according to terms; loans of this nature may require a specific allocation based on historical loss rates and other subjective factors, to the extent that impairment is not identified. Loans not evaluated for impairment and not requiring a specific allocation, because the loan is determined not to be impaired, are subject to a general allocation based on historical loss rates and other subjective factors. An important element in determining the adequacy of the allowance is an analysis of loans by loan risk rating categories. We regularly review our loan portfolio to evaluate the accuracy of risk ratings throughout the life of loans.
Our methodology for estimating inherent losses in the portfolio takes into consideration all loans in our portfolio, segmented by industry type and risk rating, and utilizes a number of subjective factors in addition to historical loss rates. Subjective factors include: the economic outlook on both a national and regional level; the volume and severity of non-performing loans; the nature, value and estimated liquidity of collateral securing the loans; trends in loan growth; concentrations with individual and interrelated borrowers, industries and geographic regions; and competitive issues that impact loan underwriting. Increases to the allowance occur when we expense amounts to the provision for loan losses or when we recover previously charged-off loans or overdrafts. We reduce the allowance when we charge-off loans or overdrafts that are deemed uncollectible, although we do not necessarily cease collection activities when a loan is charged-off. We determine the appropriateness and amount of these charges by assessing the risk potential in our portfolio on an ongoing basis. Loan charge-offs do not necessarily result in the recognition of additional expense, except in cases where the amount of a loan charge-off exceeds the loss amount previously provided for in the allowance for loan losses.
On loans of either a larger size or troubled industry classification, we also may perform an individual risk analysis on specific performing loans. This individual analysis may include factors such as an updated review of the value of the collateral securing the loan, the geographic location of the loan, the expected or potential cash flows from the borrowers operations, the relative strength and liquidity of the guarantors and the past payment performance on the loan. In cases where existing collateral appraisals or evaluations are dated or stale in our opinion, we will typically obtain new appraisals or evaluations and these new values will be used to evaluate the risk of the loan and resulting provision for loan losses. Furthermore, in cases where the cash flow or liquidity of the borrower has been eliminated or there is an absence of guarantor strength, we may deem the loan to be totally collateral dependent. In such cases, if the analysis of the net realizable value of the loan collateral is determined to be deficient, that deficiency is charged-off.
The liability for off-balance-sheet financial instruments represents our best estimate of probable losses associated with off-balance-sheet financial instruments, which consist of commitments to extend credit, commitments under credit card arrangements, and commercial and standby letters of credit. The liability is included as a component of "Accrued interest payable and other liabilities" on our balance sheet.
We evaluate the adequacy of the liability for credit losses from off-balance-sheet financial instruments based upon reviews of individual credit facilities, current economic conditions, the risk characteristics of the various categories of commitments and other relevant factors. The liability is based on estimates, which are evaluated on a regular basis, and, as adjustments become necessary, they are reported in earnings in the periods in which they become known.
Approximately 76%, or $617.20 million, of our loan portfolio is secured by real estate collateral. Within the total balance of loans secured by real estate, certain loans are designated as construction credits. Of these, $71.31 million is secured by commercial property under construction (office buildings, warehouse, commercial lot pads, etc.) and $165.55 million is secured by residential property under construction (residential subdivisions, 1-4 family dwellings, homes under construction by developers, etc.). We are actively monitoring residential and commercial real estate values in all of our market regions. The residential markets have declined significantly in several key markets such as Central Oregon and select markets in the Portland, Oregon metro area. Some of our more rural eastern Oregon and Washington markets have remained stable or experienced only minor declines. Although commercial real estate markets are also softening, only Central Oregon has demonstrated significant distress at this time. In addition, due to the downturn in national and regional real estate sales, a number of our residential real estate construction and acquisition and development customers have been unable to sell existing inventories in the normal course of business and the repayment of these loans is now solely dependent on the liquidation of the collateral. Many of the loans of this

nature were written down to their estimated fair market value less estimated costs to sell, resulting in significant charge-offs during the year ended December 31, 2008 and continuing in the quarter ended March 31, 2009. Based on this experience, we believe there is an increased risk in our remaining real estate loan portfolio, and as such we recognized additional loan loss provisions of $9.70 million during the first quarter of 2009. Further increases in the allowance for loan losses may be considered necessary during the remainder of 2009 if real estate values continue to decline; however, we expect future provisions will be at lower levels than those experienced throughout 2008 and the first quarter of 2009.
Income Taxes
We estimate tax expense based on the amount it expects to owe various taxing authorities in the current and future periods for transactions arising during the current period. Accrued and/or refundable income tax represent the net estimated amount due or to be received from taxing authorities. In estimating accrued taxes and refundable taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance in the context of our tax position. The determination of our ability to fully utilize our deferred tax assets requires significant judgment, the use of estimates and the interpretation of complex tax laws. If it is determined that we, "more likely than not", would be unable to fully recognize any deferred tax assets, we would be required to write them down to the net realizable value, which would have a material adverse affect on our future earnings, shareholders' equity and regulatory capital.
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 21 full-service branches throughout Oregon and Washington. In Oregon, we operate 14 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 and Newberg. In Washington, we operate 7 branches. These branches serve the communities of Goldendale, White Salmon, Pasco, Yakima, Sunnyside, Richland and Vancouver.

Business Developments:
On February 9, 2009, our wholly owned subsidiary, Columbia River Bank, entered into an agreement with the FDIC and the Oregon Division of Finance and Corporate Securities ("DFCS"), its principal banking regulators, 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, by the FDIC and DFCS, based on certain findings from an examination of the Bank concluded in September 2008 based on financial and lending data measured as of June 30, 2008. 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, but it did agree to adopt and implement a corrective program to address certain deficiencies noted in the examination. Significant requirements of the regulatory order and actions we took during the first quarter of 2009 to address each requirement were as follows:
Maintain above-normal capital levels. The Bank's Tier 1 leverage ratio must be at least 10% to be considered well-capitalized. The 10% threshold must be met by May 9, 2009.
• As of March 31, 2009, the Bank's Tier 1 leverage ratio was 5.97%. The Bank had not achieved the required 10% threshold for the Tier 1 leverage ratio as of May 11, 2009, the date of this report. It is unclear what, if any, actions will be taken by the FDIC as a result of not meeting this requirement of the order.

• Our efforts to increase capital levels have been adversely impacted by the continued deterioration of credit quality and the resulting need to place loans on non-accrual status and recognize additional loan loss provisions. To improve regulatory capital ratios, maintain and improve liquidity levels, hasten a return to profitability and address other requirements of the regulatory order, we took the following actions during the first quarter of 2009:

o Reduced loans by $27.69 million. We continued our efforts to re-balance our assets and liabilities, primarily by reducing loan balances by $27.69 million since December 31, 2008. Loan balances decreased due to resolution of non-performing loans and customer payments and attrition.

o Repaid $47.90 million of wholesale deposits and borrowings. We paid off higher-cost wholesale borrowings and deposits using available liquid assets and retail deposits gathered over the last several months, and have concentrated heavily on maintaining retail deposits even during the first quarter, when deposits traditionally decline as our customers reduce post-Holiday debts and withdraw funds to pay taxes. While our total deposits saw a slight decline, we are pleased with their relative stability given the current economic conditions confronting our customers across our geographic markets.

o Aggressively managed credit quality. We continue to proactively address credit quality issues as they develop. During the first quarter, we recognized loan loss provisions totaling $9.70 million and charged-off $11.05 million of non-performing loans.

o Invested in higher yielding assets. We added $20.52 million of U.S. Government-backed securities earning higher rates compared to overnight Federal Funds investments. The securities are available to support liquidity requirements as needed. Investment purchases were offset by maturities of lower yielding securities.

o Reduced salaries and benefits. Salaries and benefits decreased compared to prior year quarters due to staffing reductions and restructuring, and suspension of company contributions to employee retirement plans. No bonuses or incentive compensation were awarded in 2008 or during the three months ended March 31, 2009.

o Announced relocation plan. During the first quarter of 2009, we announced plans to relocate our operations center from Vancouver, Washington to The Dalles, Oregon and additional staff reductions, including two executive officer positions. Combined with other restructuring and staff reductions late in 2008, the relocation is expected to yield annual salary savings of approximately $3.00 million.

Retain qualified management / board of director oversight. The Bank must retain qualified management and notify the FDIC in writing when it proposes to add new members to its board of directors or to employ new senior executive officers. The Bank's board of directors is also required to 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.
• During the first quarter of 2009, we retained a professional consulting firm to evaluate the abilities, qualifications and structure of the Bank's executive management team. The firm concluded our executive team is qualified to manage the Bank and to address the requirements of the regulatory order. In addition, we updated our organization structure to provide additional support and focus in the current environment. We also developed a plan to address the consulting firm's additional recommendations.

• At the 2009 Annual Meeting of Shareholders on April 23, our shareholders elected Dr. Frank K. Toda to replace outgoing director Lori L. Boyd. Dr. Toda's accession to the board of directors is expected to occur immediately after his application is approved by our regulators. Once approved, Dr. Toda also will replace Ms. Boyd on the Bank's audit committee. Dr. Toda currently serves as President of Columbia Gorge Community College following his retirement as a Colonel at the pinnacle of a 30 year career in the U.S. Air Force. Dr. Toda's father, Frank Toda, was one of the original founders of Columbia River Bank, serving on its organization committee in 1976. Dr. Toda's thirty-plus years as a financial management officer and executive will allow us to replace Ms. Boyd's experience and dedication as she returns full-time to a busy consulting practice.

Adapt allowance for loan loss policy to current economic conditions. The order requires the Bank 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 within 30 days of the date of the order.
• We believe we have sufficiently adapted our loan loss allowance methodology to address the present economic environment, including the distressed real estate markets where we extended credit.

• We completed our plan to reduce delinquent loans, which has been provided to the FDIC. Pursuant to the plan, we added staff to and restructured our special assets team to allow for more effective and immediate loan collection efforts. We also continued to conduct quarterly Reserve Adequacy Committee meetings to identify emerging loan problems and address existing issues.

Written plans / dividend limitations / extensions of credit. The Bank is required to develop a written three-year strategic plan and a plan to preserve liquidity, and is restricted from paying cash dividends without the consent of the FDIC and from extending additional credit to certain borrowers.
• We developed a written three year strategic plan to address improvement of capital, liquidity and profitability. The plan outlines several scenarios believed to be controllable by management action, such as reduction of total assets, resolution of non-performing assets and repayment of wholesale deposits.

In March, the Federal Deposit Insurance Corporation ("FDIC") and the U.S. Department of the Treasury ("Treasury") announced details of a new joint Legacy Loans Program ("LLP"). The LLP is designed to boost private demand for distressed assets that are currently held by banks and facilitate market-priced sales of troubled assets. Under the program, the FDIC and Treasury will partner with private investors to purchase troubled assets from banks in exchange for FDIC-backed notes payable to the banks. As we await further details of the Legacy Loans Program, we are proactively reviewing our loan portfolio to identify loans we would consider selling. Depending on how the program develops, we may benefit substantially from the sales of certain loans.

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
                                                      Three Months Ended March 31,
                                                                                   %
                                                    2009            2008         Change
    Return on average assets                          -2.59 %          0.48 %
    Return on average equity                         -38.64 %          4.75 %
    Average equity to average assets                   6.71 %         10.01 %
    Net interest margin, tax equivalent basis          2.79 %          5.15 %
    Efficiency ratio                                 121.34 %         67.16 %

    Net income (loss)                           $    (6,902 )   $     1,219       -666 %
    Earnings (loss) per diluted common share    $     (0.69 )   $      0.12       -675 %
    Total gross loans (1)                       $   836,317     $   902,410         -7 %
    Total assets                                $ 1,035,072     $ 1,046,162         -1 %
    Deposits                                    $   937,208     $   900,964          4 %

    Book value per common share                 $      6.78     $     10.21
    Tangible book value per common share        $      6.78     $      9.48

(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 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 increase in FDIC premiums, as well as, administrative expansion and centralization into Vancouver, Washington. Significant items as of and for the three months ended March 31, 2009 were as follows:
• Rebalanced assets and liabilities. In part as a result of our strategic plan to re-balance our assets and liabilities and focus closely upon our asset quality, gross loans decreased by $27.69 million from December 31, 2008, as we exited certain market sectors and customer relationships, and reclassified troubled loans to other real estate owned or charged-off against our allowance for loan loss. Gross loans decreased $66.09 million or 7% from March 31, 2008 for the same reasons.

• Non-performing assets ("NPAs") of $106.36 million, or 10.28% of total assets. Non-accrual loans comprised $94.99 million, or 89%, of NPAs. The remaining balance of $11.33 million, or 11%, was comprised of properties held as other real estate owned. Of the nonaccrual loans, $64.64 million, or 68% of the total are loans secured by residential real estate construction properties, $12.06 million, or 13% are loans secured by agricultural farmland, and the remaining $18.29 million, or 19% are loans secured by other miscellaneous asset types.

• Loan loss provision of $9.70 million. Our provision for loan losses increased modestly by 8% to $9.70 million, compared to $9.00 million in the fourth quarter of 2008, as we continue to experience declining asset quality concentrated in our Central Oregon and Willamette Valley markets. Our first quarter loan loss provision increased by $6.65 million, or 218%, as compared to the first quarter of 2008. Continuing declines in asset quality are primarily attributable to the general deterioration of credit quality indicators in our residential construction portfolio.

• Deposits decreased due to seasonal factors. Deposits decreased $66.99 million, or approximately 7%, from December 31, 2008. This decrease is partially a result of our planned

reduction in wholesale deposits, with a decrease totaling $47.90 million during the three months ended March 31, 2009. The remaining decrease totaling $19.09 million represents a decrease in our retail deposits primarily due to seasonal trends, as our customer base has increased cash needs for the payment of income tax liabilities and agricultural production payments. The decrease in retail deposits for the period from December 31, 2007 to March 31, 2008 totaled $22.65 million.

• Higher FDIC premiums. FDIC premiums and state assessments totaled $1.93 million for the three months ended March 31, 2009, an increase of $1.76 million, in comparison to the same period in 2008. The increase is a result of increases in premium assessments imposed by the FDIC, which is based on our voluntary participation in the Treasury Liability Guarantee Program ("TLGP") and the FDIC's rates applicable to adequately capitalized banks. In addition, premiums increased due to the rise in financial institution failures in 2008 and the first quarter of 2009. This expense may increase in the second quarter of 2009 due to a possible special assessment affecting all FDIC participants in order to build-up the FDIC insurance fund. We expect the expense will return to first quarter 2009 levels for the third and fourth quarters of 2009.

• Reduced salaries and employee benefits. Salaries and employee benefits decreased 27%, or $1.61 million, as of March 31, 2009 in comparison to the similar period in 2008. Contributing to the decrease is the cost cutting measure to discontinue the 401(k) match, elimination of incentive compensation payments for 2009, as well as, the overall reduction in full-time equivalents ("FTE"). FTEs have decreased by 76, or 19%, from 391 FTE's at March 31, 2008 to 315 FTE's at March 31, 2009. We have made strategic efforts to reduce our salary and benefit expense, while maintaining high quality customer service; as such many of the FTE reductions were made in areas not affecting our service delivery. Included in the decrease in FTE's were 2 executive positions, which were eliminated as part of a strategic re-alignment.

• Net interest margin lower due to interest rate cuts and higher levels of non-accrual loans. Compared to the three months ended March 31, 2008, our net interest margin decreased for the three months ended March 31, 2009. This decrease is partially attributable to the federal funds rate cuts since March 2008 and the resulting decrease in our loan yields as our loans . . .