losses may be considered necessary during the remainder of 2008 if real estate values continue to decline; however, we expect future provisions will be at significantly lower levels than those experienced in the third quarter of 2008. As of September 30, 2008, our goodwill totaled $7.39 million as a result of a business combination in 1998. We follow Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 142, which requires us to evaluate goodwill for impairment not less than annually and to write down the goodwill if the business unit associated with the goodwill cannot sustain the value attributed to it. Our assessment of the fair value of goodwill is based on our current market capitalization, discounted cash flows from forecasted earnings and an evaluation of current purchase transactions. Our evaluation of the fair value of goodwill involves a substantial amount of judgment. Given the current economic environment, our goodwill impairment testing was evaluated under the "stage two" analysis defined in SFAS No. 142. The stage two analysis of goodwill required us to evaluate the fair market value of our company from the perspective of a potential purchaser. In that light, we utilized public information for sales transactions, of organizations similar to ours, occurring within the last 5 years, as well as discrete information from loan sales occurring in a similar economic environment of the 1980's. Based on this analysis, with a valuation date of September 30, 2008, we identified no impairment of goodwill. No impairment of goodwill has been identified during the initial and subsequent annual assessments (annual assessment occurs as of December 31), or during tests between annual assessments.
OVERVIEW
Columbia Bancorp ("Columbia") is a bank holding company organized in 1996 under Oregon Law. Columbia's common stock is traded on the Nasdaq Global Select Market under the symbol "CBBO." Columbia's wholly-owned subsidiary, Columbia River Bank ("CRB" or "the Bank"), is an Oregon state-chartered bank, headquartered in The Dalles, Oregon, through which substantially all business is conducted. CRB offers a broad range of services to its customers, primarily small and medium sized businesses and individuals.
We have a network of 22 full-service branches throughout Oregon and Washington. In Oregon, we operate 15 branches. These branches serve the northern and eastern Oregon communities of The Dalles, Hood River, Pendleton and Hermiston, the central Oregon communities of Madras, Redmond, and Bend, and the Willamette Valley communities of McMinnville, Canby, Lake Oswego and Newberg. In Washington, we operate 7 branches. These branches serve the communities of Goldendale, White Salmon, Pasco, Yakima, Sunnyside, Richland and Vancouver. The Lake Oswego Branch, which specialized in residential construction lending, was closed October 31, 2008.
Business Developments:
During the year, we have experienced a significant amount of change from internal and external forces. Internally, we have seen a significant change in leadership during the year with a new Chief Credit Officer, Craig Hummel, a new Chief Executive Officer and President, Terry Cochran and a new Chief Financial Officer, Staci Coburn. In addition we opened two permanent branches, Yakima and Sunnyside, Washington, and continued to make improvements upon our technology and delivery to customers. One such improvement was the centralization of our core operations in Vancouver, Washington.
Columbia River Bank is considered "adequately-capitalized" for regulatory purposes as of September 30, 2008. Only one ratio does not quantitatively qualify as "well-capitalized", and that is the total risk-based capital ratio, which is 8.50% and is estimated to be 1.50% short of meeting the quantitative threshold for well-capitalized. The ratio of Tier 1 risk-based capital and Leverage ratio are 7.24% and 6.60%, respectively, which exceeds the minimum threshold for "well-capitalized". In the previous quarters in 2008 and 2007, we were considered "well-capitalized" for regulatory purposes.
Externally, there have been a number of changes in the banking industry, especially surrounding the initiatives made by the U.S. Department of the Treasury ("Treasury") to provide relief to financial institutions and ease depositor and investor concerns. Specifically, there are now sources of relief for

financial intuitions provided by the Treasury through their newly enacted Troubled Asset Relief Program ("TARP") and other similar initiatives, including:
• TARP asset purchase program, whereby troubled assets can be sold to the Treasury.

• TARP capital, whereby the Treasury will provide a capital infusion in the form of preferred stock ownership in the institution.

• Increase in FDIC insurance coverage for depositors from $100,000 to $250,000.

• The voluntary enrollment in an FDIC insurance coverage to provide unlimited insurance coverage for non-interest bearing deposit customers.

We believe that initiatives like this have real value for community banks. Like most financial institutions across the nation, we are being affected by the results of an economy that has been described as being the worst economic situation in recent memory. The weakening economy appears to be a direct result of the real estate lending crisis that began to manifest in 2007 and accelerated dramatically in 2008. We have observed a general weakening of our credit quality. We believe this is a result of fewer residential home sales and increasing inventories of new homes and residential building lots, coupled with declining property values. This has reduced the available cash flows for repayment of loans from our builder and developer borrowers. This has led to the need for increased provisions for loan losses as well as higher charge-offs. The adverse national and regional market climates have exacerbated our current financial condition. We are an organization that has historically experienced growth year over year, with much of that growth in the residential real estate acquisition and development market.
In response to these forces, we have already begun to take the following measures:
• For the near term, the Bank intends to remain adequately capitalized by regulatory definition, and we plan to prudently manage our capital so that we return to well-capitalized in the near future. All capital management options are being analyzed, including the capital-raising initiative recently outlined in the TARP capital program and an evaluation of our balance sheet structure. Initial steps to preserve capital included the reduction of the quarterly dividend from $0.10 per share as of March 31, 2008, to $0.01 per share as of June 30, 2008, and the suspension of the dividend for the current and near-term quarters.

• Working diligently to retain and increase core deposit customers; recent activities of the Federal Deposit Insurance Corporation (FDIC) to provide unlimited coverage to all non-interest bearing demand deposit accounts and to provide coverage up to $250,000 per depositor on interest bearing relationships will help us.

• Reducing our loan balances through normal attrition, and more stringent loan approval policies and procedures for new and renewed credit relationships. We anticipate that this will result in slower, more conservative growth in the coming quarters and years as we grow our core deposit base.

• In September 2008 we announced the exit from the mortgage business and the elimination of those and other positions throughout the organization. These actions are expected to reduce our salary and benefit expense by approximately $4.2 million annually. We believe that this is a strategic re-alignment of our business and staffing model that will help to ensure customer satisfaction in the coming quarters.

• Sale of our credit card portfolio, which was considered by management to be a great opportunity not only to improve our liquidity position, but to provide substantially enhanced benefits and services to our existing and potential credit card customers.

• Elimination of the Board of Directors fees since July 2008 and for the remainder of 2008.

• Over the course of the nine months ended September 30, 2008, we have made a continued investment in our technology and delivery systems to improve our electronic banking products, including remote capture deposit, improved internet banking products, in addition to the improvements to the credit card product discussed above.

• Closure of the Lake Oswego Branch, which specialized in residential construction lending.

Financial Overview:
The following table presents an overview of our key financial performance
indicators:
Key Financial Performance Indicators:
(dollars in thousands except per share data)

                                             As of and for the                                        As of and for the
                                     Three Months Ended September 30,                          Nine Months Ended September 30,
                                                                         %                                                         %
                                  2008                2007             Change             2008                 2007              Change
Return on average
assets                              -5.01 %             1.50 %                              -1.63 %               1.37 %
Return on average
equity                             -59.62 %            15.71 %                             -17.47 %              14.49 %
Average equity to
average assets                       8.40 %             9.53 %                               9.33 %               9.43 %
Net interest margin,
tax equivalent basis                 3.86 %             5.61 %                               4.51 %               5.65 %
Efficiency ratio                    83.42 %            56.95 %                              71.59 %              56.88 %

Net income (loss)            $    (14,091 )        $   3,877            -463 %        $   (13,078 )        $    10,336            -227 %
Earnings (loss) per
diluted common share         $      (1.41 )        $    0.38            -471 %        $     (1.31 )        $      1.01            -230 %
Total gross loans (1)                                                                 $   924,181          $   874,779               6 %
Total assets                                                                          $ 1,150,026          $ 1,034,113              11 %
Deposits                                                                              $ 1,015,068          $   917,146              11 %

Book value per common
share                                                                                 $      8.75          $      9.87             -11 %
Tangible book value
per common share                                                                      $      8.02          $      9.13             -12 %

(1) Includes loan portfolio and loans held-for-sale and excludes allowance for loan losses and unearned loan fees.

The decrease noted in earnings per share for each period was primarily due to an increase in the provision for loan losses, the effect of net interest margin compression and increases in non-interest expenses related to the administrative expansion and centralization into Vancouver, Washington.
Significant items for the three and nine months ended September 30, 2008 were as follows:
• Gross loans have increased by $45.12 million from December 31, 2007, but have decreased $18.43 million from June 30, 2008, as a result of the sale of the credit card portfolio and the charge-off of selected loan balances. Gross loans have increased $49.40 million or 6% from September 30, 2007, which is less than our traditional growth rate. As a comparison, loan growth from September 30, 2006 to September 30, 2007 was 12%.

• As of September 30, 2008, non-performing assets ("NPAs") totaled $68.91 million, or 6% of total assets. Of this amount, $5.62 million, or 8%, was comprised of properties held in other real estate owned. $63.23 million, or 92%, of the NPAs were loans on non-accrual status. $49.99 million, or 79%, of the non-accrual loans are secured by residential real estate construction properties.

• Our provision for loan losses has increased $24.60 million for the three months ended September 30, 2008; and $29.95 million for the nine months ended September 30, 2008 in comparison to the same periods in 2007. This increase is primarily attributable to the general deterioration of credit quality indicators in our residential construction portfolio.

• Deposits have increased approximately 10% from December 31, 2007, or $92.18 million. This increase is attributable to increases in our participation in brokered certificates of deposit, representing 98% of the increase during the nine months ended September 30, 2008.

• Our net interest margin has decreased for the three and nine months ended September 30, 2008, this decrease is partially attributable to the federal funds rate cuts since September 2007 and the resulting decrease in our loan yields. Another contributing factor is the decrease in our interest-earning assets as a result of transfers of loans to non-accrual, as accrued interest is reversed for loans when they are placed on non-accrual status. During the three and nine months ended September 30, 2008, $1.26 million and $2.04 million, respectively, of interest income was reversed. This resulted in a 47 and 28 basis point reduction in our net interest margin, for the three and nine months ended September 30, 2008, respectively.

RESULTS OF OPERATIONS
Net Interest Income
Net interest income, our primary source of operating income, is the difference between interest income and interest expense. Interest income is earned primarily from our loan and investment security portfolios. Interest expense results primarily from customer deposits and borrowings from other sources, including Federal Home Loan Bank advances, wholesale deposits and trust preferred securities. Like most financial institutions, our net interest income increases as we are able to charge higher interest rates on loans while paying relatively lower interest rates on deposits and other borrowings. The following table presents a comparison of average balances and interest rates:
Net Interest Income Average Balances and Rates:
(dollars in thousands)

                                    Three Months Ended September 30,                        Three Months Ended September 30,
                                            Average Balances                              Average Yields/Costs Tax Equivalent
                                2008               2007             Change              2008                 2007            Change
Taxable securities           $    14,505        $    22,648        $  (8,143 )              4.41 %              4.84 %         -0.43 %
Nontaxable securities
(1)                                8,567             10,040           (1,473 )              6.95 %              6.99 %         -0.04 %
Interest bearing
deposits                          27,944             16,342           11,602                2.18 %              4.93 %         -2.75 %
Federal funds sold                54,371             36,362           18,009                1.77 %              4.81 %         -3.04 %
Loans (2) (3)                    948,689            877,314           71,375                6.51 %              8.76 %         -2.25 %

Interest earning assets        1,054,076            962,706           91,370                6.13 %              8.44 %         -2.31 %

Non-earning assets                65,624             64,389            1,235


Total assets                 $ 1,119,700        $ 1,027,095        $  92,605


Savings & interest
bearing deposits             $   347,087        $   348,736        $  (1,649 )              1.75 %              2.75 %         -1.00 %
Time certificates                400,027            342,369           57,658                4.03 %              4.96 %         -0.93 %
Borrowed funds                    58,470             12,234           46,236                2.84 %              5.84 %         -3.00 %

Interest bearing
liabilities                      805,584            703,339          102,245                2.96 %              3.88 %         -0.92 %

Non-interest bearing
demand deposits                  211,394            223,413          (12,019 )
Other liabilities                  8,693              2,434            6,259
Shareholders' equity              94,029             97,909           (3,880 )


Total liabilities and
shareholders' equity         $ 1,119,700        $ 1,027,095        $  92,605




                                      Nine Months Ended September 30,                        Nine Months Ended September 30,
                                             Average Balances                              Average Yields/Costs Tax Equivalent
                                 2008               2007             Change              2008                 2007            Change
Taxable securities            $    19,510        $    23,412        $  (3,902 )              4.62 %              4.79 %         -0.17 %
Nontaxable securities               8,781             10,779           (1,998 )              6.99 %              7.09 %         -0.10 %
Interest bearing
deposits                           22,025             18,080            3,945                2.55 %              5.01 %         -2.46 %
Federal funds sold                 34,358             41,071           (6,713 )              2.17 %              5.07 %         -2.90 %
Loans                             920,606            854,306           66,300                7.16 %              8.82 %         -1.66 %

Interest-earning assets         1,005,280            947,648           57,632                6.84 %              8.47 %         -1.63 %

Nonearning assets                  66,210             63,280            2,930


Total assets                  $ 1,071,490        $ 1,010,928        $  60,562


Savings & interest
bearing deposits              $   353,958        $   333,546        $  20,412                1.89 %              2.67 %         -0.78 %
Time certificates                 361,751            336,740           25,011                4.33 %              4.93 %         -0.60 %
Borrowed funds                     40,417             22,620           17,797                2.81 %              5.30 %         -2.49 %

Interest bearing
liabilities                       756,126            692,906           63,220                3.10 %              3.86 %         -0.76 %

Non-interest bearing
demand deposits                   208,283            219,806          (11,523 )
Other liabilities                   7,096              2,838            4,258
Shareholders' equity               99,985             95,378            4,607


Total liabilities and
shareholders' equity          $ 1,071,490        $ 1,010,928        $  60,562

(1) In calculation of average yield, tax-exempt income has been adjusted to a tax-equivelant basis at a rate of 35%

(2) Non-accrual loans and loans held-for-sale are included in the average balance

(3) Loan fee income is included in interest income in calcualtion of average yield, three months ended September 30; 2008, $349; 2007, $418; nine months ended September 30; 2008, $ 1,184; 2007, $ 1,126.

Net interest margin (net interest income as a percentage of average earning assets) measures how well a bank manages its asset and liability pricing and duration. Our tax equivalent net interest margin measured 3.86% for the three months ended September 30, 2008, compared to 5.61% for the same period in 2007. The decrease is primarily due to two factors. First, loan yields decreased as our variable rate loans tied to the prime rate charged by major financial institutions re-priced, following cuts in the Fed Funds rate. The prime rate has historically followed changes in the Fed Funds rate. Second, we reversed approximately $1.26 million of interest income from loans placed on non-accrual status during the third quarter of 2008. When a loan is placed on non-accrual status, we reverse all interest recognized as income, but not yet paid. The current period reversal resulted in a decrease in our net interest margin by 47 basis points for the three months ended September 30, 2008. As a result of the same factors, our tax equivalent net interest margin decreased to 4.51% for the nine months ended September 30, 2008 from 5.65% for the same period in 2007. Our balance sheet is currently asset sensitive, meaning that interest earning assets mature or re-price more frequently than interest bearing liabilities in a given period. As a result, 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 (see also Item 3 of this report "Quantitative and Qualitative Disclosures about Market Risk"). We have incorporated interest rate floors into $578.17 million, or 64%, of our loans, in order to mitigate the adverse effects of falling interest rates. As of September 30, 2008, our weighted-average floor rate was 6.89%, whereas the weighted-average rate on loans with floors was 7.39%. Loan interest income will continue to decrease, primarily on loans without floors, as the Fed Funds rate falls. We anticipate that interest income will decrease as a result of the October 2008 reduction of the Fed Funds rate by 50 basis points.
Re-pricing of our deposit interest rates has lagged the more immediate decrease in earning asset yields which resulted from a need to retain deposit customers since the Fed Funds rate began decreasing in September 2007. The Fed Funds rate has decreased 275 basis points from September 30, 2007 to September 30, 2008. Further decreases in the Fed Funds rate will cause our net interest margin to continue to trend downward. We expect continued pressure on our costs of funds due to the competitive deposit environment.
The following table presents increases in net interest income attributable to volume changes versus rate changes:
Volume vs. Rate Changes:
(dollars in thousands)

                                  Three Months Ended September 30,                      Nine Months Ended September 30,
. . .