Columbia Banking System
COLB
#2318
Rank
$8.17 B
Marketcap
$28.89
Share price
0.17%
Change (1 day)
8.69%
Change (1 year)
Text size:
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

----------------

Form 10-K
(Mark One)
[X]Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]

For the fiscal year ended December 31, 1999 or

[_]Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]


Commission File Number 0-20288

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Columbia Banking System, Inc.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
Washington 91-1422237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>

1102 Broadway Plaza
Tacoma, Washington 98402
(Address of principal executive offices) (Zip code)

Registrant's Telephone Number, Including Area Code: (253) 305-1900

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Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act:


Common Stock, No Par Value
(Title of class)

----------------

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 [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (17 C.F.R .229.405) is not contained herein, and will
not be contained, to the best of 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. [X]

The aggregate market value of Common Stock held by non-affiliates of
registrant at February 29, 2000 was $122,678,807.

The number of shares of registrant's Common Stock outstanding at February
29, 1999 was 10,610,059.

Documents incorporated by reference and parts of Form 10-K into which
incorporated:

<TABLE>
<S> <C>
Registrant's definitive Proxy Statement Dated March 10,
2000....................................................... Part III
</TABLE>

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COLUMBIA BANKING SYSTEM, INC.

FINANCIAL INFORMATION

<TABLE>
<S> <C>
The Company............................................................... 1
Five-Year Summary of Selected Financial Data.............................. 4
Management's Discussion and Analysis of Financial Condition And Results of
Operations............................................................... 5
Quarterly Common Stock Prices and Dividend Payments....................... 17
Report of Independent Auditors............................................ 18
Consolidated Financial Statements
Consolidated Statements of Operations................................... 19
Consolidated Balance Sheets............................................. 20
Consolidated Statements of Shareholders' Equity......................... 21
Consolidated Statements of Cash Flows................................... 22
Notes to Consolidated Financial Statements.............................. 23
Financial Data Supplement
Consolidated Five-Year Statements of Operations......................... 40
Consolidated Five-Year Summary of Average Balances and Net Interest
Revenue................................................................ 41
Consolidated Analysis of Changes in Interest Income and Expense......... 43
Loan Maturities and Sensitivity to Changes in Interest Rates............ 43
Loan Loss Allowance Allocation.......................................... 44
Average Deposit Liabilities............................................. 44
Effects of Governmental Monetary Policies............................... 45
Supervision and Regulation.............................................. 45
Employees............................................................... 46
Executive Officers of the Company....................................... 47
10-K Cross Reference Index................................................ 49
Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 50
</TABLE>

i
THE COMPANY

General

Columbia Banking System, Inc. (the "Company") is a registered bank holding
company whose wholly owned subsidiary, Columbia State Bank ("Columbia Bank"),
conducts a full-service commercial banking business. Headquartered in Tacoma,
Washington, the Company provides a full range of banking services to small and
medium-sized businesses, professionals and other individuals through banking
offices located in the Tacoma metropolitan area and contiguous parts of the
Puget Sound region of Washington, as well as the Longview and Woodland
communities in southwestern Washington. Substantially all of the Company's
loans, loan commitments and core deposits are geographically concentrated in
its service areas. Columbia Bank is a Washington state-chartered commercial
bank, the deposits of which are insured by the Federal Deposit Insurance
Corporation (the "FDIC"). The Bank is subject to regulation by the FDIC and
the Washington State Department of Financial Institutions (Division of Banks).
Although Columbia Bank is not a member of the Federal Reserve System, the
Board of Governors of the Federal Reserve System has certain supervisory
authority over the Company, which can also affect Columbia Bank.

The Company was reorganized and additional management was added in 1993 in
order to take advantage of commercial banking business opportunities resulting
from increased consolidation of banks in the Company's principal market area,
primarily through acquisitions by out-of-state holding companies, and the
resulting dislocation of customers. Since the reorganization, Columbia Bank
has grown from four branch offices at January 1, 1993 to its present 27 branch
offices and has regulatory approval to open one additional branch office in
its market area and plans to open additional branches in 2000 as discussed
below. Between January 1, 1993 and December 31, 1999, the Company increased
its consolidated assets to $1.2 billion from $198.2 million, its loans to $1.0
billion from $146.2 million, and its deposits to $1.0 billion from $151.9
million. During that same period, net interest income per year increased to
$49.5 million in 1999 from $8.6 million in 1993 and net income per year
increased to $11.7 million in 1999, from a loss of $2.2 million in 1993.

The senior management team was reorganized in mid-1998 in contemplation of
the retirement of W.W. Philip. Mr. Philip retired as President and Chief
Executive Officer of Columbia Banking System, Inc. and Chief Executive Officer
of Columbia Bank effective January 1, 2000. Upon Mr. Philip's retirement, J.
James Gallagher, Vice Chairman, was appointed Chief Executive Officer of
Columbia Banking System, Inc., and Melanie Dressel was named President and
Chief Operating Officer of Columbia Banking System, Inc. and President and
Chief Executive Officer of Columbia Bank. With the changes in leadership,
management intends to build on the solid foundation and growth momentum that
the Company has achieved to date and pursue the Company's goal of becoming a
well-capitalized, customer focused, Pacific Northwest banking institution with
a significant presence in selected markets.

Strategy

Management believes the ongoing consolidation among financial institutions
in Washington has created significant gaps in the ability of large banks
operating in Washington to serve certain customers, particularly the Company's
target customer base of small and medium-sized businesses, professionals and
other individuals. The Company's business strategy is to provide its customers
with the financial sophistication and breadth of products of a regional
banking company while retaining the appeal and service level of a community
bank. Management believes that as a result of the Company's strong commitment
to highly personalized relationship-oriented customer service, its varied
products, its strategic branch locations and the long-standing community
presence of its managers, lending officers and branch personnel, it is well
positioned to attract new customers and to increase its market share of loans,
deposits, and other financial services. The Company has closely followed the
recent changes to federal banking laws that allow financial institutions to
engage in a broader range of activities than previously permitted. The new
legislation also authorizes the creation of financial holding companies to
facilitate such expanded activity. As the Company pursues its aggressive
growth strategy, it is likely that the Company will utilize the new financial
holding company structure to accommodate an expansion of its products and
services.
The Company intends to effect its growth strategy through a combination of
growth at existing branch offices, new branch openings (usually following the
hiring of an experienced branch manager and/or lending officer with strong
community ties and banking relationships) and acquisitions. In particular, the
Company anticipates continued expansion in Pierce County, north into King
County (the location of Auburn and Bellevue), south into Thurston County (the
location of the state capital, Olympia) and northwest into Kitsap County (the
location of Port Orchard). Expansion by acquisition into other markets will be
considered as promising situations arise. In order to fund its lending
activities and to allow for increased contact with customers, the Company is
establishing a branch system catering primarily to retail depositors,
supplemented by business customer deposits and other borrowings. The Company
believes this mix of funding sources will enable it to expand lending
activities rapidly while attracting a stable core deposit base. In order to
support its strategy of growth, without compromising its personalized banking
approach or its commitment to asset quality, the Company has made significant
investments in experienced branch, lending and administrative personnel and
has incurred significant costs related to its branch expansion. Although the
Company's expense ratios have improved since 1993, management anticipates that
the expense ratios will remain relatively high by industry standards for the
foreseeable future due to the Company's aggressive growth strategy and
emphasis on convenience and personal service. Management has placed increased
emphasis on control of noninterest expense.

During 1999, Columbia Bank opened two new branches. In January, Columbia
Bank opened a newly constructed branch in Port Orchard, its first office in
Kitsap County. Additionally, a new West Olympia branch opened in temporary
quarters in April and is the Company's first Thurston County location. The
Company's future plans include new locations in Pierce, King, Kitsap and
Thurston counties of western Washington. Management continues to pursue
opportunities for expansion via a combination of internal growth and external
growth by acquisition. New branches normally do not contribute to net income
for many months after opening.

At December 31, 1999, the Company had 27 branches; 15 in Pierce County, 6
in King County, 4 in Cowlitz County, 1 in Kitsap County, and 1 in Thurston
County. Since beginning its major Pierce County expansion in August 1993, the
Company has grown from 4 to 27 branches through a combination of internal and
external growth by acquisition.

In addition to the ongoing expansion of its branch network, the Company
continuously reviews new products and services to give its customers more
banking options. Also, new technology and services are reviewed for business
development and cost saving purposes. Several new departments were added or
expanded during 1999, which are contributing to net income. The International
Department was launched during the first quarter, and became profitable
shortly thereafter. The department's services, including letters of credit,
wire transfers, and foreign currency, add excellent value to the Company's
core services. The Correspondent Banking Department continued to grow and to
provide banking services to smaller commercial banks in the northwest.
Currently, the department has relationships with eighteen banks, up from two
in 1998. The expanded Merchant Services area grew significantly during 1999,
and currently serves approximately 3,000 businesses. The Company's dealer
banking program now includes thirteen dealer relationships and grew loan
totals to $45 million from $16 million in 1998, an increase of 180%. Wholesale
Residential Lending added to net income in 1999 and offset some of the decline
in 1-4 family real estate due to rising rates in the latter part of the year.

Market Area

The economy of the Company's principal market area, while primarily
dependent upon aerospace, foreign trade and natural resources, including
agriculture and timber, has become more diversified over the past decade as a
result of the success of software companies such as Microsoft and the
establishment of numerous research and biotechnology firms. The Washington
economy and that of the Puget Sound region generally have experienced strong
growth and stability in recent years.

Pierce County, the area in which the Company's expansion is primarily
focused, is located in the South Puget Sound region. With 15 branch offices in
Pierce County at the end of 1999, the Company is positioning itself to
increase its market share in this County of approximately 700,000 residents,
the second most populous county in Washington State.

2
Bellevue, where the Company has two banking offices, is located in an area
known as the "Eastside," a metropolitan area with a population of
approximately 236,000 that includes several King County cities located east of
Seattle. A large portion of that economy is linked to the aerospace,
construction, computer software and biotechnology industries. Microsoft is
headquartered just north of Bellevue and several biotech firms are located on
the Eastside. In recent years, the area has experienced relatively rapid
growth in population and employment, and household incomes are among the
highest in Washington.

The Company has four branches in south King County, an area of several
residential communities whose employment base is supported by light
industrial, aerospace, and forest products industries. With its close
proximity to Tacoma, the south King County market area is considered an
important natural extension of the Company's Pierce County market area. The
Weyerhaeuser Corporation maintains its world headquarters in Federal Way,
which is located in south King County adjacent to the King/Pierce County line.
The Auburn and Kent Valley areas to the east of Federal Way are high
residential and commercial growth markets and considered by management to be
natural areas of expansion for the Company.

The Company's market area also includes the Longview and Woodland
communities in southwest Washington. The population of Cowlitz County, in
which Longview and Woodland are located, is approximately 94,100. Cowlitz
County's economy has become more diversified in recent years, but remains
materially dependent on the forest products industry and, as a result, is
relatively vulnerable to the cyclical downturns of that industry as well as
environmental disputes.

Olympia, with a population of approximately 40,000, and the neighboring
community of Lacey, with a population of approximately 29,000, are the
principal cities in Thurston County. The County has an approximate population
of 203,000. The area enjoys a stable economic climate due largely to state
government employment and the proximity of the Fort Lewis Army Base and
McChord Air Force Base. According to the Washington State Almanac (an annual
publication of demographic information of Washington State counties and
cities), approximately 40% of the average employment in Thurston County was
through federal, state, and local government agencies. The area also has a
significant population of retired military personnel.

Kitsap County, with a population of approximately 230,000 (sixth largest in
the State), is home to the Bremerton Naval shipyard, the Trident Submarine
Base, and the city of Port Orchard. Directly west of Seattle across Puget
Sound, commuters and visitors are able to travel by ferry in 30 to 60 minutes
to jobs and entertainment in Seattle from residences in Kitsap County.
According to the Washington State Almanac, approximately 37% of the average
employment in Kitsap County is government related.

Competition

The Company anticipates that the substantial consolidation among financial
institutions in Washington that has occurred to date will continue due in part
to recent federal legislation concerning interstate banking. Federal law
allows mergers or other combinations, relocations of a bank's main office and
branching across state lines. Several other financial institutions, which have
greater resources than the Company, compete with the Company for banking
business in the Company's market area. Among the advantages of some of these
institutions are their ability to make larger loans, finance extensive
advertising campaigns, access international money markets and allocate their
investment assets to regions of highest yield and demand. The Company
currently does not have a significant market share of the deposit-taking or
lending activities in the areas in which it conducts operations, other than in
Pierce County where its share of bank deposits has grown substantially over
the last several years. In June 1999, the Federal Deposit Insurance
Corporation (FDIC) market share report classified Columbia Bank with 15.8% of
the deposit market share in Pierce County, which placed the Bank second in the
county. Although, the Company has been able to compete effectively in its
market areas to date, there can be no assurance that it will be able to
continue to do so in the future.

In addition to competition from other banking institutions, the Company
continues to experience increased competition from non-banking companies such
as credit unions, financial services companies and brokerage houses. Recent
amendments to the federal banking laws to eliminate certain barriers between
banking and commercial firms are expected to result in even greater
competition in the future.

3
COLUMBIA BANKING SYSTEM, INC.

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------------------------------- -------- --------
(dollars in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
For the Year
Net interest income...... $ 49,509 $ 41,960 $ 35,231 $ 25,344 $ 20,702
Provision for loan
losses.................. 2,400 1,900 4,726 1,635 1,382
Noninterest income....... 10,146 8,182 10,624 4,785 3,443
Noninterest expense...... 39,644 32,794 29,066 23,380 18,656
Net income............... 11,670 10,201 9,275* 4,635* 3,691
Per Share
Net income (basic)....... $ 1.10 $ 0.97 $ 0.89* $ 0.61* $ 0.54
Net income (diluted)..... 1.08 0.94 0.87* 0.60* 0.53
Book value............... 9.35 8.48 7.55 6.93 5.34
Averages
Total Assets............. $ 1,131,416 $ 939,274 $764,728 $595,252 $458,338
Earning assets........... 1,039,628 863,193 711,484 554,941 422,968
Loans.................... 927,373 748,587 613,671 473,887 373,560
Securities............... 99,149 83,657 71,424 51,056 38,353
Deposits................. 994,096 813,685 656,206 507,612 389,327
Shareholders' equity..... 94,718 84,680 64,384 45,669 37,450
Financial Ratios
Net interest margin...... 4.78% 4.87% 4.96% 4.58% 4.91%
Return on average
assets.................. 1.03 1.09 1.21* 0.78* 1.21
Return on average
equity.................. 12.32 12.05 14.41* 10.15* 14.41
Efficiency ratio......... 66.46 65.40 65.74 75.57 77.27
Average equity to average
assets.................. 8.37 9.02 8.42 7.67 8.17
At Year-End
Total assets............. $ 1,237,157 $ 1,059,919 $864,555 $706,448 $520,059
Loans.................... 1,048,006 828,639 685,889 523,151 418,057
Allowance for loan
losses.................. 9,967 9,002 8,440 5,282 4,340
Deposits................. 1,043,544 938,345 740,430 596,504 446,899
Shareholders' equity..... 99,214 89,566 78,353 68,224 40,194
Number of full-time
equivalent employees.... 469 439 327 294 243
Number of banking
offices................. 27 25 21 20 17
Nonperforming assets:
Nonaccrual loans......... $ 4,360 $ 3,603 $ 1,462 $ 2,256 $ 449
Restructured loans....... 187 1,783 20 25 29
Real estate owned........ 1,263 901 231 484 3,304
----------- ----------- -------- -------- --------
Total nonperforming
assets................ $ 5,810 $ 6,287 $ 1,713 $ 2,765 $ 3,782
=========== =========== ======== ======== ========
Nonperforming loans to
period-end loans........ 0.43% 0.65% 0.22% 0.44% 0.11%
Nonperforming assets to
period-end assets....... 0.47% 0.59% 0.20% 0.39% 0.73%
Net loan chargeoffs...... $ 1,435 $ 1,338 $ 1,568 $ 693 $ 217
Risk-Based Capital
Ratios:
Tier I capital........... 9.12% 9.89% 10.77% 12.51% 9.53%
Total capital............ 10.01 10.88 11.93 13.48 11.21
Leverage ratio........... 8.46 8.72 9.33 10.17 7.94
<CAPTION>
1997(1) 1996(1)
-------- --------
(dollars in
thousands except
per share
*Financial information excluding certain items: amounts)
<S> <C> <C> <C> <C> <C>
For the Year
Net income excluding unusual items............... $ 8,165 $ 5,247
Per Share:
Net income excluding unusual items (basic)....... $ 0.79 $ 0.69
Net income excluding unusual items (diluted)..... 0.76 0.68
Financial Ratios
Return on average assets excluding unusual
items........................................... 1.07% 0.88%
Return on average equity excluding unusual
items........................................... 12.68% 11.49%
</TABLE>
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(1) 1997 unusual items include: key man life insurance proceeds of $3.5
million (non-taxable), additional loan loss provision of $1.3 million (net
of tax), and merger related expenses of $1.1 million (net of tax). In 1996
there was one unusual item, a SAIF special assessment of $612,000.

4
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Columbia Banking System, Inc.

This discussion should be read in conjunction with the consolidated
financial statements of Columbia Banking System, Inc. (the "Company"), and
notes thereto presented elsewhere in this report. In the following discussion,
unless otherwise noted, references to increases or decreases in average
balances in items of income and expense for a particular period and balances
at a particular date refer to the comparison with corresponding amounts for
the period or date one year earlier.

This discussion contains certain forward-looking statements within the
meaning of the federal securities laws. Actual results and the timing of
certain events could differ materially from those projected in the forward-
looking statements due to a number of factors. Specific factors include, among
others, the effect of interest rate changes, risk associated with acquiring
other banks, or opening and acquiring new branches, controlling expenses, and
general economic conditions.

Results of Operations

The results of operations of the Company are dependent to a large degree on
the Company's net interest income. The Company also generates noninterest
income through service charges and fees, merchant services fees, and income
from mortgage banking operations. The Company's operating expenses consist
primarily of compensation and employee benefit expense, and occupancy expense.
Like most financial institutions, the Company's interest income and cost of
funds are affected significantly by general economic conditions, particularly
changes in market interest rates, and by government policies and actions of
regulatory authorities.

After a soft first quarter that reflected the full impact of the Company's
new operations center and technology expenses associated with that facility,
the Company recorded net income of $11.7 million for 1999. This compares to
net income of $10.2 million in 1998 and $9.3 million in 1997. On a diluted per
share basis, net income for 1999 was $1.08 per share, compared with $0.94 per
share in 1998, and $0.87 per share in 1997.

In 1997, the results of operations include proceeds from a key man life
insurance policy upon the passing of Chairman A. G. Espe and expenses
associated with two completed mergers.

The Company completed its first bank acquisitions during the fourth quarter
of 1997, merging Cascade Community Bank and Bank of Fife into Columbia Bank.
The mergers were accounted for on a pooling-of-interest basis, and Company
financial statements for all reported periods have been restated to reflect
the mergers.

Net Interest Income. Net interest income increased $7.5 million, or 18%, in
1999 compared with an increase of $6.7 million, or 19%, in 1998. The 1999 and
1998 increase in net interest income was largely due to the overall growth of
the Company. Net interest income was favorably affected by average interest-
earning assets increasing more rapidly than average interest-bearing
liabilities, with the difference funded by noninterest-bearing deposits and
shareholders' equity. Average interest-earning assets increased $176.4 million
and $151.7 million in 1999 and 1998, respectively, while average interest-
bearing liabilities increased only $146.9 million and $116.9 million,
respectively.

Net interest margin (net interest income divided by average interest-
earning assets) decreased to 4.78% in 1999, compared with 4.87% in 1998 and
4.96% in 1997. While average interest-earning assets grew by 20% during fiscal
year 1999, that growth was offset by a decline in the average yield on
interest-earning assets to 8.13%, from 8.54% in fiscal year 1998. Similarly,
average interest-bearing liabilities grew by 21% in 1999 while the average
cost of interest-bearing liabilities decreased to 4.12% in 1999 from 4.53% in
1998. The decrease in net interest margin reflects the resulting net increase
in interest-earning assets during 1999, coupled with a flat net interest
spread for the year. Interest rates in general exhibited an upward trend
during the later half of 1999 after declining during the second half of 1998
and the first half of 1999. While the net interest margin for the

5
year ended December 31, 1999 is lower than the same period in 1998, the net
interest margin increased to 4.86% for the fourth quarter of 1999 compared
with 4.61% for the same period in 1998, and has improved since the second
quarter of 1999 net interest margin of 4.70%, and the third quarter of 1999
net interest margin of 4.83%.

Provision for Loan Losses. For the years ended December 31, 1999, 1998 and
1997, net loan charge-offs amounted to $1.4 million, $1.3 million and $1.6
million, respectively. The Company's provision for loan losses was $2.4
million for 1999, compared with $1.9 million for 1998 and $4.7 million for
1997. During 1999, the allowance for loan losses increased $965,000 to $10.0
million as compared with $9.0 million and $8.4 million at the end of 1998 and
1997, respectively. The allowance for loan losses as a percentage of loans
(excluding loans held for sale at each date) decreased to 0.95% at December
31, 1999 as compared to 1.09% and 1.23% of loans at December 31, 1998 and
1997, respectively. The decrease was primarily due to rapid loan growth during
1999. At year-end 1999, the allowance for loan losses to nonperforming loans
was 168.70% compared to 167.14% and 569.50% at December 31, 1998 and 1997,
respectively. Management anticipates that continued growth of its loan
portfolio will require increases in its loan loss provision during fiscal year
2000.

Noninterest Income. Total noninterest income increased $2.0 million, or
24%, in 1999, and $2.7 million, or 29%, in 1998 excluding proceeds from a key
man life insurance policy in 1997. Increases in noninterest income during 1999
were centered in account service charges and merchant services fees. In
general, increases in account service charges are due to the growth of the
Company, and increases in merchant services fees reflect a planned effort by
the Company to develop this portion of its business. Income from mortgage
banking declined by $614,000, or 37%, in 1999 after an increase of $645,000,
or 63% in 1998. The changes each year reflected the impact of movements in
long-term interest rates upon mortgage loan activity.

Noninterest Expense. Total noninterest expense increased $6.9 million, or
21%, in 1999 and $5.0 million, or 18%, in 1998 excluding non-recurring items
(merger expense in 1997). The increase was primarily due to personnel costs
associated with the Company's expansion as well as occupancy, merchant
processing, other expenses, and expenses associated with a new operations
center. Other expenses are volume driven and reflect the Company's rapid
growth. The Company's efficiency ratio (noninterest expense, excluding unusual
and nonrecurring items, divided by the sum of net interest income plus
noninterest income, excluding unusual and nonrecurring items) was 66.5% for
1999 compared with 65.4% and 65.7% for 1998 and 1997, respectively. The
Company has placed increased emphasis on control of noninterest expense,
however, management anticipates that the ratios will remain relatively high by
industry standards for the foreseeable future due to the Company's aggressive
growth strategy.

6
Set forth below is a schedule showing additional detail concerning
increases and decreases in the Company's noninterest expense. The portion of
compensation expense related to loan originations is deferred and deducted
from interest income over the life of the related loans.

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1999 Increase/(Decrease) 1998 Increase/(Decrease) 1997
------- ------------------- ------- ------------------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Compensation and
employee benefits...... $21,509 $3,584 $17,925 $ 2,669 $15,256
Loan origination costs.. (1,720) 389 (2,109) (182) (1,927)
------- ------ ------- ------- -------
Net compensation and
Employee benefits (as
reported).............. 19,789 3,973 15,816 2,487 13,329
Occupancy............... 6,520 1,305 5,215 727 4,488
Professional Services... 926 (25) 951 353 598
Advertising and
promotion.............. 1,712 (136) 1,848 584 1,264
Printing and supplies... 739 51 688 (51) 739
Regulatory assessments.. 404 206 198 (47) 245
Data processing......... 1,976 245 1,731 187 1,544
Losses on real estate
owned.................. 33 (29) 62 (62) 124
Telephone and network... 715 250 465 (35) 500
Postage & delivery...... 564 91 473 (58) 531
ATM network............. 390 109 281 60 221
Merchant processing..... 1,359 558 801 216 585
Taxes, licenses and
fees................... 1,485 165 1,320 330 990
Other................... 3,032 87 2,945 271 2,674
Merger expenses......... (1,234) 1,234
------- ------ ------- ------- -------
Total noninterest
expense.............. $39,644 $6,850 $32,794 $ 3,728 $29,066
======= ====== ======= ======= =======
</TABLE>

Credit Risk Management

The extension of credit in the form of loans or other credit substitutes to
individuals and businesses is a major portion of the Company's principal
business activity. Company policies and applicable laws and regulations
require risk analysis as well as ongoing portfolio and credit management. The
Company manages its credit risk through lending limit constraints, credit
review, approval policies and extensive, ongoing internal monitoring. The
Company also manages credit risk through diversification of the loan portfolio
by type of loan, type of industry, aggregation of debt limits to a single
borrower and the type of borrower.

In analyzing its existing portfolio, the Company reviews its consumer and
residential loan portfolios by risk rating each loan and analyzing their
performance as a pool of loans since no single loan is individually
significant or judged by its risk rating size or potential risk of loss. In
contrast, the monitoring process for the commercial business, real estate
construction, and commercial real estate portfolios includes periodic reviews
of individual loans with risk ratings assigned to each loan and performance
judged on a loan by loan basis. The Company reviews these loans to assess the
ability of the borrower to service all of its interest and principal
obligations and as a result the risk rating may be adjusted accordingly. In
the event that full collection of principal and interest is not reasonably
assured, the loan is appropriately downgraded and, if warranted, placed on
non-accrual status even though the loan may be current as to principal and
interest payments. Additionally, the Company would assess whether an
impairment of a loan as provided in SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan", would warrant a write-down of the loan.

Loan policies, credit quality criteria, portfolio guidelines and other
controls are established under the guidance of the Company's chief credit
officer and approved, as appropriate, by the Board. Credit Administration,
together with appropriate loan committees, has the responsibility for
administering the credit approval process. As another part of its control
process, the Company uses an independent internal credit review and
examination function to provide assurance that loans and commitments are made
and maintained as prescribed by its credit policies. This includes a review of
documentation when the loan is initially extended and subsequent on-site
examination to ensure continued performance and proper risk assessment.

7
Loan Portfolio Analysis

The Company is a full service commercial bank, which originates a wide
variety of loans. Consistent with the trend begun in 1993, the Company
continues to have success originating commercial business and commercial real
estate loans.

The following table sets forth the Company's loan portfolio by type of loan
for the dates indicated:

<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------
% of % of % of % of % of
1999 Total 1998 Total 1997 Total 1996 Total 1995 Total
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial business..... $ 426,060 40.6 % $332,638 40.1 % $270,946 39.5 % $194,843 37.2 % $133,885 32.0%
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Real estate:
One- to four-family
residential.......... 64,669 6.2 61,132 7.4 71,095 10.4 77,359 14.8 77,603 18.6
Five or more family
residential and
commercial
properties........... 377,708 36.0 291,868 35.2 206,628 30.1 151,179 28.9 113,784 27.2
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate.... 442,377 42.2 353,000 42.6 277,723 40.5 228,538 43.7 191,387 45.8
Real estate
construction:
One- to four-family
residential.......... 32,742 3.1 26,444 3.2 29,695 4.3 31,446 6.0 32,819 7.9
Five or more family
residential and
commercial
properties........... 45,886 4.4 23,213 2.8 33,806 4.9 10,724 2.1 8,985 2.1
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate
construction........ 78,628 7.5 49,657 6.0 63,501 9.2 42,170 8.1 41,804 10.0
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer................ 103,296 9.9 94,572 11.4 74,710 10.9 58,249 11.1 51,788 12.4
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Subtotal.............. 1,050,361 100.2 829,867 100.1 686,880 100.1 523,800 100.1 418,864 100.2
Less deferred loan fees
and other.............. (2,355) (0.2) (1,228) (0.1) (991) (0.1) (649) (0.1) (807) (0.2)
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans.......... $1,048,006 100.0 % $828,639 100.0 % $685,889 100.0 % $523,151 100.0 % $418,057 100.0 %
========== ===== ======== ===== ======== ===== ======== ===== ======== =====
Loans held for sale..... $ 5,479 $ 10,023 $ 4,377 $ 11,341 $ 1,367
========== ======== ======== ======== ========
</TABLE>

Total loans at year-end increased $219.4 million, or 26%, from year-end
1998. All loan categories contributed to the increase.

Commercial Loans: Commercial loans increased $93.4 million, or 28%, to
$426.1 million from year-end 1998, representing 40.6% of total loans. Net
growth in commercial loans slowed during the first quarter of 1999 and
rebounded during the last nine months of 1999. Growth during 1999 was
favorably affected by continued emphasis on maintaining and expanding an
aggressive calling campaign whereby loan officers concentrated on traditional
commercial business loans and related borrowing needs. Management is committed
to providing competitive commercial lending in the Company's primary market
areas. The Company expects to continue to expand its commercial lending
products and to emphasize in particular its relationship banking with
businesses, business owners and professional individuals.

Real Estate Loans: Residential one- to four-family loans increased $3.5
million to $64.7 million at December 31, 1999, representing 6.2% of total
loans, compared with $61.1 million at December 31, 1998. These loans are used
by the Company to collateralize advances from the FHLB. The Company's
underwriting standards require that one- to four-family portfolio loans
generally be owner-occupied and that loan amounts not exceed 80% (90% with
private mortgage insurance) of the appraised value or cost, whichever is
lower, of the underlying collateral at origination. Generally, management's
policy is to originate for sale to third parties residential loans secured by
properties located within the Company's primary market areas.

The Company makes multi-family and commercial real estate loans in its
primary market areas. Multi-family and commercial real estate lending
increased to $377.7 million at December 31, 1999, representing 36.0% of total
loans, from $291.9 million at December 31, 1998. The increase in multi-family
and commercial real

8
estate lending during 1999 reflects a mix of owner occupied and income
property transactions. Generally, multi-family and commercial real estate
loans are made only to borrowers who have existing banking relationships with
the Company. Management believes that volumes in this category of loans will
increase at a slower rate in the future. The Company's underwriting standards
generally require that the loan-to-value ratio for multi-family and commercial
loans not exceed 75% of appraised value or cost, whichever is lower, and that
commercial properties maintain debt coverage ratios (net operating income
divided by annual debt servicing) of 1.2 or better. Underwriting standards can
be influenced by competition. The Company endeavors to maintain the highest
practical underwriting standards while balancing the need to remain
competitive in its lending practices.

The Company originates a variety of real estate construction loans. One- to
four-family residential construction loans are originated for the construction
of custom homes (where the home buyer is the borrower) and provides financing
to builders for the construction of pre-sold homes and speculative residential
construction. Construction loans on one- to four-family residences increased
to $32.7 million at December 31, 1999, representing 3.1% of total loans, from
$26.4 million of total loans at December 31, 1998. Multi-family and commercial
real estate construction loans increased to $45.9 million at December 31,
1999, representing 4.4% of total loans, from $23.2 million, or 2.8% of loans,
at December 31, 1998.

The Company endeavors to limit its construction lending risk through
adherence to strict underwriting procedures.

Consumer Loans: At December 31, 1999, the Company had $103.3 million of
consumer loans outstanding, representing 9.9% of total loans, as compared with
$94.6 million, or 11.4% of loans, at December 31, 1998. Consumer loans made by
the Company include automobile loans, boat and recreational vehicle financing,
home equity and home improvement loans and miscellaneous personal loans.

At December 31, 1999, the Company had no loans to foreign domiciled
businesses or foreign countries, or loans related to highly leveraged
transactions.

Management's growth strategy has concentrated on the Tacoma/Pierce County
market. The results of that strategy are evident in the following summary of
loan growth by market area. In addition, management has aggressively pursued
growth in Cowlitz County, South King County, the Bellevue/Eastside area,
Kitsap County, and Thurston County and has committed additional resources to
those markets.

<TABLE>
<CAPTION>
December 31, Increase
------------------- ----------------
1999 1998 Amount Percent
---------- -------- -------- -------
(in thousands)
<S> <C> <C> <C> <C>
Pierce County.............................. $ 781,803 $619,688 $162,114 26.2%
All other counties......................... 266,203 208,951 57,252 27.4
---------- -------- -------- ----
Total.................................... $1,048,006 $828,639 $219,366 26.5%
========== ======== ======== ====
</TABLE>

Nonperforming Assets

Nonperforming assets consist of: (i) nonaccrual loans, which are loans
placed on a nonaccrual basis when the loan becomes past due 90 days or when
there are otherwise serious doubts about the collectibility of principal or
interest; (ii) restructured loans, for which concessions, including the
reduction of interest rates below a rate otherwise available to that borrower
or the deferral of interest or principal, have been granted due to the
borrower's weakened financial condition (interest on restructured loans is
accrued at the restructured rates when it is anticipated that no loss of
original principal will occur); (iii) real estate owned. Potential problem
loans are loans which are currently performing and are not included in
nonaccrual or restructured loans, but about which there are serious doubts as
to the borrower's ability to comply with present repayment terms and which may
later be included in nonaccrual, past due or restructured loans.

The following tables set forth, at the dates indicated, information with
respect to nonaccrual loans, restructured loans, total nonperforming loans
(nonaccrual loans plus restructured loans), real estate owned, total
nonperforming assets, accruing loans past-due 90 days or more, impaired loans,
and potential problem loans of the Company:

9
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual:
One- to four-family residential...... $ 23 $ 722 $ 661 $1,645 $ 329
Commercial real estate............... 1,784 1,542
Commercial business.................. 2,176 1,214 728 385 86
Consumer............................. 377 125 73 226 34
------ ------ ------ ------ ------
Total.............................. 4,360 3,603 1,462 2,256 449
Restructured:
One- to four-family residential...... 15 20 25 29
One- to four-family residential
construction........................ 122 1,768
Commercial business.................. 65
------ ------ ------ ------ ------
Total.............................. 187 1,783 20 25 29
Total nonperforming loans.......... $4,547 $5,386 $1,482 $2,281 $ 478
====== ====== ====== ====== ======
Real estate owned...................... 1,263 901 231 484 3,304
------ ------ ------ ------ ------
Total nonperforming assets......... $5,810 $6,287 $1,713 $2,765 $3,782
====== ====== ====== ====== ======
Accruing loans past-due 90 days or
more.................................. $ 40 $ 111 $ 154
Impaired loans......................... $4,147 $4,579 $ 728 385 86
Potential problem loans................ 2,234 1,862 669 346 239
Allowance for loan losses.............. 9,967 9,002 8,440 5,282 4,340
Nonperforming loans to loans........... 0.43% 0.65% 0.22% 0.44% 0.11%
Nonperforming assets to total assets... 0.47 0.59 0.20 0.39 0.73
====== ====== ====== ====== ======
</TABLE>

The consolidated financial statements are prepared according to the accrual
basis of accounting. This includes the recognition of interest income on the
loan portfolio, unless a loan is placed on a nonaccrual basis, which occurs
when there are serious doubts about the collectibility of principal or
interest. The policy of the Company generally is to discontinue the accrual of
interest on all loans past due 90 days or more and place them on nonaccrual
status.

Impaired loans, generally, refer to commercial business, commercial real
estate, and real estate construction loans that are restructured in a troubled
debt restructuring involving a modification of terms; nonaccrual loans and
loans past due 90 days and still accruing.

Nonperforming loans were $4.5 million, or 0.43% of total loans (excluding
loans held for sale), at December 31, 1999, compared to $5.4 million, or 0.65%
of total loans at December 31, 1998 due principally to increases in the
commercial business, commercial real estate, and consumer loan categories.

Nonaccrual loans and other nonperforming assets are centered in a small
number of lending relationships which management considers to be adequately
reserved. Substantially, all nonperforming loans are to borrowers within the
State of Washington.

Real estate owned, which is comprised of foreclosed real estate loans,
increased to $1.3 million at December 31, 1999, from $901,000 at December 31,
1998. During 1999, the Company foreclosed on $964,000 of loans collateralized
by real estate and transferred the real estate to REO. Also, the Company
reduced REO by $602,000, with proceeds of $562,000 from sales and net losses
on sales of $4,000, and write-downs of $36,000. At December 31, 1999, REO
consisted of two foreclosed properties.

Total nonperforming assets totaled $5.8 million, or 0.47% of period-end
assets at December 31, 1999, compared to $6.3 million, or 0.59% of period-end
assets at December 31, 1998.

Provision and Allowance for Loan Losses

The Company maintains an allowance for loan losses to absorb losses
inherent in the loan portfolio. The size of the allowance is determined
through quarterly assessments of the probable estimated losses in the loan
portfolio. The Company's methodology for making such assessments and
determining the adequacy of the allowance includes the following key elements:

10
1.  Formula based allowances calculated on minimum thresholds and
historical performance of the portfolio for the past five years.

2. Specific allowances for identified problem loans in accordance with
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan."

3. Unallocated allowance.

On a quarterly basis (semi-annual in the case of economic and business
conditions reviews) the senior credit officers of the Company review with
Executive Management and the Board of Directors the various additional factors
that management considers when determining the adequacy of the allowance.
These factors include the following as of the applicable balance sheet date:

1. Existing general economic and business conditions affecting the
Company's market place

2. Credit quality trends, including trends in non-performing loans

3. Collateral values

4. Seasoning of the loan portfolio

5. Bank regulatory examination results

6. Findings of internal credit examiners

7. Duration of current business cycle

The allowance is increased by provisions charged to operations, and is
reduced by loans charged off, net of recoveries.

While management believes it uses the best information available to
determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance, and net income could be significantly
affected, if circumstances differ substantially from the assumptions used in
determining the allowance.

At December 31, 1999, the Company's allowance for loan losses was $10.0
million, or 0.95% of the total loan portfolio, and 168.7% of nonperforming
loans. This compares with an allowance of $9.0 million, or 1.09% of the total
loan portfolio, and 167% of nonperforming loans, at December 31, 1998. The
decrease in the allowance as a percentage of loans was due primarily to the
$219.4 million growth in loans during 1999.

During the year ended December 31, 1999, the Company set aside $2.4 million
as a provision for loan losses as compared with $1.9 million during 1998. For
the years ended December 31, 1999, 1998 and 1997, net loan charge-offs
amounted to $1.4 million, $1.3 million, and $1.6 million, respectively.

During 1999, there were no changes in estimation methods or assumptions
that affected the Company's methodology for assessing the appropriateness of
the allowance, except that certain changes in assumptions regarding the effect
of portfolio maturity and of economic and business conditions on borrowers
affected the assessment of the appropriate provision for the year 1999. In
1997 management concluded that loss potential had increased in the loan
portfolio as a result of average annual growth in the portfolio of
approximately 31% since 1993 combined with indications of a business downturn
resulting from the effect of global economic conditions from the Asian
financial crisis and, in particular, potential adverse effects on the
aerospace, foreign trade and timber industries. This judgement was made
despite the absence of a manifested increase in nonaccrual loans or
nonperforming assets but after considering the additional factors management
considers when determining the adequacy of the allowance, as discussed above.
Thus management substantially increased the provision in 1997 to reserve for
such loss potential.

During 1998, nonperforming loan levels did rise significantly but the
reasons for the increase were determined by management to be a reflection of
the maturing of the portfolio rather than problems in the aerospace, foreign
trade and timber industries. Those borrowers who were downgraded to
nonperforming status received close supervision by the Bank with the objective
of seeing substantial improvement in performance or

11
elimination from the portfolio by refinancing outside the Bank or other means.
Progress in improving their condition was made by several borrowers during
1998. Also, the stability of other borrowers despite the downturn convinced
management that a similarly large provision in 1998 was not required. Thus the
1998 provision was reduced to an amount which did not anticipate further
significant deterioration in the quality of the loan portfolio.

In 1999, the Company's experience with loan losses was consistent with
prior years. However, its loan loss reserve as a percentage of total loans
declined due to rapid growth in the loan portfolio. Management anticipates
that continued growth of the loan portfolio will require increases in the loan
loss provision during the year 2000. In addition, the increased provision is
intended to protect against any slowdown in the local economy, which could
result in deteriorating credit quality.

The following table provides an analysis of net losses by loan type for the
last five years.

<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total loans, net at end of
period(1)................ $1,048,006 $828,639 $685,889 $523,151 $418,057
Daily average loans....... 927,373 748,587 613,671 473,887 373,560
---------- -------- -------- -------- --------
Balance of allowance for
loan losses at beginning
of period................ $ 9,002 $ 8,440 $ 5,282 $ 4,340 $ 3,175
Charge-offs:
One-to four-family
residential
construction........... (314) (57) (364) (7)
Commercial business..... (1,006) (1,195) (1,025) (514) (148)
Consumer................ (299) (333) (270) (199) (119)
---------- -------- -------- -------- --------
Total charge-offs..... (1,619) (1,585) (1,659) (720) (267)
Recoveries:
One-to four-family
residential............ 1 7
Commercial business..... 118 175 43 17 45
Consumer................ 66 72 47 3 5
---------- -------- -------- -------- --------
Total recoveries...... 184 247 91 27 50
---------- -------- -------- -------- --------
Net charge-offs......... (1,435) (1,338) (1,568) (693) (217)
Provision charged to
expense.................. 2,400 1,900 4,726 1,635 1,382
---------- -------- -------- -------- --------
Balance of allowance for
loan losses at end of
period................... $ 9,967 $ 9,002 $ 8,440 $ 5,282 $ 4,340
Net charge-off to average
loans outstanding........ 0.16% 0.18% 0.26% 0.15% 0.06%
Allowance for loan losses
to loans................. 0.95 1.09 1.23 1.01 1.04
Allowance for loan losses
to nonperforming loans... 168.70 167.14 569.50 231.57 907.95
</TABLE>
- --------
(1) Excludes loans held for sale

Securities

The Company's securities (securities available for sale and securities held
to maturity) decreased by $12.0 million to $88.1 million from year-end 1998 to
year-end 1999. The Company had no sales of securities during 1999. Purchases
during the year totaled $10.4 million while maturities and prepayments totaled
$17.4 million. U.S. Treasury and government agency securities comprise 80.1%
of the investment portfolio, with mortgage-backed securities at 10.7% and
state and municipal securities at 7.5%. The average maturity of the securities
portfolio was 5 years, 3 months at December 31, 1999.

Approximately 92.0% of the Company's securities are classified as available
for sale and carried at fair value. These securities are used by management as
part of its asset/liability management strategy and may be sold in response to
changes in interest rates and/or significant prepayment risk. For further
information on investment securities, including gross unrealized gains and
losses in the portfolio and gross realized gains and losses on sales of
securities, see Note 5 to the consolidated financial statements.

12
Premises and Equipment

In 1999, fixed assets increased $2.1 million, or 5.6% from 1998. The net
change includes purchases of $5.3 million, disposals of $2,000 and
depreciation expense of $3.2 million. The Company's capital expenditures in
2000 are anticipated to be approximately $14.0 million. Such expenditures are
expected to include approximately $12.8 million for new buildings and for
remodeling existing structures, and $1.2 million for new furniture, equipment,
and software.

Liquidity and Sources of Funds

The Company's primary sources of funds are customer deposits and advances
from the FHLB. These funds, together with loan repayments, loan sales,
retained earnings, equity and other borrowed funds, are used to make loans, to
acquire securities and other assets, and to fund continuing operations.

Deposit Activities

The Company experienced overall average deposit growth of 22.2% and 24.0%
in 1999 and 1998, respectively. All categories of deposits increased during
both years. The increase occurred primarily in "core deposits." The average
interest-bearing and noninterest-bearing demand deposits increased 31.0% and
23.3%, respectively, in 1999, and 28.4% and 34.0%, respectively in 1998.

Average deposits are summarized in the following table:

<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Demand and other noninterest-
bearing......................... $184,094 $149,353 $111,492 $ 74,940 $ 54,878
Interest-bearing demand.......... 376,079 287,007 223,514 160,020 97,326
Savings.......................... 45,478 39,768 38,301 32,438 33,145
Certificates of deposit.......... 388,445 337,557 282,899 240,214 203,978
-------- -------- -------- -------- --------
Total average deposits......... $994,096 $813,685 $656,206 $507,612 $389,327
======== ======== ======== ======== ========
</TABLE>

The Company is establishing a branch system catering primarily to retail
depositors, supplemented by business customer deposits and other borrowings.
The branch system deposits are intended to provide a stable core funding base
for the Company. Together with that stable core deposit base, management's
strategy for funding growth is also to make use of brokered and other
wholesale deposits. The Company's use of brokered and other wholesale deposits
increased in 1999 and management anticipates continued use of such deposits to
fund increasing loan demand. During 1999, total deposits increased $105.2
million to $1.0 billion at December 31, 1999. Brokered and other wholesale
deposits (excluding public deposits) increased $18.0 million to $25.3 million,
or 2.43% of total deposits, at December 31, 1999, from $7.3 million, or 0.78%
of total deposits, at December 31, 1998.

Brokered and other wholesale deposits are summarized below. The average
interest rate for these deposits was 5.60% and 5.59% at December 31, 1999 and
1998, respectively.

<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
---------------- ---------------
Percent Percent
of Total of Total
Amount maturing: Amount Deposits Amount Deposits
- ---------------- ------- -------- ------ --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Due within 1 year........................... $ 5,327 0.51% $2,000 0.21%
After 1 but within 3 years.................. 9,000 0.86 5,327 0.57
After 3 but within 5 years.................. 11,000 1.06
------- ---- ------ ----
Total brokered and other wholesale
deposits................................. $25,327 2.43% $7,327 0.78%
======= ==== ====== ====
</TABLE>


13
The increase in deposits during 1999 is largely due to the Company's growth
strategy. The following table is a summary of year-end deposits by county.

<TABLE>
<CAPTION>
December 31,
------------------------------------
Increase
----------------
1999 1998 Amount Percent
---------- -------- -------- -------
(in thousands)

<S> <C> <C> <C> <C>
Pierce County.............................. $ 737,268 $678,019 $ 59,281 8.7%
All other counties......................... 306,276 260,326 45,950 17.7
---------- -------- -------- ----
Total.................................. $1,043,544 $938,345 $105,231 11.2%
========== ======== ======== ====
</TABLE>

Borrowings

The Company relies on FHLB advances to supplement its funding sources, and
the FHLB serves as the Company's primary source of long-term borrowings. In
addition, the Company uses short-term borrowings from the FHLB when necessary.
FHLB advances are secured by one- to four-family real estate mortgages and
certain other assets. At December 31, 1999, the Company had short-term
advances of $83.7 million at an interest rate of 5.70%. During 1999 strong
loan growth exceeded deposit growth, as a result the Company utilized short-
term borrowings from the FHLB for funding. At December 31, 1999 the maximum
borrowing line from the FHLB was $123.8 million. Management anticipates that
the Company will continue to rely on the same sources of funds in the future,
and will use those funds primarily to make loans and purchase securities.

The Company, in addition to the FHLB maintains a borrowing relationship
with another financial institution. At December 31, 1999, the Company had $3.0
million in long-term borrowings.

At December 31, 1999, 1998, and 1997, average short-term (original maturity
of one year or less) borrowings did not exceed 30 percent of shareholders
equity at the end of the period.

Interest Rate Sensitivity

Columbia Bank is exposed to interest rate risk, which is the risk that
changes in prevailing interest rates will adversely affect assets,
liabilities, capital, income and expenses at different times or in different
amounts. Generally, there are four sources of interest rate risk as described
below:

Repricing risk--Generally, repricing risk is the risk of adverse
consequences from a change in interest rates that arises because of
differences in the timing of when those interest rate changes affect an
institution's assets and liabilities.

Basis risk--Basis risk is the risk of adverse consequence resulting from
unequal changes in the spread between two or more rates for different
instruments with the same maturity.

Yield curve risk--Yield curve risk is the risk of adverse consequence
resulting from unequal changes in the spread between two or more rates for
different maturities for the same instrument.

Option risk--In banking, option risks are known as borrower options to
prepay loans and depositor options to make deposits, withdrawals, and early
redemptions. Option risk arises whenever bank products give customers the
right, but not the obligation, to alter the quantity of the timing of cash
flows.

The Company maintains an asset/liability management policy that provides
guidelines for controlling exposure to interest rate risk. The guidelines
direct management to assess the impact of changes in interest rates upon both
earnings and capital. The guidelines further provide that in the event of an
increase in interest rate risk beyond preestablished limits, management will
consider steps to reduce interest rate risk to acceptable levels.

The analysis of an institution's interest rate gap (the difference between
the repricing of interest-earning assets and interest-bearing liabilities
during a given period of time) is one standard tool for the measurement of the
exposure to interest rate risk. The Company believes that because interest
rate gap analysis does not address all factors that can affect earnings
performance, it should be used in conjunction with other methods of evaluating
interest rate risk.

14
The following table sets forth the estimated maturity or repricing, and the
resulting interest rate gap of the Company's interest-earning assets and
interest-bearing liabilities at December 31, 1999. The amounts in the table
are derived from the Company's internal data and are based upon regulatory
reporting formats. Therefore, they may not be consistent with financial
information appearing elsewhere herein that has been prepared in accordance
with generally accepted accounting principles. The amounts could be
significantly affected by external factors such as changes in prepayment
assumptions, early withdrawal of deposits and competition. For example,
although certain assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates,
while other types may lag behind changes in market interest rates.
Additionally, certain assets, such as adjustable-rate mortgages, have features
which restrict changes in the interest rates of such assets both on a short-
term basis and over the lives of such assets. Further, in the event of a
change in market interest rates, prepayment and early withdrawal levels could
deviate significantly from those assumed in calculating the tables. Finally,
the ability of many borrowers to service their adjustable-rate debt may
decrease in the event of a substantial increase in market interest rates.

<TABLE>
<CAPTION>
Estimated Maturity or Repricing
---------------------------------------------------------------
0-3 4-12 1-5 5-10 More than
December 31, 1999 months months years years 10 years Total
----------------- -------- --------- -------- -------- --------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Interest-earning
deposits............... $ 170 $ 170
Securities.............. 571 $ 11,303 $ 61,218 $ 21,937 95,029
Loans:
Business and
commercial real
estate............... 374,762 $ 32,608 261,338 27,619 4,098 700,425
One- to four-family
and owner-occupied
residential real
estate............... 56,066 49,498 107,508 8,881 18,606 240,559
Consumer.............. 17,972 42,581 33,683 9,747 4,158 108,141
-------- --------- -------- -------- -------- ----------
Total interest-
earning assets...... $449,541 $ 124,687 $413,832 $107,465 $ 48,799 $1,144,324
======== ========= ======== ======== ======== ==========
Noninterest-earning
assets................. 4,360 88,473 92,833
-------- --------- -------- -------- -------- ----------
Total assets......... $449,541 $ 129,047 $413,832 $107,465 $137,272 $1,237,157
======== ========= ======== ======== ======== ==========
Percent of total
interest-earning
assets................. 39.29% 10.90 % 36.16% 9.39% 4.26% 100.00%
======== ========= ======== ======== ======== ==========
Interest-Bearing
Liabilities
Deposits:
Money market
checking............. $ 98,749 $ 98,749 $ 98,748 $ 296,246
NOW accounts.......... 20,136 80,545 100,681
Savings accounts...... 15,192 $ 15,192 $ 15,192 45,576
Time certificates of
deposit.............. 100,315 239,247 80,652 20 420,234
FHLB advances........... 83,700 83,700
Other borrowings........ 3,000 3,000
-------- --------- -------- -------- -------- ----------
Total interest-
bearing
liabilities......... $318,092 $ 340,996 $259,945 $ 15,212 $ 15,192 $ 949,437
======== ========= ======== ======== ======== ==========
Noninterest-bearing
liabilities and
equity................. 144,671 36,168 106,881 287,720
======== ========= ======== ======== ======== ==========
Total liabilities and
equity.............. $462,763 $ 340,996 $296,113 $ 15,212 $122,073 $1,237,157
======== ========= ======== ======== ======== ==========
Percent of total
interest-earning
assets................. 27.80% 29.79 % 22.71% 1.33% 1.33% 82.96%
======== ========= ======== ======== ======== ==========
Rate sensitivity gap.... $131,449 $(216,309) $153,887 $ 92,253 $ 33,607 $ 194,887
Cumulative rate
sensitivity gap........ 131,449 (84,860) 69,027 161,280 194,887
-------- --------- -------- -------- -------- ----------
Rate sensitivity gap as
a percentage of
interest-earning
assets................. 11.49% (18.89)% 13.45% 8.06% 2.93% 17.04%
Cumulative rate
sensitivity gap as a
percentage of interest-
earning assets......... 11.49% (7.40)% 6.05% 14.11% 17.04%
======== ========= ======== ======== ======== ==========
</TABLE>

15
Interest Rate Sensitivity on Net Interest Income

A number of measures are used to monitor and manage interest rate risk,
including income simulations and interest sensitivity (gap) analyses. An
income simulation model is the primary tool used to assess the direction and
magnitude of changes in net interest income resulting from changes in interest
rates. Key assumptions in the model include prepayment speeds on mortgage-
related assets, cash flows and maturities of other investment securities, loan
and deposit volumes and pricing. These assumptions are inherently uncertain
and, as a result, the model cannot precisely estimate net interest income or
precisely predict the impact of higher or lower interest rates on net interest
income. Actual results will differ from simulated results due to timing,
magnitude and frequency of interest rate changes and changes in market
conditions and management strategies, among other factors.

Based on the results of the simulation model as of December 31, 1999, the
Company would expect an increase in net interest income of $2.8 million and a
decrease in net interest income of $966,000 if interest rates gradually
decrease or increase, respectively, from current rates by 100 basis points
over a twelve-month period. Based on the results of the simulation model as of
December 31, 1998, the Company would expect an increase in net interest income
of $470,000 and a decrease in net interest income of $461,000 if interest
rates gradually decrease or increase, respectively, from current rates by 100
basis points over a twelve-month period.

Income Tax

For the years ending December 31, 1999, 1998 and 1997, the Company recorded
income tax provisions of $5.9 million, $5.2 million and $2.8 million,
respectively.

Capital

Shareholders' equity increased to $99.2 million at December 31, 1999, from
$89.6 million at December 31, 1998. The increase is due primarily to net
income for the year of $11.7 million. Shareholders' equity was 8.02% and 8.45%
of total assets at December 31, 1999 and December 31, 1998, respectively.

Banking regulations require bank holding companies to maintain a minimum
"leverage" ratio of core capital to adjusted quarterly average total assets of
at least 3%. At December 31, 1999, the Company's leverage ratio was 8.46%,
compared with 8.72% at December 31, 1998. In addition, banking regulators have
adopted risk-based capital guidelines, under which risk percentages are
assigned to various categories of assets and off-balance sheet items to
calculate a risk-adjusted capital ratio. Tier I capital generally consists of
common shareholders' equity, less goodwill and certain identifiable intangible
assets, while Tier II capital includes the allowance for loan losses and
subordinated debt, both subject to certain limitations. Regulatory minimum
risk-based capital guidelines require Tier I capital of 4% of risk-adjusted
assets and total capital (combined Tier I and Tier II) of 8% to be considered
"adequately capitalized". The Company's Tier I and total capital ratios were
9.12% and 10.01%, respectively, at December 31, 1999, compared with 9.89% and
10.88%, respectively, at December 31, 1998.

During 1992, the Federal Deposit Insurance Corporation (the "FDIC")
published the qualifications necessary to be classified as a "well
capitalized" bank, primarily for assignment of FDIC insurance premium rates
beginning in 1993. To qualify as "well capitalized," banks must have a Tier I
risk-adjusted capital ratio of at least 6%, a total risk-adjusted capital
ratio of at least 10%, and a leverage ratio of at least 5%. Columbia Bank
qualified as "well-capitalized" at December 31, 1999. Failure to qualify as
"well capitalized" can negatively impact a bank's ability to expand and to
engage in certain activities.

Applicable federal and Washington state regulations restrict capital
distributions by institutions such as Columbia Bank, including dividends. Such
restrictions are tied to the institution's capital levels after giving effect
to distributions. The Company's ability to pay cash dividends is substantially
dependent upon receipt of dividends from the Bank.

On April 28, 1999, the Company announced a 5% stock dividend payable on May
26, 1999, to shareholders of record on May 12, 1999. Average shares
outstanding and net income per share for all periods presented have been
retroactively adjusted to give effect to this transaction.

16
Impact of Inflation and Changing Prices

The impact of inflation on the Company's operations is increased operating
costs. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than the effect of general levels of inflation.
Although interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services, increases in inflation
generally have resulted in increased interest rates.

Impact of the Year 2000 Issue (Y2K)

Many existing computer systems, including the systems used by the Company,
originally used only two digits to identify a year in the date field. These
programs were designed and developed without taking into account the recent
change in the century. It was feared that the failure of any of these systems
to recognize the year 2000 could have a material effect on a company's
business, results of operations, and/or financial condition. At the century
date change on January 1, 2000, the Company's operations and electronic
systems did not incur any breakdowns, stoppages, complications or
interruptions of any type. In addition, all outside service and utility
providers that the Company subscribes to experienced no service interruptions,
and to the best of the Company's knowledge, its customers experienced few, if
any, problems. The Company developed a comprehensive Year 2000 contingency
plan. The Company's new state-of-the-art operations center has a generator
backup to run the entire facility. All branch offices have special procedures
in order to operate without the usual telecommunications links so that, in the
event of a telecommunications failure, the Company is able to process its data
through a remote site. Although the Company has taken precautions to assure
its technology is Y2K ready, should any complications arise in the future, the
Company is prepared to address such potential problems or situations. Expenses
incurred to prepare the Company for the year 2000 did not have a material
effect on its financial results for the year ended December 31, 1999.

QUARTERLY COMMON STOCK PRICES AND DIVIDEND PAYMENTS

The Company's common stock trades on The Nasdaq Stock Market under the
symbol COLB. Price information generally appears daily in the Nasdaq National
Market Issues section of The Wall Street Journal and in most major Pacific
Northwest metropolitan newspapers. On December 31, 1999, the last sale price
for the Company's stock in the over-the-counter market was $13 1/8.

The Company presently intends to retain earnings to support anticipated
growth. Accordingly, the Company does not intend to pay cash dividends on its
common stock in the foreseeable future. Please refer to the "Capital" section
of the "Management Discussion and Analysis of Financial Condition and Results
of Operations" and Notes 4 and 12 to the consolidated financial statements,
contained elsewhere in this report, for regulatory capital requirements and
restrictions on dividends to shareholders.

At December 31, 1999, the number of shareholders of record was 1,356. This
figure does not represent the actual number of beneficial owners of common
stock because shares are frequently held in "street name" by securities
dealers and others for the benefit of individual owners who may vote the
shares.

The following are high and low sales prices as reported in Nasdaq according
to information furnished by the National Association of Securities Dealers.
Prices do not include retail mark-ups, mark-downs or commissions.

<TABLE>
<CAPTION>
1999 High Low
---- ---- ----
<S> <C> <C>
First quarter............................................ $17 3/4 $ 15
Second quarter........................................... 17 7/16 13 7/8
Third quarter............................................ 16 1/4 12 1/2
Fourth quarter........................................... 16 1/2 12 7/8
For the year............................................. $17 3/4 12 1/2
<CAPTION>
1998 High Low
---- ---- ----
<S> <C> <C>
First quarter............................................ $21 1/4 $17 7/8
Second quarter........................................... 27 5/32 19 7/8
Third quarter............................................ 23 1/2 14 3/8
Fourth quarter........................................... 22 1/2 15 7/16
For the year............................................. 27 5/32 14 3/8
</TABLE>

17
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of Columbia Banking System, Inc.

We have audited the accompanying consolidated balance sheets of Columbia
Banking System, Inc. and its subsidiary (the Company) as of December 31, 1999
and 1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Columbia Banking System, Inc.
and subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States of America.


/s/ Deloitte & Touche LLP

Seattle, Washington
January 28, 2000

18
COLUMBIA BANKING SYSTEM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Years ended December
31,
-----------------------
1999 1998 1997
------- ------- -------
(in thousands except
per share)
<S> <C> <C> <C>
Interest Income
Loans................................................... $77,807 $66,858 $56,176
Securities available for sale........................... 5,619 4,696 3,800
Securities held to maturity............................. 287 419 628
Deposits with banks..................................... 639 1,654 1,457
------- ------- -------
Total interest income................................. 84,352 73,627 62,061
Interest Expense
Deposits................................................ 32,898 29,759 24,775
Federal Home Loan Bank advances......................... 1,939 1,908 1,971
Other borrowings........................................ 6 84
------- ------- -------
Total interest expense................................ 34,843 31,667 26,830
------- ------- -------
Net Interest Income..................................... 49,509 41,960 35,231
Provision for loan losses............................... 2,400 1,900 4,726
------- ------- -------
Net interest income after provision for loan losses... 47,109 40,060 30,505
Noninterest Income
Service charges and other fees.......................... 5,812 4,414 3,498
Mortgage banking........................................ 1,063 1,677 1,032
Merchant services fees.................................. 2,655 1,617 1,140
Gains on sales of loans, net............................ 1,035
Other................................................... 616 474 401
Key man life insurance.................................. 3,518
------- ------- -------
Total noninterest income.............................. 10,146 8,182 10,624
Noninterest Expense
Compensation and employee benefits...................... 19,789 15,816 13,329
Occupancy............................................... 6,520 5,215 4,488
Merchant processing..................................... 1,359 801 585
Advertising and promotion............................... 1,712 1,848 1,264
Data processing......................................... 1,976 1,731 1,544
Taxes, licenses & fees.................................. 1,485 1,320 990
Other................................................... 6,803 6,063 5,632
Merger expenses......................................... 1,234
------- ------- -------
Total noninterest expense............................. 39,644 32,794 29,066
------- ------- -------
Income before income taxes.............................. 17,611 15,448 12,063
Provision for income taxes.............................. 5,941 5,247 2,788
------- ------- -------
Net Income.............................................. $11,670 $10,201 $ 9,275
======= ======= =======
Net Income Per Common Share:
Basic................................................. $ 1.10 $ 0.97 $ 0.89
Diluted............................................... 1.08 0.94 0.87
Average number of common shares outstanding............. 10,593 10,548 10,369
Average number of diluted common shares outstanding..... 10,843 10,877 10,674
</TABLE>

See accompanying notes to consolidated financial statements.

19
COLUMBIA BANKING SYSTEM, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks................................. $ 43,027 $ 53,602
Interest-earning deposits with banks.................... 170 22,816
---------- ----------
Total cash and cash equivalents................... 43,197 76,418
Securities available for sale (fair value).............. 81,029 93,726
Securities held to maturity (fair value of $7,040 and
$6,505, respectively).................................. 7,084 6,358
FHLB stock.............................................. 6,916 5,550
Loans held for sale..................................... 5,479 10,023
Loans, net of unearned income........................... 1,048,006 828,639
Less: allowance for loan losses....................... 9,967 9,002
---------- ----------
Loans, net........................................ 1,038,039 819,637
Interest receivable..................................... 7,609 6,420
Premises and equipment, net............................. 39,166 37,077
Real estate owned....................................... 1,263 901
Other................................................... 7,375 3,809
---------- ----------
Total Assets...................................... $1,237,157 $1,059,919
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing..................................... $ 181,716 $ 180,445
Interest-bearing........................................ 861,828 757,900
---------- ----------
Total deposits.................................... 1,043,544 938,345
Federal Home Loan Bank advances......................... 83,700 25,000
Other borrowings........................................ 3,000
Other liabilities....................................... 7,699 7,008
---------- ----------
Total liabilities................................. 1,137,943 970,353

Commitments and contingent liabilities
(Note 14)

Shareholders' equity:
Preferred stock (no par value)
Authorized, 2 million shares; none
outstanding

December 31,
---------------
1999 1998
------- -------
Common stock (no par value)
Authorized shares................... 47,250 47,250
Issued and outstanding.............. 10,603 10,050 78,285 68,612
Retained earnings..................... 23,916 20,616
Accumulated other comprehensive income
(loss):
Unrealized gains (losses) on
securities available for sale, net of
tax.................................. (2,987) 338
---------- ----------
Total shareholders' equity........ 99,214 89,566
---------- ----------
Total Liabilities and
Shareholders' Equity............. $1,237,157 $1,059,919
========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

20
COLUMBIA BANKING SYSTEM, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
Common stock Accumulated
----------------- Other Total
Number of Retained Comprehensive Shareholders'
Shares Amount Earnings Income (Loss) Equity
--------- ------- -------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 9,360 $62,980 $ 5,282 $ (38) $68,224
Comprehensive income:
Net income for 1997... 9,275
Change in unrealized
gains and (losses) on
securities available
for sale, net of
tax.................. 75
Total comprehensive
income............. 9,350
Issuance of stock under
stock option and other
plans.................. 117 779 779
Issuance of shares of
common stock-- 5% stock
dividend............... 391 4,142 (4,142)
------ ------- ------- ------- -------
Balance at December 31,
1997................... 9,868 67,901 10,415 37 78,353
Comprehensive income:
Net income for 1998... 10,201
Change in unrealized
gains and (losses) on
securities available
for sale, net of
tax.................. 301
Total comprehensive
income............. 10,502
Issuance of stock under
stock option and other
plans.................. 182 711 711
------ ------- ------- ------- -------
Balance at December 31,
1998................... 10,050 68,612 20,616 338 89,566
Comprehensive income:
Net income for 1999... 11,670
Change in unrealized
gains and (losses) on
securities available
for sale, net of
tax.................. (3,325)
Total comprehensive
income............. 8,345
Issuance of stock under
stock option and other
plans.................. 49 1,303 1,303
Issuance of shares of
common stock-- 5% stock
dividend............... 504 8,370 (8,370)
------ ------- ------- ------- -------
Balance at December 31,
1999................... 10,603 $78,285 $23,916 $(2,987) $99,214
====== ======= ======= ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

21
COLUMBIA BANKING SYSTEM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Operating Activities
Net income.................................... $ 11,670 $ 10,201 $ 9,275
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses................... 2,400 1,900 4,726
Deferred income tax expense (benefit)....... (724) 30 956
Losses on real estate owned................. 4 35 105
Depreciation and amortization............... 2,270 2,304 2,189
Net realized (gains) losses on sale of
assets..................................... 2 (55) (971)
(Increase) decrease in loans held for sale.. 4,544 (5,646) 6,964
Increase in interest receivable............. (1,189) (1,397) (903)
Increase in interest payable................ 1,109 660 528
Net changes in other assets and
liabilities................................ (1,561) (883) (3,546)
--------- --------- ---------
Net cash provided by operating
activities............................... 18,525 7,149 19,323

Investing Activities
Proceeds from maturities of securities
available for sale........................... 15,191 49,250 25,337
Purchase of securities available for sale..... (8,150) (82,780) (34,286)
Proceeds from maturities of mortgage-backed
securities available for sale................ 625 5,075 3,814
Purchase of mortgage-backed securities
available for sale........................... (8,710)
Proceeds from maturities of securities held to
maturity..................................... 1,559 4,698 4,414
Purchases of securities held to maturity...... (2,287) (1,380) (1,470)
Purchases of FHLB stock....................... (927) (174)
Loans originated and acquired, net of
principal collected.......................... (220,761) (144,585) (173,877)
Proceeds from sales of loans.................. 10,177
Purchases of premises and equipment........... (5,324) (12,546) (11,043)
Proceeds from disposal of premises and
equipment.................................... 10 20 400
Proceeds from sale of real estate owned....... 562 308 588
Other, net.................................... (446) (419) (454)
--------- --------- ---------
Net cash used by investing activities..... (219,948) (191,069) (176,574)
Financing Activities
Net increase in deposits...................... 105,199 197,915 143,926
Net increase in short-term borrowings......... 3,000
Proceeds from FHLB advances................... 83,700 25,000
Repayment of FHLB advances.................... (25,000) (14,000) (20,000)
Proceeds from issuance of common stock, net... 1,303 711 779
--------- --------- ---------
Net cash provided by financing
activities............................... 168,202 184,626 149,705
--------- --------- ---------
Increase (decrease) in cash and cash
equivalents............................ (33,221) 706 (7,546)
Cash and cash equivalents at beginning
of period.............................. 76,418 75,712 83,258
--------- --------- ---------
Cash and cash equivalents at end of
period................................... $ 43,197 $ 76,418 $ 75,712
========= ========= =========


Supplemental information:
Cash paid for interest........................ $ 33,734 $ 31,007 $ 26,302
Cash paid for income taxes.................... 6,586 5,547 3,380
Transfer from securities available for sale to
held to maturity............................. 996
Loans foreclosed and transferred to real
estate owned................................. 921 1,000 440
</TABLE>

See accompanying notes to consolidated financial statements.

22
COLUMBIA BANKING SYSTEM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Columbia Banking System, Inc. (the "Company") is a registered bank holding
company whose wholly owned subsidiary, Columbia State Bank ("Columbia Bank"),
conducts a full-service commercial banking business. Headquartered in Tacoma,
Washington, the Company provides a full range of banking services to small and
medium-sized businesses, professionals and other individuals through banking
offices located in the Tacoma metropolitan area and contiguous parts of the
Puget Sound region of Washington, as well as the Longview and Woodland
communities in southwestern Washington. Substantially all of the Company's
loans, loan commitments and core deposits are geographically concentrated in
its service areas.

1. Summary of Significant Accounting Policies

In the opinion of management, all adjustments including normal recurring
accruals necessary for a fair presentation of results of operations for all
periods included herein have been made. The results of operations for the year
ending December 31, 1999 are not necessarily indicative of results to be
anticipated for future periods.

Consolidation

The consolidated financial statements of the Company include the accounts
of the corporation and its wholly owned subsidiary after the elimination of
all material intercompany transactions and accounts.

Accounting Treatment of Mergers

All mergers consummated during the reported periods qualify for "pooling of
interests" accounting treatment. Under the pooling of interests method of
accounting, the historical basis of the assets, liabilities, and equity are
combined and carried forward at their previously recorded amounts. The
statement of operations and other financial statements after the mergers are
restated retroactively as if the mergers had taken place prior to the periods
covered by such financial statements. No recognition of goodwill arising from
the mergers is required under the pooling of interests accounting method.

Securities Available for Sale

Securities to be held for indefinite periods of time and not intended to be
held to maturity or on a long-term basis are classified as available for sale
and carried at fair value. Unrealized gains and losses are recorded net of tax
as "other comprehensive income" in the consolidated statements of
shareholders' equity. Securities available for sale include securities that
management intends to use as part of its asset/liability management strategy
and that may be sold in response to changes in interest rates and/or
significant prepayment risk.

Securities Held to Maturity

Securities held to maturity are those securities which the Company has both
the ability and intent to hold to maturity. Events which may be reasonably
anticipated are considered when determining the Company's intent to hold
investment securities until maturity. Securities held to maturity are carried
at cost, adjusted for amortization of premiums and accretion of discounts
using a method that approximates the interest method.

Other than temporary declines in fair value are recognized as a reduction
in current earnings. Gains and losses on the sale of all securities are
determined using the specific identification method.

Loans

Loans are stated at their principal amount outstanding, less any
unamortized discounts and deferred net loan fees. Loans held for sale are
carried at the lower of cost or market value. The amount by which cost exceeds
market for loans held for sale is accounted for as a valuation allowance, and
changes in the allowance are included in the determination of net income in
the period in which the change occurs.

The current policy of the Company is to discontinue the accrual of interest
on all loans past due 90 days or more and place them on nonaccrual status.

23
Premiums or discounts on loans purchased and sold are amortized, using the
interest method, over periods which approximate the average life of the loans.

Loan Fee Income

Loan origination fees and direct loan origination costs are deferred and
the net amount is recognized as an adjustment to yield over the contractual
life of the related loans. Fees related to lending activity other than the
origination or purchase of loans are recognized as noninterest income during
the period the related services are performed.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level believed to be
sufficient to absorb probable losses inherent in the loan portfolio.
Management's determination of the adequacy of the allowance is based on a
number of factors, including the level of nonperforming loans, loan loss
experience, credit concentrations, a review of the quality of the loan
portfolio, collateral values and uncertainties in economic conditions.

The Bank evaluates commercial real estate, real estate construction, and
commercial business loans for impairment on an individual basis. A loan is
considered impaired when it is probable that the bank will be unable to
collect all amounts due according to the terms of the loan agreement. Factors
involved in determining impairment include, but are not limited to, the
financial condition of the borrower, value of the underlying collateral, and
current economic conditions. The valuation of impaired loans is based on
either the present value of expected future cash flows discounted at the
loan's effective interest rate or at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. The amount
by which the recorded investment in the loan exceeds either the present value
of expected future cash flows or the value of the impaired loan's collateral
when applicable, would be a specifically allocated reserve for loan losses.
Any portion of an impaired loan classified as loss under regulatory guidelines
is charged-off.

Premises and Equipment

Land, buildings, leasehold improvements and equipment are carried at
amortized cost. Buildings and equipment are depreciated over their estimated
useful lives using the straight-line method. Leasehold improvements are
amortized over the shorter of their useful lives or lease terms. Gains or
losses on dispositions are reflected in operations. Expenditures for
improvements and major renewals are capitalized, and ordinary maintenance,
repairs and small purchases are charged to operations as incurred.

Real Estate Owned

All real estate acquired in satisfaction of a loan is considered held for
disposal and reported as "real estate owned." Real estate owned is carried at
the lower of cost or fair value less estimated cost of disposal. Cost at the
time of foreclosure is defined as the fair value of the asset less estimated
disposal costs.

Income Tax

The provision for income tax is based on income and expense reported for
financial statement purposes, using the "asset and liability method" for
accounting for deferred income tax. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
A valuation allowance is recorded against any deferred tax assets for which it
is more likely than not that the deferred tax asset will not be realized.

Earnings Per Share

Earnings per share is computed using the weighted average number of common
and diluted common shares outstanding during the period. Basic EPS is computed
by dividing income available to common stockholders by

24
the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock. The only reconciling item affecting the calculation of earnings per
share is the inclusion of stock options increasing the shares outstanding for
diluted earnings per share by 250,000, 313,000, and 291,000 in 1999, 1998, and
1997, respectively.

Use of Estimates

The preparation of 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 and the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates are used in determining the level of the allowance for
loan losses, valuation allowance on deferred tax assets, depreciation of
premises and equipment and others.

Statement of Cash Flows

The accompanying consolidated statements of cash flows have been prepared
using the "indirect" method for presenting cash flows from operating
activities. For purposes of this statement, cash and cash equivalents include
cash and due from banks, interest-earning deposits with banks and federal
funds sold.

Reclassification

Certain amounts in the 1998 and 1997 consolidated financial statements have
been reclassified to conform with the 1999 presentation. These
reclassifications had no effect on net income.

Prospective Accounting Pronouncement

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The Statement establishes
accounting and reporting standards requiring that every derivative instrument
be recorded in the balance sheet measured at its fair value. This Statement
requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. The FASB has
delayed the implementation date of SFAS No. 133 for one year to fiscal years
beginning after June 15, 2000. The Company currently has no activity in
derivative instruments and hedging activities, and does not expect the
adoption of SFAS No. 133 to have a material effect on the financial
statements.

2. Stock Dividend and Stock Split

On April 28, 1999, the Company announced a 5% stock dividend payable on May
26, 1999, to shareholders of record on May 12, 1999. On April 22, 1998, the
Company announced a three shares for two stock split payable on May 20, 1998,
to shareholders of record on May 6, 1998. On April 23, 1997, the Company
announced a 5% stock dividend payable on May 22, 1997, to shareholders of
record on May 8, 1997. Average shares outstanding, net income per share and
book value per share for all periods presented have been retroactively
adjusted to give effect to these transactions.

3. Business Combinations / Restructuring

On December 1, 1997, the Company merged with Cascade Bancorp ("Cascade")
and Bank of Fife ("Fife"). At December 1, 1997, Cascade Bancorp had assets of
$90.3 million, deposits of $78.7 million and shareholders' equity of $6.8
million. At December 1, 1997, Bank of Fife had assets of $34.0 million,
deposits of $30.2 million and shareholders' equity of $3.5 million. The
Company issued 1,185,196 shares of common stock to complete the merger with
Cascade Bancorp and 488,540 shares to complete the merger with Bank of Fife.
The mergers were treated as a pooling of interests. The financial information
presented in this document reflects the pooling of interests method of
accounting for both mergers. Accordingly, under generally accepted accounting
principles, the assets, liabilities and shareholders' equity of Cascade
Bancorp and Bank of Fife were recorded on the books of the resulting
institution at their values as reported on the books of Cascade Bancorp and
Bank of Fife

25
immediately prior to the consummation of the mergers. No goodwill was created
in the mergers. This presentation required the restatement of prior periods as
if the companies had been combined for all years presented.

4. Restrictions on Subsidiary Cash, Loans and Dividends

Columbia Bank is required to maintain reserve balances with the Federal
Reserve Bank. The average required reserves for the year ended December 31,
1999 were approximately $5.7 million. The required reserves are based on
specified percentages of the Bank's total average deposits, which are
established by the Federal Reserve Board.

Under Federal Reserve regulations, Columbia Bank, generally, is limited as
to the amount it may loan to the Company, to 10% of its capital stock and
additional paid-in capital. Such loans must be collateralized by specified
obligations.

Under Washington State banking regulations, Columbia Bank is limited as to
the ability to declare or pay dividends to the Company up to the amount of the
Bank's net profits then on hand, less any required transfers to additional
paid-in capital.

5. Securities

At December 31, 1999, there were no securities of any issuer, other than
the U.S. Government and its agencies and corporations, that exceeded ten
percent of shareholders' equity.

The following table summarizes the amortized cost, gross unrealized gains
and losses and the resulting fair value of securities available for sale.

Securities Available for Sale

<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
(in thousands)
<S> <C> <C> <C> <C>
December 31, 1999:
U.S. Treasury & government agency..... $74,517 $ 7 $(3,902) $70,622
Mortgage-backed....................... 10,043 (627) 9,416
Other securities...................... 994 (3) 991
------- ---- ------- -------
Total............................... $85,554 $ 7 $(4,532) $81,029
======= ==== ======= =======
December 31, 1998:
U.S. Treasury & government agency..... $81,549 $474 $82,023
Mortgage-backed....................... 10,672 1 10,673
Other securities...................... 992 38 1,030
------- ---- ------- -------
Total............................... $93,213 $513 $93,726
======= ==== ======= =======
December 31, 1997:
U.S. Treasury & government agency..... $48,178 $ 78 $48,256
Mortgage-backed....................... 7,046 $ (27) 7,019
Other securities...................... 990 14 1,004
------- ---- ------- -------
Total............................... $56,214 $ 92 $ (27) $56,279
======= ==== ======= =======
</TABLE>

There were no sales of securities available for sale during the years ended
December 31, 1999, 1998, and 1997.

At December 31, 1999 and 1998, securities available for sale with a fair
value of $25.5 million and $4.8 million, respectively, were pledged to secure
public deposits and for other purposes as required or permitted by law.

26
The following table summarizes the amortized cost, fair value, and average
yield of securities available for sale by contractual maturity groups:

<TABLE>
<CAPTION>
December 31, 1999
-----------------------
Amortized Fair
Cost Value Yield
--------- ------- -----
(in thousands)
<S> <C> <C> <C>
U.S. Government Agency
After 1 but within 5 years............................. $38,721 $37,102 5.68%
After 5 but within 10 years............................ 35,495 33,235 6.07%
After 10 years......................................... 301 285 7.05%
------- ------- ----
Total................................................ $74,517 $70,622 5.87%
======= ======= ====
Mortgage-Backed Securities(1)
After 1 but within 5 years............................. $ 1,937 $ 1,906 6.35%
After 10 years......................................... 8,106 7,510 5.99%
------- ------- ----
Total................................................ $10,043 $ 9,416 6.06%
======= ======= ====
Other Securities
After 1 but within 5 years............................. $ 994 $ 991 6.74%
------- ------- ----
Total................................................ $ 994 $ 991 6.74%
======= ======= ====
</TABLE>
- --------
(1) The maturities reported for mortgage-backed securities are based on
contractual maturities and principal amortization.

The following table summarizes the amortized cost, gross unrealized gains
and losses and the resulting fair value of securities held to maturity.

Securities Held To Maturity

<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
(in thousands)
<S> <C> <C> <C> <C>
December 31, 1999:
State and municipal securities......... $6,587 $ 12 $(54) $6,545
Other Securities....................... 497 (2) 495
------ ---- ---- ------
Total................................ $7,084 $ 12 $(56) $7,040
====== ==== ==== ======
December 31, 1998:
U.S. Treasury & government agency...... $ 497 $ 7 $ 504
State and municipal securities......... 5,115 121 5,236
Other Securities....................... 496 18 514
FHLMC preferred stock.................. 250 1 251
------ ---- ---- ------
Total................................ $6,358 $147 $6,505
====== ==== ==== ======
December 31, 1997:
U.S. Treasury & government agency...... $4,743 $ 8 $4,751
State and municipal securities......... 4,191 54 4,245
Other Securities....................... 495 6 501
FHLMC preferred stock.................. 250 7 257
------ ---- ---- ------
Total................................ $9,679 $ 75 $9,754
====== ==== ==== ======
</TABLE>

27
The following table summarizes the amortized cost, fair value, and average
yield of securities held to maturity by contractual maturity groups:

<TABLE>
<CAPTION>
December 31, 1999
-------------------------
Amortized Fair
Cost Value Yield(2)
--------- ------ --------
(in thousands)
<S> <C> <C> <C>
State and Municipal Securities(2)
Due within 1 year..................................... $ 933 $ 933 6.13%
After 1 but within 5 years............................ 3,927 3,920 6.45%
After 5 but within 10 years........................... 1,727 1,692 6.33%
------ ------ ----
Total............................................... $6,587 $6,545 6.37%
====== ====== ====
Other Securities
After 1 but within 5 years............................ $ 497 $ 495 6.77%
------ ------ ----
Total............................................... $ 497 $ 495 6.77%
====== ====== ====
</TABLE>
- --------
(2) Yields on fully taxable equivalent basis, based on a marginal tax rate of
34%.

There were no sales of securities held to maturity during the years ended
December 31, 1999, 1998, and 1997.

6. Loans

The following is an analysis of the loan portfolio by major types of loans:

<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
---------- --------
(in thousands)
<S> <C> <C>
Commercial business...................................... $ 426,060 $332,638
Real estate:
One- to four-family residential........................ 64,669 61,132
Five or more family residential and commercial
properties............................................ 377,708 291,868
---------- --------
Total real estate.................................... 442,377 353,000

Real estate construction:
One- to four-family residential........................ 32,742 26,444
Five or more family residential and commercial
properties............................................ 45,886 23,213
---------- --------
Total real estate construction....................... 78,628 49,657

Consumer................................................. 103,296 94,572
---------- --------
Subtotal................................................. 1,050,361 829,867
Less deferred loan fees, net and other................... (2,355) (1,228)
---------- --------
Total loans.......................................... $1,048,006 $828,639
========== ========
Loans held for sale...................................... $ 5,479 $ 10,023
========== ========
</TABLE>

The following table summarizes certain information related to nonperforming
loans:

<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998 1997
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis................. $4,360 $3,603 $1,462
Restructured loans........................................ 187 1,783 20
------ ------ ------
Total nonperforming loans............................... $4,547 $5,386 $1,482
====== ====== ======
Originally contracted interest............................ $ 385 $ 408 $ 68
Recorded interest......................................... 191 221 12
------ ------ ------
Reduction in interest income............................ $ 194 $ 187 $ 56
====== ====== ======
</TABLE>


28
At December 31, 1999 and 1998, the recorded investment in impaired loans
was $4.1 million and $4.6 million, respectively. The average recorded
investment in impaired loans for the periods ended December 31, 1999, 1998 and
1997 were $4.5 million, $3.0 million, and $570,000, respectively.

At December 31, 1999 and 1998, there were no commitments for additional
funds for loans accounted for on a nonaccrual basis.

At December 31, 1999 and 1998, the Company had no loans to foreign
domiciled businesses or foreign countries, or loans related to highly
leveraged transactions.

The Company's banking subsidiary has granted loans to officers and
directors of the Company and their associates. These loans are made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with unrelated
persons and do not involve more than the normal risk of collectibility. The
aggregate dollar amount of these loans was $25.1 million and $27.6 million at
December 31, 1999 and 1998, respectively. During 1999, $1.8 million of new
related party loans were made, and repayments and transfers totaled $4.3
million.

7. Allowance for Loan Losses

Transactions in the allowance for loan losses are summarized as follows:

<TABLE>
<CAPTION>
Years Ended December
31,
-------------------------
1999 1998 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Balance at beginning of period.................... $ 9,002 $ 8,440 $ 5,282
Loans charged off................................. (1,619) (1,585) (1,659)
Recoveries........................................ 184 247 91
------- ------- -------
Net charge-offs................................. (1,435) (1,338) (1,568)
Provision charged to operating expense............ 2,400 1,900 4,726
------- ------- -------
Balance at end of period........................ $ 9,967 $ 9,002 $ 8,440
======= ======= =======
</TABLE>

8. Premises and Equipment

During 1999, the Company agreed to become the major tenant of a new office
building in downtown Tacoma, the Columbia Bank Center. The Company's executive
offices will be relocated to this new building upon completion in early 2001.
The lease agreement is for 62,105 square feet at $115,000 per month. With an
expiration date of January 1, 2016, the lease agreement provides for two
renewal options of five years each. Currently, the Company's executive offices
and the Main Office of Columbia Bank are located in approximately 51,000
square feet of leased space in downtown Tacoma. In February of 2000, the
Company expects to reach an agreement to purchase the Main Office building.
The purchase is expected to close in March 2000, and the Company intends to
lease all floors of the 5 story building except for the first floor where the
Main Office Branch is located. As of December 31, 1999, Columbia Bank had 15
offices in Pierce County, including the Main Office (7 leased and 8 owned),
three offices in Longview (two owned and one leased), two offices in Bellevue
(1 leased and 1 owned), two offices in Auburn (both owned), one office in
Federal Way (owned), one office in Kent (owned), one office in Woodland
(owned), one office in Olympia (leased), and one office in Port Orchard
(owned). Commerce Plaza, one of Columbia Bank's banking offices in Longview,
houses a retail banking office and other tenants. The Company currently is
constructing permanent full service branch buildings at four of the leased
branch locations.

29
Land, buildings, and furniture and equipment, less accumulated depreciation
and amortization, were as follows:

<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Land..................................................... $ 10,910 $ 8,667
Buildings................................................ 22,579 21,337
Leasehold improvements................................... 1,736 1,583
Furniture and equipment.................................. 14,429 13,180
Vehicles................................................. 207 181
Computer software........................................ 2,345 2,610
-------- --------
Total cost............................................. 52,206 47,558
Less accumulated depreciation and amortization........... (13,040) (10,481)
-------- --------
Total.................................................. $ 39,166 $ 37,077
======== ========
</TABLE>

Total depreciation and amortization expense on buildings and furniture and
equipment was $3.2 million, $2.6 million, and $2.1 million for the years ended
December 31, 1999, 1998 and 1997, respectively.

The Company is obligated under various noncancellable lease agreements for
property and equipment (primarily for land and buildings) which require future
minimum rental payments, exclusive of taxes and other charges, as follows:

<TABLE>
<CAPTION>
Year Ending
December 31,
1999
--------------
(in thousands)
<S> <C>
2000....................................................... $ 917
2001....................................................... 2,099
2002....................................................... 2,016
2003....................................................... 1,995
2004....................................................... 1,857
2005 and thereafter........................................ 20,613
-------
Total minimum payments................................... $29,497
=======
</TABLE>

Total rental expense on buildings and equipment was $1.6 million for the
year ended December 31, 1999, and $1.2 million for each of the years ended
December 31, 1998 and 1997.

9. Federal Home Loan Bank Advances and Long-term Debt

The Company had Federal Home Loan Bank (FHLB) short-term advances of $83.7
million at December 31, 1999, and long-term advances of $25.0 million at
December 31, 1998. In addition, the Company had long-term debt of $3.0 million
at December 31, 1999.

FHLB advances and long-term debt are at the following interest rates:

<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
(dollars in
thousands)
<S> <C> <C>
7.50....................................................... $ 3,000
5.70....................................................... 83,700
5.39....................................................... $25,000
------- -------
Total.................................................... $86,700 $25,000
======= =======
</TABLE>


30
Aggregate maturities of FHLB advances and long-term debt due in years
ending after December 31, 1999, are as follows:

<TABLE>
<CAPTION>
Amount
--------------
(in thousands)
<S> <C>
2000........................................................ $83,700
2001........................................................ 3,000
</TABLE>

FHLB advances are collateralized by a blanket pledge of residential real
estate loans with a recorded value of approximately $100.4 million at December
31, 1999, and $30.0 million at December 31, 1998. Penalties are generally
required for prepayments of certain long-term FHLB advances.

10. Income Tax

The components of income tax expense are as follows:

<TABLE>
<CAPTION>
Years Ended December
31,
----------------------
1999 1998 1997
------ ------ -------
(in thousands)
<S> <C> <C> <C>
Current............................................ $6,665 $5,217 $ 4,258
Deferred (benefit)................................. (724) 30 (1,470)
------ ------ -------
Total............................................ $5,941 $5,247 $ 2,788
====== ====== =======
</TABLE>

Significant components of the Company's deferred tax assets and liabilities
at December 31, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses.............................. $ 3,444 $ 3,099
Unrealized gain on investment securities available for
sale.................................................. 1,539
Depreciation........................................... 402
------- -------
Total deferred tax assets............................ 5,385 3,099
Deferred tax liabilities:
FHLB stock dividends................................... (1,087) (938)
Unrealized gain on investment securities available for
sale.................................................. (174)
Depreciation........................................... (100)
Other.................................................. (169) (195)
------- -------
Total deferred tax liabilities....................... (1,256) (1,407)
------- -------
Net deferred tax assets.............................. $ 4,129 $ 1,692
======= =======
</TABLE>

A reconciliation of the Company's effective income tax rate with the
federal statutory tax rate is as follows:

<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1999 1998 1997
--------------- --------------- ----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Income tax based on
statutory rate.......... $5,988 34 % $5,252 34 % $ 4,101 34 %
Increase (reduction)
resulting from:
Tax credits............ (68) (0) (32) (1) (1,252) (10)
Other nondeductible
items................. 21 0 27 1 707 5
Valuation allowance.... (768) (6)
------ --- ------ --- ------- ---
Income tax expense....... $5,941 34 % $5,247 34 % $ 2,788 23 %
====== === ====== === ======= ===
</TABLE>

31
11. Stock Options

The Company has a stock option plan ("the Plan") to provide additional
incentives to employees and directors thereby helping to attract and retain
the best available personnel. The Company applies APB Opinion 25 and related
interpretations in accounting for the Plan. Accordingly, no compensation cost
has been recognized for the Plan since the exercise price of all options has
been equal to the fair value of the Company's stock at the grant date. At
December 31, 1999, a maximum of 934,369 option shares were authorized under
the Plan, of which 613,768 were outstanding, 263,635 had been exercised and
56,966 were available for future grants.

Additionally, at December 31, 1999, the Company had options outstanding
originally granted to a company controlled by a prior director (now controlled
by the shareholder of that Company by reason of a liquidating dividend) for
the purchase of 45,392 and 17,325 shares of common stock at exercise prices of
approximately $3.37 and $4.83 per share, respectively. These options are
generally exercisable in whole or in part at any time before September 26,
2000.

At December 31, 1999 and 1998, the Company had total stock options
outstanding of 676,485 shares and 622,864 shares, respectively, for the
purchase of common stock at option prices ranging from $2.33 to
$24.76 per share. The Company's policy is to recognize compensation expense at
the date the options were granted due to the difference, if any, between the
then market value of the Company's common stock and the stated option price.

The Company has previously granted restricted stock awards to its named
executives. The purpose of such awards is to reward the executives for prior
service to the Company and to incent such executives to continue to serve the
Company in the future. In each case, the awards provide for the immediate
issuance of shares of Company common stock to the executive, with such shares
held in escrow until the executive meets certain conditions. The Company did
not grant any restricted stock awards to its executives in 1999. In 1998, the
Company granted restricted stock awards of 47,250 shares to its named
executives.

The following table outlines the stock option activity for 1999, 1998 and
1997:

<TABLE>
<CAPTION>
Weighted Weighted
Average Price Average Issue
Number of of Option Date Fair
Option Shares Shares Value
------------- ------------- -------------
(in thousands)
<S> <C> <C> <C>
Balance at December 31, 1996......... 643,758 $ 6.10
Issued............................. 98,942 11.04 $ 4.61
Exercised.......................... (110,537) 5.09
Terminated......................... (826) 5.90
-------- ------
Balance at December 31, 1997......... 631,337 7.05
Issued............................. 97,048 23.28 12.15
Exercised.......................... (105,127) 4.75
Terminated......................... (394) 17.62
-------- ------
Balance at December 31, 1998......... 622,864 9.88
Issued............................. 93,579 15.33 6.57
Exercised.......................... (29,720) 6.40
Terminated......................... (10,238) 13.75
-------- ------
Balance at December 31, 1999......... 676,485 $10.66
======== ======
Total Vested at December 31, 1999.... 427,902 $ 7.26
======== ======
</TABLE>


32
Financial data pertaining to outstanding stock options were as follows:

<TABLE>
<CAPTION>
December 31, 1999
- -------------------------------------------------------------------------------------
Weighted
Weighted Average
Average Weighted Exercise
Ranges of Remaining Average Exercise Number of Price of
Exercise Number of Contractual Price of Exercisable Exercisable
Prices Option Shares Life Option Shares Option Shares Option Shares
--------- ------------- ----------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
$ 2.33-$ 2.80 31,846 1.8 Years $ 2.37 31,846 $ 2.37
3.72- 5.40 79,217 1.2 4.42 79,217 4.42
5.62- 7.59 204,368 2.2 6.53 204,368 6.53
9.08- 12.85 162,298 6.3 10.15 91,995 10.54
13.63- 18.75 126,831 6.4 16.07 17,326 17.14
22.38- 24.76 71,925 6.4 24.54 3,150 24.76
------- --------- ------ ------- ------
676,485 4.3 Years $10.66 427,902 $ 7.26
======= ========= ====== ======= ======
</TABLE>

Had compensation cost for the Company's Plan been determined based on the
fair value at the option grant dates, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1999 1998 1997
------- ------- ------
(dollars in thousands
except per share)
<S> <C> <C> <C>
Net income attributable to common stock:
As reported........................................... $11,670 $10,201 $9,275
Pro forma............................................. 11,299 9,947 9,163
Net income per common share:
Basic:
As reported......................................... $ 1.10 $ 0.97 $ 0.89
Pro forma........................................... 1.07 0.94 0.88
Diluted:
As reported......................................... $ 1.08 $ 0.94 $ 0.87
Pro forma........................................... 1.04 0.91 0.86
</TABLE>

The fair value of options granted under the Company's stock option plan is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1999, 1998
and 1997; expected volatility of 42.00% in 1999, 57.00% in 1998 and 36.95% in
1997; risk-free rates of 5.79% for 1999, 4.51% for 1998 and 5.56% for 1997; no
annual dividend yields; and expected lives of five years for all years.

12. Regulatory Capital Requirements

The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company 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 practices. The Company's capital amounts
and classification are also subject to qualitative judgment by the regulators
about components, risk weightings, and other factors.

The FDIC has established minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets, and of Tier 1 capital to average assets. The
regulations set forth the definitions of capital, risk-weighted and average
assets. During 1992, the Federal Deposit Insurance Corporation (the "FDIC")
published the qualifications necessary to be classified as a "well
capitalized" bank, primarily for assignment of FDIC insurance premium rates
beginning in 1993. To qualify as "well capitalized," banks must have a Tier I
risk-adjusted capital

33
ratio of at least 6%, a total risk-adjusted capital ratio of at least 10%, and
a leverage ratio of at least 5%. Columbia Bank qualified as "well-capitalized"
at December 31, 1999. Failure to qualify as "well-capitalized" can negatively
impact a bank's ability to expand and to engage in certain activities.

As of September 30, 1999, the most recent notification from the FDIC
categorized the Bank as well-capitalized.

The Bank's actual capital amounts and ratios are as follows:

<TABLE>
<CAPTION>
Adequately Well
Actual Capitalized Capitalized
-------------- ------------- --------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital.................... $113,591 10.3% $88,384 8.0% $110,480 10.0%
(to risk-weighted assets)
Tier 1 Capital................... 103,624 9.4% 44,192 4.0% 66,288 6.0%
(to risk-weighted assets)
Tier 1 Capital................... 103,624 8.6% 48,213 4.0% 60,267 5.0%
(to average assets)
As of December 31, 1998:
Total Capital ................... $ 87,693 9.8% $71,863 8.0% $ 89,829 10.0%
(to risk-weighted assets)
Tier 1 Capital .................. 78,691 8.8% 35,931 4.0% 53,897 6.0%
(to risk-weighted assets)
Tier 1 Capital .................. 78,691 7.8% 40,515 4.0% 50,644 5.0%
(to average assets)
</TABLE>

13. Employee Benefit Plan

The Company maintains a defined contribution plan which allows employees to
contribute up to 15% of their compensation to the plan. Employees who are at
least 20 years of age and have completed 6 months of service are eligible to
participate in the plan. The Company is required to match 50% of employee
contributions up to 3% of each employee's total compensation. The Company
contributed approximately $316,000, $273,000 and $211,000 in matching funds to
the plan during the years ended December 31, 1999, 1998 and 1997,
respectively.

The Company's defined contribution plan provides for a nonmatching,
discretionary contribution as determined annually by the Board of Directors of
the Company. In January 2000 and 1999, the Company announced discretionary
contributions of approximately $721,000 and $581,000 for the years ended 1999
and 1998, respectively.

The Company maintains an "Employee Stock Purchase Plan" ("ESPP"). The ESPP
was amended by the Board of Directors on January 26, 2000. Under the revised
plan, substantially all employees of the Company are eligible to participate
in the ESPP. The amended plan provides for offerings every six months at which
time Common Stock is issued for cash at a price of the lower of 90% of the
fair market value of the stock at the beginning or end of the offering period.
Prior to being amended, the ESPP provided for quarterly offerings with a
purchase price of 90% of the fair market value of the Common Stock at the end
of the offering period. The new offering period will take effect March 1, 2000
with a short period starting March 1, 2000 and ending June 30, 2000 and a full
six month offering period beginning July 1, 2000. Under the ESPP, 20,117
shares were acquired by employees for approximately $293,000 in 1999. There is
no charge to income as a result of issuance of stock under this plan. The
discount offered to employees approximates the cost of raising capital and
does not have a material effect on earnings per share. At December 31, 1999,
173,643 shares of common stock were reserved for issuance under this plan.


34
14. Commitments and Contingent Liabilities

In the normal course of business, the Company makes loan commitments
(unfunded loans and unused lines of credit) and issues standby letters of
credit to accommodate the financial needs of its customers. Standby letters of
credit commit the Company to make payments on behalf of customers under
specified conditions. Historically, no significant losses have been incurred
by the Company under standby letters of credit. Both arrangements have credit
risk essentially the same as that involved in extending loans to customers and
are subject to the Company's normal credit policies, including the obtaining
of collateral, where appropriate. At December 31, 1999 and 1998, the Company's
loan commitments amounted to $372.7 million and $267.5 million, respectively.
Standby letters of credit were $6.5 million and $8.8 million at December 31,
1999 and 1998, respectively. In addition, commitments under commercial letters
of credit used to facilitate customers' trade transactions amounted to
$984,000 and $591,000 at December 31, 1999 and 1998, respectively.

The Company and its subsidiaries are from time to time defendants in and
are threatened with various legal proceedings arising from their regular
business activities. Management, after consulting with legal counsel, is of
the opinion that the ultimate liability, if any, resulting from these and
other pending or threatened actions and proceedings will not have a material
effect on the financial position or results of operations of the Company and
its subsidiaries.

15. Fair Value of Financial Instruments

The following table summarizes carrying amounts and estimated fair values
of selected financial instruments as well as assumptions used by the Company
in estimating fair value:

<TABLE>
<CAPTION>
December 31,
---------------------------------------
1999 1998
--------------------- -----------------
Assumptions Used in Carrying Fair Carrying Fair
Estimating Fair Value Amount Value Amount Value
--------------------- ---------- ---------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Assets
Cash and due from Approximately equal to $ 43,027 $ 43,027 $ 53,602 $ 53,602
banks.................. carrying value
Interest-earning
deposits with banks.... Approximately equal to 170 170 22,816 22,816
carrying value
Securities available for
sale................... Quoted market prices 81,029 81,029 93,726 93,726
Securities held to Quoted market prices 7,084 7,040 6,358 6,505
maturity...............
Loans held for sale..... Approximately equal to 5,479 5,479 10,023 10,023
carrying value
Loans................... Discounted expected future 1,038,039 1,139,118 819,637 882,836
cash flows, net of allowance
for loan losses
Liabilities
Deposits................ Fixed-rate certificates of
deposit: Discounted expected
future cash flows
All other deposits: Approximately equal
to carrying value $1,043,544 $1,047,786 $938,345 $948,718
Federal Home Loan Bank
advances............... Discounted expected future 83,700 83,700 25,000 24,994
cash flows
Other borrowings........ Discounted expected future 3,000 3,000
cash flows
</TABLE>


35
Off-Balance-Sheet Financial Instruments

The fair value of commitments is estimated based upon fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate commitments, the fair value estimation takes
into consideration an interest rate risk factor. The fair value of guarantees
and letters of credit is based on fees currently charged for similar
agreements. The fair value of these off-balance sheet items at December 31,
1999 approximates the recorded amounts of the related fees.

16. Business Segment Information

The Company is managed along three major lines of business: commercial
banking, retail banking, and real estate lending. The treasury function of the
Company, although not considered a line of business, is responsible for the
management of investments and interest rate risk.

The principal activities conducted by commercial banking are the
origination of commercial business loans and private banking services. Retail
banking includes all deposit products, with their related fee income, and all
consumer loan products as well as commercial loan products offered in the
Bank's branch offices. Real estate lending offers single-family residential,
multi-family residential, and commercial real estate loans, and the associated
loan servicing activities.

Prior to 1999, the Company was managed as one segment, not by discrete
operating segments. With the appointment of a new Executive Management
Committee in 1999, the Company began reviewing financial performance along the
three major lines described above. The Executive Management Committee, which
is the senior decision-making group of the Company, is comprised of five
members including the Vice Chairman and Chief Executive Officer, and the
President and Chief Operating Officer.

The Company generates segment results that include balances directly
attributable to business line activities. Overhead and other indirect expenses
are not allocated to the major lines of business. The Company's Executive
Management Committee manages the major lines collectively, since in the
opinion of management, all the lines are interrelated.

The financial results of each segment were derived from the Company's
general ledger system. Most reportable segments are comprised of more than one
operating segment. Expenses incurred directly by sales and back office support
functions are not allocated to the major lines of business.

Since SFAS No. 131 requires no segmentation or methodology standardization,
the organizational structure of the Company and its business line financial
results are not necessarily comparable across companies. As such, the
Company's business line performance may not be directly comparable with
similar information from other financial institutions.

Financial highlights by lines of business:

Condensed Statement of Operations

<TABLE>
<CAPTION>
Year Ended December 31, 1999
-----------------------------------------------------
Commercial Retail Real Estate
Banking Banking Lending Other Total
---------- -------- ----------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net interest income
after provision for
loan loss.............. $ 9,925 $ 30,979 $ 7,377 $ (1,172) $ 47,109
Other income............ 522 3,847 1,114 4,663 10,146
Other expense........... (2,445) (13,112) (1,882) (22,205) (39,644)
-------- -------- -------- -------- ----------
Contribution to overhead
and profit............. $ 8,002 $ 21,714 $ 6,609 $(18,714) 17,611
Income taxes.......... (5,941)
-------- -------- -------- -------- ----------
Net income.............. $ 11,670
======== ======== ======== ======== ==========
Total assets............ $369,390 $479,272 $266,051 $122,444 $1,237,157
======== ======== ======== ======== ==========
</TABLE>


36
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-----------------------------------------------------
Commercial Retail Real Estate
Banking Banking Lending Other Total
---------- -------- ----------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net interest income
after provision for
loan loss.............. $ 7,770 $ 26,545 $ 6,212 $ (467) $ 40,060
Other income............ 180 3,356 1,801 2,845 8,182
Other expense........... (1,845) (10,874) (1,731) (18,344) (32,794)
-------- -------- -------- -------- ----------
Contribution to overhead
and profit............. $ 6,105 $ 19,027 $ 6,282 $(15,966) 15,448
Income taxes.......... (5,247)
-------- -------- -------- -------- ----------
Net income.............. $ 10,201
======== ======== ======== ======== ==========
Total assets............ $275,756 $420,120 $206,286 $148,757 $1,050,919
======== ======== ======== ======== ==========
</TABLE>

<TABLE>
<CAPTION>
Year Ended December 31, 1997
---------------------------------------------------
Commercial Retail Real Estate
Banking Banking Lending Other Total
---------- -------- ----------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net interest income after
provision for loan
loss.................... $ 5,749 $ 21,920 $ 4,488 $ (1,652) $ 30,505
Other income............. 25 3,108 1,108 6,383 10,624
Other expense............ (1,695) (11,366) (1,720) (14,285) (29,066)
-------- -------- -------- -------- --------
Contribution to overhead
and profit.............. $ 4,079 $ 13,662 $ 3,876 $ (9,554) 12,063
Income taxes........... (2,788)
-------- -------- -------- -------- --------
Net income............... $ 9,275
======== ======== ======== ======== ========
Total assets............. $187,824 $394,597 $164,047 $118,087 $864,555
======== ======== ======== ======== ========
</TABLE>

17. Parent Company Financial Information

Condensed Statement of Operations--Parent Company Only

<TABLE>
<CAPTION>
Years ended December
31,
------------------------
1999 1998 1997
------- ------- ------
(in thousands)
<S> <C> <C> <C>
Income
Interest on loans................................... $ 21 $ 20 $ 44
Interest on securities available for sale........... 57 376 322
Interest-earning deposits:
Subsidiary banks .................................
Unrelated banks................................... 128 154 177
Other............................................. 67 3,518
------- ------- ------
Total Income.................................... 206 617 4,061
Expense
Compensation and employee benefits.................. 318 (16) 313
Interest............................................ 1
Other............................................... 312 278 330
------- ------- ------
Total Expenses.................................. 631 262 643
------- ------- ------
Income (Loss) before income tax benefit and equity
in undistributed net income of subsidiaries........ (425) 355 3,418
Income tax expense (benefit)........................ (145) 100 (14)
------- ------- ------
Income (loss) before equity in undistributed net
income of subsidiaries............................. (280) 255 3,432
Equity in undistributed net income of subsidiaries.. 11,950 9,946 5,843
------- ------- ------
Net Income.......................................... $11,670 $10,201 $9,275
======= ======= ======
</TABLE>


37
Condensed Balance Sheet--Parent Company Only

<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
-------- -------
(in thousands)
<S> <C> <C>
Assets
Cash and due from subsidiary bank............................. $ 32
Interest-earning deposits with unrelated banks................ 122 $ 4,020
-------- -------
Total cash and cash equivalents............................. 154 4,020
Securities available for sale................................. 5,998
Loans......................................................... 360 360
Investments in bank subsidiaries.............................. 100,637 79,032
Other assets.................................................. 1,327 3041
-------- -------
Total Assets................................................ $102,478 $89,714
======== =======
Liabilities and Shareholders' Equity
Borrowed funds................................................ $ 3,000
Other liabilities............................................. 264 $ 148
-------- -------
Total liabilities........................................... 3,264 148
Shareholders' equity.......................................... 99,214 89,566
-------- -------
Total Liabilities and Shareholders' Equity.................. $102,478 $89,714
======== =======
</TABLE>
Condensed Statement of Cash Flows--Parent Company Only

<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1999 1998 1997
-------- ------- -------
(in thousands)
<S> <C> <C> <C>
Operating Activities
Net income........................................ $ 11,670 $10,201 $ 9,275
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Equity in undistributed earnings of
subsidiaries................................... (11,950) (9,946) (5,843)
Provision for depreciation and amortization..... 12 14 31
Net changes in other assets and liabilities..... 129 (124) 181
-------- ------- -------
Net cash provided (used) by operating
activities................................... (139) 145 3,644
Investing Activities
Purchase of securities available for sale......... (5,995) (9,792)
Proceeds from maturities of securities available
for sale......................................... 6,000 6,800 7,000
Loans originated or acquired, net of principal
collected........................................ 360
Contribution of capital--bank subsidiaries........ (12,980) (3,500)
Other, net........................................ (1,050) 2 (162)
-------- ------- -------
Net cash provided (used) by investing
activities..................................... (8,030) 807 (6,094)
Financing Activities
Proceeds from other borrowings.................... 3,000
Proceeds from issuance of common stock............ 1,303 711 779
-------- ------- -------
Net cash provided by financing activities....... 4,303 711 779
-------- ------- -------
Increase (decrease) in cash and cash
equivalents.................................. (3,866) 1,663 (1,670)
Cash and cash equivalents at beginning of period.. 4,020 2,357 4,027
-------- ------- -------
Cash and cash equivalents at end of period...... $ 154 $ 4,020 $ 2,357
======== ======= =======
</TABLE>

38
18. Summary of Quarterly Financial Information--Unaudited

Quarterly financial information for the years ended December 31, 1999 and
1998 is summarized as follows:

<TABLE>
<CAPTION>
First Second Third Fourth Year Ended
1999 Quarter Quarter Quarter Quarter December 31,
---- ------- ------- ------- ------- ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Total interest income............. $19,351 $20,173 $21,725 $23,103 $84,352
Total interest expense............ 8,057 8,363 8,859 9,564 34,843
------- ------- ------- ------- -------
Net interest income............. 11,294 11,810 12,866 13,539 49,509
Provision for loan losses......... 600 600 600 600 2,400
Noninterest income................ 2,263 2,577 2,608 2,698 10,146
Noninterest expense............... 9,796 9,764 9,919 10,165 39,644
------- ------- ------- ------- -------
Income before income tax........ 3,161 4,023 4,955 5,472 17,611
Provision for income tax.......... 1,073 1,361 1,666 1,841 5,941
------- ------- ------- ------- -------
Net income........................ $ 2,088 $ 2,662 $ 3,289 $ 3,631 $11,670
======= ======= ======= ======= =======
Net income per common share:
Basic........................... $ 0.20 $ 0.25 $ 0.31 $ 0.34 $ 1.10
Diluted......................... 0.19 0.25 0.30 0.33 1.08
======= ======= ======= ======= =======
<CAPTION>
First Second Third Fourth Year Ended
1998 Quarter Quarter Quarter Quarter December 31,
---- ------- ------- ------- ------- ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Total interest income............. $17,407 $17,885 $19,009 $19,326 $73,627
Total interest expense............ 7,376 7,572 8,281 8,438 31,667
------- ------- ------- ------- -------
Net interest income............. 10,031 10,313 10,728 10,888 41,960
Provision for loan losses......... 550 450 450 450 1,900
Noninterest income................ 1,800 1,943 2,124 2,315 8,182
Noninterest expense............... 7,538 7,909 8,446 8,901 32,794
------- ------- ------- ------- -------
Income before income tax........ 3,743 3,897 3,956 3,852 15,448
Provision for income tax.......... 1,330 1,349 1,362 1,206 5,247
------- ------- ------- ------- -------
Net income........................ $ 2,413 $ 2,548 $ 2,594 $ 2,646 $10,201
======= ======= ======= ======= =======
Net income per common share:
Basic........................... $ 0.23 $ 0.24 $ 0.25 $ 0.25 $ 0.97
Diluted......................... 0.22 0.23 0.24 0.24 0.94
======= ======= ======= ======= =======
</TABLE>

39
CONSOLIDATED FIVE-YEAR STATEMENTS OF OPERATIONS(/1/)

<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- -------- -------- --------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest Income:
Loans........................ $ 77,807 $ 66,858 $ 56,176 $ 43,240 $ 36,013
Securities available for
sale........................ 5,619 4,696 3,800 2,360 705
Securities held to maturity.. 287 419 628 702 1,491
Deposits with banks.......... 639 1,654 1,457 1,583 667
---------- ---------- -------- -------- --------
Total interest income...... 84,352 73,627 62,061 47,885 38,876
Interest Expense:
Deposits..................... 32,898 29,759 24,775 20,370 16,369
Federal Home Loan Bank
advances.................... 1,939 1,908 1,971 1,938 1,503
Other borrowings............. 6 84 233 302
---------- ---------- -------- -------- --------
Total interest expense..... 34,843 31,667 26,830 22,541 18,174
---------- ---------- -------- -------- --------
Net Interest Income.......... 49,509 41,960 35,231 25,344 20,702
Provision for loan losses.... 2,400 1,900 4,726 1,635 1,382
---------- ---------- -------- -------- --------
Net interest income after
provision for loan losses... 47,109 40,060 30,505 23,709 19,320
Noninterest income........... 10,146 8,182 7,106 4,785 3,443
Key man life insurance
proceeds.................... 3,518
Noninterest expense.......... 39,644 32,794 27,832 22,768 18,656
SAIF special assessment...... 612
Merger expenses.............. 1,234
---------- ---------- -------- -------- --------
Total Noninterest expense.... 39,644 32,794 29,066 23,380 18,656
---------- ---------- -------- -------- --------
Income (loss) from continuing
operations before income
tax......................... 17,611 15,448 12,063 5,114 4,107
Provision for income tax..... 5,941 5,247 2,788 479 416
---------- ---------- -------- -------- --------
Net Income................... $ 11,670 $ 10,201 $ 9,275 $ 4,635 $ 3,691
========== ========== ======== ======== ========
Net Income Per Common Share:
Net Income Basic........... $ 1.10 $ 0.97 $ 0.89 $ 0.61 $ 0.54
Net Income Diluted......... 1.08 0.94 0.87 0.60 0.53
Average number of common
shares outstanding (basic).. 10,593 10,548 10,369 7,552 6,784
Average number of common
shares outstanding
(diluted)................... 10,843 10,877 10,674 7,767 6,907
========== ========== ======== ======== ========
Total assets at end of
period...................... $1,237,157 $1,059,919 $864,555 $706,448 $520,059
Long-term obligations........ 3,000 25,000 39,000 34,000 27,695
Cash dividends...............
========== ========== ======== ======== ========
</TABLE>
- --------
(1) These unaudited schedules provide selected financial information
concerning the Company which should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations in this Annual Report.

40
CONSOLIDATED FIVE-YEAR SUMMARY OF AVERAGE BALANCES
AND NET INTEREST REVENUE

<TABLE>
<CAPTION>
1999 1998
---------------------------- ----------------------------
Average Average Average Average
Balances(1) Interest Rate Balances(1) Interest Rate
----------- -------- ------- ----------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans:
Commercial business... $ 371,549 $32,338 8.70% $307,174 $28,039 9.13%
Real estate(2):
One-to four-family
residential........ 90,233 7,437 8.24 96,999 8,512 8.78
Five or more family
residential and
commercial
properties......... 374,788 29,985 8.00 264,314 23,008 8.70
Consumer.............. 90,803 8,047 8.86 80,100 7,299 9.11
---------- ------- ------ -------- ------- ------
Total loans....... 927,373 77,807 8.39 748,587 66,858 8.93
Securities(3)........... 99,149 6,085 6.14 83,657 5,221 6.24
Interest-earning
deposits with banks.... 13,106 639 4.87 30,949 1,654 5.35
---------- ------- ------ -------- ------- ------
Total interest-
earning assets... 1,039,628 84,531 8.13 863,193 73,733 8.54
Noninterest-earning
assets................. 91,788 76,081
---------- --------
Total assets...... $1,131,416 $939,274
========== ========
Interest-Bearing
Liabilities
Certificates of
deposit................ $ 388,445 $20,332 5.23% $337,557 $18,917 5.60%
Savings accounts........ 45,478 936 2.06 39,768 997 2.51
Interest-bearing demand
and money market
accounts............... 376,079 11,630 3.09 287,007 9,845 3.43
---------- ------- ------ -------- ------- ------
Total interest-
bearing
deposits......... 810,002 32,898 4.06 664,332 29,759 4.48
Federal Home Loan Bank
advances............... 35,684 1,939 5.43 34,538 1,908 5.52
Other borrowings........ 109 6 5.16
---------- ------- ------ -------- ------- ------
Total interest-
bearing
liabilities...... 845,795 34,843 4.12 698,870 31,667 4.53
Demand and other
noninterest-bearing
deposits............... 184,094 149,353
Other noninterest-
bearing liabilities.... 6,809 6,371
Shareholders' equity.... 94,718 84,680
---------- --------
Total liabilities
and shareholders'
equity........... $1,131,416 $939,274
========== ========
Net interest
revenue.......... $49,688 $42,066
======= =======
Net interest
spread........... 4.01% 4.01%
====== ======
Net interest
margin........... 4.78% 4.87%
====== ======
Average interest-earning
assets to average
interest-bearing
liabilities............ 122.92% 123.51%
====== ======
</TABLE>
- --------
(1) Nonaccrual loans were included in their respective loan categories.
Amortized net deferred loan fees were included in the interest income
calculations. The amortization of net deferred loan fees was $962,000 in
1999. $503,000 in 1998, $2,000 in 1997, ($588,000) in 1996, and $448,790
in 1995.

(2) Real estate average balances include real estate construction loans.

(3) Yields on fully taxable equivalent basis, based on a marginal tax rate of
34%.


41
CONSOLIDATED FIVE-YEAR SUMMARY OF AVERAGE BALANCES
AND NET INTEREST REVENUE--(Continued)

<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
Average Average Average Average Average Average
Balances(1) Interest Rate Balances(1) Interest Rate Balances(1) Interest Rate
----------- -------- ------- ----------- -------- ------- ----------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans:
Commercial business.... $218,560 $20,172 9.23% $158,460 $14,153 8.93% $110,500 $10,855 9.82%
Real estate(2):
One-to four-family
residential.......... 109,659 10,936 9.97 112,986 10,468 9.26 113,341 10,861 9.58
Five or more family
residential and
commercial
properties........... 217,412 18,727 8.61 144,340 13,473 9.33 103,878 9,942 9.57
Consumer............... 68,040 6,341 9.32 58,101 5,146 8.86 45,841 4,355 9.50
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total loans.......... 613,671 56,176 9.15 473,887 43,240 9.12 373,560 36,013 9.64
Securities(3)........... 71,424 4,513 6.32 51,056 3,126 6.12 38,353 2,241 5.84
Interest-earning
deposits with banks.... 26,389 1,456 5.52 29,998 1,583 5.28 11,055 667 6.03
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-
earning assets...... 711,484 62,145 8.73 554,941 47,949 8.64 422,968 38,921 9.20
Noninterest-earning
assets................. 53,244 40,311 35,370
-------- -------- --------
Total assets......... $764,728 $595,252 $458,338
======== ======== ========
Interest-Bearing
Liabilities
Certificates of
deposit................ $282,899 $16,017 5.66% $240,214 $13,771 5.73% $203,978 $11,680 5.73%
Savings accounts........ 38,301 1,054 2.75 32,438 943 2.91 33,145 971 2.93
Interest-bearing demand
and money market
accounts............... 223,514 7,704 3.45 160,020 5,656 3.53 97,326 3,718 3.82
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-
bearing deposits.... 544,714 24,775 4.55 432,672 20,370 4.71 334,449 16,369 4.89
Federal Home Loan Bank
advances............... 35,597 1,971 5.54 34,096 1,914 5.61 24,915 1,503 6.03
Other borrowings........ 1,681 84 5.02 3,454 257 7.44 3,331 302 9.07
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-
bearing
liabilities......... 581,992 26,830 4.61 470,222 22,541 4.79 362,695 18,174 5.01
Demand and other
noninterest-bearing
deposits............... 111,492 74,940 54,878
Other noninterest-
bearing liabilities.... 6,860 4,421 3,315
Shareholders' equity.... 64,384 45,669 37,450
-------- -------- --------
Total liabilities and
shareholders'
equity.............. $764,728 $595,252 $458,338
======== ======== ========
Net interest
revenue............. $35,315 $25,408 $20,747
======= ======= =======
Net interest spread.. 4.12% 3.85% 4.19%
====== ====== ======
Net interest margin.. 4.96% 4.58% 4.91%
====== ====== ======
Average interest-earning
assets to average
interest-bearing
liabilities............ 122.25% 118.02% 116.62%
====== ====== ======
</TABLE>

42
CONSOLIDATED ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE

The following table sets forth the amounts of the changes in consolidated
net interest income attributable to changes in volume and changes in interest
rates for the Company. Changes attributable to the combined effect of volume
and interest rates have been allocated proportionately to the changes due to
volume and the changes due to interest rates.

<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
Increase (Decrease) Due Increase (Decrease) Due
to to
------------------------- -------------------------
Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans:
Commercial business.... $ 5,525 $(1,226) $ 4,299 $ 8,086 $ (219) $ 7,867
One- to four-family
residential........... (574) (501) (1,075) (1,188) (1,236) (2,424)
Five or more family
residential and
commercial
properties............ 8,652 ($1,675) 6,977 4,081 200 4,281
Consumer............... 942 (194) 748 1,095 (137) 958
------- ------- ------- ------- ------- -------
Total loans.......... 14,545 (3,596) 10,949 12,074 (1,392) 10,682
Securities............... 949 (85) 864 763 (54) 709
Interest-earning deposits
with banks.............. (881) (134) (1,015) 242 (45) 197
------- ------- ------- ------- ------- -------
Total interest
revenue............. $14,613 $(3,815) $10,798 $13,079 $(1,491) $11,588
======= ======= ======= ======= ======= =======
Interest Expense
Deposits:
Certificates of
deposit............... $ 2,517 $(1,102) $ 1,415 $ 3,061 $ (161) $ 2,900
Savings accounts....... 247 (308) (61) 43 (100) (57)
Interest-bearing
demand................ 2,661 (876) 1,785 2,178 (37) 2,141
------- ------- ------- ------- ------- -------
Total interest on
deposits............ 5,425 (2,286) 3,139 5,282 (298) 4,984
Federal Home Loan Bank
advances................ 61 (30) 31 (59) (4) (63)
Other borrowings......... 6 6 (42) (42) (84)
------- ------- ------- ------- ------- -------
Total interest
expense............. $ 5,486 $(2,310) $ 3,176 $ 5,181 $ (344) $ 4,837
======= ======= ======= ======= ======= =======
</TABLE>

Loan Maturities and Sensitivity to Changes in Interest Rates

The following table presents, (i) the aggregate maturities of loans in each
major reportable category named below of the Company's loan portfolio and (ii)
the aggregate amounts of variable and fixed rate loans that mature after one
year.

<TABLE>
<CAPTION>
Maturing
------------------------------------------
Due Within Over 1 but Over 5
December 31, 1999 1 Year Within 5 Years Years Total
- ----------------- ---------- -------------- ------- --------
(in thousands)
<S> <C> <C> <C> <C>
Commercial business................. $242,126 $131,617 $52,317 $426,060
Real estate construction............ 23,075 14,327 41,226 78,628
-------- -------- ------- --------
Total............................. $265,201 $145,944 $93,543 $504,688
======== ======== ======= ========
Fixed rate loans.................... $ 73,081 $20,373 $ 93,454
Variable rate loans................. 72,863 73,170 146,033
-------- ------- --------
Total............................. $145,944 $93,543 $239,487
======== ======= ========
</TABLE>

43
Loan Loss Allowance Allocation

The table below shows the allocation of the Allowance for Loan Losses for
the last five years. The allocation is based on an evaluation of loan
problems, historical ratios of loan losses and other factors which may affect
future loan losses in the categories of loans shown.

<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
% of % of % of % of % of
Balance at End of Period Total Total Total Total Total
Applicable to: Amount Loans* Amount Loans* Amount Loans* Amount Loans* Amount Loans*
- ------------------------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial business..... $6,388 40.0% $5,540 40.0% $4,109 39.4% $3,178 37.2% $2,006 32.0%
Real estate and
construction:
One- to four-family
residential........... 969 10.6 972 10.6 1,041 14.7 1,115 20.8 699 26.3
Five or more family
residential and
commercial
properties............ 1,990 38.0 2,008 38.0 1,414 35.0 490 30.9 330 29.3
Consumer................ 339 11.4 482 11.4 334 10.9 499 11.1 386 12.4
Unallocated............. 281 1,542 919
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total................. $9,967 100.0% $9,002 100.0% $8,440 100.0% $5,282 100.0% $4,340 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
- --------
*Represents the total of all outstanding loans in each category as a percent
of total loans outstanding.

Average Deposit Liabilities

The following table presents the average balances outstanding and weighted
average interest rate for each major category of deposits:

<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
-------- --------- -------- --------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing demand
and money market
accounts............... $376,079 3.09% $287,007 3.43% $223,514 3.45%
Savings accounts........ 45,478 2.06 39,768 2.51 38,301 2.75
Certificates of
deposit................ 388,445 5.23 337,557 5.60 282,899 5.66
-------- ---- -------- ---- -------- ----
Total interest-bearing
deposits............. 810,002 4.06 664,332 4.48 544,714 4.55
Demand and other
noninterest-bearing.... 184,094 149,353 111,492
-------- ---- -------- ---- -------- ----
Total deposits........ $994,096 $813,685 $656,206
======== ==== ======== ==== ======== ====
</TABLE>

The following table shows the amount and maturity of certificates of
deposit that had balances of more than $100,000:

<TABLE>
<CAPTION>
December 31,
1999
--------------
(in thousands)
<S> <C>
Remaining maturity
3 months and under....................................... $ 58,131
Over 3 through 6 months.................................. 34,460
Over 6 through 12 months................................. 43,579
Over 12 months........................................... 14,400
--------
Total.................................................. $150,570
========
</TABLE>

44
Effects of Governmental Monetary Policies

Profitability in banking depends on interest rate differentials. In
general, the difference between the interest earned on a bank's loans,
securities and other interest-earning assets and the interest paid on a bank's
deposits and other interest-bearing liabilities are the major source of a
bank's earnings. Thus, the earnings and growth of the Company are affected not
only by general economic conditions, but also by the monetary and fiscal
policies of the United States and its agencies, particularly the Federal
Reserve. The Federal Reserve System implements national monetary policy for
such purposes as controlling inflation and recession by its open-market
operations in United States government securities, control of the discount
rate applicable to borrowings from the Federal Reserve and the establishment
of reserve requirements against certain deposits. The actions of the Federal
Reserve in these areas influence growth of bank loans, investments and
deposits and also affect interest rates charged on loans and paid on deposits.
The nature and impact of future changes in monetary policies and their impact
on the Company are not predictable.

Supervision and Regulation

The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 ("BHC Act") registered with and subject to
examination by the Federal Reserve Board ("FRB"). The Company's bank
subsidiary is a Washington state chartered commercial bank and is subject to
examination, supervision, and regulation by the Washington State Department of
Financial Institutions--Division of Banks ("Division"). The FDIC insures
Columbia Bank's deposits and in that capacity also regulates the Bank.

The Company's earnings and activities are affected by legislation, by
actions of the FRB, the Division, the FDIC and other regulators, and by local
legislative and administrative bodies and decisions of courts in Washington
state. For example, these include limitations on the ability of Columbia Bank
to pay dividends to the Company, and numerous federal and state consumer
protection laws imposing requirements on the making, enforcement, and
collection of consumer loans, and restrictions by regulators on the sale of
mutual funds and other uninsured investment products to customers.

Congress enacted major federal financial institution legislation in 1999.
Title I of the Gramm-Leach-Bliley Act, which becomes effective March 11, 2000,
allows bank holding companies to elect to become financial holding companies.
In addition to the activities previously permitted bank holding companies,
financial holding companies may engage in non-banking activities that are
financial in nature, such as securities, insurance, and merchant banking
activities, subject to certain limitations. It is likely that the Company will
utilize the new structure to accommodate an expansion of its products and
services.

The activities of bank holding companies, such as the Company, that are not
financial holding companies are generally limited to managing or controlling
banks. Nonbank activities of such bank holding companies are generally limited
to acquisitions of up to 5% of voting shares and activities previously
determined by the FRB by regulation or order to be closely related to banking.

Additional legislation may be enacted or regulations imposed to further
regulate banking and financial services or to limit finance charges or other
fees or charges earned in such activities. There can be no assurance whether
any such legislation or regulation will place additional limitations on the
Company's operations or adversely affect its earnings.

Federal law imposes certain restrictions on transactions between the
Company and any nonbank subsidiaries, on the one hand, and Columbia Bank on
the other. With certain exceptions, federal law also imposes limitations on,
and requires collateral for, extensions of credit by insured depository
institutions, such as Columbia Bank, to their non-bank affiliates, such as the
Company.

Subject to certain limitations and restrictions, a bank holding company,
with prior approval of the FRB, may acquire an out-of-state bank. Banks in
states that do not prohibit out-of-state mergers may merge with the approval
of the appropriate federal banking agency. A state bank may establish a de
novo branch out of state if such branching is expressly permitted by the other
state.

45
Among other things, applicable federal and state statutes and regulations
which govern a bank's activities relate to minimum capital requirements,
required reserves against deposits, investments, loans, legal lending limits,
mergers and consolidations, borrowings, issuance of securities, payment of
dividends, establishment of branches and other aspects of its operations. The
Division and the FDIC also have authority to prohibit banks under their
supervision from engaging in what they consider to be unsafe and unsound
practices.

Under longstanding FRB policy, a bank holding company is expected to act as
a source of financial strength for its subsidiary banks and to commit
resources to support such banks. The Company could be required to commit
resources to its subsidiary banks in circumstances where it might not do so,
absent such policy.

The Company and Columbia Bank are subject to risk-based capital and
leverage guidelines issued by federal banking agencies for banks and bank
holding companies. These agencies are required by law to take specific prompt
corrective actions with respect to institutions that do not meet minimum
capital standards and have defined five capital tiers, the highest of which is
"well-capitalized."

Columbia Bank is required to file periodic reports with the FDIC and the
Division and is subject to periodic examinations and evaluations by those
regulatory authorities. These examinations must be conducted every 12 months,
except that certain well-capitalized banks may be examined every 18 months.
The FDIC and the Division may each accept the results of an examination by the
other in lieu of conducting an independent examination.

In the liquidation or other resolution of a failed insured depository
institution, deposits in offices and certain claims for administrative
expenses and employee compensation are afforded a priority over other general
unsecured claims, including non-deposit claims, and claims of a parent company
such as the Company. Such priority creditors would include the FDIC, which
succeeds to the position of insured depositors.

The Company is also subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the Securities Exchange Act of
1934.

The earnings of the Company are affected by general economic conditions and
the conduct of monetary policy by the U.S. government.

Employees

At December 31, 1999, the Company had 469 full-time equivalent employees.
The Company has placed a high priority on staff development. This development
involves selective hiring and extensive training (including customer service
training). New hires are selected on the basis of both technical skills and
customer service capabilities. Emphasis has been placed upon hiring and
retaining additional key officers in areas such as lending, administration and
finance. None of the Company's employees are covered by a collective
bargaining agreement with the Company, and management believes that its
relationship with its employees is satisfactory.

46
Executive Officers of the Company

The following table sets forth certain information about the executive
officers of the Company.

<TABLE>
<CAPTION>
Has Served as
an Executive
Officer
of the
Name Age Position Company Since
---- --- -------- -------------
<C> <C> <S> <C>
J. James Gallagher(1)... 61 Director, Vice Chairman and Chief
Executive Officer 1998
Melanie J. Dressel(2)... 47 Director, President and Chief
Operating Officer--the Company;
President and Chief Executive
Officer--Columbia Bank 1997
H. R. Russell(3)........ 45 Executive Vice President--Chief
Credit Officer 1996
Gary R. Schminkey(4).... 42 Executive Vice President and
Chief Financial Officer 1993
Evans Q. Whitney(5)..... 56 Executive Vice President, Retail
Banking 1994
Donald A. Andersen(6)... 54 Senior Vice President, Senior
Loan Production Officer--
Columbia Bank 1996
Janet D. Hildebrand(7).. 51 Senior Vice President, Credit
Administrator--Columbia Bank 1998
</TABLE>
- --------
(1) Mr. Gallagher assumed the position of Chief Executive Officer of the
Company on January 1, 2000. Prior to that time and since July 1998, Mr.
Gallagher served as Vice Chairman. From January 1994 until his appointment
at Columbia, Mr. Gallagher was a principal of Gordon, Thomas, Honeywell,
Malanca, Peterson & Daheim, P.L.L.C., a law firm headquartered in Tacoma,
Washington, where he served as outside legal counsel for the Company. Mr.
Gallagher, who is a former bank regulator, has over 30 years of experience
as legal counsel to financial institutions throughout the Northwest.

(2) Ms. Dressel assumed the position of President and Chief Operating Officer
of the Company and Chief Executive Officer of Columbia Bank on January 1,
2000. Prior to that time and since July 1998, Ms. Dressell served Columbia
Bank as President and Chief Operating Officer and, since May 1997, as
Executive Vice President. Prior to that time and since June 1993,
Ms. Dressel served Columbia Bank as Senior Vice President--Private
Banking. Ms. Dressel also served as an Executive Vice President of the
Company since May 1997. She became a Director of the Company in 1998.
Ms. Dressel served as Senior Vice President and directed the private
banking division of Puget Sound National Bank for nearly five years and
was employed by Bank of California for over 14 years.

(3) Mr. Russell joined Columbia Bank as Senior Vice President--Commercial
Loans in October 1993. He was appointed Executive Vice President--Chief
Credit Officer for Columbia Bank in May 1997. Mr. Russell was employed by
Puget Sound National Bank and its successor institution for nearly 14
years, having served as Vice President--Commercial Loan Officer from 1991
to 1993.

(4) Mr. Schminkey joined Columbia Bank as Vice President and Controller in
March 1993. In 1994, he was appointed Senior Vice President--Chief
Financial Officer of Columbia Bank and the Company and subsequently was
appointed Executive Vice President--Chief Financial Officer in December
1998. Mr. Schminkey was employed by PSB, Puget Sound National Bank and its
successor institution for nearly 10 years, having served from 1991 to 1993
as Assistant Vice President--Assistant Controller for PSB and during that
same period as Vice President--Accounting and Finance for Puget Sound
National Bank and its successor institution.

(5) Mr. Whitney joined Columbia Bank as Senior Vice President--Human Resources
in March 1993. In July 1998, Mr. Whitney was appointed Executive Vice
President--Retail Banking for Columbia Bank and the Company. Mr. Whitney
was employed by PSB and Puget Sound National Bank for nearly 27 years,
having served as Senior Vice President--Human Resources for PSB and Puget
Sound National Bank from 1991 to 1993.

47
(6) Mr. Andersen joined Columbia Bank as Senior Vice President--Commercial
Loans in January 1995. Mr. Andersen was employed by Puget Sound National
Bank and its successor institution for nearly 25 years, having served as
Vice President--Commercial Loan Officer from 1991 to 1995.

(7) Ms. Hildebrand joined Columbia Bank as Senior Vice President--Credit
Administrator in August 1997. Ms. Hildebrand was employed by First
Interstate Bank of Washington and its successor, Wells Fargo Bank, for 23
years, having served as Senior Vice President and Regional Manager of Loan
Review prior to leaving that institution in 1997.

All officers are elected by the Board of Directors and serve at the
pleasure of the Board for an unspecified term.

48
10-K CROSS REFERENCE INDEX

This Annual Report and Form 10-K incorporate into a single document the
requirements of the accounting profession and the Securities and Exchange
Commission, including a comprehensive explanation of 1999 results.

Form 10-K

<TABLE>
<CAPTION>
Part and
Item No. Caption Page Number
-------- ------- ---------------------------------------------------
<C> <S> <C>
Part 1
Item 1 Business................ 1-3, 26 (Note 5), 33 (Note 12), 36 (Note 16), 41-46
Item 2 Properties.............. 29 (Note 8)
Item 3 Legal Proceedings....... 35 (Note 14)
Item 4 Submission of Matters to
a Vote of Security
Holders................ Not applicable
Part II
Item 5 Market for the
Registrant's Common
Stock and Related
Stockholder Matters.... 17
Item 6 Selected Financial
Data................... 4
Item 7 Management's Discussion
and Analysis of
Financial Condition and
Results of Operations.. 5-17
Item 7a Quantitative and
Qualitative Disclosures
About Market Risk...... 14-16
Item 8 Financial Statements and
Supplementary Data..... 19-22, 39 (Note 18)
Item 9 Changes in and
Disagreements with
Accountants on
Accounting and
Financial Disclosure... Not applicable
Part III
Item 10 Directors and Executive
Officers of the
Registrant............. *47-48
Item 11 Executive Compensation.. **
Item 12 Security Ownership of
Certain Beneficial
Owners and Management.. ***
Item 13 Certain Relationships
and Related
Transactions........... ****
Part IV
Item 14 Exhibits, Financial
Statement Schedules,
and Reports on Form 8-
K...................... 50
</TABLE>
- --------
* For information about Columbia's directors and executive officers, see
the discussion under "Proposal 1: Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance", in the definitive Proxy
Statement for Columbia's Annual Meeting of Shareholders to be held on
April 25, 2000, filed with the SEC (the "Proxy Statement"), incorporated
herein by reference.

** See the discussion under "Executive Compensation" of the Proxy Statement,
incorporated herein by reference.

***See the discussion under "Stock Ownership" of the Proxy Statement,
incorporated herein by reference.

**** See the discussion under "Interest of Management in Certain Transactions"
of the Proxy Statement, incorporated herein by reference.

None of the foregoing incorporation by reference shall include the
information referred to in Item 402 (a)(8) of Regulation S-K.

49
Exhibits, Financial Statement Schedules, and Reports on Form 8-K

The following exhibits are either filed herewith or have been previously
filed with the Securities and Exchange Commission and are filed herewith by
incorporation by reference:

. Columbia's Restated Articles of Incorporation
. Columbia's Restated Bylaws
. Material Contracts, including certain compensatory plans
. Subsidiaries of the Company
. Powers of Attorney of Directors Devine, Dressel, Fabulich, Fine, Folsom,
Halleran, Hulbert, Matson, Philip, Powell, Quoidbach, Rodman, Snyder,
Weyerhaeuser, and Will
. Financial Data Schedule

A more detailed exhibit index has been filed with the SEC. Stockholders may
obtain copies of that index, or any of the documents on that index by writing
to Columbia Banking System, Inc., Investor Relations, P.O. Box 2156, MS 8300,
Tacoma, WA 98401-2156

Reports on Form 8-K:

None

Securities and Exchange Commission
Washington, DC 20549
Form 10-K
Annual Report pursuant to Section 13 of 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1999
Commission File Number 0-20288

Columbia Banking System, Inc.
Incorporated in the State of Washington
IRS Employer Identification Number: 91-1422237
Address: 1102 Broadway Plaza
P.O. Box 2156
Tacoma, Washington 98401-2156
Telephone: (253) 305-1900

Columbia (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.

Certain information has been incorporated by reference as described herein
into Part III of this report from Columbia's 2000 Proxy Statement.

50
Independent Auditors

Deloitte & Touche LLP

Transfer Agent and Registrar

American Stock Transfer & Trust Company

Market Makers

First Union Capital Markets
Herzog, Heine, Geduld, Inc.
Keefe, Bruyette & Woods, Inc.
Mayer & Schweitzer Inc.
Pacific Crest Securities
Ragen MacKenzie Inc.
Ryan Beck & Co. Inc.

Regulatory & Securities Counsel

Davis Wright Tremaine, LLP

Annual Meeting

Sheraton Tacoma Hotel
1320 Broadway Plaza
Tacoma, Washington
Tuesday, April 25, 2000
1:00 p.m.

Stock Listing

The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Marketsm under the symbol: COLB.

Financial Information

Columbia news and financial results are available through the Internet and
mail.

Internet: For information about Columbia, including news and financial
results, product information and service locations, access our home page on
the World Wide Web; the address is http://www.columbiabank.com. You can
also view or retrieve copies of Columbia's financial reports on the
Internet by connecting to http://www.sec.gov.

Mail: At your request, we will mail you our quarterly earnings news
release, quarterly financial data on Form 10-Q and additional annual
reports. Immediate access to the Company's quarterly earnings news release
via facsimile is provided by Company News On Call by calling (800) 758-
5804, access #152519. To be added to Columbia's mailing list for quarterly
earnings news releases, or to request other information, please contact:

Jo Anne Coy
Vice President,
Marketing Director
P.O. Box 2156, MS 8300
Tacoma, WA 98401-2156
Tel (253) 305-1965
Fax (253) 305-0317
E-Mail: jcoy@columbiabank.com

51
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, on the 10th day
of March, 2000.

COLUMBIA BANKING SYSTEM, INC.
(Registrant)

/s/ J. James Gallagher
By __________________________________
J. James Gallagher
Vice Chairman and
Chief Executive Officer

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 indicated, on the 10th day of March, 2000.

Principal Executive Officer:

/s/ J. James Gallagher
By __________________________________
J. James Gallagher
Vice Chairman and
Chief Executive Officer

Principal Financial Officer:

/s/ Gary R. Schminkey
-------------------------------------
Gary R. Schminkey
Executive Vice President and
Chief Financial Officer

J. James Gallagher, pursuant to a power of attorney which is being filed
with the Annual Report on Form 10-K, has signed this report on March 10, 2000
as attorney in fact for the following directors who constitute a majority of
the Board.

<TABLE>
<S> <C>
[Richard S. DeVine] [W. W. Philip]
[Melanie J. Dressel] [John H. Powell]
[Jack Fabulich] [Robert E. Quoidbach]
[Jonathan Fine] [Donald Rodman]
[John P. Folsom] [Sidney R. Snyder]
[John Halleran] [William T. Weyerhaeuser]
[Thomas M. Hulbert] [James M. Will]
[Thomas L. Matson]
</TABLE>

/s/ J. James Gallagher
- -------------------------------------
J. James Gallagher
Attorney-in-fact

March 10, 2000

52
Columbia Banking System, Inc. Board of Directors

Richard S. Devine Melanie J. Dressell* Jack Fabulieh
President of Chinook President and Chief Chairman of Parker Paint
Resources, Inc. Operating Officer Manufacturing, Inc.
Columbia Banking
Jonathan Fine System, Inc., President J. James Gallagher*
Chief Executive Officer and Chief Executive Vice Chairman and Chief
American Red Cross Officer Executive Officer
Columbia Bank
Seattle-King County
Chapter
Columbia Banking System.
Inc.

John A. Halleran John P. Folsom Thomas L. Matson
Private Investor Chairman, President and
Owner and President
Chief Executive Officer Tom Matson Dodge, Inc.
William W. Philip*
Raleigh, Schwartz &
Powell, Inc.
Chairman, Retired Robert E. Quoidbach
President and Chief Thomas M. Hulbert Private Investor
Executive Officer
President and William T. Weyerhaeuser
Columbia Banking System, Chief Executive Officer Clinical Psychologist
Inc. and Columbia Bank Winsor Corporation
Owner and Chairman
John H. Powell** Comercom
Donald Rodman Owner
Owner and Sound Oil Company

Executive Officer Sidney R. Snyder
Rodman Realty
Vice Chairman
James M. Will Pacific Financial
President Corporation
Titus-Will Enterprises Washington State
Senator
Owner of Sid's Food
Market

- --------
* Effective January 1, 2000, Mr. Philip retired as President and Chief
Executive Officer of Columbia Banking System, Inc. and Columbia Bank. J.
James Gallagher, Vice Chairman, was appointed Chief Executive Officer of
Columbia Banking System, Inc., and Melanie Dressel was named President and
Chief Operating Officer of Columbia Banking System, Inc. and President and
Chief Executive Officer of Columbia Bank.

** John H. Powell reached the age of 75 prior to the Annual Meeting of
Shareholders to be held on April 25, 2000, and is retiring from the Board
in accordance with the Company's Bylaws.

53
Branch Locations

<TABLE>
<S> <C> <C> <C> <C> <C>
PIERCE COUNTY
1 MAIN OFFICE 2 ALLENMORE 3 EDGEWOOD/MILTON
1102 Broadway Plaza 1959 South Union 900 Meridian E
Tacoma, WA 98402 Tacoma, WA 98405 Suite 17
(253) 305-1940 (253) 627-6909 Milton, WA 98354
John Collins Ron Staples (253) 952-6646
Michael Butcher

4 FIFE 5 FIRCREST 6 GIG HARBOR
5501 Pacific Hwy. E 2401 Mildred St. W 5303 Point Fosdick Dr. NW
Fife, WA 98424 Fircrest, WA 98466 Gig Harbor, WA 98335
(253) 922-7870 (253) 566-1172 (253) 858-5105
Frank Marzano Dan Patjens Chris Gullett

7 LAKEWOOD 8 OLD TOWN 9 176th & MERIDIAN
6202 Mount Tacoma Dr. SW 2200 North 30th St. 17208 Meridian E
Lakewood, WA 98499 Tacoma, WA 98403 Puyallup, WA 98373
(253) 581-4232 (253) 272-0412 (253) 445-6748
Jay Mayer Connie Pentecost Pat Horan

10 PUYALLUP 11 SOUTH HILL MALL 12 SPANAWAY
4220 S. Meridian 3500 S. Meridian 17502 Pacific Ave. S
Puyallup, WA 98373 Suite 503 Spanaway, WA 98387
(253) 770-0770 Puyallup, WA 98373 (253) 539-3094
Stan Ausmus (253) 770-8161 Joy Johnson
Robin Conrads

13 STADIUM 14 SUMMIT 15 WESTGATE
601 N. 1st. 10409 Canyon Road E 5727 N. 21st St.
Tacoma, WA 98403 Puyallup, WA 98373 Tacoma, WA 98406
(253) 597-8811 (253) 770-9323 (253) 761-8170
Monica Stevens Debra Hamilton Connie Pentecost

KING COUNTY
16 AUBURN 17 BELLEVUE 18 BELLEVUE WAY
25 16th St. NE 777 108th Ave. NE 10350 NE 10th St.
Auburn, WA 98002 Suite 100 Bellevue, WA 98004
(253) 939-9600 Bellevue, WA 98004 (425) 452-7323
Patty Osthus (425) 646-9696 Rich Martinez
Ernie Smith

19 FEDERAL WAY 20 KENT 21 SOUTH AUBURN
33370 Pacific Highway S 504 W. Meeker 4101 A St. SE
Federal Way, WA 98003 Kent, WA 98032 Auburn, WA 98002
(253) 925-9323 (253) 852-8400 (253) 939-9800
Mike Harris Shirley McGregor Rod Clemmer

COWLITZ COUNTY
22 COMMERCE 23 30th AVENUE 24 TRIANGE MALL
1338 Commerce Ave. 2207 30th Ave. 620 A Triangle Mall
Longview, WA 98632 Longview, WA 98632 Longview, WA 98632
(360) 636-9200 (360) 423-8760 (360) 501-5601
Faith Pacheco Faith Pacheco Faith Pacheco

KITSAP COUNTY THURSTON COUNTY
25 WOODLAND 26 PORT ORCHARD 27 WEST OLYMPIA
782 Goerig St. 228 Bravo Terrace 2915 Harrison Ave. Suite 230
Woodland, WA 98674 Port Orchard, WA 98366 Olympia, WA 98502
(360) 225-9421 (360) 876-8384 (360) 375-5800
Carol Rounds Rob Putas Patti Tupper
</TABLE>


54
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit No.
-----------
<C> <S>
3(a) Restated Articles of Incorporation of the Company.

(b) Restated Bylaws of the Company.

10(a) Lease dated May 7, 1993 between the Company and William B. Swensen
Enterprises for Tacoma Main Office premises of Columbia Bank.(1)

(b) Stock Option Plan as amended and restated effective April 23,
1997.(2)

(c) Amended employment agreement between the Company and W. W. Philip
effective January 1, 1998, except with respect to sections 4.3
and 4.4 (granting restricted stock awards) which are effective
August 28, 1996 and January 28, 1998, respectively.(3)(4)

(d) Amended employment agreement between the Company and J. James
Gallagher effective July 1, 1998, except with respect to section
4.3 (granting restricted stock award) which is effective
April 22, 1998.(4)

(e) Amended employment agreement between the Company and Melanie J.
Dressel effective July 1, 1999.(4)

(f) Severance agreement between the Company and Harald R. Russell
effective June 23, 1999.(3)(4)

(g) Severance agreement between the Company and Evans Q. Whitney
effective June 23, 1999.(3)(4)

(h) Severance agreement between the Company and Gary R. Schminkey
effective June 23, 1999.(3)(4)

(i) Severance agreement between the Company and Donald A. Andersen
effective June 23, 1999.(3)(4)

(j) Severance agreement between the Company and Janet D. Hildebrand
effective June 23, 1999.(3)(4)

(k) Data processing servicing agreement dated May 3, 1993 between the
Company and M&I Data Services.(5)

(l) Deferred Compensation Plan for directors and certain key employees
effective September 22, 1999.

21 Subsidiaries of the Company are:

(a) Columbia State Bank, Tacoma, Washington, a Washington state-
chartered commercial bank.

24 Powers of Attorney dated February 23, 2000.

27 Financial Data Schedule
</TABLE>
<TABLE>
- --------
<C> <S>
(1) Incorporated by reference to the Form SB-2 (Registration No. 33-66224)
previously filed by the Company, declared effective on August 16, 1993.

(2) Incorporated by reference to the definitive Proxy Statement dated March
20, 1997 for the Annual Meeting of Shareholders held April 23, 1997.

(3) Incorporated by reference to the Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999 previously filed by the Company.

(4) This document is a management contract containing compensatory
arrangements and is required to be filed as an exhibit pursuant to Item
14(c) of this Form 10-K.

(5) Incorporated by reference to the Annual Report on Form 10-KSB for the year
ended December 31, 1993 previously filed by the Company.
</TABLE>

55