- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 For the fiscal year ended December 31, 2000 or [_]Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 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 28, 2001 was $175,739,657. The number of shares of registrant's Common Stock outstanding at February 28, 2001 was 11,914,553. Documents incorporated by reference and parts of Form 10-K into which incorporated: <TABLE> <S> <C> Registrant's definitive Proxy Statement Dated April 2, 2001....................................................... Part III </TABLE> - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
COLUMBIA BANKING SYSTEM, INC TABLE OF CONTENTS <TABLE> <S> <C> The Company............................................................... 1 Five-Year Summary of Selected Financial Data.............................. 6 Management's Discussion and Analysis of Financial Condition And Results of Operations............................................................... 7 Quarterly Common Stock Prices and Dividend Payments....................... 24 Independent Auditors Report............................................... 25 Consolidated Financials Statements Consolidated Statements of Operations................................... 26 Consolidated Balance Sheets............................................. 27 Consolidated Statements of Shareholders' Equity......................... 28 Consolidated Statements of Cash Flows................................... 29 Notes to Consolidated Financial Statements.............................. 30 Financial Data Supplement Consolidated Five-Year Statements of Operations......................... 50 Consolidated Five-Year Summary of Average Balances and Net Interest Revenue................................................................ 51 Consolidated Analysis of Changes in Interest Income and Expense......... 53 Loan Maturities and Sensitivity to Changes in Interest Rates............ 54 Average Deposit Liabilities............................................. 54 Effects of Governmental Monetary Policies............................... 54 Supervision and Regulation.............................................. 55 Executive Officers and Employees........................................ 57 Annual Report on Form 10-K................................................ 59 Form 10-K Cross Reference Index........................................... 60 Exhibits and Reports on Form 8-K.......................................... 60 </TABLE> i
NOTE REGARDING FORWARD LOOKING STATEMENTS This Annual Report and Form 10-K includes forward looking statements, which management believes are a benefit to shareholders. These forward looking statements describe Columbia's management's expectations regarding future events and developments such as future operating results, growth in loans and deposits, continued success of Columbia's style of banking and the strength of the local economy. The words "will," "believe," "expect," "should," and "anticipate" and words of similar construction are intended in part to help identify forward looking statements. Future events are difficult to predict, and the expectations described above are necessarily subject to risk and uncertainty that may cause actual results to differ materially and adversely. In addition to discussions about risks and uncertainties set forth from time to time in Columbia's filings with the SEC, factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, among others, the following possibilities: (1) local and national general and economic conditions are less favorable than expected or have a more direct and pronounced effect on Columbia than expected and adversely affect Columbia's ability to continue its internal growth at historical rates and maintain the quality of its earning assets; (2) changes in interest rates reduce interest margins more than expected and negatively affect funding sources; (3) projected business increases following strategic expansion or opening or acquiring new branches are lower than expected; (4) costs or difficulties related to the integration of acquisitions are greater than expected; (5) competitive pressure among financial institutions increases significantly; (6) legislation or regulatory requirements or changes adversely affect the businesses in which Columbia is engaged. 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 28 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 28 branch offices and has plans to open additional branches in 2001 as discussed below. In the five years ended December 31, 2000, the Company has achieved significant growth in profitability, assets, loans and deposits, as shown in the following chart. <TABLE> <CAPTION> At/For Year Ended Five Year Compounded December 31, 2000 Annual Growth Rate ----------------- -------------------- (dollars in thousands) <S> <C> <C> Net Income.......................... $ 10,070 22% Assets.............................. 1,496,495 24 Loans............................... 1,192,520 23 Deposits............................ 1,327,023 24 </TABLE> 1
Business Overview The Company's goal is to become the premier super community bank headquartered in the Pacific Northwest while establishing a significant presence in selected northwest markets. Internal growth will be augmented by strategic business combinations. The Company will build on its reputation for excellent customer service in order to be recognized in all markets it serves as the bank of choice for retail deposit customers, small to medium-sized businesses and affluent households. The Company also expects to achieve superior financial performance at the earliest practical date, consistent with development of its northwest franchise. Management believes the ongoing consolidation among financial institutions in the northwest part of the U.S. has created significant gaps in the ability of large banks operating in the states comprising that area 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 in the markets it now serves and in areas contiguous to those markets. The Company has closely followed the recent changes to federal banking laws which 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), Columbia On Call(TM) telephone banking, Columbia OnLine(TM) internet banking, development of complimentery lines of business, and acquisitions. In particular, the Company anticipates continued expansion in Pierce County, north into King County, south into Thurston County and northwest into Kitsap County. Aggressive expansion within the Seattle and "Eastside" areas of King County was begun in 2000 with the hiring of additional experienced bankers with extensive knowledge of the market. During the year 2001, the Company intends to establish a private banking and commercial banking presence in Seattle, expand its presence in Bellevue, establish retail banking offices in Issaquah and Redmond and determine other appropriate expansion locations. 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 consistently emphasized control of noninterest expense. See the discussion of noninterest expense for further detail. The Company has 28 branches, 15 in Pierce County, 7 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 expanded from 4 branches primarily through internal growth. In April 2000, Columbia Bank opened its third branch in the Auburn area with its newly constructed Forest Villa Branch. In November, the Bank moved its Edgewood-Milton branch into a larger, more convenient new facility just south of its prior 2
location. In addition, construction was completed on a permanent West Olympia facility in February 2001. During the later half of 2000, the Bank also announced plans for Pierce County branches at 11th and Martin Luther King Way, 84th & Pacific, and Bonney Lake, with target opening dates during 2001. The Company's plan to significantly increase its presence in the King County market, as discussed above, will result in the addition of at least three new offices in that market during 2001. New branches normally do not contribute to net income for many months after opening. In addition to the ongoing expansion of its branch network, the Company continuously reviews new products and services to give its customers more financial service options. Also, new technology and services are reviewed for business development and cost saving purposes. During the third quarter, the Company introduced its new online banking service Columbia On-Line(TM). Customers are able to conduct a full range of services on a real time basis, including, balance inquiries, transfers, bill paying, loan information, and check image viewing. This online service has also enhanced the delivery of cash management services to its commercial customers. Market Area The economy of the Company's principal market areas, 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. Additionally, four military bases are located in the market areas. 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 in recent years has been primarily focused and the location of Tacoma, is located in the South Puget Sound region. With 15 branch offices in Pierce County at the end of 2000, the Company has positioned itself to increase its market share in this County of approximately 706,000 residents, the second most populous county in Washington State. With two large military installations (McChord Air Force and Fort Lewis Army bases), government related employment represents approximately 20% of the County's total employment. King County to the north of Tacoma is Washington's most populous county and the location of Seattle, the State's largest city. The County has approximately 1.7 million residents. 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 237,000 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's aggressive expansion in Seattle, Bellevue, and other areas of the Eastside is intended to produce a substantial increase in the Company's share of this market; the largest banking market in the State. The Company has five 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 95,000. Cowlitz County's economy has become more diversified in recent years, but remains materially 3
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. The State Capital of 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 204,000. 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 39% 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 2000, the Federal Deposit Insurance Corporation (FDIC) market share report classified the Company with 17.4% of the deposit market share in Pierce County, which placed the Company 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. Looking Forward--2001 Performance Goals The Company anticipates that business conditions in its principal market areas will provide good opportunities to expand in 2001. Management expects that growth will be centered in the Pierce County and King County market areas. Periods of concern about slowing economic growth often provide community oriented banks that have strong credit quality and good knowledge of the local economy, such as the Company, with attractive opportunities to acquire desirable new business relationships from larger banks. These opportunities will be pursued with the same credit discipline the Company has shown during its rapid growth beginning in 1993. Management expects the recently initiated expansion in King County to reduce earnings in the short term as the Company adds key personnel and facilities in order to accelerate loan and deposit growth in the second half of 2001. In light of recent and anticipated reductions in short term interest rates, management expects declining margins in the first half of the year during which loan rates are expected to reprice more quickly than deposit rates. Management expects forecasted growth of loans and deposits to offset some of the anticipated margin decline. 4
The following 2001 performance goals anticipate declining short-term interest rates and stable credit quality for the year. The Company originally announced these objectives when management believed that full year 2000 diluted earnings per share were $1.17. Subsequent to that January 25, 2001 announcement, management determined that deterioration of a single large credit relationship required a substantial addition to the Company's allowance for loan losses as of December 31, 2000. Thus earnings for the year 2000 were revised to $0.84 per diluted share. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further details. The 2001 goals set forth below, as it relates to growth in earnings, reflects expected increases from the originally announced per share earnings of $1.17. Management continues to expect earnings per share in 2001 to be in a range of $1.25 to $1.30. A more pronounced decline in interest rates than is currently expected or any further deterioration of the credit relationship discussed above could reduce the anticipated performance of the Company. Columbia's performance goals for 2001, based on current economic and market conditions, include the following: Loan Growth in the 15-20% Range Deposit Growth in the 15-20% Range Revenue Growth of 13-15% Return on Average Equity Greater Than 12% Return on Average Assets Approximating 1% Efficiency Ratio Less Than 66% Earnings Per Share Growth 9-11%* - -------- * Earnings per share growth reflects the Company's expansion into King County, thus reducing EPS growth expectations by approximately 4 percentage points for 2001. 5
COLUMBIA BANKING SYSTEM, INC. FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA <TABLE> <CAPTION> 2000 1999 1998 1997 1996 ---------- ---------- ---------- ------------ ------------ (dollars in thousands except per share amounts) <S> <C> <C> <C> <C> <C> For the Year Net interest income..... $ 58,268 $ 49,509 $ 41,960 $ 35,231 $ 25,344 Provision for loan losses................. 9,800 2,400 1,900 4,726 1,635 Noninterest income...... 11,587 10,146 8,182 10,624 4,785 Noninterest expense..... 44,753 39,644 32,794 29,066 23,380 Net income.............. 10,070 11,670 10,201 9,275* 4,635* Per Share Basic earnings.......... $ 0.86 $ 1.00 $ 0.88 $ 0.81* $ 0.56* Diluted earnings........ 0.84 0.98 0.85 0.79* 0.54* Book value.............. 9.59 8.51 7.71 6.86 6.30 Averages Total Assets............ $1,375,600 $1,131,416 $ 939,274 $ 764,728 $ 595,252 Earning assets.......... 1,265,716 1,039,628 863,193 711,484 554,941 Loans................... 1,149,013 927,373 748,587 613,671 473,887 Securities.............. 97,585 99,149 83,657 71,424 51,056 Deposits................ 1,197,653 994,096 813,685 656,206 507,612 Shareholders' equity.... 107,555 94,718 84,680 64,384 45,669 Financial Ratios Net interest margin..... 4.62% 4.78% 4.87% 4.96% 4.58% Return on average assets................. 0.73 1.03 1.09 1.21* 0.78* Return on average equity................. 9.36 12.32 12.05 14.41* 10.15* Efficiency ratio........ 64.07 66.46 65.40 65.74 75.57 Average equity to average assets......... 7.82 8.37 9.02 8.42 7.67 At Year-End Total assets............ $1,496,495 $1,237,157 $1,059,919 $ 864,555 $ 706,448 Loans................... 1,192,520 1,048,006 828,639 685,889 523,151 Allowance for loan losses................. 18,791 9,967 9,002 8,440 5,282 Deposits................ 1,327,023 1,043,544 938,345 740,430 596,504 Shareholders' equity.... 113,823 99,214 89,566 78,353 68,224 Number of full-time equivalent employees... 513 469 439 327 294 Number of banking offices................ 28 27 25 21 20 Nonperforming assets: Nonaccrual loans........ $ 12,506 $ 4,360 $ 3,603 $ 1,462 $ 2,256 Restructured loans...... 1,136 187 1,783 20 25 Real estate owned....... 1,291 1,263 901 231 484 ---------- ---------- ---------- ------------ ------------ Total nonperforming assets............... $ 14,933 $ 5,810 $ 6,287 $ 1,713 $ 2,765 ========== ========== ========== ============ ============ Nonperforming loans to period-end loans....... 1.14% 0.43% 0.65% 0.22% 0.44% Nonperforming assets to period-end assets...... 1.00% 0.47% 0.59% 0.20% 0.39% Net loan chargeoffs..... $ 976 $ 1,435 $ 1,338 $ 1,568 $ 693 Risk-Based Capital Ratios: Tier I capital.......... 8.58% 9.12% 9.89% 10.77% 12.51% Total capital........... 9.54 10.01 10.88 11.93 13.48 Leverage ratio.......... 7.77 8.46 8.72 9.33 10.17 <CAPTION> 1997(1) 1996(1) ------------ ------------ (dollars in thousands * Financial information excluding certain items: except per share amounts) <S> <C> <C> <C> <C> <C> For the Year Net income excluding unusual items....................... $ 8,165 $ 5,247 Per Share: Basic earnings excluding unusual items................... $ 0.72 $ 0.63 Diluted earnings excluding unusual items................. 0.69 0.62 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 Savings Association Insurance Fund special assessment of $612,000. 6
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 condensed 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. 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. Net income for the year decreased 14% to $10.1 million compared to net income of $11.7 million in 1999 and $10.2 million in 1998. On a diluted per share basis, 2000 net income was $0.84 per share, compared with net income of $0.98 per share in 1999, and $0.85 per share in 1998. This decline in 2000 net income was the result of an additional loan loss provision of $6.0 million in the fourth quarter 2000 to increase the Company's allowance for loan losses. Net Interest Income. Net interest income increased $8.8 million, or 18%, in 2000 compared with an increase of $7.5 million, or 18%, in 1999. The 2000 and 1999 increases in net interest income were 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 $226.1 million and $176.4 million in 2000 and 1999, respectively, while average interest- bearing liabilities increased $204.1 million and $146.9 million, respectively. Net interest margin (net interest income divided by average interest- earning assets) decreased to 4.62% in 2000, compared with 4.78% in 1999 and 4.87% in 1998. Average interest-earning assets increased to $1.3 billion, or 22%, during fiscal year 2000, compared with $1.0 billion for fiscal year 1999. The average yield on interest-earning assets increased to 8.71% in 2000 from 8.13% in fiscal year 1999. In comparison, average interest-bearing liabilities increased to $1.0 billion, or 24%, and the average cost of interest-bearing liabilities increased to 4.93% from 4.12% in fiscal year 1999. During fiscal year 2000, competition and rising deposit interest rates created downward pressure on the Company's net interest margin. Loan and investment interest rates exhibited an increasing trend from the middle of 1999 through the first nine months of 2000. Although loan yields rose with increases in the "prime rate", competition for deposits to fund continued strong loan demand within the Company's market areas placed upward pressure on the cost of deposits and borrowings. To fund strong loan demand during 2000, the Company made greater use of borrowings from the FHLB of Seattle and certificates of deposit. The funding of new loan production at higher incremental rates, versus the Company's historical mix of deposits, caused the average cost of interest-bearing liabilities to increase faster than the yield on interest-earning assets. Provision for Loan Losses. The Company's provision for loan losses was $9.8 million for 2000, compared with $2.4 million for 1999 and $1.9 million for 1998. For the years ended December 31, 2000, 1999 and 1998, net loan charge- offs amounted to $976,000, $1.4 million and $1.3 million, respectively. During 2000, the 7
allowance for loan losses increased $8.8 million to $18.8 million as compared with $10.0 million and $9.0 million at the end of 1999 and 1998, respectively. The allowance for loan losses as a percentage of loans (excluding loans held for sale at each date) increased to 1.58% at December 31, 2000 as compared to 0.95% and 1.09% of loans at December 31, 1999 and 1998, respectively. The increase was primarily due to an additional loan loss provision of $6.0 million taken in the fourth quarter 2000 to strengthen the Company's allowance for loan losses in light of deterioration of a single large credit relationship and to further protect against pressures that might arise from a slowing economy. At year-end 2000, the allowance for loan losses to nonperforming loans was 137.74% compared to 219.19% and 167.14% at December 31, 1999 and 1998, respectively. Management anticipates that continued growth of its loan portfolio when coupled with some early evidence of slowing economic activity will require continued additions to its loan loss allowance during 2001, but in amounts substantially smaller than the amounts added in 2000. Noninterest Income. Total noninterest income increased $1.4 million, or 14%, in 2000, and $2.0 million, or 24%, in 1999, despite decreases in residential mortgage loan originations due to the effect of higher long-term interest rates. Increases in noninterest income during 2000 were centered in account service charges and merchant services income. In general, increases in account service charges and merchant services income are due to the growth of the Company. Income from mortgage banking declined by $307,000, or 29%, in 2000 and $614,000, or 37% in 1999. The changes each year reflected the impact of movements in long-term interest rates upon mortgage loan activity. Noninterest Expense. Total noninterest expense increased $5.1 million, or 13%, in 2000 and $6.9 million, or 21%, in 1999. The increase in 2000 was primarily due to personnel costs associated with the Company's expansion as well as merchant services, taxes and licenses, and other expenses. Expenses such as merchant services are volume driven and reflect the Company's rapid growth. The Company's efficiency ratio (noninterest expense divided by the sum of net interest income plus noninterest income) was 64.1% for 2000 compared with 66.5% and 65.4% for 1999 and 1998, respectively. The Company places 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. 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, ----------------------------------------------- Increase/ Increase/ 2000 (Decrease) 1999 (Decrease) 1998 ------- --------- ------- --------- ------- (in thousands) <S> <C> <C> <C> <C> <C> Compensation and employee benefits.................... $24,104 $2,595 $21,509 $3,584 $17,925 Loan origination costs....... (1,326) 394 (1,720) 389 (2,109) ------- ------ ------- ------ ------- Net compensation and Employee benefits (as reported)...... 22,778 2,989 19,789 3,973 15,816 Occupancy.................... 6,092 (428) 6,520 1,305 5,215 Professional Services........ 1,060 134 926 (25) 951 Advertising and promotion.... 1,602 (110) 1,712 (136) 1,848 Printing and supplies........ 709 (30) 739 51 688 Regulatory assessments....... 259 (145) 404 206 198 Data processing.............. 2,294 318 1,976 245 1,731 Losses on real estate owned.. 318 285 33 (29) 62 Telephone and network........ 907 192 715 250 465 Postage & delivery........... 510 (54) 564 91 473 ATM network.................. 484 94 390 109 281 Merchant processing.......... 1,989 630 1,359 558 801 Taxes, licenses and fees..... 2,055 570 1,485 165 1,320 Other........................ 3,696 664 3,032 87 2,945 ------- ------ ------- ------ ------- Total noninterest expense.. $44,753 $5,109 $39,644 $6,850 $32,794 ======= ====== ======= ====== ======= </TABLE> 8
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, private banking, 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 specific reserves or a write-down of the loan. See "Provision and Allowance For Loan Losses." 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. 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. 9
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 2000 Total 1999 Total 1998 Total 1997 Total 1996 Total ---------- ----- ---------- ----- -------- ----- -------- ----- -------- ----- (in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Commercial business..... $ 496,125 41.6 % $ 426,060 40.6 % $332,638 40.1 % $270,946 39.5 % $194,843 37.2 % ---------- ----- ---------- ----- -------- ----- -------- ----- -------- ----- Real estate: One- to four-family residential.......... 55,922 4.7 64,669 6.2 61,132 7.4 71,095 10.4 77,359 14.8 Five or more family residential and commercial properties........... 428,884 36.0 377,708 36.0 291,868 35.2 206,628 30.1 151,179 28.9 ---------- ----- ---------- ----- -------- ----- -------- ----- -------- ----- Total real estate.... 484,806 40.7 442,377 42.2 353,000 42.6 277,723 40.5 228,538 43.7 Real estate construction: One- to four-family residential.......... 33,548 2.8 32,742 3.1 26,444 3.2 29,695 4.3 31,446 6.0 Five or more family residential and commercial properties........... 74,451 6.3 45,886 4.4 23,213 2.8 33,806 4.9 10,724 2.1 ---------- ----- ---------- ----- -------- ----- -------- ----- -------- ----- Total real estate construction........ 107,999 9.1 78,628 7.5 49,657 6.0 63,501 9.2 42,170 8.1 Consumer................ 106,633 8.9 103,296 9.9 94,572 11.4 74,710 10.9 58,249 11.1 ---------- ----- ---------- ----- -------- ----- -------- ----- -------- ----- Subtotal.............. 1,195,563 100.3 1,050,361 100.2 829,867 100.1 686,880 100.1 523,800 100.1 Less deferred loan fees and other.............. (3,043) (0.3) (2,355) (0.2) (1,228) (0.1) (991) (0.1) (649) (0.1) ---------- ----- ---------- ----- -------- ----- -------- ----- -------- ----- Total loans.......... $1,192,520 100.0 % $1,048,006 100.0 % $828,639 100.0 % $685,889 100.0 % $523,151 100.0 % ========== ===== ========== ===== ======== ===== ======== ===== ======== ===== Loans held for sale..... $ 14,843 $ 5,479 $ 10,023 $ 4,377 $ 11,341 ========== ========== ======== ======== ======== </TABLE> Total loans (excluding loans held for sale) at December 31, 2000, increased $144.5 million, or 14%, from year-end 1999. Commercial business loans and five or more family residential and commercial properties were the categories contributing a majority of the increase. Commercial Loans: Commercial loans increased $70.1 million, or 16%, to $496.1 million from year-end 1999, representing 41.6% of total loans compared with 40.6% of total loans at December 31, 1999. 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 affluent individuals. Real Estate Loans: Residential one- to four-family loans decreased $8.7 million to $55.9 million at December 31, 2000, representing 4.7% of total loans, compared with $64.7 million, or 6.2% of total loans at December 31, 1999. 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 $51.2 million, or 13.5%, to $428.9 million at December 31, 2000, representing 36.0% of total loans, from $377.7 million, or 36.0% of total loans at December 31, 1999. The increase in multi-family and commercial real estate lending during 2000 reflects a mix of owner occupied and income property transactions. Generally, multi-family and commercial real estate loans are made to borrowers who have existing banking relationships with the Company. 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 10
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. Real Estate Construction Loans: 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 $806,000 to $33.5 million at December 31, 2000, representing 2.8% of total loans, from $32.7 million, or 3.1% of total loans at December 31, 1999. Multi-family and commercial real estate construction loans increased $28.6 million to $74.5 million at December 31, 2000, representing 6.3% of total loans, from $45.9 million, or 4.4% of total loans at December 31, 1999. The Company endeavors to limit its construction lending risk through adherence to strict underwriting procedures. Consumer Loans: At December 31, 2000, the Company had $106.6 million of consumer loans outstanding, representing 8.9% of total loans, as compared with $103.3 million, or 9.9% of total loans, at December 31, 1999. The balance at December 31, 1999, included approximately $6.0 million of short-term loans made to a group of individuals in connection with a single transaction which matured in February 2000. Consumer loans made by the Company include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans and miscellaneous personal loans. Foreign Outstanding: Columbia Bank is not involved with loans to foreign companies and foreign countries. Loan Growth by Market Area: 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 is aggressively pursuing growth in King County and Thurston County and has committed additional resources to those markets as well as to the Cowlitz County and Kitsap County markets. <TABLE> <CAPTION> December 31, Increase --------------------- ---------------- 2000 1999 Amount Percent ---------- ---------- -------- ------- (in thousands) <S> <C> <C> <C> <C> Pierce County............................ $ 883,205 $ 781,803 $101,402 13.0% All other counties....................... 309,315 266,203 43,112 16.2 ---------- ---------- -------- ---- Total.................................. $1,192,520 $1,048,006 $144,514 13.8% ========== ========== ======== ==== </TABLE> Nonperforming Assets Nonperforming assets consist of: (i) nonaccrual loans, which generally 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); and (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. 11
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: <TABLE> <CAPTION> December 31, --------------------------------------- 2000 1999 1998 1997 1996 ------- ------ ------ ------ ------ (in thousands) <S> <C> <C> <C> <C> <C> Nonaccrual: One-to four-family residential...... $ 410 $ 23 $ 722 $ 661 $1,645 Commercial real estate.............. 698 1,784 1,542 Commercial business................. 11,091 2,176 1,214 728 385 Consumer............................ 307 377 125 73 226 ------- ------ ------ ------ ------ Total nonaccrual loans............ 12,506 4,360 3,603 1,462 2,256 Restructured: One-to four-family residential...... 15 20 25 One-to four-family residential construction....................... 1,136 122 1,768 Commercial business................. 65 ------- ------ ------ ------ ------ Total restructured loans.......... 1,136 187 1,783 20 25 ------- ------ ------ ------ ------ Total nonperforming loans......... $13,642 $4,547 $5,386 $1,482 $2,281 ======= ====== ====== ====== ====== Real estate owned..................... 1,291 1,263 901 231 484 ------- ------ ------ ------ ------ Total nonperforming assets........ $14,933 $5,810 $6,287 $1,713 $2,765 ======= ====== ====== ====== ====== Accruing loans past-due 90 days or more................................. $ 40 $ 111 Impaired loans........................ $12,925 $4,147 4,539 $ 728 385 Potential problem loans............... 1,631 2,234 1,862 669 346 Allowance for loan losses............. 18,791 9,967 9,002 8,440 5,282 Nonperforming loans to loans.......... 1.14% 0.43% 0.65% 0.22% 0.44% Nonperforming assets to total assets.. 1.00 0.47 0.59 0.20 0.39 ======= ====== ====== ====== ====== </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, or that are nonaccrual loans, or loans past due 90 days and still accruing. Nonaccrual loans and other nonperforming assets are centered in a small number of lending relationships which management considers to be adequately reserved. In the fourth quarter 2000, deterioration of a single large credit relationship with a principal amount of $8.0 million caused the Company to place the loan on nonaccrual and include it in impaired loans. Management views this as a prudent action but is optimistic that additional collateral being obtained will reduce the amount of the impairment. Substantially, all nonperforming loans are to borrowers within the State of Washington. Real estate owned, which is comprised of foreclosed real estate loans, increased $28,000 to $1.3 million at December 31, 2000. During fiscal year 2000, the Company foreclosed and transferred to REO $1.0 million of loans collateralized by real estate, and incurred write-downs of $419,000 on existing REO. At December 31, 2000, REO consisted of three foreclosed properties. 12
Total nonperforming assets totaled $14.9 million, or 1.00% of period-end assets at December 31, 2000, compared to $5.8 million, or 0.47% of period-end assets at December 31, 1999. Nonperforming loans were $13.6 million, or 1.14% of total loans (excluding loans held for sale), at December 31, 2000, compared to $4.5 million, or 0.43% of total loans at December 31, 1999 due principally to increases in the commercial business and commercial real estate categories. 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: 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 nonperforming 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, 2000, the Company's allowance for loan losses was $18.8 million, or 1.58% of the total loan portfolio, and 137.7% of nonperforming loans. This compares with an allowance of $10.0 million, or 0.95% of the total loan portfolio, and 219.2% of nonperforming loans, at December 31, 1999. The increase in the allowance as a percentage of loans was due to the $9.8 million in loan loss provisions during fiscal year 2000 as compared with $2.4 million during 1999. For the years ended December 31, 2000, 1999 and 1998, net loan charge-offs amounted to $976,000, $1.4 million, and $1.3 million, respectively. In the fourth quarter 2000, the Company took an additional loan loss provision of $6.0 million to increase its allowance for loan losses to reflect the deterioration of a single substantial credit relationship. As a result of 13
the deterioration of this single relationship, the Company undertook a comprehensive review of the process currently in place to detect and react to other potential loan portfolio deterioration. Based on that review, management is confident that the problems with the single loan are not symptomatic of other similar problems in the loan portfolio. In addition, management is retaining a nationally recognized firm with expertise in commercial loan credit review to conduct an independent assessment of the Company's loan and collateral monitoring procedures. Consistent with the Company's practice of maintaining prudent reserves, the additional $6.0 million provision to the allowance for loan losses has been set aside now to provide against the ultimate loss that may result from the loan, and to further protect against pressures that might arise from a slowing economy. Based on information currently known to the Company, management believes that substantial progress is being made to strengthen the large credit relationship discussed above and that there is good reason to believe that a significant portion of the principal loan balance may ultimately be collected. During the year 2000, the Company refined its allowance calculations to reflect historical performance of the loan portfolio during the prior five years. Adjustments to the percentages of the allowance allocated to loan categories were made based on trends with respect to delinquencies and problem loans within each pool of loans. In addition, the provision for loan losses was increased to reflect continued rapid growth in loans and management's assessment of economic and business conditions. There were no other significant changes during the year in estimation methods or assumptions that affected the Company's methodology for assessing the appropriateness of the allowance. The most recent prior substantial adjustments to the allowance occurred in 1997. In that year 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. 14
During the year 2000, the Company's experience with loan losses did not exceed prior years. The Company's loan loss allowance as a percentage of total loans increased to 1.58% at December 31, 2000 from 0.95% at December 31, 1999 due to an increase of $7.4 million of loan loss provisions in 2000 as compared with 1999. Management anticipates that continued growth of the loan portfolio and a slowing of growth in the local economy will require continued additions to the allowance for loan losses during the year 2001. The following table provides an analysis of net losses by loan type for the last five years: <TABLE> <CAPTION> December 31, -------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- -------- -------- -------- (dollars in thousands) <S> <C> <C> <C> <C> <C> Total loans, net at end of period(1)........... $1,192,520 $1,048,006 $828,639 $685,889 $523,151 Daily average loans..... 1,149,013 927,373 748,587 613,671 473,887 ---------- ---------- -------- -------- -------- Balance of allowance for loan losses at beginning of period.... $ 9,967 $ 9,002 $ 8,440 $ 5,282 $ 4,340 Charge-offs: One- to four-family residential construction......... (21) (314) (57) (364) (7) Commercial business... (1,448) (1,006) (1,195) (1,025) (514) Consumer.............. (309) (299) (333) (270) (199) ---------- ---------- -------- -------- -------- Total charge-offs... (1,778) (1,619) (1,585) (1,659) (720) Recoveries: One- to four-family residential.......... 1 7 One- to four-family residential construction......... 8 Commercial business... 756 118 175 43 17 Consumer.............. 38 66 72 47 3 ---------- ---------- -------- -------- -------- Total recoveries.... 802 184 247 91 27 ---------- ---------- -------- -------- -------- Net charge-offs....... (976) (1,435) (1,338) (1,568) (693) Provision charged to expense................ 9,800 2,400 1,900 4,726 1,635 ---------- ---------- -------- -------- -------- Balance of allowance for loan losses at end of period................. $ 18,791 $ 9,967 $ 9,002 $ 8,440 $ 5,282 ========== ========== ======== ======== ======== Net charge-off to average loans outstanding............ 0.08 % 0.16 % 0.18 % 0.26 % 0.15 % Allowance for loan losses to total loans.. 1.58 0.95 1.09 1.23 1.01 Allowance for loan losses to nonperforming loans.................. 137.74 219.19 167.14 569.50 231.57 ========== ========== ======== ======== ======== </TABLE> - -------- (1) Excludes loans held for sale 15
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, -------------------------------------------------------------------------- 2000 1999 1998 1997 1996 -------------- ------------- ------------- ------------- ------------- % 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..... $15,650 41.3% $6,388 40.4% $5,540 40.0% $4,109 39.4% $3,178 37.2% Real estate and construction: One-to four-family residential.......... 754 7.5 969 9.3 972 10.6 1,041 14.7 1,115 20.8 Five or more family residential and commercial properties........... 1,892 42.3 1,990 40.4 2,008 38.0 1,414 35.0 490 30.9 Consumer................ 369 8.9 339 9.9 482 11.4 334 10.9 499 11.1 Unallocated............. 126 281 1,542 ------- ----- ------ ----- ------ ----- ------ ----- ------ ----- Total................ $18,791 100.0% $9,967 100.0% $9,002 100.0% $8,440 100.0% $5,282 100.0% ======= ===== ====== ===== ====== ===== ====== ===== ====== ===== </TABLE> - -------- * Represents the total of all outstanding loans in each category as a percent of total loans outstanding. Securities The Company's securities (securities available for sale and securities held to maturity) increased by $22.6 million to $110.7 million from year-end 1999 to year-end 2000. The Company had no sales of securities during 2000. Purchases during the year totaled $20.5 million while maturities and prepayments totaled $1.7 million. U.S. Treasury and government agency securities comprise 66.4% of the investment portfolio, with mortgage-backed securities at 8.2% and state and municipal securities at 10.5%. The average maturity of the securities portfolio was 5 years, 4 months at December 31, 2000. Approximately 93.3% 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 4 to the consolidated financial statements. Premises and Equipment In 2000, fixed assets increased $9.2 million, or 23.5% from 1999. The net change includes purchases of $12.6 million, disposals of $100,000 and depreciation expense of $3.3 million. The Company's capital expenditures in 2001 are anticipated to be approximately $7.5 million. Such expenditures are expected to include approximately $3.5 million for new buildings and for remodeling existing structures, and $4.0 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. 16
Deposit Activities The Company experienced overall average deposit growth of 20.5% and 22.2% in 2000 and 1999, respectively. All categories of deposits increased during both years. The increase occurred primarily in certificates of deposit. To fund strong loan demand during the fiscal year 2000, the Company has made greater use of certificates of deposit. The average interest-bearing and noninterest-bearing demand deposits increased 6.2% and 12.9%, respectively, in 2000, and 31.0% and 23.3%, respectively in 1999. Average deposits are summarized in the following table: <TABLE> <CAPTION> Years Ended December 31, ---------------------------------------------- 2000 1999 1998 1997 1996 ---------- -------- -------- -------- -------- (in thousands) <S> <C> <C> <C> <C> <C> Demand and other noninterest- bearing....................... $ 207,812 $184,094 $149,353 $111,492 $ 74,940 Interest-bearing demand........ 399,561 376,079 287,007 223,514 160,020 Savings........................ 46,722 45,478 39,768 38,301 32,438 Certificates of deposit........ 543,558 388,445 337,557 282,899 240,214 ---------- -------- -------- -------- -------- Total average deposits....... $1,197,653 $994,096 $813,685 $656,206 $507,612 ========== ======== ======== ======== ======== </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 2000, total deposits increased $283.5 million to $1.3 billion at December 31, 2000. Brokered and other wholesale deposits (excluding public deposits) increased $27.7 million to $53.0 million, or 4.0% of total deposits, at December 31, 2000, from $25.3 million, or 2.4% of total deposits, at December 31, 1999. Brokered and other wholesale deposits are summarized below. The average interest rate for these deposits was 6.35% and 5.60% at December 31, 2000 and 1999, respectively. <TABLE> <CAPTION> December 31, --------------------------------- 2000 1999 ---------------- ---------------- Percent Percent of Total of Total Amount Maturing: Amount Deposits Amount Deposits - ---------------- ------- -------- ------- -------- (dollars in thousands) <S> <C> <C> <C> <C> Due through 1 year......................... $12,787 0.96% $ 5,327 0.51% After 1 but through 3 years................ 35,124 2.65 9,000 0.86 After 3 but through 5 years................ 5,071 0.38 11,000 1.06 ------- ---- ------- ---- Total brokered and other wholesale deposits................................ $52,982 3.99% $25,327 2.43% ======= ==== ======= ==== </TABLE> The increase in deposits during 2000 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 ---------------- 2000 1999 Amount Percent ---------- ---------- -------- ------- (in thousands) <S> <C> <C> <C> <C> Pierce County............................ $ 931,498 $ 737,268 $194,230 26.3% All other counties....................... 395,525 306,276 89,249 29.1 ---------- ---------- -------- ---- Total................................ $1,327,023 $1,043,544 $283,479 27.2% ========== ========== ======== ==== </TABLE> 17
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, 2000, the Company had short-term advances of $40.0 million at an interest rate of 6.90%. At December 31, 2000 the maximum borrowing line from the FHLB was $126.0 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 has a $20 million line of credit with a large commercial bank. The interest rate on the line is indexed to the prime rate and at December 31, 2000, the balance outstanding was $4.5 million. In the event of the discontinuance of the line by either party, the Company has up to two years to repay the debt. The details of short-term borrowings were as follows: <TABLE> <CAPTION> Years Ended December 31, ------------------------- 2000 1999 1998 -------- ------- ------ (in thousands) <S> <C> <C> <C> Short-term borrowings Balance at year-end.................................. $ 40,000 $83,700 Average balance during the year...................... 54,813 12,763 $1,379 Maximum month-end balance during the year............ 101,000 83,700 6,500 Weighted average rate during the year................ 6.62% 5.34% 5.70% Weighted average rate at December 31................. 6.90 5.70 </TABLE> 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 effect earnings performance, it should be used in conjunction with other methods of evaluating interest rate risk. 18
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, 2000. 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, 2000 months months years years 10 years Total ----------------- -------- --------- -------- -------- --------- ---------- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> Interest-Earning Assets Interest-earning deposits............... $ 48,153 $ 48,153 Securities.............. 593 $ 1,180 $ 65,421 $ 41,253 $ 10,814 119,261 Loans: Business and commercial real estate............... 450,681 33,152 296,804 23,724 18,870 823,231 One-to four-family and owner-occupied residential real estate............... 63,293 47,844 121,661 7,755 16,776 257,329 Consumer.............. 52,508 10,398 32,555 11,953 6,883 114,297 -------- --------- -------- -------- -------- ---------- Total interest- earning assets...... $615,228 $ 92,574 $516,441 $ 84,685 $ 53,343 $1,362,271 ======== ========= ======== ======== ======== ========== Noninterest-earning assets................. 12,506 121,718 134,224 -------- --------- -------- -------- -------- ---------- Total assets......... $615,228 $ 105,080 $516,441 $ 84,685 $175,061 $1,496,495 ======== ========= ======== ======== ======== ========== Percent of total interest-earning assets................. 45.16% 6.80 % 37.91% 6.22% 3.91% 100.00% ======== ========= ======== ======== ======== ========== Interest-Bearing Liabilities Deposits: Money market checking............. $100,154 $ 100,154 $100,154 $ 300,462 NOW accounts.......... 23,331 93,322 116,653 Savings accounts...... 15,327 $ 15,327 $ 15,327 45,981 Time certificates of deposit.............. 215,252 357,834 65,535 21 638,642 FHLB advances........... 40,000 40,000 Other borrowings........ 4,500 4,500 -------- --------- -------- -------- -------- ---------- Total interest- bearing liabilities......... $354,064 $ 502,488 $259,011 $ 15,348 $ 15,327 $1,146,238 ======== ========= ======== ======== ======== ========== Noninterest-bearing liabilities and equity................. 180,457 45,114 124,686 350,257 ======== ========= ======== ======== ======== ========== Total liabilities and equity.............. $534,521 $ 502,488 $304,125 $ 15,348 $140,013 $1,496,495 ======== ========= ======== ======== ======== ========== Percent of total interest-earning assets................. 25.99% 36.88 % 19.01% 1.13% 1.13% 84.14% ======== ========= ======== ======== ======== ========== Rate sensitivity gap.... $261,164 $(409,914) $257,430 $ 69,337 $ 38,016 $ 216,033 Cumulative rate sensitivity gap........ 261,164 (148,750) 108,680 178,017 216,033 -------- --------- -------- -------- -------- ---------- Rate sensitivity gap as a percentage of interest-earning assets................. 19.17% (30.08)% 18.90% 5.09% 2.78% 15.86% Cumulative rate sensitivity gap as a percentage of interest- earning assets......... 19.17% (10.91)% 7.99% 13.08% 15.86% ======== ========= ======== ======== ======== ========== </TABLE> 19
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, 2000 the Company would expect an increase in net interest income of $3.1 million and an decrease in net interest income of $1.1 million 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, 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. Income Tax For the years ending December 31, 2000, 1999 and 1998, the Company recorded income tax provisions of $7.3 million, $5.9 million and $5.2 million, respectively. Capital The Company's shareholders' equity increased to $113.8 million at December 31, 2000, from $99.2 million at December 31, 1999. The increase is due primarily to net income for the year of $10.1 million. Shareholders' equity was 7.61% and 8.02% of total assets at December 31, 2000 and December 31, 1999, 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, 2000, the Company's leverage ratio was 7.77%, compared with 8.46% at December 31, 1999. 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 8.58% and 9.54%, respectively, at December 31, 2000, compared with 9.12% and 10.01%, respectively, at December 31, 1999. 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%. Failure to qualify as "well capitalized" can negatively impact a bank's ability to expand and to engage in certain activities. Management believes, as of December 31, 2000, that the Bank meets all capital adequacy requirements, but is below the criteria necessary to be "well-capitalized" as defined by regulations. 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. 20
On April 25, 2000, the Company announced a 10% stock dividend payable on May 24, 2000, to shareholders of record on May 10, 2000. Average shares outstanding and net income per share for all periods presented have been retroactively adjusted to give effect to this transaction. On April 28, 1999, the Company announced a 5% stock dividend payable on May 26, 1999, to shareholders of record on May 12, 1999. Unregistered Securities Offerings The Company has issued securities in unregistered offerings pursuant to state and federal exemptions from registration during the past three years as follows. No underwriters were involved in any of these issuances. The proceeds from each of these offerings, if any, were used for working capital. Management Restricted Stock Purchases. 1998 Issuances. In 1998, the Company entered into restricted stock award agreements with four of its senior executives under which the Company issued shares of restricted common stock as follows: 17,325 shares to Mr. Gallagher, 8,662 shares to Ms. Dressel, 8,662 shares to Mr. Whitney, and 8,662 shares to Mr. Russell, all as adjusted for stock splits and dividends. The shares were issued for no consideration into escrow until the recipient has served for five years or waiver of that requirement. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 (the "Act"). Also in 1998, the Company issued 34,650 shares (as adjusted) of restricted common stock to Mr. William Philip, the Company's then-chief executive officer. The shares were issued for no consideration into escrow until he had served for five years or earlier mandatory retirement. Mr. Philip retired as chief executive officer at year end 1999, resigned as Chairman and Director in 2000, and has been acting in a consulting capacity since that time. Upon his resignation, Mr. Philip's restricted stock award agreement was amended to provide that Mr. Philip's performance as a consultant to the Company would count towards his five-year vesting requirement. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Act. 2000 Issuances. In 2000, the Company sold an aggregate of 50,000 shares of restricted common stock to four of its senior executives, in return for a full recourse promissory note from each executive. These notes are due on or before the seventh anniversary of the note, for the full amount of the purchase price of the shares, with interest payable annually at the fixed rate of 5.87% per annum, the mid-term federal rate established by the Internal Revenue Service and effective in the month of December 2000. Specifically, the Company issued 15,000 shares each to Mr. Gallagher and Ms. Dressel in exchange for a $196,875 promissory note from each, and 10,000 shares each to Messrs. Russell and Whitney in exchange for a $131,250 promissory note from each. These issuances were exempt from registration pursuant to Section 4(2) of the Act. 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. 21
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 new executive officers 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, the President and Chief Operating Officer, and three Executive Vice presidents. 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. Since the Company is not specifically organized around lines of business, 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. 22
Financial highlights by lines of business: Condensed Statement of Operations: <TABLE> <CAPTION> Year Ended December 31, 2000 ----------------------------------------------------- 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.............. $ 9,759 $ 42,606 $ 5,917 $ (9,814) $ 48,468 Other income............ 638 4,272 767 5,910 11,587 Other expense........... (2,356) (16,010) (2,052) (24,335) (44,753) -------- -------- -------- -------- ---------- Contribution to overhead and profit............. $ 8,041 $ 30,868 $ 4,632 $(28,239) 15,302 Income taxes............ (5,232) -------- -------- -------- -------- ---------- Net income.............. $ 10,070 -------- -------- -------- -------- ---------- Total assets............ $337,193 $637,825 $322,648 $198,829 $1,496,495 ======== ======== ======== ======== ========== </TABLE> <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> <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> 23
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 29, 2000, the last sale price for the Company's stock in the over-the-counter market was $15 9/16. 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 3 and 12 to the consolidated financial statements, contained elsewhere in this report, for regulatory capital requirements and restrictions on dividends to shareholders. At February 28, 2001, the number of shareholders of record was 1,345. 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> 2000 High Low ---- ---- ---- <S> <C> <C> First quarter*........................................... $ 13 $10 1/4 Second quarter........................................... 13 10 Third quarter............................................ 14 1/4 12 1/16 Fourth quarter........................................... 15 9/16 12 7/16 For the year............................................. $15 9/16 10 </TABLE> <TABLE> <CAPTION> 1999* High Low ----- ---- --- <S> <C> <C> First quarter............................................. $16 2/3 $13 Second quarter............................................ 16 1/4 10 1/2 Third quarter............................................. 14 3/4 11 Fourth quarter............................................ 15 9/16 10 9/16 For the year.............................................. $16 2/3 10 1/2 </TABLE> - -------- * Restated for a 10% stock dividend paid on May 24, 2000 24
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, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Seattle, Washington March 23, 2001 25
COLUMBIA BANKING SYSTEM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> Years ended December 31, ------------------------ 2000 1999 1998 -------- ------- ------- (in thousands except per-share) <S> <C> <C> <C> Interest Income Loans................................................. $102,838 $77,807 $66,858 Securities available for sale......................... 5,650 5,619 4,696 Securities held to maturity........................... 268 287 419 Deposits with banks................................... 1,240 639 1,654 -------- ------- ------- Total interest income............................... 109,996 84,352 73,627 Interest Expense Deposits.............................................. 47,662 32,898 29,759 Federal Home Loan Bank advances....................... 3,630 1,939 1,908 Other borrowings...................................... 436 6 -------- ------- ------- Total interest expense.............................. 51,728 34,843 31,667 -------- ------- ------- Net Interest Income 58,268 49,509 41,960 Provision for loan losses............................. 9,800 2,400 1,900 -------- ------- ------- Net interest income after provision for loan losses............................................. 48,468 47,109 40,060 Noninterest Income Service charges and other fees........................ 6,295 5,812 4,414 Mortgage banking...................................... 756 1,063 1,677 Merchant services fees................................ 3,671 2,655 1,617 Other................................................. 865 616 474 -------- ------- ------- Total noninterest income............................ 11,587 10,146 8,182 Noninterest Expense Compensation and employee benefits.................... 22,778 19,789 15,816 Occupancy............................................. 6,092 6,520 5,215 Merchant processing................................... 1,989 1,359 801 Advertising and promotion............................. 1,602 1,712 1,848 Data processing....................................... 2,294 1,976 1,731 Taxes, licenses and fees.............................. 2,055 1,485 1,320 Other................................................. 7,943 6,803 6,063 -------- ------- ------- Total noninterest expense........................... 44,753 39,644 32,794 -------- ------- ------- Income before income taxes............................ 15,302 17,611 15,448 Provision for income taxes............................ 5,232 5,941 5,247 -------- ------- ------- Net Income............................................ $ 10,070 $11,670 $10,201 ======== ======= ======= Net Income Per Common Share: Basic............................................... $ 0.86 $ 1.00 $ 0.88 Diluted............................................. 0.84 0.98 0.85 Average number of common shares outstanding........... 11,678 11,652 11,603 Average number of diluted common shares outstanding... 11,973 11,927 11,965 </TABLE> See accompanying notes to consolidated financial statements. 26
COLUMBIA BANKING SYSTEM, INC. CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> December 31, --------------------- 2000 1999 ---------- ---------- (in thousands) <S> <C> <C> ASSETS ------ Cash and due from banks................................. $ 72,292 $ 43,027 Interest-earning deposits with banks.................... 48,153 170 ---------- ---------- Total cash and cash equivalents................... 120,445 43,197 Securities available for sale (at fair value)........... 103,287 81,029 Securities held to maturity (fair value of $7,501 and $7,040, respectively).................................. 7,435 7,084 FHLB stock.............................................. 8,539 6,916 Loans held for sale..................................... 14,843 5,479 Loans, net of unearned income........................... 1,192,520 1,048,006 Less: allowance for loan losses....................... 18,791 9,967 ---------- ---------- Loans, net........................................ 1,173,729 1,038,039 Interest receivable..................................... 10,306 7,609 Premises and equipment, net............................. 48,357 39,166 Real estate owned....................................... 1,291 1,263 Other................................................... 8,263 7,375 ---------- ---------- Total Assets...................................... $1,496,495 $1,237,157 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Deposits: Noninterest-bearing..................................... $ 232,247 $ 181,716 Interest-bearing........................................ 1,094,776 861,828 ---------- ---------- Total deposits.................................... 1,327,023 1,043,544 Federal Home Loan Bank advances......................... 40,000 83,700 Other borrowings........................................ 4,500 3,000 Other liabilities....................................... 11,149 7,699 ---------- ---------- Total liabilities................................. 1,382,672 1,137,943 Commitments and contingent liabilities (Note 14) Shareholders' equity: Preferred stock (no par value) Authorized, 2 million shares; none outstanding </TABLE> <TABLE> <CAPTION> December 31, ------------- 2000 1999 ------ ------ <S> <C> <C> <C> <C> Common stock (no par value) Authorized shares.................... 51,975 51,975 Issued and outstanding............... 11,867 10,603 92,673 78,285 Retained earnings...................... 21,649 23,916 Accumulated other comprehensive income (loss): Unrealized (losses) on securities available for sale, net of tax........ (499) (2,987) ---------- ---------- Total shareholders' equity......... 113,823 99,214 ---------- ---------- Total Liabilities and Shareholders' Equity............................ $1,496,495 $1,237,157 ========== ========== </TABLE> See accompanying notes to consolidated financial statements. 27
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 January 1, 1998................... 9,868 $67,901 $ 10,415 $ 37 $ 78,353 Comprehensive income: Net income............ 10,201 Change in unrealized gains (losses) on securities available for sale, net of tax of $152.............. 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............ 11,670 Change in unrealized gains (losses) on securities available for sale, net of tax of $1,713............ (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 Comprehensive income: Net income............ 10,070 Change in unrealized gains (losses) on securities available for sale, net of tax of $1,295............ 2,488 Total comprehensive income............. 12,558 Issuance of stock under stock option and other plans.................. 203 1,673 1,673 Tax benefits from exercise of stock options................ 378 378 Issuance of shares of common stock--10% stock dividend............... 1,061 12,337 (12,337) ------ ------- -------- ------- -------- Balance at December 31, 2000................... 11,867 $92,673 $ 21,649 $ (499) $113,823 ====== ======= ======== ======= ======== </TABLE> See accompanying notes to consolidated financial statements. 28
COLUMBIA BANKING SYSTEM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> 2000 1999 1998 --------- --------- --------- (in thousands) <S> <C> <C> <C> Operating Activities Net income.................................... $ 10,070 $ 11,670 $ 10,201 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses................... 9,800 2,400 1,900 Deferred income tax expense (benefit)....... (2,235) (724) 30 Losses on real estate owned................. 224 4 35 Depreciation and amortization............... 1,923 2,270 2,304 Net realized (gains) losses on sale of assets..................................... 16 2 (55) (Increase) decrease in loans held for sale.. (9,364) 4,544 (5,646) Increase in interest receivable............. (2,697) (1,189) (1,397) Net changes in other assets and liabilities................................ 3,444 (452) (223) --------- --------- --------- Net cash provided by operating activities............................... 11,181 18,525 7,149 Investing Activities Proceeds from maturities of securities available for sale........................... 83 15,191 49,250 Purchase of securities available for sale..... (19,215) (8,150) (82,780) Proceeds from maturities of mortgage-backed securities available for sale................ 727 625 5,075 Purchase of mortgage-backed securities available for sale........................... (8,710) Proceeds from maturities of securities held to maturity..................................... 933 1,559 4,698 Purchases of securities held to maturity...... (1,286) (2,287) (1,380) Purchases of FHLB stock....................... (1,623) (927) Loans originated and acquired, net of principal collected.......................... (145,113) (220,761) (144,585) Purchases of premises and equipment........... (12,556) (5,324) (12,546) Proceeds from disposal of premises and equipment.................................... 15 10 20 Proceeds from sale of real estate owned....... 772 562 308 Other, net.................................... (446) (419) --------- --------- --------- Net cash used by investing activities..... (177,263) (219,948) (191,069) Financing Activities Net increase in deposits...................... 283,479 105,199 197,915 Net increase in other borrowings.............. 1,500 3,000 Proceeds from FHLB advances................... 40,000 83,700 Repayment of FHLB advances.................... (83,700) (25,000) (14,000) Tax benefits from exercise of stock options... 378 Proceeds from issuance of common stock, net... 1,673 1,303 711 --------- --------- --------- Net cash provided by financing activities............................... 243,330 168,202 184,626 --------- --------- --------- Increase (decrease) in cash and cash equivalents............................ 77,248 (33,221) 706 Cash and cash equivalents at beginning of period.............................. 43,197 76,418 75,712 --------- --------- --------- Cash and cash equivalents at end of period................................... $ 120,445 $ 43,197 $ 76,418 ========= ========= ========= Supplemental information: Cash paid for interest........................ $ 48,411 $ 33,734 $ 31,007 Cash paid for income taxes.................... 7,227 6,586 5,547 Loans foreclosed and transferred to real estate owned................................. 1,024 921 1,000 </TABLE> See accompanying notes to consolidated financial statements. 29
COLUMBIA BANKING SYSTEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Three Years Ended December 31, 2000 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 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. 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 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. 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 activities other than the origination or purchase of loans are recognized as noninterest income during the period the related services are performed. 30
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 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. 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, 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 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 items affecting the calculation of earnings per share is the inclusion of stock options and restricted stock awards increasing the shares outstanding in diluted earnings per share of 295,000, 275,000, and 362,000 in 2000, 1999, and 1998, respectively. 31
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. Statements of Cash Flows For purposes of the statements of cash flows, cash and cash equivalents include cash and due from banks, interest-earning deposits with banks and federal funds sold with maturities of 90 days or less. Reclassification Certain amounts in the 1999 and 1998 consolidated financial statements have been reclassified to conform with the 2000 presentation. These reclassifications had no effect on net income. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities". In June 2000, the FASB issued SFAS 138, which amends certain provisions of SFAS 133 to clarify specific areas causing difficulties in implementation. The Company has not historically engaged in any hedging activities, and does not anticipate that it will enter into any transaction that will qualify for hedge accounting as defined by SFAS 133. The Company adopted SFAS 133 and the corresponding amendments under SFAS 138 effective on January 1, 2001, and does not own any derivative instruments. The adoption of SFAS 133, as amended by SFAS 138, did not have a material impact on the Company's consolidated results of operations, financial position or cash flows. On December 3, 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The Company adopted the guidance in SAB 101 effective October 31, 2000. The adoption of SAB 101 did not have a material impact on the Company's consolidated results of operations, financial position or cash flows. SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", was issued in September 2000 and replaces SFAS No. 125 of the same title. This statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over most of SFAS No. 125's provisions without reconsideration. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of this statement by the Company is not expected to materially affect the results of operations or financial condition of the Company. 2. Stock Dividend and Stock Split On April 25, 2000, the Company announced a 10% stock dividend payable on May 24, 2000, to shareholders of record as of May 10, 2000. 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. 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. 32
3. 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, 2000 and 1999, were approximately $9.1 million and $5.7 million, respectively. 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. 4. Securities At December 31, 2000, 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, 2000: U.S. Treasury & government agency.... $ 74,458 $ (976) $ 73,482 Corporate securities................. 15,615 $416 16,031 Mortgage-backed...................... 9,313 (205) 9,108 State & municipal securities......... 4,599 67 4,666 -------- ---- ------- -------- Total.............................. $103,985 $483 $(1,181) $103,287 ======== ==== ======= ======== December 31, 1999: U.S. Treasury & government agency.... $ 74,517 $ 7 $(3,902) $ 70,622 Mortgage-backed...................... 10,043 (627) 9,416 Corporate 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 Corporate securities................. 992 38 1,030 -------- ---- ------- -------- Total.............................. $ 93,213 $513 $ 93,726 ======== ==== ======= ======== </TABLE> There were no sales of securities available for sale during the years ended December 31, 2000, 1999, and 1998. At December 31, 2000 and 1999, securities available for sale with a fair value of $29.3 million and $25.5 million, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. 33
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, 2000 ----------------------- Amortized Fair Cost Value Yield --------- ------- ----- (in thousands) <S> <C> <C> <C> U.S. Government Agency After 1 but through 5 years............................ $58,716 $58,071 5.74% After 5 but through 10 years........................... 15,442 15,113 6.36% After 10 years......................................... 300 298 7.06% ------- ------- ---- Total................................................ $74,458 $73,482 5.88% ======= ======= ==== Corporate Securities Due through 1 year..................................... $ 500 $ 500 6.50% After 1 but through 5 years............................ 497 410 6.99% After 5 but through 10 years........................... 14,618 15,121 7.44% ------- ------- ---- Total................................................ $15,615 $16,031 7.40% ======= ======= ==== Mortgage-Backed Securities(1) After 1 but through 5 years............................ $ 1,908 $ 1,901 6.35% After 10 years......................................... 7,405 7,207 5.96% ------- ------- ---- Total................................................ $ 9,313 $ 9,108 6.04% ======= ======= ==== State and Municipal Securities(2) After 1 but through 5 years............................ $ 484 $ 492 6.74% After 10 years......................................... 4,115 4,174 7.28% ------- ------- ---- Total................................................ $ 4,599 $ 4,666 7.23% ======= ======= ==== </TABLE> - -------- (1) The maturities reported for mortgage-backed securities are based on contractual maturities and principal amortization. (2) Yields on fully taxable equivalent basis, based on a marginal tax rate of 35%. 34
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, 2000: State and municipal securities......... $6,937 $ 64 $7,001 Corporate securities................... 498 2 500 ------ ---- ---- ------ Total................................ $7,435 $ 66 $7,501 ====== ==== ==== ====== December 31, 1999: State and municipal securities......... $6,587 $ 12 $(54) $6,545 Corporate 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 Corporate & other securities........... 496 18 514 FHLMC preferred stock.................. 250 1 251 ------ ---- ---- ------ Total................................ $6,358 $147 $6,505 ====== ==== ==== ====== </TABLE> 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, 2000 ------------------------- Amortized Fair Cost Value Yield(2) --------- ------ -------- (in thousands) <S> <C> <C> <C> State and Municipal Securities(2) Due through 1 year.................................... $ 780 $ 781 6.32% After 1 but through 5 years........................... 4,049 4,072 6.54% After 5 but through 10 years.......................... 1,817 1,823 6.42% After 10 years........................................ 291 326 9.51% ------ ------ ---- Total............................................... $6,937 $7,002 6.61% ====== ====== ==== Corporate Securities After 1 but through 5 years........................... $ 498 $ 500 6.77% ------ ------ ---- Total............................................... $ 498 $ 500 6.77% ====== ====== ==== </TABLE> - -------- (2) Yields on fully taxable equivalent basis, based on a marginal tax rate of 35%. There were no sales of securities held to maturity during the years ended December 31, 2000, 1999, and 1998. 35
5. Loans The following is an analysis of the loan portfolio by major types of loans (net of unearned income): <TABLE> <CAPTION> December 31, ---------------------- 2000 1999 ---------- ---------- (in thousands) <S> <C> <C> Commercial business.................................... $ 496,125 $ 426,060 Real estate: One- to four-family residential...................... 55,922 64,669 Five or more family residential and commercial properties.......................................... 428,884 377,708 ---------- ---------- Total real estate.................................. 484,806 442,377 Real estate construction: One- to four-family residential...................... 33,548 32,742 Five or more family residential and commercial properties.......................................... 74,451 45,886 ---------- ---------- Total real estate construction..................... 107,999 78,628 Consumer............................................... 106,633 103,296 ---------- ---------- Subtotal............................................... 1,195,563 1,050,361 Less deferred loan fees, net and other................. (3,043) (2,355) ---------- ---------- Total loans, net of unearned income................ $1,192,520 $1,048,006 ---------- ---------- Loans held for sale.................................... $ 14,843 $ 5,479 ========== ========== </TABLE> The following table summarizes certain information related to nonperforming loans: <TABLE> <CAPTION> December 31, ----------------------- 2000 1999 1998 ------- ------ ------ (in thousands) <S> <C> <C> <C> Loans accounted for on a nonaccrual basis.............. $12,506 $4,360 $3,603 Restructured loans..................................... 1,136 187 1,783 ------- ------ ------ Total nonperforming loans.......................... $13,642 $4,547 $5,386 ======= ====== ====== Originally contracted interest......................... $ 599 $ 385 $ 408 Less recorded interest................................. (133) (191) (221) ------- ------ ------ Reduction in interest income....................... $ 466 $ 194 $ 187 ======= ====== ====== </TABLE> At December 31, 2000 and 1999, the recorded investment in impaired loans was $12.9 million and $4.1 million, respectively. A specific allowance for loan losses has been made for impaired loans of $7.0 million at December 31, 2000, and no allowance for loan losses for impaired loans has been made for the year ended December 31, 1999. The average recorded investment in impaired loans for the periods ended December 31, 2000, 1999 and 1998 was $5.8 million $4.5 million, and $3.0 million, respectively. Interest income recognized on impaired loans was an immaterial amount. At December 31, 2000 and 1999, there were no commitments for additional funds for loans accounted for on a nonaccrual basis. At December 31, 2000 and 1999, 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 related interests. 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 $24.5 million and $25.1 million at 36
December 31, 2000 and 1999, respectively. During 2000, $3.9 million of new related party loans were made, and repayments totaled $4.5 million. During 1999, $1.8 million of new related party loans were made, and repayments totaled $4.3 million. 6. Allowance for Loan Losses Transactions in the allowance for loan losses are summarized as follows: <TABLE> <CAPTION> Years ended December 31, ------------------------- 2000 1999 1998 ------- ------- ------- (in thousands) <S> <C> <C> <C> Balance at beginning of period....................... $ 9,967 $ 9,002 $ 8,440 Loans charged off.................................... (1,778) (1,619) (1,585) Recoveries........................................... 802 184 247 ------- ------- ------- Net charge-offs.................................... (976) (1,435) (1,338) Provision charged to operating expense............... 9,800 2,400 1,900 ------- ------- ------- Balance at end of period........................... $18,791 $ 9,967 $ 9,002 ======= ======= ======= </TABLE> 7. Premises and Equipment The Company's executive offices will be relocated to the "Columbia Bank Center" in downtown Tacoma upon the building's completion in early 2001. The Company will lease space in the building as its' major tenant. The operating 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. The Company's executive offices and the Main Office of Columbia Bank are located in approximately 51,000 square feet of owned space in downtown Tacoma. The Company purchased its current Main Office building in March of 2000. The Company intends to lease to others all floors of the 5 story building except for the first floor where the Main Office Branch is located and some additional space on the 4th floor. As of December 31, 2000, Columbia Bank had 15 offices in Pierce County, including the Main Office (3 leased and 12 owned), three offices in Longview (two owned and one leased), two offices in Bellevue (1 leased and 1 owned), three offices in Auburn (owned), one office in Federal Way (leased), one office in Kent (owned) one office in Woodland (owned), one office in West 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. In addition, construction was completed on a permanent (owned) West Olympia facility in February 2001. Land, buildings, and furniture and equipment, less accumulated depreciation and amortization, were as follows: <TABLE> <CAPTION> December 31, ------------------ 2000 1999 -------- -------- (in thousands) <S> <C> <C> Land..................................................... $ 12,621 $ 10,910 Buildings................................................ 31,086 22,579 Leasehold improvements................................... 847 1,736 Furniture and equipment.................................. 15,990 14,429 Vehicles................................................. 234 207 Computer software........................................ 2,600 2,345 -------- -------- Total cost............................................. 63,378 52,206 Less accumulated depreciation and amortization........... (15,021) (13,040) -------- -------- Total.................................................. $ 48,357 $ 39,166 ======== ======== </TABLE> 37
Total depreciation and amortization expense on buildings and furniture and equipment was $3.3 million, $3.2 million, and $2.6 million for the years ended December 31, 2000, 1999 and 1998, respectively. As of December 31, 2000, 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, 2000 -------------- (in thousands) <S> <C> 2001....................................................... $ 2,147 2002....................................................... 2,105 2003....................................................... 2,087 2004....................................................... 1,963 2005....................................................... 1,951 2006 and thereafter........................................ 18,681 ------- Total minimum payments................................... $28,934 ======= </TABLE> Total rental expense on buildings and equipment was $1.1 million, $1.6 million, and $1.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. 8. Deposits Year-end deposits are summarized in the following table: <TABLE> <CAPTION> Years ended December 31, ------------------------------ 2000 1999 1998 ---------- ---------- -------- (in thousands) <S> <C> <C> <C> Demand and other noninterest-bearing............ $ 232,247 $ 181,716 $180,445 Interest-bearing demand......................... 116,653 100,680 91,430 Money market.................................... 300,462 296,246 267,372 Savings......................................... 45,981 45,577 43,342 Certificates of deposits less than $100,000..... 358,074 268,755 242,979 Certificates of deposit greater than $100,000... 273,606 150,570 112,777 ---------- ---------- -------- Total......................................... $1,327,023 $1,043,544 $938,345 ========== ========== ======== </TABLE> 9. Federal Home Loan Bank Advances and Long-term Debt The Company had Federal Home Loan Bank (FHLB) short-term advances of $40.0 million and $83.7 million at December 31, 2000 and 1999, respectively. In addition, the Company had long-term debt of $4.5 million and $3.0 million at December 31, 2000 and 1999, respectively. FHLB advances and long-term debt are at the following interest rates: <TABLE> <CAPTION> December 31, --------------- 2000 1999 ------- ------- (dollars in thousands) <S> <C> <C> 8.50......................................................... $ 4,500 7.50......................................................... $ 3,000 6.90......................................................... 40,000 5.70......................................................... 83,700 ------- ------- Total...................................................... $44,500 $86,700 ======= ======= </TABLE> 38
Aggregate maturities of FHLB advances and long-term debt due in years ending after December 31, 2000, are as follows: <TABLE> <CAPTION> Amount -------------- (in thousands) <S> <C> 2001........................................................ $40,000 2002........................................................ 4,500 </TABLE> FHLB advances are collateralized by a blanket pledge of residential real estate loans with a recorded value of approximately $48.0 million at December 31, 2000, and $100.4 million at December 31, 1999. Penalties are generally required for prepayments of certain long-term FHLB advances. The Company has a $20 million line of credit with a large commercial bank. The interest rate on the line is indexed to the prime rate. At December 31, 2000, the balance outstanding was $4.5 million and is included in other borrowings on the consolidated balance sheet. In the event of the discontinuance of the line by either party, the Company has up to two years to repay the debt. 10. Income Tax The components of income tax expense are as follows: <TABLE> <CAPTION> Years ended December 31, ----------------------- 2000 1999 1998 ------- ------ ------ (in thousands) <S> <C> <C> <C> Current............................................ $ 7,467 $6,665 $5,217 Deferred (benefit)................................. (2,235) (724) 30 ------- ------ ------ Total............................................ $ 5,232 $5,941 $5,247 ======= ====== ====== </TABLE> Significant components of the Company's deferred tax assets and liabilities at December 31, 2000 and 1999 are as follows: <TABLE> <CAPTION> December 31, ---------------- 2000 1999 ------- ------- (in thousands) <S> <C> <C> Deferred tax assets: Allowance for loan losses.............................. $ 6,667 $ 3,444 Unrealized loss on investment securities available for sale.................................................. 244 1,539 Depreciation........................................... 402 ------- ------- Total deferred tax assets............................ 6,911 5,385 Deferred tax liabilities: FHLB stock dividends................................... (1,305) (1,087) Depreciation........................................... (518) Other.................................................. (19) (169) ------- ------- Total deferred tax liabilities....................... (1,842) (1,256) ------- ------- Net deferred tax assets.............................. $ 5,069 $ 4,129 ======= ======= </TABLE> 39
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, ----------------------------------------------- 2000 1999 1998 --------------- --------------- --------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> Income tax based on statutory rate............ $5,356 35% $6,161 35% $5,407 35% Increase (reduction) resulting from: Tax credits.............. (127) (1) (68) (0) (32) (1) Change in effective graduated tax rate...... (173) (1) (155) (1) Other nondeductible items................... 3 0 21 0 27 1 ------ --- ------ --- ------ --- Income tax................. $5,232 34% $5,941 34% $5,247 34% ====== === ====== === ====== === </TABLE> 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 Accounting Principles Board (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, 2000, a maximum of 1,385,306 option shares were authorized under the Plan, of which 1,280,530 were granted, 353,449 have been exercised, 119,920 have been terminated, and 224,696 were available for future grants. At December 31, 2000 and 1999, the Company had stock options outstanding of 807,161 shares and 744,134 shares, respectively, for the purchase of common stock at options prices ranging from $2.25 to $22.51 per share. The Company's policy is to recognize compensation expense at the date the options are granted based on the difference, if any, between the then market value of the Company's common stock and the stated option price. The following table outlines the stock option activity for 2000, 1999 and 1998: <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 January 1, 1998........... 694,471 $ 6.41 Granted............................ 106,753 21.16 $11.05 Exercised.......................... (115,640) 4.32 Terminated......................... (433) 16.02 -------- ------ Balance at December 31, 1998......... 685,151 8.98 Granted............................ 102,937 13.94 5.97 Exercised.......................... (32,692) 5.82 Terminated......................... (11,262) 12.50 -------- ------ Balance at December 31, 1999......... 744,134 9.74 Granted............................ 214,450 13.02 6.78 Exercised.......................... (128,807) 5.06 Terminated......................... (22,616) 13.98 -------- ------ Balance at December 31, 2000......... 807,161 $11.24 ======== ====== Total Vested at December 31, 2000.... 409,618 $ 7.37 ======== ====== </TABLE> 40
Financial data pertaining to outstanding stock options were as follows: <TABLE> <CAPTION> December 31, 2000 - ------------------------------------------------------------------------------------- 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> $ 2.25-$ 4.50 33,453 0.9 Years $ 3.21 33,453 $ 3.21 4.50- 6.75 183,328 1.3 5.78 183,328 5.78 6.75- 9.00 122,666 4.4 8.40 122,666 8.40 9.00- 11.26 41,884 6.9 10.09 36,384 10.03 11.26- 13.51 223,202 7.7 12.88 18,192 11.68 13.51- 15.76 103,565 5.9 14.33 15,595 15.58 15.76- 18.01 19,935 5.1 16.02 20.26- 22.51 79,128 5.4 22.31 ------- --------- ------ ------- ------ 807,161 4.9 Years $11.24 409,618 $ 7.37 ======= ========= ====== ======= ====== </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, ----------------------- 2000 1999 1998 ------- ------- ------- (dollars in thousands except per share) <S> <C> <C> <C> Net income attributable to common stock: As reported.......................................... $10,070 $11,670 $10,201 Pro forma............................................ 9,685 11,299 9,947 Net income per common share: Basic: As reported........................................ $ 0.86 $ 1.10 $ 0.97 Pro forma.......................................... 0.83 1.07 0.94 Diluted: As reported........................................ $ 0.84 $ 1.08 $ 0.94 Pro forma.......................................... 0.81 1.04 0.91 </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 2000, 1999 and 1998; expected volatility of 46.56% in 2000, 42.00% in 1999 and 57.00% in 1998; risk-free rates of 5.23% for 2000, 5.79% for 1999 and 4.51% for 1998; no annual dividend yields; and expected lives of five years for fiscal years 1998 and 1999, and six years for fiscal year 2000. The Company periodically grants 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. In 1998, the Company granted restricted stock awards of 43,311 shares to its named executives. The fair value of the restricted stock awards are amortized over a 5 year period. Amortization expense was approximately $343,000, $330,000 and $377,000 for the years ended December 31, 2000, 1999, and 1998, respectively. 41
12. Regulatory Capital Requirements The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets (as defined in the regulations) and of Tier 1 capital to average assets (as defined in the regulations). Management believes, as of December 31, 2000 and 1999, that the Corporation and the Bank met all capital adequacy requirements to which they are subject. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. Management believes, as of December 31, 2000, that the Bank meets all capital adequacy requirements, but is below the criteria necessary to be "well capitalized" as defined by regulations. The Company's and the Bank's actual amounts and ratios as of December 31, 2000 and 1999 are also presented in the table. Actual capital amounts and ratios for the Company and the Columbia bank are presented in the table below: <TABLE> <CAPTION> To Be Well Capitalized For Capital Under Prompt Adequacy Corrective Action Actual Purposes Provision -------------- -------------- ------------------- Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- ---------- -------- <S> <C> <C> <C> <C> <C> <C> As of December 31, 2000: Total Capital (to risk- weighted assets) The Company.............. $127,051 9.5% $106,537 8.0% NA N.A Columbia Bank............ 130,445 9.8% 106,412 8.0% 133,014 10.0% Tier 1 Capital (to risk- weighted assets) The Company.............. 114,260 8.6% 53,268 4.0% NA N.A Columbia Bank............ 117,654 8.8% 53,206 4.0% 79,809 6.0% Tier 1 Capital (to average assets) The Company.............. 114,260 7.8% 58,849 4.0% NA N.A Columbia Bank............ 117,654 8.0% 58,796 4.0% 73,495 5.0% As of December 31, 1999: Total Capital (to risk- weighted assets) The Company.............. $112,091 10.0% $ 89,582 8.0% NA N.A Columbia Bank............ 113,591 10.3% 88,384 8.0% 110,480 10.0% Tier 1 Capital (to risk- weighted assets) The Company.............. 102,124 9.1% 44,791 4.0% NA N.A Columbia Bank............ 103,624 9.4% 44,192 4.0% 66,288 6.0% Tier 1 Capital (to average assets) The Company.............. 102,124 8.5% 48,285 4.0% NA N.A Columbia Bank............ 103,624 8.6% 48,213 4.0% 60,267 5.0% </TABLE> 42
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 $376,000, $316,000 and $273,000 in matching funds to the plan during the years ended December 31, 2000, 1999 and 1998, respectively. The Company's defined contribution plan provides for a nonmatching, discretionary contribution as determined annually by the Board of Directors of the Company. The Company's discretionary contributions were approximately $827,000, $721,000, and $581,000 for the years ended 2000, 1999, and 1998, respectively. The Company maintains an "Employee Stock Purchase Plan" ("ESPP"). The Plan was amended by the Board of Directors on January 26, 2000. Under the amended 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 took 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, 26,688 shares were acquired by employees for approximately $285,000 in 2000. 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 net income and earnings per share. At December 31, 2000, 87,914 shares of common stock were available for issuance under this plan. 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, 2000 and 1999, the Company's loan commitments amounted to $349.5 million and $372.7 million, respectively. Standby letters of credit were $8.3 million and $6.5 million at December 31, 2000 and 1999, respectively. In addition, commitments under commercial letters of credit used to facilitate customers' trade transactions amounted to $7,900 and $984,000 at December 31, 2000 and 1999, respectively. The Company and its subsidiary 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 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 subsidiary. 43
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, ------------------------------------------- 2000 1999 --------------------- --------------------- Assumptions Used in Carrying Carrying Estimating Fair Value Amount Fair Value Amount Fair Value --------------------- ---------- ---------- ---------- ---------- (in thousands) <S> <C> <C> <C> <C> <C> Assets Cash and due from $ 72,292 $ 72,292 $ 43,027 $ 43,027 banks.................. Approximately equal to carrying value Interest-earning deposits with banks............. Approximately equal to 48,153 48,153 170 170 carrying value Securities available for sale................... Quoted market prices 103,287 103,287 81,029 81,029 Securities held to maturity............... Quoted market prices 7,435 7,502 7,084 7,040 Loans held for sale..... Approximately equal to 14,843 14,843 5,479 5,479 carrying value Loans................... Discounted expected future 1,173,729 1,293,828 1,038,039 1,139,118 cash flows, net of allowance for loan losses Liabilities Deposits................ Fixed-rate certificates of $1,327,023 $1,332,665 $1,043,544 $1,047,786 deposit: Discounted expected future cash flows All other deposits: Approximately equal to carrying value Federal Home Loan Bank advances............... Discounted expected future 40,000 39,981 83,700 83,700 cash flows Other borrowings........ Discounted expected future 4,500 4,500 3,000 3,000 cash flows </TABLE> Off-Balance-Sheet Financial Instruments The fair value of commitments, guarantees and letters of credit at December 31, 2000 approximates the recorded amounts of the related fees, which are not material. The fair value 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. 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 44
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 new executive officers 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, the President and Chief Operating Officer, and three Executive Vice Presidents. 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. Since the Company is not specifically organized around lines of business, 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. 45
Financial highlights by lines of business: Condensed Statement of Operations: <TABLE> <CAPTION> Year Ended December 31, 2000 ----------------------------------------------------- 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.............. $ 9,759 $ 42,606 $ 5,917 $ (9,814) $ 48,468 Other income............ 638 4,272 767 5,910 11,587 Other expense........... (2,356) (16,010) (2,052) (24,335) (44,753) -------- -------- -------- -------- ---------- Contribution to overhead and profit............. $ 8,041 $ 30,868 $ 4,632 $(28,239) 15,302 Income taxes.......... (5,232) -------- -------- -------- -------- ---------- Net income.............. $ 10,070 ======== ======== ======== ======== ========== Total assets............ $337,193 $637,825 $322,648 $198,829 $1,496,495 ======== ======== ======== ======== ========== <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 ======== ======== ======== ======== ========== <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> 46
17. Parent Company Financial Information Condensed Statement of Operations--Parent Company Only <TABLE> <CAPTION> Years ended December 31, ------------------------- 2000 1999 1998 ------- ------- ------- (in thousands) <S> <C> <C> <C> Income Interest on loans.................................. $ 23 $ 21 $ 20 Interest on securities available for sale.......... 57 376 Dividend from bank subsidiary...................... 2,000 Interest-earning deposits: Unrelated banks.................................. 13 128 154 Other............................................ 10 67 ------- ------- ------- Total Income................................... 2,046 206 617 Expense Compensation and employee benefits................. 348 318 (16) Interest........................................... 436 1 Other.............................................. 739 312 278 ------- ------- ------- Total Expenses................................. 1,523 631 262 ------- ------- ------- Income (loss) before income tax benefit and equity in undistributed net income of subsidiary......... 523 (425) 355 Income tax expense (benefit)....................... (517) (145) 100 ------- ------- ------- Income (loss) before equity in undistributed net income of subsidiary.............................. 1,040 (280) 255 Equity in undistributed net income of subsidiary... 9,030 11,950 9,946 ------- ------- ------- Net Income......................................... $10,070 $11,670 $10,201 ======= ======= ======= </TABLE> Condensed Balance Sheet--Parent Company Only <TABLE> <CAPTION> December 31, ----------------- 2000 1999 -------- -------- (in thousands) <S> <C> <C> Assets Cash and due from subsidiary bank............................ $ 301 $ 32 Interest-earning deposits with unrelated banks............... 292 122 -------- -------- Total cash and cash equivalents............................ 593 154 Loans........................................................ 1,016 360 Investment in bank subsidiary................................ 117,155 100,637 Other assets................................................. 1,317 1,327 -------- -------- Total Assets............................................... $120,081 $102,478 ======== ======== Liabilities and Shareholders' Equity Borrowed funds............................................... $ 4,500 $ 3,000 Other liabilities............................................ 1,758 264 -------- -------- Total liabilities.......................................... 6,258 3,264 Shareholders' equity......................................... 113,823 99,214 -------- -------- Total Liabilities and Shareholders' Equity................. $120,081 $102,478 ======== ======== </TABLE> 47
Condensed Statement of Cash Flows--Parent Company Only <TABLE> <CAPTION> Years ended December 31, -------------------------- 2000 1999 1998 ------- -------- ------- (in thousands) <S> <C> <C> <C> Operating Activities Net income........................................ $10,070 $ 11,670 $10,201 Adjustments to reconcile net income to net cash provided (used) by operating activities: Equity in undistributed earnings of subsidiary.. (9,030) (11,950) (9,946) Provision for depreciation and amortization..... 14 12 14 Net changes in other assets and liabilities..... 1,490 129 (124) ------- -------- ------- Net cash provided (used) by operating activities................................... 2,544 (139) 145 Investing Activities Purchase of securities available for sale......... (5,995) Proceeds from maturities of securities available for sale......................................... 6,000 6,800 Loans originated or acquired, net of principal collected........................................ (656) Contribution of capital--bank subsidiary, net..... (5,000) (12,980) Other, net........................................ (1,050) 2 ------- -------- ------- Net cash provided (used) by investing activities..................................... (5,656) (8,030) 807 Financing Activities Proceeds from other borrowings.................... 1,500 3,000 Tax benefits from exercise of stock options....... 378 Proceeds from issuance of common stock............ 1,673 1,303 711 ------- -------- ------- Net cash provided by financing activities....... 3,551 4,303 711 ------- -------- ------- Increase (decrease) in cash and cash equivalents.................................. 439 (3,866) 1,663 Cash and cash equivalents at beginning of period.. 154 4,020 2,357 ------- -------- ------- Cash and cash equivalents at end of period...... $ 593 $ 154 $ 4,020 ======= ======== ======= </TABLE> 48
18. Summary of Quarterly Financial Information--Unaudited Columbia Banking System, Inc. Quarterly financial information for the years ended December 31, 2000 and 1999 is summarized as follows: <TABLE> <CAPTION> First Second Third Fourth Year Ended 2000 Quarter Quarter Quarter Quarter December 31, - ---- ------- ------- ------- ------- ------------ (in thousands, except per share amounts) <S> <C> <C> <C> <C> <C> Total interest income........... $24,813 $27,010 $28,348 $29,825 $109,996 Total interest expense.......... 10,959 12,561 13,495 14,713 51,728 ------- ------- ------- ------- -------- Net interest income........... 13,854 14,449 14,853 15,112 58,268 Provision for loan losses....... 900 900 900 7,100 9,800 Noninterest income.............. 2,593 2,907 3,018 3,069 11,587 Noninterest expense............. 10,823 11,284 11,305 11,341 44,753 ------- ------- ------- ------- -------- Income (loss) before income tax.......................... 4,724 5,172 5,666 (260) 15,302 Provision for income tax........ 1,628 1,781 1,947 (124) 5,232 ------- ------- ------- ------- -------- Net income (Loss)............... $ 3,096 $ 3,391 $ 3,719 $ (136) $ 10,070 ======= ======= ======= ======= ======== Net income (Loss) per common share: Basic......................... $ 0.27 $ 0.29 $ 0.32 $ (0.01) $ 0.86 Diluted....................... 0.26 0.28 0.31 (0.01) 0.84 ======= ======= ======= ======= ======== <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......................... $ 0.18 $ 0.23 $ 0.28 $ 0.31 $ 1.00 Diluted....................... 0.17 0.22 0.28 0.30 0.98 ======= ======= ======= ======= ======== </TABLE> 49
FINANCIAL DATA SUPPLEMENT CONSOLIDATED FIVE-YEAR STATEMENTS OF OPERATIONS(1) Columbia Banking System, Inc. <TABLE> <CAPTION> Years ended December 31, -------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- -------- -------- (dollars in thousands, except per share amounts) <S> <C> <C> <C> <C> <C> Interest Income: Loans...................... $ 102,838 $ 77,807 $ 66,858 $ 56,176 $ 43,240 Securities available for sale...................... 5,650 5,619 4,696 3,800 2,360 Securities held to maturity.................. 268 287 419 628 702 Deposits with banks........ 1,240 639 1,654 1,457 1,583 ---------- ---------- ---------- -------- -------- Total interest income.... 109,996 84,352 73,627 62,061 47,885 Interest Expense: Deposits................... 47,662 32,898 29,759 24,775 20,370 Federal Home Loan Bank advances.................. 3,630 1,939 1,908 1,971 1,938 Other borrowings........... 436 6 84 233 ---------- ---------- ---------- -------- -------- Total interest expense... 51,728 34,843 31,667 26,830 22,541 ---------- ---------- ---------- -------- -------- Net Interest Income........ 58,268 49,509 41,960 35,231 25,344 Provision for loan losses.. 9,800 2,400 1,900 4,726 1,635 ---------- ---------- ---------- -------- -------- Net interest income after provision for loan losses.................... 48,468 47,109 40,060 30,505 23,709 Noninterest income......... 11,587 10,146 8,182 7,106 4,785 Key man life insurance proceeds.................. 3,518 Noninterest expense........ 44,753 39,644 32,794 27,832 22,768 SAIF special assessment.... 612 Merger expenses............ 1,234 ---------- ---------- ---------- -------- -------- Noninterest expense........ 44,753 39,644 32,794 29,066 23,380 ---------- ---------- ---------- -------- -------- Income before income tax... 15,302 17,611 15,448 12,063 5,114 Provision for income tax... 5,232 5,941 5,247 2,788 479 ---------- ---------- ---------- -------- -------- Net Income................. $ 10,070 $ 11,670 $ 10,201 $ 9,275 $ 4,635 ========== ========== ========== ======== ======== Net Income Per Common Share: Basic.................... $ 0.86 $ 1.00 $ 0.88 $ 0.81 $ 0.56 Diluted.................. 0.84 0.98 0.85 0.79 0.54 Average number of common shares outstanding (basic)................... 11,678 11,652 11,603 11,406 8,307 Average number of common shares outstanding (diluted)................. 11,973 11,927 11,965 11,741 8,544 ========== ========== ========== ======== ======== Total assets at end of period.................... $1,496,495 $1,237,157 $1,059,919 $864,555 $706,448 Long-term obligations...... 4,500 3,000 25,000 39,000 34,000 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. 50
CONSOLIDATED FIVE-YEAR SUMMARY OF AVERAGE BALANCES AND NET INTEREST REVENUE Columbia Banking System, Inc. <TABLE> <CAPTION> 2000 1999 ---------------------------- ---------------------------- 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.... $ 475,807 $45,280 9.52% $ 371,549 $32,338 8.70% Real estate(2): One- to four-family residential.......... 108,063 9,389 8.69 90,233 7,437 8.24 Five or more family residential and commercial properties........... 463,002 38,431 8.30 374,788 29,985 8.00 Consumer............... 102,141 9,737 9.53 90,803 8,047 8.86 ---------- ------- ------ ---------- ------- ------ Total loans........... 1,149,013 102,837 8.95 927,373 77,807 8.39 Securities(3)........... 97,585 6,152 6.30 99,149 6,085 6.14 Interest-earning deposits with banks.... 19,118 1,240 6.49 13,106 639 4.87 ---------- ------- ------ ---------- ------- ------ Total interest-earning assets............... 1,265,716 110,229 8.71 1,039,628 84,531 8.13 Noninterest-earning assets................. 109,884 91,788 ---------- ---------- Total assets.......... $1,375,600 $1,131,416 ========== ========== Interest-Bearing Liabilities Certificates of deposit................ $ 543,558 $33,053 6.08% $ 388,445 $20,332 5.23% Savings accounts........ 46,722 937 2.01 45,478 936 2.06 Interest-bearing demand and money market accounts............... 399,561 13,672 3.42 376,079 11,630 3.09 ---------- ------- ------ ---------- ------- ------ Total interest-bearing deposits............. 989,841 47,662 4.82 810,002 32,898 4.06 Federal Home Loan Bank advances............... 54,813 3,630 6.62 35,684 1,939 5.43 Other borrowings........ 5,245 436 8.31 109 6 5.16 ---------- ------- ------ ---------- ------- ------ Total interest-bearing liabilities.......... 1,049,899 51,728 4.93 845,795 34,843 4.12 Demand and other noninterest-bearing deposits............... 207,812 184,094 Other noninterest- bearing liabilities.... 10,334 6,809 Shareholders' equity.... 107,555 94,718 ---------- ---------- Total liabilities and shareholders' equity............... $1,375,600 $1,131,416 ========== ========== Net interest revenue(3)........... $58,501 $49,688 ======= ======= Net interest spread... 3.78% 4.01% ====== ====== Net interest margin... 4.62% 4.78% ====== ====== Average interest-earning assets to average interest-bearing liabilities............ 120.56% 122.92% ====== ====== </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 $1.4 million in 2000, $962,000 in 1999, and $503,000 in 1998. (2) Real estate average balances include real estate construction loans. (3) Yields on fully taxable equivalent basis, based on a marginal tax rate of 35% for calendar year 2000, and 34% for all prior years presented. 51
CONSOLIDATED FIVE-YEAR SUMMARY OF AVERAGE BALANCES AND NET INTEREST REVENUE--(Continued) Columbia Banking System, Inc. <TABLE> <CAPTION> 1998 1997 1996 ---------------------------- ---------------------------- ---------------------------- Average Average Average Average Average Average Balances(1) Interest Rate Balances(1) Interest Rate Balances(1) Interest Rate ----------- -------- ------- ----------- -------- ------- ----------- -------- ------- (dollars in thousands) Interest-Earning Assets Loans: <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Commercial business............ $307,174 $28,039 9.13% $218,560 $20,172 9.23% $158,460 $14,153 8.93% Real estate(2): One- to four-family residential.................. 96,999 8,512 8.78 109,659 10,936 9.97 112,986 10,468 9.26 Five or more family residential and commercial properties................... 264,314 23,008 8.70 217,412 18,727 8.61 144,340 13,473 9.33 Consumer....................... 80,100 7,299 9.11 68,040 6,341 9.32 58,101 5,146 8.86 -------- ------- ------ -------- ------- ------ -------- ------- ------ Total loans................... 748,587 66,858 8.93 613,671 56,176 9.15 473,887 43,240 9.12 Securities(3)................... 83,657 5,221 6.24 71,424 4,513 6.32 51,056 3,126 6.12 Interest-earning deposits with banks.. 30,949 1,654 5.35 26,389 1,456 5.52 29,998 1,583 5.28 -------- ------- ------ -------- ------- ------ -------- ------- ------ Total interest-earning assets....................... 863,193 73,733 8.54 711,484 62,145 8.73 554,941 47,949 8.64 Noninterest-earning assets...... 76,081 53,244 40,311 -------- -------- -------- Total assets.................. $939,274 $764,728 $595,252 ======== ======== ======== Interest-Bearing Liabilities Certificates of deposit......... $337,557 $18,917 5.60% $282,899 $16,017 5.66% $240,214 $13,771 5.73% Savings accounts................ 39,768 997 2.51 38,301 1,054 2.75 32,438 943 2.91 Interest-bearing demand and money market accounts................ 287,007 9,845 3.43 223,514 7,704 3.45 160,020 5,656 3.53 -------- ------- ------ -------- ------- ------ -------- ------- ------ Total interest-bearing deposits..................... 664,332 29,759 4.48 544,714 24,775 4.55 432,672 20,370 4.71 Federal Home Loan Bank advances....................... 34,538 1,908 5.52 35,597 1,971 5.54 34,096 1,914 5.61 Other borrowings................ 1,681 84 5.02 3,454 257 7.44 -------- ------- ------ -------- ------- ------ -------- ------- ------ Total interest-bearing liabilities.................. 698,870 31,667 4.53 581,992 26,830 4.61 470,222 22,541 4.79 Demand and other noninterest- bearing deposits............... 149,353 111,492 74,940 Other noninterest-bearing liabilities.................... 6,371 6,860 4,421 Shareholders' equity............ 84,680 64,384 45,669 -------- -------- -------- Total liabilities and shareholders' equity......... $939,274 $764,728 $595,252 ======== ======== ======== Net interest revenue(3)....... $42,066 $35,315 $25,408 ======= ======= ======= Net interest spread........... 4.01% 4.12% 3.85% ====== ====== ====== Net interest margin........... 4.87% 4.96% 4.58% ====== ====== ====== Average interest-earning assets to average interest-bearing liabilities... 123.51% 122.25% 118.02% ====== ====== ====== </TABLE> 52
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> 2000 Compared to 1999 1999 Compared to 1998 Increase (Decrease) Increase (Decrease) Due to Due to ------------------------ ------------------------- Volume Rate Total Volume Rate Total ------- ------ ------- ------- ------- ------- (in thousands) <S> <C> <C> <C> <C> <C> <C> Interest Income(1) Loans: Commercial business...... $ 9,710 $3,232 $12,942 $ 5,525 $(1,226) $ 4,299 One- to four-family residential............. 1,532 420 1,952 (574) (501) (1,075) Five or more family residential and commercial properties... 7,286 1,160 8,446 8,652 (1,675) 6,977 Consumer................. 1,052 638 1,690 942 (194) 748 ------- ------ ------- ------- ------- ------- Total loans............ 19,580 5,450 25,030 14,545 (3,596) 10,949 Securities................. (92) 159 67 949 (85) 864 Interest-earning deposits with banks................ 349 252 601 (881) (134) (1,015) ------- ------ ------- ------- ------- ------- Total interest revenue (TE).................. $19,837 $5,861 $25,698 $14,613 $(3,815) $10,798 ======= ====== ======= ======= ======= ======= Interest Expense Deposits: Certificates of deposit.. $ 9,054 $3,667 $12,721 $ 2,517 $(1,102) $ 1,415 Savings accounts......... 15 (14) 1 247 (308) (61) Interest-bearing demand.. 755 1,287 2,042 2,661 (876) 1,785 ------- ------ ------- ------- ------- ------- Total interest on deposits.............. 9,824 4,940 14,764 5,425 (2,286) 3,139 Federal Home Loan Bank advances.................. 1,201 490 1,691 61 (30) 31 Other borrowings........... 425 5 430 6 6 ------- ------ ------- ------- ------- ------- Total interest expense............... $11,450 $5,435 $16,885 $ 5,486 $(2,310) $ 3,176 ======= ====== ======= ======= ======= ======= </TABLE> The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each. - -------- TE = Taxable Equivalent (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 $1.4 million in 2000, $962,000 in 1999, and $503,000 in 1998. 53
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 Through Over 1 but Over 5 December 31, 2000 1 Year Through 5 Years Years Total - ----------------- ----------- --------------- -------- -------- (in thousands) <S> <C> <C> <C> <C> Commercial business.............. $298,564 $133,531 $ 64,030 $496,125 Real estate construction......... 30,616 20,777 56,606 107,999 -------- -------- -------- -------- Total.......................... $329,180 $154,308 $120,636 $604,124 ======== ======== ======== ======== Fixed rate loans................. $ 80,647 $ 34,908 $115,555 Variable rate loans.............. 73,661 85,728 159,389 -------- -------- -------- Total.......................... $154,308 $120,636 $274,944 ======== ======== ======== </TABLE> 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, ---------------------------------------------------------- 2000 1999 1998 -------------------- ------------------ ------------------ 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............... $ 399,561 3.42% $376,079 3.09% $287,007 3.43% Savings accounts........ 46,722 2.01 45,478 2.06 39,768 2.51 Certificates of deposit................ 543,558 6.08 388,445 5.23 337,557 5.60 ---------- ---- -------- ---- -------- ---- Total interest-bearing deposits............. 989,841 4.82 810,002 4.06 664,332 4.48 Demand and other noninterest-bearing.... 207,812 184,094 149,353 ---------- -------- -------- Total deposits........ $1,197,653 $994,096 $813,685 ========== ======== ======== </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, 2000 -------------- (in thousands) <S> <C> Remaining maturity 3 months and under....................................... $105,233 Over 3 through 6 months.................................. 51,441 Over 6 through 12 months................................. 68,127 Over 12 months........................................... 48,805 -------- Total.................................................. $273,606 ======== </TABLE> 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 54
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 became 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, and 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. 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 55
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. 56
EXECUTIVE OFFICERS AND EMPLOYEES 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 Company Name Age Position Since ---- --- -------- ------------- <C> <C> <S> <C> J. James Gallagher(1)... 62 Director, Vice Chairman and Chief 1998 Executive Officer Melanie J. Dressel(2)... 48 Director, President and Chief 1997 Operating Officer--the Company; President and Chief Executive Officer--Columbia Bank H. R. Russell(3)........ 46 Executive Vice President--Senior 1996 Credit Officer Evans Q. Whitney(4)..... 57 Executive Vice President, Retail 1994 Banking Gary R. Schminkey(5).... 43 Executive Vice President and 1993 Chief Financial Officer Donald A. Andersen(6)... 55 Senior Vice President, Senior 1996 Loan Production Officer-- Columbia Bank Janet D. Hildebrand(7).. 52 Senior Vice President, Credit 1998 Administrator--Columbia Bank </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 the Columbia Bank on January 1, 2000. Prior to that time and since July 1998, Ms. Dressel 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 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--Senior 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. 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. (5) 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 57
during that same period as Vice President--Accounting and Finance for Puget Sound National Bank and its successor institution. (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. Employees At December 31, 2000, the Company had 513 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. 58
ANNUAL REPORT ON FORM 10-K 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, 2000 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. Disclosures of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of Columbia's knowledge, in the definitive Proxy Statements incorporated by reference in Part III of this Form 10-K, or any amendment if this Form 10-K. Certain information has been incorporated by reference as described herein into Part III of this report from Columbia's Proxy Statement dated April 2, 2001. 59
FORM 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 2000 results. Only those sections of the Annual Report referenced in the following cross-reference index are incorporated into the Form 10-K. Form 10-K <TABLE> <CAPTION> Proxy Statement Part and Annual Report Page Item No. Caption Page Number Number* -------- ------- ------------------- --------- <C> <S> <C> <C> Part 1 Item 1 Business............................. 1-5, 33 (Note 4), 42 (Note 12), 44 (Note 16), 51-56 Item 2 Properties........................... 37 (Note 7) Item 3 Legal Proceedings.................... 43 (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............................. 24 Item 6 Selected Financial Data.............. 6 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 7-23 Item 7a Quantitative and Qualitative Disclosures About Market Risk....... 18-20 Item 8 Financial Statements and Supplementary Data.................. 26-29, 49 (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 5, 18 Item 11 Executive Compensation*.............. 9 Item 12 Security Ownership of Certain Beneficial Owners and Management.... 3 Item 13 Certain Relationships and Related Transactions........................ 18 Part IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 60 </TABLE> - -------- * The Compensation Committee Report on Executive Compensation, the Stock Performance Graph and the Audit Committee Report are not incorporated into this Form 10-K Annual Report on reference. Exhibits and Reports on Form 8-K Exhibits: The following exhibits are either filed herewith or have been previously filed with the Securities and Exchange Commission and are filed with this Form 10-K Annual Report through incorporation by reference: . Columbia's Restated Articles of Incorporation . Columbia's Restated Bylaws . Material Contracts, including certain compensatory plans and agreements . Subsidiary of the Company . Powers of Attorney of Directors Devine, Dressel, Fabulich, Fine, Folsom, Gallagher, Halleran, Hulbert, Matson, Quoidbach, Rodman, Snyder, Weyerhaeuser, and Will. 60
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: The Company did not file any current reports on Form 8-K with the SEC during the fourth quarter of fiscal 2000. 61
Independent Auditors Deloitte & Touche LLP Transfer Agent and Registrar American Stock Transfer & Trust Company Market Makers Dain Rauscher Herzog, Heine, Geduld, Inc. Hoefer & Arnett, Inc. Keefe, Bruyette & Woods, Inc. Ragen MacKenzie Inc. Ryan Beck & Co. Inc. Regulatory and Securities Counsel Davis Wright Tremaine, LLP Annual Meeting Sheraton Tacoma Hotel 1320 Broadway Plaza Tacoma, Washington Tuesday, May 15, 2001 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, at 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 62
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 30th day of March, 2001. 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 30th day of March, 2001. 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 February 28, 2001 as attorney in fact for the following directors who constitute a majority of the Board. <TABLE> <S> <C> [Richard S. DeVine] [Thomas M. Hulbert] [Melanie J. Dressel] [Thomas L. Matson] [Jack Fabulich] [Robert E. Quoidbach] [Jonathan Fine] [Donald Rodman] [John P. Folsom] [Sidney R. Snyder] [J. James Gallagher] [William T. Weyerhaeuser] [John Halleran] [James M. Will] </TABLE> /s/ J. James Gallagher - ------------------------------------- J. James Gallagher Attorney-in-fact February 28, 2001 63
Columbia Banking System, Inc. Board of Directors <TABLE> <S> <C> <C> Richard S. Devine Melanie J. Dressel Jack Fabulich Chairman President and Chief Operating Officer Honorary Chairman of Parker Raleigh, Schwarz & Powell, Inc. Columbia Banking System, Inc., Paint Manufacturing, Inc. President President and Chief Executive Officer Commissioner Chinook Resources, Inc. Columbia Bank Port of Tacoma Jonathan Fine John P. Folsom J. James Gallagher Chief Executive Officer President and Vice Chairman and Chief United Way of Chief Executive Officer Executive Officer King County Raleigh, Schwarz & Powell, Inc. Columbia Banking System. Inc. John A. Halleran Thomas M. Hulbert Thomas L. Matson Private Investor President and Owner and President Chief Executive Officer Tom Matson Dodge, Inc. Winsor Corporation President & Chief Executive Officer Hulco, Inc. Robert E. Quoidbach* Donald Rodman Sidney R. Snyder Private Investor Owner and Vice Chairman Executive Officer Pacific Financial Corporation Rodman Realty Washington State Senator Owner of Sid's Food Market William T. Weyerhaeuser** James M. Will Chairman President Columbia Banking System, Inc. Titus-Will Enterprises Clinical Psychologist Director Potlach Corporation </TABLE> - -------- * Robert E. Quoidbach reached the age of 75 prior to the Annual Meeting of Shareholders to be held on May 15, 2001, and is retiring from the Board in accordance with the Company's Bylaws. ** On January 24, 2001, William T. Weyerhaeuser became Chairman of the Board. 64
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 1250 Meridian E Tacoma, WA 98402 Tacoma, WA 98405 Milton, WA 98354 (253) 305-1940 (253) 627-6909 (253) 952-6646 Vicki Powers Robert Bruback 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 Doug Hedger 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 Nelson Alana Rouff 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 Kathleen Knapper 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 Barbara Graves Jeff Wemhoff 19 FEDERAL WAY 20 FOREST VILLA 21 KENT 33370 Pacific Highway S 2749 Auburn Way S. 504 W. Meeker Federal Way, WA 98003 Auburn, WA 98002 Kent, WA 98032 (253) 925-9323 (253) 887-1186 (253) 852-8400 Mike Harris Lillian McGinnis Shirley McGregor COWLITZ COUNTY 22 SOUTH AUBURN 23 COMMERCE 24 30th AVENUE 4101 A St. SE 1338 Commerce Ave. 2207 30th Ave. Auburn, WA 98002 Longview, WA 98632 Longview, WA 98632 (253) 939-9800 (360) 636-9200 (360) 423-8760 Rod Clemmer Faith Pacheco Faith Pacheco KITSAP COUNTY 25 TRIANGE MALL 26 WOODLAND 27 PORT ORCHARD 620 A Triangle Mall 782 Goerig St. 228 Bravo Terrace Longview, WA 98632 Woodland, WA 98674 Port Orchard, WA 98366 (360) 501-5601 (360) 225-9421 (360) 876-8384 Faith Pacheco Carol Rounds Rob Putas THURSTON COUNTY 28 WEST OLYMPIA 2820 Harrison Ave Olympia, WA 98502 (360) 375-5800 Diane Avery </TABLE> 65
INDEX TO EXHIBITS <TABLE> <CAPTION> Exhibit No. ------- <C> <S> 3.1 Amended and Restated Articles of Incorporation. (3) 3.2 Restated Bylaws. (2) 4.1 Specimen of common stock certificate. (5) 10.1 Data processing servicing agreement dated May 3, 1993 between the Company and M&I Data Services. (1) 10.2 Deferred Compensation Plan for directors and certain key employees effective September 22, 1999. (2) 10.3 2000 Amended and Restated Stock Option Plan. (3) 10.4 Amended and Restated Employee Stock Purchase Plan. (5) 10.5 Office Lease, dated as of December 15, 1999, between the Company and Haub Brothers Enterprises Trust. (5) 10.6 Amended Employment Agreement between the Bank, the Company and J. James Gallagher effective December 20, 2000. (5) (4) 10.7 Amended Employment Agreement between the Bank, the Company and Melanie J. Dressel effective December 20, 2000. (5) (4) 10.8 Employment Agreement between the Bank, the Company and Harald R. Russell effective December 20, 2000. (5) (4) 10.9 Employment Agreement between the Bank, the Company and Evans Q. Whitney effective December 20, 2000. (5) (4) 10.10 Form of Severance Agreement between the Company and each of Mr. Schminkey, Mr. Andersen and Ms. Hildebrand, effective December 20, 2000. (5) (4) 10.11 Form of Promissory Note issued by each of Mr. Gallagher, Ms. Dressel, Mr. Whitney and Mr. Russell to the Company in consideration of the Company's 2000 issuance of restricted stock. (5) 10.12 Amended Restricted Stock Award Agreement between the Bank, the Company and J. James Gallagher effective July 1, 1998. (5) 10.13 Restricted Stock Award Agreement between the Bank, the Company and Melanie J. Dressel effective January 28, 1998. (5) 10.14 Restricted Stock Award Agreement between the Bank, the Company and Harald R. Russell effective January 28, 1998. (5) 10.15 Restricted Stock Award Agreement between the Bank, the Company and Evans Q. Whitney effective January 28, 1998. (5) 21 Subsidiary of the Company: Columbia State Bank. 23 Consent of Deloitte & Touche, LLP. (5) 24 Power of Attorney dated February 28, 2001. (5) </TABLE> - -------- (1) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1993. (2) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. (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 Form 10-K. (5) Filed with this Annual Report on Form 10-K for the year ended December 31, 2000. 2