible for the security of the FDIC insurance.
Columbia also offers check verification services to merchants allowing them the ability to
determine, on a 24-hour basis, whether a check drawn on an account has sufficient funds to cover
the amount drawn. In addition, Columbia offers VISA merchant program, check recovery service,
payroll services and Human Resource support center services for business customers. Investment Products.Columbias affiliation with Primevest allows it to offer non-FDIC insured
financial products and services to Columbias business customers as well as to consumers through
the CRB Financial Services Team. These include insurance and annuity products and employee
retirement plan products such as SEPs, IRAs and 401(k) plans. Products and Services- Mortgage Banking Segment Consumer Distribution Channels CRB Mortgage Team Products and Services.Columbias mortgage segment offers a complete range of
mortgage banking services including loans for single-family owner occupied homes, construction to
permanent financing packages, reverse mortgages and mortgages for vacation and rental homes.
Customers can choose between fixed, variable, interest only and balloon rate options. Construction
loans are available through the conventional two-step process or through a construction to
permanent product. Junior lien financing is also offered as a single product or in combination with
a first mortgage. An added benefit offered through the Mortgage Team is the ability for customers
to access alternative secondary market outlets not normally available from other financial
institutions. Principal Markets of Operation Columbia accepts deposits at its branches in Wasco, Hood River, Jefferson, Deschutes, Clackamas,
Yamhill and Umatilla Counties in Oregon and Klickitat and Benton Counties in Washington. Columbia
makes loans in these counties and in adjacent counties including Sherman, Gilliam and Crook
counties in Oregon and Skamania County in Washington. Many of its products and services, including
investment products through CRB Financial Services Team and mortgages through the CRB Mortgage
Team, are offered and sold throughout Oregon and south central Washington. Columbias ability to
increase its market share in the communities it serves is driven by a marketing plan consisting of
several key components. A principal objective is to create and foster a sales culture in each
branch and department. Employees are trained to cross-sell, offering appropriate products and
services to existing customers and expanding business relationships. Columbia regularly examines
the desirability and profitability of adding new products and services to those currently offered.
Columbia also promotes specific products through media advertising, but relies primarily on
referrals and direct sales calls for new business. Columbia recognizes the importance of community
service and supports employee involvement in community activities. This participation allows
Columbia to make a contribution to the communities it serves while also increasing Columbias
visibility and business opportunities. Columbia does business in many different non-metropolitan communities. Management believes the
diverse assortment of customers, communities and economic sectors that Columbia serves are a source
of strength. In addition, as a community banking organization Columbia has certain competitive
advantages because of its local focus. However, Columbia is also more reliant on the local
economies in its market areas than are large banks. 7 - Columbia Bancorp




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Columbia includes as an asset on its balance sheet a mortgage servicing asset (MSA), which
represents the estimated present value of future income relating to service retained premiums from
mortgage loans sold. The MSA has been steadily declining in value during the last three years as
low mortgage interest rates have encouraged borrowers to pay off or refinance mortgages at a
higherthan-expected rate and due to Columbia initiating a strategic shift in 2003 to discontinue
retaining servicing on mortgages sold. This trend is illustrated below. 
 2004
    
    
    2003
    
    
    2002Mortgage Servicing Asset Reconciliation:Mortgage Servicing Asset (MSA), beginning
    
    $
    3,691,449
    
    
    $
    4,614,391
    
    
    $
    6,196,801Add servicing retained premiums
    
    
    92,296
    
    
    
    1,935,108
    
    
    
    2,227,511Deduct MSA amortization
    
    
    (1,621,091
    )
    
    
    (2,000,050
    )
    
    
    (1,028,810
    )Deduct MSA valuation adjustments
    
    
    
    
    
    
    (858,000
    )
    
    
    (2,781,111
    )Mortgage Servicing Asset, ending
    
    $
    2,162,654
    
    
    $
    3,691,449
    
    
    $
    4,614,391
 Competition Columbias competitors for deposits are banks, savings and loan associations, credit unions, money
market funds, issuers of corporate and government securities, insurance companies, brokerage firms,
mutual funds and other financial intermediaries. Columbias business model is to compete on the
basis of customer service and not solely on price. Columbia competes for deposits by offering a
variety of deposit accounts at rates generally competitive with financial institutions in the local
markets it serves. Columbias competitors include Wells Fargo, US Bank, Bank of the Cascades,
Liberty Bank, Washington Mutual, Umpqua Bank, West Coast Bank, Banner Bank and Sterling Bank.
Columbia believes it will have continued success against its competitors because Columbias mission
is to create the experience that makes Columbia the bank of choice and focuses on maximizing
employee, customer and shareholder wealth. Columbias competition for loans comes principally from banks, savings and loan associations,
mortgage companies, finance companies, insurance companies, credit unions and other institutional
lenders. A primary competitor for agricultural loans is Farm Credit Services as well as for the
many other types of loans by the same competitors listed in the preceding paragraph competing for
deposits. Columbia competes for loan originations through the pricing of interest rates and loan
fees charged, its array of commercial and mortgage loan products and the efficiency and quality of
services provided to borrowers. Lending activity can also be affected by the availability of
funding sources, local and national economic conditions, current interest rate levels and loan
demand. As described above, Columbia competes with larger commercial banks by emphasizing a
community bank orientation of decentralized lending authority and personal service to customers. A potential new source of competition is the array of on-line banking services offered by
traditional commercial banks and other financial service providers and by newly formed companies
that use the Internet to advertise and sell competing products. Columbia offers many on-line
banking services to its customers, but Management believes that, for the foreseeable future, its
customers will continue to prefer the personalized and, locally-based services that Columbia
offers. Employees As of December 31, 2004, Columbia had 289 full-time equivalent employees. This number of
employees, which compares to 272 at December 31, 2003, has remained fairly steady, even though
Columbia has grown its branch network and overall size. Efficiencies have been obtained in the
retail branches, which have off-set the growth in administrative staff requirements necessary for
compliance with the Sarbanes-Oxley Act of 2002. None of the employees are subject to a collective
bargaining agreement. Columbia considers its relationships with its employees to be good and has
been named one of The 100 Best Companies to Work For in Oregon for the past two years according
to Oregon Business magazine. Directors and Executive Officers Information regarding Columbias executive officers and Board of Directors is set forth in
Directors and Executive Officers of the Registrant, in Item 10, which is incorporated herein by
reference. Columbia Bancorp -8




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Website Access to Reports Columbia makes available all periodic and current reports, free of charge, on its website as soon
as reasonably practicable after such material is electronically filed with, or furnished to the
Securities and Exchange Commission (SEC). Columbias website address is www.columbiabancorp.com.
The contents of the website are not incorporated into this report or into Columbias other filings
with the SEC. SUPERVISION AND REGULATION General Columbia is extensively regulated under federal and state law. These laws and regulations are
primarily intended to protect depositors, borrowers and shareholders. The discussion below
describes and summarizes certain statutes and regulations. These descriptions and summaries are
qualified in their entirety by reference to the particular statute or regulation. Changes in
applicable laws or regulations may have a material effect on the business and prospects of
Columbia. The operations of Columbia may also be affected by changes in the policies of banking
and other government regulators. Columbia cannot accurately predict the nature or extent of the
effects on its business and earnings that fiscal or monetary policies, or new federal or state
laws, may have in the future. Gramm-Leach-Bliley Financial Services Modernization Act In 1999 Congress passed the Gramm-Leach-Bliley Financial Services Modernization Act (the FSMA).
This new legislation repealed certain provisions of the Glass-Steagall Act that had required the
separation of the banking, insurance and securities businesses. It also created a new business
structure known as a financial services holding company. Under this law, banks were given broader
opportunities to affiliate with insurance and securities companies. Banks could also become
tempting acquisition targets, as insurance and securities companies seek such affiliations
themselves. The FSMA may also encourage local jurisdictions to enact tighter bank privacy
provisions. The enactment and implementation of the FSMA resulted in new competitive challenges
and opportunities for community banks. Columbia is a financial services holding company under the FSMA and is therefore subject to
supervision of, and regulation by, the Board of Governors of the Federal Reserve System (Federal
Reserve). Columbia is examined by, files annual reports with, and provides the Federal Reserve
with any additional information as it may require. Financial holding companies are bank holding
companies that satisfy certain criteria and are permitted to engage in activities that traditional
bank holding companies are not. Holding Company Bank Ownership. The Bank Holding Company Act of 1956 (the BHCA) requires every
bank holding company to obtain the prior approval of the Federal Reserve before (i) acquiring,
directly or indirectly, ownership or control of any voting shares of another bank or bank holding
company if, after such acquisition, it would own or control more than 5% of such shares, (ii)
acquiring all or substantially all of the assets of another bank or bank holding company, or (iii)
merging or consolidating with another bank or bank holding company. Holding Company Control of Nonbanks.With some exceptions, the BHCA also prohibits a bank holding
company from acquiring or retaining direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or from engaging directly
or indirectly in activities other than those of banking, managing, or controlling banks, or
providing services for its subsidiary. The principal exceptions to these prohibitions involve
certain nonbank activities which, by statute or by Federal Reserve regulation or order, have been
identified as activities closely related to the business of banking or of managing or controlling
banks. In making this determination, the Federal Reserve considers whether the performance of such
activities by a bank holding company can be expected to produce benefits to the public such as
greater convenience, increased competition, or gains in the efficient use of resources, which can
be expected to outweigh the risks of possible adverse effects such as decreased or unfair
competition, conflicts of interest, or unsound banking practices. The Economic Growth and
Regulatory Reduction Act of 1996 amended the BHCA to eliminate the requirement that bank holding
companies seek prior Federal Reserve approval before engaging in certain permissible nonbanking
activities if the holding company is well capitalized and meets certain other specific criteria. 9 - Columbia Bancorp




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Transactions with Affiliates.Subsidiary banks of a bank holding company are subject to
restrictions imposed by the Federal Reserve Act on extensions of credit to the holding company or
its subsidiaries, on investments in their securities, and on the use of their securities as
collateral for loans to any borrower. These regulations and restrictions may limit Columbias
ability to obtain funds from CRB for its cash needs, including funds for payment of dividends,
interest and operational expenses. Tying Arrangements.Under the Federal Reserve Act and certain regulations of the Federal Reserve,
a bank holding company and its subsidiaries are prohibited from engaging in certain tying
arrangements in connection with any extension of credit, lease or sale of property, or furnishing
of services. For example, CRB may not generally require a customer to obtain other services from

it or from Columbia, and may not require that the customer promise not to obtain other services
from a competitor as a condition to an extension of credit to the customer. Federal and State Bank Regulation General.CRB is an Oregon state-chartered bank with deposits insured by the FDIC, and is subject
to the supervision and regulation of the Oregon Director of Banks and the FDIC. CRB is also subject
to the supervision and regulation of the Washington Department of Financial Institutions. These
agencies have the authority to prohibit banks from engaging in what they believe constitute unsafe
or unsound banking practices. Oregons Division of Finance and Corporate Securities and the FDIC
conduct annual joint examinations of Columbias safe and sound banking practices. Community Reinvestment Act (CRA).CRA requires that, in connection with examinations of
financial institutions within their jurisdiction, the Federal Reserve or the FDIC evaluate the
records of financial institutions in meeting the credit needs of their local communities, including
low and moderate income neighborhoods, consistent with the safe and sound operation of those banks.
These factors are also considered in evaluating mergers, acquisitions and applications to open a
branch or facility. Insider Credit Transactions.Banks are also subject to certain restrictions imposed by the Federal
Reserve Act on extensions of credit to executive officers, directors, principal shareholders or any
related interests of such persons. Extensions of credit (i) must be made on substantially the same
terms, including interest rates and collateral, and follow credit underwriting procedures that are
not less stringent than those prevailing at the time for comparable transactions with persons not
covered above and who are not employees; and (ii) must not involve more than the normal risk of
repayment or present other unfavorable features. Banks are also subject to certain lending limits
and restrictions on overdrafts to such persons. A violation of these restrictions may result in
the assessment of substantial civil monetary penalties on the affected bank or any officer,
director, employee, agent or other person participating in the conduct of the affairs of that bank;
the imposition of a cease and desist order and other regulatory sanctions. FDICIA.Under the Federal Deposit Insurance Corporation Improvement Act (FDICIA), each federal
banking agency has prescribed, by regulation, safety and soundness standards for institutions under
its authority. These standards cover internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, asset growth, compensation, fees and benefits, as
well as operational and managerial standards the agency measures; asset quality, earnings, interest
rate sensitivity, liquidity and capital. An institution which fails to meet these standards must
develop a plan acceptable to the agency, specifying the steps that the institution will take to
meet the standards. Failure to submit or implement such a plan may subject the institution to
regulatory sanctions. Management believes that CRB meets all such standards and, therefore, does
not believe that these regulatory standards materially affect Columbias business operations. Interstate Banking and Branching The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act) permits
nationwide interstate banking and branching under certain circumstances. This legislation
generally authorizes interstate branching and relaxes federal law restrictions on interstate
banking. Currently, financial holding companies may purchase banks in any state, and states may
not prohibit such purchases. Additionally, banks are permitted to merge with banks in other states
as long as the home state of neither merging bank has opted out. The Interstate Act requires
regulators to consult with community organizations before permitting an interstate institution to
close a branch in a low-income area. Columbia Bancorp -10




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Under recent FDIC regulations, banks are prohibited from using their interstate branches primarily
for deposit production. The FDIC has accordingly implemented a loan-to-deposit ratio screen to
ensure compliance with this prohibition. Oregon and Washington each enacted opting in legislation in accordance with the Interstate Act
provisions allowing banks to engage in interstate merger transactions subject to certain aging
requirements. In both states, branches may not be acquired or opened separately in the home state
by an out-of-state bank, but once an out-of-state bank has acquired a bank within the state, either
through merger or acquisition of all or substantially all of the banks assets, the out-of-state
bank may open additional branches within the home state. In 1996, Columbia, an Oregon
state-chartered bank, acquired Klickitat Valley Bank (KVB) a Washington state-chartered bank,
which allows Columbia to now open additional branches in Washington. Deposit Insurance The deposits of CRB are currently insured to a maximum of $100,000 per depositor through the Bank
Insurance Fund (BIF) administered by the FDIC. CRB is required to pay semi-annual deposit
insurance premium assessments to the FDIC. The FDICIA included provisions to reform the Federal Deposit Insurance System, including the
implementation of risk-based deposit insurance premiums. The FDICIA also permits the FDIC to make
special assessments on insured depository institutions in amounts determined by the FDIC to be
necessary to give it adequate assessment income to repay amounts borrowed from the U.S. Treasury
and other sources, or for any other purpose the FDIC deems necessary. The FDIC has implemented a
risk-based insurance premium system under which banks are assessed insurance premiums based on how
much risk they present to the BIF. Banks with higher levels of capital and a low degree of
supervisory concern are assessed lower premiums than banks with lower levels of capital or a higher
degree of supervisory concern. Columbia is assessed at the lowest risk classification level for
premiums. Dividends The principal source of Columbias cash revenues is dividends received from its subsidiary. The
payment of dividends is subject to government regulation, in that regulatory authorities may
prohibit banks and financial holding companies from paying dividends which would constitute an
unsafe or unsound banking practice. In addition, a bank may not pay cash dividends if that payment
could reduce the amount of its capital below the minimum applicable regulatory capital
requirements. Also, under the Oregon Bank Act, the Oregon Director of Banks may suspend the
payment of dividends if it is determined that the payment would cause a banks remaining
shareholders equity to be inadequate for the safe and sound operation of the bank. Other than the
laws and regulations noted above, which apply to all banks and financial holding companies, neither
Columbia nor CRB is currently subject to any regulatory restrictions on their dividends. Capital Adequacy Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation
of financial holding companies and banks. If capital falls below minimum guideline levels, the
holding company or bank may be denied approval to acquire or establish additional banks or nonbank
businesses or to open new facilities. The FDIC and Federal Reserve use risk-based capital guidelines for banks and financial holding
companies. These are designed to make such capital requirements more sensitive to differences in
risk profiles among banks and financial holding companies, to account for off-balance sheet
exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet
items are assigned to broad risk categories, each with appropriate weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.
The guidelines are minimums, and the Federal Reserve has noted that financial holding companies
contemplating significant expansion programs should not allow expansion to diminish their capital
ratios and should maintain ratios well in excess of the minimum. The current guidelines require
all financial holding companies and federally regulated banks to maintain a minimum risk-based
total capital ratio equal to 8%, of which at least 4% must be Tier I capital. Columbia maintains
capital ratios well in excess of the minimum requirements and expects to remain well above the
minimums. 11 - Columbia Bancorp




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Tier I capital for financial holding companies includes common shareholders equity, qualifying
perpetual preferred stock (up to 25% of total Tier I capital, if cumulative, although under a
Federal Reserve Rule, redeemable perpetual preferred stock may not be counted as Tier I capital
unless the redemption is subject to the prior approval of the Federal Reserve), and minority
interests in equity accounts of consolidated subsidiaries, less intangibles. Tier II capital
includes: (i) the allowance for loan losses of up to 1.25% of risk-weighted assets; (ii) any
qualifying perpetual preferred stock which exceeds the amount which may be included in Tier I
capital; (iii) hybrid capital instruments; (iv) perpetual debt; (v) mandatory convertible
securities; and (vi) subordinated debt and intermediate term preferred stock of up to 50% of Tier I
capital. Total capital is the sum of Tier I and Tier II capital, less reciprocal holdings of other
banking organizations, capital instruments, and investments in unconsolidated subsidiaries. The assets of the banks and financial holding companies receive risk-weights of 0%, 20%, 50%, 100%
and in some cases 200%. In addition, certain off-balance sheet items are given credit conversion
factors to convert them to asset equivalent amounts to which an appropriate risk-weight will apply.
These computations result in total risk-weighted assets. Most loans are assigned to the 100% risk category, except for first mortgage loans fully secured by
residential property which carry a 50% rating. Most investment securities are assigned to the 20%
category, except for municipal or state revenue bonds which have a 50% risk-weight, and direct
obligations of, or obligations guaranteed by, the United States Treasury or certain agencies of the
federal government which have 0% risk-weight. In converting off-balance sheet items, direct credit
substitutes, including general guarantees and standby letters of credit backing financial
obligations, are given a 100% conversion factor. Transaction related contingencies such as bid
bonds, other standby letters of credit and undrawn commitments, including commercial credit lines
with an initial maturity of more than one year, have a 50% conversion factor. Short-term,
self-liquidating trade contingencies are converted at 20%, and short-term commitments have a 0%
factor. The Federal Reserve also employs a leverage ratio, which is Tier I capital as a percentage of total
assets less intangibles, to be used as a supplement to risk-based guidelines. The principal
objective of the leverage ratio is to constrain the maximum degree to which a financial holding
company may leverage its equity capital base. The Federal Reserve requires a minimum leverage
ratio of 4% to be deemed adequately capitalized. The FDICIA created a statutory framework of supervisory actions indexed to the capital level of the
individual institution. Under regulations adopted by the FDIC, an institution is assigned to one
of five capital categories depending on its total risk-based capital ratio, Tier I risk-based
capital ratio and leverage ratio, together with certain subjective factors. Institutions which are
deemed to be undercapitalized, depending on the category to which they are assigned, are subject
to certain mandatory supervisory corrective actions. Effects of Government Monetary Policy The earnings and growth of Columbia are affected not only by general economic conditions but also
by the fiscal and monetary policies of the federal government, particularly the Federal Reserve.
The Federal Reserve can and does implement national monetary policy for such purposes as curbing
inflation and combating recession, but its open market operations in U.S. government securities,
control of the discount rate applicable to borrowings from the Federal Reserve, and establishment
of reserve requirements against certain deposits influence the growth of bank loans, investments
and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and
impact of future changes in monetary policies and their impact on Columbia cannot be predicted with
certainty. Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley or SOX) establishes a comprehensive framework to
modernize and reform the oversight of public company auditing, improves quality and transparency in
financial reporting by those companies and strengthens the independence of auditors. The Act also
created the Public Company Accounting Oversight Board (PCAOB), a regulatory body supervised by
the SEC with broad powers to set auditing, quality controls and ethics standards for accounting
firms that audit public companies. The impact on Columbia has been significant in costs and
resources to insure proper compliance with this new legislation. Columbia Bancorp -12




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Changes in Banking Laws and Regulations The laws and regulations that affect banks and financial holding companies frequently undergo
significant changes at the federal and state levels. Bills are introduced from time to time in the
United States Congress that contain proposals to alter the structure, regulation, and competitive
relationships of the nations financial institutions. Any changes in laws and regulations could
have the effect of increasing or decreasing the cost of doing business, limiting or expanding
permissible activities (including activities in the insurance and securities fields), or affecting
the competitive balance among banks, savings associations and other financial institutions. Such
changes could also reduce the extent of federal deposit insurance, broaden the powers or the
geographical range of operations of financial holding companies, alter the extent to which banks
could engage in securities activities, alter the taxation of banks, financial holding companies and
other financial services organizations, and change the structure and jurisdiction of various
financial institution regulatory agencies. Management cannot anticipate or predict specific
ongoing changes in laws and regulations or the extent to which they might affect its business. 
 ITEM 2. PROPERTIES Nine of Columbias facilities in Hood River, The Dalles, Redmond, Bend, McMinnville, Madras,
Hermiston and Pendleton, Oregon, as well as its two full-service branch facilities in White Salmon
and Goldendale, Washington, are housed in properties owned, free of encumbrances, by Columbia.
Columbia leases the space for its Canby, Newberg, South Redmond, Wall Street (Bend) and Kennewick
branches, both McMinnville and Bend limited-service branches in retirement communities, its
facility in The Dalles Safeway store and the Administration office located in The Dalles. All of
Columbias branches, except the Kennewick, Washington branch, the Westside branch in The Dalles,
Oregon and its limited service branches, have drive-up facilities. The CRB Mortgage Team operates
from the second floor of Columbias Bend branch; 1701 NE Third Street. The following sets forth
certain information regarding Columbias branch facilities. 
 Square
    
    
    Opened or
    
    
    OccupancyCity and County
    
    Address
    
    Feet
    
    
    Acquired
    
    
    StatusOregon BranchesThe Dalles (Main Branch), Wasco County
    
    316 East Third Street
    
    
    11,441
    
    
    
    1977
    
    
    OwnedThe Dalles (Westside Branch),(1) Wasco County
    
    520 Mt. Hood Street
    
    
    430
    
    
    
    1986
    
    
    LeasedHood River Branch, Hood River County
    
    2650 Cascade Avenue
    
    
    6,875
    
    
    
    1993
    
    
    OwnedMadras Branch, Jefferson County
    
    624 SW Fourth Street
    
    
    7,660
    
    
    
    1995
    
    
    OwnedRedmond Branch, Deschutes County
    
    434 North Fifth Street
    
    
    5,900
    
    
    
    1995
    
    
    OwnedSouth Redmond Branch, Deschutes County
    
    1502 SW Odem Medo Rd
    
    
    5,078
    
    
    
    2004
    
    
    LeasedBend Branch, Deschutes County
    
    1701 NE Third Street
    
    
    8,306
    
    
    
    1996
    
    
    OwnedShevlin Center Branch,(2)Deschutes County
    
    925 SW Emkay Drive
    
    
    15,000
    
    
    
    1999
    
    
    OwnedBend Limited Facility, Deschutes County
    
    1010 NE Purcell Blvd
    
    
    80
    
    
    
    2002
    
    
    Other(3)Wall Street Branch, Deschutes County
    
    1133 Wall Street
    
    
    12,421
    
    
    
    2004
    
    
    LeasedHermiston Branch, Umatilla County
    
    1033 South Highway 395
    
    
    4,700
    
    
    
    1998
    
    
    OwnedPendleton Branch, Umatilla County
    
    2101 SW Court Place
    
    
    4,700
    
    
    
    1999
    
    
    OwnedMcMinnville Branch,(2)Yamhill County
    
    723 N Baker
    
    
    9,893
    
    
    
    1998
    
    
    OwnedMcMinnville Limited Facility, Yamhill County
    
    900 NW Hill Road
    
    
    60
    
    
    
    1998
    
    
    Other(3)McMinnville Limited Facility, Yamhill County
    
    300 NW Hillside Pkwy
    
    
    60
    
    
    
    2001
    
    
    Other(3)Canby Branch, Clackamas County
    
    223 NE 2nd Street
    
    
    3,615
    
    
    
    2001
    
    
    LeasedNewberg Branch, Yamhill County
    
    901 N Brutscher St., Ste A
    
    
    3,900
    
    
    
    1999
    
    
    Leased
 13- Columbia Bancorp




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Square
    
    Square
    
    
    Opened or
    
    
    OccupancyCity and County
    
    AddressFeet
    
    Feet
    
    
    Acquired
    
    
    StatusWashington BranchesWhite Salmon Branch, Klickitat County
    
    390 NE Tohomish Street
    
    
    5,500
    
    
    
    1996
    
    
    OwnedGoldendale Branch, Klickitat County
    
    202 West Main Street
    
    
    6,105
    
    
    
    1996
    
    
    OwnedKennewick Branch, Benton County
    
    1408 N Louisiana St, Ste 102-103
    
    
    2,600
    
    
    
    2003
    
    
    LeasedOther Facilities
The Dalles, OR, Administration, Wasco County
    
    401 E Third St, Suite 200
    
    
    14,868
    
    
    
    2002
    
    
    Leased
   (1) Leased space in a Safeway supermarket. Lease term expires December 2005.(2) Branch operations are located on the first floor. The second floor is available for
lease to other parties.(3) CRB has an agreement in place that does not require financial payment for these
limited-branch facilities. 
 In 1999, Columbia purchased 156,723 square feet of bare land in the Columbia River Center in
The Dalles for future branch or administrative operations expansion. During 2004, Columbia sold a
portion of this land, retaining 39,252 square feet with the intent of using this for future branch
expansion. Columbia also purchased bare land in 1995, adjacent to the Hood River Branch, for the
purpose of future parking expansion. After the completion of parking expansion in 2001, Columbia
partitioned the remaining 13,068 square feet of land and sold it in 2004. Additionally, in 2004
Columbia purchased 159,442 square feet of bare land in Pasco, Washington with the intent of future
branch expansion. 
 ITEM 3. LEGAL PROCEEDINGS During the normal course of its business, Columbia is a party to various debtor-creditor legal
actions, which individually or in the aggregate, could be material to Columbias business,
operations or financial condition. These include cases filed as a plaintiff in collection and
foreclosure cases, and the enforcement of creditors rights in bankruptcy proceedings. Management
is presently aware of two legal proceedings, detailed below, involving Columbia that, if determined
adversely to Columbia, would have a material adverse affect on its operations or performance. Columbia River Bank v. Cascadia Revolving Fund, Wasco, Oregon County, Circuit Court Case No.
CC04-217 This litigation arose from a dispute between Columbia and another lender, Cascadia Revolving Fund,
over the validity of a subordination agreement relating to loans made to a borrower that ceased
doing business in 2004. The issue is whether Cascadia Revolving Fund is entitled to recover from
Columbia $150,000 in collateral liquidation proceeds. Columbia denies that it is liable to
Cascadia and is contesting the claim. Trial is set for May 3, 2005. Management believes that the
potential loss, if any, to Columbia arising from an unfavorable outcome would not exceed $150,000
in principal. Columbia River Bank v. Anthony Glavin, et al., USDC (OR) Case No. 04-CV-1034-MO Columbia commenced this action against three guarantors to recover the sum of $3,122,240 following
the default of a commercial borrower. Two of the guarantors are individuals, and the third is a
trust, and the guaranties provide that the guarantors are jointly and severally liable for the full
amount of the debt. The defendants have denied liability, and the two individual guarantors have
alleged affirmative defenses and counterclaims against Columbia on various grounds, claiming
damages in excess of $1 million. Subsequent to the period covered by this report, on February 18,
2005 the U.S. District Court for the District of Oregon entered summary judgment for Columbia on
its claims against the guarantors, and entered summary judgment in favor of Columbia with respect
to the guarantors counterclaims in this matter. Management believes this enhances the likelihood
of a recovery but can offer no assurance that such a recovery will be made, and if made, in what
amounts or at what time. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of securities holders of Columbia during the quarter ended
December 31, 2004. Columbia Bancorp -14




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Part II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The common stock of Columbia Bancorp trades on the NASDAQ National Market under the symbol CBBO.
Trading in Columbias stock on NASDAQ commenced on November 6, 1998. The respective high and low
sale prices of Columbias common stock for the periods indicated are shown below. All prices for
the periods shown have been adjusted for subsequent stock splits. Prices do not include retail
markups, markdowns, or commissions and may not represent actual transactions. Columbia has paid
dividends on its common stock on a quarterly basis. The table below also sets forth dividends
declared per share of common stock for the periods indicated. Our principal source of cash for
dividends are comprised of dividends paid by our wholly owned operating subsidiary, Columbia River
Bank. Federal and state banking laws and regulations impose strict limitations upon a banks
ability to pay dividends, including requirements to comply with minimum capital requirements and
other bank safety and soundness criteria. To the extent CRB fails to comply with these
requirements, the bank will be unable to pay dividends to Columbia Bancorp, which will materially
restrict the ability to pay dividends to shareholders. As of February 16, 2005 Columbia had
8,865,256 shares issued and outstanding of no par value common stock, which were held by
approximately 3,040 shareholders of record. 
 2004
    
    
    2003 (1)Stock Trading Range
    
    
    Cash Dividend
    
    
    Stock Trading Range
    
    
    Cash DividendTable 1
    
    High
    
    
    Low
    
    
    Declared
    
    
    High
    
    
    Low
    
    
    DeclaredFirst Quarter
    
    $
    18.76
    
    
    $
    16.00
    
    
    $
    0.09
    
    
    $
    15.23
    
    
    $
    13.00
    
    
    $
    0.07Second Quarter
    
    
    17.35
    
    
    
    13.55
    
    
    
    0.09
    
    
    
    16.05
    
    
    
    12.75
    
    
    
    0.08Third Quarter
    
    
    17.00

    
    
    
    13.80
    
    
    
    0.09
    
    
    
    14.98
    
    
    
    13.10
    
    
    
    0.08Fourth Quarter
    
    
    20.76
    
    
    
    16.44
    
    
    
    0.09
    
    
    
    17.53
    
    
    
    14.40
    
    
    
    0.09
   (1)
    
    Prior periods have been adjusted to reflect the 10% stock dividend, effective May 1, 2003. 
 Sales of Unregistered Securities Columbia had no sales of unregistered securities during the fourth quarter of 2004. 15 - Columbia Bancorp




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ITEM 6. SELECTED FINANCIAL DATA The following table sets forth certain information concerning the consolidated financial condition,
operating results, and key operating ratios for Columbia at the dates and for the periods
indicated. This information does not purport to be complete, and should be read in conjunction
with Managements Discussion and Analysis of Financial Condition and Results of Operations, and
the Consolidated Financial Statements of Columbia and Notes thereto. 
 Table 2
    
    As of and For the Years Ended December 31,(dollars in thousands except dollars per share data)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Income Statement DataInterest income
    
    $
    42,708
    
    
    $
    38,230
    
    
    $
    37,616
    
    
    $
    35,078
    
    
    $
    33,367Interest expense
    
    
    7,328
    
    
    
    6,831
    
    
    
    7,782
    
    
    
    11,583
    
    
    
    12,256Net interest income
    
    
    35,380
    
    
    
    31,399
    
    
    
    29,834
    
    
    
    23,495
    
    
    
    21,111Loan loss provision
    
    
    2,760
    
    
    
    2,575
    
    
    
    1,800
    
    
    
    1,450
    
    
    
    1,697Net income
    
    
    10,735
    
    
    
    9,834
    
    
    
    9,381
    
    
    
    7,374
    
    
    
    5,624Balance Sheet DataInvestment securities
    
    $
    45,398
    
    
    $
    31,682
    
    
    $
    36,048
    
    
    $
    43,532
    
    
    $
    60,544Total loans, net
    
    
    574,125
    
    
    
    464,350
    
    
    
    432,687
    
    
    
    380,283
    
    
    
    299,881Total assets
    
    
    715,373
    
    
    
    584,136
    
    
    
    544,326
    
    
    
    482,207
    
    
    
    416,859Total deposits
    
    
    606,944
    
    
    
    496,358
    
    
    
    458,624
    
    
    
    394,636
    
    
    
    346,427Shareholders equity
    
    
    65,877
    
    
    
    57,804
    
    
    
    50,190
    
    
    
    46,445
    
    
    
    41,326Per Share DataEarnings per common shareBasic earnings per common share (1)
    
    $
    1.22
    
    
    $
    1.13
    
    
    $
    1.05
    
    
    $
    0.83
    
    
    $
    0.63Diluted earnings per common share (1)
    
    
    1.19
    
    
    
    1.09
    
    
    
    1.03
    
    
    
    0.81
    
    
    
    0.63Cash dividends declared per common share (1)
    
    
    0.36
    
    
    
    0.32
    
    
    
    0.28
    
    
    
    0.28
    
    
    
    0.25Book value per common share (1)
    
    
    7.45
    
    
    
    6.61
    
    
    
    5.80
    
    
    
    5.25
    
    
    
    4.68Capital RatiosTier I capital ratio (2)
    
    
    9.80
    %
    
    
    10.46
    %
    
    
    9.71
    %
    
    
    9.36
    %
    
    
    9.78
    %Total risk-based capital ratio (3)
    
    
    11.05
    %
    
    
    11.71
    %
    
    
    10.96
    %
    
    
    10.61
    %
    
    
    11.03
    %Leverage ratio (4)
    
    
    8.74
    %
    
    
    9.19
    %
    
    
    8.57
    %
    
    
    8.61
    %
    
    
    8.14
    %Financial RatiosReturn on average assets
    
    
    1.64
    %
    
    
    1.71
    %
    
    
    1.80
    %
    
    
    1.64
    %
    
    
    1.41
    %Return on average equity
    
    
    17.50
    %
    
    
    18.25
    %
    
    
    18.80
    %
    
    
    16.76
    %
    
    
    14.40
    %
   (1)
    
    Prior periods have been adjusted to reflect the 10% stock dividend,
effective May 1, 2003.(2)
    
    Tier I capital divided by risk-weighted assets.(3)
    
    Total regulatory capital divided by
risk-weighted assets.(4)
    
    Tier I capital divided by
average total assets. 
 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The following discussion should be read in conjunction with Columbia Bancorps (Columbia) audited
consolidated financial statements and the notes thereto as of December 31, 2004 and 2003 and for
each of the three years in the period ended December 31, 2004 included elsewhere in this report. Columbia is a financial holding company which conducts operations principally through its
wholly-owned subsidiary, Columbia River Bank (CRB). CRB is a state chartered bank which offers a
broad range of services to its customers, primarily small and medium sized businesses, farmers and
individuals. CRB has a network of 20 branches. In Oregon, Columbia has 14 full-service branch
facilities and three limited-service branch facilities that serve the northern and eastern Oregon
communities of The Dalles (2), Hood River, Pendleton and Hermiston, the central Oregon communities
of Madras, Redmond (2), and Bend (4),
and the communities of McMinnville (3), Canby and Newberg in the Willamette Valley. Columbias
three south central Washington full-service branches serve the communities of Goldendale, White
Salmon and Kennewick. Columbia Bancorp - 16




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##### Table of Contents



Until March 31, 2004, Columbia also recognized Columbia Bancorp Trust I (Trust), as a
wholly-owned subsidiary. The Trust is a Delaware statutory business trust which was used to issue
trust preferred securities in 2002 for the purpose of repurchasing shares of common stock and to
maintain appropriate regulatory capital. The Trust issued $4.0 million of trust-preferred
securities at a floating rate indexed to the 90 day LIBOR with a margin of 3.30%. These securities
are considered to be Tier I for regulatory capital purposes. In accordance with Financial
Accounting Standards Board (FASB) Interpretation No. 46R, Consolidation of Variable Interest
Entities, Columbia was required to deconsolidate the Trust effective March 31, 2004. Columbias Executive Management Teams (Management) goal is to grow Columbias earning assets
while maintaining a high return on equity and high asset quality. The key to this, in Managements
view, is to emphasize personalized, quality banking products and services for its customers, to
hire and retain excellent, high performing branch and administrative personnel, and to respond
quickly to customer demand and growth opportunities. Management also intends to increase
Columbias penetration in existing markets, and to expand into new markets through suitable
acquisitions and new branch openings. As of December 31, 2004, Columbia had total assets of $715.37 million, total deposits of $606.94
million and shareholders equity of $65.88 million. As of December 31, 2003 and 2002, total assets
were $584.14 million and $544.33 million; total deposits were $496.36 million and $458.62 million,
and shareholders equity was $57.80 million and $50.19 million, respectively. Columbias net
income for years ended December 31, 2004, 2003 and 2002, were $10.73 million, $9.83 million and
$9.38 million, respectively. Columbias year 2004 net income represents the eighteenth consecutive
year of increasing net income. For the year ended December 31, 2004, Columbias return on average
assets was 1.64% and return on average equity was 17.50%, as compared to 2003 and 2002, when
returns on average assets were 1.71% and 1.80% and returns on average equity were 18.25% and
18.80%, respectively. Management believes the increase in net income and asset growth was fueled
by strong demand for business loans and new initiatives to attract deposits. Return on average daily assets and equity and certain other ratios for the periods indicated are
presented below. 
 Table 3(dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Net income
    
    $
    10,735
    
    
    $
    9,834
    
    
    $
    9,381
    
    
    $
    7,374
    
    
    $
    5,624Average assets
    
    
    655,674
    
    
    
    573,934
    
    
    
    521,537
    
    
    
    450,262
    
    
    
    398,422RETURN ON AVERAGE ASSETS
    
    
    1.64
    %
    
    
    1.71
    %
    
    
    1.80
    %
    
    
    1.64
    %
    
    
    1.41
    %Net income
    
    $
    10,735
    
    
    $
    9,834
    
    
    $
    9,381
    
    
    $
    7,374
    
    
    $
    5,624Average equity
    
    
    61,333
    
    
    
    53,898
    
    
    
    49,905
    
    
    
    43,990
    
    
    
    39,062RETURN ON AVERAGE EQUITY
    
    
    17.50
    %
    
    
    18.25
    %
    
    
    18.80
    %
    
    
    16.76
    %
    
    
    14.40
    %Cash dividends declared and paid
    
    $
    3,171
    
    
    $
    2,819
    
    
    $
    2,580
    
    
    $
    2,570
    
    
    $
    2,326Net income
    
    
    10,735
    
    
    
    9,834
    
    
    
    9,381
    
    
    
    7,374
    
    
    
    5,624PAYOUT RATIO
    
    
    29.54
    %
    
    
    28.66
    %
    
    
    27.50
    %
    
    
    34.85
    %
    
    
    41.36
    %Average equity
    
    $
    61,333
    
    
    $
    53,898
    
    
    $
    49,905
    
    
    $
    43,990
    
    
    $
    39,062Average assets
    
    
    655,674
    
    
    
    573,934
    
    
    
    521,537
    
    
    
    450,262
    
    
    
    398,422AVERAGE EQUITY TO ASSET RATIO
    
    
    9.35
    %
    
    
    9.39
    %
    
    
    9.13
    %
    
    
    9.77
    %
    
    
    9.80
    %
 
 17- Columbia Bancorp




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##### Table of Contents



Critical accounting policies and estimates The Managements Discussion and Analysis of Financial Condition and Results of Operations, as
well as disclosures included elsewhere in this Form 10-K, are based upon Columbias consolidated
financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial statements requires
Management to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. On an ongoing basis, Management evaluates the estimates used, including the
adequacy of the allowance for loan and lease losses, impairment of intangible assets, contingencies
and litigation. Estimates are based upon historical experience, current economic conditions and
other factors that Management considers reasonable under the circumstances. These estimates result
in judgments regarding the carrying values of assets and liabilities when these values are not
readily available from other sources as well as assessing and identifying the accounting treatments
of commitments and contingencies. Actual results may differ from these estimates under different
assumptions or conditions. The following critical accounting policies involve the more significant
judgments and assumptions used in the preparation of the consolidated financial statements. The allowance for loan and lease losses is established to absorb known and inherent losses
attributable to loans and leases outstanding and related off-balance-sheet commitments. The
adequacy of the allowance is monitored on an ongoing basis and is based on Managements evaluation
of numerous factors. These factors include the quality of the current loan portfolio, the trend in
the loan portfolios risk ratings, current economic conditions, loan concentrations, loan growth
rates, past-due and non-performing trends, evaluation of specific loss estimates for all
significant problem loans, historical charge-off and recovery experience and other pertinent
information. Approximately 68% of Columbias gross loan portfolio is secured by real estate and a
significant depreciation in real estate values in Oregon and Washington would cause Management to
increase the allowance for loan and lease losses. During 2003 and prior years, Columbia capitalized servicing retained mortgage premiums which
resulted in recognition of a mortgage servicing asset (MSA) and a corresponding recognition of
servicing income. The MSA has been valued on a quarterly basis by a qualified, third party with
access and knowledge of current servicing portfolio values in the market place. The techniques
used in valuing the MSA incorporate assumptions relative to prevailing conditions in the secondary
servicing market. These assumptions have been dependent upon near term transactions and include
prepayment speed forecasts, market discount rates, earning rates, servicing costs, acquisition
costs and ancillary income. A calculated decrease in the value of the MSA is recorded as a
valuation write-down adjustment. However, actual fair values may differ from the measured
valuation due to limitations in available third-party market quotations and potential changes in
the underlying assumptions. The mortgage servicing asset has been amortized over the expected life
of the outstanding net servicing income. The expected life of the outstanding net servicing income
that is generated from the MSA can vary from Managements estimates due to interest rate volatility
and changing prepayment speeds. Prepayment speeds in excess of Managements estimates could
negatively impact the recorded value of the MSA. Columbia initiated a strategic shift in 2003 and discontinued the practice of capitalizing service
retained mortgage premiums. CRB Mortgage Team (Mortgage Team) now originates mortgage loans
which are sold exclusively on a brokerage basis with the mortgage servicing released. This means
the existing MSA balance will not increase as a result of additional mortgage loan activity in
which mortgage premiums are retained. This strategy continued into 2004 with a focus on producing
quality loans, providing competitive loan products, and selling service released mortgage premiums
in the secondary servicing market. Management believes this will reduce interest rate risk
associated with the MSA. Any future decision to sell the MSA will be dependent upon the movement
of interest rates. A rise in interest rates in 2005 will likely improve the value of the MSA and
provide Management with the ability to examine sale options. At December 31, 2004, Columbia had approximately $7.4 million in goodwill as a result of business
combinations. Columbia adopted Statement of Financial Accounting Standards (SFAS) No. 142 on
January 1, 2002. Annual and periodic analyses of recorded goodwill for impairment involves, as
required by SFAS 142, judgment on the part of Management. Neither the initial or annual
assessments have identified impairment of goodwill such that the net book value of the reporting
unit exceeded its estimated fair value. Columbia Bancorp - 18




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##### Table of Contents



Columbia applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option plans. Accordingly,
compensation costs are recognized as the difference between the exercise price of each option and
the market price of Columbias stock at the date of each grant. Had compensation cost for
Columbias 2004, 2003, and 2002 grants for stock-based compensation plans been determined
consistent with SFAS No. 123, its net income and earnings per common share for December 31, 2004,
2003, and 2002, would approximate the pro forma amounts shown in Table 4. 
 Table 4(dollars in thousands except per share data)
    
    2004
    
    
    2003
    
    
    2002Net income, as reported
    
    $
    10,735
    
    
    $
    9,834
    
    
    $
    9,381Deduct: Total stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of related tax effects
    
    
    (82
    )
    
    
    (177
    )
    
    
    (811
    )$
    10,653
    
    
    $
    9,657
    
    
    $
    8,570Pro forma net incomeEarnings per share(1):Basic  as reported
    
    $
    1.22
    
    
    $
    1.13
    
    
    $
    1.05Basic  pro forma
    
    
    1.21
    
    
    
    1.11
    
    
    
    0.96Diluted  as reported
    
    
    1.19
    
    
    
    1.09
    
    
    
    1.03Diluted  pro forma
    
    
    1.18
    
    
    
    1.07
    
    
    
    0.94
 (1) Amounts for 2002 have been adjusted to reflect the 10% stock dividend, effective May 1,
2003. 
 The fair value of each option granted is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions for December 31, 2004, 2003 and
2002: 
 Table 5
    
    2004
    
    
    2003
    
    
    2002Dividend yield
    
    
    1.80
    %
    
    
    2.14
    %
    
    
    2.14
    %Expected life (years)
    
    6-8 years
    
    6 years
    
    6 yearsExpected volatility
    
    
    43.28
    %
    
    
    43.71
    %
    
    
    45.25
    %Risk-free rate
    
    
    2.90-3.02
    %
    
    
    3.02
    %
    
    
    2.08
    %
 The effects of applying SFAS No. 123 in the pro forma disclosure are not indicative of
future amounts. Recently, the Financial Accounting Standards Board (FASB) announced the release of
SFAS No. 123 (R), Share-Based Payment. The effect of this revision will require Columbia to
begin recognizing the fair values of stock options granted as compensation cost over the vesting
period. SFAS 123 (R) will take effect for interim periods beginning after June 15, 2005. As
permitted by SFAS 123, Columbia currently accounts for share-based payments to employees using the
intrinsic value method and, as such, generally recognizes no compensation cost for employee stock
options. Accordingly, the adoption of SFAS 123 (R)s fair value method will have a significant
impact on our result of operations, although it will have no impact on our overall financial
position. The impact of adoption of SFAS 123 (R) cannot be predicted at this time because it will
depend on levels of share-based payments granted in the future. However, had we adopted SFAS
123 (R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123
as described in the disclosure of pro forma net income and earnings per share in Note 1 to our
consolidated financial statements. Statement 123 (R) also requires the benefits of tax deductions
in excess of recognized compensation cost to be reported as a financing cash flow, rather than as
an operating cash flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after adoption. While
Columbia cannot estimate what those amounts will be in the future (because they depend on, among
other things, when employees exercise stock options), the amount of operating cash flows recognized
in prior periods for such excess tax deductions were approximately $122,000, $212,000 and $123,000 in 2004, 2003 and
2002, respectively. 19- Columbia Bancorp




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##### Table of Contents



Columbia may become party to various legal proceedings. These matters have a high degree of
uncertainty associated with them. There can be no assurance that the ultimate outcome will not
differ materially from Columbias assessment of them. There can also be no assurance that all
matters that may be brought against Columbia are known to them at any point in time. Results of Operations Net Interest Income For Columbia, the primary component of earnings is net interest income. Net interest income is the
difference between interest income, principally from loan and investment security portfolios, and
interest expense, principally on customer deposits and bank borrowings from other sources, such as
trust preferred securities. Changes in net interest income result from changes in volume, spread
and margin. Volume refers to the dollar level of interest-earning assets and interest bearing
liabilities. Spread refers to the difference between the yield on interest-earning assets and the
cost of interest bearing liabilities. Net interest margin is the ratio of net interest income to
total average interest-earning assets and is influenced by the relative level of interest-earning
assets and interest bearing liabilities. Average Balances and Average Rates Earned and Paid.The following table shows average balances and
interest income or interest expense, with the resulting average yield or rates by category of
earning assets or interest bearing liabilities. 
 Year Ended December 31, 2004
    
    
    Year Ended December 31, 2003
    
    
    Year Ended December 31, 2002Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    AverageTable 6
    
    Average
    
    
    Income or
    
    
    Yields or
    
    
    Average
    
    
    Income or
    
    
    Yields or
    
    
    Average
    
    
    Income or
    
    
    Yields or(dollars in thousands)
    
    Balance
    
    
    Expense
    
    
    Rates
    
    
    Balance
    
    
    Expense
    
    
    Rates
    
    
    Balance
    
    
    Expense
    
    
    RatesInterest-earning assets:Loans (1)
    
    $
    544,945
    
    
    $
    41,240
    
    
    
    7.57
    %
    
    $
    456,137
    
    
    $
    36,496
    
    
    
    8.00
    %
    
    $
    419,608
    
    
    $
    35,334
    
    
    
    8.42
    %Investment securities
Taxable securities
    
    
    16,846
    
    
    
    435
    
    
    
    2.58
    
    
    
    17,033
    
    
    
    514
    
    
    
    3.02
    
    
    
    18,822
    
    
    
    1,035
    
    
    
    5.58Nontaxable securities (2)
    
    
    13,296
    
    
    
    973
    
    
    
    7.32
    
    
    
    15,662
    
    
    
    1,150
    
    
    
    7.34
    
    
    
    17,191
    
    
    
    1,223
    
    
    
    7.12Total investment securities (2)
    
    
    30,142
    
    
    
    1,408
    
    
    
    4.67
    
    
    
    32,695
    
    
    
    1,664
    
    
    
    5.09
    
    
    
    36,013
    
    
    
    2,258
    
    
    
    6.31Interest-earning balances due
from banks
    
    
    12,031
    
    
    
    215
    
    
    
    1.79
    
    
    
    13,444
    
    
    
    286
    
    
    
    2.13
    
    
    
    10,781
    
    
    
    340
    
    
    
    3.02Federal funds sold
    
    
    13,940
    
    
    
    201
    
    
    
    1.44
    
    
    
    21,663
    
    
    
    205
    
    
    
    0.95
    
    
    
    6,465
    
    
    
    99
    
    
    
    1.53Total interest-earning
assets (3)
    
    
    601,058
    
    
    
    43,064
    
    
    
    7.16
    
    
    
    523,939
    
    
    
    38,651
    
    
    
    7.37
    
    
    
    472,867
    
    
    
    38,031
    
    
    
    8.04Nonearning assets
    
    
    54,616
    
    
    
    
    
    
    
    
    
    
    
    49,995
    
    
    
    
    
    
    
    
    
    
    
    48,670Total assets
    
    $
    655,674
    
    
    
    
    
    
    
    
    
    
    $
    573,934
    
    
    
    
    
    
    
    
    
    
    $
    521,537Interest bearing liabilities:Interest bearing checking and
savings accounts
    
    $
    230,826
    
    
    $
    1,476
    
    
    
    0.64
    %
    
    $
    219,682
    
    
    $
    1,597
    
    
    
    0.73
    %
    
    $
    189,356
    
    
    $
    1,732
    
    
    
    0.92
    %Time deposit & IRAs
    
    
    157,854
    
    
    
    4,554
    
    
    
    2.89
    
    
    
    128,719
    
    
    
    4,023
    
    
    
    3.13
    
    
    
    128,731
    
    
    
    4,696
    
    
    
    3.54Borrowed funds
    
    
    38,093
    
    
    
    1,298
    
    
    
    3.41
    
    
    
    29,212
    
    
    
    1,211
    
    
    
    4.15
    
    
    
    35,343
    
    
    
    1,354
    
    
    
    3.83Total interest bearing liabilities
    
    
    426,773
    
    
    
    7,328
    
    
    
    1.72
    
    
    
    377,613
    
    
    
    6,831
    
    
    
    1.81
    
    
    
    353,430
    
    
    
    7,782
    
    
    
    2.19Non-interest bearing deposits
    
    
    163,953
    
    
    
    
    
    
    
    
    
    
    
    138,931
    
    
    
    
    
    
    
    
    
    
    
    114,652Total deposits and borrowed funds
    
    
    590,726
    
    
    
    
    
    
    
    
    
    
    
    516,544
    
    
    
    
    
    
    
    
    
    
    
    468,082Other liabilities
    
    
    3,615
    
    
    
    
    
    
    
    
    
    
    
    3,492
    
    
    
    
    
    
    
    
    
    
    
    3,550Total liabilities
    
    
    594,341
    
    
    
    
    
    
    
    
    
    
    
    520,036
    
    
    
    
    

    
    
    
    
    
    
    471,632Shareholders equity
    
    
    61,333
    
    
    
    
    
    
    
    
    
    
    
    53,898
    
    
    
    
    
    
    
    
    
    
    
    49,905Total liabilities and
shareholders equity
    
    $
    655,674
    
    
    
    
    
    
    
    
    
    
    $
    573,934
    
    
    
    
    
    
    
    
    
    
    $
    521,537Net interest income (tax equivalent)
    
    
    
    
    
    $
    35,736
    
    
    
    
    
    
    
    
    
    
    $
    31,820
    
    
    
    
    
    
    
    
    
    
    $
    30,249Net interest income (as reported)
    
    
    
    
    
    $
    35,380
    
    
    
    
    
    
    
    
    
    
    $
    31,399
    
    
    
    
    
    
    
    
    
    
    $
    29,834Average yield on average earning
assets (1)
    
    
    
    
    
    
    
    
    
    
    7.16
    %
    
    
    
    
    
    
    
    
    
    
    7.37
    %
    
    
    
    
    
    
    
    
    
    
    8.04
    %Interest expense to average earning
assets
    
    
    
    
    
    
    
    
    
    
    1.22
    %
    
    
    
    
    
    
    
    
    
    
    1.30
    %
    
    
    
    
    
    
    
    
    
    
    1.64
    %Net interest
margin (3)
    
    
    
    
    
    
    
    
    
    
    5.95
    %
    
    
    
    
    
    
    
    
    
    
    6.07
    %
    
    
    
    
    
    
    
    
    
    
    6.40
    %Net interest spread
    
    
    
    
    
    
    
    
    
    
    5.44
    %
    
    
    
    
    
    
    
    
    
    
    5.56
    %
    
    
    
    
    
    
    
    
    
    
    5.85
    %
    (1)
    
    Non-accrual loans and loans held for sale are included in the average balance.(2)
    
    Tax-exempt income has been adjusted to a tax-equivalent basis at a rate of 36.6% for 2004
and 2003 and a rate of 34% for 2002.(3)
    
    Net interest margin is computed by dividing net
interest income (taxable equivalent basis) by total average earning assets. 
 Columbia Bancorp - 20




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##### Table of Contents



Analysis of Changes in Interest Differential.The following table shows the dollar amount of
the increase (decrease) in Columbias net interest income and expense and attributes such dollar
amounts to changes in volume as well as changes in rates. Rate and volume variances have been
allocated proportionally between rate and volume changes. 
 2004 over 2003
    
    
    2003 over 2002
    
    
    2002 over 2001Increase (Decrease) due to
    
    
    Increase (Decrease) due to
    
    
    Increase (Decrease) due toTable 7
    
    
    
    
    
    
    
    
    
    Net
    
    
    
    
    
    
    
    
    
    
    Net
    
    
    
    
    
    
    
    
    
    
    Net(dollars in thousands)
    Volume
    
    Rate
    
    
    Change
    
    
    Volume
    
    
    Rate
    
    
    Change
    
    
    Volume
    
    
    Rate
    
    
    ChangeInterest-earning assets:Loans
    
    $
    7,100
    
    
    $
    (2,356)
    
    
    $
    4,744
    
    
    $
    3,073
    
    
    $
    (1,911
    )
    
    $
    1,162
    
    
    $
    6,595
    
    
    $
    (3,396
    )
    
    $
    3,199Investment securitiesTaxable securities
    
    
    1
    
    
    
    (80
    )
    
    
    (79
    )
    
    
    (85
    )
    
    
    (436
    )
    
    
    (521
    )
    
    
    (568
    )
    
    
    (12
    )
    
    
    (580
    )Nontaxable securities
    
    
    (111
    )
    
    
    (1
    )
    
    
    (112
    )
    
    
    (63
    )
    
    
    (15
    )
    
    
    (78
    )
    
    
    (56
    )
    
    
    (7
    )
    
    
    (63
    )Balances due from banks
    
    
    (37
    )
    
    
    (34
    )
    
    
    (71
    )
    
    
    79
    
    
    
    (134
    )
    
    
    (55
    )
    
    
    178
    
    
    
    (255
    )
    
    
    (77
    )Federal funds sold
    
    
    (73
    )
    
    
    69
    
    
    
    (4
    )
    
    
    232
    
    
    
    (126
    )
    
    
    106
    
    
    
    195
    
    
    
    (136
    )
    
    
    59Total
    
    
    6,880
    
    
    
    (2,402
    )
    
    
    4,478
    
    
    
    3,236
    
    
    
    (2,622
    )
    
    
    614
    
    
    
    6,344
    
    
    
    (3,806
    )
    
    
    2,538Interest bearing liabilities:Interest bearing checking
and savings accounts
    
    
    88
    
    
    
    (209
    )
    
    
    (121
    )
    
    
    377
    
    
    
    (512
    )
    
    
    (135
    )
    
    
    659
    
    
    
    (2,244
    )
    
    
    (1,585
    )Time deposits
    
    
    918
    
    
    
    (387
    )
    
    
    531
    
    
    
    (139
    )
    
    
    (534
    )
    
    
    (673
    )
    
    
    540
    
    
    
    (2,230
    )
    
    
    (1,690
    )Borrowed funds
    
    
    374
    
    
    
    (287
    )
    
    
    87
    
    
    
    (235
    )
    
    
    92
    
    
    
    (143
    )
    
    
    60
    
    
    
    (586
    )
    
    
    (526
    )Total
    
    
    1,380
    
    
    
    (883
    )
    
    
    497
    
    
    
    3
    
    
    
    (954
    )
    
    
    (951
    )
    
    
    1,259
    
    
    
    (5,060
    )
    
    
    (3,801
    )Net increase (decrease) in
net interest income
    
    $
    5,500
    
    
    $
    (1,519
    )
    
    $
    3,981
    
    
    $
    3,233
    
    
    $
    (1,668
    )
    
    $
    1,565
    
    
    $
    5,085
    
    
    $
    1,254
    
    
    $
    6,339
 
 Net interest income on a tax equivalent basis, before provision for loan losses, for
the year ended December 31, 2004, was $35.74 million, which is an increase of 12.31% compared to
net interest income of $31.82 million in 2003, where there was an increase of 5.19% compared to net
interest income of $30.25 million in 2002. The overall tax equivalent earning asset yield was
7.16% in 2004 compared to 7.37% in 2003 and 8.04% in 2002. For the same years, rates on interest
bearing liabilities were 1.72%, 1.81% and 2.19%, respectively. Net interest spread in 2004 was
5.44%, in 2003 it was 5.56% and in 2002 it was 5.85%. The net interest spread for year 2004,
decreased 12 basis points over year 2003, due in large part to the effect of falling interest rates
lowering yields on earning assets and a rise in deposit costs in the second half of 2004 due to
rising short-term interest rates. Total interest-earning assets averaged $601.06 million for the year ended December 31, 2004,
compared to $523.94 million and $472.87 million for the corresponding periods in 2003 and 2002.
The majority of the growth in earning assets occurred in the loan category. Increases in the loan
portfolio are attributed to favorable interest rates, market conditions and the execution of
Columbias strategy to provide personal, quality banking products and services, to hire experienced
lending and administrative support staff personnel in strategic branch locations and to emphasize
marketing strategies. Average loans, which generally carry a higher yield than investment securities and other earning
assets, comprised 90.66% of average earning assets during 2004, compared to 87.06% in 2003 and
88.74% in 2002. During the same periods, average yields on loans were 7.57% in 2004, 8.00% in 2003
and 8.42% in 2002. Average investment securities comprised 5.01% of average earning assets in
2004, which was down from 6.24% in 2003 and 7.62% in 2002. Tax equivalent interest yields on
investment securities were 4.67% for 2004, 5.09% in 2003 and 6.31% in 2002. Interest bearing liabilities averaged $426.77 million for the year ended December 31, 2004, $377.61
million during the same period in 2003 and $353.43 million during the same period in 2002.
Interest cost, as a percentage of earning assets, decreased to 1.22% in 2004, compared to 1.30% in
2003 and 1.64% in 2002. The decline in interest cost as a percentage of earning assets resulted
from falling interest rates during the previous three years. Deposit rates were near historically
low levels during the last few years, but began to gradually rise in the second half of 2004 as the
Fed Funds rate was increased and short-term treasury yields rose. 21- Columbia Bancorp




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##### Table of Contents



Provision for Loan Losses The provision for loan losses represents charges made to earnings to maintain an adequate allowance
for loan losses. The allowance is maintained at an amount Management believes to be sufficient to
absorb losses in the loan portfolio. Factors considered in establishing an appropriate allowance
include a careful assessment of the financial condition of the borrower; a realistic determination
of the value and adequacy of underlying collateral; the condition of the local economy and the
condition of the specific industry of the borrower; a comprehensive analysis of the levels and
trends of loan categories; and a review of delinquent and classified loans. When a provision for
loan loss is recorded, the amount is based on past charge-off experience, a careful analysis of the
current portfolio, and an evaluation of economic trends in Columbias market areas. Management
will continue to closely monitor the loan quality of new and existing relationships through
stringent review and evaluation procedures and by making loan officers accountable for collection
efforts. Columbia applies a systematic process for determining the adequacy of the allowance for loan
losses, including both external and internal loan review functions and a quarterly analysis of the
adequacy of the allowance. The quarterly analysis includes determination of specific potential
loss factors on individual classified loans, historical potential loss factors derived from actual
net charge-off experience and trends in non-performing loans, and potential loss factors for other
loan portfolio risks such as loan concentrations, the condition of the local economy, and the
nature and volume of loans. For the year ended December 31, 2004, the allowance for loan losses
totaled $8.18 million, compared to $6.61 million at December 31, 2003, and $6.42 million at
December 31, 2002. This represents an increase of 23.78% between 2003 and 2004 and an increase of
3.05% between 2002 and 2003. The increase in 2004 is due in large part to the 24% growth in the
loan portfolio during 2004. A more detailed review of the loan loss provision and allowance for
loan losses is presented in Table 13. The recorded values of loans actually removed from the consolidated balance sheets are referred to
as charge-offs and, after netting out recoveries on previously charged-off loans, become net
charge-offs. Columbias policy is to charge off loans when, in Managements opinion, the loan or a
portion thereof is deemed uncollectible, although concerted efforts are made to maximize recovery
after the charge-off. For the year ended December 31, 2004, loan charge-offs exceeded recoveries
by $1.19 million as compared to 2003 and 2002, when loan charge-offs exceeded recoveries by $2.38
million and $695,024, respectively. The decrease in loan losses between 2003 and 2004 is primarily
attributable to a single write-down of $1.46 million that was taken during 2003. Columbia believes
the large write-down in 2003 was an unusual and infrequent occurrence and 2004 loan losses are more
reflective of historic levels. Non-interest Income Total non-interest income declined 6.86% from year 2003 through year 2004, and increased 4.36% from
year 2002 through 2003. During the prior three years, non-interest income was $8.31 million in
2004, $8.92 million in 2003 and $8.55 million in 2002. Non-interest income is primarily comprised
of six categories; service charges and fees, Mortgage Team net revenues, credit card discounts and
fees, CRB Financial Services Team revenues, net gain on sale or call of investments securities and
other non-interest income. Each of the categories increased during 2004, except for Mortgage Team
revenues and CRB Financial Services Team revenues. Mortgage Team net revenues increased $238,358
from 2002 to 2003, and decreased $1.84 million from 2003 to 2004. The decrease in Mortgage Team
net revenues during 2004 was due to a significant slow down in loans originated. The decrease in
CRB Financial Services Team revenues from 2003 to 2004 of $58,961 was attributable to a volatile
market environment and cautious investors, resulting in lower volume and revenue. Service charges
and fees were $4.66 million for the year 2004, an increase of 8.13% compared to $4.31 million for
the year 2003, and $4.09 million for the year 2002. The growth in service charges and fees were
attributable to an increase in overdraft protection charges. The remainder of the change in
non-interest income is primarily attributable to improved revenues and growth received from credit
card discounts and fees, appraisal fee income and a net gain on the sale of land. Columbia Bancorp - 22




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##### Table of Contents



Non-interest Expense Non-interest expense consists principally of salaries and benefits, occupancy costs, item and
statement processing expenses and other non-interest expenses. A measure of Columbias ability to
control non-interest expenses is the efficiency ratio. For the year ended December 31, 2004, the
efficiency ratio was 54.86%, as compared to 55.43% in 2003 and 57.26% in 2002. The efficiency
ratio (non-interest expense divided by net interest income and non-interest income) reflects an
improving trend due to growth in revenue from net interest income and efforts by Management to
monitor and control overhead expenses. Non-interest expense for 2004 was $23.97 million, as compared to $22.35 million for 2003 and $21.98
million for 2002. The changes in non-interest expense are primarily the result of an increase in
salary expense, occupancy expense and other non-interest expenses. The additional increases relate
primarily to costs associated with the investment in new branches, commitment to employee training,
continued investment in technology and promotion related expenses. Additionally, costs associated
with compliance of Sarbanes-Oxley Section 404 (SOX 404) legislation totaled approximately $90,000
during the fourth quarter of 2004. Columbia expects to incur approximately $60,000 during the
first quarter of 2005 to complete the 2004 compliance with SOX 404. Income Taxes The provision for income taxes was $6.23 million in 2004, $5.56 million in 2003 and $5.22 million
in 2002. The provision resulted in effective combined federal and state tax rates of 36.71% in
2004, 36.14% in 2003 and 35.77% in 2002. The effective tax rates differ from combined estimated
statutory rates of 38.6% principally due to the effects of nontaxable interest income, which is
recognized for accounting purposes, but not for tax purposes. 
 Summary Balance SheetsTable 8
    
    December 31,
    
    
    Increase (Decrease)(dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    12/31/03  12/31/04
    
    
    12/31/02  12/31/03ASSETSFederal funds sold
    
    $
    20,286
    
    
    $
    14,956
    
    
    $
    3,735
    
    
    $
    5,330
    
    
    
    35.64
    %
    
    $
    11,221
    
    
    
    300.43
    %Investments
    
    
    45,398
    
    
    
    31,682
    
    
    
    36,048
    
    
    
    13,716
    
    
    
    43.29
    
    
    
    (4,366
    )
    
    
    (12.11
    )Total loans, net
    
    
    574,125
    
    
    
    464,350
    
    
    
    432,687
    
    
    
    109,775
    
    
    
    23.64
    
    
    
    31,663
    
    
    
    7.32Other assets (1)
    
    
    75,564
    
    
    
    73,148
    
    
    
    71,856
    
    
    
    2,416
    
    
    
    3.30
    
    
    
    1,292
    
    
    
    1.80Total assets
    
    $
    715,373
    
    
    $
    584,136
    
    
    $
    544,326
    
    
    $
    131,237
    
    
    
    22.47
    %
    
    $
    39,810
    
    
    
    7.31
    %LIABILITIES
Non-interest bearing
deposits
    
    $
    172,422
    
    
    $
    150,425
    
    
    $
    131,831
    
    
    $
    21,997
    
    
    
    14.62
    %
    
    $
    18,594
    
    
    
    14.10
    %Interest bearing deposits
    
    
    434,522
    
    
    
    345,933
    
    
    
    326,793
    
    
    
    88,589
    
    
    
    25.61
    
    
    
    19,140
    
    
    
    5.86Total deposits
    
    
    606,944
    
    
    
    496,358
    
    
    
    458,624
    
    
    
    110,586
    
    
    
    22.28
    
    
    
    37,734
    
    
    
    8.23Other liabilities (2)
    
    
    42,552
    
    
    
    29,974
    
    
    
    35,512
    
    
    
    12,578
    
    
    
    41.96
    
    
    
    (5,538
    )
    
    
    (15.59
    )Total liabilities
    
    
    649,496
    
    
    
    526,332
    
    
    
    494,136
    
    
    
    123,164
    
    
    
    23.40
    
    
    
    32,196
    
    
    
    6.52SHAREHOLDERS
EQUITY
    
    
    65,877
    
    
    
    57,804
    
    
    
    50,190
    
    
    
    8,073
    
    
    
    13.97
    
    
    
    7,614
    
    
    
    15.17Total liabilities and
shareholders equity
    
    $
    715,373
    
    
    $
    584,136
    
    
    $
    544,326
    
    
    $
    131,237
    
    
    
    22.47
    %
    
    $
    39,810
    
    
    
    7.31
    %
    (2) Includes accrued interest payable and other
liabilities. 
 23 - Columbia
Bancorp




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##### Table of Contents



Financial Condition
Investments Federal funds sold are short-term investments that mature on a daily basis. Columbia invests in
these instruments to provide for additional earnings on excess available cash balances. Because of
their short maturities, the balance of federal funds sold fluctuates dramatically on a day-to-day
basis. The balance on any one-day is influenced by cash demands, customer deposit levels, loan
activity and future expected cash flows. Investments in federal funds sold totaled $20.30 million
at December 31, 2004, compared to $14.96 million at December 31, 2003, and $3.74 million at
December 31, 2002. A year-to-year comparison shows that Columbias investment securities at December 31, 2004, totaled
$45.40 million, compared to $31.68 million at December 31, 2003, and $36.05 million at December 31,
2002. This represents an increase of 43.29% between 2003 and 2004 and a decrease of 12.11% between
2002 and 2003. The increase in the investment portfolio occurred among available-for-sale
securities in order to replace many of the investments called from the portfolio due to falling
interest rates. For the years ended December 31, 2003 and 2002, no single investment security held
by Columbia equaled or exceeded 10% of its consolidated shareholders equity. For the year ended
December 31, 2004, Columbia had one investment security that totaled 10.61% of its consolidated
shareholders equity. The investment security is a federal agency backed discount note structured
to earn a higher rate of return as compared to the overnight federal funds rate. The investment
security matured on January 26, 2005. On December 31, 2004, investments in federal funds sold (an
overnight investment) were $20.30 million and investments in restricted stock were $2.43 million.
The balance of federal funds sold is influenced by cash demands, customer deposit levels, loan
activity, and future expected cash flows. Columbia follows a financial accounting principle which requires that investment securities be
identified as trading, held-to-maturity or available-for-sale. Held-to-maturity securities are
those that Columbia has the intent and ability to hold until they mature or are called.
Available-for-sale securities are those that Management may sell if liquidity requirements dictate
or if alternative investment opportunities arise. Management determines the mix of
available-for-sale and held-to-maturity investment securities based on the Board of Directors
approved asset-liability policy, Managements assessment of Columbias need for relative liquidity
and other factors. At December 31, 2004, the investment portfolio, excluding restricted equity securities, consisted
of 58.60% available-for-sale securities and 41.40% held-to-maturity securities. At December 31,
2003, the portfolio consisted of 48.11% available-for-sale securities and 51.89% held-to-maturity
securities. At December 31, 2002, Columbias investment portfolio, excluding restricted equity
securities, consisted of 44.23% available-for-sale securities and 55.77% held-to-maturity
securities. At December 31, 2004, Columbias investment portfolio had total net unrealized gains of
approximately $523,000. This compares to net unrealized gains of approximately $961,000 at
December 31, 2003 and net unrealized gains of $1.10 million at December 31, 2002. Unrealized gains
and losses reflect changes in market conditions and do not represent the amount of actual profits
or losses that may be realized. Actual realized gains and losses occur at the time investment
securities are sold or called. At each financial statement date, Management assesses each investment to determine if impaired
investments are temporarily impaired or if the impairment is other-than-temporary based upon the
positive and negative evidence available. Evidence evaluated includes, but is not limited to,
industry analyst reports, credit market conditions and interest rate trends. A decline in the
market value of any security below cost that is deemed other-than-temporary results in a charge to
earnings and the corresponding establishment of a new cost basis for the security. Columbia Bancorp -24




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##### Table of Contents



The following table provides the carrying value of Columbias portfolio of investment securities as
of December 31, 2003, 2002 and 2001, respectively. 
 Table 9
    
    December 31,
    
    
    December 31,
    
    
    December 31,(dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Investments available-for-sale:U.S. Government obligations
    
    $
    23,899
    
    
    $
    13,004
    
    
    $
    11,644Municipal securities
    
    
    674
    
    
    
    793
    
    
    
    1,727Equity securities
    
    
    606
    
    
    
    79
    
    
    
    113Corporate debt securities
    
    
    
    
    
    
    
    
    
    
    1,26625,179
    
    
    
    13,876
    
    
    
    14,750Investments held-to-maturity:Obligations of states and political subdivisions
    
    
    12,535
    
    
    
    13,016
    
    
    
    14,748Mortgage-backed securities
    
    
    5,174
    
    
    
    1,867
    
    
    
    3,770U.S. Government obligations
    
    
    81
    
    
    
    81
    
    
    
    8217,790
    
    
    
    14,964
    
    
    
    18,600Restricted equity securities
    
    
    2,429
    
    
    
    2,842
    
    
    
    2,698Total investment securities
    
    $
    45,398
    
    
    $
    31,682
    
    
    $
    36,048
 
 The maturities of investment securities, segmented by amortized cost, estimated fair
value, and tax equivalent yields, were as follows as of the dates indicated. 
 December 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2002Table 10
    
    Amortized
    
    
    Estimated
    
    
    %
    
    
    Amortized
    
    
    Estimated
    
    
    %
    
    
    Amortized
    
    
    Estimated
    
    
    %(dollars in thousands)
    
    Cost
    
    

    Fair Value
    
    

    Yield (1)
    
    

    Cost
    
    

    Fair Value
    
    

    Yield (1)
    
    

    Cost
    
    

    Fair Value
    
    

    Yield (1)U.S. Government
agencies:One year or less
    
    $
    9,287
    
    
    $
    9,287
    
    
    
    3.94
    %
    
    $
    8,402
    
    
    $
    8,458
    
    
    
    2.27
    %
    
    $
    9,809
    
    
    $
    10,034
    
    
    
    2.98
    %One to five years
    
    
    19,496
    
    
    
    19,355
    
    
    
    3.88
    %
    
    
    6,526
    
    
    
    6,555
    
    
    
    2.67
    %
    
    
    5,461
    
    
    
    5,530
    
    
    
    2.50
    %Five to ten years
    
    
    215
    
    
    
    217
    
    
    
    4.73
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    Over ten years
    
    
    303
    
    
    
    305
    
    
    
    4.67
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Obligations of states
and political
subdivisions:One year or less
    
    
    155
    
    
    
    156
    
    
    
    2.93
    %
    
    
    865
    
    
    
    873
    
    
    
    5.02
    %
    
    
    2,212
    
    
    
    2,250
    
    
    
    3.38
    %One to five years
    
    
    3,267
    
    
    
    3,375
    
    
    
    4.93
    %
    
    
    2,292
    
    
    
    2,418
    
    
    
    3.82
    %
    
    
    3,421
    
    
    
    3,574
    
    
    
    3.89
    %Five to ten years
    
    
    9,124
    
    
    
    9,590
    
    
    
    6.16
    %
    
    
    9,169
    
    
    
    9,816
    
    
    
    5.83
    %
    
    
    8,228
    
    
    
    8,684
    
    
    
    6.04
    %Over ten years
    
    
    627
    
    
    
    683
    
    
    
    6.15
    %
    
    
    1,430
    
    
    
    1,520
    
    
    
    6.37
    %
    
    
    2,613
    
    
    
    2,738
    
    
    
    6.40
    %Corporate and other debt
securities:One to five years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,229
    
    
    
    1,266
    
    
    
    2.57
    %Total debt securities
    
    
    42,474
    
    
    
    42,968
    
    
    
    4.46
    %
    
    
    28,684
    
    
    
    29,640
    
    
    
    3.96
    %
    
    
    32,973
    
    
    
    34,076
    
    
    
    4.06
    %Equity securities
    
    
    577
    
    
    
    606
    
    
    
    
    
    
    
    75
    
    
    
    79
    
    
    
    
    
    
    
    113
    
    
    
    113Restricted equity securities
    
    
    2,429
    
    
    
    2,429
    
    
    
    
    
    
    
    2,843
    
    
    
    2,843
    
    
    
    
    
    
    
    2,698
    
    
    
    2,698Total securities
    
    $
    45,480
    
    
    $
    46,003
    
    
    
    
    
    
    $
    31,602
    
    
    $
    32,562
    
    
    
    
    
    
    $
    35,784
    
    
    $
    36,887
    
 25 - Columbia
Bancorp




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##### Table of Contents



Loans Columbias loan policies and procedures establish the basic guidelines governing its lending
operations. Generally, the guidelines address the types of loans that it seeks, target markets,
underwriting and collateral requirements, terms, pricing, and compliance with laws and regulations.
All loans or credit lines are subject to approval procedures and amount limitations. These
limitations apply to the borrowers total outstanding indebtedness to CRB, including the
indebtedness of any guarantor. The policies are reviewed and approved by the Board of Directors of
CRB. Bank officers are charged with loan origination in compliance with underwriting standards overseen
by the loan administration department and in conformity with established loan policies. On an
annual basis, the Board of Directors determines the lending and approval authority of the
President, the Chief Administrative Officer and the Chief Credit Officer, who then delegate lending
and approval authority to other lending officers. Such delegated authority may include authority
related to loans, letters of credit, overdrafts, uncollected funds, and such other authority as
determined by the Board of Directors, the President or Chief Credit Officer within their delegated
authority. The Chief Credit Officer has the authority to approve loans up to an approval limit as set by the
Board of Directors. All loans above the approval limit of the Chief Credit Officer, and up to a
certain limit, are reviewed for approval by the President or Chief Administrative Officer. Loans
which exceed this limit are subject to review and approval by the Board Loan Committee. All loans
approved by the Board Loan Committee are reviewed by the full Board of Directors at regularly
scheduled meetings. Columbias unsecured legal lending limit was $10.23 million and its real
estate secured lending limit was $17.05 million at December 31, 2004. Columbia rarely makes loans
for an amount approaching its legal lending limits. Net outstanding loans totaled $574.13 million at December 31, 2004, representing an increase of
$109.77 million, or 23.64% compared to $464.35 million at December 31, 2003. Unfunded loan
commitments grew to $189.48 million as of December 31, 2004, representing an increase of $7.44
million, or 4.09% over year-end 2003. Columbias net loan portfolio (excludes loans held for sale) at December 31, 2004, includes loans
secured by real estate 67.61%, commercial loans 16.38%, agricultural loans 13.86%, consumer and
other loans 3.85%, deferred loan fees (0.27%) and reserve for loan loss (1.43%). The largest
category is concentrated in real estate loans. This is primarily due to the significant growth of
commercial real estate loan activity. Residential mortgage loans usually are temporarily financed
on the balance sheet before being sold to the secondary market and are classified as loans held for
sale. Some commercial loans are secured by real estate, but are used for purposes other than
financing the purchase of real property, such as inventory financing and equipment purchases, where
real property serves as collateral for the loan. Columbia Bancorp -26




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##### Table of Contents



The following table presents the composition of Columbias loan portfolio, excluding mortgage loans
held for sale, at the dates indicated. 
 Table 11
    
    December 31, 2004
    
    

December
31, 2003
    
    

December
31, 2002(dollars in thousands)
    


Amount
    
    

Percentage
    
    

Amount
    
    

Percentage
    
    

Amount
    
    

PercentageCommercial
    
    $
    93,618
    
    
    
    16.38
    %
    
    $
    86,163
    
    
    
    18.67
    %
    
    $
    69,882
    
    
    
    16.48
    %Agricultural
    
    
    79,224
    
    
    
    13.86
    %
    
    
    64,059
    
    
    
    13.88
    %
    
    
    61,770
    
    
    
    14.57
    %Real estate secured loans:Commercial property
    
    
    156,175
    
    
    
    27.32
    %
    
    
    125,359
    
    
    
    27.16
    %
    
    
    100,918
    
    
    
    23.81
    %Farmland
    
    
    50,585
    
    
    
    8.85
    %
    
    
    42,301
    
    
    
    9.17
    %
    
    
    35,748
    
    
    
    8.43
    %Construction
    
    
    139,415
    
    
    
    24.39
    %
    
    
    87,427
    
    
    
    18.94
    %
    
    
    91,036
    
    
    
    21.47
    %Residential
    
    
    29,584
    
    
    
    5.18
    %
    
    
    34,295
    
    
    
    7.43
    %
    
    
    42,688
    
    
    
    10.07
    %Home equity lines
    
    
    10,701
    
    
    
    1.87
    %
    
    
    4,799
    
    
    
    1.04
    %
    
    
    2,102
    
    
    
    0.50
    %Total real estate
    
    
    386,460
    
    
    
    67.61
    %
    
    
    294,181
    
    
    
    63.74
    %
    
    

    272,492
    
    
    
    64.28
    %Consumer
    
    
    14,386
    
    
    
    2.51
    %
    
    
    18,242
    
    
    
    3.95
    %
    
    
    20,937
    
    
    
    4.94
    %Other
    
    
    7,660
    
    
    
    1.34
    %
    
    
    6,975
    
    
    
    1.51
    %
    
    
    6,499
    
    
    
    1.53
    %Total loans
    
    
    581,348
    
    
    
    101.70
    %
    
    
    469,620
    
    
    
    101.75
    %
    
    
    431,580
    
    
    
    101.80
    %Less unearned loan fees
    
    
    (1,556
    )
    
    
    (0.27
    )%
    
    
    (1,450
    )
    
    
    (0.32
    )%
    
    
    (1,245
    )
    
    
    (0.29
    )%Less allowance for loan losses
    
    
    (8,184
    )
    
    
    (1.43
    )%
    
    
    (6,612
    )
    
    
    (1.43
    )%
    
    
    (6,417
    )
    
    
    (1.51
    )%Loans receivable, net
    
    $
    571,608
    
    
    
    100.00
    %
    
    $
    461,558
    
    
    
    100.00
    %
    
    $
    423,918
    
    
    
    100.00
    %Volume change from prior year
    
    
    
    
    
    
    23.84
    %
    
    
    
    
    
    
    8.88
    %
    
    
    
    
    
    
    17.32
    %
 December 31, 2001
    
    
    December 31, 2000Amount
    
    
    Percentage
    
    
    Amount
    
    
    PercentageCommercial
    
    $
    64,163
    
    
    
    17.76
    %
    
    $
    70,790
    
    
    
    23.61
    %Agricultural
    
    
    54,934
    
    
    
    15.20
    %
    
    
    44,299
    
    
    
    14.17
    %Real estate secured loans:Commercial property
    
    
    80,092
    
    
    
    22.17
    %
    
    
    58,411
    
    
    
    19.48
    %Farmland
    
    
    25,292
    
    
    
    7.00
    %
    
    
    20,723
    
    
    
    6.91
    %Construction
    
    
    70,474
    
    
    
    19.50
    %
    
    
    41,374
    
    
    
    13.80
    %Residential
    
    
    44,512
    
    
    
    12.32
    %
    
    
    45,612
    
    
    
    15.21
    %Home equity lines
    
    
    3,309
    
    
    
    0.92
    %
    
    
    3,393
    
    
    
    1.13
    %Total real estate
    
    
    223,679
    
    
    
    61.91
    %
    
    
    169,513
    
    
    
    56.53
    %Consumer
    
    
    19,802
    
    
    
    5.48
    %
    
    
    19,195
    
    
    
    6.40
    %Other
    
    
    5,251
    
    
    
    1.45
    %
    
    
    1,690
    
    
    
    0.56
    %Total loans
    
    
    367,829
    
    
    
    101.80
    %
    
    
    305,487
    
    
    
    101.87
    %Less unearned loan fees
    
    
    (1,194
    )
    
    
    (0.33
    )%
    
    
    (1,028
    )
    
    
    (0.34
    )%Less allowance for loan losses
    
    
    (5,312
    )
    
    
    (1.47
    )%
    
    
    (4,578
    )
    
    
    (1.53
    )%Loans receivable, net
    
    $
    361,323
    
    
    
    100.00
    %
    
    $
    299,881
    
    
    
    100.00
    %Volume change from prior year
    
    
    
    
    
    
    20.49
    %
    
    
    
    
    
    
    23.06
    %
 27 - Columbia Bancorp




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##### Table of Contents



The following table sets forth Columbias loan portfolio maturities, excluding mortgage loans
held for sale, on fixed rate loans and repricing dates on variable rate loans, for the periods
indicated. 
 December 31, 2004Table 12
    
    Less than
    
    
    3 months-
    
    
    
    
    
    
    
    
    
    
    Over
    
    
    Total(dollars in thousands)
    
    3 months
    
    

    1 year
    
    

    1-5 years
    
    
    5-10 years
    
    
    10 years
    
    
    loansCommercial loans
    
    $
    60,188
    
    
    $
    3,547
    
    
    $
    28,135
    
    
    $
    1,281
    
    
    $
    467
    
    
    $
    93,618Agricultural loans
    
    
    71,059
    
    
    
    1,320
    
    
    
    6,573
    
    
    
    272
    

    
    
    
    
    
    
    79,224Real estate secured loans:Commercial property
    
    
    31,610
    
    
    
    6,641
    
    
    
    110,059
    
    
    
    3,877
    
    
    
    3,988
    
    
    
    156,175Farmland
    
    
    6,127
    
    
    
    3,792
    
    
    
    33,733
    
    
    
    2,161
    
    
    
    4,772
    
    
    
    50,585Construction
    
    
    130,715
    
    
    
    614
    
    
    
    7,716
    
    
    
    
    
    
    
    369
    
    
    
    139,414Residential
    
    
    11,396
    
    
    
    1,277
    
    
    
    7,875
    
    
    
    3,459
    
    
    
    5,577
    
    
    
    29,584Home equity lines
    
    
    10,628
    
    
    
    
    
    
    
    9
    
    
    
    48
    
    
    
    17
    
    
    
    10,702Total real estate loans
    
    
    190,476
    
    
    
    12,324
    
    
    
    159,392
    
    
    
    9,545
    
    
    
    14,723
    
    
    
    386,460Consumer
    
    
    8,270
    
    
    
    751
    
    
    
    4,701
    
    
    
    487
    
    
    
    177
    
    
    
    14,386Other
    
    
    5,953
    
    
    
    12
    
    
    
    357
    
    
    
    305
    
    
    
    1,033
    
    
    
    7,660Total loans
    
    $
    335,946
    
    
    $
    17,954
    
    
    $
    199,158
    
    
    $
    11,890
    
    
    $
    16,400
    
    
    $
    581,348Loans with fixed interest rates
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    71,581Loans with variable interest rates  daily reprice
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    322,781Loans with variable interest rates  other than daily reprice
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    186,986Total loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    581,348Loans with rate floors
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    328,447Loans with variable interest rates  daily reprice  on or under rate floors
    
    
    
    
    
    
    
    
    
    
    
    
    $
    56,243Loans with variable interest rates  other than daily reprice  on or under rate floors
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    16,664
 At December 31, 2004, Columbia had 9.67% or $56.24 million of its total loans with a
rate floor that reprices daily sitting on or under the rate floor. As interest rates rise these
loans will begin to raise above the loan floor, increasing the interest income received on them and
improving the yield for the net interest margin. Additionally, 87.69% of Columbias loan portfolio
on December 31, 2004, had a variable interest rate. Allowance for Loan and Lease Losses The allowance for loan losses is established through a provision for loan losses charged to expense
based on an overall assessment of Columbias credit portfolio and on the quality of individual
loans within that portfolio. The reserve is an amount that Management believes will be adequate to
absorb possible losses on existing loans that may become uncollectible, based on evaluations of the
collectibility of loans and prior loan loss experience. Management charges loans against the
reserve when it is determined that the principal or a portion thereof may be uncollectible.
Accrual of interest is discontinued on a loan when Management believes, after considering economic
and business conditions, that collection efforts are doubtful. Also, the collateral position is
carefully evaluated when the borrowers financial condition is such that collection of principal
and interest is doubtful. Columbia follows guidance from Financial Accounting Standard Boards Statements 5 and 114 and the
Interagency Policy Statement issued by the Federal Financial Institutions Examination Council
(FFIEC) regarding Allowance for Loan and Lease Losses methodologies. On a quarterly basis,
Management determines the appropriate allowance for loan and lease losses using the following three
methodologies:  
    Loss allocation to groups of loans by internal risk grade
    Loss allocation by loan type
    Loss allocation by historical loss percentage Managements determination of the adequacy of the reserve is based on an assessment of the risk in
the portfolio given the conditions at the time. This assessment consists of certain loans and
leases being Columbia Bancorp - 28




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##### Table of Contents



evaluated on an individual basis, as well as all loans being categorized based on
common credit risk attributes and as a group. The adequacy of the allowance is monitored on an
ongoing basis and is based on Managements evaluation of numerous factors. These factors include the quality of the current
loan portfolio, the trend in the loan portfolios risk ratings, current economic conditions, loan
concentrations, loan growth rates, past-due and non-performing trends, evaluations of specific loss
estimates for all significant problem loans, historical charge-off and recovery experience and
other pertinent information. The following table shows Columbias loan loss experience for the periods indicated. 
 Table 13
    
    Years Ended December 31,(dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Loans outstanding at end of period, net of
unearned loan fees (1)
    $
    582,310
    
    
    $
    470,962
    
    
    $
    439,104
    
    
    $
    385,595
    
    
    $
    304,459Average loans outstanding for the period (1)
    
    $
    544,945
    
    
    $
    456,137
    
    
    $
    419,608
    
    
    $
    348,239
    
    
    $
    288,058Allowance for loan losses balance, beginning of year
    
    $
    6,612
    
    
    $
    6,417
    
    
    $
    5,312
    
    
    $
    4,578
    
    
    $
    3,298Loans charged off:Commercial
    
    
    (762
    )
    
    
    (417
    )
    
    
    (319
    )
    
    
    (587
    )
    
    
    (139
    )Real estate
    
    
    (116
    )
    
    
    (1,569
    )
    
    
    (197
    )
    
    
    (56
    )
    
    
    (14
    )Real estate construction
    
    
    
    
    
    
    
    
    
    
    (58
    )
    
    
    
    
    
    
    Agriculture
    
    
    (80
    )
    
    
    (40
    )
    
    
    (15
    )
    
    
    (79
    )
    
    
    (256
    )Consumer loans
    
    
    (198
    )
    
    
    (412
    )
    
    
    (206
    )
    
    
    (20
    )
    
    
    (8
    )Credit card and related accounts
    
    
    (135
    )
    
    
    (96
    )
    
    
    (91
    )
    
    
    (57
    )
    
    
    (42
    )Total loans charged off
    
    
    (1,291
    )
    
    
    (2,534
    )
    
    
    (886
    )
    
    
    (799
    )
    
    
    (459
    )Recoveries:Commercial
    
    
    67
    
    
    
    50
    
    
    
    97
    
    
    
    71
    
    
    
    6Real estate
    
    
    8
    
    
    
    35
    
    
    
    
    
    
    
    1
    
    
    
    Real estate construction
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    Agriculture
    
    
    4
    
    
    
    28
    
    
    
    11
    
    
    
    
    
    
    
    30Consumer loans
    
    
    13
    
    
    
    31
    
    
    
    72
    
    
    
    5
    
    
    
    3Credit card and related accounts
    
    
    11
    
    
    
    10
    
    
    
    5
    
    
    
    6
    
    
    
    3Total recoveries
    
    
    103
    
    
    
    154
    
    
    
    191
    
    
    
    83
    
    
    
    42Net charge-offs
    
    
    (1,188
    )
    
    
    (2,380
    )
    
    
    (695
    )
    
    
    (716
    )
    
    
    (417
    )Provision for loan losses
    
    
    2,760
    
    
    
    2,575
    
    
    
    1,800
    
    
    
    1,450
    
    
    
    1,697Allowance for loan losses balance, end of period
    
    $
    8,184
    
    
    $
    6,612
    
    
    $
    6,417
    
    
    $
    5,312
    
    
    $
    4,578Ratio of net loans charged off to
average loans outstanding
    
    
    0.22
    %
    
    
    0.52
    %
    
    
    0.17
    
    
    
    0.21
    %
    
    
    0.14Ratio of allowance for loan losses to loans at
end of period
    
    
    140
    %
    
    
    1.40
    %
    
    
    1.46
    %
    
    
    1.38
    %
    
    
    1.50
    %
      The adequacy of the reserve for loan losses should be measured in the context of
several key ratios: (1) the ratio of the reserve to total outstanding loans; (2) the ratio of total
non-performing loans to total loans; and, (3) the ratio of net charge-offs to average loans
outstanding. Since 2000, Columbias ratio of the reserve for loan losses to total loans has ranged
from 1.38% to 1.50%. The amounts provided by these ratios have been sufficient to fund Columbias
charge-offs and to provide for potential losses as the loan portfolio has grown. Columbias
historical ratio of net charge-offs to average outstanding loans illustrates its moderate loan
charge-off and recovery experience. From December 31, 2000 through December 31, 2004, net
charge-offs ranged from 0.14% to 0.52% of average loans. Management believes Columbias loan
underwriting policies and its loan officers knowledge of their customers are significant
contributors to Columbias ability to mitigate loan losses. During the year ended December 31, 2004, Columbia recognized $1.29 million in loan charge-offs and
$103,659 in recoveries for a net charge-off of $1.19 million. The decrease in loan charge-offs for
2004, as compared to 2003, is primarily attributable to a write-down of a single real estate
secured loan for $1.46 million in 2003. Management believes the write-down in 2003 was an unusual
and infrequent occurrence. 29 - Columbia Bancorp




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##### Table of Contents



Net charge-offs for 2004, were consistent with Columbias historical
experience in view of the growth in its loan portfolio. The following table presents information with respect to non-performing loans and other assets. 
 Table 14
    
    December 31,(dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Loans on non-accrual status
    
    $
    4,217
    
    
    $
    3,292
    
    
    $
    742
    
    
    $
    890
    
    
    $
    1,163Loans past due  greater than 90 days
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    7Restructured loans
    
    
    
    
    
    
    10
    
    
    
    25
    
    
    
    113
    
    
    
    116Total non-performing loans
    
    
    4,217
    
    
    
    3,302
    
    
    
    772
    
    
    
    1,003
    
    
    
    1,286Other real estate owned
    
    
    100
    
    
    
    42
    
    
    
    
    
    
    
    349
    
    
    
    Total non-performing assets
    
    $
    4,317
    
    
    $
    3,344
    
    
    $
    772
    
    
    $
    1,352
    
    
    $
    1,286Allowance for loan losses
    
    $
    8,184
    
    
    $
    6,612
    
    
    $
    6,417
    
    
    $
    5,312
    
    
    $
    4,578Ratio of total non-performing assets to
total assets
    
    
    0.60
    %
    
    
    0.57
    %
    
    
    0.14
    %
    
    
    0.28
    %
    
    
    0.31
    %Ratio of total non-performing loans to
total loans, net of unearned loan fees
    
    
    0.74
    %
    
    
    0.71
    %
    
    
    0.18
    %
    
    
    0.26
    %
    
    
    0.43
    %Ratio of reserve for loan losses to
total non-performing assets
    
    
    189.57
    %
    
    
    197.74
    %
    
    
    830.73
    %
    
    
    392.82
    %
    
    
    355.95
    %
 Columbia has adopted a policy for placement of loans on non-accrual status after they become
90 days past due unless an exception is made to the policy. Further, Management may place loans
that are not contractually past due or that are deemed fully collateralized on non-accrual status
to promote better oversight and review of loan arrangements. Loans on non-accrual status at
December 31, 2004, totaled approximately $4.22 million compared to $3.29 million at December 31,
2003, and $742,000 at December 31, 2002. The increase in nonaccrual loans is attributable to a
single commercial real estate secured loan for $3.12 million. This loan was originated over two
years ago to fund a hotel, and the property has failed to reach projected occupancy levels.
Columbia deems this loan to be fully collectible at this time due to a combination of the estimated
collateral value and the recognized ability of the guarantors to repay the principal balance in
full. At this time, Columbia is seeking payment from the guarantors. If an agreement can not be
reached with the guarantors, Columbia will pursue its rights through a legal course of action. Management has adopted procedures to identify and monitor loans that have had their original terms
restructured to accommodate borrowers financial needs. Loan revisions and modifications are
provided to meet the credit needs of borrowers in weakened financial condition and to enhance
ultimate collection. As of December 31, 2004, loans that had been classified as restructured were
insignificant and were performing in accordance with their restructured terms. However, Management
continues to monitor restructured loans for any changes or deterioration in performance. At December 31, 2002, and 2000 Columbia had no assets categorized as other real estate owned
(OREO). There was $100,000 in OREO at December 31, 2004, $41,500 at December 31, 2003, and
$349,000 at December 31, 2001. These amounts represent assets acquired through loan foreclosure or
recovery activities. 30 - Columbia Bancorp




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##### Table of Contents



Deposits The following table sets forth composition of Columbias deposit balances for the dates indicated. 
 Table 15
    
    December 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2002(dollars in thousands)
    
    Amount
    
    
    Percentage
    
    
    Amount
    
    
    Percentage
    
    
    Amount
    
    
    PercentageInterest bearing demand deposits
    
    $
    211,240
    
    
    
    34.81
    %
    
    $
    187,452
    
    
    
    37.76
    %
    
    $
    182,341
    
    
    
    39.76
    %Savings deposits
    
    
    35,926
    
    
    
    5.92
    
    
    
    35,733
    
    
    
    7.20
    
    
    
    32,940
    
    
    
    7.18Time deposits less than $100,000
    
    
    83,242
    
    
    
    13.71
    
    
    
    84,414
    
    
    
    17.01
    
    
    
    66,766
    
    
    
    14.56Time deposits greater than $100,000
    
    
    104,114
    
    
    
    17.15
    
    
    
    38,334
    
    
    
    7.72
    
    
    
    44,746
    
    
    
    9.76Total interest bearing
deposits
    
    
    434,522
    
    
    
    71.59
    
    
    
    345,933
    
    
    
    69.69
    
    
    
    326,793
    
    
    
    71.26Total non-interest bearing
deposits
    
    
    172,422
    
    
    
    28.41
    
    
    
    150,425
    
    
    
    30.31
    
    
    
    131,831
    
    
    
    28.74Total interest bearing and
non-interest bearing
deposits
    
    $
    606,944
    
    
    
    100.00
    %
    
    $
    496,358
    
    
    
    100.00
    %
    
    $
    458,624
    
    
    
    100.00
    %
 At December 31, 2004, total deposits were $606.94 million, an increase of $110.59 million or
22.28%, from total deposits of $496.36 million at December 31, 2003. The total deposits at
December 31, 2003, of $496.36 million represent an increase of $37.73 million or 8.23%, from total
deposits of $458.62 million at December 31, 2002. Deposit growth in 2004, 2003 and 2002 was due to
a combination of competitive pricing strategies, increased marketing and emphasis on the sales
culture within the branches. The growth in deposit accounts in 2004 has primarily been in interest
bearing demand deposits and time deposits with balances greater than $100,000. To the extent
Columbia can fund operations with non-interest bearing demand deposits, net interest spread, which
is the difference between interest income and interest expense, will improve. At December 31,
2004, core deposits, which consist of all demand deposit accounts, savings accounts and
certificates of deposit with balances less than $100,000, accounted for 82.85% of total deposits,
down from 92.28% as of December 31, 2003. The following table summarizes the average amount of, and the average rate paid on each of the
deposit categories for the periods shown. 
 Years ended December 31,Table 16
    
    2004 Averages
    
    
    2003 Averages
    
    
    2002 Averages(dollars in thousands)
    
    Amount
    
    
    Rate Paid
    
    
    Amount
    
    
    Rate Paid
    
    
    Amount
    
    
    Rate PaidNon-interest bearing deposits
    
    $
    163,953
    
    
    
    N/A
    
    
    $
    138,931
    
    
    
    N/A
    
    
    $
    114,652
    
    
    
    N/AInterest bearing demand deposits
    
    
    194,534
    
    
    
    0.69
    %
    
    
    189,353
    
    
    
    0.79
    %
    
    
    160,853
    
    
    
    1.00
    %Savings deposits
    
    
    36,292
    
    
    
    0.39
    %
    
    
    33,687
    
    
    
    0.50
    %
    
    
    32,034
    
    
    
    0.69
    %Time certificates
    
    
    157,854
    
    
    
    2.89
    %
    
    
    125,360
    
    
    
    3.15
    %
    
    
    125,199
    
    
    
    3.64
    %Total deposits
    
    $
    552,633
    
    
    
    
    
    
    $
    487,331
    
    
    
    
    
    
    $
    432,738
 Interest bearing deposits consist of money market, savings and time certificate accounts.
Interest bearing account balances tend to grow or decline as Columbia adjusts its pricing and
product strategies based on market conditions, including competing deposit products. At December
31, 2004, total interest bearing deposit accounts were $434.52 million, an increase of $88.59
million, or 25.61%, from December 31, 2003. The slight decrease in time deposits with balances
less than $100,000 accounts was offset by increases in interest bearing, savings and time deposits
with balances in excess of $100,000 accounts. Interest bearing demand accounts increased $23.79
million, or 12.69%, and time deposits with balances in excess of $100,000 accounts increased $65.78
million, or 171.60%, from December 31, 2003 to 2004. The increase in time deposits with balances
in excess of $100,000 accounts is attributed primarily to an increase in brokered or wholesale
certificates of deposit and public certificates of deposit with balances greater than $100,000.
Overall, deposits grew due to a combination of competitive pricing strategies, increased marketing
and an emphasis on a sales culture within the branches. 31 - Columbia Bancorp




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##### Table of Contents



Columbia utilizes brokered deposits as a source for funding present and future loan growth. In
most cases, brokered deposit accounts are purchased with a long-term maturity of two to seven
years. Brokered deposits are included in totals for time deposits with balances less than $100,000
and totaled $46.65 million and $26.17 million as of December 31, 2004 and 2003, respectively.
During 2004, Columbia initiated the process to acquire wholesale deposits (deposits obtained
outside the retail branch network) similar to brokered certificates of deposit through a process
whereby Columbia posts rates on a proprietary network that solicits certificates of deposits from
other financial institutions. This new source of funding has contributed $18.92 million as of
December 31, 2004, with maturities ranging from 30 days to 2 years. For regulatory purposes these
are classified as either brokered certificates of deposit or public certificates of deposit
depending on their source. As of December 31, 2004, Columbia had acquired approximately $39.40
million in brokered and wholesale certificates of deposit, in order to meet current and future loan
growth. During the second half of 2004, Columbia saw an increase in deposit gathering efforts at
the branch level and began to decrease its origination of brokered certificates of deposit and
wholesale deposits. Columbia expects this decrease to continue into the first half of 2005. At
December 31, 2004, time certificates of deposit with balances in excess of $100,000 totaled $104.11
million, or 17.15% of total outstanding deposits, compared to $38.33 million, or 7.72%, of total
outstanding deposits at December 31, 2003, and $44.75 million, or 9.76%, of total outstanding
deposits at December 31, 2002. The following table sets forth, by time remaining to maturity, all
time certificates of deposit accounts outstanding at December 31, 2004. 
 Table 17
    
    Time Deposits
    
    
    Time Deposits(dollars in thousands)
    
    less than $100,000
    
    
    greater than $100,000
    
    
    TotalThree months or less
    
    $
    18,231
    
    
    $
    18,853
    
    
    $
    37,084Over three through six months
    
    
    15,332
    
    
    
    8,056
    
    
    
    23,388Over six months through twelve months
    
    
    22,127
    
    
    
    26,913
    
    
    
    49,040Over twelve months through five years
    
    
    27,324
    
    
    
    46,599
    
    
    
    73,923Over five years
    
    
    228
    
    
    
    3,693
    
    
    
    3,921$
    83,242
    
    
    $
    104,114
    
    
    $
    187,356
 Long-Term and Short-Term Borrowings The following table sets forth certain information with respect to Columbias Federal Home Loan
Bank of Seattle borrowings. 
 Table 18
    
    December 31,(dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Amount outstanding at end of period
    
    $
    34,040
    
    
    $
    21,133
    
    
    $
    26,285Weighted-average interest rate at end of
period
    
    
    3.41
    %
    
    
    3.44
    %
    
    
    4.20
    %Maximum amount outstanding at any
month-end during the year
    
    $
    46,941
    
    
    $
    27,372
    
    
    $
    50,622Average amount outstanding during the
period
    
    $
    30,023
    
    
    $
    23,672
    
    
    $
    28,673Weighted-average interest rate during
the period
    
    
    3.36
    %
    
    
    3.90
    %
    
    
    4.05
    %
 Short-term borrowings, in the form of a Treasury tax and loan note totaled $849,970,
$850,000 and $850,000 at December 31, 2004, 2003 and 2002, respectively. Columbia Bancorp - 32




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Trust Preferred Securities In December 2002, Columbia issued $4 million in unsecured subordinated debentures to its
wholly-owned subsidiary, Columbia Bancorp Trust I (Trust), which has since been deconsolidated in
accordance with FIN 46R. The interest payments on the subordinated debentures are intended to pass
through the Trust to the beneficial owners of the Trust, in the form of trust preferred securities.
The subordinated debentures and trust preferred securities have identical rate, terms and
conditions  variable rates tied to the 90 day LIBOR with a margin of 3.30% and 30 year maturities.
The Trust Preferred Securities are considered Tier I capital for regulatory purposes. Management
entered into this transaction in order to repurchase 328,422 shares of common stock at a price of
$12.25 per share in November 2002 and maintain regulatory capital within the well-capitalized
category as defined by the Banks regulators. As previously discussed, Columbia deconsolidated the Trust as of March 31, 2004. As a result, the
junior subordinated debentures issued by Columbia to the issuer trusts, totaling $4.1 million, are

reflected on Columbias consolidated balance sheet at December 31, 2004, under the caption Junior
Subordinated Debentures. Columbia also recognized its $124,000 investment in the Trust, which is
recorded among Other Assets in its consolidated balance sheet at December 31, 2004. Shareholders Equity and Regulatory Capital Shareholders equity increased $8.07 million during 2004. Shareholders equity at December 31,
2004, was $65.88 million compared to $57.80 million at December 31, 2003. This increase reflects
net income and other comprehensive income of $10.62 million and $725,193 in exercised stock
options. These additions to equity were partially offset by cash dividends paid or declared of
$3.17 million. Columbias Board of Directors authorized a program to repurchase shares of Columbias common stock
valued at up to $1.6 million, in 2003 with an expiration date of June 30, 2004. In May 2004,
Columbia adopted a new plan, set to expire June 30, 2005, to allow the repurchase of up to $1.0
million in common stock. Columbia has authorized the repurchase programs because the Board of
Directors believes in the long-term value of Columbias stock, and that such repurchase constitutes
a sound investment use of Columbias funds. The repurchase plan will be conducted in the open
market pursuant to the securities Exchange Act Rule 10b-18 at the sole discretion of Management. 33 - Columbia Bancorp




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##### Table of Contents



During the first quarter of 2004, Columbia repurchased and retired 12,500 shares of stock as shown
below; no other activity occurred in 2004. 
 Total # of Shares Purchased
    
    
    Maximum Dollar Value ofTotal # of Shares
    
    
    Average Price
    
    
    as Part of a Publicly
    
    
    Shares Remaining to beTable 19
    
    Purchased
    
    
    Paid per Share
    
    
    Announced Plan(s)(1)
    
    
    Purchased Under the Plan(s)(1)August-03
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    1,600,000September-03
    
    
    16,700
    
    
    
    14.85
    
    
    
    16,700
    
    
    
    1,352,005Three Months Ended
September 30, 2003
    
    
    16,700
    
    
    
    14.85
    
    
    
    16,700
    
    
    
    1,352,005October-03
    
    
    

    
    
    $
    
    
    
    
    
    
    
    $
    1,352,005November-03
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,352,005December-03
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,352,005Three Months Ended
December 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,352,005Twelve Months Ended
December 31, 2003
    
    
    16,700
    
    
    $
    14.85
    
    
    
    16,700
    
    
    $
    1,352,005January-04
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    1,352,005February-04
    
    
    12,500
    
    
    
    18.10
    
    
    
    12,500
    
    
    
    1,125,776March-04
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,125,776Three Months Ended
March 31, 2004
    
    
    12,500
    
    
    
    18.10
    
    
    
    12,500
    
    
    
    1,125,776April-04
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    1,125,776May-04
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,125,776June-04
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,125,776Three Months Ended
June 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,125,776July-04(2)
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    1,000,000August-04
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000,000September-04
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000,000Three Months Ended
September 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000,000October-04
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    1,000,000November-04
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000,000December-04
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000,000Three Months Ended
December 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000,000Twelve Months Ended
December 31, 2004
    
    
    12,500
    
    
    $
    18.10
    
    
    
    12,500
    
    
    $
    1,000,000
   (1)  (2)
 
 The Federal Reserve Board and the Federal Deposit Insurance Corporation have established
minimum requirements for capital adequacy for financial holding companies and member banks. The
requirements address both risk-based capital and leverage 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 reflects
Columbias various capital ratios at December 31, 2004, and December 31, 2003, as compared to
regulatory minimums for capital adequacy purposes. 
 Table 20
    
    December 31, 2004
    
    
    December 31, 2003
    
    
    Regulatory MinimumTier I capital
    
    
    9.80
    %
    
    
    10.46
    %
    
    
    4.00
    %Total risk-based capital
    
    
    11.05
    %
    
    
    11.71
    %
    
    
    8.00
    %Leverage ratio
    
    
    8.74
    %
    
    
    9.19
    %
    
    
    4.00
    %
 Columbia Bancorp - 34




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##### Table of Contents



Liquidity and Capital Resources Columbias Management has adopted policies to help maintain liquidity in order to respond to
changes in the financial environment and ensure sufficient funds are available to meet its
anticipated cash demands, which ordinarily come from customers needs for borrowing and deposit
withdrawals. Generally, Columbias major sources of liquidity are customer deposits, sales and
maturities of investment securities, and net cash provided by operating activities. From time to
time, Columbia also may draw upon credit lines with the Federal Home Loan Bank of Seattle and
correspondent banks, as well as brokered certificates of deposit and other wholesale borrowings. Scheduled loan repayments are a relatively
stable source of funds, while deposit inflows and unscheduled loan prepayments are not as stable
because they are influenced by general interest rate levels, competing interest rates available on
other investments, market competition, economic conditions and other factors. Liquid asset
balances include cash, amounts due from other banks, federal funds sold, unpledged securities
available-for-sale and securities held-to-maturity with maturities occurring within three months.
At December 31, 2004, these liquid assets totaled $62.13 million or 8.69% of total assets, as
compared to $50.66 million or 8.67% of total assets at December 31, 2003. The total liquid assets
of $50.66 million or 8.67% of total assets as of December 31, 2003, compare to $44.54 million or
8.18% of total assets at December 31, 2002. As of December 31, 2004 and 2003, unused and available
lines of credit totaled $74.94 million and $72.95 million, respectively. During the first half of 2004, net loan growth along with projected future loan growth exceeded
expected deposit growth for the year. Because of this, Columbia increased its usage of other
borrowings and brokered certificates of deposit by $12.91 million and $20.47 million, respectively.
Columbia also carried a balance of $18.92 million in other wholesale certificates of deposits as
of December 31, 2004. Additionally, during the last half of 2004, Columbia began a new deposit
gathering campaign and sold or participated $19.62 million in loans, which improved liquidity.
Federal funds sold increased by $5.33 million from December 31, 2003, to December 31, 2004.
Management will continue to rely on retail branch deposit growth, brokered and wholesale
certificates of deposit and other funding sources, as necessitated to maintain acceptable levels of
liquidity. However, during the last half of 2004 and into the first half of 2005, Management
intends to decrease its use of brokered and wholesale certificates of deposits, believing retail
branch deposit gathering efforts will be sufficient for funding loan demand. The analysis of liquidity also includes a review of the changes that appear in the consolidated
statements of cash flows for the year ended December 31, 2004. The statement of cash flows
includes operating, investing, and financing categories. Operating activities include net income
of $10.73 million, which is adjusted for non-cash items and increases or decreases in cash due to
changes in certain assets and liabilities. The net change from operating activities from 2003 to
2004 was a decrease of $4.74 million, mostly attributed to the decrease in the process from the
sale of mortgage loans held-for-sale. Investing activities consist primarily of both proceeds from
and purchases of securities and the impact of the net growth in loans. During 2004, investing
activities increased $94.66 million, most notably in the form of net growth in loans of $74.03
million. Financing activities present the cash flows associated with deposit accounts and reflect
various transactions with shareholders. Financing activities increased during 2004 by $90.38
million, mostly in the area of deposit growth which grew $72.85 million over 2003. At December 31, 2004, Columbia had outstanding unfunded lending commitments of $189.48 million.
Nearly all of these commitments represented unused portions of commitments to extend credit to
businesses, credit lines available to consumers under credit card and other arrangements and
commercial and standby letters of credit. Many of these credit lines will not be fully drawn upon
and, accordingly, the aggregate commitments do not necessarily represent future cash requirements.
Management believes that Columbias sources of liquidity, $50.66 million in liquid assets, $74.94
million in unused lines of credits and the use of brokered or wholesale certificates of deposits,
are sufficient to meet likely calls on outstanding commitments, although there can be no assurance
in this regard. Additionally, Management monitors liquidity on a daily, weekly, monthly and
quarterly basis, depending on the need to ensure liquidity is available to meet its anticipated
cash demands. 35 - Columbia Bancorp




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##### Table of Contents



Business Segment Information Columbia derives revenues from two primary business segments, community banking and mortgage
banking. The following table presents financial information about each of these business segments
for the three most recent fiscal years. 
 Table 21
    
    Community
    
    
    Mortgage(dollars in thousands)
    
    Banking
    
    
    Banking
    
    
    ConsolidatedDecember 31, 2004Net interest income before provision for
loan losses
    
    $
    35,205
    
    
    $
    175
    
    
    $
    35,380Non-interest income
    
    
    5,656
    
    
    
    2,656
    
    
    
    8,312Amortization of the mortgage servicing asset
    
    
    
    
    
    
    1,621
    
    
    
    1,621Salaries and benefits
    
    
    11,878
    
    
    
    1,525
    
    
    
    13,403Occupancy expense, excluding depreciation
    
    
    1,093
    
    
    
    77
    
    
    
    1,170Depreciation
    
    
    1,415
    
    
    
    69
    
    
    
    1,484Other non-interest expenses
    
    
    7,484
    
    
    
    430
    
    
    
    7,914Income before provision for income taxes
    
    
    17,852
    
    
    
    (891
    )
    
    
    16,961Total assets
    
    $
    708,826
    
    
    $
    6,547
    
    
    $
    715,373December 31, 2003Net interest income before provision for
loan losses
    
    $
    30,998
    
    
    $
    401
    
    
    $
    31,399Non-interest income
    
    
    3,808
    
    
    
    5,116
    
    
    
    8,924Amortization of the mortgage servicing asset
    
    
    
    
    
    
    2,000
    
    
    
    2,000Impairment of mortgage servicing asset
    
    
    
    
    
    
    858
    
    
    
    858Salaries and benefits
    
    
    10,812
    
    
    
    2,244
    
    
    
    13,056Occupancy expense, excluding depreciation
    
    
    749
    
    
    
    157
    
    
    
    906Depreciation
    
    
    1,250
    
    
    
    91
    
    
    
    1,341Other non-interest expenses
    
    
    6,541
    
    
    
    506
    
    
    
    7,047Income before provision for income taxes
    
    
    15,737
    
    
    
    (339
    )
    
    
    15,398Total assets
    
    $
    575,463
    
    
    $
    8,673
    
    
    $
    584,136December 31, 2002Net interest income before provision for
loan losses
    
    $
    29,417
    
    
    $
    417
    
    
    $
    29,834Non-interest income
    
    
    2,780
    
    
    
    5,771
    
    
    
    8,551Amortization of the mortgage servicing asset
    
    
    
    
    
    
    1,029
    
    
    
    1,029Impairment of mortgage servicing asset
    
    
    
    
    
    
    2,781
    
    
    
    2,781Salaries and benefits
    
    
    10,310
    
    
    
    2,750
    
    
    
    13,060Occupancy expense, excluding depreciation
    
    
    668
    
    
    
    151
    
    
    
    819Depreciation
    
    
    1,141
    
    
    
    98
    
    
    
    1,239Other non-interest expenses
    
    
    4,195
    
    
    
    657
    
    
    
    4,852Income before provision for income taxes
    
    
    15,883
    
    
    
    (1,278
    )
    
    
    14,605Total assets
    
    $
    526,202
    
    
    $
    18,124
    
    
    $
    544,326
 Total assets within the Mortgage Team have decreased from last year to $6.55 million at year
end 2004. Assets were $8.67 million and $18.12 million for years ending 2003 and 2002,
respectively. Assets of CRB Mortgage Team are primarily comprised of real estate loans in the
portfolio, real estate loans held for sale, mortgage servicing asset, accrued interest receivable,
and furniture and equipment. The mortgage servicing asset as of December 31, 2004, 2003 and 2002,
was valued at $2.16 million, $3.69 million and $4.61 million, respectively. CRB uses a qualified
independent third party to value the mortgage service asset (MSA) in accordance with Statement of
Accounting Standard (SFAS) 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. A qualified independent third party measures the MSA using
information obtained from knowledge of the secondary servicing market and assesses current
transaction values between willing parties. The techniques used in valuing the MSA incorporate
assumptions relative to prevailing conditions in the secondary servicing market. The assumptions
used for valuing the MSA are gathered from near term transactions and include prepayment speed
forecasts, market discount rates, earning rates, servicing costs, acquisition costs and ancillary
income. The mortgage servicing asset is amortized in proportion to and over the period of the
estimated life of the net servicing income. Columbia Bancorp -36




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##### Table of Contents



In 2004, the Mortgage Team recorded a loss before income taxes of $891,000. A loss for the year
ended December 31, 2003, was $339,000; and a loss of $1.28 million was recognized in 2002. The
Mortgage Teams earnings in 2003 and 2002 were negatively impacted by higher mortgage servicing
asset amortization and valuation write-downs. This was caused by the prevailing low mortgage
interest rate environment present during the last three years, which motivated a record number of
borrowers to refinance their mortgage loans. Because borrowers refinance their mortgage loans or
pay them off early, amortization expense must be adjusted to properly match the estimated period of
the outstanding net servicing income. In addition, the mortgage servicing asset is periodically
valued based on a fair value assessment as measured by a qualified and independent entity with
access and knowledge of current servicing portfolio transaction values. If net valuation
write-downs of the mortgage servicing asset are assessed, there is a corresponding charge to the
income statement. During 2004, Columbia had no valuation write-downs. During 2003 and 2002,
Columbia assessed net valuation write-downs in the amounts of $858,000 and $2.78 million,
respectively. The contributing factors to Mortgage Teams loss in 2004 were lower mortgage
originations, overhead expenses remaining constant while experiencing a drop in production and MSA
amortization expense in excess of loan servicing revenue. Inflation At this time, Management does not consider the long-term effects of inflation, as measured by the
Consumer Price Index, will be material to Columbias financial position and results of operations. Off-Balance Sheet Arrangements In the normal course of business, Columbia utilizes financial instruments with off-balance sheet
risk to meet the financing needs of its customers, including loan commitments to extend credit,
commercial letters of credit, standby letters of credit, unused portions of VISA credit cards, and
commitments to fund mortgage loans. The increase in off-balance sheet items has occurred during the last three years as a result of
growth in the loan portfolio. The table below sets forth the distribution of Columbias contingent
liabilities by off-balance sheet type. Commitments to extend credit increased primarily due to
growth and expansion of commercial real estate construction lending from Columbias Central Oregon
branches. 
 Table 22
    
    December 31,(dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Commitments to extend credit
    
    $
    168,812
    
    
    $
    162,232
    
    
    $
    148,938Undisbursed credit card lines of credit
    
    
    18,437
    
    
    
    17,333
    
    
    
    15,220Commercial and standby letters of credit
    
    
    2,227
    
    
    
    2,466
    
    
    
    2,654Total
    
    $
    189,476
    
    
    $
    182,031
    
    
    $
    166,812
 37 - Columbia Bancorp




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##### Table of Contents



Contractual Obligations Columbias contractual obligations include notes due to the Federal Home Loan Bank of Seattle and
treasury tax and loan program with the Federal Reserve, trust preferred securities, operating
leases, deferred compensation and salary continuation plans. Detailed below is a schedule of
Columbias current contractual obligations by maturity and/or payment due. 
 Table 23
    
    Payment due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More than
    
    
    Unspecified(dollars in thousands)
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 years

    
    
    maturityLong-term debt obligationsFederal Home Loan Bank notes
    
    $
    34,040
    
    
    $
    6,750
    
    
    $
    14,500
    
    
    $
    12,062
    
    
    $
    728
    
    
    $
    Trust preferred securities (1)
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    
    Treasury tax and loan note
    
    
    850
    
    
    
    850
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    4,260
    
    
    
    600
    
    
    
    1,464
    
    
    
    1,464
    
    
    
    732
    
    
    
    Other long
term liabilities(2)
    
    
    861
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    861Total
    
    $
    44,011
    
    
    $
    8,200
    
    
    $
    15,964
    
    
    $
    13,526
    
    
    $
    5,460
    
    
    $
    861
   (1)
    
    Columbia has the right to redeem trust preferred securities on or after January 7, 2008.(2)
    
    Amount includes deferred compensation and salary continuation plan benefit obligations. 
 Derivative Management Prior to 2004, the CRB Mortgage Team would accept loan applications that often did not fund and
close for 30 to 60 days. During this time, the loan had been considered to be in the open
mortgage pipeline. Once the loan was either funded or closed, it was then removed from the open
mortgage pipeline. The loans that comprise the open mortgage pipeline were price-locked to the
borrower; therefore, interest rate fluctuations could have resulted in gains and/or losses from the
sale of loans on the secondary market. The risk of price fluctuations to the open mortgage
pipeline was managed by the use of derivative-forward contracts and put options. The underlying
securities of the derivatives were mortgage-backed securities, which generally corresponded with
the composition of the open mortgage pipeline. The structure of the derivatives was intended to
serve as a hedge against the impact of rising and falling interest rates. The gain or loss on the
hedged item attributable to the hedged risk is recognized in earnings in the same period, as
required by Statement of Financial Accounting Standards (SFAS) 133, Accounting for Derivative
Instruments and Hedging Activities. During the fourth quarter of 2003, the Mortgage Team
discontinued the practice of using derivative instruments to hedge the open mortgage pipeline.
Therefore, as of December 31, 2004, there were no outstanding derivatives in use for managing
interest rate risk in the mortgage pipeline. The Mortgage Team instituted a new practice in 2004
of locking mortgage loan applicants using a method known as best efforts. The method of selling
best efforts involves the sale of mortgage loans to third party investors at a committed loan
rate and loan amount within a predetermined time period without risk of a penalty for failure to
deliver the locked mortgage loans. The benefit to Columbia is that it shifts the interest rate
risk to the investor and eliminates the need to use derivatives for managing interest rate risk,
but it does have the effect of lowering the amount of service release mortgage premium income.
Management determined it is in Columbias best interest to accept the lower income for a reduction
in interest rate risk exposure. This strategy will be evaluated on a periodic basis and may change
as information becomes available and/or personnel are hired with specialized skills to effectively
manage the interest rate risk exposure from secondary marketing activity. Recently Issued Accounting Standards In December 2004, the
FASB issued Statement No. 123(R) Share-Based Payment. This statement
replaces existing requirements under SFAS No. 123 Accounting for Stock-Based Compensation, and
eliminates the ability to account for share-based compensation transactions under APB Opinion No.
25 Accounting for Stock Issued to Employees. SFAS No. 123(R) requires stock-based transactions
to be recognized as compensation expense in the income statement based on their fair values at the
date of grant. The fair value should be estimated using option-pricing models such as the
Black-Scholes model or a binomial model. This statement is effective for interim periods beginning
after June 15, 2005. At this time, Columbia does not believe the future impact on earnings to be a
great extent different than what has historically been reported as the pro forma effect to income
in Note 1. The impact to operating and financing cash flows is not considered to be material to
the Financial Statements. Columbia Bancorp -38




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In December 2003, the Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position 03-3 (SOP 03-3), Accounting for
Certain Loans or Debt Securities Acquired in a Transfer, which addresses the accounting for
certain loans acquired in a transfer when it is probable, at acquisition, that the investor will be
unable to collect all contractually required payments receivable. SOP 03-3 is to be applied
prospectively, effective for loans acquired in years beginning after December 15, 2004. SOP 03-3
requires acquired loans with evidence of credit deterioration to be recorded at fair value and
prohibits recording any valuation allowance related to such loans at the time of purchase. This SOP
limits the yield that may be accreted on such loans to the excess of the investors estimated cash
flows over its initial investment in the loan. The excess of contractual cash flows over cash flows
expected to be collected is not to be recognized as an adjustment of yield. Subsequent increases in
cash flows expected to be collected are recognized prospectively through adjustment of the loans
yield over its remaining life. Decreases in cash flows expected to be collected are recognized as
impairment. Loans carried at fair value, mortgage loans held-for-sale, and loans to borrowers in
good standing under revolving credit agreements are excluded from the scope of SOP 03-3. In November 2003, the EITF reached a consensus that certain quantitative and qualitative
disclosures should be required for debt and marketable equity securities classified as
available-for-sale or held-to-maturity under SFAS No. 115 and 124, that are impaired at the balance
sheet date, but for which an other-than-temporary impairment has not been recognized. This EITF
consensus is effective for fiscal years ending after December 15, 2003. Accordingly, Columbia has
adopted the provisions of this consensus as of December 31, 2003 and the result did not have an
impact on Columbias statement of financial position or results of operations. In September 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. This statement establishes standards regarding
classification and measurement of certain financial instruments with characteristics of both
liabilities and equity. It requires financial instruments within the scope of this statement to be
classified as liabilities. Many of these financial instruments were previously classified as
equity. This statement became effective for financial instruments entered into or modified after
May 31, 2003, and was otherwise effective at the beginning of the first interim period beginning
after September 15, 2003. For financial instruments created before the issuance date of this
statement and still existing at the beginning of the interim period of adoption, transition was
achieved by reporting the cumulative effect of a change in an accounting principle by initially
measuring the financial instruments at fair value. Application of the provisions of this statement
did not have a material impact on Columbias consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. This statement amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in other contracts and
for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. Application of the provisions of this statement did not have a material impact on
Columbias consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable
Interest Entities. This interpretation clarifies the application of Accounting Research Bulletin
No. 51, Consolidated Financial Statements, and requires existing unconsolidated variable interest
entities to be consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. This interpretation explains how to identify variable
interest entities and how an enterprise assesses its interests in a variable interest entity to
decide whether to consolidate that entity. In December 2003, the FASB made revisions and delayed
implementation of certain provisions of FIN 46 by issuing FIN 46R. As a public entity that is not
a Small Business Issuer, Columbia was required to apply FIN 46R to all unconsolidated variable
interest entities no later than March 31, 2004, with the exception of unconsolidated
special-purpose entities, which had an implementation deadline of December 31, 2003.
Special-purpose entities for this provision are expected to include entities whose activities are
primarily related to securitizations or other forms of asset-backed financings or single-lessee
leasing arrangements. As a result of adoption of FIN 46R, Columbia no longer consolidates Columbia
Bancorp Trust I within its financial statements and recognizes $4.1 million as junior subordinated
debentures due to the Trust effective March 31, 2004. Management does not anticipate adoption of
the Interpretation will have further effects on the financial condition or results of operations of
Columbia. 39 - Columbia Bancorp




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Factors That May Affect Future Results of Operations Columbias past experience may not be indicative of future performance, and as noted elsewhere in
this report, Management has included forward-looking statements about its business, plans and
prospects that are subject to change. In addition to the other risks or uncertainties contained in
this report, the following risks may affect its operating results, financial condition and cash
flows. If any of these risks occur, either alone or in combination with other factors, Columbias
business, financial condition or operating results could be adversely affected. Moreover, readers
should note that this is not an exhaustive list of the risks Columbia faces; some risks are unknown
or not quantifiable, and other risks that Management currently perceives as immaterial may
ultimately prove more significant than expected. Statements about plans, predictions or
expectations should not be construed to be assurances of performance or promises to take a given
course of action. Adequacy of Loan Loss Allowance.Columbia has established a reserve for probable losses Management
expects in connection with loans in its credit portfolio. This allowance reflects Managements
estimates of the collectibility of certain identified loans, as well as an overall risk assessment
of total loans outstanding. Managements determination of the amount of loan loss allowance is
highly subjective; although Management personnel apply criteria such as risk ratings and historical
loss rates, these factors may not be adequate predictors of future loan performance. Accordingly,
Management cannot offer assurances that these estimates ultimately will prove correct or that the
loan loss allowance will be sufficient to protect against losses that ultimately may occur. If
Columbias loan loss allowance proves to be inadequate, it may suffer unexpected charges to income,
which would adversely impact its results of operations and financial condition. Moreover, bank
regulators frequently monitor banks loan loss allowances, and if regulators were to determine that
the allowance is inadequate, they may require Columbia to increase the allowance, which also would
adversely impact its revenues and financial condition. Valuation of the Mortgage Servicing Asset. Columbia includes on its balance sheet an asset that is
largely influenced by the net present value of expected net servicing income, which was created
from mortgages originated and sold in the secondary market. The value of this asset reflects
certain assumptions about net service fee income, servicing costs, prospective interest rates, real
estate markets, rates of debt retirement, and other factors relating to the length of time during
which those revenues can be expected to continue. The estimates and assumptions used in valuing
the mortgage servicing asset are determined by a qualified independent third party. The qualified
independent third party measures the value of the mortgage servicing asset based on assumptions
influenced by current market conditions and near term transactions, which are likely to cause the
value of the mortgage servicing asset to fluctuate. Therefore, potential valuation adjustments,
which are charged against or credited to current income, may have a material adverse impact on
revenues for the periods in which adjustments occur. Growth and Management. Columbias financial performance and profitability will depend on its
ability to manage recent and possible future growth. Although Management believes that it has
substantially integrated the business and operations of past acquisitions, there can be no
assurance that unforeseen issues relating to the acquisitions will not adversely affect us. In
addition, any future acquisitions and continued growth may present operating and other problems
that could have an adverse effect on Columbias business, financial condition and results of
operations. Accordingly, there can be no assurance that Columbia will be able to execute its growth
strategy or maintain the level of profitability that it has experienced in the past. Changes in Market Interest Rates.Columbias earnings are impacted by changing interest rates.
Changes in interest rates affect the demand for new loans, the credit profile of existing loans,
the rates received on loans and securities, and rates paid on deposits and borrowings. The
relationship between the rates received on loans and securities and the rates paid on deposits and
borrowings is known as the net interest spread. Given Columbias current volume and mix of
interest bearing liabilities and interest-earning assets, net interest spread could be expected to
increase during times when interest rates rise in a parallel shift
along the yield curve
and, conversely, to decline during times of similar falling interest rates. Approximately 10.00% of
Columbias total loans are on or under rate floors that reprice daily with the prime rate, which
will take an approximately 53 basis point rise in the prime rate before these variable interest
rate loans float with market rates above the contractual rate floor. Exposure to interest rate
risk is managed by monitoring the re-pricing frequency of CRBs rate-sensitive assets and
rate-sensitive liabilities over any given period. Although Management believes the current level
of interest rate sensitivity is reasonable, significant
fluctuations in interest rates could potentially have an adverse affect on Columbias business,
financial condition and results of operations. Columbia Bancorp -40




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Geographic Concentration.Substantially all of Columbias business is derived from a
ninecounty area in central, north-central and northeastern Oregon and south-central Washington.
These areas are not extensively populated, and rely primarily upon the agricultural, electrical
power generation and transportation markets for their economic success. While Management has
planned Columbias expansion strategy in part as a means to diversify the geographic concentration
of its business, Columbias business is and will remain sensitive to economic factors that relate
to these industries and local and regional business conditions. As a result, local or regional
economic downturns, or downturns that disproportionately affect one or more of the key industries
in regions served by Columbia, may have a more pronounced effect upon its business than they might
on an institution that is less geographically concentrated. The extent of the future impact of
these events on economic and business conditions cannot be predicted; however, prolonged or acute
fluctuations could have a material and adverse impact upon Columbias results of operation and
financial condition. Regulation.Columbia is subject to government regulation that could limit or restrict its
activities, which in turn could adversely impact its operations. The financial services industry is
regulated extensively. Federal and state regulation is designed primarily to protect the deposit
insurance funds and consumers, as well as Columbias shareholders. These regulations can sometimes
impose significant limitations on Columbias operations. In addition, these regulations are
constantly evolving and may change significantly over time. Significant new laws or changes in
existing laws or repeal of existing laws may cause Columbias results to differ materially.
Further, federal monetary policy, particularly as implemented through the Federal Reserve System,
can significantly affect credit availability. Federal legislation such as Sarbanes-Oxley can
dramatically shift resources and costs to ensure adequate compliance. Competition.Competition may adversely affect Columbias performance. The financial services
business in Columbias market areas is highly competitive. It is becoming increasingly competitive
due to changes in regulation, technological advances, and the accelerating pace of consolidation
among financial services providers. Columbia faces competition both in attracting deposits and in
originating loans. Columbia competes for loans principally through the pricing of interest rates
and loan fees and the efficiency and quality of services. Increasing levels of competition in the
banking and financial services industries may reduce Columbias market share or cause the prices
charged for its services to fall. Columbias results may differ in future periods depending upon
the nature or level of competition. Credit Risk.A source of risk arises from the possibility that losses will be sustained if a
significant number of Columbias borrowers, guarantors and related parties fail to perform in
accordance with the terms of their loans. Columbia has adopted underwriting and credit monitoring
procedures and credit policies, including the establishment and review of the allowance for credit
losses, which Management believes are appropriate to minimize this risk by assessing the likelihood
of nonperformance, tracking loan performance and diversifying its credit portfolio. These policies
and procedures, however, may not prevent unexpected losses that could materially affect Columbias
results of operations. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk Management In the banking industry, a major risk involves changing interest rates, which can have a
significant impact on Columbias profitability. Columbia manages its exposure to changes in
interest rates through asset and liability management activities within the guidelines established
by its Asset Liability Committee (ALCO). ALCO has the responsibility for approving and ensuring
compliance with asset-liability management policies, including interest rate risk exposure, capital
position, liquidity management and the investment portfolio. Reports prepared by ALCO are provided
to the Board of Directors on a regular basis. Asset-liability management simulation models are used to measure interest rate risk. The models
quantify interest rate risk through simulating forecasted net interest income and economic value of


equity over a 12-month forward-looking time horizon under various rate scenarios. The economic
value of equity is defined as the difference between the market value of current assets less the
market value of liabilities. By measuring
the change in the present value of equity under different rate scenarios, Management is able to
identify interest rate risk that may not be evident in simulating changes in the forecasted net
interest income. 41 - Columbia Bancorp




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Table 24 below shows the simulated percentage change in forecasted net interest income and the
economic value of equity based on changes in the interest rate environment. The change in interest
rates assumes an immediate, parallel and sustained shift in the base interest rate forecast.
Through these simulations, Management estimates the impact on net interest income and present value
of equity based on a 100 and 200 basis point upward and downward gradual change of market interest
rates over a one-year period. The analysis did not allow rates to fall below zero. 
 Table 24
    
    Percent Change
    
    
    Percent Changein Net Interest
    
    
    in Present ValueChange in Interest Rates
    
    Income
    
    
    of Equity-200 Basis points
    
    
    -6.30
    %
    
    
    -4.03
    %-100 Basis points
    
    
    -4.40
    %
    
    
    -3.20
    %+100 Basis points
    
    
    6.02
    %
    
    
    4.10
    %+200 Basis points
    
    
    12.20
    %
    
    
    8.17
    %
 As illustrated in the above table, Columbias balance sheet is currently asset sensitive,
meaning that interest-earning assets mature or reprice more quickly than interest bearing
liabilities in a given period. Therefore, according to the model, net interest income should
increase slightly when rates increase and shrink somewhat when rates fall in an interest rate shift
that is parallel across all terms of the yield curve. This is primarily a result of the
concentration of variable rate and short-term commercial loans in Columbias portfolio. The simulation model does not take into account future management actions that could be undertaken,
should a change occur in actual market interest rates. Also, certain assumptions underlie modeling
simulation results and these assumptions may have significant impact on the results. These include
assumptions regarding the level of interest rates and balance changes of deposit products that do
not have stated maturities. These assumptions have been developed through a combination of industry
standards and historical pricing behavior and modeled for future expectations. The model also
includes assumptions about changes in the composition or mix of the balance sheet. The results
derived from the simulation model could vary significantly due to external factors such as changes
in prepayment assumptions, early withdrawals of deposits and unforeseen competitive factors. Mortgage Servicing Asset The CRB Mortgage Team has recorded a mortgage-servicing asset (MSA) that contains risk due to
changes in loan prepayments. The value of the MSA will likely decline when interest rates fall due
to an increase in loan prepayments. The MSA is measured on a quarterly basis by a qualified
independent entity with access and knowledge of current servicing transaction values between
willing parties. The techniques used in valuing the MSA incorporate assumptions relative to
prevailing conditions in the secondary servicing market. The assumptions used for valuing the MSA
are gathered from near term transactions and include prepayment speed forecasts, market discount
rates, earning rates, servicing costs, acquisition costs and ancillary income. A decrease in the
value of the MSA is recorded as a valuation write-down adjustment. However, actual fair values may
differ from the measured valuation due to limitations in available third-party market quotations
and assumptions. The value of the mortgage servicing asset is interest rate sensitive and may require quarterly
valuation adjustments. If mortgage rates were to increase in 2005, Management would expect the
mortgage servicing asset value to stabilize and may in some instances be increased. In this
instance, the monthly mortgage servicing asset amortization expense would be adjusted to meet the
expected remaining life of the outstanding net servicing income. Columbia Bancorp -42




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Selected Quarterly Financial Data (unaudited) The following tables set forth Columbias unaudited consolidated financial data regarding
operations for each quarter of 2004 and 2003. This information, in the opinion of Management,
includes all normal and recurring adjustments, to fairly state the information contained in the
tables. Certain amounts previously reported have been reclassified to conform with the current
presentation. These reclassifications had no net impact on the results of operations. 
 2004 Quarterly Financial DataTable 25
    
    First
    
    
    Second
    
    
    Third
    
    
    Fourth(In thousands except per share data)
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    TotalIncome Statement DataInterest income
    
    $
    9,607
    
    
    $
    10,352
    
    
    $
    11,208
    
    
    $
    11,541
    
    
    $
    42,708Interest expense
    
    
    1,467
    
    
    
    1,554
    
    
    
    2,027
    
    
    
    2,280
    
    
    
    7,328Net interest income
    
    
    8,140
    
    
    
    8,798
    
    
    
    9,181
    
    
    
    9,261
    
    
    
    35,380Loan loss provision
    
    
    700
    
    
    
    1,390
    
    
    
    550
    
    
    
    120
    
    
    
    2,760Net interest income after
loan loss provision
    
    
    7,440
    
    
    
    7,408
    
    
    
    8,631
    
    
    
    9,141
    
    
    
    32,620Non-interest income
    
    
    1,581
    
    
    
    1,917
    
    
    
    2,016
    
    
    
    2,798
    

    
    
    8,312Non-interest expense
    
    
    5,871
    
    
    
    5,674
    
    
    
    6,013
    
    
    
    6,413
    
    
    
    23,971Income before provision for
income taxes
    
    
    3,150
    
    
    
    3,651
    
    
    
    4,634
    
    
    
    5,526
    
    
    
    16,961Provision for income taxes
    
    
    1,133
    
    
    
    1,336
    
    
    
    1,736
    
    
    
    2,021
    
    
    
    6,226Net income
    
    $
    2,017
    
    
    $
    2,315
    
    
    $
    2,898
    
    
    $
    3,505
    
    
    $
    10,735Earnings Per ShareBasic earnings per common share
    
    $
    0.23
    
    
    $
    0.26
    
    
    $
    0.33
    
    
    $
    0.40
    
    
    $
    1.22Diluted earnings per common share
    
    $
    0.22
    
    
    $
    0.26
    
    
    $
    0.32
    
    
    $
    0.39
    
    
    $
    1.19
 2003 Quarterly Financial DataFirst
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    TotalIncome Statement DataInterest income
    
    $
    9,396
    
    
    $
    9,583
    
    
    $
    9,737
    
    
    $
    9,514
    
    
    $
    38,230Interest expense
    
    
    1,770
    
    
    
    1,776
    
    
    
    1,703
    
    
    
    1,582
    
    
    
    6,831Net interest income
    
    
    7,626
    
    
    
    7,807
    
    
    
    8,034
    
    
    
    7,932
    
    
    
    31,399Loan loss provision
    
    
    300
    
    
    
    1,700
    
    
    
    400
    
    
    
    175
    
    
    
    2,575Net interest income after
loan loss provision
    
    
    7,326
    
    
    
    6,107
    
    
    
    7,634
    
    
    
    7,757
    
    
    
    28,824Non-interest income
    
    
    2,000
    
    
    
    1,971
    
    
    
    2,843
    
    
    
    2,110
    
    
    
    8,924Non-interest expense
    
    
    5,588
    
    
    
    5,758
    
    
    
    5,651
    
    
    
    5,353
    
    
    
    22,350Income before provision for
income taxes
    
    
    3,738
    
    
    
    2,320
    
    
    
    4,826
    
    
    
    4,514
    
    
    
    15,398Provision for income taxes
    
    
    1,348
    
    
    
    849
    
    
    
    1,767
    
    
    
    1,600
    
    
    
    5,564Net income
    
    $
    2,390
    
    
    $
    1,471
    
    
    $
    3,059
    
    
    $
    2,914
    
    
    $
    9,834Earnings Per ShareBasic earnings per common share (1)
    
    $
    0.27
    
    
    $
    0.17
    
    
    $
    0.35
    
    
    $
    0.33
    
    
    $
    1.13Diluted earnings per common share (1)
    
    $
    0.26
    
    
    $
    0.16
    
    
    $
    0.34
    
    
    $
    0.32
    
    
    $
    1.09
   (1)
    
    Prior periods have been adjusted to reflect the 10% stock dividend, effective May 1, 2003. 
 Additional information called for by this item is contained in Columbia Bancorps Annual
Report to Shareholders for the year ended December 31, 2004, and is incorporated herein by
reference. 43 - Columbia Bancorp




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders
Columbia Bancorp and Subsidiary We have audited the accompanying consolidated balance sheets of Columbia Bancorp and Subsidiary as
of December 31, 2004 and 2003, and the related consolidated statements of income and comprehensive
income, changes in shareholders equity, and cash flows for each of the three years in the period
ended December 31, 2004. These consolidated financial statements are the responsibility of Columbia
Bancorps Management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by Management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Columbia Bancorp and Subsidiary as of December 31,
2004 and 2003, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2004, in conformity with United States generally accepted
accounting principles. We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the effectiveness of the
Companys internal control over financial reporting as of December 31, 2004, based on the criteria
established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 14, 2005, expressed an
unqualified opinion on managements assessment of the
effectiveness of the Companys internal control over financial reporting and an
unqualified opinion on the effectiveness of the Companys
internal control over financial reporting. (SIGNATURE) Portland, Oregon
January 20, 2005 Columbia Bancorp -44




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COLUMBIA BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS December 31,2004
    
    
    2003ASSETSCASH AND CASH EQUIVALENTSCash and due from banks
    
    $
    25,527,270
    
    
    $
    33,809,732Interest-bearing deposits with banks
    
    
    12,165,712
    
    
    
    5,100,513Federal funds sold
    
    
    20,285,817
    
    
    
    14,955,948Total cash and cash equivalents
    
    
    57,978,799
    
    
    
    53,866,193INVESTMENT SECURITIESInvestment securities available-for-sale
    
    
    24,573,394
    
    
    
    13,796,896Investment securities held-to-maturity
    
    
    17,789,481
    
    
    
    14,963,728Equity securities
    
    
    605,594
    
    
    
    78,750Restricted equity securities
    
    
    2,429,200
    
    
    
    2,843,100Total investment securities
    
    
    45,397,669
    
    
    
    31,682,474LOANSLoans held-for-sale
    
    
    2,517,182
    
    
    
    2,792,384Loans, net of allowance for loan losses and unearned loan fees
    
    
    571,607,850
    
    
    
    461,557,765Total loans
    
    
    574,125,032
    
    
    
    464,350,149OTHER ASSETSProperty and equipment, net of accumulated depreciation
    
    
    15,222,622
    
    
    
    13,766,909Accrued interest receivable
    
    
    4,107,806
    
    
    
    3,769,527Goodwill
    
    
    7,389,094
    
    
    
    7,389,094Mortgage servicing asset, net of accumulated
amortization and valuation allowance
    
    
    2,162,654
    
    
    
    3,691,449Other assets
    
    
    8,988,842
    
    
    
    5,619,839Total other assets
    
    
    37,871,018
    
    
    
    34,236,818TOTAL ASSETS
    
    $
    715,372,518
    
    
    $
    584,135,634LIABILITIES AND SHAREHOLDERS EQUITYDEPOSITSNoninterest-bearing demand deposits
    
    $
    172,421,947
    
    
    $
    150,425,062Interest-bearing demand deposits
    
    
    211,239,408
    
    
    
    187,452,543Savings accounts
    
    
    35,926,117
    
    
    
    35,732,611Time certificates
    
    
    187,356,091
    
    
    
    122,747,824Total deposits
    
    
    606,943,563
    
    
    
    496,358,040OTHER LIABILITIESNotes payable
    
    
    34,889,564
    
    
    
    21,983,465Accrued interest payable and other liabilities
    
    
    3,538,413
    
    
    
    3,989,665Junior subordinated debentures
    
    
    4,124,000
    
    
    
    Guaranteed undivided beneficial interest in junior subordinated
deferrable interest debenture (Trust preferred securities)
    
    
    
    
    
    
    4,000,000Total other liabilities
    
    
    42,551,977
    
    
    
    29,973,130Total liabilities
    
    
    649,495,540
    
    
    
    526,331,170COMMITMENTS AND CONTINGENCIES (Note 19)SHAREHOLDERS EQUITYCommon stock, no par value, 20,000,000 shares authorized;
8,839,151 and 8,750,582 shares issued and outstanding
at December 31, 2004 and 2003, respectively
    
    
    32,140,776
    
    
    
    31,520,099Retained earnings
    
    
    33,816,489
    
    
    
    26,252,366Accumulated comprehensive (loss) income, net of taxes
    
    
    (80,287
    )
    
    
    31,999Total shareholders equity
    
    
    65,876,978
    
    
    
    57,804,464TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    715,372,518
    
    
    $
    584,135,634
 See accompanying notes. 
 45 - Columbia Bancorp




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COLUMBIA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Years Ended December 31,2004
    
    
    2003
    
    
    2002INTEREST INCOMEInterest and fees on loans
    
    $
    41,239,595
    
    
    $
    36,496,259
    
    
    $
    35,334,245Interest on investments:Taxable investment securities
    
    
    434,568
    
    
    
    514,195
    
    
    
    1,035,059Nontaxable investment securities
    
    
    617,105
    
    
    
    729,022
    
    
    
    807,504Interest on federal funds sold
    
    
    201,278
    
    
    
    205,367
    
    
    
    99,071Other interest and dividend income
    
    
    215,417
    
    
    
    285,276
    
    
    
    340,172Total interest income
    
    
    42,707,963
    
    
    
    38,230,119
    
    
    
    37,616,051INTEREST EXPENSEInterest on interest-bearing demand deposit
and savings accounts
    
    
    1,475,891
    
    
    
    1,665,626
    
    
    
    1,825,731Interest on time certificates
    
    
    4,554,432
    
    
    
    3,954,361
    
    
    
    4,601,960Other borrowed funds
    
    
    1,297,755
    
    
    
    1,210,653
    
    
    
    1,354,438Total interest expense
    
    
    7,328,078
    
    
    
    6,830,640
    
    
    
    7,782,129NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES
    
    
    35,379,885
    
    
    
    31,399,479
    
    
    
    29,833,922PROVISION FOR LOAN LOSSES
    
    
    2,760,000
    
    
    
    2,575,000
    
    
    
    1,800,000NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES
    
    
    32,619,885
    
    
    
    28,824,479
    
    
    
    28,033,922NON-INTEREST INCOMEService charges and fees
    
    
    4,657,884
    
    
    
    4,307,634
    
    
    
    4,089,240Mortgage Team net revenues
    
    
    1,121,546
    
    
    
    2,431,672
    
    
    
    2,193,314CRB Financial Services Team revenues
    
    
    520,427
    
    
    
    579,388
    
    
    
    559,968Credit card discounts and fees
    
    
    465,481
    
    
    
    436,953
    
    
    
    419,762Net (loss) gain on sale or call of investment securities
    
    
    (6,823
    )
    
    
    462,249
    
    
    
    295,822Other non-interest income
    
    
    1,553,040
    
    
    
    705,881
    
    
    
    993,041Total non-interest income
    
    
    8,311,555
    
    
    
    8,923,777
    
    
    
    8,551,147NON-INTEREST EXPENSESalaries and employee benefits
    
    
    13,402,913
    
    
    
    13,055,840
    
    
    
    13,059,535Occupancy expense
    
    
    2,654,462
    
    
    
    2,247,309
    
    
    
    2,058,065Item and statement processing
    
    
    774,591
    
    
    
    777,594
    
    
    
    760,156Advertising
    
    
    811,067
    
    
    
    536,871
    
    
    
    500,086Data processing expense
    
    
    512,770
    
    
    
    352,743
    
    
    
    370,889Other non-interest expense
    
    
    5,815,286
    
    
    
    5,379,794
    
    
    
    5,231,736Total non-interest expense
    
    
    23,971,089
    
    
    
    22,350,151
    
    
    
    21,980,467INCOME BEFORE PROVISION FOR
INCOME TAXES
    
    
    16,960,351
    
    
    
    15,398,105
    
    
    
    14,604,602PROVISION FOR INCOME TAXES
    
    
    6,225,661
    
    
    
    5,564,309
    
    
    
    5,223,497NET INCOME
    
    
    10,734,690
    
    
    
    9,833,796
    
    
    
    9,381,105OTHER COMPREHENSIVE INCOME (LOSS)Unrealized (losses) gains on securities:Unrealized holding (losses) gains arising during the period
    
    
    (92,800
    )
    
    
    173,809
    
    
    
    30,473Reclassification adjustment for (losses) gains
included in net income
    
    
    4,326
    
    
    
    (295,839
    )
    
    
    (194,011
    )Reduction in fair value of interest-rate swap
    
    
    (23,812
    )
    
    
    (20,221
    )
    
    
    Other comprehensive loss, net of taxes
    
    
    (112,286
    )
    
    
    (142,251
    )
    
    
    (163,538
    )COMPREHENSIVE INCOME
    
    $
    10,622,404
    
    
    $
    9,691,545
    
    
    $
    9,217,567BASIC EARNINGS PER SHARE OF COMMON
STOCK
    
    $
    1.22
    
    
    $
    1.13
    
    
    $
    1.05DILUTED EARNINGS PER SHARE OF
COMMON STOCK
    
    $
    1.19
    
    
    $
    1.09
    
    
    $
    1.03
 See accompanying notes. 
 Columbia Bancorp -46




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##### Table of Contents



COLUMBIA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY AccumulatedComprehensive
    
    
    TotalCommon Stock
    
    
    Retained
    
    
    Income
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Earnings
    
    
    (Loss)
    
    
    EquityBALANCE, December 31, 2001
    
    
    8,037,078
    
    
    $
    20,733,594
    
    
    $
    25,373,550
    
    
    $
    337,788
    
    
    $
    46,444,932Stock options exercised
    
    
    153,724
    
    
    
    1,008,572
    
    
    
    
    
    
    
    
    
    
    
    1,008,572Income tax benefit from stock options
exercised
    
    
    
    
    
    
    122,704
    
    
    
    
    
    
    
    
    
    
    
    122,704Repurchase of common stock
    
    
    (328,422
    )
    
    
    (4,023,170
    )
    
    
    
    
    
    
    
    
    
    
    (4,023,170
    )Cash dividends paid
    
    
    
    
    
    
    
    
    
    
    (1,951,234
    )
    
    
    
    
    
    
    (1,951,234
    )Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    (628,990
    )
    
    
    
    
    
    
    (628,990
    )Net income and comprehensive income
    
    
    
    
    
    
    
    
    
    
    9,381,105
    
    
    
    (163,538
    )
    
    
    9,217,567BALANCE, December 31, 2002
    
    
    7,862,380
    
    
    
    17,841,700
    
    
    
    32,174,431
    
    
    
    174,250
    
    
    
    50,190,381Stock options exercised
    
    
    113,015
    
    
    
    782,637
    
    
    
    
    
    
    
    
    
    
    
    782,637Income tax benefit from stock options
exercised
    
    
    
    
    
    
    212,242
    
    
    
    
    
    
    
    
    
    
    
    212,24210% stock dividend and cash paid for
fractional shares
    
    
    791,887
    
    
    
    12,931,515
    
    
    
    (12,937,194
    )
    
    
    
    
    
    
    (5,679
    )Repurchase of common stock
    
    
    (16,700
    )
    
    
    (247,995
    )
    
    
    
    
    
    
    
    
    
    
    (247,995
    )Cash dividends paid
    
    
    
    
    
    
    
    
    
    
    (2,031,115
    )
    
    
    
    
    
    
    (2,031,115
    )Cash dividends declared
    
    
    
    
    
    
    
    
    
    

    (787,552
    )
    
    
    
    
    
    
    (787,552
    )Net income and comprehensive income
    
    
    
    
    
    
    
    
    
    
    9,833,796
    
    
    
    (142,251
    )
    
    
    9,691,545BALANCE, December 31, 2003
    
    
    8,750,582
    
    
    
    31,520,099
    
    
    
    26,252,366
    
    
    
    31,999
    
    
    
    57,804,464Stock options exercised
    
    
    101,069
    
    
    
    725,193
    
    
    
    
    
    
    
    
    
    
    
    725,193Income tax benefit from stock options
exercised
    
    
    
    
    
    
    121,713
    
    
    
    
    
    
    
    
    
    
    
    121,713Repurchase of common stock
    
    
    (12,500
    )
    
    
    (226,229
    )
    
    
    
    
    
    
    
    
    
    
    (226,229
    )Cash dividends paid
    
    
    
    
    
    
    
    
    
    
    (2,375,043
    )
    
    
    
    
    
    
    (2,375,043
    )Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    (795,524
    )
    
    
    
    
    
    
    (795,524
    )Net income and comprehensive income
    
    
    
    
    
    
    
    
    
    
    10,734,690
    
    
    
    (112,286
    )
    
    
    10,622,404BALANCE, December 31, 2004
    
    
    8,839,151
    
    
    $
    32,140,776
    
    
    $
    33,816,489
    
    
    $
    (80,287
    )
    
    $
    65,876,978
 See accompanying notes. 
 47 - Columbia Bancorp




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##### Table of Contents



COLUMBIA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31,2004
    
    
    2003
    
    
    2002CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    10,734,690
    
    
    $
    9,833,796
    
    
    $
    9,381,105Adjustments to reconcile net income to net cash from
operating activities:Amortization of premiums and discounts on investment securities
    
    
    52,682
    
    
    
    16,113
    
    
    
    65,407Net loss (gain) on sale or call of investment securities
    
    
    6,823
    
    
    
    (462,249
    )
    
    
    (295,822
    )Federal Home Loan Bank stock dividend
    
    
    (69,800
    )
    
    
    (144,900
    )
    
    
    (157,700
    )Loss on sale or write-down of property, equipment,
and other real estate owned
    
    
    (560,650
    )
    
    
    118,196
    
    
    
    55,395Depreciation and amortization:Property, equipment, and other
    
    
    1,551,223
    
    
    
    1,351,158
    
    
    
    1,238,839Mortgage servicing asset
    
    
    1,621,091
    
    
    
    2,000,050
    
    
    
    1,028,810Impairment of mortgage servicing asset
    
    
    
    
    
    
    858,000
    
    
    
    2,781,111Deferred income tax benefit
    
    
    (194,493
    )
    
    
    (828,758
    )
    
    
    (692,556
    )Provision for loan losses
    
    
    2,760,000
    
    
    
    2,575,000
    
    
    
    1,800,000Increase (decrease) in cash due to changes in certain assets
and liabilities:Proceeds from the sale of mortgage loans held-for-sale
    
    
    42,608,162
    
    
    
    236,753,057
    
    
    
    239,365,825Production of mortgage loans held-for-sale
    
    
    (42,332,960
    )
    
    
    (230,775,664
    )
    
    
    (229,175,623
    )Accrued interest receivable
    
    
    (338,279
    )
    
    
    125,710
    
    
    
    (409,704
    )Mortgage servicing asset
    
    
    (92,296
    )
    
    
    (1,935,108
    )
    
    
    (2,227,511
    )Other assets
    
    
    (1,178,026
    )
    
    
    (781,711
    )
    
    
    (326,919
    )Accrued interest payable and other liabilities
    
    
    (92,050
    )
    
    
    537,802
    
    
    
    2,865,950Net cash from operating activities
    
    
    14,476,117
    
    
    
    19,240,492
    
    
    
    25,296,607CASH FLOWS FROM INVESTING ACTIVITIESProceeds from the sale of available-for-sale securities
    
    
    4,500,000
    
    
    
    5,670,252
    
    
    
    300,000Proceeds from the maturity of available-for-sale securities
    
    
    8,100,000
    
    
    
    19,030,000
    
    
    
    7,300,000Purchases of available-for-sale securities
    
    
    (23,508,519
    )
    
    
    (23,533,877
    )
    
    
    (4,000,000
    )Proceeds from the maturity or call of held-to-maturity securities
    
    
    1,340,143
    
    
    
    4,954,467
    
    
    
    4,077,273Purchases of held-to-maturity securities
    
    
    (4,180,255
    )
    
    
    (1,347,865
    )
    
    
    (81,579
    )Purchases of equity securities
    
    
    (601,250
    )
    
    
    
    
    
    
    Net change from the sale (purchases) of restricted equity securities
    
    
    483,700
    
    
    
    
    
    
    
    18,813Net change in loans made to customers
    
    
    (114,346,355
    )
    
    
    (40,319,910
    )
    
    
    (64,947,534
    )Investment in low-income housing tax credits
    
    
    (76,750
    )
    
    
    
    
    
    
    (10,000
    )Investment in bank-owned life insurance
    
    
    (2,000,000
    )
    
    
    
    
    
    
    Proceeds from the sale of property and equipment
    
    
    1,519,486
    
    
    
    
    
    
    
    25,269Proceeds from the sale of other real estate owned
    
    
    1,531,330
    
    
    
    63,174
    
    
    
    876,690Payments made for purchase of property and equipment
    
    
    (3,952,582
    )
    
    
    (1,042,699
    )
    
    
    (1,589,572
    )Net cash from investing activities
    
    
    (131,191,052
    )
    
    
    (36,526,458
    )
    
    
    (58,030,640
    )CASH FLOWS FROM FINANCING ACTIVITIESNet change in demand deposit and savings accounts
    
    
    45,977,256
    
    
    
    26,498,587
    
    
    
    66,596,197Net change in time certificates
    
    
    64,608,267
    
    
    
    11,235,449
    
    
    
    (5,396,585
    )Net increase (decrease) in notes payable
    
    
    12,906,099
    
    
    
    (5,151,481
    )
    
    
    (8,769,596
    )Proceeds from issuance of Trust Preferred Securities
    
    
    
    
    
    
    
    
    
    
    4,000,000Dividends paid and cash paid for fractional shares
    
    
    (3,163,045
    )
    
    
    (2,666,573
    )
    
    
    (2,593,588
    )Proceeds from the exercise of stock options
    
    
    725,193
    
    
    
    782,637
    
    
    
    1,008,572Repurchase of common stock
    
    
    (226,229
    )
    
    
    (247,995
    )
    
    
    (4,023,170
    )Net cash from financing activities
    
    
    120,827,541
    
    
    
    30,450,624
    
    
    
    50,821,830NET INCREASE IN CASH AND CASH
EQUIVALENTS
    
    
    4,112,606
    
    
    
    13,164,658
    
    
    
    18,087,797CASH AND CASH EQUIVALENTS, beginning of year
    
    
    53,866,193
    
    
    
    40,701,535
    
    
    
    22,613,738CASH AND CASH EQUIVALENTS, end of year
    
    $
    57,978,799
    
    
    $
    53,866,193
    
    
    $
    40,701,535SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATIONInterest paid in cash
    
    $
    8,277,852
    
    
    $
    6,728,204
    
    
    $
    7,784,590Taxes paid in cash
    
    $
    6,744,000
    
    
    $
    6,027,000
    
    
    $
    5,919,000SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIESChange in unrealized gain or loss on available-for-sale
securities, net of taxes
    
    $
    (104,590
    )
    
    $
    (122,030
    )
    
    $
    (163,538
    )Change in fair value of interest-rate swap
    
    $
    (7,696
    )
    
    $
    (20,221
    )
    
    $
    Cash dividend declared and payable after year-end
    
    $
    795,524
    
    
    $
    787,552
    
    
    $
    628,990Transfers of loans to other real estate owned
    
    $
    1,536,270
    
    
    $
    104,700
    
    
    $
    553,100
 See accompanying notes. 
 Columbia Bancorp -48




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##### Table of Contents



NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and nature of operations Columbia Bancorp (Columbia) was incorporated on October
3, 1995, and became the holding company of Columbia River Bank (the Bank) effective January 1,
1996. The Bank is a state-chartered financial institution authorized to provide banking services in
the states of Oregon and Washington. With its administrative headquarters in The Dalles, Oregon,
the Bank operates 20 branch facilities; 17 branches are located in Wasco, Hood River, Deschutes,
Clackamas, Jefferson, Umatilla, and Yamhill counties in Oregon, and three branches in Benton and
Klickitat counties in Washington. The Bank operates a mortgage banking division, the CRB Mortgage
Team, which provides services to all banking branches of the Bank. Through arrangements with
Primevest Financial Services, Inc., a registered securities broker-dealer, the CRB Financial
Services Team offers a wide range of non-Federal Deposit Insurance Corporation insured financial
products and services to consumers. Until March 31, 2004, Columbia also recognized Columbia Bancorp
Trust I (Trust), as a wholly-owned Delaware statutory business trust, for purposes of issuing
guaranteed undivided beneficial interests in junior subordinated debentures (Trust Preferred
Securities). During December 2002, the Trust issued $4.0 million in Trust Preferred Securities for
the purpose of repurchasing shares of common stock and to maintain appropriate regulatory capital.
In accordance with Financial Accounting Standards Boards (FASB) Interpretation No. 46 (revised
December 2003) (FIN 46R) Consolidation of Variable Interest Entities, Columbia was required to
deconsolidate the Trust effective March 31, 2004. Substantially all activity of Columbia is
conducted through its subsidiary bank. The Bank, along with Columbia, is subject to the regulations
of certain federal and state agencies and undergoes periodic examinations by those regulatory
authorities. All significant intercompany accounts and transactions between Columbia and its subsidiary have
been eliminated in the preparation of the consolidated financial statements. Managements estimates and assumptions Preparation of the consolidated financial statements, in
conformity with generally accepted accounting principles, requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the date of the
balance sheet, and revenues and expenses for the period. Actual results could differ significantly
from those estimates. Significant estimations made by Management primarily involve the calculation
of the allowance for loan losses and the valuation of the mortgage servicing asset. Cash and cash equivalents Cash and cash equivalents normally include cash on hand, amounts due
from banks, and federal funds sold. Cash and due from banks include amounts the Bank is required to
maintain to meet certain average reserve and compensating balance requirements of the Federal
Reserve. As of December 31, 2004 and 2003, the Bank had no reserve requirement to be maintained at
the Federal Reserve; however, total clearing balance requirements at December 31, 2004 and 2003
were $400,000. Investment securities Columbia is required to specifically identify its investment securities as
held-to-maturity, available-for-sale, or trading accounts. Accordingly, Management has
determined that all investment securities held at December 31, 2004 and 2003, are either
held-to-maturity or available-for-sale and conform to the following accounting policies: Securities held-to-maturity Bonds, notes and debentures for which Columbia has the intent and
ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are
recognized in interest income, using the interest method over the period to maturity. Securities available-for-sale Available-for-sale securities consist of bonds, notes, debentures
and certain equity securities not classified as held-to-maturity securities. Securities are
generally classified as available-for-sale if the instrument may be sold in response to such
factors as (1) changes in market interest rates and related changes in the prepayment risk, (2)
needs for liquidity, (3) changes in the availability of and the yield on alternative instruments
and (4) changes in funding sources and terms. Unrealized holding gains and losses, net of tax, on
available-for-sale securities are reported as other comprehensive income and carried as accumulated
comprehensive income or loss within shareholders equity until realized. Fair values for these
investment securities are based on quoted market prices. Gains and losses on the sale of
available-for-sale securities are determined using the specific-identification method. 49 - Columbia Bancorp




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##### Table of Contents



Declines in the fair value of individual held-to-maturity and available-for-sale securities, below

their cost, that are other than temporary result in write-downs of the individual securities to
their fair value. The related write-
downs are included in earnings as realized losses. At each financial statement date, Management
assesses each investment to determine if impaired investments are temporarily impaired or if the
impairment is other-than-temporary based upon the positive and negative evidence available.
Evidence evaluated includes, but is not limited to, industry analyst reports, credit market
conditions and interest rate trends. A decline in the market value of any security below cost that
is deemed other-than-temporary results in a charge to earnings and the corresponding establishment
of a new cost basis for the security. Premiums and discounts are recognized in interest income
using the effective interest method over the period to maturity. Equity securities Columbias equity investments consist of a participation in a mutual fund for
the purpose of Community Reinvestment Act (CRA) credit and corporate equity securities. These
securities are carried at fair value. Fair values for these investment securities are based on
quoted market prices. Gains and losses on the sale of available-for-sale securities are determined
using the specific-identification method. Restricted equity securities Columbias equity investments in the Federal Home Loan Bank of
Seattle and the Federal Agriculture Mortgage Corporation are classified as restricted equity
securities since ownership of these instruments is restricted and there is no active market for
them. These investments are carried at cost. Loans held-for-sale Mortgage loans held-for-sale are carried at the lower of cost or estimated
fair market value. Fair market value is determined on an aggregate loan basis. At December 31, 2004
and 2003, mortgage loans held-for-sale were carried at cost which approximated fair market value. Loans, net of allowance for loan losses and unearned loan fees 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 payment in full of principal and interest is
not expected, or 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. Nonaccrual loans are considered impaired
loans. Each impaired loan is 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 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 nonaccrual 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. The allowance for loan losses is established through a provision for loan losses charged to
expense. Loans are charged against the allowance for loan losses when Management believes that the
collectibility of the principal is unlikely. The allowance is an amount that Management believes
will be adequate to absorb possible losses on existing loans that may become uncollectible, based
on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take
into consideration such factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic conditions that may
affect the borrowers ability to pay. Various regulatory agencies, as a regular part of their
examination process, periodically review the Banks allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their judgment of information
available to them at the time of the examinations. Property and equipment Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed by straight-line and accelerated methods over the estimated useful lives
of the assets, which range from 3 to 7 years for furniture and
equipment, and 31 1/2 years for
building premises. Goodwill Goodwill represents the excess of cost over the fair value of net assets acquired from
the purchase of Valley Community Bancorp in 1998, and was amortized by the straight-line method
over a 15-year period until December 31, 2001. Under Statement of Financial Accounting Standards
(SFAS) No. Columbia Bancorp -50




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142, Goodwill and Other Intangible Assets, the Bank ceased amortization of goodwill effective January
1, 2002, completed its initial assessment of goodwill impairment in March 2002, and has completed
the annual assessment each December thereafter. Goodwill impairment is deemed to exist if the net
book value of a reporting unit exceeds its estimated fair value. Columbias reporting units are
generally consistent with the operating segments identified in Note 23  Segment Information.
Neither the initial or annual assessments have identified impairment of goodwill such that the net
book value of the reporting unit exceeded its estimated fair value. Mortgage servicing asset, net of amortization and valuation allowance Mortgage servicing rights
retained are measured by allocating the carrying value of the loans between the assets sold and the
interest retained, based on the relative fair value at the date of sale. Mortgage servicing rights
retained are capitalized and included in the mortgage servicing asset (MSA) at their allocated
carrying value and amortized in proportion to, and over the period of, estimated future net
servicing revenues. Impairment of the mortgage servicing asset is assessed based on the fair value
of those rights. The amount of a valuation allowance recognized is the amount by which the
capitalized mortgage servicing asset exceeds the calculated fair value. For 2002 and 2003, fair
values were estimated using discounted cash flows of servicing revenues less servicing costs based
on current market interest rates, inflation rates, and industry prepayment rates in accordance with
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. To validate the carrying value of the MSA, the Bank utilizes an independent third
party vendor, who uses a combination of near term secondary marketing transactions, discount rates,
loan pre-payment rates, estimated loan lives, servicing costs, weighted-average term to maturity
rates and other relevant factors. Investment in a limited partnership Columbia has a 10% interest in a limited partnership that
owns and operates affordable housing projects. Investment in these projects serve as an element of
Columbias compliance with the Community Reinvestment Act, and Columbia receives tax benefits in
the form of deductions for operating losses and tax credits. The tax credits may be used to reduce
taxes currently payable or may be carried back one year or forward 20 years to recapture or reduce
taxes. Columbia uses the equity method in accounting for its interest in the partnerships
operating results; tax credits are recorded in the years they become available to reduce income
taxes. Other real estate owned Other real estate, acquired through foreclosure or deeds in lieu of
foreclosure, is carried at the lower of cost or estimated net realizable value. When property is
acquired, any excess of the loan balance over its estimated net realizable value is charged to the
allowance for loan losses. Subsequent write-downs to net realizable value, if any, or any
disposition gains or losses are included in non-interest income and expense. At December 31, 2004
and 2003, the Bank held $100,000 and $41,500, respectively, in other real estate owned. Income taxes Deferred income tax assets and liabilities are determined based on the tax effects
of the differences between the book and tax bases of the various balance sheet assets and
liabilities. Deferred tax assets and liabilities are reflected at currently enacted income tax
rates applicable to the period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred income tax assets and
liabilities are adjusted through the provision for income taxes. Advertising Advertising costs are charged to expense during the year in which they are incurred.
Advertising expenses include promotional expenses such as public relations costs and donations, and
were $811,067, $536,871, and $500,086 for the years ended December 31, 2004, 2003, and 2002,
respectively. Earnings per share Basic earnings per share is computed by dividing net income available to
shareholders by the weighted-average number of common shares outstanding during the period, after
giving retroactive effect to stock dividends and splits. Diluted earnings per share is computed
similar to basic earnings per share except the denominator is increased to include the number of
additional common shares that would have been outstanding if dilutive potential common shares had
been issued. Included in the denominator is the dilutive effect of stock options computed by the
treasury stock method. Stock options Columbia applies Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations in accounting for its stock option plan using the
intrinsic value-based method. Accordingly, compensation costs are recognized as the difference
between the exercise price of each option and the market price of Columbias stock at the date of
each grant. Had 51 - Columbia Bancorp




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compensation cost for Columbias 2004, 2003, and 2002 grants under its stock-based compensation
plan been determined consistent with the fair value-based method defined in SFAS No. 123,
Accounting for Stock-Based Compensation, its net income and earnings per common share for
December 31, 2004, 2003, and 2002, would approximate the pro forma amounts shown in the following
table. 
 (dollars in thousands except per share data)
    
    2004
    
    
    2003
    
    
    2002Net income, as reported
    
    $
    10,735
    
    
    $
    9,834
    
    
    $
    9,381Deduct: Total stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of related tax effects
    
    
    (82
    )
    
    
    (177
    )
    
    
    (811
    )$
    10,653
    
    
    $
    9,657
    
    
    $
    8,570Pro forma net incomeEarnings per share(1):Basic - as reported
    
    $
    1.22
    
    
    $
    1.13
    
    
    $
    1.05Basic - pro forma
    
    
    1.21
    
    
    
    1.11
    
    
    
    0.96Diluted - as reported
    
    
    1.19
    
    
    
    1.09
    
    
    
    1.03Diluted - pro forma
    
    
    1.18
    
    
    
    1.07
    
    
    
    0.94
   (1)
    
    Amounts for 2002 have been adjusted to reflect the 10% stock dividend, effective May 1,
2003. 
 The fair value of each option granted is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions for December 31, 2004, 2003, and
2002. 
 2004
    
    
    2003
    
    
    2002Dividend yield
    
    
    1.80
    %
    
    
    2.14
    %
    
    
    2.14
    %Expected life (years)
    
    6-8 years
    
    6 years
    
    6 yearsExpected volatility
    
    
    43.28
    %
    
    
    43.71
    %
    
    
    45.25
    %Risk-free rate
    
    
    2.90-3.02
    %
    
    
    3.02
    %
    
    
    2.08
    %
 The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future
amounts. Off-balance-sheet financial instruments In the ordinary course of business, the Bank enters into
off-balance-sheet financial instruments consisting of commitments to extend credit, commitments
under credit card arrangements, commercial letters of credit and standby letters of credit. These
financial instruments are recorded in the consolidated financial statements when they are funded or
related fees are incurred or received. The Bank maintains an allowance for off-balance-sheet items,
included in the allowance for loan losses, established through charges to the provision for loan
losses. The allowance is an amount that Management believes will be adequate to absorb possible
losses associated with off-balance sheet credit risk. The evaluations take into consideration such
factors as changes in the nature and volume of the commitments to extend credit undisbursed balance
of existing lines of credit and letters of credit. Columbia monitors these off-balance-sheet items regularly along with its liquidity position to
ensure funds are available if these commitments are funded. Derivative financial instruments Columbia has adopted SFAS No. 133, Accounting for Derivatives
and Hedging Activities, and SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an Amendment of SFAS No. 133. All derivative instruments, including
certain derivative instruments embedded in other contracts, are recognized in the consolidated
balance sheets at fair value. SFAS No. 133 requires that the accounting for gains or losses from
changes in the derivative instruments fair value is contingent upon whether the derivative
instrument qualifies as a hedge under the accounting standard. On the date Columbia enters into a
derivative contract, Columbia designates the derivative instrument as (1) a hedge of the fair value
of a recognized asset or liability or of an unrecognized firm
commitment (fair value hedge), (2) a hedge of a forecasted transaction or of the Columbia Bancorp -52




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variability of
cash flows to be received or paid related to a recognized asset or liability (cash flow hedge), or
(3) a hedge for trading, customer accommodation, or not qualifying for hedge accounting
(free-standing derivative instruments). For a fair value hedge, changes in the fair value of the
derivative instrument and changes in the fair value of the hedged asset or liability, or of an
unrecognized firm commitment attributable to the hedged risk are recorded in current period net
income. For a cash flow hedge, changes in the fair value of the derivative instrument to the extent
that it is effective are recorded in other comprehensive income, net of tax, within shareholders
equity and subsequently reclassified to net income in the same period that the hedged transaction
impacts net income. For free-standing derivative instruments, changes in the fair values are
reported in current period net income. Columbia formally documents the relationship between hedging
instruments and hedged items, as well as the risk management objective and strategy for undertaking
any hedge transaction. This process includes linking all derivative instruments that are designated
as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to
specific forecasted transactions. Columbia has historically used forward sales contract derivatives
as a strategy to mitigate the risk associated with interest rate volatility and currently uses an
interest-rate swap to mitigate the variability of interest payments on its junior subordinated
debentures. Columbia also formally assesses both at the inception of the hedge and on an ongoing
basis, whether the derivative instruments used are highly effective in offsetting changes in fair
values or cash flows of hedged items. Fair value of financial instruments The following methods and assumptions were used by Columbia
in estimating fair values of financial instruments as disclosed herein: Held-to-maturity, available-for-sale, equity securities and restricted equity securities Fair
values for investment securities, excluding restricted equity securities, are based on quoted
market prices. The carrying values of restricted equity securities approximate fair values. Loans receivable For variable rate loans that reprice frequently and have no significant change
in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans
(for example, one-to-four family residential), credit card loans, and other consumer loans are
based on quoted market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. Fair values for commercial real
estate and commercial loans are estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of similar credit quality. Fair
values for impaired loans are estimated using a discounted cash flow analysis or underlying
collateral values, where applicable. Deposit liabilities The fair values disclosed for demand deposits are, by definition, equal to
the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying
amounts of variable rate money market accounts and savings accounts approximate their fair values
at the reporting date. Fair values for fixed rate CDs are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits. Short-term borrowings The carrying amounts of federal funds purchased, borrowings under
repurchase agreements, and other short-term borrowings maturing within 90 days approximate their
fair values. Fair values of other short-term borrowings are estimated using discounted cash flow
analyses based on the Banks current incremental borrowing rates for similar types of borrowing
arrangements. Long-term debt The fair value of the Banks long-term debt is estimated using a discounted cash
flow analysis based on the Banks current incremental borrowing rate for similar types of borrowing
arrangements. Off-balance-sheet instruments The Banks off-balance-sheet instruments include unfunded
commitments to extend credit and standby and performance letters of credit. The fair value of these
instruments is not considered practicable to estimate because of the lack of quoted market prices
and the inability to estimate fair value without incurring excessive costs. Recently issued accounting
standards In December 2004, the FASB issued Statement
No. 123(R)
Share-Based Payment. This statement replaces existing requirements under SFAS No. 123
Accounting
for Stock-Based Compensation, and eliminates the ability to account for share-based compensation
transactions under APB Opinion No. 25 Accounting for Stock
Issued to Employees. SFAS No. 123(R)
requires stock-based transactions to be recognized as compensation expense in the 53 - Columbia Bancorp




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income statement
based on their fair values at the date of grant. The fair value should be estimated using
option-pricing models such as the Black-Scholes model or a binomial model. This statement is
effective for interim periods beginning after June 15, 2005. At this time, Columbia does not
believe the future impact on earnings to be a great extent different than what has historically
been reported as the pro forma effect to income in Note 1. The impact to operating and financing
cash flows is not considered to be material to the Financial Statements. In December 2003, the Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position 03-3 (SOP 03-3), Accounting for
Certain Loans or Debt Securities Acquired in a Transfer, which addresses the accounting for
certain loans acquired in a transfer when it is probable, at acquisition, that the investor will be
unable to collect all contractually required payments receivable. SOP 03-3 is to be applied
prospectively, effective for loans acquired in years beginning after December 15, 2004. SOP 03-3
requires acquired loans with evidence of credit deterioration to be recorded at fair value and
prohibits recording any valuation allowance related to such loans at the time of purchase. This SOP
limits the yield that may be accreted on such loans to the excess of the investors estimated cash
flows over its initial investment in the loan. The excess of contractual cash flows over cash flows
expected to be collected is not to be recognized as an adjustment of yield. Subsequent increases in
cash flows expected to be collected are recognized prospectively through adjustment of the loans
yield over its remaining life. Decreases in cash flows expected to be collected are recognized as
impairment. Loans carried at fair value, mortgage loans held-for-sale, and loans to borrowers in
good standing under revolving credit agreements are excluded from the scope of SOP 03-3. In November 2003, the EITF reached a consensus that certain quantitative and qualitative
disclosures should be required for debt and marketable equity securities classified as
available-for-sale or held-to-maturity under SFAS No. 115 and 124, that are impaired at the balance
sheet date but for which an other-than-temporary impairment has not been recognized. This EITF
consensus is effective for fiscal years ending after December 15, 2003. Accordingly, Columbia has
adopted the provisions of this consensus as of December 31, 2003 and the result did not have an
impact on Columbias statement of financial position or results of operations. In September 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. This statement establishes standards regarding
classification and measurement of certain financial instruments with characteristics of both
liabilities and equity. It requires financial instruments within the scope of this statement to be
classified as liabilities. Many of these financial instruments were previously classified as
equity. This statement became effective for financial instruments entered into or modified after
May 31, 2003, and was otherwise effective at the beginning of the first interim period beginning
after September 15, 2003. For financial instruments created before the issuance date of this
statement and still existing at the beginning of the interim period of adoption, transition was
achieved by reporting the cumulative effect of a change in an accounting principle by initially
measuring the financial instruments at fair value. Application of the provisions of this statement
did not have a material impact on Columbias consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. This statement amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in other contracts and
for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. Application of the provisions of this statement did not have a material impact on
Columbias consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable
Interest Entities. This interpretation clarifies the application of Accounting Research Bulletin
No. 51, Consolidated Financial Statements, and requires existing unconsolidated variable interest
entities to be consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. This interpretation explains how to identify variable
interest entities and how an enterprise assesses its interests in a variable interest entity to
decide whether to consolidate that entity. In December 2003, the FASB made revisions and delayed
implementation of certain provisions of FIN 46 by issuing FIN 46R. As a public entity that is not
a Small Business Issuer, Columbia was required to apply FIN 46R to all unconsolidated variable
interest entities no later than March 31, 2004, with the exception of unconsolidated
special-purpose entities, which had an implementation deadline of December 31, 2003.
Special-purpose entities for this provision are expected to include entities whose activities are
primarily related to securitizations or other forms of asset-backed financings or single-lessee
leasing arrangements. As a result of adoption of FIN 46R, Columbia no longer consolidates Columbia
Bancorp Trust I within its financial statements and recognizes $4.1 million as junior subordinated
debentures due to the Trust Columbia Bancorp -54




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##### Table of Contents



effective March 31, 2004. Management does not anticipate adoption of
the Interpretation will have further effects on the financial condition or results of operations of
Columbia. Reclassifications Certain reclassifications have been made to the 2003 and 2002 consolidated
financial statements to conform with the current year presentations. NOTE 2 INVESTMENT SECURITIES The amortized cost and estimated fair values of Columbias investment securities at December 31,
2004 and 2003 are summarized as follows. 
 Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2004:Available-for-sale securities:Obligations of U.S.
government agencies
    
    $
    24,045,449
    
    
    $
    
    
    
    $
    (146,327
    )
    
    $
    23,899,122Municipal securities
    
    
    639,617
    
    
    
    34,655
    
    
    
    
    
    
    
    674,272$
    24,685,066
    
    
    $
    34,655
    
    
    $
    (146,327
    )
    
    $
    24,573,394Held-to-maturity securities:Mortgage-backed
securities
    
    $
    5,174,079
    
    
    $
    39,089
    
    
    $
    (28,664
    )
    
    $
    5,184,504Municipal securities
    
    
    12,534,465
    
    
    
    596,234
    
    
    
    (936
    )
    
    
    13,129,763Obligations of U.S.
government agencies
    
    
    80,937
    
    
    
    
    
    
    
    
    
    
    
    80,937$
    17,789,481
    
    
    $
    635,323
    
    
    $
    (29,600
    )
    
    $
    18,395,204Equity securities
    
    $
    576,524
    
    
    $
    29,070
    
    
    $
    
    
    
    $
    605,594
 Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2003:Available-for-sale securities:Obligations of U.S.
government agencies
    
    $
    12,980,989
    
    
    $
    24,165
    
    
    $
    (1,250
    )
    
    $
    13,003,904Municipal securities
    
    
    739,455
    
    
    
    53,537
    
    
    
    
    
    
    
    792,992$
    13,720,444
    
    
    $
    77,702
    
    
    $
    (1,250
    )
    
    $
    13,796,896Held-to-maturity securities:Mortgage-backed
securities
    
    $
    1,866,412
    
    
    $
    62,116
    
    
    $
    
    
    
    $
    1,928,528Municipal securities
    
    
    13,016,058
    
    
    
    818,153
    
    
    
    (539
    )
    
    
    13,833,672Obligations of U.S.
government agencies
    
    
    81,258
    
    
    
    
    
    
    
    
    
    
    
    81,258$
    14,963,728
    
    
    $
    880,269
    
    
    $
    (539
    )
    
    $
    15,843,458Equity securities
    
    $
    75,000
    
    
    $
    3,750
    
    
    $
    
    
    
    $
    78,750
 
 55 - Columbia Bancorp




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The following table presents the gross unrealized losses and fair value of the Banks
investment securities, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, at December 31, 2004. 
 Less than 12 months
    
    
    12 months or more
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesObligations of U.S.
government agencies
    
    $
    23,898,669
    
    
    $
    (146,327
    )
    
    $
    
    
    
    $
    
    
    
    $
    23,898,669
    
    
    $
    (146,327
    )Mortgage-backed securities
    
    
    4,487,623
    
    
    
    (28,664
    )
    
    
    
    
    
    
    
    
    
    
    4,487,623
    
    
    
    (28,664
    )Municipal securities
    
    
    337,035
    
    
    
    (578
    )
    
    
    55,054
    
    
    
    (358
    )
    
    
    392,089
    
    
    
    (936
    )$
    28,723,327
    
    
    $
    (175,569
    )
    
    $
    55,054
    
    
    $
    (358
    )
    
    $
    28,778,381
    
    
    $
    (175,927
    )
 
 Columbia uses an outside third party to determine current market values of the securities it
holds. These fair market values are compared to current carrying values to determine if a security
is in a gain or loss position. As market rates fluctuate, a securitys fair value can move from a
gain or loss position. Columbia had one security in its portfolio at December 31, 2004, that had
an unrealized loss for 12 months or longer. Columbia believes that the unrealized loss on this
security is due to changes in market rates. The amortized cost and estimated fair value of investment securities at December 31, 2004, by
contractual maturity, are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties. 
 Available-for-Sale
    
    
    Held-to-MaturityEstimated
    
    
    
    
    
    
    EstimatedAmortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueDue in one year or less
    
    $
    8,989,354
    
    
    $
    8,974,566
    
    
    $
    452,513
    
    
    $
    468,441Due after one year through
five years
    
    
    15,695,712
    
    
    
    15,598,828
    
    
    
    7,066,793
    
    
    
    7,132,865Due after five years through
ten years
    
    
    
    
    
    
    
    
    
    
    9,339,561
    
    
    
    9,806,353Due after ten years
    
    
    
    
    
    
    
    
    
    
    930,614
    
    
    
    987,54524,685,066
    
    
    
    24,573,394
    
    
    
    17,789,481
    
    
    
    18,395,204Equity securities
    
    
    576,524
    
    
    
    605,594
    
    
    
    
    
    
    
    $
    25,261,590
    
    
    $
    25,178,988
    
    
    $
    17,789,481
    
    
    $
    18,395,204
 
 For the purpose of the maturity table, mortgage-backed securities, which are not due at a single
maturity date, have been allocated over maturity groupings based on the weighted-average
contractual maturities of underlying collateral. Mortgage-backed securities may mature earlier than
their weighted-average contractual maturities because of principal prepayments. As of December 31, 2004 and 2003, investment securities with an amortized cost of $17.06 million
and $14.04 million, respectively, have been pledged to secure notes payable at the Federal Home
Loan Bank of Seattle and Federal Reserve Bank and public or other deposits, as required by law. Columbia Bancorp- 56




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NOTE 3 RESTRICTED EQUITY SECURITIES The composition of restricted equity securities is as follows. 
 2004
    
    
    2003Federal Home Loan Bank of Seattle stock
    
    $
    2,419,800
    
    
    $
    2,833,700Federal Agriculture Mortgage Corporation stock
    
    
    9,400
    
    
    
    9,400$
    2,429,200
    
    
    $
    2,843,100
 NOTE 4 LOANS AND ALLOWANCE FOR LOAN LOSSES The loan portfolio consists of the following. 
 2004
    
    
    2003Commercial
    
    $
    93,618,385
    
    
    $
    86,163,437Agriculture
    
    
    79,223,710
    
    
    
    64,058,572Real estate
    
    
    247,045,236
    
    
    
    206,754,240Real estate
 construction
    
    
    139,414,655
    
    
    
    87,426,996Consumer
    
    
    14,385,879
    
    
    
    18,241,447Credit card and other loans
    
    
    7,660,273
    
    
    
    6,975,262581,348,138
    
    
    
    469,619,954Less allowance for loan losses
    
    
    (8,184,488
    )
    
    
    (6,612,308
    )Less unearned loan fees
    
    
    (1,555,800
    )
    
    
    (1,449,881
    )Loans, net of allowance for loan losses
and unearned loan fees
    
    $
    571,607,850
    
    
    $
    461,557,765
 Columbia had a recorded investment in impaired loans of $4.22 million and $3.29 million at
December 31, 2004 and 2003, respectively. The Banks average investment in impaired loans, measured
on the basis of the present value of expected future cash flows discounted at the loans effective
interest rates, was approximately $4.22 million and $4.02 million during 2004 and 2003,
respectively. The total allowance for loan losses related to these loans at December 31, 2004 and
2003 was approximately $785,000 and $1.11 million, respectively. Had the impaired loans performed
according to their original terms, additional interest income of $421,609, $589,125 and $215,663
would have been recognized in 2004, 2003 and 2002, respectively. No interest income has been
recognized on impaired loans during the period of impairment. Changes in the allowance for loan losses were as follows. 
 2004
    
    
    2003
    
    
    2002BALANCE, beginning of year
    
    $
    6,612,308
    
    
    $
    6,416,691
    
    
    $
    5,311,715Provision for loan losses
    
    
    2,760,000
    
    
    
    2,575,000
    
    
    
    1,800,000Loans charged off
    
    
    (1,291,479
    )
    
    
    (2,533,521
    )
    
    
    (886,156
    )Loan recoveries
    
    
    103,659
    
    
    
    154,138
    
    
    
    191,132BALANCE, end of year
    
    $
    8,184,488
    
    
    $
    6,612,308
    
    
    $
    6,416,691
 
 57 - Columbia Bancorp




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NOTE 5 PROPERTY AND EQUIPMENT The major classifications of property and equipment are summarized as follows. 
 2004
    
    
    2003Land
    
    $
    4,365,164
    
    
    $
    3,468,310Construction in progress
    
    
    346,307
    
    
    
    355,759Buildings and improvements
    
    
    10,740,303
    
    
    
    10,171,670Furniture and equipment
    
    
    7,856,658
    
    
    
    6,730,885Total property and equipment
    
    
    23,308,432
    
    
    
    20,726,624Less accumulated depreciation
    
    
    (8,085,810
    )
    
    
    (6,959,715
    )Property and equipment, net of
accumulated depreciation
    
    $
    15,222,622
    
    
    $
    13,766,909
 
 For certain bank branch facilities, Columbia leases office space to third parties. Minimum
future rental income from noncancellable leases for the next five years beginning in 2005 is
approximately $117,000, through 2008, and $81,000 in 2009. Minimum lease rental income for the year
2010 and thereafter is approximately $6,000. NOTE 6 MORTGAGE SERVICING AND LENDING ACTIVITIES Mortgages serviced for others, which totaled $333.74 million and $444.65 million at December 31,
2004 and 2003, respectively, are not included in the accompanying consolidated balance sheets.
During fourth quarter 2003, Management initiated a strategic shift from originating mortgage loans
with servicing retained premiums to one of servicing released premiums. This resulted in less than
$100,000 in additional servicing retained premiums being capitalized in 2004, attributable to
previously committed construction to permanent loans being completed subsequent to December 31,
2003. The key statistics and assumptions used to determine the value of the MSA at December 31,
2004, segmented by interest rate tranches, were as follows. 
 Adjustable< = 6.00%
    
    
    6.01% - 7.00%
    
    
    > = 7.01%
    
    
    RateUnpaid principal balance
    
    $
    180,154,069
    
    
    $
    99,978,421
    
    
    $
    29,272,765
    
    
    $
    24,336,707Number of loans
    
    
    1,476
    
    
    
    959
    
    
    
    333
    
    
    
    164Weighted-average term to maturity
(months)
    
    
    251
    
    
    
    279
    
    
    
    298
    
    
    
    334Estimated loan life (months)
    
    
    78
    
    
    
    54
    
    
    
    35
    
    
    
    23Servicing cost of each loan per month,
net of ancillary income
    
    $
    25
    
    
    $
    25
    
    
    $
    25
    
    
    $
    40Discount rate (average)
    
    
    10.02
    %
    
    
    10.08
    %
    
    
    10.27
    %
    
    
    11.49
    %
 
 Columbia Bancorp - 58




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##### Table of Contents



Changes in the balance of the MSA were as follows. 
 2004
    
    
    2003
    
    
    2002MSA balance, beginning of year
    
    $
    3,691,449
    
    
    $
    4,614,391
    
    
    $
    6,196,801Additions for capitalized servicing
right premiums
    
    
    92,296
    
    
    
    1,935,108
    
    
    
    2,227,511Amortization of MSA
    
    
    (1,621,091
    )
    
    
    (2,000,050
    )
    
    
    (1,028,810
    )Valuation allowance adjustments
    
    
    
    
    
    
    (858,000
    )
    
    
    (2,781,111
    )$
    2,162,654
    
    
    $
    3,691,449
    
    
    $
    4,614,391
 
 The valuation allowance provides for adjustments to the cost basis of the total mortgage
servicing asset to estimated fair value. The fair value adjustment is recorded as an adjustment to
the CRB Mortgage Teams net revenues when recognized. CRB Mortgage Team net revenues consisted of
the following. 
 2004
    
    
    2003
    
    
    2002Mortgage loan origination and
processing fee income
    
    $
    927,545
    
    
    $
    2,337,879
    
    
    $
    2,513,005Loan servicing fees
    
    
    995,357
    
    
    
    1,193,393
    
    
    
    1,163,815Net mortgage servicing expense
    
    
    (1,528,796
    )
    
    
    (924,092
    )
    
    
    (1,582,410
    )Gain (loss) on loan sales
    
    
    195,516
    
    
    
    (288,909
    )
    
    
    1,353,772Servicing release premium
    
    
    531,924
    
    
    
    253,607
    
    
    
    461,982Hedge expense
    
    
    
    
    
    
    (140,206
    )
    
    
    (1,720,539
    )Other
    
    
    
    
    
    
    
    
    
    
    3,689Mortgage Team net revenues
    
    $
    1,121,546
    
    
    $
    2,431,672
    
    
    $
    2,193,314
 
 NOTE 7 TIME CERTIFICATES Time certificates of deposit of $100,000 and over, aggregated $104.11 million and $38.33 million at
December 31, 2004 and 2003, respectively. Brokered time certificates, which are time certificates
purchased by a broker in large blocks, had an aggregate carrying value of $46.65 million and $26.17
million at December 31, 2004 and 2003, respectively. New in 2004, wholesale certificates of
deposit, which are similar to brokered certificates of deposit through which Columbia posts rates
on a certificates of deposit proprietary network that solicits deposits from other financial
institutions, had an aggregate carrying value of $18.92 million at December 31, 2004. At December 31, 2004, the scheduled maturities for all time certificates are as follows. 
 Years ending December 31,
    2005
    
    
    $
    109,512,3842006
    
    
    
    30,277,4582007
    
    
    
    19,449,5362008
    
    
    
    6,346,2522009
    
    
    
    17,849,031Thereafter
    
    
    
    3,921,430$
    187,356,091
 
 59 - Columbia Bancorp




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NOTE 8 LINES OF CREDIT AND BORROWED FUNDS The Bank has federal funds line of credit agreements with five financial institutions and the
Federal Reserve Bank of San Francisco. Maximum aggregate borrowings available under these lines
totaled $31.40 million, with available line of credit funds reduced by other borrowings. These
lines support short-term liquidity and cannot be used for more than 1 to 15 consecutive business
days, depending on the lending institution. At December 31, 2004 and 2003, there were no borrowings
outstanding under these agreements. The Bank is a member of the Federal Home Loan Bank (FHLB) of Seattle and has entered into credit
arrangements with the FHLB under which authorized borrowings are collateralized by the Banks FHLB
stock as well as loans or other instruments which may be pledged. As of December 31, 2004 and 2003,
the Bank had total borrowings outstanding with the FHLB of $34.04 million and $21.13 million,
respectively. Interest rates on notes outstanding range from 2.09% to 6.08%. The Bank had $43.54
million available for additional borrowings at December 31, 2004. Maximum borrowings available
from the FHLB for notes payable, lines of credit and the Cash Management Advance agreement totaled
$74.94 million at December 31, 2004. The Bank had outstanding notes from the FHLB at December 31, 2004 and 2003, as follows. 
 December 31, 2004
    
    December 31, 2003Weighted-
    
    
    
    
    
    
    
    Weighted-Maturity
    
    Average
    
    
    
    
    
    Maturity
    
    AverageAmount
    
    Year
    
    Interest Rate
    
    Amount
    
    
    Year
    
    Interest Rate$                            6,750,000
    
    2005
    
    2.84%
    
    $
    5,921,147
    
    
    2004
    
    2.22%3,000,000
    
    2006
    
    3.12%
    
    
    3,750,000
    
    
    2005
    
    3.17%11,500,000
    
    2007
    
    3.91%
    
    
    3,000,000
    
    
    2006
    
    2.70%9,509,958
    
    2008
    
    3.30%
    
    
    6,500,000
    
    
    2007
    
    4.78%2,551,613
    
    2009
    
    2.81%
    
    
    1,180,334
    
    
    2008
    
    3.63%728,023
    
    2013
    
    5.47%
    
    
    781,984
    
    
    2013
    
    5.47%$                          34,039,594
    
    
    
    3.41%
    
    $
    21,133,465
    
    
    
    
    3.44%
 
 The Bank also participates in the U.S. Treasury Departments Treasury Investment Program,
which facilitates the acceptance and processing of federal tax deposits. Under this program, the
Bank is authorized to accumulate daily tax payments up to authorized limits, and deploy the funds
in short-term investments. In exchange, the Bank is required to issue a fully collateralized demand
note to the U.S. Treasury and pay interest at the federal funds rate minus 25 basis points. As of
December 31, 2004 and 2003, the Bank had $849,970 and $850,000, respectively, outstanding under
this program. NOTE 9 JUNIOR SUBORDINATED DEBENTURES In December 2002, Columbia formed a wholly-owned Delaware statutory business trust subsidiary,
Columbia Bancorp Trust I (the Trust), which issued $4.00 million of guaranteed undivided
beneficial interests in Columbias Junior Subordinated Deferrable Interest Debentures (Trust
Preferred Securities). These debentures qualify as Tier 1 capital under Federal Reserve Board
guidelines. All of the common securities of the Trust are owned by Columbia. The proceeds from the
issuance of the common securities and the Trust Preferred Securities were used by the Trust to
purchase $4.12 million of junior subordinated debentures of Columbia. The debentures which
represent the sole asset of the Trust accrue and pay distributions quarterly at a variable rate of
90-day LIBOR plus 3.3% per annum of the stated liquidation value of $1,000 per capital security.
Columbia has entered into contractual arrangements which, taken collectively, fully and
unconditionally guarantee payment of: (1) accrued and unpaid distributions required to be paid on
the Trust Preferred Securities, (2) the redemption price with respect to any Trust Preferred
Securities called for redemption by the Trust and (3) payments due upon a voluntary or involuntary
dissolution, winding up or liquidation of the Trust. The Trust Preferred Securities are mandatorily
redeemable upon maturity of the debentures on January 7, 2033, or upon earlier redemption as provided in the indenture.
Columbia has the right to redeem the debentures purchased by the Trust in whole or in Columbia Bancorp - 60




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part, on or after January 7, 2008. As specified in the indenture, if the debentures are
redeemed prior to maturity, the redemption price will be the principal amount and any accrued
interest. For the years ended December 31, 2004 and 2003, Columbia paid interest expense related to
the Trust Preferred Securities of $194,567 and $187,162, respectively. In March 2004, Columbia deconsolidated the Trust, in accordance with FASB FIN 46R Consolidation of
Variable Interest Entities. As a result, the junior subordinated debentures issued by Columbia to
the issuer trusts, totaling $4.12 million, are reflected on Columbias consolidated balance sheet
at December 31, 2004, under the caption Junior Subordinated Debentures. Columbia also recognized
its $124,000 investment in the Trust, which is recorded among Other Assets in its consolidated
balance sheet at December 31, 2004. NOTE 10 INTEREST-RATE SWAP During January 2003, in connection with the issuance of $4.00 million of floating-rate Trust
Preferred Securities described in Note 9, Columbia entered into an interest-rate swap agreement
with an unrelated third party. Under the terms of the agreement, which expires in January 2008,
Columbia will pay 3.27% on a notional amount of $4.00 million and receive credit for the 90-day
LIBOR rate on the same amount. The effect of this transaction was the conversion of the $4.00
million trust preferred issuance from a floating rate at 90-day LIBOR plus 330 basis points to a
fixed rate of 6.57% for five years, the point at which Columbia has the option to call the Trust
Preferred Securities. Columbia has classified the swap agreement as a cash flow hedge in accordance
with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. For the periods
ended December 31, 2004 and 2003, the hedge has been highly effective in achieving offsetting cash
flows attributable to the hedged risk. NOTE 11 INCOME TAXES The provision for income taxes consists of the following.   2004
    
    
    2003
    
    
    2002Current tax expense:Federal
    
    $
    6,467,478
    
    
    $
    5,077,462
    
    
    $
    4,989,761State
    
    
    1,080,338
    
    
    
    1,015,005
    
    
    
    926,2927,547,816
    
    
    
    6,092,467
    
    
    
    5,916,053Deferred tax (benefit) expense:Federal
    
    
    (1,182,981
    )
    
    
    (479,137
    )
    
    
    (613,200
    )State
    
    
    (139,174
    )
    
    
    (49,021
    )
    
    
    (79,356
    )(1,322,155
    )
    
    
    (528,158
    )
    
    
    (692,556
    )Provision for income taxes
    
    $
    6,225,661
    
    
    $
    5,564,309
    
    
    $
    5,223,497
 
 61 - Columbia Bancorp




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The components of the deferred income tax benefit consist of the following.   2004
    
    
    2003
    
    
    2002Mortgage servicing rights
    
    $
    (580,943
    )
    
    $
    (350,718
    )
    
    $
    (601,316
    )Loan loss provision not deductible
for tax
    
    
    (664,872
    )
    
    
    (141,778
    )
    
    
    (371,906
    )Difference between book and tax
depreciation methods
    
    
    (578
    )
    
    
    (117,890
    )
    
    
    217,179Deferred compensation
    
    
    (128,991
    )
    
    
    (53,472
    )
    
    
    (22,933
    )Difference between book and tax
recognition of Federal Home
Loan Bank stock dividends
    
    
    26,615
    
    
    
    54,957
    
    
    
    60,031Cash surrender value greater than
investment in life insurance policies
    
    
    (156,770
    )
    
    
    55,186
    
    
    
    101,584Other differences
    
    
    183,384
    
    
    
    25,557
    
    
    
    (75,195
    )Deferred income tax benefit
    
    $
    (1,322,155
    )
    
    $
    (528,158
    )
    
    $
    (692,556
    )
 
 The net deferred tax asset consists of the following.   2004
    
    
    2003Deferred tax assets:Allowance for loan losses
    
    $
    3,020,179
    
    
    $
    2,355,307Purchased state tax credits
    
    
    315,121
    
    
    
    300,600Deferred compensation
    
    
    327,192
    
    
    
    198,201Unrealized losses on investment securities
    
    
    31,000
    
    
    
    Other
    
    
    
    
    
    
    49,6383,693,492
    
    
    
    2,903,746Deferred tax liabilities:Mortgage servicing rights
    
    
    (821,808
    )
    
    
    (1,402,751
    )Accumulated depreciation
    
    
    (959,269
    )
    
    
    (959,847
    )Cash surrender value greater than life insurance
policies
    
    
    
    
    
    
    (156,770
    )Federal Home Loan Bank stock dividends
    
    
    (348,126
    )
    
    
    (321,511
    )Unrealized gains on investment securities
    
    
    
    
    
    
    (12,000
    )Other
    
    
    (133,746
    )
    
    
    (2,262,949
    )
    
    
    (2,852,879
    )Net deferred tax asset
    
    $
    1,430,543
    
    
    $
    50,867
 
 Management believes, based upon Columbias historical performance that the deferred tax
assets will be realized in the normal course of operations and, accordingly, Management has not
reduced deferred tax assets by a valuation allowance. The tax provision differs from the federal statutory rate due principally to the effect of tax
exemptions for interest received on municipal investments. Columbia Bancorp - 62




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A reconciliation between the federal tax rate and the effective tax rate is as follows.   2004
    
    
    2003
    
    
    2002Federal income taxes at statutory rate
    
    $
    5,766,520
    
    
    $
    5,234,876
    
    
    $
    4,965,565State income tax expense, net of
federal income tax benefit
    
    
    713,023
    
    
    
    534,522
    
    
    
    549,190Effect of nontaxable interest income
    
    
    (200,083
    )
    
    
    (236,035
    )
    
    
    (257,239
    )Increase in cash surrender value of
life insurance policies
    
    
    (23,796
    )
    
    
    
    
    
    
    Other
    
    
    (30,002
    )
    
    
    30,946
    
    
    
    (34,019
    )$
    6,225,661
    
    
    $
    5,564,309
    
    
    $
    5,223,49737
    %
    
    
    36
    %
    
    
    36
    %
 
 NOTE 12 EARNINGS PER SHARE Basic earnings per share excludes dilution and is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for the year,
retroactively adjusted for stock dividends and splits. Diluted earnings per share reflect the
potential dilution that could occur if common shares were issued pursuant to the exercise of
options under existing stock option plans. The following table illustrates the computations of basic and diluted earnings per share for the
years ended December 31, 2004, 2003, and 2002.   2004
    
    
    2003
    
    
    2002Basic earnings per share:Income available to common shareholders
    
    $
    10,734,690
    
    
    $
    9,833,796
    
    
    $
    9,381,105Weighted-average common shares
outstanding
    
    
    8,795,148
    
    
    
    8,716,572
    
    
    
    8,900,643Basic earnings per share
    
    $
    1.22
    
    
    $
    1.13
    
    
    $
    1.05Diluted earnings per share:Income available to common shareholders
    
    $
    10,734,690
    
    
    $
    9,833,796
    
    
    $
    9,381,105Weighted-average common shares
outstanding
    
    
    8,795,148
    
    
    
    8,716,572
    
    
    
    8,900,643Net effect
of dilutive stock options - based
on the treasury stock method using
average market price
    
    
    247,338
    
    
    
    277,899
    
    
    
    232,094Weighted-average common shares
outstanding and common stock
equivalents
    
    
    9,042,486
    
    
    
    8,994,471
    
    
    
    9,132,737Diluted earnings per share
    
    $
    1.19
    
    
    $
    1.09
    
    
    $
    1.03
 
 63 - Columbia Bancorp




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Outstanding common stock options excluded from diluted earnings per share, because their impact on
the calculation would have been antidilutive, totaled 54,000, 20,000 and 160,000 at December 31,
2004, 2003, and 2002, respectively. NOTE 13 STOCK OPTION PLAN Columbia maintains a stock incentive plan originally adopted by the Bank in 1993 prior to
Columbias formation. The plan, most recently amended in January 2002 by the board of directors and
ratified by the shareholders in April 2002, allows for the granting of both incentive and
nonstatutory stock options. The option price for incentive stock options cannot be less than 100%
of the fair market value of the shares on the date of grant. The stock options expire ten years
from the date of grant. The option price, number of shares granted recipients, and duration for the
plan stock options are determined and approved by the Board of Directors. The following summarizes options available and outstanding under this plan, retroactively adjusted
for stock dividends and splits. Weighted-
    
    
    Weighted-Non-
    
    
    Average
    
    
    AverageTotal
    
    
    Incentive
    
    
    statutory
    
    
    Exercise
    
    
    FairOptions
    
    
    Options
    
    
    Options
    
    
    Price
    
    
    ValueOptions under grant  December 31, 2001
    
    
    698,203
    
    
    
    578,841
    
    
    
    119,362
    
    
    $
    6.43Options granted in 2002:Incentive stock options
    
    
    168,677
    
    
    
    168,677
    
    
    
    
    
    
    $
    13.45
    
    
    $
    4.97Nonstatutory stock options
    
    
    15,400
    
    
    
    
    
    
    
    15,400
    
    
    $
    10.65
    
    
    $
    4.08Options exercised in 2002:Incentive stock options
    
    
    (137,093
    )
    
    
    (137,093
    )
    
    
    
    
    
    $
    5.79Nonstatutory stock options
    
    
    (32,003
    )
    
    
    
    
    
    
    (32,003
    )
    
    $
    6.71Options expired or forfeited in 2002
    
    
    (5,940
    )
    
    
    (5,940
    )
    
    
    
    
    
    $
    6.53Options under grant  December 31, 2002
    
    
    707,244
    
    
    
    604,485
    
    
    
    102,759
    
    
    $
    8.21Options granted in 2003:Incentive stock options
    
    
    30,432
    
    
    
    30,432
    
    
    
    
    
    
    $
    13.64
    
    
    $
    5.05Nonstatutory stock options
    
    
    26,167
    
    
    
    
    
    
    
    26,167
    
    
    $
    16.19
    
    
    $
    6.02Options exercised in 2003:Incentive stock options
    
    
    (98,082
    )
    
    
    (98,082
    )
    
    
    
    
    
    $
    6.37Nonstatutory stock options
    
    
    (20,894
    )
    
    
    
    
    
    
    (20,894
    )
    
    $
    7.56Options expired or forfeited in 2003
    
    
    (5,990
    )
    
    
    (5,990
    )
    
    
    
    
    
    $
    12.91Options under grant  December 31, 2003
    
    
    638,877
    
    
    
    530,845
    
    
    
    108,032
    
    
    $
    9.06Options granted in 2004:Incentive stock options
    
    
    34,000
    
    
    
    34,000
    
    
    
    
    
    
    $
    17.50
    
    
    $
    6.66Options exercised in 2004:Incentive stock options
    
    
    (96,863
    )
    
    
    (96,863
    )
    
    
    
    
    
    $
    7.15Nonstatutory stock options
    
    
    (4,206
    )
    
    
    
    
    
    
    (4,206
    )
    
    $
    5.01Options expired or forfeited in 2004
    
    
    (221
    )
    
    
    (221
    )
    
    
    
    
    
    $
    13.55Options under grant  December 31, 2004
    
    
    571,587
    
    
    
    467,761
    
    
    
    103,826
    
    
    $
    9.89Options reserved  December 31, 2004
    
    
    316,831
 
 Columbia Bancorp - 64




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The following table summarizes information regarding stock options outstanding at December 31,
2004, under Columbias stock option plan.   Incentive Stock Options
    
    
    Nonstatutory Stock OptionsNumber
    
    
    Average
    
    
    
    
    
    
    Number
    
    
    AverageNumber
    
    
    of Options
    
    
    Remaining
    
    
    
    
    
    
    of Options
    
    
    RemainingExercise
    
    of Options
    
    
    Outstanding
    
    
    Contractual Life
    
    
    Exercise
    
    
    Outstanding
    
    
    Contractual LifePrice
    
    Outstanding
    
    
    and Exercisable
    
    
    (in years)
    
    
    Price
    
    
    and Exercisable
    
    
    (in years)$  3.04
    
    
    5,595
    
    
    
    5,595
    
    
    
    0.5
    
    
    $
    3.04
    
    
    
    12,375
    
    
    
    0.5$  5.08
    
    
    33,809
    
    
    
    33,809
    
    
    
    2.6
    
    
    $
    5.08
    
    
    
    13,202
    
    
    
    2.6$10.45
    
    
    2,200
    
    
    
    2,200
    
    
    
    3.3
    
    
    $
    6.25
    
    
    
    3,080
    
    
    
    5.0$  7.27
    
    
    1,100
    
    
    
    1,100
    
    
    
    4.4
    
    
    $
    6.59
    
    
    
    4,620
    
    
    
    6.1$  7.05
    
    
    2,200
    
    
    
    2,200
    
    
    
    4.4
    
    
    $
    8.96
    
    
    
    37,642
    
    
    
    7.0$  6.25
    
    
    50,423
    
    
    
    50,423
    
    
    
    5.0
    
    
    $
    10.65
    
    
    
    9,240
    
    
    
    9.6$  6.59
    
    
    84,541
    
    
    
    84,541
    
    
    
    6.1
    
    
    $
    13.64
    
    
    
    3,667
    
    
    
    8.0$  7.50
    
    
    500
    
    
    
    500
    
    
    
    6.5
    
    
    $
    16.61
    
    
    
    20,000
    
    
    
    8.9$  8.96
    
    
    97,962
    
    
    
    97,962
    
    
    
    7.0$10.09
    
    
    1,845
    
    
    
    1,845
    
    
    
    7.2$10.36
    
    
    2,200
    
    
    
    2,200
    
    
    
    7.3$13.55
    
    
    122,054
    
    
    
    122,054
    
    
    
    8.0$13.64
    
    
    27,132
    
    
    
    27,132
    
    
    
    8.0$13.77
    
    
    2,200
    
    
    
    2,200
    
    
    
    8.2$17.44
    
    
    30,000
    
    
    
    12,000
    
    
    
    9.0$17.94
    
    
    2,000
    
    
    
    2,000
    
    
    
    9.0$18.00
    
    
    2,000
    
    
    
    2,000
    
    
    
    9.2467,761
    
    
    
    449,761
    
    
    
    
    
    
    
    
    
    
    
    103,826
 
 Under the 2002 amended stock option plan, an aggregate of no more than 888,418 of the
issued and outstanding shares of Columbias common stock is available for award or grant as of
December 31, 2004. Subsequent to year end 2004, Columbia granted 48,575 options to employees as of January 31, 2005
with an exercise of price $18.08. NOTE 14 EMPLOYEE BENEFIT PLANS AND AGREEMENTS Columbia has established an employee stock ownership plan (ESOP) for the benefit of its
employees. The ESOP allows participation by all employees over the age of 20 who have also met
minimum service requirements. Contributions to the ESOP are at the discretion of the Board of
Directors and are used to purchase shares of Columbias common stock. Employees are not permitted
to contribute individually to the ESOP but vest in their proportionate share of the ESOP plan over
a period of six years. The allocated shares in the ESOP are considered outstanding for purposes of
calculating earnings per share. For the year ending December 31, 2004, Columbia contributed
$120,000 to the ESOP and $100,000 for the years ending December 31, 2003, and 2002. The ESOPs assets as of December 31 were as follows.   2004
    
    
    2003Allocated shares, retroactively adjusted
for stock dividends and splits
    
    
    331,089
    
    
    
    344,217Cash on hand
    
    $
    25,695
    
    
    $
    23,090
 
 65- Columbia Bancorp




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Columbia has also adopted a 401(k) savings investment plan which allows employees to defer
certain amounts of compensation for income tax purposes under Section 401(k) of the Internal
Revenue Code. Essentially, all employees over the age of 18 are eligible to participate in the
plan. Employees may elect to defer and contribute up to the statutory limits. Their contributions
and those of Columbia, which are limited to 100% of employee contributions up to 4% of total
participant compensation, are invested by plan trustees in employee-designated funds. For the years
ending December 31, 2004, 2003, and 2002, Columbia contributed approximately $436,000, $451,000 and
$456,000, respectively, to the plan. Columbia has established an employee incentive compensation program which provides eligible
participants additional compensation based upon the achievement of certain Bank goals. For the
years ending December 31, 2004, 2003 and 2002, additional compensation of approximately $1.36
million, $1.37 million and $2.23 million, respectively, was paid to eligible employees pursuant to
this program. Columbia entered into both employment and retirement agreements, beginning in 1996 and later
amended, with its former chief executive officer. The employment agreement provided for the former
chief executive officers salary and customary benefits until the agreement terminated upon his
retirement in May 2001. The retirement agreement also provides annual post-retirement compensation
for a seven-year period after the former chief executive officers retirement. Columbias
obligation under the agreement was partially funded with a $120,000 interest-earning investment and
is being paid in annual installments of $48,000 plus interest earned on the $120,000 of invested
funds. At December 31, 2004, Columbia had a liability recorded of $155,766 as its obligation for
past services pursuant to the retirement agreement. During 2001, Columbia purchased bank-owned life insurance (BOLI) to support life insurance,
salary continuation, and deferred compensation benefits for certain key employees. As of December
31, 2004 and 2003, Columbia recognized a salary continuation liability of $402,686 and $226,405,
respectively, and an elective deferred compensation liability of $135,225 and $87,842,
respectively, pursuant to these benefit plans. Payments under the salary continuation component
commence when the respective key employee reaches the age of 62 and the economic value of the
insurance coverage allocated to the employees estate is then reported as taxable income to that
employee. As of December 31, 2004 and 2003, the cash surrender value of the BOLI was $5.76 million
and $3.54 million, respectively. During 2002, Columbia entered into an employment agreement for a phantom stock grant with its chief
executive officer (CEO). The CEO received 15,764 units at a price of $8.96, retroactively
adjusted for stock dividends and splits, and exercisable per the plan agreement after December 31,
2002. Upon exercise of the grant, the CEO will receive a cash payment equal to the difference
between the unit grant price and the common stock market price for each unit on the date of
exercise. As of December 31, 2004, no units have been exercised. Columbia has recognized a
liability for the phantom stock grant in the amount of $167,355 and $130,626 as of December 31,
2004 and 2003, respectively. NOTE 15 TRANSACTIONS WITH RELATED PARTIES Certain directors, executive officers, and principal shareholders are customers of and have had
banking transactions with the Bank, and the Bank expects to have such transactions in the future.
All loans and commitments to lend included in such transactions were made in compliance with
applicable laws on substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and do not involve more than
the normal risk of collectibility or present any other unfavorable features. The amount of loans
outstanding to directors, executive officers, principal shareholders and companies with whom they
are associated was as follows.   2004
    
    
    2003BALANCE, beginning of year
    
    $
    10,352,164
    
    
    $
    11,082,369Loans made
    
    
    6,911,685
    
    
    
    1,112,282Loans repaid
    
    
    (3,888,114
    )
    
    
    (1,842,487
    )BALANCE, end of year
    
    $
    13,375,735
    
    
    $
    10,352,164
 At December 31, 2004, directors, executive officers, principal shareholders and companies
with which they are associated had approximately $3.55 million on deposit at the Bank. Columbia Bancorp - 66




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NOTE 16 CONCENTRATIONS OF CREDIT RISK All of the Banks loans, commitments, and commercial and standby letters of credit have been
granted to customers in the Banks market areas. The majority of such customers are also depositors
of the Bank. Investments in state and municipal securities are not significantly concentrated
within any one region of the United States. The concentrations of credit by type of loan are set
forth in Note 4. The distribution of commitments to extend credit approximates the distribution of
loans outstanding. Commercial and standby letters of credit were granted primarily to commercial
borrowers as of December 31, 2004. The Banks loan policies do not allow the extension of credit to
any single borrower or group of related borrowers in excess of $1.00 million without approval from
either the Board Loan Committee, President, Chief Credit Officer or Chief Administrative Officer. NOTE 17 FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK In the normal course of business to meet the financing needs of its customers, the Bank is a party
to financial instruments with off-balance-sheet risk. These financial instruments include
commitments to extend credit and the issuance of letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in
the consolidated balance sheets. The contract amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments. The Banks exposure to credit loss, in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit and letters of credit written, is represented
by the contractual amount of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet instruments. The Bank may or may not require collateral or other security to support financial instruments with
credit risk, depending on its loan underwriting guidelines.   Contract AmountsDecember 31,2004
    
    
    2003Financial instruments whose contract amounts
contain credit risk:Commitments to extend credit
    
    $
    168,812,079
    
    
    $
    162,232,037Undisbursed credit card lines of credit
    
    
    18,437,055
    
    
    
    17,332,801Commercial and standby letters of credit
    
    
    2,226,916
    
    
    
    2,466,414$
    189,476,050
    
    
    $
    182,031,252
 
 Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained, if deemed necessary by the
Bank upon an extension of credit, is based on Managements credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory, property and equipment and
income-producing properties. Written letters of credit are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. Those guarantees are primarily issued to support public
and private borrowing arrangements, including commercial paper, bond financing and similar
transactions. The credit risk involved in issuing letters of credit is essentially the same as
involved in extending loan facilities to customers. The Bank holds cash, marketable securities or
real estate as collateral supporting those commitments for which collateral is deemed necessary. An allowance for off-balance-sheet loan commitments, undisbursed lines of credit and letters of
credit has been established in the amount of approximately $443,000 at December 31, 2004. 67 - Columbia Bancorp




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NOTE 18 RISK MANAGEMENT ACTIVITIES During the fourth quarter of 2003, the Bank discontinued its practice of entering into derivative
financial instruments to mitigate the risk that a change in interest rates might result in a
decline in the value of the CRB Mortgage Teams committed loan pipeline and adversely impact
revenues. The CRB Mortgage Team has continued to generate mortgage loans for sale; however, loans
produced are sold on a best efforts basis to investors. The overall consideration received for
best efforts sales generally results in less revenue on a per loan basis. The execution of best
efforts sales results in a loan commitment to an investor 30 to 60 days prior to funding. Under
best efforts, interest rate risk is shifted away from the Bank and onto the investor who assumes
the risk of interest rate changes from the commitment date. Prior to the recent change, the Banks policy required the use of hedging through forward contracts
for the sale of mortgage-backed securities or through purchase/sale option contracts, designated as
fair value hedges, when the pipeline of committed fixed rate conforming loans aggregated certain
dollar thresholds. The hedge transactions were entered into to protect the Banks mortgage loan
pipeline from interest rate risks that might arise from suddenly increasing or falling rates during
the loan origination period through delivery to third-party purchases. To mitigate this risk, the
Bank anticipated potential interest rate changes and factors that influenced pipeline fallout,
which represented the percentage of loans that were not expected to close, in calculating the
amount of derivative instruments to execute. There were no forward sales or option contracts outstanding as of December 31, 2004 and 2003. As of
December 31, 2002, forward sales and option contracts to sell mortgage-backed securities were
$27.00 million with maturities of up to two months. Derivative instruments as of December 31, 2002,
had an unrealized loss of $322,248 recognized in the consolidated statements of income and
comprehensive income. The mortgage-backed securities that were to be delivered under these
contracts were fixed rate and generally corresponded with the composition of the Banks committed
loan pipeline. Changes in the fair value of the mortgage loan commitments and forward sales
contracts have been recognized in Mortgage Team net revenues in the consolidated statements of
income and comprehensive income. In a falling interest rate environment, the Bank expected to recognize a loss on the derivative
instrument and a gain on the sale of funded loans from the committed loan pipeline. The
effectiveness of the Banks hedging activities was measured by assessing the net losses and gains
on derivative instruments realized, unrealized premiums and discounts on loan sales and yield
spread premium payments on mortgage loans sold. For the periods ended December 31, 2003 and 2002, there were aggregated hedge ineffectiveness
losses of $429,115 and $366,767, respectively. Hedge ineffectiveness resulted from the Banks
decision to subsidize loan pricing in order to increase its mortgage servicing asset volume.
Revenues from servicing rights premiums were not considered in the measure of effectiveness. The
ineffectiveness from hedging activities, along with the servicing retained premiums, servicing
release premiums, servicing income and other servicing expenses, are included in Mortgage Team net
revenues in the consolidated statements of income and comprehensive income. As of December 31, 2004 and 2003, the Bank had short-term rate and point commitments amounting to
$3.42 million and $3.80 million, respectively, to fund fixed rate mortgage loan applications in
process. Substantially all of these commitments are for periods of 60 days or less. After funding
and sale of the mortgage loans, the Banks exposure to credit loss in the event of nonperformance
by the mortgagor is limited. Prior to sale of the loan, the Bank has potential exposure to credit
loss in the event of
nonperformance by the counterparty. The Bank manages this credit risk by selecting only well
established, financially strong counterparties. Columbia Bancorp - 68




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NOTE 19 COMMITMENTS AND CONTINGENCIES Operating lease commitments- As of December 31, 2004, Columbia leased certain properties. Future
minimum lease commitments are as follows.   Years ending December 31, 2005
    
    $

    686,0002006
    
    
    714,0002007
    
    
    792,0002008
    
    
    792,0002009
    
    
    792,000Thereafter
    
    
    5,476,000$
    9,252,000
 
 Rental expense for all operating leases was $530,858, $328,721 and $261,972 for the years
ended December 31, 2004, 2003 and 2002, respectively. Legal contingencies- Columbia may become a defendant in certain claims and legal actions arising
in the ordinary course of business. These matters have a high degree of uncertainty associated with
them. There can be no assurance that the ultimate outcome will not differ materially from
Columbias assessment of each matter. There can also be no assurance that all matters that may be
brought against Columbia are known to them at any point in time. In the opinion of Management,
after consultation with legal counsel regarding outstanding legal matters that could possibly
result in a financial loss, there are no matters presently known to Columbia that are expected to
have a material adverse effect on the consolidated financial condition of Columbia. 69 - Columbia Bancorp




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NOTE 20 PARENT COMPANY FINANCIAL INFORMATION Condensed financial information for Columbia Bancorp (unconsolidated parent company only) is as
follows. December 31,2004
    
    
    2003ASSETSCash
    
    $
    620,598
    
    
    $
    1,018,312Investment security held-to-maturity
    
    
    80,937
    
    
    
    81,258Corporate equity securities
    
    
    101,250
    
    
    
    78,750Investment in subsidiary Bank
    
    
    68,542,717
    
    
    
    60,341,388Deferred tax asset
    
    
    471,683
    
    
    
    333,855Other assets
    
    
    1,527,721
    
    
    
    1,265,050TOTAL ASSETS
    
    $
    71,344,906
    
    
    $
    63,118,613LIABILITIESJunior Subordinated Debentures
    
    $
    4,124,000
    
    
    $
    4,124,000Interest-rate swap liability
    
    
    44,033
    
    
    
    20,221Dividend payable
    
    
    795,524
    
    
    
    787,552Deferred compensation plan liability
    
    
    206,163
    
    
    
    181,686Employee benefit withholding
    
    
    113,865
    
    
    
    135,530Interest and other payables
    
    
    184,343
    
    
    
    65,160Total liabilities
    
    
    5,467,928
    
    
    
    5,314,149SHAREHOLDERS EQUITYCommon stock
    
    
    32,140,776
    
    
    
    31,520,099Retained earnings
    
    
    33,816,489
    
    
    
    26,252,366Accumulated comprehensive income, net of tax
    
    
    (80,287
    )
    
    
    31,999Total shareholders equity
    
    
    65,876,978
    
    
    
    57,804,464TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY
    
    $
    71,344,906
    
    
    $
    63,118,613
   Columbia Bancorp - 70




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Years Ended December 31,2004
    
    
    2003
    
    
    2002REVENUESEquity in undistributed earnings of subsidiary
    
    $
    8,319,064
    
    
    $
    7,213,593
    
    
    $
    7,208,039Dividends
    
    
    3,300,000
    
    
    
    2,909,603
    
    
    
    2,500,000Other
    
    
    6,580
    
    
    
    449,502
    
    
    
    314,403EXPENSESAdministrative and other expenses
    
    
    (890,954
    )
    
    
    (738,902
    )
    
    
    (641,337
    )Net income
    
    $
    10,734,690
    
    
    $
    9,833,796
    
    
    $
    9,381,105
 
 
 Years Ended December 31,2004
    
    
    2003
    
    
    2002CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    10,734,690
    
    
    $
    9,833,796
    
    
    $
    9,381,105Adjustments to reconcile net income to net cash from operating
activities:Equity in undistributed earnings of subsidiaries
    
    
    (8,319,064
    )
    
    
    (7,213,593
    )
    
    
    (7,208,039
    )Gain on sale of corporate equity securities
    
    
    
    
    
    
    (457,265
    )
    
    
    (294,133
    )Loss on sale or write-down of land
    
    
    5,429
    
    
    
    23,067
    
    
    
    Changes in other assets and liabilities
    
    
    (221,979
    )
    
    
    (394,822
    )
    
    
    (156,406
    )Net cash from operating activities
    
    
    2,199,076
    
    
    
    1,791,183
    
    
    
    1,722,527CASH FLOWS FROM INVESTING ACTIVITIESInvestment in Columbia Bancorp Trust I
    
    
    
    
    
    
    
    
    
    
    (124,000
    )Purchase of corporate equity securities
    
    
    
    
    
    
    (75,000
    )
    
    
    Proceeds from sale of corporate equity securities
    
    
    
    
    
    
    570,252
    
    
    
    481,146Purchase of held-to-maturity security
    
    
    
    
    
    
    
    
    
    
    (81,579
    )Proceeds from sale of property and equipment
    
    
    102,381
    
    
    
    
    
    
    
    Payments made for purchase of property and equipment
    
    
    (35,540
    )
    
    
    
    
    
    
    Net cash from investing activities
    
    
    66,841
    
    
    
    495,252
    
    
    
    275,567CASH FLOWS FROM FINANCING ACTIVITIESDividends paid and cash paid for fractional shares
    
    
    (3,162,595
    )
    
    
    (2,666,573
    )
    
    
    (2,593,588
    )Repurchase of common stock
    
    
    (226,229
    )
    
    
    (247,995
    )
    
    
    (4,023,170
    )Proceeds from issuance of Junior Subordinated
Deferrable Interest Debentures
    
    
    
    
    
    
    
    
    
    
    4,124,000Proceeds from the exercise of stock options
    
    
    725,193
    
    
    
    782,637
    
    
    
    1,008,572Net cash from financing activities
    
    
    (2,663,631
    )
    
    
    (2,131,931
    )
    
    
    (1,484,186
    )NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (397,714
    )
    
    
    154,504
    
    
    
    513,908CASH AND CASH EQUIVALENTS, beginning of year
    
    
    1,018,312
    
    
    
    863,808
    
    
    
    349,900CASH AND CASH EQUIVALENTS, end of year
    
    $
    620,598
    
    
    $
    1,018,312
    
    
    $
    863,808SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIESChange in unrealized loss or gain on available-for-sale, net of tax
    
    $
    (104,590
    )
    
    $
    (122,030
    )
    
    $
    (163,538
    )Change in fair value of interest-rate swap
    
    $
    (7,696
    )
    
    $
    (20,221
    )
    
    $
    Cash dividend payable
    
    $
    795,524
    
    
    $
    787,552
    
    
    $
    628,990
 
 71- Columbia Bancorp




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NOTE 21 REGULATORY
MATTERS Columbia and the Bank are subject to various regulatory capital requirements administered by
federal and state banking agencies. Failure to meet minimum requirements can initiate certain
mandatory  and possibly additional discretionary  actions by regulators that, if undertaken,
could have a direct material effect on a banks financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, banks must meet specific
capital guidelines that involve quantitative measures of the banks assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting practices. Capital
amounts and classification are also subject to qualitative judgments by the regulators about
components, risk-weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require Columbia and the
Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital
to average assets (as defined). Management believes, as of December 31, 2004, that Columbia and the
Bank meet all capital adequacy requirements to which they are subject. As of the most recent notifications from its regulatory agencies, the Bank was categorized as
well-capitalized under the regulatory framework for prompt corrective action. To be categorized as
adequately capitalized, the Bank must maintain minimum total risk-based capital, Tier 1 risk-based
capital, and Tier 1 leverage capital ratios as set forth in the table below. There are no
conditions or events since that notification that Management believes may have changed the
institutions category. 
 To Be Well-Capitalized UnderFor Capital
    
    
    Prompt CorrectiveAs of December 31, 2004
    
    Actual
    
    
    Adequacy Purposes
    
    
    Action Provisions(dollars in thousands)
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioTotal capital to risk-weighted assets:Columbia Bancorp
    
    $
    70,270
    
    
    
    11.1
    %
    
    $
    50,885
    
    
    
    38
    %
    
    
    N/A
    
    
    
    N/AColumbia River Bank
    
    $
    68,935
    
    
    
    10.9
    %
    
    $
    50,723
    
    
    
    38
    %
    
    $
    63,404
    
    
    
    310
    %Tier 1 capital to risk-weighted assets:Columbia Bancorp
    
    $
    62,341
    
    
    
    9.8
    %
    
    $
    25,442
    
    
    
    34
    %
    
    
    N/A
    
    
    
    N/AColumbia River Bank
    
    $
    61,006
    
    
    
    9.6
    %
    
    $
    25,362
    
    
    
    34
    %
    
    $
    38,042
    
    
    
    36
    %Tier 1 capital to average assets:Columbia Bancorp
    
    $
    62,341
    
    
    
    8.7
    %
    
    $
    28,537
    
    
    
    34
    %
    
    
    N/A
    
    
    
    N/AColumbia River Bank
    
    $
    61,006
    
    
    
    8.6
    %
    
    $
    28,507
    
    
    
    34
    %
    
    $
    35,634
    
    
    
    35
    %
 To Be Well-Capitalized UnderFor Capital
    
    
    Prompt CorrectiveAs of December 31, 2003
    
    Actual
    
    
    Adequacy Purposes
    
    
    Action Provisions(dollars in thousands)
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioTotal capital to risk-weighted assets:Columbia Bancorp
    
    $
    60,431
    
    
    
    11.7
    %
    
    $
    41,285
    
    
    
    38
    %
    
    
    N/A
    
    
    
    N/AColumbia River Bank
    
    $
    58,968
    
    
    
    11.5
    %
    
    $
    41,164
    
    
    
    38
    %
    
    $
    51,455
    
    
    
    310
    %Tier 1 capital to risk-weighted assets:Columbia Bancorp
    
    $
    53,977
    
    
    
    10.5
    %
    
    $
    20,649
    
    
    
    34
    %
    
    
    N/A
    
    
    
    N/AColumbia River Bank
    
    $
    52,534
    
    
    
    10.2
    %
    
    $
    20,581
    
    
    
    34
    %
    
    $
    30,872
    
    
    
    36
    %Tier 1 capital to average assets:Columbia Bancorp
    
    $
    53,997
    
    
    
    9.2
    %
    
    $
    23,501
    
    
    
    34
    %
    
    
    N/A
    
    
    
    N/AColumbia River Bank
    
    $
    52,534
    
    
    
    9.0
    %
    
    $
    23,453
    
    
    
    34
    %
    
    $
    29,316
    
    
    
    35
    %
 
 Columbia Bancorp - 72




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NOTE 22 FAIR VALUES OF FINANCIAL INSTRUMENTS The following table estimates fair values and the related carrying values of Columbias financial
instruments. 
 2004
    
    
    2003Estimated
    
    
    
    
    
    
    EstimatedCarrying
    
    
    Fair
    
    
    Carrying
    
    
    Fair(dollars in thousands)
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash and due from banks
    
    $
    25,527
    
    
    $
    25,527
    
    
    $
    33,810
    
    
    $
    33,810Interest-bearing deposits with banks
    
    $
    12,166
    
    
    $
    12,166
    
    
    $
    5,101
    
    
    $
    5,101Federal funds sold
    
    $
    20,286
    
    
    $
    20,286
    
    
    $
    14,956
    
    
    $
    14,956Investment securities available-for-sale
    
    $
    24,573
    
    
    $
    24,573
    
    
    $
    13,876
    
    
    $
    13,876Investment securities held-to-maturity
    
    $
    17,789
    
    
    $
    18,395
    
    
    $
    14,964
    
    
    $
    15,843Equity securities
    
    $
    606
    
    
    $
    606
    
    
    $
    79
    
    
    $
    79Restricted equity securities
    
    $
    2,429
    
    
    $
    2,429
    
    
    $
    2,843
    
    
    $
    2,843Loans held-for-sale
    
    $
    2,517
    
    
    $
    2,517
    
    
    $
    2,792
    
    
    $
    2,792Loans, net of allowance for loan losses
and unearned loan fees
    
    $
    571,608
    
    
    $
    569,270
    
    
    $
    461,558
    
    
    $
    465,772Mortgage servicing asset
    
    $
    2,163
    
    
    $
    2,163
    
    
    $
    3,691
    
    
    $
    3,691Financial liabilities:Demand and savings deposits
    
    $
    419,587
    
    
    $
    419,587
    
    
    $
    373,610
    
    
    $
    373,610Time certificates
    
    $
    187,356
    
    
    $
    189,130
    
    
    $
    122,748
    
    
    $
    126,048Notes payable
    
    $
    34,890
    
    
    $
    34,952
    
    
    $
    21,983
    
    
    $
    22,345Junior Subordinated Deferrable Interest
Debentures
    
    $
    4,124
    
    
    $
    4,124
    
    
    $
    4,000
    
    
    $
    4,000
 
  In addition, other assets and liabilities of Columbia that are not defined as financial instruments
are not included in the above disclosures, such as property and equipment. Also, nonfinancial
instruments typically not recognized in the consolidated financial statements nevertheless may have
value but are not included in the above disclosures. These include, among other items, the
estimated earnings power of core deposit accounts, the earnings potential of loan servicing rights,
the trained work force, customer goodwill, and similar items. NOTE 23 SEGMENT INFORMATION Columbia operates two primary segments, the community banking segment and the mortgage banking
segment. The community banking segment consists of Columbias subsidiary, Columbia River Bank,
which operates 20 branch facilities in Oregon and Washington. The Bank offers loan, investment, and
deposit products to its customers who range from individuals to medium-size agricultural and
commercial companies. The mortgage banking segment consists of the CRB Mortgage Team, with
administrative offices in Bend, Oregon, and an additional eight offices in Oregon. The CRB Mortgage
Team offers a full range of mortgage lending services and products to its clients. In 2002, Management evaluated the internal controls and accounting processes of the CRB Mortgage
Team. As a result of this evaluation, certain activities were reclassified for internal financial
statement 73- Columbia Bancorp




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purposes, thus affecting account level detail of the internal segment reporting process. Due to the
overall volume and nature of transactions that impact secondary marketing activities, Management
determined it to be impracticable and of minimal benefit to restate prior periods for these account
reclassification changes. The overall performance of the Bank and the overall composition of the
reportable segments remain unchanged as a result of these internal segment reporting process
changes. Financial information that Columbia uses to evaluate the reportable segments and the reconciliation
to Columbias consolidated results are summarized as follows. 
 Community
    
    
    MortgageDecember 31, 2004
    
    Banking
    
    
    Banking
    
    
    Consolidated(in thousands)Net interest income before provision for loan losses
    
    $
    35,205
    
    
    $
    175
    
    
    $
    35,380Noninterest income
    
    $
    5,656
    
    
    $
    2,656
    
    
    $
    8,312Amortization of the mortgage servicing asset
    
    $
    
    
    
    $
    1,621
    
    
    $
    1,621Salaries and benefits
    
    $
    11,878
    
    
    $
    1,525
    
    
    $
    13,403Occupancy expense, excluding depreciation
    
    $
    1,093
    
    
    $
    77
    
    
    $
    1,170Depreciation
    
    $
    1,415
    
    
    $
    69
    
    
    $
    1,484Income (loss) before provision for income taxes
    
    $
    17,852
    
    
    $
    (891
    )
    
    $
    16,961Goodwill
    
    $
    7,389
    
    
    $
    
    
    
    $
    7,389Total assets
    
    $
    708,826
    
    
    $
    6,547
    
    
    $
    715,373
 December 31, 2003(in thousands)Net interest income before provision for loan losses
    
    $
    30,998
    
    
    $
    401
    
    
    $
    31,399Noninterest income
    
    $
    3,808
    
    
    $
    5,116
    
    
    $
    8,924Amortization of the mortgage servicing asset
    
    $
    
    
    
    $
    2,000
    
    
    $
    2,000Impairment of mortgage servicing rights
    
    $
    
    
    
    $
    858
    
    
    $
    858Salaries and benefits
    
    $
    10,812
    
    
    $
    2,244
    
    
    $
    13,056Occupancy expense, excluding depreciation
    
    $
    749
    
    
    $
    157
    
    
    $
    906Depreciation
    
    $
    1,260
    
    
    $
    91
    
    
    $
    1,341Income (loss) before provision for income taxes
    
    $
    15,737
    
    
    $
    (339
    )
    
    $
    15,398Goodwill
    
    $
    7,389
    
    
    $
    
    
    
    $
    7,389Total assets
    
    $
    575,463
    
    
    $
    8,673
    
    
    $
    584,136
 December 31, 2002(in thousands)Net interest income before provision for loan losses
    
    $
    29,417
    
    
    $
    417
    
    
    $
    29,834Noninterest income
    
    $
    2,780
    
    
    $
    5,771
    
    
    $
    8,551Amortization of the mortgage servicing asset
    
    $
    
    
    
    $
    1,029
    
    
    $
    1,029Impairment of mortgage servicing rights
    
    $
    
    
    
    $
    2,781
    
    
    $
    2,781Salaries and benefits
    
    $
    10,310
    
    
    $
    2,750
    
    
    $
    13,060Occupancy expense, excluding depreciation
    
    $
    668
    
    
    $
    151
    
    
    $
    819Depreciation
    
    $
    1,141
    
    
    $
    98
    
    
    $
    1,239Income (loss) before provision for income taxes
    
    $
    15,883
    
    
    $
    (1,278
    )
    
    $
    14,605Goodwill
    
    $
    7,389
    
    
    $
    
    
    
    $
    7,389Total assets
    
    $
    526,202
    
    
    $
    18,124
    
    
    $
    544,326
 
  Columbia Bancorp - 74




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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants regarding accounting and financial
disclosure matters during the year ended December 31, 2004. 
 ITEM 9A. CONTROLS AND PROCEDURES Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Management has evaluated the effectiveness of the design and operation of its disclosure controls
and procedures. Columbias principal executive and financial officers supervised and participated
in this evaluation. Based upon this evaluation Columbias principal executive and financial
officers each concluded that the disclosure controls and procedures were effective as of the end of
the fiscal year covered by this report. The design of any system of controls is based in part upon
various assumptions about the likelihood of future events, and there can be no assurance that any
of Managements plans, products or procedures will succeed in achieving their intended goals under
future conditions. In addition, no change in Columbias internal control over financial reporting
occurred during the fourth quarter of 2004 that has materially affected, or is reasonably likely to
materially affect, its internal control over financial reporting; including any corrective actions
with regard to significant deficiencies or material weaknesses. Managements Report on the Internal Control Over Financial Reporting Management of Columbia is responsible for establishing, maintaining and testing internal controls
over accurate financial reporting. Columbias internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of such financial reporting,
including the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles (GAAP). These internal controls over financial reporting include policies, procedures and processes that:  
    Address the maintenance of reasonably detailed records and data that accurately and
fairly reflect the transactions and dispositions of Columbias assets;
    Provide reasonable assurance that transactions are recorded as necessary to allow the
preparation of financial statements in accordance with GAAP and that our receipts and
expenditures are being made with proper authorizations of Columbias management and
directors; and
    Provide reasonable assurance regarding the timely prevention or detection of
unauthorized transactions, acquisitions, expenditures or the use or disposition of
Columbias assets that could have a material effect on the consolidated financial
statements. Any internal control system will have inherent limitations and may not prevent or detect
misstatements. The future evaluation of the effectiveness of such controls is subject to the risk
that controls may become inadequate due to changes in conditions, or that the level of compliance
with policies and procedures may deteriorate over time. Management assessed the effectiveness of Columbias internal controls over financial reporting as
of December 31, 2004. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), an Internal
Control-Integrated Framework. Based on our assessment and those criteria, management believes that
Columbia maintained effective internal control over financial reporting as of December 31, 2004. In addition, Columbias independent registered public accounting firm has audited and issued their
report on Managements assessment of Columbias internal control over financial reporting, which
appears below. 75- Columbia Bancorp




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors
Columbia Bancorp We have audited the managements assessment, included in the accompanying Management Report on
Internal Control Over Financial Reporting, that Columbia Bancorp (the Company) maintained effective
internal control over financial reporting as of December 31, 2004, based on criteria established in
Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Columbia Bancorps management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the Companys internal control over financial
reporting. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use of disposition of the companys assets that could have a material effect on the
financial statements. Because of the inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of the effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with policies and procedures may deteriorate. In our opinion, managements assessment that Columbia Bancorp maintained effective internal control
over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based
on criteria established in Internal Control  Integrated Framework issued by the COSO. Also, in our
opinion, Columbia Bancorp maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal Control 
Integrated Framework issued by the COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Columbia Bancorp as of December 31, 2004,
and the related statements of income, stockholders equity, and cash flows for the year then ended
and our report dated January 20, 2005, expressed an unqualified opinion on these financial
statements. (SIGNATURE) Portland, Oregon
March 14, 2005 Columbia Bancorp - 76




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ITEM 9B. OTHER INFORMATION None. 
 PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors of Columbia is set forth under Election of Directors in
Columbias Notice of Annual Meeting of Shareowners and Proxy Statement to be filed within 120 days
after Columbias year end of December 31, 2004 (the Proxy Statement), which information is
incorporated herein by reference. The names of the directors of Columbia and their employer and principal occupation as of the date
hereof are set forth below. Directors: Donald T. Mitchell, Chairman, Lumber Broker, Retired
Robert L.R. Bailey, Orchard View Farms, Owner
Charles F. Beardsley, Hershner & Bell Real Estate & Insurance, Owner
Richard E. Betz, Royal Columbia Farms, Inc, Bud-Rich Potato, Inc, Owner
William A. Booth, Booth & Kelly Real Estate & Insurance, Owner
Lori R. Boyd, Boyd & Boyd, LLP, Owner
Dennis L. Carver, Goldendale Chiropractic Clinic, Chiropractor/Owner
Roger L. Christensen, Columbia Bancorp and Columbia River Bank, President & Chief Executive Officer
Terry L. Cochran, Banker, Retired
James J. Doran, Jim Doran Chevrolet Oldsmobile, Jim Doran Dodge Chrysler, Owner
Jean S. McKinney, McKinney Ranch, Owner Executive Officers: The executive officers of Columbia and their ages and titles are set forth below. Business
experience for the past five years is provided in accordance with SEC rules are set forth under
Information Regarding Management in the Proxy Statement, which information is incorporated herein
by reference. Roger L. Christensen (47).Columbia Bancorp & Columbia River Bank, President & Chief Executive OfficerR. Shane Correa (39).Columbia River Bank, Executive Vice President & Chief Banking OfficerJames C. McCall (59).Columbia River Bank, Executive Vice President & Chief Administrative OfficerCraig J. Ortega (47).Columbia River Bank, Executive Vice President & Chief Operating OfficerGreg B. Spear (39).Columbia Bancorp & Columbia River Bank, Executive Vice President & Chief Financial OfficerBritt W. Thomas (45).Columbia River Bank, Executive Vice President & Chief Credit Officer Code of Ethics Columbia has adopted a code of business conduct and ethics for directors, officers (including
Columbias principal executive officer, principal financial officer and controller) and financial
personnel, known as the Code of Ethics Policy. The Code of Ethics Policy is available on
Columbias website at www.columbiabancorp.com. Shareholders may request a free copy of the Code of
Ethics Policy from: Columbia Bancorp
Attn: Investor Relations
P.O. Box 1050
The Dalles OR 97058
(541) 298-6649 77- Columbia Bancorp




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##### Table of Contents



Audit Committee Information regarding Columbias audit committee members is set forth in the Proxy Statement, which
information is incorporated herein by reference 
 ITEM 11. EXECUTIVE COMPENSATION AND REPORT OF COMPENSATION COMMITTEE Information regarding Columbias compensation of its named executive officers is set forth under
Executive Compensation in the Proxy Statement, which information is incorporated herein by
reference. Information regarding Columbias compensation of its directors is set forth under
Director Compensation in the Proxy Statement, which information is incorporated herein by
reference. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER
MATTERS Information regarding security ownership of certain beneficial owners, directors and executive
officers is set forth under Equity compensation Plan Information in the Proxy Statement, which
information is incorporated herein by reference. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is set forth under Certain
Relationships and Related Transactions in the Proxy Statement, which information is incorporated
herein by reference. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding principal auditor fees and services is set forth under Principal Auditor
Fees and Services, in the Proxy Statement, which information is incorporated herein by reference. 
 PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Exhibits. The following documents are filed as part of this report and are incorporated herein by reference
from the Registrants 2004 Annual Report, and are being filed with the Securities and Exchange
Commission as part of Columbia Bancorps Form 10-K for the year ended December 31, 2004.  (i)
    Independent Auditors Report(ii)
    Consolidated Balance Sheets for the Years Ended December 31, 2004 and 2003(iii)
    Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2004, 2003, and 2002(iv)
    Consolidated Statements of Changes in Shareholders Equity for the Years Ended December 31, 2004, 2003, and 2002(v)
    Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002(vi)
    Notes to Consolidated Financial Statements The following documents are not included in this 2004 Annual Report, but are either being filed
with, or incorporated by reference into, Columbia Bancorps Form 10-K for the year ended December
31, 2004 and filed with the Securities and Exchange Commission Columbia Bancorp - 78




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3.1.1
    
    Articles of Incorporation of Columbia Bancorp (Incorporated herein by reference to Exhibit
3(i) to Columbias form 10-Q for the period ended June 30, 1999.)3.1.2
    
    Bylaws of Columbia Bancorp (Incorporated herein by reference to Exhibit 15.5 to Columbias
Form 10-KSB for the year ended December 31, 1998.)4.1
    
    Indenture dated as of December 19, 2002 between Columbia Bancorp, as Issuer, and Wells Fargo
Bank, N.A., as Trustee, relating to Floating Rate Junior Subordinated Debt Securities due
2033.*4.2
    
    Form of Floating Rate Junior subordinated Debt Security due 2033.**10.1+
    
    Employment Agreement between Roger L. Christensen and Columbia Bancorp dated April 15, 2004.
(Incorporated herein by reference to Exhibit 10.1 to Columbias quarterly report on Form 10-Q
for the period ended June 30, 2004.)10.2+
    
    Employment Agreement between James C. McCall and Columbia River Bank dated April 15, 2004.
(Incorporated herein by reference to Exhibit 10.2 to Columbias quarterly report on Form 10-Q
for the period ended June 30, 2004.)10.3+
    
    Employment Agreement between Craig J. Ortega and Columbia River Bank dated April 15, 2004.*10.4+
    
    Employment Agreement between Britt W. Thomas and Columbia River Bank dated April 15, 2004.
(Incorporated herein by reference to Exhibit 10.2 to Columbias quarterly report on Form 10-Q
for the period ended September 30, 2004.)10.5+
    
    Deferred Compensation Agreement of April 1, 1999 between Terry L. Cochran and Columbia
Bancorp. (Incorporated herein by reference to Exhibit 10.2 to Columbias Annual Report on Form
10-K for the year ended December 31, 1999.)10.6+
    
    Columbia Bancorp Restated Employee Stock Ownership Plan and Trust Agreement (1999
Restatement). (Incorporated herein by reference to Exhibit 10.2 to Columbias Annual Report on
Form 10-K for the year ended December 31, 1999.)10.7+
    
    Executive Salary Continuation Agreement between Columbia River Bank and Roger L.
Christensen. (Incorporated herein by reference to Exhibit 10.2 to Columbias Periodic Report
on Form 10-Q for the period ended September 30, 2002.)10.8+
    
    Executive Bonus Deferral Agreement between Columbia River Bank and Roger L. Christensen.
(Incorporated herein by reference to Exhibit 10.2 to Columbias Periodic Report on Form 10-Q
for the period ended September 30, 2002.)10.9+
    
    Split Dollar Agreement between Columbia River Bank and Roger L. Christensen. (Incorporated
herein by reference to Exhibit 10.3 to Columbias Periodic Report on Form 10-Q for the period
ended September 20, 2002.)10.10+
    
    Phantom Stock Agreement between Columbia Bancorp and Roger L. Christensen. (Incorporated
herein by reference to Exhibit 10.4 to Columbias Periodic Report on Form 10-Q for the period
ended September 30, 2002.)10.11+
    
    Executive Salary Continuation Agreement between Columbia River Bank and James C. McCall.
(Incorporated herein by reference to Exhibit 10.11 to Columbias Annual Report on Form 10-K
for the period ended December 31, 2002.)10.12+
    
    Executive Bonus Deferral Agreement between Columbia River Bank and James C. McCall.
(Incorporated herein by reference to Exhibit 10.12 to Columbias Annual Report on Form 10-K
for the period ended December 31, 2002.)10.13+
    
    Split Dollar Agreement between Columbia River Bank and James C. McCall. (Incorporated herein
by reference to Exhibit 10.13 to Columbias Annual Report on Form 10-K for the period ended
December 31, 2002.)10.14+
    
    Executive Salary Continuation Agreement between Columbia River Bank and Craig J. Ortega.
(Incorporated herein by reference to Exhibit 10.14 to Columbias Annual Report on Form 10-K
for the period ended December 31, 2002.)10.15+
    
    Executive Bonus Deferral Agreement between Columbia River Bank and Craig J. Ortega.
(Incorporated herein by reference to Exhibit 10.15 to Columbias Annual Report on Form 10-K
for the period ended December 31, 2002.)
 79- Columbia Bancorp




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##### Table of Contents



10.16+
    
    Split Dollar Agreement between Columbia River Bank and Craig J. Ortega. (Incorporated herein
by reference to Exhibit 10.16 to Columbias Annual Report on Form 10-K for the period ended
December 31, 2002.)10.17+
    
    Executive Salary Continuation Agreement between Columbia River Bank and Britt W. Thomas.
(Incorporated herein by reference to Exhibit 10.17 to Columbias Annual Report on Form 10-K
for the period ended December 31, 2002.)10.18+
    
    Executive Bonus Deferral Agreement between Columbia River Bank and Britt W. Thomas.
(Incorporated herein by reference to Exhibit 10.18 to Columbias Annual Report on Form 10-K
for the period ended December 31, 2002.)10.19+
    
    Split Dollar Agreement between Columbia River Bank and Britt W. Thomas. (Incorporated herein
by reference to Exhibit 10.19 to Columbias Annual Report on Form 10-K for the period ended
December 31, 2002.)10.20+
    
    Executive Salary Continuation Agreement between Columbia River Bank and Greg B. Spear.
(Incorporated herein by reference to Exhibit 10.20 to Columbias Annual Report on Form 10-K
for the period ended December 31, 2002.)10.21+
    
    Executive Bonus Deferral Agreement between Columbia River Bank and Greg B. Spear.
(Incorporated herein by reference to Exhibit 10.21 to Columbias Annual Report on Form 10-K
for the period ended December 31, 2002.)10.22+
    
    Split Dollar Agreement between Columbia River Bank and Greg B. Spear. (Incorporated herein
by reference to Exhibit 10.22 to Columbias Annual Report on Form 10-K for the period ended
December 31, 2002.)10.23+
    
    Employment Agreement between R. Shane Correa and Columbia River Bank dated May 15, 2003.
(Incorporated herein by reference to Exhibit 10.3 to Columbias quarterly report on Form 10-Q
for the period ended September 30, 2004.)10.24+
    
    Employment Agreement between Greg B. Spear and Columbia Bancorp dated April 15, 2004.
(Incorporated herein by reference to Exhibit 10.1 to Columbias quarterly report on Form 10-Q
for the period ended September 30, 2004.)10.25+
    
    Columbia Bancorp 1999 Stock Incentive Plan (Amended 2002) (Incorporated herein by reference
to Exhibit 4.2 to Columbias report S-8 Securities to be offered to employees in employee
benefit plans filed January 28, 2005.)10.26+
    
    Executive Salary Continuation Agreement between Columbia River Bank and R. Shane Correa.*13.1
    
    Annual Report to Shareholders for the Year Ended December 31, 2004.*21.1
    
    List of Subsidiary.*23.1
    
    Consent of Moss Adams, LLP.*31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-4(a).*31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).*31.2
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) and
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.*32.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) and
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.*
    * Included as an exhibit to Columbia Bancorps Form 10-K for the year ended December 31, 2004 filed
with the Securities and Exchange Commission. ** Incorporated by reference to Exhibit A as contained in Exhibit 4.1 of this report. Columbia Bancorp - 80




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: February 24, 2005
    
    By:
    
    Roger L. Christensen, President & C.E.O  Columbia and CRB
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated. PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR DATED: February 24, 2005
    
    By:
    
    Roger L. Christensen, President & C.E.O  Columbia and CRBCHIEF FINANCIAL OFFICERDATED: February 24, 2005
    
    By:
    
    Greg B. Spear, Chief Financial Officer andExecutive Vice-President  Columbia and CRBDIRECTORS:DATED: February 24, 2005
    
    
    
    By: Donald T. Mitchell, Director and ChairmanDATED: February 24, 2005
    
    
    
    By: Robert L. R. Bailey, DirectorDATED: February 24, 2005
    
    
    
    By: Charles F. Beardsley, DirectorDATED: February 24, 2005
    
    
    
    By: Richard E. Betz, DirectorDATED: February 24, 2005
    
    
    
    By: William A. Booth, DirectorDATED: February 24, 2005
    
    
    
    By: Lori R. Boyd, DirectorDATED: February 24, 2005
    
    
    
    By: Dennis L. Carver, DirectorDATED: February 24, 2005
    
    
    
    By: Terry, L. Cochran, DirectorDATED: February 24, 2005
    
    
    
    By: James J. Doran, DirectorDATED: February 24, 2005
    
    
    
    By: Jean S. McKinney, Director