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 industry 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 five 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 December 31, 2008, we identified an impairment of goodwill and recognized an impairment charge of $7.39 million, resulting in the elimination of all previously recorded goodwill. Overview
Columbia Bancorp ("Columbia") is a bank holding company organized in 1996 under Oregon Law. Columbia's wholly-owned subsidiary, Columbia River Bank ("CRB," 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 21 full-service branches throughout Oregon and Washington. In Oregon, we operate 14 branches that 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 and Newberg. In Washington, we operate 7 branches that serve the communities of Goldendale, White Salmon, Pasco, Yakima, Sunnyside, Richland and Vancouver.
The following table presents an overview of our key financial performance indicators as of and for the years ended December 31:

Table 4
(dollars in thousands except per share data)       2008            2007            2006

Total assets                                   $ 1,122,294     $ 1,042,708     $ 1,033,188
Total loans, gross (1)                             864,004         879,064         813,443
Total deposits                                   1,004,196         922,893         859,065
Net income (loss)                                  (26,358 )        14,482          15,775
Earnings (loss) per diluted common share             (2.63 )          1.42            1.55
Return on average assets                             -2.42 %          1.43 %          1.79 %
Return on average equity                            -27.35 %         14.96 %         18.72 %
Average equity to average assets ratio                8.86 %          9.55 %          9.56 %
Net interest margin, tax equivalent basis             4.01 %          5.61 %          6.44 %
Efficiency ratio                                     77.99 %         56.49 %         55.00 %
Cash dividend payout ratio                              NM           27.71 %         24.56 %

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

NM Not meaningful

32 - Columbia Bancorp

Financial Highlights
2008 compared to 2007
• Gross loans, including loans held for sale, decreased by $15.06 million from December 31, 2007. As part of a fourth quarter 2008 strategy to rebalance our loan and deposit portfolios, we reduced gross loans by $58.43 million to $864.00 million as of December 31, 2008, compared to $922.43 million as of September 30, 2008.

• As of December 31, 2008, non-performing assets ("NPAs") totaled $102.03 million, or 9% of total assets. Of this amount, $9.62 million, or 9%, was comprised of properties held in other real estate owned. $92.35 million, or 91%, of the NPAs were loans on non-accrual status. $63.12 million, or 68%, of the non-accrual loans are secured by residential real estate construction properties.

• Deposits increased approximately 9% from December 31, 2007, or $81.30 million. This increase is partially attributable to increases in retail deposits, representing 50% of the increase during the year. The remaining portion of the increase is a result of the growth in wholesale deposits.

• Our net interest margin decreased from 5.61% as of December 31, 2007 to 4.01% as of December 31, 2008. This decrease is primarily attributable to the decrease in our interest earning assets as a result of transfers of loans to non-accrual status, as accrued interest is reversed for loans when they are placed on non-accrual status. Another contributing factor is the Fed Funds rate cuts since December 2007 and the resulting decrease in our loan yields. During the year, $7.20 million of interest income was foregone as a result of the reclassification of loans to non-accrual status. This resulted in a 71 basis point reduction in our net interest margin.

• Our provision for loan losses increased $38.37 million compared to 2007. This increase is primarily attributable to the general deterioration of credit quality indicators in our residential construction portfolio.

2007 compared to 2006
• Demand for real estate construction and development loans during the first half of 2007 contributed to gross loan growth of 8%.

• Deposits grew 7% primarily due to promotionally priced certificate of deposit offerings and higher wholesale deposit borrowings.

• Net interest income increased 1% primarily due to the net effect of volume increases in loans and time deposits. Net interest margin decreased from 6.44% to 5.61% as a result of Fed Funds rate cuts, promotionally priced deposit products and an increase in wholesale borrowings.

• Provision for loan losses increased 63% to provide for the effect of an agricultural loan charge-off during the first half of 2007 and for the real estate downturn that began during the second half of 2007.

• Occupancy expense increased 21% due to the opening of a joint branch and administration facility in Vancouver, Washington and due to a full year of expenses associated with branches opened during 2006.

• Other non-interest expense increased 13% due to legal and other costs associated with a charged-off agricultural loan, as well as higher software licensing expense and consulting fees.

33 - Columbia Bancorp

Net income for the year ended December 31, 2006 includes the effects of the following items:
• New branches in Richland, Pasco, Yakima and Sunnyside, Washington contributed $45.95 million in loan growth and $43.17 million in deposit growth, as well as increases in net interest income and non-interest expenses.

• Loan growth of 18% from our new and existing branches, combined with Federal Reserve interest rate increases, increased loan interest income 33%.

• Net interest margin increased from 5.95% to 6.44% due to the effect of rising interest rates. The positive effect of rising interest rates on our variable rate loan portfolio outpaced the negative effect from our borrowings and deposit accounts.

• Salaries and benefits increased 24% primarily due to employees hired to staff new branch and administrative positions, annual merit increases and market salary adjustments.

Operational Highlights
During 2008, we finalized a lease for office space in downtown Vancouver, Washington. This space houses our core operations team: retail operations, loan operations and information technology. These teams are focused on streamlining operational processes and improving and enhancing the product and delivery to our customers.
We made a strategic decision to close CRB Mortgage Team, which originated mortgage loans to be sold on the secondary market, thus reducing the operational costs and risk exposure associated with that business.
We closed our Lake Oswego, Oregon location which was a branch dedicated primarily to residential lending. We also closed our two temporary office locations in Yakima and Sunnyside, Washington due to the completed construction of permanent branch locations.
In March 2008, we hired a new Chief Credit Officer and over the course of the year we have enhanced our problem credit management department through the re-allocation of staff recourses and the hiring of additional problem credit managers or support staff. These individuals have been working chiefly on identification and resolution of problem credits. We anticipate adding additional resources, as deemed necessary, in the coming quarters of 2009. In October 2008, with the departure of Roger Christensen, Terry Cochran was appointed as President and Chief Executive Officer of Columbia Bancorp and Columbia River Bank. Mr. Cochran is a former President, CEO and director of Columbia Bancorp and Columbia River Bank-serving the bank from 1981 until 2001. A 42-year banking professional, Cochran is a graduate of Washington State University and Pacific Coast Banking School. He is also a former president of the Oregon Bankers Association (OBA), and was inducted into the OBA Hall of Fame in 2001. Cochran's office will be based in The Dalles, Oregon. Cochran also replaced Craig Ortega as President of Columbia River Bank. Ortega remains an executive officer at Columbia River Bank and continues as an integral member of the organization.
In November 2008, upon the departure of Greg Spear, Staci Coburn was appointed as Chief Financial Officer of Columbia Bancorp and Columbia River Bank. Ms. Coburn joined Columbia River Bank as Financial Assistant in April of 1998 and remained in that position through April 2000. She was promoted to the role of Assistant Vice President and Accounting Manager and served in that capacity from April 2000 to November 2001. Ms. Coburn was Vice President and later Senior Vice President and Controller from November 2001 through September 2007, and was named Corporate Vice President and Chief Accounting Officer of CRB and Principal Accounting Officer of Columbia Bancorp in September of 2007. She holds a B.B.A. degree in accounting from Boise State University and is a licensed Certified Public Accountant in the State of Oregon. Ms. Coburn has 13 years of combined banking and accounting-related experience.

34 - Columbia Bancorp

In October 2008, our credit card portfolio was sold; strategically this provided us with an opportunity to improve our liquidity position and, through a joint marketing agreement with the acquiring institution, a means to enhance benefits and services to our existing and potential credit card customers. Throughout 2008, the nation and the banking industry have faced considerable economic challenges stemming from the slowdown in residential lending. As a result, we are in the process of reducing our concentration of residential land and acquisition projects.
On February 9, 2009, the Bank entered into an agreement with the FDIC and the Oregon Division of Finance and Corporate Securities which requires the Bank to take certain measures to improve its safety and soundness. In conjunction with this agreement, the Bank stipulated to issuance of a cease and desist order against the Bank. In entering into the stipulation and consenting to entry of the order, the Bank did not concede the findings or admit to any of the assertions therein.
Among the corrective actions required are for the Bank to maintain above-normal capital levels. The Bank must also develop and adopt a plan to maintain the minimum risk-based capital requirements for a "well capitalized" bank, including a total risk-based capital ratio of at least 10%. In addition, the Bank must retain qualified management and must notify the FDIC in writing when it proposes to add any individual to its board of directors or to employ any new senior executive officer. Under the regulatory order the Bank's board of directors must also increase its participation in the affairs of the Bank, assuming full responsibility for the approval of sound policies and objectives for the supervision of all the Bank's activities.
The regulatory order further requires the Bank to increase allowance for loan losses by $25.00 million, a step that was taken during the fiscal quarter ended September 30, 2008, and to adapt its existing policy for estimating the adequacy of its loan loss allowance to address the current state of the local and regional economy, particularly in the real estate sector. The Bank also must eliminate certain classified assets and must develop a plan to reduce delinquent loans, as well as reducing loans to borrowers in the troubled commercial real estate market sector. The regulatory order also requires the Bank to develop a written three-year strategic plan and a plan to preserve liquidity. The bank feels it can meet the requirements of that agreement, resulting in a stronger and more efficient operating profile in the years to come. Many of the elements contained within the agreement were already implemented during the third quarter of 2008.
The Bank has developed specific plans focused on increasing liquidity and improving capital levels. The Bank's first priority is to maintain liquidity sufficient to continue to meet our obligations as they come due. During 2008 and through the date of this report, the Bank has increased retail deposits, reduced dependence on wholesale (brokered) deposits, reduced loan balances, voluntarily participated in the FDIC Temporary Liquidity Guarantee Program, and increased borrowing capacity through additional pledging of loans to Federal Home Loan Bank and Federal Reserve Bank. Going forward, the Bank plans to improve its capital levels primarily through a strategy of reducing its overall asset size, resolving problem loans to minimize further losses and by lowering staff levels commensurate with the anticipated decrease in the size of the Bank. 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, and is derived from both the interest rates we charged and the volume of our interest earning assets. 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.
35 - Columbia Bancorp

Average Balances and Average Rates Earned and Paid - The following table presents average balances of assets and liabilities, the related interest income or expense and the resulting average yield or rate:

                                      Year Ended December 31, 2008                          Year Ended December 31, 2007                          Year Ended December 31, 2006
                                                  Interest         Average                              Interest         Average                              Interest         Average
Table 5                         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           Rates
Interest earning assets:
Loans (1) (4)                $     914,846       $   62,553             6.84 %     $     859,483       $   75,104             8.74 %     $    744,067        $   67,027             9.01 %
Investment securities
Taxable securities                  19,571              821             4.19              22,839            1,103             4.83             23,463               993             4.23
Nontaxable securities
(2)                                  8,537              595             6.96              10,530              742             7.05             11,849               844             7.12

Total investment
securities                          28,108            1,416             5.03              33,369            1,845             5.53             35,312             1,837             5.20
Interest earning
balances due from banks             23,432              460             1.96              17,390              849             4.88             14,563               689             4.73
Federal funds sold                  51,302              737             1.44              39,772            1,985             4.99             28,394             1,416             4.99

Total interest earning
assets                           1,017,688           65,166             6.40             950,014           79,783             8.40            822,336            70,969             8.63
Nonearning assets                   70,599                                                63,424                                               58,745

Total assets                 $   1,088,287                                         $   1,013,438                                         $    881,081


Interest bearing
liabilities:
Interest bearing demand
and savings accounts         $     345,074       $    6,595             1.91 %     $     335,262       $    8,842             2.64 %     $    320,481        $    6,931             2.16 %
Time deposits and IRAs             391,763           16,628             4.24             338,524           16,616             4.91            219,084             9,407             4.29
Borrowed funds                      39,579            1,124             2.84              19,717            1,050             5.33             33,746             1,664             4.93

Total interest bearing
liabilities                        776,416           24,347             3.14             693,503           26,508             3.82            573,311            18,002             3.14
Non-interest bearing
deposits                           208,398                                               220,325                                              219,526

Total deposits and
borrowed funds                     984,814                                               913,828                                              792,837
Other liabilities                    7,092                                                 2,820                                                3,986

Total liabilities                  991,906                                               916,648                                              796,823
Shareholders' equity                96,381                                                96,790                                               84,258

Total liabilities and
shareholders' equity         $   1,088,287                                         $   1,013,438                                         $    881,081


Net interest income (tax
equivalent)                                      $   40,819                                            $   53,275                                            $   52,967


Net interest income (as
reported)                                        $   40,615                                            $   53,015                                            $   52,671


Average yield on average
earning assets                                                          6.40 %                                                8.40 %                                                8.63 %


Interest expense to
average earning assets                                                  2.39 %                                                2.79 %                                                2.19 %


Net interest margin (3)                                                 4.01 %                                                5.61 %                                                6.44 %


Net interest spread                                                     3.27 %                                                4.58 %                                                5.49 %

(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 35%.

(3) Net interest margin is computed by dividing net interest income (taxable equivalent basis) by total average interest earning assets.

(4) Loan fee income is included in interest income in calcualtion of average yield, year ended December 31; 2008, $1,197; 2007, $1,573; 2006, $3,883.

Net interest margin (net interest income as a percentage of average earning assets) measures how well a bank manages the pricing and duration of its assets and liabilities. From 2007 to 2008, our tax equivalent net interest margin decreased from 5.61% to 4.01% primarily due to the following factors: First, loan yields decreased following three Fed Funds rate cuts since December 2007. Second, during the year we offered competitively priced certificate of deposit and interest bearing deposit products to attract and retain core deposit customers. Third, in 2008 compared to 2007, we had higher average balances in wholesale deposits to support loan growth and minimize across-the-board rate increases in our retail deposit portfolio (see discussion of wholesale deposits under "Deposit" section below). Fourth, we reversed $3.01 million of interest income on loans as a result of re-classifying them to non-accrual status and $7.20 million of interest income was foregone as a result of loans on non-accrual status. From 2006 to 2007, our tax equivalent net interest margin decreased from 6.44% to 5.61% due to the same factors listed as one through three for 2007 to 2008.

36 - Columbia Bancorp

We expect our net interest margin will continue to trend lower due to the level of our loans on non-accrual status at the end of the year, and our expectation for little to no increases in the Fed Funds rate in 2009. Our balance sheet is asset sensitive, meaning that assets re-price, or adjust to market interest rates, more rapidly than liabilities. As a result, decreases in the Fed Funds rate negatively impact interest income as variable rate loans tied to the Prime Rate re-price (the Prime Rate has historically followed changes in the Fed Funds rate). Lower interest rates on our loans combined with the competitive deposit environment and lagging re-pricing of liabilities will contribute to decreases in net interest margin.
Changes in net interest income result from changes in volume and net interest spread. Volume refers to the dollar level of interest earning assets and interest bearing liabilities. Net interest spread refers to the difference . . .