- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 ---------------- 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 ---------------- 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> - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
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> - -------- (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