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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 1998
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _____
Commission file number: 0-27938
COLUMBIA BANCORP
(Exact name of registrant as specified in its charter)
93-1193156
Oregon (I.R.S. Employer
(State of incorporation) Identification No.)
420 East Third Street, Suite 200
The Dalles, Oregon 97058
(Address of principal executive offices)
Registrant's telephone number: (541) 298-6649
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common stock, no par value
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 is not contained herein, and will not be contained, to the
best of the 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. [ ]
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of February 15, 1999 was $61,758,995.
The number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: 7,964,932 shares of no par value
common stock on March 15, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement dated March 5, 1999 for the
1999 Annual Meeting of Shareholders ("Proxy Statement"), and the 1998 Annual
Report to Shareholders are incorporated by reference in Part II and III hereof.
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COLUMBIA BANCORP
FORM 10-K
TABLE OF CONTENTS
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PAGE
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Disclosure Regarding Forward Looking Statements 3
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PART I
Item 1. Business 3-17
Item 2. Properties 17-18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
PART II
(Portions of Items 5, 6, 7 and 8 are incorporated by reference from
Columbia Bancorp's 1998 Annual Report to Shareholders)
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 19
Item 6. Selected Financial Data 19-20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 20-35
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 35-36
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure 37
PART III
(Items 10 through 13 are incorporated by reference from Columbia
Bancorp's definitive proxy statement for the Annual Meeting of
Shareholders to be held on April 16, 1999)
Item 10. Directors, Executive Officers of the Registrant 37
Item 11 Executive Compensation 37-38
Item 12. Security Ownership of Certain Beneficial Owners and Management 38
Item 13. Certain Relationships and Related Transactions 38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 38-39
SIGNATURES 40-41
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This document includes forward-looking statements as defined in applicable
federal securities laws and regulations. Such forward-looking statements are
based on certain assumptions made by Columbia's management, information
currently available to management, and management's present beliefs about
Columbia's business and operations. All statements, other than statements of
historical fact in this document, including without limitation, statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business" regarding Columbia's financial position, business
strategy, and plans and objectives of management of Columbia for future
operations, are forward-looking statements. Forward-looking statements can be
identified by words such as "believe," "estimate," "anticipate," "expect,"
"intend," "will," "may," "should," or other similar phrases or words. Although
Columbia believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Readers are therefore cautioned not to place undue
reliance on such forward-looking statements. Such factors as changed conditions,
incorrect assumptions or the materialization of a risk or uncertainty could
cause actual results to differ materially from results described in this
document as believed, anticipated, estimated, expected, or intended. Columbia
does not intend to update these forward-looking statements other than in
Columbia's quarterly and annual reports and other filings under applicable
securities laws.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Columbia Bancorp ("Columbia") is a bank holding company headquartered in
The Dalles, Oregon. Its subsidiaries include Columbia River Bank ("CRB"), Valley
Community Bank ("VCB") and Valley Community Mortgage Services, Inc. CRB is a
ten-branch, state-chartered institution authorized to provide banking services
by the States of Oregon and Washington. VCB is a state-chartered institution
authorized to provide banking services from its single office location in
McMinnville, Oregon. Columbia offers a broad range of financial services to its
customers, primarily small and medium sized businesses, farmers, and
individuals. Columbia's nine Oregon branches serve the northern and eastern
Oregon communities of The Dalles, Hood River, Pendleton and Hermiston, the
central Oregon communities of Madras, Redmond, and Bend, and the community of
McMinnville in the Willamette Valley. Columbia's two south central Washington
branches serve the communities of Goldendale and White Salmon. VCB operates from
one location in McMinnville, Oregon, 36 miles southwest of metropolitan
Portland.
As of December 31, 1998, Columbia had total assets of $342.41 million,
total deposits of $295.68 million, and shareholders' equity of $34.76 million.
Columbia's net income for the year ended December 31, 1998, was $4.72 million,
which was Columbia's tenth consecutive year of increasingly higher net income.
For the year ended December 31, 1998, Columbia's return on average assets was
1.83% and return on average equity was 18.10%. Since the year ended December 31,
1993, it has increased earnings by an average of 20.39% per year and increased
its return on average assets from 1.45% in 1994 to 1.83% in 1998. During the
same period, Columbia has achieved a return on average equity greater than
14.91% each year while sustaining high asset quality. Columbia has consistently
performed in the top quartile when comparing its return on average equity to its
national peer group comprising over 900 banks with assets of between $100 and
$300 million and multiple branches located in non-metropolitan areas.
From its origins as a one-branch community bank in The Dalles, Columbia
has grown as a result of merger and acquisition activity, new branch openings,
the introduction of new business lines, and the expansion and cross-marketing of
its existing products and community-bank lending expertise. In 1995, CRB merged
with Juniper Banking Company, and in 1996 Columbia was formed as CRB's holding
company. In 1996, Columbia acquired Washington-based Klickitat Valley Bank.
Further growth came from CRB's Hood River and Bend branch openings, and from the
expansion in 1997 of CRB's residential mortgage business. In November 1998,
Columbia acquired Valley Community Bank, and in September CRB opened a new
branch in Hermiston, Oregon. CRB
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opened a new branch in Pendleton, Oregon in January 1999, and plans to complete
construction of a second Bend branch, including facilities for a business
lending group, by mid-1999. Collectively, these growth and acquisition
activities have enabled Columbia to diversify its portfolio and its operating
risk over several market areas and local economies.
The markets in which Columbia operates are relatively economically
diverse, and therefore pose both opportunities and challenges to a community
bank operating in all of these economies. Columbia's approach to meeting the
challenge is to staff its branches and business groups with managers who are
established in their communities and have developed a loyal customer following.
Columbia's senior management, in conjunction with the branch managers,
individually examines each branch to determine which products and services are
best suited for that geographic region. The diverse economies also provide
opportunities to limit Columbia's exposure to adverse market conditions in any
one economic sector.
BUSINESS STRATEGY
Columbia's strategy is to continue building on its position as a leading
community-based provider of financial services in Oregon and south central
Washington. The key to the success of this strategy, in Columbia's view, is to
continue to provide exceptional personal service to the communities it now
serves, and to successfully expand into new communities by identifying and
meeting their unique financial services needs. Columbia's target branch
locations are in non-metropolitan regions, where it aims to deliver prompt,
accurate, and friendly personal banking services. The components of Columbia's
business strategy are outlined below.
Successfully operate in non-metropolitan regions. In direct contrast to
the present strategies of certain major regional banks, which have closed
branches and reduced service levels in Columbia's identified communities,
Columbia believes that the key to profitably operating in non-metropolitan
communities is to: (i) provide a high level of service to the customer; (ii)
staff branches with employees who have established ties to the community; (iii)
attract and retain a highly skilled management team; and, (iv) allow branch
personnel the flexibility to emphasize products and services which best fit
their local economy. In addition, by decentralizing a portion of the management
function to the branch level, Columbia believes it can make business decisions
regarding customers more quickly and with more knowledge than its major banking
competitors. Columbia believes it is able to profitably attract and retain
customers by providing and delivering such products and services tailored to
their individual needs, and by delivering them with a high degree of personal
attention.
Maintain high asset quality. Columbia seeks to maintain high asset
quality through a program that includes prompt and strict adherence to
established credit policies, training and supervision of lending officers, and a
periodic professional independent loan review. Additionally, Columbia uses
incentives to maintain high asset quality, including tying a portion of its loan
officers' compensation to the quality of the loans they originate. Columbia also
believes that its commitment to hire branch managers with long term ties to
their communities is of significant assistance in determining the quality of
loan transactions. The variety of economies in which Columbia's branches are
located increases the diversification and, in Columbia's opinion, the strength
of the overall loan portfolio.
Seize merger and acquisition opportunities. In 1995, CRB merged with
Juniper Banking Company of central Oregon, and in 1996 Columbia acquired
Klickitat Valley Bank of south central Washington. After both transactions,
Columbia was able to provide the same or improved levels of community banking
products and services in these new market areas. In November 1998, Columbia
acquired McMinnville-based VCB. Columbia believes the economy in the McMinnville
area affords it the opportunity to leverage two of its core competencies: small
business lending and agricultural lending. Additionally, the acquisition became
Columbia's first entrance into Oregon's most populous region, the Willamette
Valley. Management believes there are significant future growth opportunities in
McMinnville and its surrounding communities.
Continue to expand through new branches and new products. Columbia has
grown through the establishment of new branches in Hood River and Bend, Oregon
and more recently through the opening in September 1998 of a branch in
Hermiston, Oregon, and January 1, 1999 in Pendleton, Oregon. An additional
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branch in Bend is planned in order to take advantage of growth opportunities and
to leverage existing nearby operations. In addition, Columbia's banking
products, including its loan programs, and other services are designed to be
responsive to the needs of local community businesses and individual customers.
For example, in 1997 Columbia recognized an opportunity in rapidly growing
central Oregon, and established a mortgage lending group in Bend to originate
and sell residential mortgages. Columbia also offers investment products and
services through its affiliation with the Primevest Financial Services, Inc.
brokerage organization, through which it offers stocks, bonds, mutual funds,
IRAs, retirement plans, and estate planning. Columbia's products and services
are designed to both increase its customer base and to enhance cross-selling
opportunities.
GROWTH HISTORY
Columbia's Origins and Activities Through 1994. Columbia's subsidiary,
CRB, was incorporated and chartered in Oregon in 1976 and opened for business in
1977. CRB developed and grew as a one-branch community bank in The Dalles.
Several of Columbia's present senior executive officers, including its Chief
Executive Officer and President, have been with CRB since the early 1980s.
Collectively, Columbia's four-member senior management team has over 89 years of
banking experience, much of it gained through years of service at CRB.
CRB's first branch expansion was a satellite branch facility that opened
in 1986 west of The Dalles' city center. Two years later, Columbia opened a
branch in the small Oregon community of Maupin. (Management subsequently
determined that the Maupin branch was unprofitable, and the branch was closed in
May 1998.)
In 1992 CRB purchased land adjacent to a newly established Wal-Mart
store in nearby Hood River, on which it built and opened its second branch
outside of The Dalles. The Hood River Branch opened for business in May 1993.
Activities in 1995. On January 1, 1995 CRB merged with Juniper, a
community bank in central Oregon with branches in Madras and Redmond, Oregon.
Following this merger, CRB's full service branches increased from three to five,
and its assets increased from $62 million to $92 million. CRB retained the
"Juniper Banking Company" name and added three experienced former Juniper
directors to its Board. Also, in 1995 CRB replaced its existing branch facility
in the western part of The Dalles with a branch facility in a newly built
Safeway supermarket west of The Dalles' downtown core. This branch takes
deposits, accepts loan applications, and offers other products and services,
however, it does not process loans on-site.
Activities in 1996. In early 1996, Columbia became CRB's holding
company. In June of 1996 Columbia acquired Klickitat Valley Bank, a south
central Washington community bank headquartered in Goldendale, Washington and
with a branch in White Salmon. As CRB did with Juniper, Columbia retained the
"Klickitat Valley Bank" name, and added, during 1996 and 1997, four experienced
former Klickitat directors to the Columbia Board. Klickitat was a natural
acquisition candidate for Columbia. Klickitat's White Salmon branch was within a
few miles of CRB's Hood River branch across the Columbia River, and there were
and are multiple economic ties between these two communities. Klickitat Valley
Bank was Goldendale's only community bank, and this community's
agriculture-based economy fit well with CRB's lending expertise.
In late 1996 CRB opened its first branch in Bend, Oregon under the
"Juniper Banking Company" name. Bend's proximity to CRB's existing Redmond and
Madras branches, and Bend's economic growth and increasing population, made this
a natural branch extension for Columbia. Bend is the largest community in which
Columbia operates. Management believes that Bend's population growth, the
expansion and diversity of its economic base, and its strong home construction
market afford significant opportunities for growth.
Activities in 1997. In 1997, Columbia's growth came internally from
increased loans and deposits at its branches. Loan growth at the new Bend branch
was significant, with assets increasing 239% over the prior year, from $3.3
million to $11.2 million. Further growth came from enhanced home mortgage growth
through Columbia's mortgage group, established in mid-1997.
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Activities in 1998.
Secondary Common Stock Offering and Nasdaq Listing. During November
1998, Columbia registered 1,000,000 shares of common stock for sale to the
public at a price of $9 per share, for an aggregate offering price of
$9,000,000. All shares were sold, resulting in net proceeds of $8,126,115, after
deducting $873,885 for underwriting discounts and commissions, legal,
accounting, printing fees, and other offering expenses. Net proceeds were used
in connection with Columbia's expansion plans, including the acquisition of
Valley. Pending such use, the net proceeds were invested in short-term,
investment- grade securities. In connection with the offering, Columbia's common
stock was listed on the Nasdaq Stock Market, where trading commenced in the
stock on November 6, 1998.
Acquisition of Valley Community Bancorp. Columbia's most recent
acquisition-based expansion was its purchase of Valley Community Bancorp
("Valley") on November 30, 1998 for a cash purchase price of $15.10 million (the
"Acquisition"). Subsequent to the Acquisition, Valley was merged into Columbia
Bancorp, and its subsidiaries, including VCB, became wholly-owned subsidiaries
of Columbia.
Valley was an Oregon bank holding company organized in 1984. Its
wholly-owned Oregon bank subsidiary, VCB, was chartered in 1982, and is a member
of the Federal Reserve System. VCB owns and operates from a 9,600 square foot,
two-story building close to downtown McMinnville, Oregon, which is 36 miles
southwest of Portland in Oregon's Willamette Valley. VCB has 14.5 full-time
equivalent employees. Most of its data processing work is handled by Datatech of
Oregon, Inc., a data processing company owned by several Oregon community banks,
including VCB and CRB.
VCB's loan and deposit business is largely concentrated in and around
McMinnville, a city of over 23,000 located in Yamhill County, Oregon. Despite
its proximity to Portland, Oregon's largest metropolitan area, McMinnville
maintains a small-town atmosphere and character. The diverse agricultural
economy of Yamhill County, with a population of over 79,000, produces wine
grapes, wheat, grass seed, nuts, berries, and nursery products. VCB's customer
base also includes small businesses, professionals, and a growing population of
retirees. Agricultural lending constituted 26.61% of VCB's loan portfolio as of
December 31, 1998. Other components of the loan portfolio as of that date were
real estate loans, 54.69%, commercial and industrial loans, 16.38%, and consumer
loans, 3.21%.
Columbia presently operates VCB as a separate subsidiary under the
"Valley Community Bank" name. Columbia's management believes the Acquisition is
an excellent strategic fit for Columbia, and presents a favorable opportunity to
increase Columbia's value and to diversify its customer base and loan portfolio,
especially in agricultural lending.
Hermiston and Pendleton, Umatilla County, Oregon. Columbia opened a new
branch in Hermiston, Oregon in September of 1998. Hermiston, which has a
population of over 11,000, is 100 miles east of The Dalles. The new branch
operates from 1,500 square feet of leased space south of downtown Hermiston.
Columbia has purchased land for the construction of a permanent Hermiston
branch. The branch offers full-service community banking services, including
loans to local commercial and agricultural-based business.
In January 1999 Columbia opened a branch in Pendleton, which is 26 miles
east of Hermiston and is the largest town in eastern Oregon. Columbia hired a
manager for the new branch who has strong ties to the Pendleton community and 25
years experience with one of Columbia's super-regional bank competitors.
Columbia currently operates out of leased facilities but has acquired land for a
permanent branch facility.
Hermiston and Pendleton represent the major population bases of Umatilla
County in eastern Oregon. The area's climate supports cattle ranching, and field
crops such as wheat, onions, potatoes, and hay. In addition, there is a growing
service and small business economy in the region based on expanding government
employment and the recent construction of a Wal-Mart distribution center outside
of Hermiston. Management believes that the area's relative proximity to The
Dalles, its small town, rural-based atmosphere, and its economic prospects make
this expansion an ideal fit with Columbia's approach to service and its lending
expertise.
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Planned Branch Opening in Bend, Oregon. Columbia plans to open a second
branch in Bend, Oregon in the summer of 1999. Columbia has purchased land in the
western part of Bend in the upscale Shevlin Business Park, an office park
development. Bend is the largest city in central Oregon, and the largest single
market area in which Columbia operates. Columbia believes the second Bend branch
will allow opportunities for future growth, especially for business lending
services. When complete, the new facility will house a full-service branch plus
a new business lending group.
CONSUMER PRODUCTS AND SERVICES
Columbia offers a broad range of deposit and loan products and services
tailored to meet the banking requirements of consumers in Columbia's market
areas. These include:
Deposit Products. Columbia's consumer deposit products include many
noninterest-bearing checking account products priced at various levels,
interest-bearing checking and savings accounts, money market accounts, and
certificates of deposit. These accounts generally earn interest at rates
established by management based on competitive market factors and management's
desire to increase certain types or maturities of deposit liabilities. Columbia
does not pay brokerage commissions to attract deposits. It strives to establish
customer relations to attract core deposits in noninterest-bearing transactional
accounts, which reduces its cost of funds.
Mortgage Loans. In August of 1997, Columbia created a division of CRB to
originate conventional and federally insured residential mortgage loans for sale
in the secondary market. The division, now known as the "Columbia River Bank
Mortgage Group," has grown its business substantially since its inception. As of
December 31, 1997, the mortgage group had sold 60 loans valued at $6.44 million.
Between January 1, 1998 and December 31, 1998, an additional 1,064 loans valued
at $117.54 million were sold. The group has benefited from a number of factors,
including strong demand for mortgages, especially in the Bend area, a favorable
interest rate environment, utilization of advanced software for evaluating and
processing mortgage applications, and an aggressive sales culture. The mortgage
group operates its primary retail loan operations from branch facilities in
Bend, Oregon, but offers its products at all of Columbia's Oregon and Washington
branches. It also offers wholesale and loan brokerage services throughout
Oregon, including some mortgage loan products and servicing support for certain
other Oregon banks. Through December 31, 1998, approximately 60% of Columbia's
mortgage business had been generated from its mortgage group and from Columbia's
branches. The remaining 40% derive from relationships with mortgage brokers and
other community banks.
Investment Products. Through an arrangement with Primevest Financial
Services, Inc., ("Primevest"), a registered securities broker-dealer, Columbia
offers a wide range of financial products and services to consumers. A Primevest
Investment Center is maintained in Columbia's main branch in The Dalles. Ann
Marie Jelderks, a registered Primevest representative and a CRB Vice President,
markets stocks, mutual funds, traditional and Roth IRAs, SEPs, tax sheltered
annuities, life insurance, and other financial products to Columbia customers
and others in The Dalles and Hood River. Two other Primevest investment
consultants sell similar products in Columbia's central Oregon and south central
Washington territories. Primevest's representatives also offer retirement
planning services. Columbia receives a portion of the commissions generated by
financial product sales. Columbia plans to offer these products and services to
its new customer base in the Hermiston and Pendleton branches and at VCB.
Technology-Based Products and Services. Columbia uses both traditional
and new technology to support its focus on personal service. These include a
VISA credit and check card (debit card) program, ATMs at each of Columbia's
full-service branches, including four drive-up ATMs, a telephone banking service
that allows customers to speak directly with a customer service representative
during normal banking hours, and 24-hour telephone access to their accounts. In
addition, Columbia has registered a CRB domain name for a planned Internet site,
and intends to begin offering on-line banking services within 12 months.
Consumer Loans. Columbia provides loans to individual borrowers for a
variety of purposes, including secured and unsecured personal loans, home equity
and personal lines of credit, and motor vehicle loans.
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Senior Customer Services. Since a significant portion of Columbia's
consumer market consists of senior citizens, Columbia offers several special
products and programs aimed at this group. These include a reduced rate checking
account product for seniors, and special trips to the Oregon coast, the
Pendleton Roundup, an annual rodeo event, and other places and events. In
addition, Columbia's Primevest division markets retirement planning products and
investments to the senior customer group.
LOAN PRODUCTS FOR COMMERCIAL, AGRICULTURAL, AND OTHER BUSINESS CUSTOMERS
Columbia has an experienced lending staff, including special expertise
in small business and agricultural lending. Columbia's loan officers also
emphasize continuing contact with the business customer after the loan is made.
Columbia believes that its business customers appreciate the ongoing
relationship they develop with their local lending officer. Such
relationship-based banking is an important aspect of Columbia's continual
efforts to maintain high asset quality.
Commercial Loans. Columbia offers customized loans to its commercial
customers, including equipment and inventory financing, operational lines of
credit, SBA loans for qualified businesses, and accounts receivable financing. A
significant portion of Columbia's loan portfolio consists of commercial loans.
(For regulatory reporting purposes, a portion of Columbia's commercial loans are
designated as real estate loans because they are secured by real property,
although the loans finance accounts receivable, equipment and inventory
purchases, and other commercial activities.) Lending decisions are based on
careful evaluation of the financial strength, management, and credit history of
the borrower and the quality of the collateral securing the loan. Commercial
loans secured by real property are generally limited to 75% of the value of the
collateral. Columbia typically requires personal guarantees and secondary
sources of repayment.
Agricultural Loans. Columbia provides loans to agricultural businesses,
including production lines of credit, equipment financing, and term loans for
capital improvements and other business purposes. Agricultural loans are
generally secured by crops, equipment, and inventory, as well as real estate.
Agricultural lending can require significant follow-up time, as farmers request
budgeting assistance and other financial advice. Columbia employs both an
agricultural loan consultant with decades of farm lending experience, and an
experienced agricultural representative who is a full-time Columbia employee, to
assist its regular loan officers with this process. Columbia's loan officers,
many of whom are graduates of the Western Agricultural School in Pullman,
Washington, make frequent visits to farming operation sites, attend regular
agricultural lending programs and seminars, and actively participate in growers'
associations and other agricultural-based organizations.
Real Estate Loans. Real estate loans are available for the construction,
purchasing, and refinancing of commercial and rental properties. Borrowers can
choose from a variety of fixed and adjustable rate options and terms.
Columbia's real estate loans are in large part loans to commercial
customers, farmers, and ranchers, which are secured by the properties used in
their businesses. The majority of these loans have a variable rate feature with
adjustment periods varying from one to five years. If loan repayment is
dependent on projected income, Columbia often requires a government guaranty as
additional collateral support. Insofar as payments on real estate loans depend
on the successful operation and management of the businesses and properties
securing the loans, repayment can be affected by local real estate market and
economic conditions. Fluctuating land values and local economic conditions can
make loans secured by real property difficult to evaluate and monitor.
Government-Assisted Loan Programs. Columbia's loan officers make loans
to small businesses and to farmers that are supported by guarantees issued by
various state and federal government agencies. Columbia is active in the SBA 7-A
and 504 programs, and in similar programs offered by the Farm Services Agency
(formerly the Farmers Home Administration) and by Oregon's state government.
Columbia has utilized these programs to serve customers who are expanding their
operations, venturing into new product lines, or constructing special use real
estate. The government guarantees a portion of these loans, which reduces risk
in Columbia's loan portfolio.
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Services to Non-Profits and Public Entities. Columbia offers a general
array of loan products to borrowers in the non-profit and public entity sector,
including city and county governments, together with special programs, such as
jumbo CDs and low-cost loan programs. Columbia also offers consumer services to
nonprofit and public sector employees, such as Columbia VISA card enrollment and
direct deposit services.
Business Lending Group in Bend. Columbia plans to open a second branch
facility in Bend, Oregon in mid-1999. In addition to housing a new full-service
branch, the facility will also contain a the business lending group staffed by
experienced commercial loan officers. This newly formed lending group will focus
on developing lending opportunities in Bend's rapidly growing small business
sector.
For all of its loans, Columbia at all times seeks to maintain sound loan
underwriting standards with written loan policies, appropriate individual and
branch limits, and loan committee reviews. In the case of particularly large
loan commitments or loan participations, loans are reviewed by a loan committee
at the Board of Directors level of Columbia's subsidiaries. Underwriting
standards are designed to achieve a high-quality loan portfolio, compliance with
lending regulations and the desired mix of loan maturities and industry
concentrations. Management seeks to minimize credit losses by closely monitoring
the financial condition of its borrowers and the value of collateral.
OTHER PRODUCTS AND SERVICES FOR BUSINESS CUSTOMERS
Columbia offers additional banking and other products to its business
customers.
Deposit and Related Products. Columbia's business deposit products
include basic, regular, and interest-bearing checking accounts, merchant VISA
and MasterCard programs, and business money market and sweep accounts. Columbia
also offers check verification services to merchants allowing them the ability
to determine, on a 24-hour basis, whether a check drawn on an account has
sufficient funds to cover the amount drawn.
Investment Products. Columbia's affiliation with Primevest allows it to
offer financial products and services to Columbia's business customers as well
as to consumers. These include insurance and annuity products, and employee
retirement plan products such as SEP-IRAs and 401(k) plans.
Accounts Receivable Purchasing. Columbia offers its business customers
the opportunity to obtain financing for their businesses through the sale of
accounts receivable. Columbia offers this program in collaboration with a
third-party vendor of accounts receivable management and collection software.
Under the program, Columbia purchases the accounts receivable for cash at a
discount, plus future charge sales on a daily basis. Accounts receivable
collection is handled by Columbia using the vendor's proprietary software.
Columbia began offering this service in early 1998.
STAFF TRAINING AND EDUCATION - COLUMBIA BANCORP UNIVERSITY
Columbia has several staff training and education programs. All new
employees undergo a two-day orientation program, during which they meet senior
management and become familiar with Columbia's history, customer service goals,
and culture. In 1997, Columbia established a formal, continuing education
program for employees under the name "Columbia Bancorp University." Under this
program, employees are encouraged to attend regular employment-related
educational programs consistent with the employee's career goals and needs. Many
of the programs are taught by Columbia's senior management and other experienced
in-house staff, although attendance at classes offered by banking schools and
associations is also encouraged. These activities are coordinated through
Columbia's full-time corporate training officer. Columbia's management believes
that such continuing training and education programs are important to
maintaining organizational cohesion and consistently high quality customer
service.
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MARKETING
Columbia accepts deposits at its branches in Wasco, Hood River,
Jefferson, Deschutes, Yamhill and Umatilla Counties in Oregon and in Klickitat
County in Washington. Columbia makes loans in all of these counties and in
adjacent counties, including Sherman, Gilliam, and Crook counties in Oregon and
Skamania County in Washington. Many of its products and services, including
investment products through Primevest and mortgages through Columbia's mortgage
group, are offered and sold throughout Oregon and south central Washington.
Columbia's ability to increase its market share in the communities it
serves is driven by a marketing plan consisting of several key components. A
principal objective is to create and foster a sales culture in each office.
Employees are trained to cross-sell, offering appropriate products and services
to existing customers and attempting to increase the business relationships
Columbia shares with these customers. Columbia regularly examines the
desirability and profitability of adding new products and services to those
currently offered. Columbia also promotes specific products by media
advertising, but relies primarily on referrals and direct contacts for new
business. Columbia recognizes the importance of community service and supports
employee involvement in community activities. This participation allows Columbia
to make a contribution to the communities it serves, which management believes
increases Columbia's visibility in its markets and thereby increases business
opportunities.
Columbia does business in many different non-metropolitan communities.
Management believes the diverse assortment of customers, communities, and
economic sectors that Columbia serves is a source of strength. In addition, as a
community banking organization Columbia has certain competitive advantages
because of its local focus. However, Columbia is also more reliant on the local
economies in its market areas than are super-regional and national banks.
Columbia attempted to sharpen its market focus in 1998 by ceasing the
use of certain assumed business names. CRB had retained the use of the assumed
business names "Juniper Banking Company" and "Klickitat Valley Bank" after its
merger with Juniper and its acquisition of Klickitat. CRB ceased using these
names in the fourth quarter of 1998. All CRB branches now do business under the
"Columbia River Bank" name. Columbia believes this change has brought additional
cohesiveness to the Columbia organization and should enhance name awareness.
COMPETITION
The market for banking services, including deposit and loan products, is
highly competitive. The major commercial bank competitors are super-regional
institutions headquartered outside the state of Oregon. Deposits held by
super-regionals were approximately 63% of statewide commercial bank deposits as
of June 30, 1998, which is the most recent date for which this information is
available. These major banks have the advantage of offering their customers
services and statewide banking facilities that Columbia does not offer.
Columbia's competitors for deposits are commercial banks, savings and
loan associations, credit unions, money market funds, issuers of corporate and
government securities, insurance companies, brokerage firms, mutual funds, and
other financial intermediaries. These competitors may offer rates greater than
Columbia can or is willing to offer. Columbia competes for deposits by offering
a variety of deposit accounts at rates generally competitive with financial
institutions in the area.
Columbia's competition for loans comes principally from commercial
banks, savings and loan associations, mortgage companies, finance companies,
insurance companies, credit unions, and other institutional lenders. An
important competitor for agricultural loans is Farm Credit Services, formerly
known as the Production Credit Association. Columbia competes for loan
originations through the level of interest rates and loan fees charged, its
array of commercial and mortgage loan products, and the efficiency and quality
of services provided to borrowers. Lending activity can also be affected by the
availability of lendable funds, local and national economic conditions, current
interest rate levels, and loan demand. As described above, Columbia competes
with the larger commercial banks by emphasizing a community bank orientation and
efficient personal service to customers.
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Competition from other single or multi-branch community banks, of which
there are many in Oregon and Washington, presents a special competitive threat.
These other community banks can open new branches in the communities Columbia
serves, competing directly for customers who desire the high level of service
that a community bank can offer. Therefore, these banks directly target the loan
and deposit customers that Columbia seeks. Other community banks also compete
for the same management personnel and the same potential acquisition and merger
candidates that would be of interest to Columbia. New community bank start-ups
present similar competitive threats.
A potential new source of competition is the array of on-line banking
services offered by traditional commercial banks and other financial service
providers, and by newly formed companies that use the Internet to advertise and
sell competing products. However, Columbia's management believes that for the
foreseeable future its customers will continue to want the personal,
locally-based services that it offers. Columbia also plans to begin offering
some on-line banking services to its customers within the next 12 months.
THE YEAR 2000 ISSUE
The Year 2000 creates challenges with respect to the automated systems
used by financial institutions and other companies. Many software programs are
not able to recognize "2000" as a calendar year, since most programs and systems
were designed to store calendar years in the 1900s by assuming the "19" and
storing only the last two digits of the year. For example, these automated
systems would recognize a year stored as "00" as the year "1900," rather than as
the Year 2000. If these automated systems are not appropriately re-coded,
updated, or replaced before the Year 2000, they will likely confuse data, crash,
or fail in some manner. In addition, many software programs and automated
systems will fail to recognize the Year 2000 as a leap year. The issue is not
limited to computer systems. Year 2000 issues will potentially affect every
system that has an embedded microchip, such as automated teller machines,
elevators, and vaults.
The Year 2000 challenge raises special concerns for financial
institutions, since many transactions, such as interest accruals and payments,
are date sensitive. It also may affect the operations of third parties with whom
Columbia and its subsidiaries do business, including Columbia's vendors,
suppliers, regulators, utility companies, and customers.
Columbia's State of Readiness. Columbia is committed to addressing these
Year 2000 challenges in a prompt and responsible manner and has dedicated
resources to do so. Management has completed an assessment of its automated
systems and has implemented a plan to resolve these issues, including purchasing
appropriate computer technology. Columbia's Year 2000 compliance plan ("Y2K
Plan") has five phases. These phases are (1) project management, (2) awareness,
(3) assessment, (4) testing, and (5) remediation and implementation. Columbia
has substantially completed phases (1) through (3), although appropriate
follow-up activities are continuing to occur, and Columbia is currently involved
in the testing phase of the Y2K Plan. Expected completion of phase 5 will be
June 30, 1999. However, Columbia will continue to monitor its systems for
compliance and state of readiness.
Project Management. Columbia has assigned primary responsibility for
Year 2000 project management to CRB's Compliance Officer. Columbia has also
formed a Year 2000 compliance committee, consisting of appropriate
representatives from its critical operational areas, including the President and
Chief Executive Officer and the Chief Financial Officer, to assist the
Compliance Officer in implementing the Y2K Plan. In addition, Columbia provides
periodic reports to its Board of Directors in order to assist it in overseeing
Columbia's Year 2000 readiness preparations.
Awareness. Columbia has completed several projects designed to promote
awareness of Year 2000 issues throughout its organization and its customer base.
These projects include mailing information brochures to deposit and loan
customers, providing training for lending officers and other staff, and
assigning a compliance officer to
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answer customer questions and to respond to vendor, customer, and shareholder
inquiries. Additionally, Columbia's branch personnel have provided awareness
seminars for their business customers and the communities they serve.
Assessment. Assessment is the process of identifying all
mission-critical applications that could potentially be negatively affected by
dates in the Year 2000 and beyond. Columbia's assessment phase is substantially
complete. Systems examined during this phase included telecommunications
systems, account-processing applications, and other software and hardware used
in connection with customer accounts. Columbia's operations, like those of many
other companies, are intertwined with the operations of certain of its business
partners. Accordingly, Columbia's operations could be materially affected if the
operations of those companies who provide Columbia with mission critical
applications, systems, and services are materially affected. For example,
Columbia depends upon vendors who provide it with equipment, technology, and
software in connection with its business operations. Failure of these software
vendors to achieve Year 2000 readiness could substantially affect the operations
of Columbia. In addition, lawsuits and other financial challenges materially
affecting the financial viability of these vendors could materially affect
Columbia. In response to this concern, Columbia has identified and contacted
those vendors who provide mission-critical applications. Columbia is assessing
their Year 2000 compliance efforts and will continue to monitor their progress
as the Year 2000 approaches.
Testing. Updating and testing Columbia's mission-critical automated
systems is currently underway. All of these systems will be tested to verify
that dates in the Year 2000 are being appropriately recognized and processed.
Testing of Columbia's current mission-critical automated systems will be
substantially complete by the end of the first quarter of 1999. Testing of
renovations and new systems will continue throughout 1999.
Remediation and Implementation. This phase involves obtaining and
implementing renovated software applications provided by vendors. As these
applications are received and implemented, Columbia will test them for Year 2000
compliance. This phase also involves upgrading and replacing automated systems
where appropriate. This activity will continue throughout 1999. Although this
phase will be substantially complete before the end of 1999, additional
follow-up activities may take place in the Year 2000 and beyond.
Certain important data processing services, including overnight
processing of debits and credits, are provided to Columbia by Datatech of
Oregon, Inc. ("Datatech"), an Oregon corporation. CRB, VCB and five other Oregon
community banks own Datatech. Datatech provides data processing services only to
its shareholder-banks ("Datatech Banks"). As a provider of services that could
be negatively affected by the Year 2000 problem, and that could therefore have a
negative impact on Columbia, the Datatech banks have taken the following steps
to address Datatech's Year 2000 readiness:
Project Management. Representatives of the Datatech Banks sit on
Datatech's Board of Directors, which oversees Datatech's Year 2000 efforts.
Datatech makes periodic reports to its Board of Directors in order to assist the
Board in its oversight process.
Assessment. The Datatech Banks assess Datatech's Year 2000 compliance
efforts on an ongoing basis. The Datatech Banks have requested Datatech to
prepare and submit a comprehensive action plan detailing Datatech's plans for
and progress toward addressing the Year 2000 problems, including Datatech's
progress in obtaining Year 2000 reports from its own vendors.
Testing. Datatech's Year 2000 compliance testing for its hardware and
software systems is ongoing. All of its mission-critical systems will be tested
to verify that dates in the year 2000 are being appropriately recognized and
processed. Testing of renovations and new systems will continue throughout 1999.
Renovation and Implementation. Datatech expects to upgrade and replace
automated systems where appropriate. This activity will continue throughout
1999. Although this phase will be substantially complete before the end of 1999,
additional follow-up activities may take place in the Year 2000 and beyond.
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The widely-publicized Year 2000 issue will continue to raise
considerable uncertainties and risks for financial institutions such as
Columbia. The possible interruption of Columbia's business operations, and the
operations of those with whom it does business, has the potential to materially
impact Columbia's financial condition, revenues and liquidity. The extent to
which such risks and effects will actually materialize cannot be known with
complete certainty. However, Columbia believes it will be prepared to avoid any
significant adverse Year 2000 consequences arising from factors which Columbia
has the ability to control, such as the readiness of Columbia's own computer
systems. In addition, Columbia intends to have in place reasonable contingency
plans for addressing problems arising from events it cannot directly control.
As of the date of this Form 10-K, Columbia does not expect the known and
reasonably anticipated costs of preparing for the Year 2000 issue, including
software and hardware upgrades, system testing and personnel training, to be
material. Through December 31, 1998, Columbia spent approximately $100,000 on
direct and indirect costs to address the issue. For the years 1999 and 2000,
Columbia expects to spend between $450,000 and $750,000 on continuing technology
upgrades, contingency planning, system testing and personnel training. However,
no assurance can be given that Columbia's Year 2000-related costs will not be
higher as a result of factors that cannot be foreseen at the present time. Such
unanticipated costs could have a material adverse effect on Columbia's business
and operations.
SUPERVISION AND REGULATION
GENERAL
Columbia is extensively regulated under federal and state law. These
laws and regulations are primarily intended to protect depositors, not
shareholders. The discussion below describes and summarizes certain statutes and
regulations. These descriptions and summaries are qualified in their entirety by
reference to the particular statute or regulation. Changes in applicable laws or
regulations may have a material effect on the business and prospects of
Columbia. The operations of Columbia may also be affected by changes in the
policies of banking and other government regulators. Columbia cannot accurately
predict the nature or extent of the effects on its business and earnings that
fiscal or monetary policies, or new federal or state laws, may have in the
future.
FEDERAL BANK HOLDING COMPANY REGULATION
Columbia is a bank holding company as defined in the Bank Holding
Company Act of 1956, as amended (the "BHCA"), and is therefore subject to
regulation, supervision, and examination by the Federal Reserve. In general, the
BHCA limits the business of bank holding companies to owning or controlling
banks and engaging in other activities closely related to banking. Columbia must
file annual reports with the Federal Reserve and must provide it with such
additional information as it may require.
Holding Company Bank Ownership. The BHCA requires every bank holding
company to obtain the prior approval of the Federal Reserve before (i)
acquiring, directly or indirectly, ownership or control of any voting shares of
another bank or bank holding company if, after such acquisition, it would own or
control more than 5% of such shares, (ii) acquiring all or substantially all of
the assets of another bank or bank holding company, or (iii) merging or
consolidating with another bank or bank holding company.
Holding Company Control of Nonbanks. With some exceptions, the BHCA also
prohibits a bank holding company from acquiring or retaining direct or indirect
ownership or control of more than 5% of the voting shares of any company which
is not a bank or bank holding company, or from engaging directly or indirectly
in activities other than those of banking, managing, or controlling banks, or
providing services for its subsidiaries. The principal exceptions to these
prohibitions involve certain nonbank activities which, by statute or by Federal
Reserve regulation or order, have been identified as activities closely related
to the business of banking or of managing or controlling banks. In making this
determination, the Federal Reserve considers whether the performance of such
activities by a bank holding company can be expected to produce benefits to the
public such as greater convenience, increased competition, or gains in the
efficient use of resources, which can be expected to outweigh the risks of
possible adverse effects such as decreased or unfair competition, conflicts of
interest, or unsound banking practices.
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The Economic Growth and Regulatory Reduction Act of 1996 amended the BHCA to
eliminate the requirement that bank holding companies seek prior Federal Reserve
approval before engaging in certain permissible nonbanking activities if the
holding company is well-capitalized and meets certain other specific criteria.
Transactions with Affiliates. Subsidiary banks of a bank holding company
are subject to restrictions imposed by the Federal Reserve Act on extensions of
credit to the holding company or its subsidiaries, on investments in their
securities, and on the use of their securities as collateral for loans to any
borrower. These regulations and restrictions may limit Columbia's ability to
obtain funds from CRB for its cash needs, including funds for payment of
dividends, interest, and operational expenses.
Tying Arrangements. Under the Federal Reserve Act and certain
regulations of the Federal Reserve, a bank holding company and its subsidiaries
are prohibited from engaging in certain tying arrangements in connection with
any extension of credit, lease or sale of property, or furnishing of services.
For example, CRB may not generally require a customer to obtain other services
from it or from Columbia, and may not require that the customer promise not to
obtain other services from a competitor as a condition to an extension of credit
to the customer.
FEDERAL AND STATE BANK REGULATION
General. CRB and VCB are Oregon stock banks with deposits insured by the
Federal Deposit Insurance Corporation ("FDIC"), and are subject to the
supervision and regulation of the Oregon Director of Banks and the FDIC. CRB is
also subject to the supervision and regulation the Washington Department of
Financial Institutions, and VCB is a Federal Reserve member bank. These agencies
have the authority to prohibit banks from engaging in what they believe
constitute unsafe or unsound banking practices.
CRA. The Community Reinvestment Act (the "CRA") requires that, in
connection with examinations of financial institutions within their
jurisdiction, the Federal Reserve or the FDIC evaluates the record of the
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those banks. These factors are also considered in evaluating
mergers, acquisitions, and applications to open a branch or facility.
Insider Credit Transactions. Banks are also subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to
executive officers, directors, principal shareholders, or any related interests
of such persons. Extensions of credit (i) must be made on substantially the same
terms, including interest rates and collateral, and follow credit underwriting
procedures that are not less stringent than those prevailing at the time for
comparable transactions with persons not covered above and who are not
employees; and (ii) must not involve more than the normal risk of repayment or
present other unfavorable features. Banks are also subject to certain lending
limits and restrictions on overdrafts to such persons. A violation of these
restrictions may result in the assessment of substantial civil monetary
penalties on the affected bank or any officer, director, employee, agent, or
other person participating in the conduct of the affairs of that bank, the
imposition of a cease and desist order, and other regulatory sanctions.
FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act
(the "FDICIA"), each federal banking agency has prescribed, by regulation,
noncapital safety and soundness standards for institutions under its authority.
These standards cover internal controls, information systems, and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, such other operational and managerial
standards as the agency determines to be appropriate, and standards for asset
quality, earnings and stock valuation. An institution which fails to meet these
standards must develop a plan acceptable to the agency, specifying the steps
that the institution will take to meet the standards. Failure to submit or
implement such a plan may subject the institution to regulatory sanctions.
Management believes that CRB and VCB meet all such standards, and therefore,
does not believe that these regulatory standards materially affect Columbia's
business operations.
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INTERSTATE BANKING AND BRANCHING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Act") permits nationwide interstate banking and branching under
certain circumstances. This legislation generally authorizes interstate
branching and relaxes federal law restrictions on interstate banking. Currently,
bank holding companies may purchase banks in any state, and states may not
prohibit such purchases. Additionally, banks are permitted to merge with banks
in other states as long as the home state of neither merging bank has opted out.
The Interstate Act requires regulators to consult with community organizations
before permitting an interstate institution to close a branch in a low-income
area.
Under recent FDIC regulations, banks are prohibited from using their
interstate branches primarily for deposit production. The FDIC has accordingly
implemented a loan-to-deposit ratio screen to ensure compliance with this
prohibition.
Oregon and Washington each enacted "opting in" legislation in accordance
with the Interstate Act provisions allowing banks to engage in interstate merger
transactions subject to certain "aging" requirements. In both states, branches
may not be acquired or opened separately in the home state by an out-of-state
bank, but once an out-of-state bank has acquired a bank within the state, either
through merger or acquisition of all or substantially all of the bank's assets,
the out-of-state bank may open additional branches within the home state.
DEPOSIT INSURANCE
The deposits of CRB and VCB are currently insured to a maximum of
$100,000 per depositor through the Bank Insurance Fund ("BIF") administered by
the FDIC. CRB and VCB are required to pay semi-annual deposit insurance premium
assessments to the FDIC.
The FDICIA included provisions to reform the Federal Deposit Insurance
System, including the implementation of risk-based deposit insurance premiums.
The FDICIA also permits the FDIC to make special assessments on insured
depository institutions in amounts determined by the FDIC to be necessary to
give it adequate assessment income to repay amounts borrowed from the U.S.
Treasury and other sources, or for any other purpose the FDIC deems necessary.
The FDIC has implemented a risk-based insurance premium system under which banks
are assessed insurance premiums based on how much risk they present to the BIF.
Banks with higher levels of capital and a low degree of supervisory concern are
assessed lower premiums than banks with lower levels of capital or a higher
degree of supervisory concern.
DIVIDENDS
The principal source of Columbia's cash revenues is dividends received
from its subsidiaries. The payment of dividends is subject to government
regulation, in that regulatory authorities may prohibit banks and bank holding
companies from paying dividends which would constitute an unsafe or unsound
banking practice. In addition, a bank may not pay cash dividends if that payment
could reduce the amount of its capital below that necessary to meet minimum
applicable regulatory capital requirements. Also, under the Oregon Bank Act, the
Oregon Director of Banks may suspend the payment of dividends if it is
determined that the payment would cause a bank's remaining stockholders' equity
to be inadequate for the safe and sound operation of the bank. Other than the
laws and regulations noted above, which apply to all banks and bank holding
companies, neither Columbia, CRB nor VCB are currently subject to any regulatory
restrictions on their dividends.
CAPITAL ADEQUACY
Federal bank regulatory agencies use capital adequacy guidelines in the
examination and regulation of bank holding companies and banks. If capital falls
below minimum guideline levels, the holding company or bank may be denied
approval to acquire or establish additional banks or nonbank businesses or to
open new facilities.
The FDIC and Federal Reserve use risk-based capital guidelines for banks
and bank holding companies.
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These are designed to make such capital requirements more sensitive to
differences in risk profiles among banks and bank holding companies, to account
for off-balance sheet exposure, and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and off-balance
sheet items. The guidelines are minimums, and the Federal Reserve has noted that
bank holding companies contemplating significant expansion programs should not
allow expansion to diminish their capital ratios and should maintain ratios well
in excess of the minimum. The current guidelines require all bank holding
companies and federally regulated banks to maintain a minimum risk-based total
capital ratio equal to 8%, of which at least 4% must be Tier I capital.
Tier I capital for bank holding companies includes common shareholders'
equity, qualifying perpetual preferred stock (up to 25% of total Tier I capital,
if cumulative, although under a Federal Reserve Rule, redeemable perpetual
preferred stock may not be counted as Tier I capital unless the redemption is
subject to the prior approval of the Federal Reserve), and minority interests in
equity accounts of consolidated subsidiaries, less intangibles, except as
described above. Tier II capital includes: (i) the allowance for loan losses of
up to 1.25% of risk-weighted assets; (ii) any qualifying perpetual preferred
stock which exceeds the amount which may be included in Tier I capital; (iii)
hybrid capital instruments; (iv) perpetual debt; (v) mandatory convertible
securities; and (vi) subordinated debt and intermediate term preferred stock of
up to 50% of Tier I capital. Total capital is the sum of Tier I and Tier II
capital, less reciprocal holdings of other banking organizations, capital
instruments, and investments in unconsolidated subsidiaries.
The assets of banks and bank holding companies receive risk-weights of
0%, 20%, 50%, and 100%. In addition, certain off-balance sheet items are given
credit conversion factors to convert them to asset equivalent amounts to which
an appropriate risk-weight will apply. These computations result in total
risk-weighted assets.
Most loans are assigned to the 100% risk category, except for first
mortgage loans fully secured by residential property, which carry a 50% rating.
Most investment securities are assigned to the 20% category, except for
municipal or state revenue bonds, which have a 50% risk-weight, and direct
obligations of, or obligations guaranteed by, the United States Treasury or
agencies of the federal government, which have 0% risk-weight. In converting
off-balance sheet items, direct credit substitutes, including general guarantees
and standby letters of credit backing financial obligations, are given a 100%
conversion factor. Transaction related contingencies such as bid bonds, other
standby letters of credit and undrawn commitments, including commercial credit
lines with an initial maturity of more than one year, have a 50% conversion
factor. Short-term, self-liquidating trade contingencies are converted at 20%,
and short-term commitments have a 0% factor.
The Federal Reserve also employs a leverage ratio, which is Tier I
capital as a percentage of total assets less intangibles, to be used as a
supplement to risk-based guidelines. The principal objective of the leverage
ratio is to constrain the maximum degree to which a bank holding company may
leverage its equity capital base. The Federal Reserve requires a minimum
leverage ratio of 3%. However, for all but the most highly rated bank holding
companies, and for bank holding companies seeking to expand, the Federal Reserve
expects an additional cushion of at least 1% to 2%.
The FDICIA created a statutory framework of supervisory actions indexed
to the capital level of the individual institution. Under regulations adopted by
the FDIC, an institution is assigned to one of five capital categories,
depending on its total risk-based capital ratio, Tier I risk-based capital
ratio, and leverage ratio, together with certain subjective factors.
Institutions which are deemed to be "undercapitalized" depending on the category
to which they are assigned are subject to certain mandatory supervisory
corrective actions. Columbia does not believe that these regulations have any
material effect on its operations.
EFFECTS OF GOVERNMENT MONETARY POLICY
The earnings and growth of Columbia are affected not only by general
economic conditions, but also by the fiscal and monetary policies of the federal
government, particularly the Federal Reserve. The Federal Reserve can and does
implement national monetary policy for such purposes as curbing inflation and
combating recession,
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but its open market operations in U.S. government securities, control of the
discount rate applicable to borrowings from the Federal Reserve, and
establishment of reserve requirements against certain deposits, influence the
growth of bank loans, investments and deposits, and also affect interest rates
charged on loans or paid on deposits. The nature and impact of future changes in
monetary policies and their impact on Columbia cannot be predicted with
certainty.
CHANGES IN BANKING LAWS AND REGULATIONS
The laws and regulations that affect banks and bank holding companies
are currently undergoing significant changes. Bills may be introduced in the
United States Congress that contain proposals to alter the structure,
regulation, and competitive relationships of the nation's financial
institutions. If enacted into law, these bills could have the effect of
increasing or decreasing the cost of doing business, limiting or expanding
permissible activities (including activities in the insurance and securities
fields), or affecting the competitive balance among banks, savings associations,
and other financial institutions. Some of these bills could reduce the extent of
federal deposit insurance, broaden the powers or the geographical range of
operations of bank holding companies, alter the extent to which banks could
engage in securities activities, and change the structure and jurisdiction of
various financial institution regulatory agencies. Whether or in what form such
legislation may be adopted, or the extent to which the business of Columbia
might be affected thereby, cannot be predicted with certainty.
ITEM 2. PROPERTIES
Six of Columbia's facilities in Hood River, The Dalles, Redmond, Bend,
McMinnville and Madras, Oregon, as well as its two full-service branch
facilities in south central Washington, are housed in properties owned by
Columbia. Columbia leases the space for its in-store facility in the Safeway
store in The Dalles. Columbia has plans to double the size of the Hood River
branch, from 4,000 to 8,000 square feet. The planned second branch in the
Shevlin Business Park in West Bend is in the development stage, and will be
wholly owned by Columbia when construction is complete. The new branches in
Hermiston and Pendleton presently occupy leased space, and Columbia has
purchased land in both Hermiston and Pendleton on which it will construct
permanent branch facilities. All of Columbia's presently owned full-service
branches have drive-up facilities and automated teller machines. Columbia's
mortgage group operates from the second floor of Columbia's present Bend branch.
The following sets forth certain information regarding Columbia's branch
facilities.
<TABLE>
<CAPTION>
Date
Opened or
City and County Address Square Feet Acquired Occupancy Status
- --------------- ------- ----------- ---------- ----------------
<S> <C> <C> <C> <C>
Oregon Branches
The Dalles (Main Branch),
Wasco County 316 East Third Street 8,000 1977 Owned
The Dalles (Westside Branch),
Wasco County (1) 520 Mt. Hood Street 430 1986 Leased
Hood River Branch,
Hood River County 2650 Cascade Avenue 4,000 1993 Owned
Madras Branch,
Jefferson County 624 SW Fourth Street 7,400 1995 Owned
Redmond Branch,
Deschutes County 434 North Fifth Street 4,700 1995 Owned
</TABLE>
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<TABLE>
<CAPTION>
Date
Opened or
City and County Address Square Feet Acquired Occupancy Status
- --------------- ------- ----------- ---------- ----------------
<S> <C> <C> <C> <C>
Bend Branch,
Deschutes County 1701 NE Third Street 8,306 1996 Owned
Hermiston Branch,
Umatilla County (2) 1055 South Highway 395 1,500 1998 Leased
Pendleton Branch,
Umatilla County (2) 16 SE Court Avenue 1,776 1999 Leased
McMinnville Branch, VCB
Yamhill County 723 N Baker 9,600 1998 Owned
Washington Branches
White Salmon Branch,
Klickitat County 390 NE Tohomish Street 5,500 1996 Owned
Goldendale Branch,
Klickitat County 202 West Main Street 6,105 1996 Owned
</TABLE>
- ----------
(1) Leased space in a Safeway supermarket. Lease term expires September
2000.
(2) Leased on a month-to-month basis pending construction of new facility.
Columbia maintains its administrative offices in 1,900 square feet of
leased office space in The Dalles. This space is adequate presently but will not
be suitable over the longer term, and Columbia is presently searching for
permanent space in The Dalles for its administrative operations. Columbia is
committed to keeping its administrative headquarters in The Dalles. It intends
to purchase rather than lease space for this purpose.
EMPLOYEES
As of December 31, 1998, Columbia had a total of 187 full-time
equivalent employees. This number of employees, which compares to 133 at
December 31, 1997, has increased due to the acquisition of VCB, the addition of
personnel to the Columbia River Bank Mortgage Group and various other
administrative functions. None of the employees are subject to a collective
bargaining agreement. Columbia considers its relationships with its employees to
be good.
ITEM 3. LEGAL PROCEEDINGS
Columbia is from time-to-time a party to various legal actions arising
in the normal course of business, such as collection cases and the enforcement
of creditors' rights in bankruptcy proceedings. Management is not presently
aware of any material pending or threatened claims against Columbia.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of securities holders of the
Registrant during the quarter ended December 31, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
The information called for by this item is contained in Columbia
Bancorp's Annual Report to Shareholders for the year ended December 31, 1998,
portions of which are attached hereto as Exhibit 13.1.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain information concerning the
consolidated financial condition, operating results, and key operating ratios
for Columbia at the dates and for the periods indicated. This information does
not purport to be complete, and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Consolidated Financial Statements of Columbia and Notes thereto.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS EXCEPT
PER SHARE DATA)
INCOME STATEMENT DATA
Interest income $ 12,220 $ 13,815 $ 15,385 $ 18,144 $ 21,328
Interest expense 3,999 5,216 5,746 6,270 7,205
--------- --------- --------- --------- ---------
Net interest income 8,221 8,599 9,639 11,874 14,123
Loan loss provision 203 88 246 581 1,000
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 8,018 8,511 9,393 11,293 13,123
Noninterest income 1,486 1,552 1,799 2,481 4,678
Noninterest expense 6,070 6,495 7,180 8,092 10,633
--------- --------- --------- --------- ---------
Income before provision for
income taxes 3,434 3,568 4,012 5,682 7,168
Provision for income taxes 1,098 1,079 1,285 1,795 2,450
--------- --------- --------- --------- ---------
Net income $ 2,336 $ 2,489 $ 2,727 $ 3,887 $ 4,718
========= ========= ========= ========= =========
DIVIDENDS
Cash dividends declared and paid $ 472 $ 555 $ 882 $ 842 $ 1,587
Ratio of dividends to net income 20.21% 22.30% 32.37% 21.67% 33.64%
PER SHARE DATA(1)
Basic earnings per common share $ 0.35 $ 0.37 $ 0.41 $0 .57 $ 0.67
Diluted earnings per common share $ 0.35 $ 0.36 $ 0.40 $0 .55 $ 0.65
Book value per common share $ 2.32 $ 2.60 $ 2.89 $3 .35 $ 4.37
Weighted average shares outstanding
Basic 6,688 6,693 6,732 6,813 7,066
Diluted 6,762 6,842 6,847 7,013 7,238
BALANCE SHEET DATA
Investment securities $ 56,229 $ 49,454 $ 51,484 $ 48,804 $ 47,894
Loans, net $ 90,070 $ 104,178 $ 118,228 $ 155,219 $ 206,551
Total assets $ 162,202 $ 178,486 $ 200,302 $ 231,827 $ 342,413
Total deposits $ 142,803 $ 158,874 $ 178,744 $ 201,568 $ 295,680
Shareholders' equity $ 15,186 $ 17,484 $ 19,533 $ 22,987 $ 34,756
SELECTED RATIOS
Return on average assets 1.45% 1.46% 1.45% 1.77% 1.83%
Return on average equity 16.54% 15.45% 14.91% 18.37% 18.10%
Total loans to deposits 63.07% 65.57% 66.14% 77.00% 69.86%
Net interest margin 5.74% 5.67% 5.74% 6.15% 6.19%
Efficiency ratio(2) 62.53% 63.98% 62.77% 56.37% 56.56%
ASSET QUALITY RATIOS
Reserve for loans losses to:
Ending total loans 1.05% 1.02% 0.83% 1.04% 1.13%
Nonperforming assets(3) 500.00% 291.30% 384.17% 112.65% 108.82%
Nonperforming assets to ending
total assets 0.12% 0.21% 0.04% 0.63% 0.64%
Net loan charge-offs (recoveries)
to average loans 0.27% (0.03)% 0.29% (0.04)% 0.38%
CAPITAL RATIOS
Average shareholders' equity to
average assets 8.74% 9.48% 9.73% 9.62% 10.12%
Tier I capital ratio(4) 14.55% 14.40% 14.20% 13.70% 10.90%
Total risk-based capital ratio(5) 15.46% 15.20% 14.90% 14.70% 11.90%
Leverage ratio(6) 9.47% 9.90% 9.90% 10.60% 8.90%
</TABLE>
- ---------------
(1) Per share data reflects retroactive restatement for stock splits in 1998
(3-for-2 and 2-for-1) and 1995 (3-for-1).
19
<PAGE> 20
(2) Efficiency ratio is noninterest expense divided by the sum of net
interest income plus noninterest income.
(3) Nonperforming assets consist of nonaccrual loans, loans contractually
past due 90 days or more, and other real estate owned.
(4) Tier I capital divided by risk-weighted assets.
(5) Total capital divided by risk-weighted assets.
(6) Tier I capital divided by average total assets.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
From its origins as a one-branch bank in The Dalles, Columbia has grown
as a result of merger and acquisition activity, new branch openings, the
introduction of new business lines, and the expansion and cross-marketing of its
existing products and community-bank lending expertise. In 1995, CRB merged with
Juniper Banking Company, and in 1996 Columbia was formed as CRB's holding
company. In 1996, Columbia acquired Washington-based Klickitat Valley Bank.
Further growth came from CRB's Hood River and Bend branch openings, and from the
expansion in 1997 of CRB's residential mortgage business. In November 1998,
Columbia acquired Valley Community Bank, and in September CRB opened a new
branch in Hermiston, Oregon. CRB opened a new branch in Pendleton, Oregon in
January 1999, and plans to complete construction of a second Bend branch,
including facilities for a business lending group, by mid-1999. Collectively,
these growth and acquisition activities have enabled Columbia to diversify its
portfolio and its operating risk over several market areas and local economies.
Columbia's goal is to grow its earning assets while maintaining a high
return on equity and keeping asset quality high. The key to this, in Columbia's
view, is to emphasize personal, quality banking products and services for its
customers, to hire and retain competent branch management and administrative
personnel, and to respond quickly to customer demand and growth opportunities.
Columbia also intends to increase its market penetration in its existing
markets, and to expand into new markets through further suitable acquisitions
and through new branch openings. Columbia's goal continues to be increase
earning assets without compromising its commitment to high asset quality.
For the year ended December 31, 1998, net income was $4.72 million,
representing an increase of 21.39% over net income of $3.89 million earned
during the year ended December 31, 1997. Net income for 1997 was up 42.49% over
net income of $2.73 million earned during the year ended December 31, 1996. Net
income for 1996 was up 9.64% from $2.49 million for the year ended December 31,
1995. Diluted earnings per share were $0.65, $0.55, and $0.40 for the years
ended December 31, 1998, 1997, and 1996, respectively. Return on average assets
was 1.83% for the year ended December 31, 1998, compared with 1.77% for the year
ended December 31, 1997, and 1.45% in 1996. Return on average equity was 18.10%
for the year ended December 31, 1998, compared with 18.37% for the year ended
December 31, 1997, and 14.91% for the year ended December 31, 1996. The increase
in earnings for the year ended December 31, 1998, versus the comparable period
in 1997 can be attributed to growth in earning assets, deposits, fee income
growth, increased customer activity at the Bend branch, and greater operating
efficiency.
20
<PAGE> 21
Return on average daily assets and equity and certain other ratios for
the periods indicated are presented below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS EXCEPT PER
SHARE DATA)
Net income $ 2,336 $ 2,489 $ 2,727 $ 3,887 $ 4,718
Average assets 161,671 170,352 188,061 219,905 257,664
RETURN ON AVERAGE ASSETS 1.45% 1.46% 1.45% 1.77% 1.83%
Net income $ 2,336 $ 2,489 $ 2,727 $ 3,887 $ 4,718
Average equity 14,122 16,114 18,292 21,157 26,069
RETURN ON AVERAGE EQUITY 16.54% 15.45% 14.91% 18.37% 18.10%
Cash dividends declared and paid per share $ 0.07 $ 0.08 $ 0.13 $ 0.12 $0.2 2
Basic earnings per common share 0.35 0.37 0.41 0.57 0.6 7
DIVIDEND PAYOUT RATIO 20.21% 22.30% 32.37% 21.67% 33.64%
Average equity $ 14,122 $ 16,144 $ 18,292 $ 21,157 $ 26,069
Average assets 161,671 170,352 188,061 219,905 257,664
AVERAGE EQUITY TO ASSET RATIO 8.74% 9.48% 9.73% 9.62% 10.12%
</TABLE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
For financial institutions, the primary component of earnings is net
interest income. Net interest income is the difference between interest income,
principally from loan and investment security portfolios, and interest expense,
principally on customer deposits. Changes in net interest income result from
changes in "volume," "spread," and "margin." Volume refers to the dollar level
of interest-earning assets and interest-bearing liabilities. Spread refers to
the difference between the yield on interest-earning assets and the cost of
interest-bearing liabilities. Net interest margin is the ratio of net interest
income to total average interest-earning assets and is influenced by the
relative level of interest-earning assets and interest-bearing liabilities.
Average Balances and Average Rates Earned and Paid. The following table
shows average balances and interest income or interest expense, with the
resulting average yield or rates by category of earning assets or
interest-bearing liabilities:
21
<PAGE> 22
<TABLE>
<CAPTION>
Year Ended December 31, 1996 Year Ended December 31, 1997
------------------------------------ ------------------------------------
Interest Average Interest Average
Average Income or Yields or Average Income or Yields or
Balance Expense Rates Balance Expense Rates
--------- --------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 111,841 $ 11,855 10.60% $ 140,891 $ 14,764 10.48%
Investment securities
Taxable securities 34,781 2,074 5.96 36,826 2,296 6.24
Nontaxable securities (2) 14,964 1,168 7.80 15,112 1,114 7.37
Interest-earning balances due
from banks 2,129 96 4.51 2,322 127 5.45
Federal funds sold 11,182 589 5.27 4,114 221 5.38
--------- --------- --------- --------- --------- ---------
Total interest-earning
assets (3) 174,897 15,782 9.02 199,265 18,522 9.30
Cash and due from banks 7,976 14,091
Premises and equipment, net 4,092 5,096
Loan loss allowance (1,153) (1,315)
Other assets 2,249 2,768
--------- ---------
Total assets $ 188,061 $ 219,905
========= =========
Interest-bearing liabilities:
Interest-bearing checking and
savings accounts $ 90,062 $ 2,967 3.29% $ 102,005 $ 3,313 3.25%
Time deposit and IRA accounts 49,286 2,717 5.51 51,164 2,772 5.42
Borrowed Funds 1,073 62 5.66 3,236 185 5.68
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities 140,421 5,746 4.09 156,405 6,270 4.01
Noninterest-bearing deposits 28,328 38,299
Other liabilities 1,872 5,326
--------- ---------
Total liabilities 170,621 200,030
Shareholders' equity 17,440 19,875
--------- ---------
Total liabilities and
shareholders' equity $ 188,061 $ 219,905
========= =========
Net interest income $ 10,036 $ 12,252
========= =========
Net interest spread 4.93% 5.29%
========= =========
Average yield on average earning
assets (1) 9.02% 9.30%
========= =========
Interest expense to average earning
assets 3.29% 3.15%
========= =========
Net interest margin (3) 5.74% 6.15%
========= =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
------------------------------------
Interest Average
Average Income or Yields or
Balance Expense Rates
--------- --------- ---------
<S> <C> <C> <C>
Interest-earning assets:
Loans $ 175,588 $ 17,939 10.22%
Investment securities
Taxable securities 31,686 1,890 5.97
Nontaxable securities (2) 16,819 1,284 7.63
Interest-earning balances due
from banks 3,142 159 5.05
Federal funds sold 8,042 492 6.12
--------- --------- ---------
Total interest-earning
assets (3) 235,277 21,764 9.25
Cash and due from banks 14,663
Premises and equipment, net 5,545
Loan loss allowance (1,917)
Other assets 4,096
---------
Total assets $ 257,664
=========
Interest-bearing liabilities:
Interest-bearing checking and
savings accounts $ 115,101 $ 3,571 3.10%
Time deposit and IRA accounts 58,370 3,195 5.47
Borrowed Funds 7,929 439 5.53
--------- --------- ---------
Total interest-bearing liabilities 181,400 7,205 3.97
Noninterest-bearing deposits 48,983
Other liabilities 1,212
---------
Total liabilities 231,595
Shareholders' equity 26,069
---------
Total liabilities and
shareholders' equity $ 257,664
=========
Net interest income $ 14,559
=========
Net interest spread 5.28%
=========
Average yield on average earning
assets (1) 9.25%
=========
Interest expense to average earning
assets 3.06%
=========
Net interest margin (3) 6.19%
=========
</TABLE>
- -----------------
(1) Tax-exempt income has been adjusted to a tax-equivalent basis at 34%.
(2) Nonaccrual loans are included in the average balance.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
Analysis of Changes in Interest Differential. The following table shows
the dollar amount of the increase (decrease) in Columbia's net interest income
and expense and attributes such dollar amounts to changes in volume as well as
changes in rates. Rate and volume variances have been allocated proportionally
between rate and volume changes:
22
<PAGE> 23
<TABLE>
<CAPTION>
1996 OVER 1995 1997 OVER 1996 1998 OVER 1997
----------------------------- ----------------------------- -----------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
----------------------------- ----------------------------- -----------------------------
NET NET NET
VOLUME RATE CHANGE VOLUME RATE CHANGE VOLUME RATE CHANGE
------- ------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 1,613 $ (370) $ 1,243 $ 3,079 $ (169) $ 2,910 $ 3,636 $ (461) $ 3,175
Investment securities
Taxable securities (261) 182 (79) 122 100 222 (321) (85) (406)
Nontaxable securities 140 29 169 12 (65) (53) 126 44 170
Balances due from banks 33 15 48 8 22 30 45 (13) 32
Federal funds sold 232 14 246 (372) 4 (368) 211 60 271
------- ------- ------- ------- ------- ------- ------- ------- -------
Total(*) 1,757 (130) 1,627 2,849 (108) 2,741 3,697 (455) 3,242
------- ------- ------- ------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Interest-bearing checking
and savings accounts 335 (56) 279 393 (47) 346 425 (168) 257
Time deposits 282 66 348 104 (49) 55 390 33 423
Borrowed funds (94) (4) (98) 122 1 123 267 (11) 256
------- ------- ------- ------- ------- ------- ------- ------- -------
Total 523 6 529 619 (95) 524 1,082 (146) 936
------- ------- ------- ------- ------- ------- ------- ------- -------
Net increase (decrease) in
net interest income $ 1,234 $ (136) $ 1,098 $ 2,230 $ (13) $ 2,217 $ 2,615 $ (309) $ 2,306
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
* Tax-exempt income has been adjusted to a tax equivalent basis at a 34% rate.
Net interest income, before provision for loan loss, for the year ended
December 31, 1998 was $14.12 million, an increase of 18.94% compared to net
interest income of $11.87 million in 1997, which was $2.23 million or 23.13%
higher than the $9.64 million in 1996. The overall tax-equivalent earning asset
yield was 9.25% in 1998 compared to 9.30% in 1997 and 9.02% in 1996. For the
same years, rates on interest-bearing liabilities were 3.97%, 4.01%, and 4.09%,
respectively. These results were primarily due to an increase in the volume of
earning assets and the growth of noninterest-bearing deposits. For the
three-year period 1996 through 1998, the average yield on earning assets
increased 0.23% while rates paid on interest-bearing liabilities decreased by
0.12%. Average loans increased 57.00% while average noninterest-bearing deposits
increased 72.91%.
Total interest-earning assets averaged $235.28 million for the year
ended December 31, 1998, compared to $199.27 million for the corresponding
period in 1997. Most of the increase was due to an increase in loans. Increases
in the loan portfolio are attributed to the acquisition of Valley Community
Bank, growth from the Columbia River Bank Mortgage Group in Bend, Oregon which
opened during the third quarter of 1997, opportunities afforded by the banking
industry's consolidation and closure of branches in Columbia's market areas, and
the hiring of additional senior lending personnel in strategic branch locations
and administrative capacities.
Interest-bearing liabilities averaged $181.40 million for the year ended
December 31, 1998 compared to $156.41 million during the same period in 1997.
Although further competitive pressure is expected in expanding deposit
relationships, management, as a matter of policy, does not seek to attract
high-priced, brokered deposits. In the near-term, management does not anticipate
Columbia's net interest margins will be significantly impacted by competitive
pressure for deposit accounts.
Loans, which generally carry a higher yield than investment securities
and other earning assets, comprised 74.63% of average earning assets during
1998, compared to 70.71% in 1997 and 63.95% in 1996. During the same periods,
average yields on loans were 10.22% in 1998, 10.48% in 1997, and 10.60% in 1996.
Investment securities comprised 20.62% of average earning assets in 1998, which
was down from 26.06% in 1997 and 28.44% in 1996. The decrease in the portfolio
of investment securities has provided funds for Columbia's strong loan growth.
Tax
23
<PAGE> 24
equivalent interest yields on investment securities have ranged from 6.54% in
1998 to 6.57% in 1997 and 6.52% in 1996.
Interest cost, as a percentage of earning assets, decreased to 3.06% in
1998, compared to 3.15% in 1997 and 3.29% in 1996. Local competitive pricing
conditions and funding needs for Columbia's investments in loans have been the
primary determinants of rates paid for deposits during these three years.
PROVISION FOR LOAN LOSSES
The provision for loan losses represents charges made to earnings to
maintain an adequate allowance for loan losses. The allowance is maintained at
an amount believed to be sufficient to absorb losses in the loan portfolio.
Factors considered in establishing an appropriate allowance include a careful
assessment of the financial condition of the borrower; a realistic determination
of the value and adequacy of underlying collateral; the condition of the local
economy and the condition of the specific industry of the borrower; a
comprehensive analysis of the levels and trends of loan categories; and a review
of delinquent and classified loans. Columbia applies a systematic process for
determining the adequacy of the allowance for loan losses, including an internal
loan review function and a quarterly analysis of the adequacy of the allowance.
The quarterly analysis includes determination of specific potential loss factors
on individual classified loans, historical potential loss factors derived from
actual net charge-off experience and trends in nonperforming loans, and
potential loss factors for other loan portfolio risks such as loan
concentrations, the condition of the local economy, and the nature and volume of
loans.
The recorded values of loans actually removed from the consolidated
balance sheets are referred to as charge-offs and, after netting out recoveries
on previously charged-off assets, become net charge-offs. Columbia's policy is
to charge off loans when, in management's opinion, the loan or a portion thereof
is deemed uncollectible, although concerted efforts are made to maximize
recovery after the charge-off. When a charge to the loan loss provision is
recorded, the amount is based on past charge-off experience, a careful analysis
of the current portfolio, and an evaluation of future economic trends in
Columbia's market areas. Management will continue to closely monitor the loan
quality of new and existing relationships through stringent review and
evaluation procedures and by making loan officers accountable for collection
efforts.
For the years ended December 31, 1996 through 1998, Columbia charged
$246,000, $581,000, and $1,000,000 respectively, to its provision for loan
losses. The 72.12% increase in 1998 over the provision for loan losses recorded
in 1997 was necessary to accommodate the growth in Columbia's loan portfolio, to
establish a reserve for potential losses consistent with revisions in Columbia's
loan policy, and to replenish the allowance for loan losses for charge-offs
incurred during 1998. During this period, average outstanding loans grew 57.00%
and the allowance for loan losses kept pace by increasing 139.32% through
charges to the provision for loan losses. Columbia's increase in the provision
for loan losses has primarily been a function of strong loan demand and the
resulting growth in the loan portfolio.
For the year ended December 31, 1998, loan charge-offs exceeded
recoveries by $669,000 as compared to 1997, when loan recoveries exceeded
charge-offs by $63,000. Nearly one-third of the loss experienced in 1998 was due
to a loss from one loan. All remaining net charge-offs incurred by Columbia were
smaller in amount and generally distributed evenly among all other branch
locations.
NONINTEREST INCOME
Total noninterest income increased through year-end 1998 from 1996. Over
this three-year period, noninterest income has increased from $1.80 million in
1996, to $2.48 million in 1997, and to $4.68 million in 1998. Noninterest income
is primarily derived from service charges and related fees, as well as mortgage
origination and processing fees. Such income increased $2.20 million, or 88.57%
for the year ended December 31, 1998, compared to the year ended December 31,
1997. The principal reason for this increase was income generated by Columbia's
mortgage lending division, which was formed in September of 1997, and which
operates under the name "Columbia River Bank Mortgage Group." For the year ended
1998, this division generated $924,000 in income from originating, processing,
servicing, and selling mortgage loans. The increase was also the result of
24
<PAGE> 25
increasing deposit volumes and related service fees. Service charges were $1.74
million for the year ended December 31, 1998, compared to $1.55 million for the
year ended December 31, 1997. Management attributes this 12.91% increase to the
increase in customers served at all of Columbia's branches. The remainder of the
increase in noninterest income is primarily attributable to improved revenues
received from credit card discounts and fees, investment fee income provided by
Columbia's financial services department, and other noninterest fees and
charges.
NONINTEREST EXPENSE
Noninterest expenses consist principally of employees' salaries and
benefits, occupancy costs, data processing expenses, and other noninterest
expenses. A measure of Columbia's ability to contain noninterest expenses is the
efficiency ratio. This statistic is derived by dividing total noninterest
expenses by total net interest income and noninterest income. For the year ended
December 31, 1998, the ratio had slipped to 56.56% compared to 56.37% for the
corresponding period of 1997. The decrease in the efficiency ratio primarily
reflects increased expenses discussed further below.
Noninterest expense was $10.63 million for the year ended December 31, 1998,
an increase from $8.09 million for the year ended December 31, 1997, and $7.18
million for the year ended December 31, 1996. This was due to an increase in
staffing costs, as well as increases in other key operating costs such as
occupancy expense and supplies, primarily relating to the formation and staffing
of Columbia River Bank Mortgage Group and the opening of the Hermiston and
Pendleton, Oregon branches of CRB. Columbia's investments in new and expanded
technology for the Mortgage Group's operations, to support internal services,
and to provide additional technology-based products for customers also resulted
in expense increases. In 1998, Columbia's total noninterest expense was 56.56%
of net revenues, while in 1997 and 1996 it was 56.37% and 62.78%, respectively,
of net revenues.
Salary and benefit expense was $6.01 million in 1998, $4.46 million in
1997, and $3.97 million in 1996. As of December 31, 1998, Columbia had 187
full-time equivalent employees, which compares to 133 as of December 31, 1997
and 132 as of December 31, 1996. The increase in this expense category was the
result of a full year of staffing the Columbia River Bank Mortgage Group, the
staffing of the new Hermiston and Pendleton branches and the normal expense
increases associated with maintaining an expanded employee base.
Net occupancy expense consists of depreciation on premises and
equipment, maintenance and repair expenses, utilities, and related expenses.
Columbia's net occupancy expense increased steadily over the three-year period.
This expense category was $948,000 in 1998, an increase of $212,000, or 28.87%,
over the $736,000 reported in 1997. From 1996 to 1998, net occupancy expense
increased by $294,000, from $654,000 to $948,000, an increase of 44.95%. These
increases reflect the operation of the Bend branch, the occupancy costs
associated with the new Hermiston and Pendleton facilities and the formation in
1997 of the Columbia River Bank Mortgage Group. This also reflects the costs
relating to continued investment in Columbia's computer systems, which have been
upgraded throughout the organization.
FDIC insurance premiums are a function of outstanding deposit
liabilities. Because the Bank Insurance Fund has since been adequately
capitalized, Columbia was required to make only nominal premium payments in
1996, 1997 and 1998. For the three year period ended December 31, 1998, Columbia
paid the lowest premium available for its deposit insurance coverage.
Other noninterest expense increases arose from investments in technology
and data processing, and in new service delivery channels to enable Columbia to
continue its focus on efficient, personal service. Data processing expenses
increased 32.30% in 1998 over the previous year, which reflects both the growth
of Columbia's customer and account base and ongoing upgrades to the data
processing operations.
One factor that will impact expenses in the immediate near-term future
is the Year 2000 issue. Management has initiated an organization-wide program to
prepare Columbia's computer systems and applications for the Year 2000. This
program involves computer system upgrades, systems testing, contingency planning
and personnel training. For a discussion of the Year 2000 issue and its
potential impact on Columbia's business and
25
<PAGE> 26
operations, see the information in Item 1 under the heading "The Year 2000
Issue."
INCOME TAXES
The provision for income taxes was $2.45 million in 1998, $1.80 million
in 1997, and $1.29 million in 1996. The provision resulted in effective combined
federal and state tax rates of 34.18% in 1998, 31.60% in 1997, and 32.03% in
1996. Effective tax rates differ from combined estimated statutory rates of 38%
principally due to the effects of nontaxable interest income which is recognized
for book but not for tax purposes. In addition, Columbia's state income tax rate
was reduced from 6.6% to 3.81% in 1997 as a result of surplus revenues received
by the State of Oregon.
FINANCIAL CONDITION
SUMMARY BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, INCREASE (DECREASE)
----------------------------------- ---------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1997 1998 12/31/96 - 12/31/97 12/31/97 - 12/31/98
--------- --------- --------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 7,367 $ 2,834 $ 12,555 $ (4,533) -61.53% $ 9,721 343.01%
Investments 51,484 48,804 47,894 (2,680) -5.21% (910) -1.86%
Loans 118,228 155,219 206,552 36,991 31.29% 51,333 33.07%
Other assets(1) 23,223 24,970 75,412 1,747 7.52% 50,442 202.01%
--------- --------- --------- --------- --------- --------- ---------
Total assets $ 200,302 $ 231,827 $ 342,413 $ 31,525 15.74% $ 110,586 47.70%
========= ========= ========= ========= =========
LIABILITIES
Noninterest-bearing
deposits $ 33,549 $ 46,377 $ 67,409 $ 12,828 38.24% $ 21,032 45.35%
Interest-bearing deposits 145,195 155,191 228,271 9,996 6.88% 73,080 47.09%
--------- --------- --------- --------- --------- --------- ---------
Total deposits 178,744 201,568 295,680 22,824 12.77% 94,112 46.69%
Other liabilities(2) 2,025 7,272 11,977 5,247 259.11% 4,705 64.70%
--------- --------- --------- --------- --------- --------- ---------
Total liabilities 180,769 208,840 307,657 28,071 15.53% 98,817 47.32%
SHAREHOLDERS'
EQUITY 19,533 22,987 34,756 3,454 17.68% 11,769 51.20%
--------- --------- --------- --------- --------- --------- ---------
Total liabilities and
shareholder's equity $ 200,302 $ 231,827 $ 342,413 $ 31,525 15.74% $ 110,586 47.70%
========= ========= ========= ========= =========
</TABLE>
(1) Includes cash and due from banks, fixed assets, and accrued interest
receivable.
(2) Includes accrued interest payable and other liabilities.
INVESTMENTS
A year-to-year comparison shows that Columbia's investment securities at
December 31, 1998, totaled $47.89 million, compared to $48.80 million at
December 31, 1997, and $51.48 million at December 31, 1996. This represents a
decrease of 5.21% between 1996 and 1997, and a decrease of 1.86% between 1997
and 1998. Increases or decreases in the investment portfolio are primarily a
function of loan demand and changes in Columbia's deposit structure. On December
31, 1999, investments in federal funds sold (an overnight investment) were
$12.55 million and investments in restricted stock were $1.12 million. The
balance of federal funds sold is influenced by cash demands, customer deposit
levels, loan activity, and other investment transactions.
Columbia follows a financial accounting principle which requires that
investment securities be identified as held-to-maturity or available-for-sale.
Held-to-maturity securities are those that Columbia has the intent and ability
to hold until they mature or are called. Available-for-sale securities are those
that management may sell if liquidity requirements dictate or if alternative
investment opportunities arise. The mix of available-for-sale and
held-to-maturity investment securities is determined by management, based on
Columbia's asset-liability policy, management's assessment of the relative
liquidity of Columbia, and other factors.
26
<PAGE> 27
At December 31, 1998, the investment portfolio, excluding restricted
equity securities, consisted of 62.99% available-for-sale securities and 37.01%
held-to-maturity securities. At December 31, 1997, Columbia's investment
portfolio, excluding restricted equity securities, consisted of 65.18%
available-for-sale securities and 34.82% held-to-maturity securities, and at
December 31, 1996, available-for-sale securities were 18.87% of the portfolio
and held-to-maturity securities were 79.83% of the portfolio. The change in mix
from 1996 to 1997 was primarily due to an adjustment in the accounting
classification of the investment portfolio of Klickitat Valley Bank after its
acquisition by Columbia in 1996. The present mix provides greater investment
flexibility by placing more of the portfolio in the available-for-sale category.
At December 31, 1998, Columbia's investment portfolio had total net
unrealized gains of approximately $574,000. This compares to net unrealized
gains of approximately $371,000 at December 31, 1997, and $46,000 at December
31, 1996. Unrealized gains and losses reflect changes in market conditions and
do not represent the amount of actual profits or losses Columbia may ultimately
realize. Actual realized gains and losses occur at the time investment
securities are sold or redeemed.
Federal funds sold are short term investments which mature on a daily
basis. Columbia invests in these instruments to provide for additional earnings
on excess available cash balances. Because of their short maturities, the
balance of federal funds sold fluctuates dramatically on a day-to-day basis. The
balance on any one day is influenced by cash demands, customer deposit levels,
loan activity, and other investment transactions. Investments in federal funds
sold totaled $12.55 million at December 31, 1998, compared to $2.83 million at
December 31, 1997, and $7.37 million at December 31, 1996.
The following table provides the book value of Columbia's portfolio of
investment securities as of December 31, 1998, 1997, and 1996, respectively.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------ ------------ ------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Investments available-for-sale:
U.S. Treasury securities $ 1,803 $ 3,214 $ 3,199
U.S. Government obligations 7,159 26,943 23,168
Corporate debt securities 452 853 605
Corporate equity securities 300 300 300
Municipal securities -- -- 2,195
------- ------- -------
9,714 31,310 29,467
------- ------- -------
Investments held-to-maturity:
Obligations of states and political subdivisions 15,351 16,571 16,336
Mortgage-backed securities 451 157 974
U.S. Treasury securities 2,319 -- --
U.S. Government obligations 20,821 -- --
Corporate debt securities 2,157 -- --
------- ------- -------
41,099 16,728 17,310
------- ------- -------
Restricted equity securities 672 766 1,117
------- ------- -------
Total investment securities $51,485 $48,804 $47,894
======= ======= =======
</TABLE>
27
<PAGE> 28
Investment securities at the dates indicated consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------------- ------------------------------- -------------------------------
APPROXIMATE APPROXIMATE APPROXIMATE
AMORTIZED MARKET % AMORTIZED MARKET % AMORTIZED MARKET %
COST VALUE YIELD(*) COST VALUE YIELD(*) COST VALUE YIELD(*)
--------- ----------- -------- --------- ----------- -------- --------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasuries and
agencies:
One year or less $ 902 $ 904 5.81% $ 1,599 $ 1,599 5.47% $ 558 $ 553 5.34%
One to five years 3,215 3,196 5.97% 1,611 1,614 5.72% 2,603 2,646 4.80%
U.S. Government
agencies:
One year or less 1,814 1,814 5.47% 5,052 5,058 5.75% 1,190 1,181 5.95%
One to five years 19,393 19,284 6.37% 17,333 17,321 6.35% 20,377 20,465 5.94%
Five to ten years 5,331 5,304 7.01% 3,701 3,727 6.60% 2,499 2,494 5.94%
Due after ten years 1,916 1,900 7.30% 1,000 994 7.51%
Obligations of states and
political subdivisions:
One year or less 2,659 2,674 5.77% 2,165 2,187 6.00% 2,820 2,822 4.57%
One to five years 8,340 8,517 6.61% 6,887 7,051 7.29% 7,167 7,379 6.93%
Five to ten years 3,952 3,966 7.40% 3,005 3,080 6.72% 2,887 2,952 6.56%
Over ten years 400 400 7.74% 4,513 4,610 7.35% 5,655 5,838 6.95%
Corporate and other debt
securities:
One year or less 1,852 1,861 5.83% 250 250 5.98% 605 605 6.37%
One to five years 756 756 6.45% 603 603 6.45% -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total debt securities 50,530 50,576 6.49% 47,719 48,094 6.90% 46,361 46,935 6.11%
Corporate equity securities 300 300 300 300 300 300
Restricted equity securities 672 672 766 766 816 816
------- ------- ------- ------- ------- -------
Total securities $51,502 $51,548 $48,785 $49,160 $47,477 $48,051
------- ------- ------- ------- ------- -------
</TABLE>
* Weighted average yields are stated on a federal tax-equivalent basis at
a 34% rate, and have been annualized, where appropriate.
LOANS
Columbia's loan policies and procedures establish the basic guidelines
governing its lending operations. Generally, the guidelines address the types of
loans that Columbia seeks, target markets, underwriting and collateral
requirements, terms, interest rate and yield considerations, and compliance with
laws and regulations. All loans or credit lines are subject to approval
procedures and amount limitations. These limitations apply to the borrower's
total outstanding indebtedness to Columbia, including the indebtedness of any
guarantor. The policies are reviewed and approved at least annually by the Board
of Directors of Columbia. Columbia supplements its own supervision of the loan
underwriting and approval process with periodic loan audits by outside
professionals experienced in loan review work.
Bank officers are charged with loan origination in compliance with
underwriting standards overseen by the loan administration department and in
conformity with established loan policies. On an annual basis, the Board of
Directors determines the lending authority of the President, who then delegates
lending authority to the Chief Lending Officer and other lending officers. Such
delegated authority may include authority related to loans, letters of credit,
overdrafts, uncollected funds, and such other authority as determined by the
Board or the President within the President's delegated authority.
The President has authority to approve loans up to a lending limit set
by the Board of Directors. All loans
28
<PAGE> 29
above the lending limit of the President and up to a certain limit are reviewed
for approval by an internal loan committee. Loans which exceed this limit but
are less than pre-established lending limits must be conditionally approved by
an internal loan committee, and are subject to the approval of the Board's loan
committee up to pre-established lending limits. Minutes from Board loan
committee meetings are reviewed by the full Board at regularly scheduled monthly
meetings. All loans above the lending limit up to Columbia's statutory
loan-to-one-borrower limitation (also known as the legal lending limit)
require approval of the full Board of Directors. Columbia's unsecured legal
lending limit was $3.48 million at December 31, 1998. Columbia seldom makes
loans approaching its unsecured legal lending limit.
Net outstanding loans totaled $206.55 million at December 31, 1998,
representing an increase of $51.33 million, or 33.07%, compared to $155.22
million at December 31, 1997. Loan commitments grew to $57.66 million as of
December 31, 1998, representing an increase of $21.35 million over year-end
1997. Net outstanding loans were $118.23 million at December 31, 1996, and
$104.18 million at December 31, 1995.
Columbia's net loan portfolio at December 31, 1998, includes loans
secured by real estate (56.32% of total), commercial loans (19.98% of total),
agricultural loans (16.75% of total), and consumer loans (8.02% of total). These
percentages are generally consistent with previous reporting periods. Loans
secured by real estate include loans made for purposes other than financing
purchases of real property, such as inventory financing and equipment purchases,
where real property serves as collateral for the loan.
This table presents the composition of Columbia's loan portfolio at the
dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------ ------------------------ -------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Commercial $ 26,485 22.40% $ 28,464 18.34% $ 41,275 19.98%
Agricultural 15,592 13.19% 20,511 13.21% 34,604 16.75%
Real estate secured loans:
Commercial property 19,255 16.29% 29,319 18.89% 41,090 19.89%
Farmland 5,610 4.75% 6,212 4.00% 8,603 4.17%
Construction 4,613 3.90% 13,504 8.70% 20,048 9.71%
Residential 31,489 26.63% 40,200 25.90% 43,919 21.26%
Home equity lines 1,555 1.31% 2,239 1.44% 2,675 1.30%
--------- --------- --------- --------- --------- ---------
Total real estate 62,522 52.88% 91,474 58.93% 116,335 56.32%
Consumer 13,776 11.65% 15,665 10.09% 16,569 8.02%
Other 1,148 0.97% 1,356 0.88% 933 0.45%
--------- --------- --------- --------- --------- ---------
Total loans 119,523 101.09% 157,470 101.45% 209,716 101.53%
Less deferred loan fees (300) (0.25)% (612) (0.39)% (784) (0.38)%
Less reserve for loan losses (995) (0.84)% (1,639) (1.06)% (2,380) (1.15)%
--------- --------- --------- --------- --------- ---------
Loans receivable, net $ 118,228 100.00% $ 155,219 100.00% $ 206,552 100.00%
========= ========= ========= ========= ========= =========
</TABLE>
29
<PAGE> 30
The following table shows the maturities and sensitivity of Columbia's
loans to changes in interest rates at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------
DUE AFTER ONE DUE
DUE IN ONE YEAR THROUGH AFTER TOTAL
(DOLLARS IN THOUSANDS) YEAR OR LESS FIVE YEARS FIVE YEARS LOANS
-------------- --------------- ------------ --------
<S> <C> <C> <C> <C>
Commercial loans $ 19,312 $ 6,098 $ 3,054 $ 28,464
Agricultural loans 19,407 935 169 20,511
Real estate secured loans:
Commercial property 4,063 10,257 14,999 29,319
Farmland 1,549 2,709 1,954 6,212
Construction 9,957 2,769 778 13,504
Residential 8,774 3,586 27,840 40,200
Home equity lines 2,086 124 29 2,239
-------- -------- -------- --------
Total real estate loans 26,429 19,445 45,600 91,474
Consumer 6,682 7,131 1,852 15,665
Other 937 86 333 1,356
-------- -------- -------- --------
Total loans $ 72,767 $ 33,695 $ 51,008 $157,470
======== ======== ======== ========
Loans with fixed interest rates $ 80,654
Loans with floating interest rates 76,816
--------
$157,470
========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------------
DUE AFTER ONE DUE
DUE IN ONE YEAR THROUGH AFTER TOTAL
(DOLLARS IN THOUSANDS) YEAR OR LESS FIVE YEARS FIVE YEARS LOANS
-------------- -------------- ------------ --------
<S> <C> <C> <C> <C>
Commercial loans $ 25,827 $ 10,347 $ 5,101 41,275
Agricultural loans 31,499 2,714 391 34,604
Real estate secured loans:
Commercial property 10,726 13,603 16,761 41,090
Farmland 1,862 3,872 2,869 8,603
Construction 16,421 2,878 749 20,048
Residential 13,472 4,463 25,984 43,919
Home equity lines 2,553 122 -- 2,675
-------- -------- -------- --------
Total real estate loans 45,034 24,938 46,363 116,335
Consumer 7,334 7,710 1,525 16,569
Other 734 52 147 933
-------- -------- -------- --------
Total loans $110,428 $ 45,761 $ 53,527 $209,716
======== ======== ======== ========
Loans with fixed interest rates $107,389
Loans with floating interest rates 102,327
--------
$209,716
========
</TABLE>
LOAN LOSSES AND RECOVERIES
The reserve for loan losses is established through a provision for loan
losses charged to expenses. Loans are charged against the reserve for loan
losses when management believes that the collectibility of the principal or a
portion thereof is unlikely. The reserve is an amount that management believes
will be adequate to absorb possible losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and prior
loan loss experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions that
may affect the borrower's ability to pay. Accrual of interest is discontinued on
a loan when management believes, after considering economic and business
conditions, collection efforts and collateral position, that the borrower's
financial condition is such that collection of interest is doubtful.
30
<PAGE> 31
The following table shows Columbia's loan loss experience for the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans outstanding at end of period, net of
unearned interest income $ 91,024 $ 105,250 $ 119,223 $ 156,858 $ 208,932
========= ========= ========= ========= =========
Average loans outstanding for the period $ 87,609 $ 97,087 $ 111,841 $ 140,891 $ 175,588
========= ========= ========= ========= =========
Reserve for loan losses balance, beginning of year $ 992 $ 955 $ 1,072 $ 995 $ 1,639
--------- --------- --------- --------- ---------
Loans charged off:
Commercial (193) (34) (30) (7) (219)
Real estate -- -- -- -- (51)
Agriculture (50) (14) (317) -- (369)
Installment loans (19) (16) (21) (19) (77)
Credit card and related accounts (7) (55) (9) (14) (51)
--------- --------- --------- --------- ---------
Total loans charged off (269) (119) (377) (40) (767)
--------- --------- --------- --------- ---------
Recoveries:
Commercial 19 107 26 21 40
Real estate -- -- -- -- --
Agriculture 1 7 7 80 49
Installment loans 4 31 20 1 1
Credit card and related accounts 5 3 -- 1 8
--------- --------- --------- --------- ---------
Total recoveries 29 148 53 103 98
--------- --------- --------- --------- ---------
Net (charge-offs) recoveries (240) 29 (324) 63 (669)
Provision charged to operations 203 88 247 581 1,000
--------- --------- --------- --------- ---------
Acquisition of Valley Community Bancorp 410
--------- --------- --------- --------- ---------
Reserve for loan losses balance, end of period $ 955 $ 1,072 $ 995 $ 1,639 $ 2,380
========= ========= ========= ========= =========
Ratio of net loans charged off (recovered) to
average loans outstanding 0.27% (0.03)% 0.29% (0.04)% 0.38%
Ratio of reserve for loan losses to loans at
end of period 1.05% 1.02% 0.83% 1.04% 1.13%
</TABLE>
The adequacy of the reserve for loan losses should be measured in the
context of several key ratios: (1) the ratio of the reserve to total outstanding
loans; (2) the ratio of total nonperforming loans to total loans; and, (3) the
ratio of net charge-offs (recoveries) to average loans outstanding. Since 1993,
Columbia's ratio of the reserve for loan losses to total loans has ranged from
0.83% to 1.13%. The amounts provided by these ratios have been sufficient to
fund Columbia's charge-offs, which have not been historically significant, and
to provide for potential losses as the loan portfolio has grown. These ratios
have also been consistent with the level of nonperforming loans to total loans.
From December 31, 1993 through June 30, 1998, nonperforming loans to total loans
have ranged from a low of 0.20% to a high of .93%. This experience tracks with
changes in the ratio of the reserve for loan losses to total loans and with the
actual balances maintained in the reserve account. Finally, Columbia's
historical ratio of net charge-offs (recoveries) to average outstanding loans
illustrates its favorable loan charge-off and recovery experience. In two of the
five years from 1994 to 1998, annual loan recoveries have actually exceeded
charge-offs. For the remaining three years between December 31, 1994 and 1998,
net charge-offs ranged from 0.27% to 0.38% of average loans. Management believes
Columbia's loan underwriting policies and its loan officers' knowledge of their
customers are significant contributors to Columbia's success in limiting loan
losses.
31
<PAGE> 32
During the year ended December 31, 1998, Columbia recognized $767,000 in
loan losses and $9,000 in recoveries. One large loss of $206,000, net of
recoveries, contributed significantly to this increase over the prior five
years. Although management worked with the borrower to establish a viable
repayment plan, the loan, which was identified for its credit weaknesses at the
time Columbia acquired Klickitat Valley Bank, was ultimately recognized as a
loss. Other charge-offs recorded in 1998 were not as significant and were
consistent with Columbia's historical experience in view of the growth in its
loan portfolio. Management has taken aggressive action to limit credit losses by
lowering lending authorities, when and if appropriate, and has recently added
further staff to credit administration functions. Therefore, management believes
its charge-off and recovery experience will be consistent with that of prior
years and that implementation of Columbia's current loan underwriting,
oversight, and collection policies , once implemented, will serve to promote
high asset quality and low loan loss experience at all of its branches,
including its proposed new branch facilities and at Valley after its pending
acquisition.
The following table presents information with respect to nonperforming
loans and other assets:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual status $ 68 $ 308 $ 229 $1,041 $1,082
Loans past due - greater than 90 days 118 60 30 414 --
Restructured loans -- -- -- -- 825
------ ------ ------ ------ ------
Total nonperforming loans 186 368 259 1,455 1,907
Other real estate owned 5 -- -- -- 281
------ ------ ------ ------ ------
Total nonperforming assets $ 191 $ 368 $ 259 $1,455 $2,188
====== ====== ====== ====== ======
Allowance for loans losses $ 955 $1,072 $ 995 $1,639 $2,380
Ratio of total nonperforming assets to
total assets 0.12% 0.21% 0.04% 0.63% 0.64%
Ratio of total nonperforming loans to
total loans 0.20% 0.35% 0.21% 0.93% 0.91%
Ratio of allowance for loan losses to
total nonperforming assets 500.00% 291.30% 384.17% 112.65% 108.82%
</TABLE>
Columbia has adopted a policy for placement of loans on nonaccrual
status after they become 90 days past due unless otherwise formally waived.
Further, Columbia may place loans that are not contractually past due or that
are deemed fully collateralized on nonaccrual status to promote better oversight
and review of loan arrangements. Loans on nonaccrual status at December 31,
1998, totaled approximately $1.08 million, compared to $1.04 million at December
31, 1997, and $229,000 at the end of 1996.
In 1998, Columbia adopted procedures to identify and monitor loans that
have had their original terms restructured to accommodate borrowers' financial
needs. Loan revisions and modifications are commonly provided to meet the credit
needs of borrowers in weakened financial condition and to enhance ultimate
collection. As of December 31, 1998, Columbia identified loans totaling $825,000
that had been classified as restructured. All of these loans are currently
performing in accordance with their restructured terms. However, management will
continue to monitor these loans for any changes or deterioration in performance.
At December 31, 1998, Columbia had $281,000 in the other real estate
owned ("OREO") category, which represents assets held through loan foreclosure
or recovery activities. There were no assets in OREO at December 31, 1997 or
1996.
32
<PAGE> 33
DEPOSITS
The following table sets forth the average balances of Columbia's
interest-bearing deposits, interest expense, and average rates paid for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1996 1997 1998
------------------------------ ------------------------------ ------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing checking $ 66,856 $ 2,238 3.35% $ 79,134 $ 2,645 3.34% $ 92,669 $ 2,962 3.20%
Savings 26,986 842 3.12% 30,818 1,172 3.80% 26,252 855 3.26%
Time deposits 45,506 2,604 5.72% 43,217 2,268 5.25% 54,550 2,949 5.41%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing
deposits 139,348 $ 5,684 4.08% 153,169 $ 6,085 3.97% 173,471 $ 6,766 3.90%
======== ======== ======== ======== ======== ========
Total noninterest-bearing
deposits 28,328 38,299 48,983
-------- -------- --------
Total noninterest and
noninterest-bearing
deposits $167,676 $191,468 $222,454
======== ======== ========
</TABLE>
At December 31, 1998, total deposits were $295.68 million, an increase
of $94.11 million or 49.69%, from total deposits of $201.57 million at December
31, 1997. Total deposits in 1997 increased by 12.77% over 1996. Deposit growth
in 1997 and 1998 was due to a combination of pricing strategies, increased
marketing, and increased emphasis on implementing a sales culture within the
branches, as well as the acquisition of VCB. The growth in deposit accounts has
primarily been in interest-bearing and noninterest-bearing demand accounts.
Noninterest-bearing demand deposits, also called "core deposits," continued to
be a significant portion of Columbia's deposit base. To the extent Columbia can
fund operations with core deposits, net interest spread, which is the difference
between interest income and interest expense, will improve. At December 31,
1998, core deposits accounted for 22.80% of total deposits, down slightly from
23.01% as of December 31, 1997.
Interest-bearing deposits consist of money market, savings, and time
certificate accounts. Interest-bearing account balances tend to grow or decline
as Columbia adjusts its pricing and product strategies based on market
conditions, including competing deposit products. At December 31, 1998, total
interest-bearing deposit accounts were $228.27 million, an increase of $73.08
million, or 47.09%, from December 31, 1997. Increases were strong in all
interest-bearing deposit categories, including interest bearing demand accounts,
savings accounts, and time deposits. Interest-bearing demand accounts increased
$49.21 million, or 57.56%, from December 31, 1997 to 1998, and $12.83 million,
or 17.66%, from 1996 to 1997. The growth in these deposits has, in management's
opinion, been helped by continued customer perceptions of declining service
levels provided by super-regional bank competitors.
Columbia is not dependent on brokered deposits or high-priced time
deposits. At December 31, 1998, time certificates of deposits in excess of
$100,000 totaled $10.88 million, or 3.68% of total outstanding deposits,
compared to $8.94 million, or 4.43%, of total outstanding deposits at December
31, 1997, and $12.21 million, or 6.83%, of total outstanding deposits at
December 31, 1996. The following table sets forth, by time remaining to
maturity, all time certificates of deposit accounts outstanding at December 31,
1998:
<TABLE>
<S> <C>
(IN THOUSANDS)
Three months or less $20,882
Over three through six months 19,006
Over six months through twelve months 12,670
Over twelve months 13,028
-------
$65,586
=======
</TABLE>
33
<PAGE> 34
SHORT-TERM BORROWINGS
The following table sets forth certain information with respect to
Columbia's Federal Home Loan Bank of Seattle borrowings as of December 31, 1994,
1995, 1996, 1997, and 1998.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Amount outstanding at end of period $3,381 $1,200 $ 600 $4,600 $7,300
Weighted average interest rate at end of
period 5.27% 5.42% 5.68% 5.89% 5.41%
Maximum amount outstanding at any
month-end and during the year $4,031 $3,581 $1,200 $4,600 $7,600
Average amount outstanding during the
period $1,872 $2,341 $ 813 $2,781 $6,933
Average weighted interest rate during
the period 5.08% 6.15% 5.86% 5.80% 5.53%
</TABLE>
SHAREHOLDERS' EQUITY
Shareholders' equity increased $11.77 million during 1998. Shareholders'
equity at December 31, 1998, was $34.76 million compared to $22.99 million at
December 31, 1997. This increase reflects net income and comprehensive income of
$4.76 million, $237,000 in exercised stock options, and sales of common stock of
$8.36 million. These additions to equity were partially offset by cash dividends
paid or declared of $1.59 million..
Dividends declared and paid were $0.22 per share in 1998, $0.12 per
share in 1997, and $0.13 per share in 1996. Dividends in 1996 exceeded those for
1997 as a result of a change in Columbia's dividend policy from annual to
quarterly payments and a special $.07 per share dividend paid to shareholders
following Columbia's acquisition of Klickitat Valley Bank in 1996.
LIQUIDITY
Columbia has adopted policies to maintain a relatively liquid position
to enable it to respond to changes in the financial environment and ensure
sufficient funds are available to meet customers' needs for borrowing and
deposit withdrawals. Generally, Columbia's major sources of liquidity are
customer deposits, sales and maturities of investment securities, the use of
federal funds markets, and net cash provided by operating activities. Scheduled
loan repayments are a relatively stable source of funds, while deposit inflows
and unscheduled loan prepayments, which are influenced by general interest rate
levels, interest rates available on other investments, competition, economic
conditions, and other factors, are not. Liquid asset balances include cash,
amounts due from other banks, federal funds sold, and securities
available-for-sale and securities held-to-maturity with maturities in the next
three months. At December 31, 1998, these liquid assets totaled $95.88 million
or 28.00% of total assets as compared to $50.94 million or 21.98% of total
assets at December 31, 1997. Another source of liquidity is the ability to
borrow from the Federal Home Loan Bank of Seattle and other correspondent banks.
At December 31, 1998, credit limits through these institutions totaled
approximately $58.12 million.
The analysis of liquidity also includes a review of the changes that
appear in the consolidated statements of cash flows for the year ended December
31, 1998. The statement of cash flows includes operating, investing, and
financing categories. Operating activities include net income of $4.72 million,
which is adjusted for noncash items and increases or decreases in cash due to
changes in certain assets and liabilities. Investing activities consist
primarily of both proceeds from and purchases of securities, and the impact of
the net growth in loans. Financing activities present the cash flows associated
with deposit accounts, and reflect dividends paid to shareholders.
At December 31, 1998, Columbia had outstanding commitments to make loans
of $57.66 million. Nearly all of these commitments represented unused portions
of credit lines available to consumers under credit card and
34
<PAGE> 35
other arrangements and to businesses. Many of these credit lines will not be
fully drawn upon and, accordingly, the aggregate commitments do not necessarily
represent future cash requirements. Management believes that Columbia's sources
of liquidity are more than adequate to meet likely calls on outstanding
commitments; although there can be no assurance in this regard.
CAPITAL
The Federal Reserve Board and the Federal Deposit Insurance Corporation
have established minimum requirements for capital adequacy for bank holding
companies and member banks. The requirements address both risk-based capital and
leveraged capital. The regulatory agencies may establish higher minimum
requirements if, for example, a corporation has previously received special
attention or has a high susceptibility to interest rate risk.
The following reflects Columbia's various capital ratios at December 31,
1998, and December 31, 1997, as compared to regulatory minimums for capital
adequacy purposes:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 AT DECEMBER 31, 1998 REGULATORY MINIMUM
-------------------- -------------------- ------------------
<S> <C> <C> <C>
Tier I capital 13.70% 10.90% 4.00%
Total risk-based capital 14.70% 11.90% 8.00%
Leverage ratio 10.60% 8.90% 4.00%
</TABLE>
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET-LIABILITY MANAGEMENT AND INTEREST RATE SENSITIVITY
Columbia's results of operations depend substantially on its net
interest income. Interest income and interest expense are affected by general
economic conditions and by competition in the marketplace. Columbia's interest
and pricing strategies are driven by its asset-liability management analysis and
by local market conditions.
Columbia seeks to manage its assets and liabilities to generate a stable
level of earnings in response to changing interest rates and to manage its
interest rate risk. Columbia further strives to serve its communities and
customers through deployment of its resources on a corporate-wide basis so that
qualified loan demands may be funded wherever necessary in its branch banking
system. Asset/liability management involves managing the relationship between
interest rate sensitive assets and interest rate sensitive liabilities. If
assets and liabilities do not mature or reprice simultaneously, and in equal
amounts, the potential for exposure to interest rate risk exists, and an
interest rate "gap" is said to be present.
Rising and falling interest rate environments can have various effects
on a bank's net interest income, depending on the interest rate gap, the
relative changes in interest rates that occur when assets and liabilities are
repriced, unscheduled repayments of loans, early withdrawals of deposits, and
other factors.
The following table sets forth the dollar amount of maturing
interest-earning assets and interest-bearing liabilities at December 31, 1998,
and the difference between them for the maturing or repricing periods indicated.
The amounts in the table are derived from Columbia's internal data, which varies
from amounts classified in its financial statements, and, although the
information may be useful as a general measure of interest rate risk, the data
could be significantly affected by external factors such as prepayments of loans
or early withdrawals of deposits. Each of these may greatly influence the timing
and extent of actual repricing of interest-earning assets and interest-bearing
liabilities.
35
<PAGE> 36
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------------
VARIABLE LESS THAN ONE YEAR
RATE ONE YEAR OR LONGER TOTAL
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Investments $ 37,177 $ 7,957 $ 45,890 $ 91,024
Loans 79,533 35,032 91,987 206,552
--------- --------- --------- ---------
Total assets 116,710 42,989 137,877 297,576
LIABILITIES
Core deposits 162,601 42,414 79,787 284,802
Jumbo CDs -- 9,565 1,313 10,878
Borrowings 8,066 -- 1,668 9,734
--------- --------- --------- ---------
Total liabilities 170,667 51,979 82,768 305,414
--------- --------- --------- ---------
(53,957) (8,990) 55,109 (7,838)
--------- --------- --------- ---------
Net cumulative position $ (53,957) $ (62,947) $ (7,838)
========= ========= =========
Cumulative Gap as a percent of assets (15.76)% (18.38)% (2.29)%
========= ========= =========
</TABLE>
The net cumulative gap position is somewhat negative since more
liabilities than assets reprice during the next year. This exposure to
increasing rates is currently exaggerated by "sticky" deposit rates (not
expected to reprice rapidly in increasing rate environment) and a higher than
normal level of short-term cash (not included in rate sensitive assets).
However, Columbia's asset rates change more than deposit rates, and management
feels Columbia's asset yields will change more than cost of funds when rates
change.
Management believes that Columbia has relatively low interest rate risk
that is somewhat asset-sensitive. The net interest margin should increase
slightly when rates increase and shrink somewhat when rates fall. This interest
rate risk is driven by concentration of rate sensitive variable rate and
short-term commercial loans, one of Columbia's major business lines. Columbia
does have significant amounts of fixed rate loans to offset most of the impact
from repricing of short-term loans. However, there can be no assurance that
fluctuations in interest rates will not have a material adverse impact on
Columbia.
Columbia's sensitivity to gains or losses in future earnings due to
hypothetical decreases or increases in interest rates is as follows:
<TABLE>
<CAPTION>
INCREASE OR FINANCIAL IMPACT
DECREASE IN ON NET
INTEREST RATES INTEREST MARGIN
-------------- ---------------
<S> <C>
2% $1,602,000
1% $801,000
-1% ($839,000)
-2% ($1,762,000)
</TABLE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is contained in Columbia
Bancorp's Annual Report to Shareholders for the year ended December 31, 1998,
and is incorporated herein by reference.
36
<PAGE> 37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is contained in Columbia
Bancorp's definitive proxy statement for the annual meeting of shareholders to
be held April 16, 1999, and is incorporated herein by reference.
ITEM 11 EXECUTIVE COMPENSATION
The information called for by this item is contained in Columbia
Bancorp's definitive proxy statement for the annual meeting of shareholders to
be held April 16, 1999, and is incorporated herein by reference.
In addition to the information incorporated herein by reference, the
following additional information is provided pursuant to Section 402(k) of
Regulation S-K.
METHODS AND PROCEDURES FOR SETTING EXECUTIVE COMPENSATION; COMMITTEE REPORTS
Columbia's top executive, Terry L. Cochran, served as President and
Chief Executive Officer of both Columbia Bancorp and of its subsidiary CRB in
1998. Mr. Cochran's 1998 compensation package, including base salary and cash
bonus compensation, was determined by the Executive Committee of CRB and
approved by the entire CRB Board. (Mr. Cochran was a member of the CRB Executive
Committee in 1998, but did not participate in final Committee decisions relating
to his own compensation.)
Mr. Cochran's 1998 base compensation was determined by the Executive
Committee with reference to compensation data from various surveys of peer group
bank compensation, principally the Milliman & Robertson, Inc. Northwest
Financial Industry Salary Survey. This data was used as a reference point to set
base compensation at what the Executive Committee believed was a competitive
level. For 1998, Mr. Cochran received base compensation of $143,333. In setting
Mr. Cochran's cash bonus compensation, the Executive Committee employed a
quantitative formula consisting of six growth and performance measures: (1) the
quality of Columbia's loan portfolio; (2) return on assets and equity; (3) asset
growth; (4) stock price; (5) regulatory compliance; and (6) technology plan goal
achievement. Each component of the formula was given a percentage weighting
based on the Executive Committee's judgement of the importance of the measure.
For example, in 1998 return on assets and equity was given the greatest relative
weighting in the formula. Each performance measure is also assigned a range of
target levels. At year end, the target level achieved for each performance
measure is combined to arrive at the final bonus compensation award. The maximum
bonus compensation that may be awarded under the formula is 50% of base salary.
In 1998, Mr. Cochran's total cash bonus compensation was $50,166, or 35%
of total base compensation of $143,333. The factors which the Board weighted
most heavily in making the final 1998 bonus determination were return on equity,
average asset growth, and regulatory compliance, which collectively constituted
60% of the total bonus formula. For the 1998 calendar year, the targets set for
these three factors were fully achieved.
Base compensation and cash bonus compensation for Columbia's four other
executive officers is determined through a yearly performance and goal setting
process involving each executive officer. The CRB Board delegated this task to
Mr. Cochran in 1998. Mr. Cochran met individually with each executive officer to
review the past year's performance and to set compensation and performance goals
for the next year. Base compensation for executive
37
<PAGE> 38
officers is determined with reference to surveys of peer group bank compensation
for comparable positions, principally the Milliman & Robertson, Inc. Northwest
Financial Industry Salary Survey. Cash bonus compensation for executive officers
is based on a quantitative formula consisting of various growth and performance
measures depending on the nature of the executive officer's responsibilities.
For example, the Chief Lending Officer's cash bonus compensation depends heavily
on the quality of Columbia's loan portfolio. Each performance measure is also
assigned a range of target levels. At year end, the target level achieved for
each performance measure is combined to arrive at the final bonus compensation
award. For 1998 the maximum cash bonus compensation that could be awarded to
executive officers under the formula was 30% of base salary.
The role of CRB's Human Resources Committee in the executive
compensation process is to gather and analyze comparative compensation data, to
set the general outlines of Columbia's cash bonus compensation program, and to
make preliminary recommendations to the full CRB Board concerning stock option
grants. In 1998 the Human Resources Committee was not directly involved in
setting compensation for the executive officers.
The Board of Directors of Columbia in its discretion awards incentive
compensation in the form of stock options grants from time to time to executive
officers and other Columbia personnel. The Board does not employ quantitative
criteria in awarding stock options. In 1998 no stock options were granted to
Columbia's executive officers.
This report is submitted by: (1) the CRB Executive Committee, consisting
of Donald T. Mitchell, Chairperson, William A. Booth, Terry L. Cochran, Jean S.
McKinney, James B. Roberson, Greg P. Walden and (prior to his resignation in
December of 1998) Stephen D. Martin, and (2) the CRB Human Resources Committee,
consisting of Jean S. McKinney, Chairperson, Robert L. R. Bailey, Charles F.
Beardsley and Terry L. Cochran.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is contained in Columbia
Bancorp's definitive proxy statement for the Annual Meeting of Shareholders to
be held April 16, 1999, and is incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is contained in Columbia
Bancorp's definitive proxy statement for the Annual Meeting of Shareholders to
be held April 16, 1999, and is incorporated herein by reference.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits.
Pursuant to Item 601 of Regulation S-K, the following exhibits are
attached hereto or are incorporated herein by reference.
(Note: The per share earnings computation statement required by Item
601(b)(11) of Regulation S-K is contained in Note 19 to the Consolidated
Financial Statements included in Columbia's 1998 Annual Report to Shareholders.
A copy of this 1998 Annual Report is attached hereto as an exhibit.)
1. Articles of Incorporation and Bylaws. (Regulation S-K, Item 601,
Exhibit Table Item (3)). A copy of Columbia's Articles of
Incorporation, as amended, is attached hereto. Columbia's Bylaws
are attached as Exhibit 15.5 to Columbia's Annual Report on Form
10-KSB for the year ended December 31, 1998 and incorporated
herein by reference.
38
<PAGE> 39
2. Material Contracts. (Regulation S-K, Item 601, Exhibit Table
Item (10)).
10.1 Employment Agreement of May 1, 1998 between Terry L.
Cochran and Columbia Bancorp, a copy of which is
attached hereto.
10.2 Deferred Compensation Agreement of May 1, 1998 between
Terry L. Cochran and Columbia Bancorp, a copy of which
is attached hereto.
10.3 Columbia Bancorp 1999 Stock Incentive Plan, adopted by
Columbia's Board of Directors on February 19, 1999 and
subject to shareholder approval at Columbia's annual
meeting of shareholders scheduled for April 16, 1999. A
copy of the Stock Incentive Plan is attached as Exhibit
1 to the definitive proxy materials filed by Columbia
with the Securities and Exchange Commission on March 9,
1999, and is incorporated herein by this reference.
3. Annual Report to Shareholders. (Regulation S-K, Item 601, Exhibit
Table Item (13)). A copy of Columbia's 1998 Annual Report to Shareholders is
attached hereto.
4. List of Subsidiaries. (Regulation S-K, Item 601, Exhibit Table Item
(21)). Attached hereto is a list of Columbia's subsidiaries as of December 31,
1998.
5. Financial Data Schedule. (Regulation S-K, Item 601, Exhibit Table
Item (27)). Columbia's Financial Data Schedule is attached hereto.
(b) Reports on Form 8-K.
Columbia filed one Report on Form 8-K in the fourth quarter of 1998. The
Report was filed as of December 4, 1998, and described the completion of
Columbia's acquisition of Valley Community Bancorp, which was effective as of
November 30, 1998. The Report incorporated by reference certain pro forma and
other financial information relating to the acquisition filed as part of
Columbia's Form 10-Q for the period ending September 30, 1998.
Upon written request to Columbia's Chief Financial Officer, Neal T.
McLaughlin, P.O. Box 1050, The Dalles, Oregon 97058 a copy of any exhibit
referenced herein will be provided to the requesting party upon payment of
Columbia's reasonable copying expense of $.25 per page.
39
<PAGE> 40
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
BANCORP
DATED: March 26, 1999 By: /s/ Terry L. Cochran
-----------------------------------
Terry L. Cochran, President & C.E.O.
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 and on the dates indicated.
PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR
DATED: March 26, 1999 By: /s/ Terry L. Cochran
-----------------------------------
Terry L. Cochran, President, C.E.O.,
and Director
CHIEF FINANCIAL OFFICER
DATED: March 26, 1999 By: /s/ Neal T. McLaughlin
-----------------------------------
Neal T. McLaughlin: Chief Financial
Officer and Chief Accounting Officer
- Columbia Bancorp
DIRECTORS:
DATED: March 26, 1999 By: /s/ Don T. Mitchell
-------------------------
Don T. Mitchell, Director
DATED: March 26, 1999 By: /s/ William A. Booth
--------------------------
William A. Booth, Director
DATED: _________________, 1999 By: ____________________________________
Robert L. R. Bailey, Director
DATED: _________________, 1999 By: ____________________________________
Charles F. Beardsley, Director
DATED: _________________, 1999 By: ____________________________________
Dennis Carver, Director
DATED: _________________, 1999 By: ____________________________________
Ted M. Freeman, Director
40
<PAGE> 41
SIGNATURES
(Continued)
DATED: March 26, 1999 By: /s/ Jane F. Lee
---------------------
Jane F. Lee, Director
DATED: March 26, 1999 By: /s/ Jean McKinney
-----------------------
Jean McKinney, Director
DATED: March 29, 1999 By: /s/ James B. Roberson
---------------------------
James B. Roberson, Director
DATED: _________________, 1999 By: ____________________________________
Greg Walden, Director
41
<PAGE> 42
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
- ------- ----
<S> <C> <C>
3.1(I) Columbia Bancorp's Articles of Incorporation, as amended
10.1 Employment Agreement of May 1, 1998 between Terry L.
Cochran and Columbia Bancorp.
10.2 Deferred Compensation Agreement of May 1, 1998 between
Terry L. Cochran and Columbia Bancorp.
13.1 1998 Annual Report to Shareholders.
21.1 Columbia's subsidiaries as of December 31, 1998.
27.1 Financial Data Schedule.
</TABLE>
42
<PAGE> 1
ARTICLES OF INCORPORATION
Columbia Bancorp
ARTICLE I
The name of the Corporation is Columbia Bancorp.
ARTICLE II
(1) The Corporation is authorized to issue 10,000,000 shares of
Common Stock. (As amended by shareholder vote on April 29, 1997).
(2) Holders of Common Stock are entitled to one vote per share on
any matter submitted to the shareholders. On dissolution of the Corporation,
after any preferential amount with respect to Preferred Stock has been paid or
set aside, the holders of Common Stock and the holders of any series of
Preferred Stock entitled to participate in the distribution of assets are
entitled to receive the net assets of the Corporation.
(3) The Board of Directors (the "Board") is authorized, subject
to limitations prescribed by the Oregon Business Corporation Act, as amended
from time to time (the "Act"), and by the provisions of this Article, to provide
for the issuance of shares of Preferred Stock in series, to establish from time
to time the number of shares to be included in each series, and to determine the
designations, relative rights, preferences and limitations of the shares of each
series. The authority of the Board with respect to each series includes, without
limitation, determination of the following:
(a) The number of shares in and the distinguishing
designation of that series;
(b) Whether shares of that series shall have full,
special, conditional, limited or no voting rights, except to the extent
otherwise provided by the Act;
(c) Whether shares of that series shall be convertible and
the terms and conditions of the conversion, including provision for the
adjustment of the conversion rate in circumstances determined by the Board;
(d) Whether shares of that series shall be redeemable and
the terms and conditions of the redemption, including the date or dates upon or
after which they shall be redeemable and the amount per share payable in case of
redemption, which amount may vary under different conditions or at different
redemption dates;
Page 1 - COLUMBIA BANCORP ARTICLES OF INCORPORATION
<PAGE> 2
(e) The dividend rate, if any, on shares of that series,
the manner of calculating any dividends, and the preferences of any dividends;
(f) The rights of shares of that series in the event of
voluntary or involuntary dissolution of the Corporation, and the rights of
priority of that series relative to the Common Stock and any other series of
Preferred Stock on the distribution of assets on dissolution; and
(g) Any other rights, preferences and limitations of that
series that are permitted by law to vary.
ARTICLE III
(1) The Board shall supervise the business of the Corporation.
(2) The Board shall consist of not more than twelve (12) and not
less than seven (7) members. The exact number of directors at any given time
shall be fixed within these limits by approval of the directors.
(3) The Board shall be divided into three classes, none of which
shall have less than two (2) members, identified as class (A), class (B), and
class (C). The term of office of directors in class (A) shall expire at the
first annual meeting of shareholders after their election or when their
successors are qualified and elected. The term of office of directors in class
(B) shall expire at the second annual meeting of shareholders after their
election or when their successors are qualified and elected. The term of office
of directors in class (C) shall expire at the third annual meeting of
shareholders after their election or when their successors are qualified and
elected. At each meeting thereafter, the number of directors equal to the number
in the class whose term expires at the time of such meeting shall be elected to
hold office until the third succeeding annual meeting or until their successors
are qualified and elected.
(4) The shareholders of the Corporation may remove one or more
directors only for cause. If the director is elected by a voting group of
shareholders, only the shareholders of that voting group may participate in the
vote to remove the director. A director may be removed by the shareholders only
at a meeting called for the purpose of removing the director. The notice of such
meeting must state that the purpose, or one of the purposes, of the meeting is
the removal of the director. For the purposes of this Article "cause" shall mean
(i) any breach of a director's duty of loyalty to the Corporation or its
shareholders, (ii) acts or omissions of a director which are not in good faith
or which involve intentional misconduct or a knowing violation of the law, (iii)
any distribution to a director which is unlawful under the provisions of ORS
60.367, or (iv) any transaction with the Corporation from which the director
derived an improper or illegal personal benefit.
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<PAGE> 3
(5) Any directorship to be filled by reason of a vacancy in the
Board or a vacancy resulting from an increase in the number of directors shall
be filled by the affirmative vote of a majority of all the directors remaining
in office. Such vacancy shall be filled by the Board for the unexpired term of
such vacancy at the first regular meeting of the Board after the vacancy occurs.
Shareholders may not fill vacancies.
(6) Notwithstanding any other provisions of these Articles of
Incorporation or the bylaws of the Corporation, the provisions of this Article
III may not be amended or repealed, and no provisions inconsistent herewith may
be adopted by the Corporation, without the affirmative vote of seventy-five
percent (75%) of all of the votes entitled to be cast on the matter.
ARTICLE IV
(1) Any offer, proposal or plan to (a) merge, consolidate or
combine the Corporation and/or any of its subsidiaries in any way with any other
corporation, entity or affiliate thereof, or to (b) sell all or substantially
all of the Corporation and/or any of its subsidiaries or assets to any other
corporation, entity or affiliate thereof, which proposal or plan is not approved
by a majority of the Board, must be approved by the affirmative vote of
seventy-five percent (75%) of the shares of each class of stock of the
Corporation entitled to vote on the proposal.
(2) Notwithstanding any other provisions of these Articles of
Incorporation or the bylaws of the Corporation, the provisions of this Article
IV may not be amended or repealed, and no provisions inconsistent herewith may
be adopted by the Corporation, without the affirmative vote of seventy-five
percent (75%) of all of the votes entitled to be cast on the matter.
ARTICLE V
(1) No director of the Corporation shall be personally liable to
the Corporation or its shareholders for monetary damages for conduct as a
director, provided that this Article shall not eliminate the liability of a
director for (i) any breach of a director's duty of loyalty to the Corporation
or its shareholders, (ii) acts or omissions of a director which are not in good
faith or which involve intentional misconduct or a knowing violation of the law,
(iii) any distribution to a director which is unlawful under the provisions of
ORS 60.367, (iv) any transaction with the Corporation from which the director
derived an improper or illegal personal benefit, or (v) any act or omission for
which such elimination of liability is not permitted under the Act.
(2) No amendment to the Act that further limits the acts or
omissions for which elimination of liability is permitted shall affect the
liability of a
Page 3 - COLUMBIA BANCORP ARTICLES OF INCORPORATION
<PAGE> 4
director for any act or omission occurring prior to the effective date of the
amendment.
(3) If the Act or other Oregon law is amended to authorize the
elimination or limitation of the liability of directors, then the liability of a
director of the Corporation shall be so eliminated or limited to the fullest
extent permitted by the Act or by Oregon law as so amended.
ARTICLE VI
(1) The Corporation shall indemnify to the fullest extent not
prohibited by the Act or other law any current or former director of the
Corporation who is made, or threatened to be made, a party to an action, suit or
proceeding, whether civil, criminal, administrative, investigative or other,
including an action, suit or proceeding by or in the right of the Corporation,
by reason of the fact that such person was or is a director, employee or agent
of the Corporation or any of its subsidiaries, or was or is a fiduciary within
the meaning of the Employee Retirement Income Security Act of 1974 with respect
to any employee benefit plan of the Corporation or any of its subsidiaries, or
serves or served at the request of the Corporation as a director, officer,
employee or agent, or as a fiduciary of an employee benefit plan, of another
corporation, partnership, joint venture, trust or other enterprise.
(2) The Corporation shall reimburse or pay for the reasonable
expenses incurred by any such current or former director in any such action,
suit or proceeding in advance of the final disposition of the same if the
director sets forth in writing (i) the director's good faith belief of
entitlement to indemnification under this Article, and (ii) the director's
agreement to repay all advances if it is ultimately determined that the director
is not entitled to indemnification.
(3) No amendment to this Article that limits the Corporation's
obligation to indemnify any person shall have any effect on such obligation for
any act or omission that occurs prior to the later of the effective date of the
amendment or the date on which notice of the amendment is given to the person.
This Article shall not be deemed exclusive of any other provisions for
indemnification or advancement of expenses of directors, officers, employees,
agents and fiduciaries that may be part of or included in any statute, bylaw,
agreement, general or specific action of the Board, vote of shareholders or
other document or arrangement. The Corporation may enter into written agreements
of indemnification.
ARTICLE VII
(1) Unless otherwise permitted by the Board, any business,
including nominations of directors, may be properly brought before an annual
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<PAGE> 5
shareholders meeting by a shareholder only upon the shareholder's timely notice
in writing to the secretary of the Corporation. To be timely, a shareholder's
notice must be delivered to or mailed and received at the principal executive
offices of the Corporation not later than the close of business on the tenth
(10th) business day following the day on which notice or disclosure of the date
of the annual meeting is given or made to shareholders.
(2) A shareholder's notice under this Article VII shall set forth
(i) a brief description of each matter desired to be brought before the annual
meeting and the reason for conducting such business at the meeting, (ii) the
name and address of the proposing shareholder, (iii) the class and number of
shares of stock of the Corporation which are beneficially owned by the proposing
shareholder, (iv) any material interest of the shareholder in the business
proposed, and (v) as for each person whom the shareholder proposes to nominate
for election as a director (a) the name, age, business address, and residence
address of such person, (b) the principal occupation or employment of such
person, (c) the class and number or shares of stock, if any, of the Corporation
which are beneficially owned by such person, (d) the proposed nominee's written
consent, and (e) any other information relating to such person that is required
to be disclosed or is otherwise required by any applicable law.
(3) Notwithstanding any other provisions of these Articles of
Incorporation or the bylaws of the Corporation, the provisions of this Article
VII may not be amended or repealed, and no provisions inconsistent herewith may
be adopted by the Corporation, without the affirmative vote of seventy-five
percent (75%) of all of the votes entitled to be cast on the matter.
ARTICLE VIII
The street address and the mailing address of the initial
registered office of the Corporation is 316 East Third Street, The Dalles,
Oregon 97058 and the name of its initial registered agent is Terry L. Cochran.
ARTICLE IX
The name and address of the incorporator is Bennett H. Goldstein,
Attorney at Law, 2548 SW St. Helens Court, Portland, Oregon 97201.
Page 5 - COLUMBIA BANCORP ARTICLES OF INCORPORATION
<PAGE> 6
ARTICLE X
The mailing address for notices to the Corporation is c/o Bennett
H. Goldstein, Attorney at Law, 2548 SW St. Helens Court, Portland, Oregon 97201.
Date: October 2, 1995.
/s/
------------------------------
Bennett H. Goldstein, Incorporator
FILING AND AMENDMENT HISTORY
Articles of Incorporation filed on October 3, 1995 as Oregon Secretary of
State Registry No. 480168-85.
On April 29, 1997 an amendment to Article II was approved by shareholders
increasing authorized shares from 4 million to 10 million.
Page 6 - COLUMBIA BANCORP ARTICLES OF INCORPORATION
<PAGE> 1
1998 EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
this 1st day of May, 1998 by and between Columbia Bancorp, an Oregon corporation
("Bancorp") and Terry L. Cochran ("Employee").
RECITALS
(1) Bancorp is an Oregon corporation and is the holding company of
Columbia River Banking Company (the "Bank"), a state-chartered Oregon financial
institution with its principal office in The Dalles, Oregon.
(2) Bancorp desires to employ Employee as President and Chief
Executive Officer of Bancorp and of the Bank.
Now, therefore, it is agreed:
1. Relationship and Duties.
1.1 Bancorp shall employ Employee as an officer of Bancorp with the
title of President and Chief Executive Officer to perform such services and
duties as the Board of Directors of Bancorp (the "Bancorp Board") may designate
from time to time. Subject to the terms and conditions hereof, employee shall
perform such duties and exercise such authority as are customarily performed and
exercised by persons holding such office, subject to the general direction of
the Bancorp Board. Such services and duties shall be exercised in good faith and
in accordance with standards of reasonable business judgment.
1.2 Employee shall serve on the Bancorp Board and on such committees
established by the Bancorp Board to which Employee may be appointed.
1.3 Subject to Section 1.7 of the Agreement, Employee shall also be
employed to serve as an officer of the Bank with the title of President and
Chief Executive Officer to perform such services and duties as the Board of
Directors of the Bank (the "Bank Board") may designate from time to time.
Subject to the terms and conditions hereof, employee shall perform such duties
and exercise such authority as are customarily performed and exercised by
persons holding such office, subject to the general direction of the Bank Board.
Such services and duties shall be exercised in good faith and in accordance with
standards of reasonable business judgment.
1.4 Employee shall serve on the Bank Board and on such committees
established by the Bank Board to which Employee may be appointed.
1.5 Employee shall devote his full time, attention and efforts to
the diligent performance of his duties as an officer and director of Bancorp and
of the Bank. Employee will not accept employment with any other individual,
corporation, partnership, governmental authority or any other entity, or engage
in any other venture for profit which Bancorp may consider to be in conflict
with Bancorp's or the Bank's best interests or to be in competition with
Bancorp's or the Bank's business, or which may interfere in
<PAGE> 2
any way with Employee's performance of his duties hereunder. Any exceptions to
the above conditions must be approved by the Bancorp Board in writing.
1.6 Nothing in the Agreement shall prohibit Employee from serving on
the board of directors of any profit or non-profit corporation not in direct
competition with Bancorp or the Bank or with any other subsidiary, sister or
affiliated corporation of Bancorp. In addition, Employee may own stock in any
other corporation whether or not the stock is publicly traded; provided, that if
such corporation operates a business in competition with Bancorp Employee may
not own more than five percent (5%) of the outstanding shares of such
corporation.
1.7 Nothing in the Agreement shall prohibit Bancorp from modifying,
adding to or otherwise changing Employee's duties as a full-time employee during
the term of the Agreement. In particular, and without limitation, Bancorp may in
its discretion direct Employee to (i) cease work as President and Chief
Executive Officer of the Bank and devote 100% of his efforts to serving as
President and Chief Executive Officer of Bancorp, (ii) allocate his efforts on
behalf of Bancorp and of the Bank in a manner determined by the Bancorp Board,
or (iii) undertake special projects on behalf of Bancorp, the Bank or both. Any
such modifications, additions to or changes in Employee's duties shall not be
deemed a termination of Employee's employment under the Agreement.
Notwithstanding the foregoing, Employee shall retain the title of President and
Chief Executive Officer of Bancorp during the term of the Agreement.
2. Term of Employment.
2.1 The initial term of employment under the Agreement shall be two
years beginning May 15, 1998 and ending May 14, 2000.
2.2 Employee's term of employment under the Agreement may be
extended for successive one-year terms after May 14, 2000 subject to the mutual
agreement of the parties. The parties shall reach mutual agreement concerning
such extensions on or before a date which is no less than one year prior to the
date of expiration of Employee's term of employment under the Agreement,
including any extensions thereof. Each extended term shall begin on the
fifteenth day of May in the year the extension becomes effective.
3. Termination.
3.1 As used in the Agreement, "termination" shall mean the
termination of Employee's employment relation with Bancorp, whether initiated by
Bancorp or by Employee, and whether for cause or without cause; provided, that
Employee's retirement from full-time employment under Section 7 herein shall not
constitute a "termination" of employment under the terms of the Agreement.
3.2 Notwithstanding any other provisions of the Agreement, the
employment of Employee shall terminate immediately on the earlier to occur of
any of the following:
3.2.1 Employee's death;
<PAGE> 3
3.2.2 Employee's complete disability. "Complete disability" as
used herein shall mean the inability of Employee, due to illness, accident, or
other physical or mental incapacity, to perform the services required under the
Agreement for an aggregate of sixty (60) days within any period of 120
consecutive days during the term hereof; provided, however, that disability
shall not constitute a basis for discharge for cause;
3.2.3 The discharge of Employee by Bancorp for cause. "Cause"
as used herein shall mean (i) Employee's negligence or misconduct as shall
constitute, as a matter of law, a breach of the covenants and obligations of
Employee hereunder; (ii) failure or refusal of Employee to comply with the
provisions of the Agreement; (iii) Employee's conviction by any duly constituted
court with competent jurisdiction of a crime (other than traffic offenses); (iv)
Employee's malfeasance or incompetence, provided that in applying this criteria
the Bancorp Board shall not be unreasonable or arbitrary, and provided further
that prior to effecting a dismissal under this Section (iv) the Bancorp Board
shall afford Employee with fair and reasonable warning and with a fair and
reasonable opportunity to cure any defects in Employee's performance.
3.3 Employee may terminate his employment with Bancorp with or
without cause by giving thirty (30) days written notice of termination. "Cause"
as used herein shall include Bancorp's failure or refusal to comply with the
provisions of the Agreement.
3.4 The termination of Employee's employment prior to the Retirement
Date as defined in Section 7.1 herein shall constitute a tender by Employee of
his resignation as an officer of Bancorp and of the Bank, as a member of the
Bancorp Board, the Bank Board and any committees thereof, and as an officer and
Board member of any other subsidiaries of Bancorp.
3.5 If prior to the Retirement Date Employee's employment is
terminated by Employee with or without cause, or by Bancorp without cause,
Employee shall be paid all base salary and benefits accrued under the Agreement
as of the termination date, and in addition, shall be entitled to the deferred
compensation payments provided under Section 1 of the Deferred Compensation
Agreement of May 1, 1998 between the parties (the "DC Agreement") or any
successor agreement thereto.
3.6 If prior to the Retirement Date, as defined in Section 7.1
herein, Employee's employment is terminated by Bancorp with cause, Employee
shall be paid all base salary and benefits accrued under the Agreement as of the
termination date, but shall not be entitled to the deferred compensation
payments provided under Section 1 of the DC Agreement.
4. Compensation.
4.1 Employee shall be paid an annual base salary of $145,000 in
equal bimonthly installments, subject to any deductions required by law, for the
period beginning May 15, 1998 and ending December 31, 1998. For the period
beginning January 1, 1999 and ending December 31, 1999, Employee's annual base
salary shall be $150,000.
<PAGE> 4
4.2 On or before the 30th day of April, 1999, Bancorp shall
determine Employee's annual base salary for the calendar year beginning January
1, 2000. If Employee's term of employment under the Agreement has been extended,
on the 30th day of April, 2000, and for each successive April 30th prior to the
date of beginning of any further extended term, Bancorp shall determine
Employee's annual base salary for the immediately following calendar year.
4.3 On or before June 30, 1998, the Bancorp Board shall determine
the amount of and the formulas and methods for establishing Employee's
performance bonus for the 1998 calendar year, subject to any deductions required
by law. Further, in December, 1998 and in the month of December of each
successive year for as long as Employee is employed under the Agreement, the
Bancorp Board shall determine the amount of and the formulas and methods for
establishing Employee's performance bonus for the following calendar year,
subject to any deductions required by law. The amount of such bonus shall be set
in the Bancorp Board's sole discretion, and the Bancorp Board may decline to
award a performance bonus in any year.
4.4 Employee shall receive no fees for serving as a member of the
Bancorp Board or the Bank Board as long as Employee is also employed by Bancorp.
If after the Retirement Date Employee continues to serve as a member of the
Bancorp Board or any the Board of any of Bancorp's subsidiaries, Employee shall
be entitled to receive the fees and other amounts payable to any other such
member.
5. Benefits.
5.1 Employee shall be eligible to participate in any plan of the
Bank or of Bancorp relating to stock options, stock purchases, profit sharing,
group life insurance, medical coverage, education and other retirement or
employee benefits that the Bank or Bancorp may adopt for the benefit of
employees.
5.2 Employee shall be eligible to participate in any other benefits
which may be or become applicable to Bancorp's or the Bank's executive
employees. In addition, Employee shall be entitled to (i) a reasonable car
allowance or, at the Bancorp Board's discretion, in lieu of an allowance an
automobile and all expenses of maintenance to cover its use, (ii) a reasonable
expense account for use in connection with Bancorp and Bank business, (iii)
membership fees and dues for membership in one golf club mutually agreeable
between Employee and the Bancorp Board, and (iv) any other benefits which in the
Bancorp Board's judgment are commensurate with the responsibilities and
functions to be performed by Employee under the Agreement, including the payment
of reasonable expenses for attendance by Employee and Employee's spouse at
annual and periodic meetings of trade associations.
6. Vacations and Leaves.
6.1 Employee shall be entitled to an annual paid vacation of
thirty-five (35) business days per year for the 1998 calendar year and forty-two
(42) business days per year for the 1999 calendar year. If the Agreement is not
renewed or extended beyond May 14, 2000, Employee shall be entitled to paid
vacation of twenty (20) business days for the period beginning January 1, 2000
and ending May 14, 2000. The timing of
<PAGE> 5
vacations shall be scheduled in a reasonable manner by Employee. Employee shall
not be entitled to receive any additional compensation from Bancorp on account
of his failure to take a vacation, and may not accumulate unused vacation time
from one calendar year to the next.
6.2 In addition to paid vacations, Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
employment with Bancorp and the Bank for such additional periods of time and for
such valid and legitimate reasons as the Bancorp Board in its discretion may
determine.
6.3 The Bancorp Board may grant Employee a leave or leaves of
absence, with or without pay, at such time or times and upon such terms and
conditions as the Bancorp Board, in its discretion, may determine.
6.4 In each calendar year Employee shall be absent from Bancorp and
the Bank for one period of two consecutive weeks. Such period may include
vacation, leave, sick leave, attendance at seminars or conventions, or any
combination thereof.
7. Retirement From Full-Time Employment.
7.1 If Employee's employment is not otherwise terminated prior
thereto, Employee's last day of employment under the Agreement or any extensions
thereof shall be deemed Employee's date of retirement (the "Retirement Date"),
after which Employee shall be deemed retired from employment by Bancorp. From
and after the Retirement Date, the Agreement shall be of no further force and
effect, and the relationship between Employee and Bancorp shall be governed
exclusively by the DC Agreement.
7.2 If Employee's employment is terminated hereunder prior to the
Retirement Date, Employee's right to payment and benefits under the Agreement
and under the DC Agreement shall be determined in accordance with Section 3 and
Section 8 of the Agreement and under the DC Agreement. Such termination of
employment shall not invalidate the DC Agreement.
7.3 Employee's retirement shall not constitute Employee's tender of
resignation as a Board member or Board committee member of the Board of
Directors of Bancorp or any of its subsidiaries. From and after the Retirement
Date Employee may serve in such positions on the same terms and conditions as
other such members and in accordance with applicable bylaws.
8. Change of Control.
8.1 Employee's rights on termination of employment under Section 3
of the Agreement, as well as all other rights of Employee under the Agreement
and the DC Agreement or otherwise, shall survive a change of control of Bancorp.
8.2 If a change of control of Bancorp occurs prior to the Retirement
Date, Employee shall have ninety (90) days following the date such change of
control becomes effective to elect to terminate Employee's employment without
cause. If
<PAGE> 6
Employee so elects to terminate, Employee shall receive all payments and
benefits due to Employee on termination under the Agreement and under the DC
Agreement. Such payments and benefits shall include, without limitation, the
deferred compensation payments provided under Section 1 of the DC Agreement.
8.3 Employee shall be entitled to the payments and benefits provided
under this Section 8 whether or not Employee opposed or favored the change in
control. Employee's rights under this Section are in addition to, and not in
lieu of, Employee's rights under Section 7 of the Agreement and under the DC
Agreement.
8.4 The following items shall be due and payable immediately at
Employee's election in the event that a change of control occurs:
8.4.1 Nonforfeitable deferred compensation;
8.4.2 Long-term performance plan objective payments, if any,
shall be declared accomplished and earned based upon performance up to the date
of the change of control.
8.5 If Employee is a participant in a restricted stock plan or share
option plan, and such plan is terminated involuntarily as a result of the change
of control, all stock and options shall be declared fully vested and shall be
paid, awarded or otherwise distributed. With respect to any unexercised options
under any stock option plan, such options may be exercised within the period
provided in such plan. Effective as of the date of the change of control, any
holding period established for stock paid as bonus or other compensation shall
be deemed terminated, except as otherwise provided by law.
8.6 As used in this Section, "control" shall mean the acquisition of
twenty-five percent (25%) or more of the voting securities of Bancorp by any
person, or persons acting as a group within the meaning of Section 13(d) of the
Securities Exchange Act of 1934, or to such acquisition of a percentage between
ten percent (10%) and twenty-five percent (25%) if the Board or the Comptroller
of the Currency, the FDIC, or the Federal Reserve Bank have made a determination
that such acquisition constitutes or will constitute control of Bancorp. The
term "person" refers to an individual, corporation, Bank, bank holding company,
or other entity, but excludes any Employee Stock Ownership Plan established for
the benefit of employees of Bancorp or any of its subsidiaries.
9. Post Termination Covenants.
9.1 If Employee terminates his employment without cause, or if
Employee's employment is terminated by Bancorp for cause, then for one year from
the date of such termination Employee will not, without the prior written
consent of Bancorp:
9.1.1 Undertake full or part-time work, either as an employee
or as a consultant, for another financial institution if such work is to be
done, in whole or in part, in or from an office or other work site in Wasco,
Hood River, Jefferson, Deschutes, Sherman or Gilliam Counties, Oregon or in
Klickitat County, Washington; or
<PAGE> 7
9.1.2 Hire for any financial institution or other employer
(including himself) any employee of Bancorp, the Bank or any other subsidiary of
Bancorp, or directly or indirectly cause such an employee to leave his or her
employment to work for another employer, if such employee is to work in or from
an office or other work site in Wasco, Hood River, Jefferson, Deschutes, Sherman
or Gilliam Counties, Oregon or in Klickitat County, Washington.
9.2 The covenants in this Section do not apply if Employee
terminates his employment for cause, or if Employee's employment is terminated
by Bancorp without cause.
10. Miscellaneous.
10.1 Employee's retirement from employment under the Agreement on the
Retirement Date shall not be deemed a retirement or general termination under
any provision of Bancorp's 1996 Stock Incentive Plan or under any provision of
any successor Plan, except as otherwise provided therein or as provided under
law, and shall therefore not limit the time within which Employee may exercise
Employee's stock option rights under the Plan unless the Plan or applicable law
provides to the contrary.
10.2 Each and every portion of the Agreement is contractual and not a
mere recital, and all recitals shall be deemed incorporated into the Agreement.
The Agreement shall be governed by and interpreted according to Oregon law and
any applicable federal law. The Agreement may not be amended except by a
subsequent written agreement signed by all parties hereto.
10.3 The Agreement contains the entire understanding and agreement of
the parties with respect to the parties' relationship, and all prior
negotiations, discussions or understandings, oral or written, are hereby
integrated herein. No prior negotiations, discussions or agreements not
contained herein or in such documents shall be binding or enforceable against
the parties.
10.4 The Agreement may be signed in several counterparts. The
signature of one party on any counterpart shall bind such party just as if all
parties had signed that counterpart. Each counterpart shall be considered an
original. All counterparts of the Agreement shall together constitute one
original document.
10.5 Employee's rights under the Agreement are in addition to
Employee's rights under the Deferred Compensation Agreement of May 1, 1998
between the parties or any successor agreement thereto.
10.6 All rights and duties of Bancorp under the Agreement shall be
binding on and inure to the benefit of Bancorp's successors and assigns,
including any person or entity which acquires a controlling interest in Bancorp
and any person or entity which acquires all or substantially all of Bancorp's
assets. Bancorp and any such successor or assign shall be and remain jointly and
severally liable to Employee under the Agreement. Employee may not assign or
transfer Employee's rights or interests in or under the Agreement other than by
a will or by the laws of descent and distribution. The
<PAGE> 8
Agreement shall inure to the benefit of and be enforceable by Employee's estate
or legal representative.
10.7 Any waiver by any party hereto of any provision of the
Agreement, or of any breach thereof, shall not constitute a waiver of any other
provision or of any other breach. If any provision, paragraph or subparagraph
herein shall be deemed invalid, illegal or unenforceable in any respect, the
validity and enforceability of the remaining provisions, paragraphs and
subparagraphs shall not be affected.
10.8 Any dispute, controversy, claim or difference concerning or
arising from the Agreement or the rights or performance of either party under
the Agreement, including disputes about the interpretation or construction of
the Agreement, shall be settled through binding arbitration in the State of
Oregon and in accordance with the rules of the American Arbitration Association.
A judgment upon the award rendered in such arbitration may be entered in any
court of competent jurisdiction.
10.9 The Agreement supersedes and replaces the Employment Agreement
between Employee and Bancorp of May 1, 1997, and the latter agreement shall be
deemed null and void as of May 1, 1998.
_______________________________________
Employee
COLUMBIA BANCORP
By:____________________________________
Chairman
<PAGE> 1
1998 DEFERRED COMPENSATION AGREEMENT
This 1998 Deferred Compensation Agreement (the "Agreement") is made and
entered into this 1st day of May, 1998 by and between Columbia Bancorp, an
Oregon corporation ("Bancorp") and Terry L. Cochran ("Employee").
RECITALS
(1) Bancorp is an Oregon corporation and is the holding company of
Columbia River Banking Company (the "Bank"), a state-chartered Oregon financial
institution with its principal office in The Dalles, Oregon.
(2) Employee is now employed full-time by Bancorp as President and
Chief Executive Officer of Bancorp and of the Bank. Employee has served as
President and Chief Executive Officer of Bancorp since its formation in 1995,
and has served in many positions at the Bank, including President and Chief
Executive Officer, since 1981.
(3) Bancorp recognizes the contributions that Employee has made to
the success and profitability of the Bank and of Bancorp, and desires to provide
deferred compensation and other consideration to Employee as compensation for
his services and for the confidentiality covenants set forth in the Agreement.
Now, therefore, it is agreed:
1. Deferred Compensation.
1.1 Employee shall become eligible for deferred compensation under
the Agreement upon his retirement as a full-time employee of Bancorp; provided,
that in no event shall Employee be entitled to deferred compensation payments
under the Agreement prior to May 15, 2000 regardless of the date of Employee's
termination of employment by retirement or otherwise.
1.2 Beginning on the first 15th day of May immediately following the
date of Employee's retirement, and on the 15th day of May of each year
thereafter through and including May 15, 2006, Bancorp shall pay Employee
deferred compensation consisting of (i) $26,000 per year, plus (ii) Accrued
Interest as provided in Section 1.3 herein.
1.3 Payment of the Accrued Interest described in Section 1.2(ii) has
been provided for by the purchase of a $120,000 market rate certificate of
deposit (the "CD") on December 26, 1995. The CD, which has been or shall be
replaced upon maturity as required from time to time to fulfill the terms of the
Agreement, was purchased to fund such payments. Upon the maturity of the CD a
new market rate certificate of deposit shall be purchased with a comparable
maturity for the same purpose as long as Employee is entitled to deferred
compensation payments under the Agreement. Any interest earned (the "Accrued
Interest") on the CD and any subsequent certificates of deposit purchased under
the Agreement shall be paid to Employee as follows: (i) on the first May 15 on
which Employee is paid his first yearly deferred compensation payment under the
Agreement, Employee shall also be paid all Accrued Interest earned from the
first date the CD and any subsequent certificates of deposit began earning
interest
<PAGE> 2
through the May 15 of the year in which Employee is paid such first yearly
payment; (ii) on the 15th day of May of each year thereafter through and
including May 15, 2006, Employee shall be paid all Accrued Interest earned from
the CD and any subsequent certificates of deposit from May 15 of the previous
calendar year through May 15 of the current payment year.
1.4 For the purposes of this Agreement, Employee shall be deemed
"retired" on and as of the date of occurrence of one or more of the following:
(i) the date of expiration of Employee's term of employment under the Employment
Agreement between the parties of May 1, 1998 where such term has not been
extended; (ii) the effective date of termination of Employee's employment by
Bancorp or by Employee, with or without cause; or (iii) such other date on which
the parties may mutually agree in writing.
1.5 If prior to retirement Employee is terminated by Bancorp with
cause, Employee shall not be entitled to any deferred compensation payments or
any benefits under Section 1.6 or elsewhere in the Agreement, and the Agreement
shall as of such termination date be null and void.
1.6 As additional consideration under the Agreement, from and after
the date of Employee's retirement through May 15, 2006, Bancorp shall provide
Employee with all medical, dental, disability, vision and life insurance which
Bancorp or the Bank provides to full-time employees.
2. Change of Control.
2.1 If there is a change of control of Bancorp on or at any time
prior to May 15, 2006, Employee shall continue to be entitled to receive the
deferred compensation provided in Section 1 of the Agreement.
2.2 If Employee is a participant in a restricted stock plan or share
option plan, and such plan is terminated involuntarily as a result of the change
of control, all stock and options shall be declared fully vested and shall be
distributed. With respect to any unexercised options under any stock option
plan, such options may be exercised within the period provided in such plan.
Effective as of the date of the change of control, any holding period
established for stock paid as bonus or other compensation shall be deemed
terminated, except as otherwise provided by law.
2.3 As used in this Section, "control" shall mean the acquisition of
twenty-five percent (25%) or more of the voting securities of Bancorp by any
person, or persons acting as a group within the meaning of Section 13(d) of the
Securities Exchange Act of 1934, or to such acquisition of a percentage between
ten percent (10%) and twenty-five percent (25%) if the Board or the Comptroller
of the Currency, the FDIC, or the Federal Reserve Bank have made a determination
that such acquisition constitutes or will constitute control of Bancorp. The
term "person" refers to an individual, corporation, Bank, bank holding company,
or other entity, but excludes any Employee Stock Ownership Plan established for
the benefit of employees of Bancorp or any of its subsidiaries.
<PAGE> 3
3. Covenants.
3.1 Employee shall at all times fully cooperate with Bancorp and its
affiliates in the defense or prosecution of any litigation arising from or
relating to matters about which Employee has knowledge based on his employment
or other work, paid or unpaid, for Bancorp and its affiliates.
3.2 Employee shall at all times keep all confidential and
proprietary information gained from his employment by Bancorp, or other previous
and present paid or unpaid work for Bancorp and its affiliates, in strictest
confidence, and will not disclose or otherwise disseminate such information to
anyone, other than to Board members or employees of Bancorp or its affiliates,
except as may be required by law, regulation or subpoena.
4. Miscellaneous.
4.1 Employee's retirement shall not be deemed a retirement or
general termination under any provision of Bancorp's 1996 Stock Incentive Plan
or under any provision of any successor Plan, and shall therefore not limit the
time within which Employee may exercise his stock option rights thereunder,
except as otherwise provided under the Plan or any successor plan or under
applicable law.
4.2 Each and every portion of the Agreement is contractual and not a
mere recital, and all recitals shall be deemed incorporated into the Agreement.
The Agreement shall be governed by and interpreted according to Oregon law and
any applicable federal law. The Agreement may not be amended except by a
subsequent written agreement signed by all parties hereto.
4.3 The Agreement contains the entire understanding and agreement of
the parties with respect to the parties' relationship, and all prior
negotiations, discussions or understandings, oral or written, are hereby
integrated herein. No prior negotiations, discussions or agreements not
contained herein or in such documents shall be binding or enforceable against
the parties.
4.4 The Agreement shall be effective and binding upon the parties as
of and from and after May 1, 1998 until its expiration or termination as
provided herein. Employee's rights under the Agreement are in addition to
Employee's rights under the Employment Agreement of May 1, 1998 between the
parties.
4.5 The Agreement may be signed in several counterparts. The
signature of one party on any counterpart shall bind such party just as if all
parties had signed that counterpart. Each counterpart shall be considered an
original. All counterparts of the Agreement shall together constitute one
original document.
4.6 All rights and duties of Bancorp under the Agreement shall be
binding on and inure to the benefit of Bancorp's successors and assigns,
including any person or entity which acquires a controlling interest Bancorp and
any person or entity which acquires all or substantially all of Bancorp's
assets. Bancorp and any such successor or assign shall be and remain jointly and
severally liable to Employee under the
<PAGE> 4
Agreement. Employee may not assign or transfer Employee's rights or interests in
or under the Agreement other than by a will or by the laws of descent and
distribution.
4.7 The Agreement, including the payment rights provided in the
Agreement, shall inure to the benefit of and be enforceable by Employee's estate
or legal representative. Without limitation of the foregoing, it is understood
and agreed that if Employee's employment is terminated prior to the first date
on which Employee becomes eligible for the deferred compensation payments
provided under the Agreement, and if such termination is due to death,
disability or any other reason, other than termination with cause as described
in Section 1.5 herein, the Employee or his estate shall be entitled to all
deferred compensation payments hereunder from and after the first such date of
eligibility.
4.8 Any waiver by any party hereto of any provision of the
Agreement, or of any breach thereof, shall not constitute a waiver of any other
provision or of any other breach. If any provision, paragraph or subparagraph
herein shall be deemed invalid, illegal or unenforceable in any respect, the
validity and enforceability of the remaining provisions, paragraphs and
subparagraphs shall not be affected.
4.9 Any dispute, controversy, claim or difference concerning or
arising from the Agreement or the rights or performance of either party under
the Agreement, including disputes about the interpretation or construction of
the Agreement, shall be settled through binding arbitration in the State of
Oregon and in accordance with the rules of the American Arbitration Association.
A judgment upon the award rendered in such arbitration may be entered in any
court of competent jurisdiction.
4.10 The Agreement supersedes and replaces the Deferred Compensation
Agreement between Employee and Bancorp of May 1, 1997, and the latter agreement
shall be deemed null and void as of May 1, 1998.
_______________________________________
Terry L. Cochran
COLUMBIA BANCORP
By:____________________________________
Chairman
<PAGE> 1
1998 COLUMBIA BANCORP ANNUAL REPORT
<PAGE> 2
1998
COLUMBIA BANCORP
ANNUAL REPORT
C O N T E N T S
<TABLE>
<S> <C>
Columbia Bancorp Today 2
A Message to Shareholders 3
Community Conscious Banking 4
Financial Highlights 6
Management's Discussion
and Analysis 7
Consolidated Financial Statements
Consolidated Balance Sheets 12
Income Statement 13
Shareholders' Equity Statement 14
Cash Flow Statements 15
Notes to Consolidated Financial
Statements 16
Auditor's Report 25
The Faces of Columbia Bancorp 26
Banking Services 31
Branch Locations 32
</TABLE>
<PAGE> 3
[2]
COLUMBIA BANCORP
TODAY
The success of any financial institution is integrally linked to the
financial condition of the communities in which it operates. There is a
synergistic relationship between thriving communities and the banks that serve
them, which is why we consider it an important part of our mission to act as
"prosperity-building partners" with our customers, shareholders and employees.
As a community banking organization, we tailor each branch to the specific needs
of its community, and put that community's dollars back to work to support the
local people and economy.
Columbia Bancorp currently has eleven banking offices serving the financial
needs of the people and businesses of The Dalles, Hood River, White Salmon,
Goldendale, Hermiston, Pendleton, Madras, Redmond, Bend and McMinnville. Our
staff is committed to achieving consistent financial performance and providing
responsive service as we work to ensure the continued prosperity of our region.
[PHOTOGRAPH]
<PAGE> 4
[3]
A MESSAGE TO
SHAREHOLDERS
To Our Shareholders, Customers and Friends,
This was a landmark year for Columbia Bancorp. We continued to grow our
asset base and profitability, as well as offer our customers more services and
benefits. We completed a one million share public stock offering that culminated
in a listing on the Nasdaq National Market, and we reached record levels in
financial performance, which our 18% return on average equity bears out.
One of the more visible changes for our customers was the renaming of our
Juniper Banking Company and Klickitat Valley Bank branches to Columbia River
Bank. The transition was smooth, alleviating customer confusion and providing
additional cost efficiencies.
Using proceeds from the public stock offering, we made our third major
acquisition, Valley Community Bank located in McMinnville, Oregon. Historically,
we've been very successful in integrating new banks into the family. With each
new branch, we've been able to offer a broader range of services, realize
economies and diversify our loan portfolio. The acquisition of Valley Community
Bank follows in this tradition. We are confident that its outstanding management
team, its strong financial performance and the healthy McMinnville economy will
make this an exceptionally sound investment.
Geographic expansion continued with new Columbia River Bank branches in the
fast growing communities of Pendleton (the largest town in Eastern Oregon) and
Hermiston. This region is currently enjoying a vibrant economy as a result of
three large construction projects: the Wal-Mart Western Regional Distribution
Center, the U.S. Army's chemical decommissioning plant and a new Union Pacific
Railroad facility. All three projects are drawing new residents and will employ
large numbers of people for years to come.
While new branches increase operating expenses and can create a drag on
earnings in the early stages, deposits at the new branches are coming in
stronger than anticipated, and we expect the Pendleton and Hermiston branches to
break even as early as 1999. In addition, a second branch in Bend, Oregon is on
schedule to open by mid-1999.
Our stellar financial performance continues with 1998 marking eleven
consecutive years of income growth. We reached record net income of $4.7
million, or $.65 per diluted share. This is a 21% increase over 1997, despite
the costs related to the acquisition, the opening of new branches, the public
offering and the Nasdaq listing. Assets increased 48%, loans grew by 33% and
deposits jumped 47% from a year ago. We're especially pleased with the
performance of our mortgage group, which helped boost non-interest income 89%.
The Board of Directors declared a $.06 per share quarterly dividend in December.
Finally, I'd like to thank Steve Martin, who resigned as Chairman in
December for health reasons, for his invaluable contributions to the success of
Columbia Bancorp. He was a founding director of Columbia River Bank in 1977,
served as Chairman of the Bank Board since 1995 and also served as Chairman of
the holding company since its formation in 1996. We wish Steve all the best. Don
Mitchell, formerly Vice-Chairman and a founding director of Columbia Bancorp,
was elected as Chairman to replace Steve, and Bill Booth was elected
Vice-Chairman. I also wish to thank retiring director Ted Freeman for his
service to Columbia Bancorp. Ted was formerly the chairman of Juniper Banking
Company and an integral part of the formation of Columbia Bancorp.
I'm looking forward to building on our strong 1998 performance in 1999 as
we bring our commitment to high quality personal service to new customers
throughout the region. We will continue to strive for the solid financial
performance that creates value for our shareholders.
TERRY L. COCHRAN
President and CEO
[PHOTOGRAPH]
"OUR STELLAR FINANCIAL PERFORMANCE CONTINUES WITH 1998 MARKING ELEVEN
CONSECUTIVE YEARS OF INCOME GROWTH."
TERRY L. COCHRAN
President and CEO
<PAGE> 5
[4]
[PHOTOGRAPH]
COMMUNITY CONSCIOUS
BANKING
Part of our commitment to the financial well-being of the communities we
serve is determining how best to respond to their specific needs. We develop
programs that are unique to each community's financial infrastructure and goals.
In some cases we donate time and services. In others, we fund community projects
through corporate sponsorship. In every instance, we get involved in doing
whatever is needed to improve the quality of life for our friends and neighbors.
In the Columbia River Gorge, where agriculture is a significant economic
part of the community, we developed a special lending program for farmers to
finance state-of-the-art equipment purchases and to bridge operating costs
between harvests. When windsurfing gave birth to a burgeoning tourist industry,
we offered loans specially tailored to small businesses with seasonal highs and
lows.
In rapidly growing Central Oregon, we're at the forefront in financing new
construction. A lending program we developed has been so successful that we'll
be opening a second branch in 1999 on Bend's westside. And, through volunteer
employee efforts we're helping to make the new Deschutes County Fairgrounds a
reality. The spacious new multi-use facility will serve as a hub of Central
Oregon activity, attracting major national conventions and quality entertainment
as well as continuing to host the annual county fair and scores of other
community and commercial events.
[PHOTOGRAPH]
<PAGE> 6
[5]
[PHOTOGRAPH]
In Pendleton, we help support one of the area's largest tourist attractions,
the Pendleton Roundup. We have employees that volunteer many hours to make sure
the West's oldest rodeo delivers the economic impact the community depends on.
With as many as 70,000 visitors each year, the Pendleton Roundup can account for
more than 50 percent of a local merchant's annual income.
In McMinnville, where we've recently acquired Valley Community Bank, our
loans and other services are working to support one of the largest commercial
nursery operations in the world. And in Madras, we're especially proud of our
continued involvement with the Collage of Cultures, a festival celebrating
cultural diversity in Central Oregon. It not only represents important
employment opportunities for the community, it supports cultural pride and
preservation statewide.
From mortgage lending to agricultural partnerships, small business loans to
Primevest investment services, Columbia Bancorp offers a lifetime of
personalized banking services. We strive to be responsive to our customers'
changing needs, from the time they open their first checking accounts, through
college, careers, buying homes, building security, and on into retirement.
"COLUMBIA RIVER BANK IS A WELCOME ADDITION TO UMATILLA COUNTY. THEY PROVIDE
PROFESSIONAL BANKING SERVICES FOR CORPORATE ACCOUNTS AS WELL AS QUALITY PERSONAL
BANKING SERVICES FOR INDIVIDUALS. IN TODAY'S BIG BANKING CLIMATE OF 1-800
NUMBERS, IT IS REFRESHING FOR US TO BE ABLE TO WORK WITH COLUMBIA RIVER BANK'S
STAFF FACE-TO-FACE FOR ALL OUR BANKING NEEDS. AT COLUMBIA RIVER BANK OUR COMPANY
HAS FOUND COMPETITIVE RATES, COMPREHENSIVE SERVICES, AND TIMELY DECISIONS
EXCEEDING EVEN OUR HIGHEST LEVEL OF EXPECTATIONS."
DOUGLAS FLATT
VP Administration
Mid-Columbia Bus Company
<PAGE> 7
[6]
FINANCIAL
HIGHLIGHTS
Columbia Bancorp had net income for 1998 of $4.7 million, or $.65 per
diluted share. This represents a 21% increase over the $3.9 million or $.55 per
diluted share earned in 1997. Total assets increased 48% to $342.4 million
compared to $231.8 million the previous year. This was due in part to the
acquisition of Valley Community Bank, as well as significant internal growth.
After provision for loan losses, net interest income was up 16% to $13.1 million
compared to $11.3 million in 1997. Non-interest income was up 89% in 1998 to
$4.7 million compared to $2.5 million the previous year. This increase resulted
from service charges, fees generated from mortgage lending, and gains on
mortgage servicing rights. Operating expenses totaled $10.6 million for 1998, up
from $8.1 million in 1997. This was primarily due to the costs related to the
acquisition of Valley Community Bank and the opening of new branches in
Pendleton and Hermiston. Net loans increased 33% to $206.6 million from $155.2
million in 1997.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
(in thousands,except for per share amounts)
At December 31:
ASSETS $342,413 $231,827 $200,302
DEPOSITS $295,680 $201,568 $178,744
NET LOANS $206,552 $155,218 $118,228
SHAREHOLDERS' EQUITY $ 34,756 $ 22,987 $ 19,600
For the year:
NET EARNINGS $ 4.72 $ 3.89 $ 2.73
BASIC EARNINGS PER SHARE $ .67 $ .57 $ .41
DILUTED EARNINGS PER SHARE $ .65 $ .55 $ .40
</TABLE>
ASSETS
[PERFORMANCE GRAPH]
[millions]
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
$162,202 $178,486 $200,302 $231,827 $342,413
</TABLE>
DEPOSITS
[PERFORMANCE GRAPH]
[millions]
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
$142,803 $158,874 $178,744 $201,568 $295,680
</TABLE>
NET LOANS
[PERFORMANCE GRAPH]
[millions]
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
$90,070 $104,178 $118,228 $155,218 $206,552
</TABLE>
NET EARNINGS
[PERFORMANCE GRAPH]
[millions]
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
$2,337 $2,489 $2,727 $3,886 $4,718
</TABLE>
<PAGE> 8
[7]
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
From its origins as a one-branch bank in The Dalles, Columbia Bancorp
("Columbia") has grown as a result of merger and acquisition activity, new
branch openings, the introduction of new business lines, and the expansion and
cross-marketing of its existing products and community bank lending expertise.
In 1995, Columbia River Bank ("CRB") merged with Juniper Banking Company, and in
1996 Columbia was formed as CRB's holding company. In 1996, Columbia acquired
Washington-based Klickitat Valley Bank. Further growth came from CRB's Hood
River and Bend branch openings, and from the expansion in 1997 of CRB's
residential mortgage business. In November 1998, Columbia acquired Valley
Community Bank ("VCB"), and in September CRB opened a new branch in Hermiston,
Oregon. CRB opened a new branch in Pendleton, Oregon in January 1999, and plans
to complete construction of a second Bend branch, including facilities for a
business lending group, by mid-1999. According to information published by the
State of Oregon, if the acquisition of VCB had been completed as of September
30, 1998, Columbia would rank as the 3rd largest community banking organization
in Oregon as measured by total pro forma assets of $313 million. Collectively,
these growth and acquisition activities have enabled Columbia to diversify its
portfolio and its operating risk over several market areas and local economies.
Columbia's goal is to grow its earning assets while maintaining a high
return on equity and keeping asset quality high. The key to this, in Columbia's
view, is to emphasize personal, quality banking products and services for its
customers, to hire and retain competent branch management and administrative
personnel, and to respond quickly to customer demand and growth opportunities.
Columbia also intends to increase its market penetration in its existing
markets, and to expand into new markets through further suitable acquisitions
and through new branch openings. Columbia's goal continues to be increasing
earning assets without compromising its commitment to high asset quality.
For the year ended December 31, 1998, net income was $4.72 million,
representing an increase of 21.39% over net income of $3.89 million earned
during the year ended December 31, 1997. Net income for 1997 was up 42.49% over
net income of $2.73 million earned during the year ended December 31, 1996. Net
income for 1996 was up 9.64% from $2.49 million for the year ended December 31,
1995. Diluted earnings per share were $0.65, $0.55, and $0.40 for the years
ended December 31, 1998, 1997, and 1996, respectively. Return on average assets
was 1.83% for the year ended December 31, 1998, compared with 1.77% for the year
ended December 31, 1997, and 1.45% in 1996. Return on average equity was 18.10%
for the year ended December 31, 1998, compared with 18.37% for the year ended
December 31, 1997, and 14.91% for the year ended December 31, 1996. The increase
in earnings for the year ended December 31, 1998, versus the comparable period
in 1997 can be attributed to growth in earning assets, deposits, fee income
growth, increased customer activity at the Bend branch, and greater operating
efficiency.
Return on average daily assets and equity and certain other ratios for the
periods indicated are presented below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(dollars in thousands except
per share data)
Net income $ 4,718 $ 3,887 $ 2,727 $ 2,489 $ 2,336
Average assets $ 257,664 $ 219,905 $ 188,061 $ 170,352 $ 161,671
RETURN ON AVERAGE ASSETS $ 1.83% 1.77% $ 1.45% $ 1.46% $ 1.45%
Net income $ 4,718 $ 3,887 $ 2,727 $ 2,489 $ 2,336
Average equity $ 26,069 $ 21,157 $ 18,292 $ 16,114 $ 14,122
RETURN ON AVERAGE EQUITY 18.10% 18.37% 14.91% 15.45% 16.54%
Cash dividends declared
and paid per share $ 0.22 $ 0.12 $ 0.13 $ 0.08 $ 0.07
Basic earnings
per common share $ 0.67 $ 0.57 $ 0.41 $ 0.37 $ 0.35
DIVIDEND PAYOUT RATIO 33.64% 21.67% 32.37% 22.30% 20.21%
Average equity $ 26,069 $ 21,157 $ 18,292 $ 16,144 $ 14,122
Average assets $ 257,664 $ 219,905 $ 188,061 $ 170,352 $ 161,671
AVERAGE EQUITY TO ASSET RATIO 10.12% 9.62% 9.73% 9.48% 8.74%
</TABLE>
RESULTS OF OPERATIONS
NET INTEREST INCOME. Net interest income, before provision for loan loss,
for the year ended December 31, 1998 was $14.12 million, an increase of 18.94%
compared to net interest income of $11.87 million in 1997, which was $2.23
million or 23.13% higher than the $9.64 million in 1996. The overall
tax-equivalent earning asset yield was 9.25% in 1998 compared to 9.30% in 1997
and 9.02% in 1996. For the same years, rates on interest-bearing liabilities
were 3.97%, 4.01%, and 4.09%, respectively. These results were primarily due to
an increase in the volume of earning assets and the growth of
noninterest-bearing deposits. For the three-year period 1996 through 1998, the
average yield on earning assets increased 0.23% while rates paid on
interest-bearing liabilities decreased by 0.12%. Average loans increased 57.00%
while average noninterest-bearing deposits increased 72.91%.
Total interest-earning assets averaged $235.28 million for the year ended
December 31, 1998, compared to $199.27 million for the corresponding period in
1997. Most of the increase was due to an increase in loans. Increases in the
loan portfolio are attributed to the acquisition of Valley Community Bank,
growth from the Columbia River Bank Mortgage Group in Bend, Oregon which opened
during the third quarter of 1997, opportunities afforded by the banking
industry's consolidation and closure of branches in Columbia's market areas, and
the hiring of additional senior lending personnel in strategic branch locations
and administrative capacities.
Interest-bearing liabilities averaged $181.40 million for the year ended
December 31, 1998 compared to $156.41 million during the same period in 1997.
Although further competitive pressure is expected in expanding deposit
relationships, management, as a matter of policy, does not seek to attract
high-priced, brokered deposits. In the near-term, management does not anticipate
Columbia's net interest margins will be significantly impacted by competitive
pressure for deposit accounts.
Loans, which generally carry a higher yield than investment securities and
other earning assets, comprised 74.63% of average earning assets during 1998,
compared to 70.71% in 1997 and 63.95% in 1996. During the same periods, average
yields on
<PAGE> 9
[8]
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME $ 21,328 $ 18,144 $ 15,385 $ 13,815
INTEREST EXPENSE $ 7,205 $ 6,269 $ 5,745 $ 5,216
NET INTEREST INCOME $ 13,123 $ 11,293 $ 9,393 $ 8,511
LOAN LOSS PROVISION $ 1,000 $ 581 $ 246 $ 88
NET INCOME $ 4,718 $ 3,886 $ 2,727 $ 2,489
TOTAL ASSETS $342,413 $231,827 $200,302 $178,486
TOTAL DEPOSITS $295,680 $201,568 $178,744 $158,874
SHAREHOLDERS' EQUITY $ 34,756 $ 21,557 $ 19,533 $ 17,484
TOTAL LOANS TO DEPOSITS 69.86% 77.00% 66.14% 65.57%
RETURN ON AVERAGE ASSETS 1.83% 1.77% 1.45% 1.46%
RETURN ON AVERAGE EQUITY 18.10% 18.37% 14.91% 15.45%
AVERAGE ASSETS TO AVERAGE EQUITY 10.12% 9.62% 9.73% 9.48%
</TABLE>
loans were 10.22% in 1998, 10.48% in 1997, and 10.60% in 1996. Investment
securities comprised 20.62% of average earning assets in 1998, which was down
from 26.06% in 1997 and 28.44% in 1996. The decrease in the portfolio of
investment securities has provided funds for Columbia's strong loan growth. Tax
equivalent interest yields on investment securities have ranged from 6.54% in
1998 to 6.57% in 1997 and 6.52% in 1996.
Interest cost, as a percentage of earning assets, decreased to 3.06% in
1998, compared to 3.15% in 1997 and 3.29% in 1996. Local competitive pricing
conditions and funding needs for Columbia's investments in loans have been the
primary determinants of rates paid for deposits during these three years.
PROVISION FOR LOAN LOSSES. The provision for loan losses represents charges
made to earnings to maintain an adequate allowance for loan losses. The
allowance is maintained at an amount believed to be sufficient to absorb losses
in the loan portfolio. Factors considered in establishing an appropriate
allowance include a careful assessment of the financial condition of the
borrower, a realistic determination of the value and adequacy of underlying
collateral, the condition of the local economy and the condition of the specific
industry of the borrower, a comprehensive analysis of the levels and trends of
loan categories, and a review of delinquent and classified loans. Columbia
applies a systematic process for determining the adequacy of the allowance for
loan losses, including an internal loan review function and a quarterly analysis
of the adequacy of the allowance. The quarterly analysis includes the
determination of specific potential loss factors on individual classified loans,
historical potential loss factors derived from actual net charge-off experience
and trends in nonperforming loans, and potential loss factors for other loan
portfolio risks such as loan concentrations, the condition of the local economy,
and the nature and volume of loans.
The recorded values of loans actually removed from the consolidated balance
sheets are referred to as charge-offs and, after netting out recoveries on
previously charged-off assets, become net charge-offs. Columbia's policy is to
charge off loans when, in management's opinion, the loan or a portion thereof is
deemed uncollectible, although concerted efforts are made to maximize recovery
after the charge-off. When a charge to the loan loss provision is recorded, the
amount is based on past charge-off experience, a careful analysis of the current
portfolio, and an evaluation of future economic trends in Columbia's market
areas. Management will continue to closely monitor the loan quality of new and
existing relationships through stringent review and evaluation procedures and by
making loan officers accountable for collection efforts.
For the years ended December 31, 1996 through 1998, Columbia charged
$246,000, $581,000, and $1,000,000, respectively, to its provision for loan
losses. The 72.12% increase in 1998 over the provision for loan losses recorded
in 1997 was necessary to accommodate the growth in Columbia's loan portfolio, to
establish a reserve for potential losses consistent with revisions in Columbia's
loan policy, and to replenish the allowance for loan losses for charge-offs
incurred during 1998. During this period, average outstanding loans grew 57.00%
and the allowance for loan losses kept pace by increasing 139.32% through
charges to the provision for loan losses. Columbia's increase in the provision
for loan losses has primarily been a function of strong loan demand and the
resulting growth in the loan portfolio.
For the year ended December 31, 1998, loan charge-offs exceeded recoveries
by $669,000 as compared to 1997, when loan recoveries exceeded charge-offs by
$63,000. Nearly one-third of the loss experienced in 1998 was due to a loss from
one loan. All remaining net charge-offs incurred by Columbia were smaller in
amount and generally distributed evenly among all branch locations.
NONINTEREST INCOME. Total noninterest income increased through year-end 1998
from 1996. Over this three-year period, noninterest income has increased from
$1.80 million in 1996, to $2.48 million in 1997, and to $4.68 million in 1998.
Noninterest income is primarily derived from service charges and related fees,
as well as mortgage origination and processing fees. Such income increased $2.20
million, or 88.57% for the year ended December 31, 1998, compared to the year
ended December 31, 1997. The principal reason for this increase was income
generated by Columbia's mortgage lending division, which was formed in September
of 1997, and which operates under the name "Columbia River Bank Mortgage Group."
For the year ended 1998, this division generated $924,000 in income from
<PAGE> 10
[9]
originating, processing, servicing, and selling mortgage loans. The increase was
also the result of increasing deposit volumes and related service fees. Service
charges were $1.74 million for the year ended December 31, 1998, compared to
$1.55 million for the year ended December 31, 1997. Management attributes this
12.91% increase to the increase in customers served at all of Columbia's
branches. The remainder of the increase in noninterest income is primarily
attributable to improved revenues received from credit card discounts and fees,
investment fee income provided by Columbia's financial services department, and
other noninterest fees and charges.
NONINTEREST EXPENSE. Noninterest expenses consist principally of employees'
salaries and benefits, occupancy costs, data processing expenses, and other
noninterest expenses. A measure of Columbia's ability to contain noninterest
expenses is the efficiency ratio. This statistic is derived by dividing total
noninterest expenses by total net interest income and noninterest income. For
the year ended December 31, 1998, the ratio decreased to 56.56% compared to
56.37% for the corresponding period of 1997. The decrease in the efficiency
ratio primarily reflects increased expenses discussed further below.
Noninterest expense was $10.63 million for the year ended December 31, 1998,
an increase from $8.09 million for the year ended December 31, 1997, and $7.18
million for the year ended December 31, 1996. This was due to an increase in
staffing costs, as well as increases in other key operating costs such as
occupancy expense and supplies, primarily relating to the formation and staffing
of the Columbia River Bank Mortgage Group and the opening of the Hermiston and
Pendleton, Oregon branches of CRB. Columbia's investments in new and expanded
technology for the Mortgage Group's operations, to support internal services,
and to provide additional technology-based products for customers also resulted
in expense increases. In 1998, Columbia's total noninterest expense was 56.56%
of net revenues, while in 1997 and 1996 it was 56.37% and 62.78%, respectively,
of net revenues.
Salary and benefit expense was $6.01 million in 1998, $4.46 million in 1997,
and $3.97 million in 1996. As of December 31, 1998, Columbia had 187 full-time
equivalent employees, which compares to 133 as of December 31, 1997 and 132 as
of December 31, 1996. The increase in this expense category was the result of a
full year of staffing the Columbia River Bank Mortgage Group, the staffing of
the new Hermiston and Pendleton branches and the normal expense increases
associated with maintaining an expanded employee base.
Net occupancy expense consists of depreciation on premises and equipment,
maintenance and repair expenses, utilities, and related expenses. Columbia's net
occupancy expense increased steadily over the three-year period. This expense
category was $948,000 in 1998, an increase of $212,000, or 28.87%, over the
$736,000 reported in 1997. From 1996 to 1998, net occupancy expense increased by
$294,000, from $654,000 to $948,000, an increase of 44.95%. These increases
reflect the operation of the Bend branch, the occupancy costs associated with
the new Hermiston and Pendleton facilities and the formation in 1997 of the
Columbia River Bank Mortgage Group. This also reflects the costs relating to
continued investment in Columbia's computer systems, which have been upgraded
throughout the organization.
FDIC insurance premiums are a function of outstanding deposit liabilities.
Because the Bank Insurance Fund has since been adequately capitalized, Columbia
was required to make only nominal premium payments in 1996, 1997 and 1998. For
the three year period ended December 31, 1998, Columbia paid the lowest premium
available for its deposit insurance coverage.
Other noninterest expense increases arose from investments in technology and
data processing, and in new service delivery channels to enable Columbia to
continue its focus on efficient, personal service. Data processing expenses
increased 32.30% in 1998 over the previous year, which reflects both the growth
of Columbia's customer and account base and ongoing upgrades to data processing
operations.
One factor that will impact expenses in the immediate and near-term future
is the Year 2000 issue. Management has initiated an organization-wide program to
prepare Columbia's computer systems and applications for the year 2000. This
program involves computer system upgrades, systems testing, contingency planning
and personnel training. For a discussion of the Year 2000 issue and its
potential impact on Columbia's business and operations, see the information
below under the heading "The Year 2000 Issue."
INCOME TAXES. The provision for income taxes was $2.45 million in 1998,
$1.80 million in 1997, and $1.29 million in 1996. The provision resulted in
effective combined federal and state tax rates of 34.18% in 1998, 31.60% in
1997, and 32.03% in 1996. Effective tax rates differ from combined estimated
statutory rates of 38% principally due to the effects of nontaxable interest
income which is recognized for book but not for tax purposes. In addition,
Columbia's state income tax rate was reduced from 6.6% to 3.81% in 1997 as a
result of surplus revenues received by the State of Oregon.
SHAREHOLDERS' EQUITY. Shareholders' equity increased $11.77 million during
1998. Shareholders' equity at December 31, 1998 was $34.76 million compared to
$22.99 million at December 31, 1997. This increase reflects net income and
comprehensive income of $4.76 million, $237,000 in exercised stock options, and
sales of common stock of $8.36 million. These additions to equity were partially
offset by cash dividends paid or declared of $1.59 million.
Dividends declared and paid were $0.22 per share in 1998, $0.12 per share in
1997, and $0.13 per share in 1996. Dividends in 1996 exceeded those for 1997 as
a result of a change in Columbia's dividend policy from annual to quarterly
payments and a special $.07 per share dividend paid to shareholders following
Columbia's acquisition of Klickitat Valley Bank in 1996.
ASSET-LIABILITY MANAGEMENT & INTEREST RATE SENSITIVITY. Columbia's results
of operations depend substantially on its net interest income. Interest income
and interest expense are affected by general economic conditions and by
competition in the market-place. Columbia's interest and pricing strategies are
driven by its asset-liability management analysis and by local market
conditions.
Columbia seeks to manage its assets and liabilities to generate a stable
level of earnings in response to changing interest rates and to manage its
interest rate risk. Columbia further strives to serve its communities and
customers through deployment of its resources on a corporate-wide basis so that
qualified loan demands may be funded wherever necessary in its branch banking
system. Asset/liability management involves managing the relationship between
interest rate sensitive assets and interest rate sensitive liabilities. If
assets and liabilities do not mature or reprice simultaneously, and in equal
amounts, the potential for exposure to interest rate risk exists, and an
interest rate "gap" is said to be present.
<PAGE> 11
[10]
Rising and falling interest rate environments can have various effects on a
bank's net interest income, depending on the interest rate gap, the relative
changes in interest rates that occur when assets and liabilities are repriced,
unscheduled repayments of loans, early withdrawals of deposits, and other
factors.
The following table sets forth the dollar amount of maturing
interest-earning assets and interest-bearing liabilities at December 31, 1998,
and the difference between them for the maturing or repricing periods indicated.
The amounts in the table are derived from Columbia's internal data, which varies
from amounts classified in its financial statements. Although this information
may be useful as a general measure of interest rate risk, the data could be
significantly affected by external factors such as prepayments of loans or early
withdrawals of deposits. Each of these factors may greatly influence the timing
and extent of actual repricing of interest-earning assets and interest-bearing
liabilities.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------------------------------
LESS THAN ONE YEAR
(dollars in thousands) VARIABLE RATE ONE YEAR OR LONGER TOTAL
------------ --------- --------- ---------
<S> <C> <C> <C> <C>
ASSETS
Investments $ 37,177 $ 7,957 $ 45,890 $ 91,024
Loans 79,533 35,032 91,987 206,552
--------- --------- --------- ---------
Total assets $ 116,710 $ 42,989 $ 137,877 $ 297,576
LIABILITIES
Core deposits $ 162,601 $ 42,414 $ 79,787 $ 284,802
Jumbo CD's -- 9,565 1,313 10,878
Borrowings 8,066 -- 1,668 9,734
Total liabilities $ 170,667 $ 51,979 $ 82,768 $ 305,414
--------- --------- --------- ---------
$ (53,957) $ (8,990) $ 55,109 $ (7,838)
=========
Net cumulative position $ (53,957) $ (62,947) $ (7,838)
========= ========= =========
Cumulative gap as a percent of assets (15.76)% (18.38)% (2.29)%
========= ========= =========
</TABLE>
The net cumulative gap position is somewhat negative since more liabilities
than assets will reprice during the next year. This exposure to increasing rates
is currently exaggerated by "sticky" deposit rates (not expected to reprice
rapidly in an increasing rate environment) and a higher than normal level of
short-term cash (not included in rate-sensitive assets). However, Columbia's
asset rates change more than deposit rates, and management feels Columbia's
asset yields will change more than the cost of funds when rates change.
Management believes that Columbia has a relatively low interest rate risk
that is somewhat asset-sensitive. The net interest margin should increase
slightly when rates increase and shrink somewhat when rates fall. This interest
rate risk is driven by a concentration of rate sensitive variable rate and
short-term commercial loans, one of Columbia's major business lines. Columbia
does have significant amounts of fixed rate loans to offset most of the impact
from the repricing of short-term loans. However, there can be no assurance that
fluctuations in interest rates will not have a material adverse impact on
Columbia.
Columbia's sensitivity to gains or losses in future earnings due to
hypothetical decreases or increases in interest rates is as follows:
<TABLE>
<CAPTION>
INCREASE IN FINANCIAL IMPACT ON DECREASE IN FINANCIAL IMPACT ON
INTEREST RATES NET INTEREST MARGIN INTEREST RATES NET INTEREST MARGIN
<S> <C> <C> <C>
+1% $ 801,000 -1% $ 839,000
+2% $ 1,602,000 -2% $ 1,762,000
</TABLE>
LIQUIDITY. Columbia has adopted policies to maintain a relatively
liquid position to enable it to respond to changes in the financial environment
and ensure sufficient funds are available to meet customers' needs for borrowing
and deposit withdrawals. Generally, Columbia's major sources of liquidity are
customer deposits, sales and maturities of investment securities, the use of
federal funds markets, and net cash provided by operating activities. Scheduled
loan repayments are a relatively stable source of funds, while deposit inflows
and unscheduled loan prepayments, which are influenced by general interest rate
levels, interest rates available on other investments, competition, economic
conditions, and other factors, are not. Liquid asset balances include cash,
amounts due from other banks, federal funds sold, and securities
available-for-sale and securities held-to-maturity with maturities in the next
three months. At December 31, 1998, these liquid assets totaled $95.88 million
or 28.00% of total assets as compared to $50.94 million or 21.98% of total
assets at December 31, 1997. Another source of liquidity is the ability to
borrow from the Federal Home Loan Bank of Seattle and other correspondent banks.
At December 31, 1998, credit limits through these institutions totaled
approximately $58.12 million.
The analysis of liquidity also includes a review of the changes that appear
in the consolidated statements of cash flows for the year ended December 31,
1998. The statement of cash flows includes operating, investing and financing
categories. Operating activities include net income of $4.72 million, which is
adjusted for noncash items and increases or decreases in cash due to changes in
certain assets and liabilities. Investing activities consist primarily of both
proceeds from and purchases of securities, and the impact of the net growth in
loans. Financing activities present the cash flows associated with deposit
accounts, and reflect dividends paid to shareholders.
At December 31, 1998, Columbia had outstanding commitments to make loans of
$57.66 million. Nearly all of these commitments represented unused portions of
credit lines available to consumers under credit card and other arrangements and
to businesses. Many of these credit lines will not be fully drawn upon and,
accordingly, the aggregate commitments do not necessarily represent actual
future cash requirements. Management believes that Columbia's sources of
liquidity are more than adequate to meet likely calls on outstanding
commitments, although there can be no assurance in this regard.
CAPITAL. The Federal Reserve Board and the Federal Deposit Insurance
Corporation have established minimum requirements for capital adequacy for bank
holding companies and member banks. The requirements address both risk-based
capital and leveraged capital. The regulatory agencies may establish higher
minimum requirements if, for example, a corporation has previously received
special attention or has a high susceptibility to interest rate risk.
The following reflects Columbia's various capital ratios at December 31,
1998 and December 31, 1997, as compared to regulatory minimums for capital
adequacy purposes:
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997 Regulatory Minimum
-------------------- ------------------- -----------------
<S> <C> <C> <C>
Tier I capital 10.90% 13.70% 4.00%
Total risk-based capital 11.90% 13.70% 8.00%
Leverage ratio 8.90% 10.60% 4.00%
</TABLE>
THE YEAR 2000 ISSUE
The widely-publicized Year 2000 issue raises considerable uncertainties and
risks for financial institutions such as Columbia. The challenge arises because
many computers utilized for processing date-sensitive information cannot
recognize the Year 2000 as the beginning of a new century. Consequently, the
calculations performed by such computers may be erroneous, causing these
computer systems to produce incorrect data or, in some cases, to fail
completely. This raises a special problem for financial institutions, since many
financial
<PAGE> 12
[11]
transactions, such as interest accruals and payments, are date sensitive. The
issue may also affect the operations of those with whom Columbia does business,
including its correspondent banks, suppliers, utility companies, and customers.
The possible interruption of Columbia's business operations, and the operations
of those with whom it does business, has the potential to materially impact
Columbia's financial condition, revenues and liquidity. The extent to which such
risks and effects will actually materialize cannot be known with complete
certainty. However, Columbia believes it will be prepared to avoid any
significant adverse Year 2000 consequences arising from factors which Columbia
has the ability to control, such as the readiness of Columbia's own computer
systems. In addition, Columbia intends to have in place reasonable contingency
plans for addressing problems arising from events it cannot directly control.
As of the date of this Annual Report, Columbia does not expect the known and
reasonably anticipated costs of preparing for the Year 2000 issue, including
software and hardware upgrades, system testing and personnel training, to be
material. Through December 31, 1998, Columbia spent approximately $100,000 on
direct and indirect costs to address the issue. For the years 1999 and 2000,
Columbia expects to spend between $450,000 and $750,000 on continuing technology
upgrades, contingency planning, system testing and personnel training. However,
no assurance can be given that Columbia's Year 2000-related costs will not be
substantially higher as a result of factors that cannot be foreseen at the
present time. Such unanticipated costs could have a material adverse effect on
Columbia's business and operations.
A detailed discussion of Columbia's plans for addressing the Year 2000 issue
may be found in Columbia's Form 10-K Annual Report for 1998, which will be filed
on or before March 31, 1999 with the United States Securities and Exchange
Commission.
DISCLOSURE REGARDING
FORWARD-LOOKING STATEMENTS
This Annual Report includes forward-looking statements as defined in
applicable federal securities laws and regulations. Such forward-looking
statements are based on certain assumptions made by Columbia's management,
information currently available to management, and management's present beliefs
about Columbia's business and operations. All statements, other than statements
of historical fact, in this Annual Report concerning Columbia's financial
position, its business strategy, and the plans and objectives of management
regarding Columbia's future growth and operations, are forward-looking
statements. Forward-looking statements can be identified by words such as
"believe," "estimate," "anticipate," "expect," "intend," "will," "may,"
"should," or other similar phrases or words. Although Columbia believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Readers are therefore cautioned not to place undue reliance on such
forward-looking statements. Such factors as changed conditions, incorrect
assumptions or the materialization of a risk or uncertainty could cause actual
results to differ materially from results described in this Annual Report as
believed, anticipated, estimated, expected or intended. Columbia does not intend
to publish revisions to any forward-looking statements in this Annual Report to
reflect events or circumstances arising after the date of its publication, or to
describe the occurrence of unanticipated events, other than in Columbia's
quarterly and annual reports and other public filings required under applicable
securities laws.
MARKET PRICE OF COMMON STOCK
Columbia has only one class of issued and outstanding stock, its common
stock. The common stock is quoted on the Nasdaq National Market under the symbol
"CBBO". Trading in Columbia's stock on Nasdaq commenced on November 6, 1998.
Through December 31, 1997, the common stock was not listed or quoted on any
exchange or quotation system, and Columbia endeavored to facilitate transactions
between shareholders and potential investors by keeping an informal record of
persons who had expressed an interest in buying or selling common stock, and by
acting as an intermediary between buyers and sellers. Columbia also kept
informal records as to transaction prices. Many transactions between buyers and
sellers occurred without Columbia's knowledge and involvement, and came to its
attention only after the fact when it was notified of a change in record
ownership. Consequently, the transaction price information for 1997 is based
solely on prices which were reported to Columbia for specific transactions by
persons whose transactions came to its attention. The reported prices may not
represent all transactions in the shares traded for 1997, and no assurance can
be given as to the accuracy of the reported prices, as the prices were not
independently verified.
Beginning in January 1998, several brokerage firms began serving as market
makers for the common stock, and stock price information for the common stock
became available on the OTC Bulletin Board. The transaction prices through
November 5, 1998 were obtained from the high and low prices listed on the OTC
Bulletin Board, and do not include private transactions, if any.
The following table sets forth high and low bid and sales prices as
indicated, for the common stock for the last two years. All prices for the
periods shown have been adjusted for all stock splits. Prices do not include
retail markups, markdowns, or commissions, and may not represent actual
transactions.
On February 2, 1999 Columbia's common stock was held of record by
approximately 1,170 shareholders.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1997(1)
First quarter $ 5.67 $ 5.00
Second quarter $ 6.67 $ 5.17
Third quarter $ 7.33 $ 6.00
Fourth quarter $ 8.33 $ 6.67
1998(2)
First quarter $ 12.00 $ 8.17
Second quarter $ 11.63 $ 10.13
Third quarter $ 10.75 $ 9.00
Fourth quarter(through November 5) $ 8.88 $ 8.25
Fourth quarter (3) $ 9.37 $ 8.75
</TABLE>
(1) Based solely on prices reported to Columbia without independent
verification.
(2) Prices for the first three quarters and the fourth quarter through November
5 are bid prices quoted on the OTC Bulletin Board.
(3) Sales prices quoted on the Nasdaq National Market for the period November 6
through December 31, 1998.
DIVIDENDS
Columbia's Board of Directors declared quarterly dividends of $.03 per share
of Columbia's common stock in 1997, for total 1997 dividends of $.12 per share.
In 1998, Columbia's Board declared quarterly dividends per share of $.05, $.05,
$.06, and $.06, respectively, for total 1998 dividends of $.22 per share. All
dividend amounts have been adjusted for all stock splits in 1997 and 1998.
<PAGE> 13
[12]
CONSOLIDATED
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash and due from banks $ 22,643,895 $ 15,353,965
Interest-bearing deposits with other banks 30,575,012 1,524,173
Federal funds sold 12,554,775 2,834,363
------------ ------------
TOTAL CASH AND CASH EQUIVALENTS 65,773,682 19,712,501
------------ ------------
Investment securities available-for-sale 29,466,769 31,309,883
Investment securities held-to-maturity 17,310,222 16,728,036
Restricted equity securities 1,117,200 765,900
------------ ------------
TOTAL INVESTMENT SECURITIES 47,894,191 48,803,819
------------ ------------
Loans held-for-sale 7,818,603 2,713,665
Loans, net of allowance for loan losses and unearned loan fees 198,733,188 152,504,671
Property and equipment, net of depreciation 8,190,068 5,256,561
Accrued interest receivable 2,487,122 2,185,544
Goodwill 9,286,832 -
Other real estate owned 280,800 -
Other assets 1,948,763 649,982
------------ ------------
TOTAL ASSETS $342,413,249 $231,826,743
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS
Noninterest-bearing demand deposits $ 67,408,747 $ 46,377,081
Interest-bearing demand deposits 134,716,357 85,502,927
Savings accounts 27,969,402 26,835,712
Time certificates 65,585,883 42,852,424
------------ ------------
TOTAL DEPOSITS 295,680,389 201,568,144
------------ ------------
Notes payable 9,734,095 5,263,824
Accrued interest payable and other liabilities 2,242,545 2,007,289
------------ ------------
TOTAL LIABILITIES 307,657,029 208,839,257
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, no par value, 10,000,000 shares authorized, 7,949,032
issued and outstanding at December 31, 1998 (2,288,451 in 1997) 14,125,315 5,528,218
Additional paid-in capital 6,317,732 6,317,732
Retained earnings 14,257,975 11,131,444
Accumulated other comprehensive income, net of taxes 55,198 10,092
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 34,756,220 22,987,486
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $342,413,249 $231,826,743
============ ============
</TABLE>
See Independent Auditor's Report and accompanying notes.
<PAGE> 14
[13]
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 17,938,902 $ 14,764,313 $ 11,854,765
Interest on investments:
Taxable investment securities 1,719,464 2,257,934 2,094,413
Nontaxable investment securities 847,508 735,421 770,631
Interest on federal funds sold 492,361 221,167 589,264
Other interest and dividend income 329,615 164,685 75,632
------------ ------------ ------------
TOTAL INTEREST INCOME 21,327,850 18,143,520 15,384,705
------------ ------------ ------------
INTEREST EXPENSE
Interest on interest-bearing deposit and savings accounts 3,570,752 3,313,451 2,967,193
Interest on time deposit accounts 3,195,414 2,771,986 2,717,481
Other borrowed funds 438,588 183,637 60,717
------------ ------------ ------------
TOTAL INTEREST EXPENSE 7,204,754 6,269,074 5,745,391
------------ ------------ ------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 14,123,096 11,874,446 9,639,314
PROVISION FOR LOAN LOSSES 1,000,000 581,000 246,479
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 13,123,096 11,293,446 9,392,835
------------ ------------ ------------
NONINTEREST INCOME
Service charges and fees 1,744,620 1,545,174 1,093,346
Credit card discounts and fees 420,577 389,965 288,075
Financial services department income 311,925 230,405 158,575
Mortgage servicing revenue 664,666 -- --
Gain on sale of loans, net of discounts 197,154 -- --
Mortgage loan origination income 766,913 118,818 --
Other noninterest income 571,963 196,361 259,064
------------ ------------ ------------
TOTAL NONINTEREST INCOME 4,677,818 2,480,723 1,799,060
------------ ------------ ------------
NONINTEREST EXPENSES
Salaries and employee benefits 6,014,344 4,463,483 3,965,087
Occupancy expense 948,287 735,858 653,541
Data processing expense 364,431 304,456 231,817
Credit card processing fees 282,041 254,299 213,887
Office supplies 200,439 199,930 164,680
FDIC assessment 24,042 19,749 5,742
Other noninterest expenses 2,799,578 2,114,509 1,945,259
------------ ------------ ------------
TOTAL NONINTEREST EXPENSES 10,633,162 8,092,284 7,180,013
------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 7,167,752 5,681,885 4,011,882
PROVISION FOR INCOME TAXES 2,449,899 1,795,476 1,285,011
------------ ------------ ------------
NET INCOME 4,717,853 3,886,409 2,726,871
OTHER COMPREHENSIVE INCOME
Unrealized gains (losses) on securities:
Unrealized holding gains arising during the period 148,939 13,059 11,826
Reclassification adjustments for (gains)
losses included in net income (103,833) 8,265 279
------------ ------------ ------------
OTHER COMPREHENSIVE INCOME 45,106 21,324 12,105
------------ ------------ ------------
COMPREHENSIVE INCOME $ 4,762,959 $ 3,907,733 $ 2,738,976
============ ============ ============
BASIC EARNINGS PER SHARE OF COMMON STOCK $ 0.67 $ 0.57 $ 0.41
DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 0.65 $ 0.55 $ 0.40
</TABLE>
See Independent Auditor's Report and accompanying notes.
<PAGE> 15
[14]
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL COMPREHENSIVE TOTAL
-------------------------- PAID-IN RETAINED INCOME STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS (LOSS) EQUITY
--------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 2,237,817 $ 4,974,400 $ 4,848,953 $ 7,683,876 $ (23,337) $ 17,483,892
Stock options exercised 10,156 66,262 27,899 -- -- 94,161
Sale of common stock 6,868 98,556 -- -- -- 98,556
Transfer to surplus -- -- 1,440,880 (1,440,880) -- --
Cash dividends -- -- -- (702,215) -- (702,215)
Cash dividends declared -- -- -- (180,388) -- (180,388)
Net income & comprehensive income -- -- -- 2,726,871 12,105 2,738,976
--------- ------------ ------------ ------------ --------- ------------
BALANCE, December 31, 1996 2,254,841 5,139,218 6,317,732 8,087,264 (11,232) 19,532,982
Stock options exercised 21,415 214,001 -- -- -- 214,001
Sale of common stock 12,195 174,999 -- -- -- 174,999
Cash dividends -- -- -- (613,384) -- (613,384)
Cash dividends declared -- -- -- (228,845) -- (228,845)
Net income & comprehensive income -- -- -- 3,886,409 21,324 3,907,733
--------- ------------ ------------ ------------ --------- ------------
BALANCE, December 31, 1997 2,288,451 5,528,218 6,317,732 11,131,444 10,092 22,987,486
Stock options exercised 26,110 236,607 -- -- -- 236,607
Sale of common stock 1,009,375 8,360,490 -- -- -- 8,360,490
3 for 2 stock split & cash paid
for fractional shares 1,154,755 -- -- (4,037) -- (4,037)
2 for 1 stock split 3,470,341 -- -- -- -- --
Cash dividends -- -- -- (1,110,343) -- (1,110,343)
Cash dividends declared -- -- -- (476,942) -- (476,942)
Net income & comprehensive income -- -- -- 4,717,853 45,106 4,762,959
--------- ------------ ------------ ------------ --------- ------------
BALANCE, December 31, 1998 7,949,032 $ 14,125,315 $ 6,317,732 $ 14,257,975 $ 55,198 $ 34,756,220
========= ============ ============ ============ ========= ============
</TABLE>
See Independent Auditor's Report and accompanying notes.
<PAGE> 16
[15]
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,717,853 $ 3,886,409 $ 2,726,871
Adjustments to reconcile net income to net cash
from operating activities:
Amortization of premiums and
discounts of investment securities (8,385) 30,775 -
Loss (gain) on sale or write-down of
property and equipment (10,393) (1,576) 145
Loss (gain) on sale of available-for-sale
securities (142,320) 4,940 -
Loss (gain) on call of
held-to-maturity investment securities (15,003) 7,583 422
Depreciation and amortization 552,955 449,048 380,198
Federal Home Loan Bank stock dividend (59,600) (53,000) (49,500)
Deferred income tax benefit (186,665) (278,770) (168,112)
Provision for loan losses 1,000,000 581,000 246,479
Increase (decrease) in cash due to changes in
certain assets and liabilities:
Accrued interest receivable (76,406) (237,100) (132,568)
Other assets (865,964) (8,756) 477,221
Accrued interest payable and other liabilities (946,616) 533,915 272,868
------------ ------------ ------------
NET CASH FROM OPERATING ACTIVITIES 3,959,456 4,914,468 3,754,024
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of available-for-sale securities 16,220,625 1,647,406 -
Proceeds from the maturity of available-for-sale securities 7,665,000 12,517,460 4,718,237
Proceeds from the maturity of held-to-maturity securities 2,524,291 3,576,370 14,795,881
Purchases of held-to-maturity securities (3,097,129) (4,534,473) (15,266,716)
Purchases of available-for-sale securities (15,995,790) (10,454,096) (6,769,594)
Purchase of restricted equity securities - (41,000) -
Net change in loans made to customers (32,594,458) (37,571,668) (14,296,125)
Cash paid, net of cash received from acquisition (709,364) - -
Proceeds from the sale of property and equipment 10,393 - 40,200
Payments made for purchase of property and equipment (1,847,077) (822,715) (1,446,111)
------------ ------------ ------------
NET CASH FROM INVESTING ACTIVITIES (27,823,509) (35,682,716) (18,224,228)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in demand deposit and savings accounts 43,715,064 24,253,865 19,753,977
Net change in time deposits 15,860,017 (1,429,579) 115,572
Net increase in short term borrowings 2,693,811 4,000,000 224,712
Borrowings of long-term debt 402,471 663,824 -
Repayments of long-term debt - - (600,000)
Fractional share payments (4,037) - -
Dividends paid (1,339,189) (793,772) (702,215)
Proceeds from stock options
exercised and sales of common stock 470,982 389,000 192,717
Proceeds from public stock offering, net of expenses 8,126,115 - -
------------ ------------ ------------
NET CASH FROM FINANCING ACTIVITIES 69,925,234 27,083,338 18,984,763
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 46,061,181 (3,684,910) 4,514,559
CASH AND CASH EQUIVALENTS, beginning of year 19,712,501 23,397,411 18,882,852
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 65,773,682 $ 19,712,501 $ 23,397,411
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid in cash $ 7,270,325 $ 6,250,774 $ 5,677,890
Taxes paid in cash $ 2,582,783 $ 2,069,541 $ 1,459,808
SCHEDULE OF NONCASH ACTIVITIES
Unrealized gain on securities
transferred from held-to-maturity to
available-for-sale, net of tax $ - $ 23,991 $ -
Change in unrealized loss on
available-for-sale securities, net of tax $ 45,106 $ (2,667) $ 12,105
Cash dividend declared and payable after year-end $ 476,942 $ 228,845 $ 180,388
</TABLE>
See Independent Auditor's Report and accompanying notes.
<PAGE> 17
[16]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION & SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS. Columbia Bancorp ("Columbia") was
incorporated on October 3, 1995, and became the holding company of Columbia
River Bank ("CRB") effective January 1, 1996.
CRB is a state-chartered institution authorized to provide banking services
by the States of Oregon and Washington. With its administrative headquarters in
The Dalles, Oregon, CRB operates branch facilities in The Dalles, Hood River,
Hermiston, Pendleton, Madras, Redmond and Bend, Oregon. In Washington, it
operates branches in Goldendale and White Salmon.
As further discussed in Note 2, Columbia acquired Valley Community Bancorp
and its subsidiaries, Valley Community Bank ("VCB") and Valley Community
Mortgage Services, Inc. in November 1998. VCB is a state-chartered institution
authorized to provide banking services from its single office location in
McMinnville, Oregon.
Substantially all activity of Columbia is conducted through its two
subsidiary banks, CRB and VCB (collectively, the "Banks"), which, along with
Columbia, are subject to the regulations of certain Federal and State agencies
and undergo periodic examinations by those regulatory authorities. All
significant intercompany accounts and transactions between Columbia, CRB and VCB
have been eliminated in the preparation of the consolidated financial
statements.
BUSINESS ACQUISITION AND EXPANSION ACTIVITY. In June 1996, Columbia acquired
Klickitat Valley Bank ("Klickitat"), a community bank headquartered in
Goldendale, Washington and with a branch in White Salmon, Washington. The
acquisition was accomplished through the exchange of 8.5 shares of Columbia
common stock for each share of Klickitat common stock. The transaction was
accounted for as a pooling-of-interests and, accordingly, the assets,
liabilities, and stockholders' equity, and results of operations of the separate
entities have been combined for 1996, 1997, and 1998 as though the entities had
been combined as of the beginning of 1995. In 1997 Klickitat was merged into
CRB, and in 1998 CRB changed the "Klickitat Valley Bank" name of its Washington
branches to "Columbia River Bank."
In 1997, CRB began operations of a mortgage banking division, Columbia River
Bank Mortgage Group (the "Mortgage Group"), which is headquartered in Bend,
Oregon. The Mortgage Group has an office in The Dalles, Oregon and provides
services to all commercial banking branches of Columbia.
In November 1998 Columbia acquired Valley Community Bancorp and its
subsidiaries, Valley Community Bank and Valley Community Mortgage Services,
Inc., and opened new CRB branches in Hermiston and Pendleton, Oregon. With this
acquisition and new branch openings, Columbia's operations as of December 31,
1998 include eight bank branches and two mortgage banking division offices in
Oregon and two bank branches in Southwest Washington.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results could
differ significantly from those estimates. Significant estimations made by
management primarily involve the calculation of the allowance for loan losses.
INVESTMENT SECURITIES. Columbia is required to specifically identify its
investment securities as "held-to-maturity," "available-for-sale," or "trading
accounts." Accordingly, management has determined that all investment securities
held at December 31, 1998 and 1997, are either "available-for-sale" or
"held-to-maturity" and conform to the following accounting policies:
Securities held-to-maturity. Bonds, notes, and debentures for which Columbia has
the intent and ability to hold to maturity are reported at cost, adjusted for
premiums and discounts that are recognized in interest income using the interest
method over the period to maturity.
Securities available-for-sale. Available-for-sale securities consist of bonds,
notes, debentures, and certain equity securities not classified as
held-to-maturity securities. Securities are generally classified as
available-for-sale if the instrument may be sold in response to such factors as:
(1) changes in market interest rates and related changes in the prepayment risk,
(2) needs for liquidity, (3) changes in the availability of and the yield on
alternative instruments, and (4) changes in funding sources and terms.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as other comprehensive income and carried as accumulated
comprehensive income within stockholders' equity. Fair values for these
investment securities are based on quoted market prices. Gains and losses on the
sale of available-for-sale securities are determined using the
specific-identification method.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary
result in write-downs of the individual securities to their fair value. The
related write-downs would be included in earnings as realized losses. Premiums
and discounts are recognized in interest income using the effective interest
method over the period to maturity.
RESTRICTED EQUITY SECURITIES. Columbia's equity investments in the Federal
Home Loan Bank, Federal Agriculture Mortgage Corporation and Federal Reserve
Bank stock are classified as restricted equity securities since ownership of
these instruments is restricted and they do not have an active market. As
restricted equity securities, these investments are carried at cost.
LOANS, NET OF ALLOWANCE FOR LOAN LOSSES AND UNEARNED INCOME. Loans are
stated at the amount of unpaid principal, reduced by an allowance for loan
losses and unearned income. Interest on loans is calculated by using the
simple-interest method on daily balances of the principal amount outstanding.
The allowance for loan losses is established through a provision for loan losses
charged to expenses. Loans are charged against the allowance for loan losses
when management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the
<PAGE> 18
[17]
borrower's ability to pay. Various regulatory agencies, as a regular part of
their examination process, periodically review the Banks' reserve for loan
losses. Such agencies may require the Banks to recognize additions to the
allowance based on their judgment of information available to them at the time
of their examinations.
Impaired loans are carried at the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's market price,
or the fair value of the collateral if the loan is collateral dependent. Accrual
of interest is discontinued on impaired loans when management believes, after
considering economic and business conditions, collection efforts, and collateral
position, that the borrower's financial condition is such that collection of
interest is doubtful. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield of the related loan.
LOANS HELD-FOR-SALE. Mortgage loans held-for-sale are carried at the lower
of cost or estimated market value. Market value is determined on an aggregate
loan basis. At December 31, 1998 and 1997, mortgage loans held-for-sale were
carried at cost which approximated market.
LOAN SERVICING. The cost of mortgage servicing rights is amortized in
proportion to, and over the period of, estimated net servicing revenues.
Impairment of mortgage servicing rights is assessed based on the fair value of
those rights. Fair values are estimated using discounted cash flows based on a
current market interest rate. The amount of impairment recognized is the amount
by which the capitalized mortgage servicing rights exceed fair value.
Rights to future interest income from serviced loans that exceeds
contractually specified servicing fees are classified as interest-only strips
and accounted for as debt securities that are available-for-sale.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost, less
accumulated depreciation. Depreciation is computed by the straight-line and
accelerated methods over the estimated useful lives of the assets, which range
from three to seven years for furniture and equipment and 31-1/2 years for
building premises.
OTHER REAL ESTATE. Other real estate, acquired through foreclosure or
deeds in lieu of foreclosure, is carried at the lower of cost or estimated net
realizable value. When property is acquired, any excess of the loan balance over
its estimated net realizable value is charged to the reserve for loan losses.
Subsequent write-downs to net realizable value, if any, or any disposition gains
or losses are included in noninterest income and expense.
GOODWILL. Goodwill represents the excess of cost over the fair value of
net assets acquired from the purchase of Valley Community Bancorp (see Note 2),
and is being amortized over a 15 year period using the straight line method.
INCOME TAXES. Deferred income tax assets and liabilities are determined
based on the tax effects of the differences between the book and tax bases of
the various balance sheet assets and liabilities. Deferred tax assets and
liabilities are reflected at currently enacted income tax rates applicable to
the period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.
ADVERTISING. Advertising costs are charged to expense during the year in
which they are incurred.
STATEMENT OF CASH FLOWS. Cash equivalents are generally all short-term
investments with a maturity of three months or less. Cash and cash equivalents
normally include cash on hand, amounts due from banks, and federal funds sold.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS. Columbia holds no derivative
financial instruments. However, in the ordinary course of business, the Banks
have entered into off-balance-sheet financial instruments consisting of
commitments to extend credit, commitments under credit card arrangements,
commercial letters of credit, and standby letters of credit. These financial
instruments are recorded in the financial statements when they are funded or
related fees are incurred or received.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The following methods and assumptions
were used by Columbia in estimating fair values of financial instruments as
disclosed herein:
Cash and cash equivalents. The carrying amounts of cash and short-term
instruments approximate their fair value.
Held-to-maturity and available-for-sale securities. Fair values for
investment securities, excluding restricted equity securities, are based on
quoted market prices. The carrying values of restricted equity securities
approximate fair values.
Loans receivable. For variable-rate loans that reprice frequently and have
no significant change in credit risk, fair values are based on carrying values.
Fair values for certain mortgage loans (for example, one-to-four family
residential), credit card loans, and other consumer loans are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. Fair values for
commercial real estate and commercial loans are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values for impaired
loans are estimated using discounted cash flow analyses or underlying collateral
values, where applicable.
Deposit liabilities. The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate, fixed-term
money market accounts and certificates of deposit (CDs) approximate their fair
values at the reporting date. Fair values for fixed-rate CDs are estimated using
a discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on time deposits.
<PAGE> 19
[18]
Short-term borrowings. The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings maturing
within 90 days approximate their fair values. Fair values of other short-term
borrowings are estimated using discounted cash flow analyses based on the Banks'
current incremental borrowing rates for similar types of borrowing arrangements.
Long-term debt. The fair values of the Banks' long-term debt are estimated
using discounted cash flow analyses based on the Banks' current incremental
borrowing rates for similar types of borrowing arrangements.
Accrued interest. The carrying amounts of accrued interest approximate their
fair values.
Off-balance-sheet instruments. The Banks' off-balance-sheet instruments
include unfunded commitments to extend credit and standby letters of credit. The
fair value of these instruments is not considered practicable to estimate
because of the lack of quoted market prices and the inability to estimate fair
value without incurring excessive costs.
STOCK OPTIONS. In October 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation." This standard defines a fair value
based method of accounting for an employee stock option or similar equity
instrument. This statement gives entities a choice between recognizing related
compensation expense by adopting the new fair value method or continue to
measure compensation using the intrinsic value approach under Accounting
Principles Board ("APB") Opinion No. 25, the former standard. If the former
standard for measurement were elected, SFAS No. 123 requires supplemental
disclosure to show any significant effects of using the new measurement
criteria. Columbia has elected to continue using the measurement prescribed by
APB Opinion No. 25, and accordingly, this pronouncement has had no effect on
Columbia's financial position or results of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS. In June 1997, the FASB issued SFAS No.
130 "Reporting Comprehensive Income" which Columbia is required to adopt for
years beginning after December 15, 1997. This statement establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general purpose financial
statements. This statement requires that Columbia recognize the unrealized gain
or loss on available-for-sale securities as a component of comprehensive income.
Other issued but not yet required FASB statements are not currently
applicable to Columbia's operations. Management believes these pronouncements
will have no material effect upon Columbia's financial position or results of
operation.
RECLASSIFICATIONS. Certain reclassifications have been made
to the 1997 and 1996 financial statements to conform with current
year presentations.
NOTE 2 -- ACQUISITION OF VALLEY COMMUNITY BANCORP
Effective November 30, 1998, Columbia completed its acquisition of Valley
Community Bancorp and its wholly-owned subsidiaries, VCB and Valley Community
Mortgage Services, Inc., headquartered in McMinnville, Oregon. As consideration
for the acquisition, Columbia paid $15.1 million in exchange for all of the
outstanding common and preferred stock held by shareholders of Valley Community
Bancorp. Following the acquisition, Valley Community Bancorp was effectively
dissolved and its subsidiaries became direct subsidiaries of Columbia. As of
December 31, 1998, substantially all activity is conducted through VCB. Valley
Community Mortgage Services, Inc. was not engaged in any business activities in
1998.
The business combination has been accounted for as a purchase for accounting
purposes. Accordingly, under generally accepted accounting principles, the
assets and liabilities of Valley Community Bancorp have been recorded by
Columbia at their respective fair market values as of the effective date of the
acquisition. As a result, goodwill, which is the excess of the purchase price
over the net fair value of the assets acquired and liabilities assumed, was
recorded at $9,339,217. Amortization of goodwill over a 15-year period will
result in a charge to earnings of approximately $629,000 per year. The following
summarizes the fair values of the assets acquired and liabilities assumed as of
the November 30, 1998 acquisition date (in thousands):
<TABLE>
<S> <C>
Cash and due from banks $14,334
Investment securities 5,863
Restricted equity securities 292
Loans,net 20,020
Premises and equipment, net 1,587
Accrued interest and other assets 460
Goodwill 9,339
-------
Total assets $51,895
=======
Deposits $34,537
Notes payable 1,374
Accrued interest and other liabilities 882
-------
Total liabilities 36,793
Cash paid for acquisition 15,102
-------
Total liabilities assumed and cash paid for acquisition $51,895
=======
</TABLE>
The financial statements for the year ended December 31, 1998, include the
operations of VCB from December 1, 1998 to December 31, 1998. The following
information presents the pro forma results of operations for the years ended
December 31, 1998 and 1997, as though the acquisition had occurred on January 1,
1997. The pro forma results do not necessarily indicate the actual result that
would have been obtained nor are they necessarily indicative of the future
operations of the combined companies.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
UNAUDITED PRO FORMA
(in thousands) 1998 1997
---------- ----------
<S> <C> <C>
Net interest income before provision for loan loss $ 16,137 $ 13,783
Net income $ 5,446 $ 4,054
Earnings per common share:
Basic $ 0.80 $ 0.52
Diluted $ 0.78 $ 0.51
</TABLE>
<PAGE> 20
[19]
NOTE 3 --INVESTMENT SECURITIES
The book value and approximate market values of Columbia's investment
securities at December 31, 1998 and 1997, are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
December 31, 1998
AVAILABLE FOR SALE SECURITIES
U.S. Treasury securities $ 4,794,749 $ 39,640 $-- $ 4,834,389
Obligation of U.S.
government agencies 23,092,877 91,876 (16,546) 23,168,207
Corporate debt securities 604,896 230 (93) 605,033
Corporate equity securities 300,000 -- -- 300,000
Municipal securities 558,786 354 -- 559,140
------------ ------------ ------------ ------------
$ 29,351,308 $ 132,100 $ (16,639) $ 29,466,769
============ ============ ============ ============
HELD-TO-MATURITY SECURITIES
Mortgage-backed securities $ 973,836 $ 792 $ (2,148) $ 972,480
Municipal securities 16,336,386 472,033 (12,207) 16,796,212
------------ ------------ ------------ ------------
$ 17,310,222 $ 472,825 $ (14,355) $ 17,768,692
============ ============ ============ ============
December 31,1997
AVAILABLE FOR SALE SECURITIES
U.S. Treasury securities $ 3,210,274 $ 6,017 $ (2,996) $ 3,213,295
Obligation of U.S.
government agencies 26,929,960 72,640 (59,483) 26,943,117
Corporate debt securities 853,967 149 (645) 853,471
Corporate equity securities 300,000 -- --- 300,000
------------ ------------ ------------ ------------
$ 31,294,201 $ 78,806 $ (63,124) $ 31,309,883
============ ============ ============ ============
HELD-TO-MATURITY SECURITIES
Mortgage-backed securities $ 156,509 $ 1,833 $ (2,641) $ 155,701
Municipal securities 16,571,527 356,342 (70) 16,927,799
------------ ------------ ------------ ------------
$ 16,728,036 $ 358,175 $ (2,711) $ 17,083,500
============ ============ ============ ============
</TABLE>
The amortized cost and estimated market value of investment securities at
December 31, 1998, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD-TO-MATURITY
-------------------------- --------------------------
COST MARKET COST MARKET
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 4,568,194 $ 4,574,263 $ 3,382,551 $ 3,415,655
Due after one year through five years 23,483,704 23,591,913 6,233,726 6,423,050
Due after five years through ten years 999,410 1,000,593 2,038,647 2,091,962
Due after ten years -- -- 5,655,298 5,838,025
----------- ----------- ----------- -----------
29,051,308 29,166,769 17,310,222 17,768,692
Corporate equity securities 300,000 300,000 -- --
----------- ----------- ----------- -----------
$29,351,308 $29,466,769 $17,310,222 $17,768,692
=========== =========== =========== ===========
</TABLE>
For the purpose of the maturity table, mortgage-backed securities, which are
not due at a single maturity date, have been allocated over maturity groupings
based on the weighted-average contractual maturities of underlying collateral.
Mortgage-backed securities mature earlier than their weighted-average
contractual maturities because of principal prepayments.
Effective with Columbia's acquisition of Klickitat (see Note 1), Columbia
reclassified certain investments in debt securities, held by Klickitat, from
held-to-maturity to available-for-sale to maintain its existing interest rate
risk position and credit risk policy as permitted by financial accounting
standards. At the time of transfer, the investment securities had an amortized
cost of $25,242,573 and an estimated market value of $25,205,592. Recognition of
the market value of the transferred investment securities resulted in an after
tax adjustment to stockholders' equity at December 31, 1997, of $23,991.
As of December 31, 1998 and 1997, investment securities with a book value of
$8,092,616 and $5,337,367 respectively, have been pledged to secure public
deposits as required by law.
NOTE 4 -- RESTRICTED EQUITY SECURITIES
The composition of restricted equity securities is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Federal Home Loan Bank stock $ 999,800 $ 756,500
Federal Agriculture Mortgage Corporation stock 9,400 9,400
Federal Reserve Bank stock 108,000 --
---------- ----------
$1,117,200 $ 765,900
========== ==========
</TABLE>
NOTE 5 -- LOANS
The loan portfolio consists of the following:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Commercial $ 41,274,990 $ 38,012,762
Agriculture 34,603,691 22,365,007
Real estate 108,516,555 75,003,128
Consumer 16,568,629 17,385,488
Other loans 933,494 1,989,591
------------- -------------
201,897,359 154,755,976
Less:
Allowance for loan losses (2,380,220) (1,638,633)
Unearned loan fees (783,951) (612,672)
------------- -------------
$ 198,733,188 $ 152,504,671
============= =============
</TABLE>
Impairment of loans having recorded investments of $1,906,757 at December
31, 1998, and $1,041,389 at December 31, 1997, have been recognized in
conformity with SFAS No. 114 as amended by SFAS No. 118. The Banks' average
investment in impaired loans, measured on the basis of the present value of
expected future cash flows discounted at the loans' effective interest rate, was
$2,020,428 during 1998 and $461,586 during 1997. The total allowance for loan
losses related to these loans at December 31, 1998 and 1997 was approximately
$293,000, and $221,000, respectively. Had the impaired loans performed according
to their original terms, additional interest income of $113,298, $58,533,
$10,991 would have been recognized in 1998, 1997, and 1996, respectively. No
interest income has been recognized on impaired loans during the period of
impairment.
NOTE 6 -- ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE, beginning of year $ 1,638,633 $ 994,576 $ 1,071,494
Acquired with the acquisition of
Valley Community Bancorp 410,540 -- --
Provision for loan losses 1,000,000 581,000 246,479
Loans charged-off (766,632) (40.144) (391,873)
Loan Recoveries 97,679 103,201 68,476
----------- ----------- -----------
BALANCE, end of year $ 2,380,220 $ 1,638,633 $ 994,576
=========== =========== ===========
</TABLE>
NOTE 7 -- LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
mortgage loans serviced for others was $44,530,731 at December 31, 1998. There
were no mortgage loans serviced for others as of December 31, 1997.
Mortgage servicing rights of $667,961 were capitalized in 1998. Amortization
of mortgage servicing rights was $18,119 for the year then ended.
<PAGE> 21
[20]
NOTE 8 -- PROPERTY AND EQUIPMENT
The major classifications of property and equipment are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Land $ 2,019,606 $ 1,049,281
Construction in progress 710,410 --
Buildings and improvements 5,632,191 4,134,478
Furniture and equipment 3,702,965 2,917,131
------------ ------------
12,065,172 8,100,890
Less accumulated depreciation (3,875,104) (2,844,329)
------------ ------------
$ 8,190,068 $ 5,256,561
============ ============
</TABLE>
NOTE 9 -- TIME DEPOSITS
Time certificates of deposit of $100,000 and over, aggregated $10,878,017
and $8,937,725 at December 31, 1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities for all time deposits are as
follows:
<TABLE>
<S> <C>
1999 $52,557,896
2000 10,319,094
2001 1,477,122
2002 432,450
2003 and thereafter 799,321
-----------
$65,585,883
===========
</TABLE>
NOTE 10 -- INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current tax provision
Federal $ 2,225,178 $ 1,901,578 $ 1,280,500
State 411,386 172,668 172,623
----------- ----------- -----------
2,636,564 2,074,246 1,453,123
----------- ----------- -----------
Deferred tax benefit
Federal (165,276) (252,657) (142,785)
State (21,389) (26,113) (25,327)
----------- ----------- -----------
(186,665) (278,770) (168,112)
----------- ----------- -----------
$ 2,449,899 $ 1,795,476 $ 1,285,011
=========== =========== ===========
</TABLE>
The components of the deferred tax benefit consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Loan loss provision not deductible for tax $(127,122) $(236,640) $ (92,993)
Difference between book & tax recognition
of deferred loan fees -- -- 34,513
Difference between book & tax depreciation
methods 37,698 36,577 (6,996)
Difference between accrual & cash
basis tax reporting (102,083) (58,547) (71,077)
Deferred compensation expense 7,233 (43,025) (51,908)
Difference between book & tax recognition
of Federal Home Loan Bank stock dividends 22,979 22,865 20,349
Other differences (25,370) -- --
--------- --------- ---------
Deferred tax benefit $(186,665) $(278,770) $(168,112)
========= ========= =========
</TABLE>
The net deferred tax asset in the accompanying consolidated balance sheets
consists of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 725,309 $ 437,156
Net operating loss carryforward 61,471 --
Deferred compensation 221,132 101,849
----------- -----------
1,007,912 539,005
----------- -----------
Deferred tax liabilities:
Accumulated depreciation (581,023) (58,698)
Conversion to accrual basis tax reporting (62,970) --
Federal Home Loan Bank stock dividends (92,497) (76,238)
Other (13,046) (50,898)
(749,536) (185,834)
----------- -----------
Net deferred tax assets $ 258,376 $ 353,171
=========== ===========
</TABLE>
Management believes, based upon Columbia's historical performance, that the
deferred tax asset will be realized in the normal course of operations and,
accordingly, management has not reduced deferred tax assets by a valuation
allowance.
As a result of Columbia's acquisition of Valley Community Bancorp, Columbia
recorded an additional net deferred tax liability of $281,460 at November 30,
1998.
The tax provision differs from the federal statutory rate of 34% due
principally to the effect of tax exemptions for interest received on municipal
investments. The 1997 provision for income taxes reflects a reduction in the
state income tax rate from 6.6% to 3.8%.
A reconciliation between the statutory federal income tax rate and the
effective tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Federal income taxes at statutory rate $ 2,437,036 $ 1,931,841 $ 1,364,039
State income tax expense, net of
federal tax benefit 271,503 126,501 174,757
Effect of nontaxable interest income (255,867) (220,901) (221,674)
Other (2,773) (41,965) (32,111)
----------- ----------- -----------
$ 2,449,899 $ 1,795,476 $ 1,285,011
=========== =========== ===========
34% 32% 32%
</TABLE>
NOTE 11 -- TRANSACTIONS WITH RELATED PARTIES
Certain directors, executive officers, and principal stockholders are
customers of and have had banking transactions with the Banks, and the Banks
expect to have such transactions in the future. All loans and commitments to
loan included in such transactions were made in compliance with applicable laws
on substantially the same terms (including interest rates and collateral) as
those prevailing at the time for comparable transactions with other persons and
do not involve more than the normal risk of collectibility or present any other
unfavorable features. The amount of loans outstanding to directors, executive
officers, principal stockholders, and companies with which they are associated
was as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
BALANCE, beginning of year $ 2,297,536 $ 2,967,310
Acquired with Valley Community Bancorp 798,564 --
Loans made 972,945 634,100
Loans repaid (1,247,257) (1,303,874)
----------- -----------
BALANCE, end of year $ 2,821,788 $ 2,297,536
=========== ===========
</TABLE>
Columbia has a 28.6% shareholder interest in Datatech of Oregon, Inc.
("Datatech"), a bank service corporation functioning as a data processing
facility for the Banks and five other community banks in Oregon. The investment
in Datatech is accounted for by the cost method. Under this accounting method,
Columbia recognizes income from its investment as dividends are distributed.
Dividends received in excess of earnings are considered a return of investment
and are recorded as reductions of cost of the investment. For the periods ended
December 31, 1998, 1997, and 1996, Columbia's recorded data processing expenses
paid to Datatech were $361,782, $304,456, and $194,696, respectively. Columbia
had prime rate, unsecured loans to Datatech of $167,323 at December 31, 1998,
and $23,353 at December 31, 1997. As of December 31, 1998, Columbia's recorded
investment in Datatech was $66,506.
<PAGE> 22
[21]
NOTE 12 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business to meet the financing needs of its
customers, the Banks are a party to financial instruments with off-balance-sheet
risk. These financial instruments include commitments to extend credit and the
issuance of letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the statement of financial position. The contract amounts of those instruments
reflect the extent of involvement the Banks have in particular classes of
financial instruments.
The Banks' exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
letters of credit written is represented by the contractual amount of those
instruments. The Banks use the same credit policies in making commitments and
conditional obligations as they do for on-balance-sheet instruments.
Unless noted otherwise, the Banks do not require collateral or other
security to support financial instruments with credit risk.
<TABLE>
<CAPTION>
CONTRACT AMOUNTS AT DECEMBER 31
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $50,735,130 $31,314,369
Undisbursed credit card lines of credit 6,329,831 4,707,097
Commercial and standby letters of credit 597,797 287,684
----------- -----------
$57,662,758 $36,309,150
=========== ===========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained, if deemed
necessary by the Bank upon an extension of credit, is based on management's
credit evaluation of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property and equipment, and income-producing
properties.
Letters of credit written are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third-party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Banks hold cash, marketable
securities or real estate as collateral supporting those commitments for which
collateral is deemed necessary.
NOTE 13 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table estimates fair value and the related carrying values of
Columbia's financial instruments at December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks $ 53,219 $ 53,219 $ 16,878 $ 16,878
Federal funds sold 12,555 12,555 2,834 2,834
Securities available for sale 29,467 29,467 31,310 31,310
Securities held to maturity 17,310 17,769 16,728 17,084
Restricted equity securities 1,117 1,117 766 766
Loans held for sale 7,819 7,819 2,714 2,714
Loans,net 198,733 204,334 152,505 149,981
FINANCIAL LIABILITIES
Demand and savings deposits 230,095 230,095 154,624 154,624
Time deposits 65,586 65,735 46,944 46,894
Notes payable 9,734 9,734 5,264 5,264
</TABLE>
While estimates of fair value are based on management's judgment of the most
appropriate factors, there is no assurance that were Columbia to have disposed
of such items at December 31, 1998 and 1997, the estimated fair values would
necessarily have been achieved at that date, since market values may differ
depending on various circumstances. The estimated fair values at December 31,
1998 and 1997 should not necessarily be considered to apply at subsequent dates.
In addition, other assets and liabilities of Columbia that are not defined
as financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not recognized
in the financial statements nevertheless may have value but are not included in
the above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the earnings potential of loan servicing rights,
the trained work force, customer goodwill, and similar items.
NOTE 14 -- CONCENTRATIONS OF CREDIT RISK
All of the Banks' loans, commitments and commercial and standby letters of
credit have been granted to customers in the Banks' market area. The majority of
such customers are also depositors of the Banks. Investments in state and
municipal securities are not significantly concentrated within any one region of
the United States. The concentrations of credit by type of loan are set forth in
Note 5. The distribution of commitments to extend credit approximates the
distribution of loans outstanding. Commercial and standby letters of credit were
granted primarily to commercial borrowers as of December 31, 1998. The Banks'
loan policies do not allow the extension of credit to any single borrower or
group of related borrowers in excess of $1,000,000 without approval from the
Banks' respective loan committees.
<PAGE> 23
[22]
NOTE 15 -- COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments - As of December 31, 1998, Columbia leased
certain properties. The annual commitment for rentals under these noncancellable
operating leases is summarized as follows:
<TABLE>
<S> <C>
1999 $ 89,290
2000 44,025
----------
$ 133,315
==========
</TABLE>
Rental expense for all operating leases was $65,457, $44,510, and $28,303
for the periods ended December 31, 1998, 1997, and 1996, respectively.
Legal Contingencies - Columbia may become a defendant in certain claims and
legal actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, there are no matters
presently known to Columbia that are expected to have a material adverse effect
on the consolidated financial condition of Columbia.
Year 2000 Compliance - The Year 2000 ("Y2K") issue is the result of older
computer programs being written using two digits rather than four to define the
applicable year. A computer program that has date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruption of
operations including, among other things, a temporary inability to process
transactions, send statements, or engage in similar normal business activities.
Based on an assessment of computer hardware, software, and other equipment
operated by Columbia, management presently believes that all equipment and
programs should be Y2K compliant by December 31, 1999. A program for addressing
the Y2K issue through awareness, assessment, renovation and testing has been
developed and implemented. The costs of implementing and completing the
program's phases have not been of a material nature and should continue to not
be material through program completion.
Columbia has initiated formal communications with all significant suppliers
to determine the extent to which they are vulnerable to those third parties'
failures to remedy their own Y2K impact issues. Third-party responses have
generally indicated satisfactory progress in addressing any needs for equipment
or software renovation. Columbia's large customers are also being contacted to
build Y2K awareness and encourage early solutions regarding potential business
disruption due to processing failures. There can be no guarantee that the
systems of other companies on which Columbia's systems rely will be timely
converted, or that a failure to convert by another company, or a conversion that
is incompatible with Columbia's systems, would not have a material adverse
effect on Columbia. However, Columbia will test for the Y2K preparedness of all
internal functions and external functions provided by third parties whenever
possible.
NOTE 16 -- NOTES PAYABLE
The Banks are members of the Federal Home Loan Bank ("FHLB") of Seattle. As
members, the Banks entered into "Advances, Security and Deposit Agreements"
which provide a credit arrangement with FHLB. Borrowings under the credit
arrangement are the Banks' FHLB stock as well as deposits or other instruments
which may be pledged. As of December 31, 1998 and 1997, the Banks had borrowings
outstanding with the FHLB of $8,667,800 and $4,600,000, respectively. The
promissory notes mature in 1999 and 2001 and carry interest rates from 5.30% to
6.00%.
CRB also participates in the U.S. Treasury Department's Treasury Investment
Program which facilitates the acceptance and processing of federal tax deposits.
Under this program, CRB is authorized to accumulate daily tax payments, up to
authorized limits, and deploy the funds in short-term investments. In exchange,
CRB is required to issue a fully collateralized demand note to the Treasury and
pay interest at the federal funds rate minus 25 basis points. As of December 31,
1998 and 1997, CRB had $1,066,295 and $663,824, respectively, outstanding under
this program.
NOTE 17 -- STOCK INCENTIVE PLANS
Columbia maintains a Stock Incentive Plan (the "Plan") originally adopted by
CRB in 1993 prior to Columbia's formation. The Plan allows for the granting of
both incentive stock options and nonstatutory stock options. The option price
for incentive stock options is determined by Columbia's Board of Directors and
cannot be less than 100% of the fair market value of the shares on the date of
grant. The incentive stock options expire ten years from the date of grant. The
option price and duration of options for nonstatutory stock options is
determined by the Board of Directors.
The following, as adjusted for 1998 stock splits and dividends, summarizes
options available and outstanding under this plan as of December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF OPTIONS EXERCISE PRICE
---------- --------------
<S> <C> <C>
Options under grant December 31, 1995 266,100 $ 3.00
Options exercised in 1996:
Incentive stock options (19,968) $ 2.94
Nonstatutory stock options (10,500) $ 3.33
Options expired or forfeited in 1996 (3,600) $ 3.00
--------
Options under grant and excercisable
December 31, 1996 232,032 $ 3.03
Options granted in 1997:
Incentive stock options 129,000 $ 5.58
Nonstatutory stock options 78,000 $ 5.58
Options exercised in 1997:
Incentive stock options (52,244) $ 2.81
Nonstatutory stock options (12,000) $ 5.58
Options expired or forfeited in 1997 (1,800) $ 3.34
-------
Options under grant and exercisable
December 31, 1997 372,988 $ 4.39
Options granted in 1998:
Incentive stock options 5,000 $10.50
Gifted shares in 1998 400 $
Options exercised in 1998:
Incentive stock options (31,000) $ 3.84
Nonstatutory stock options (24,900) $ 4.72
-------
Options under grant and exercisable
December 31, 1998 322,488 $ 4.53
=======
Options reserved, December 31, 1998 78,000
=======
</TABLE>
<PAGE> 24
[23]
Had compensation cost for Columbia's 1998 and 1997 grants
for stock-based compensation plans been determined consistent
with SFAS No. 123, its net income and net income per common
share for December 31, 1998 and 1997, would approximate the pro
forma amounts below. The disclosure requirements of SFAS No. 123
were not material to the 1996 consolidated financial statements. (In
thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net income $4,718 $4,512 $3,887 $3,669
Basic earnings per common share $ 0.67 $ 0.64 $ 0.57 $ 0.54
Diluted earnings per common share $ 0.65 $ 0.62 $ 0.55 $ 0.52
</TABLE>
The fair value of each option granted during 1997 is estimated on the date
of grant using the Black-Scholes option pricing model with the following
assumptions: (1) dividend yield of 2.09%, (2) expected volatility of 32.57%,
(3) risk-free rate of 6.36%, and (4) expected life of 3.75 years.
The fair value of each option granted during 1998 is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions: (1) dividend yield of 2.08%, (2) expected volatility of 34.89%,
(3) risk-free rate of 4.55%, and (4) expected life of 3.92 years.
The effects of applying SFAS No. 123 in this pro forma disclo-
sure are not indicative of future amounts. SFAS No. 123 does not
apply to awards prior to 1995, and additional awards in future years
are anticipated.
NOTE 18 -- EMPLOYEE BENEFIT PLANS
Columbia has in place an Employee Stock Ownership Plan ("ESOP") for the
benefit of its employees. The plan allows participation by all employees over
the age of 20 who have also met minimum service requirements. Contributions to
the plan are at the discretion of the Board of Directors and are used to
purchase shares of Columbia's common stock. Employees are not permitted to
contribute individually to the plan but vest in their proportionate share of the
plan interest after six years of participation. For the periods ending December
31, 1998, 1997, and 1996, Columbia contributed $230,000, $222,966 and $163,279,
respectively, to the plan.
The ESOP's assets as of December 31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Allocated shares 284,766 85,400
Cash on hand $ 19,588 $ 12,685
</TABLE>
Columbia has also adopted a 401(k) Savings Investment Plan which allows
employees to defer certain amounts of compensation for income tax purposes under
Section 401(k) of the Internal Revenue Code. Essentially, all full-time
employees over the age of 20 and meeting length of service requirements are
eligible to participate in the plan. Employees may elect to defer and
contribute, within statutory limits, up to 10% of their annual compensation into
the plan. Their contributions and those of Columbia, which are limited to 25% of
employee contributions up to 4% of total participant compensation, are invested
by Plan trustees in employee designated funds. For the periods ending December
31, 1998, 1997, and 1996, Columbia contributed $45,474, $31,278, and $21,932,
respectively, to the Plan.
Columbia has established an employee bonus program which provides eligible
participants additional compensation based upon the achievement of annual return
on asset targets established by the Board of Directors. For the periods ending
December 31, 1998, 1997, and 1996, additional compensation of $636,169,
$428,890, and $158,979, respectively, was paid to eligible employees.
Klickitat also maintained a profit sharing plan covering substantially all
employees. The plan provided for a discretionary employer contribution each
year. Klickitat's maximum profit sharing contribution was 15% of taxable
compensation for the year, limited to $150,000. There were no employer or
employee contributions to this plan in 1997 when it was terminated and all
covered employees became eligible under Columbia's plan. The employer
contribution was $111,382 for the year ended December 31, 1996.
Beginning 1996 and as later amended, Columbia entered into both employment
and retirement agreements with its chief executive officer. The employment
agreement provides for the executive's salary and customary benefits until
termination of the agreement in May 2000. The retirement agreement provides
annual post-retirement compensation for a seven-year period after the chief
executive's retirement. A portion of Columbia's obligation under the agreement
has been funded with a $120,000 interest-earning investment and will be paid in
annual installments of $26,000 plus interest earned on invested funds. For the
year ended December 31, 1998, Columbia recorded a liability of $222,757 as its
obligation for current services pursuant to the retirement plan. In the event
employment of the chief executive officer is terminated prior to expiration of
the agreements, all salary and benefits accrued as of the termination date and
all retirement payments provided in the retirement agreement will be paid to the
executive.
During 1996, Klickitat entered into both employment and retirement
agreements with its chief executive officer. Klickitat's chief executive retired
on December 31, 1996, and pursuant to the agreement, will be paid in annual
installments of $60,000. For the year ended December 31, 1998, Columbia recorded
a liability of $60,000 as its remaining obligation for services pursuant to this
retirement agreement.
<PAGE> 25
[24]
NOTE 19 -- EARNINGS PER SHARE
In 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which is
effective for financial statements issued for periods ending after December 15,
1997. SFAS No. 128 replaced standards for computing and presenting earnings per
share and requires a dual presentation of basic and diluted earnings per share.
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the year. Diluted earnings per share reflect the potential
dilution that could occur if common shares were issued pursuant to the exercise
of options under existing stock option plans. Comparative earnings per share
data for the years ended December 31, 1998, 1997 and 1996 have been restated to
conform with the current year presentation. The following table illustrates the
computations of basic and diluted earnings per share for the years ended
December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
1998
Basic earnings per share
Income available to common shareholders $4,717,853 7,066,229 $ 0.67
Effect of dilutive securities
Outstanding common stock options -- 172,236
---------- ---------
Income available to common shareholders
plus assumed conversions $4,717,853 7,238,465 $ 0.65
========== ========= ========
1997
Basic earnings per share
Income available to common shareholders $3,886,409 6,813,264 $ 0.57
Effect of dilutive securities
Outstanding common stock options -- 200,225
---------- ---------
Income available to common shareholders
plus assumed conversions $3,886,409 7,013,489 $ 0.55
========== ========= ========
1996
Basic earnings per share
Income available to common shareholders $2,726,871 6,732,393 $ 0.41
Effect of dilutive securities
Outstanding common stock options -- 114,465
---------- ---------
Income available to common shareholders
plus assumed conversions $2,726,871 6,846,858 $ 0.40
========== ========= ========
</TABLE>
NOTE 20 -- PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Columbia Bancorp (unconsolidated parent
company only) is as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash $ 180,369 $ 186,018
Investment securities 300,000 300,000
Investment in subsidiaries 25,503,434 22,561,360
Goodwill 9,286,832 --
Other assets 281,411 168,953
------------ ------------
Total assets $ 35,552,046 $ 23,216,331
============ ============
LIABILITIES
Dividend payable $ 476,942 $ 228,845
Deferred compensation 318,884 --
------------ ------------
Total liabilities 795,826 228,845
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 14,125,315 5,528,218
Additional paid-in capital 6,317,732 6,317,732
Retained earnings 14,257,975 11,131,444
Unrealized gain on available-for-sale
investment securities 55,198 10,092
------------ ------------
34,756,220 22,987,486
------------ ------------
Total liabilities and stockholders' equity $ 35,552,046 $ 23,216,331
============ ============
REVENUES
Equity in undistributed (excess
distribution of) earnings
of subsidiary banks $ (3,046,307) $ 3,541,345
Dividends 7,975,000 468,956
EXPENSES
Goodwill and administrative expenses
of subsidiary banks (210,840) (123,892)
------------ ------------
Net income $ 4,717,853 $ 3,886,409
============ ============
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,717,853 $ 3,886,409
Adjustments to reconcile net income
to net cash from operating activities:
Excess distribution of (equity in
undistributed) earnings of subsidiary bank 3,046,307 (3,541,345)
Amortization of goodwill 52,384 -
Changes in other assets and liabilities (7,513) 5,584
------------ ------------
Net cash from operating activities 7,809,031 350,648
============ ============
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from public stock offering, net of costs 8,126,115 -
Cash dividends and fractional share payments (1,343,226) (793,772)
Proceeds from stock options exercised
and sales of common stock 470,982 389,000
------------ ------------
Net cash from financing activities 7,253,871 (404,772)
------------ ------------
cash flows from investing activities
Cash paid, net of cash received from acquisition (15,068,551) -
------------ ------------
Net cash from investing activities (15,068,551) -
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,649) (54,124)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 186,018 240,142
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 180,369 $ 186,018
============ ============
SCHEDULE OF NONCASH ACTIVITIES
Change in unrealized gain (loss) on
available-for-sale securities, net of tax $ 45,106 $ (2,667)
Unrealized gain on securities
transferred from held-to-maturity
to available-for-sale, net of taxes $ - $ 23,991
Cash dividend, payable after year-end $ 476,942 $ 228,845
</TABLE>
NOTE 21 -- REGULATORY MATTERS
Banks are subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum requirements can initiate
certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on a bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, banks must meet specific capital
guidelines that involve quantitative measures of the banks' assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. Capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require Columbia and the Banks to maintain minimum amounts and ratios (set forth
in the following table) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined). Management believes, as of December 31, 1998, that
Columbia and the Banks meet all capital adequacy requirements to which they are
subject.
As of the most recent notifications from their regulatory agencies, Columbia
and the Banks were categorized as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as adequately
capitalized, Columbia and the Banks must maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios as set forth in the table on the
following page. There are no conditions or events since that notification that
management believes have changed the institutions' category.
The Banks' actual capital amounts and ratios are also presented in the
following table.
<PAGE> 26
[25]
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY CORRECTIVE PROMPT
ACTUAL PURPOSES ACTION
------------------------ ---------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998
Columbia Bancorp
Total capital to risk
weighted assets $27,588 11.9% $18,544 >=8.0% $23,180 >=10.0%
Tier I capital to risk
weighted assets 25,207 10.9% 9,272 >=4.0% 13,908 >=6.0%
Tier I capital to
average assets 25,207 8.9% 11,283 >=4.0% 14,104 >=5.0%
AS OF DECEMBER 31, 1998
Columbia River Bank
Total capital to risk
weighted assets $22,852 11.3% $16,186 >=8.0% $20,232 >=10.0%
Tier I capital to risk
weighted assets 20,822 10.3% 8,093 >=4.0% 12,139 >=6.0%
Tier I capital to
average assets 20,822 7.7% 10,860 >=4.0% 13,575 >=5.0%
AS OF DECEMBER 31, 1998
Valley Community Bank
Total capital to risk
weighted assets $ 4,812 16.6% $ 2,320 >=8.0% $ 2,900 >=10.0%
Tier I capital to risk
weighted assets 4,449 15.3% 1,160 >=4.0% 1,740 >=6.0%
Tier I capital to
average assets 4,449 8.9% 1,993 >=4.0% 2,491 >=5.0%
AS OF DECEMBER 31, 1997
Columbia Bancorp
Total capital to risk
weighted assets $22,987 13.7% $13,420 >=8.0% $16,775 >=10.0%
Tier I capital to risk
weighted assets 22,977 13.7% 6,710 >=4.0% 10,065 >=6.0%
Tier I capital to
average assets 22,977 10.6% 8,641 >=4.0% 10,801 >=5.0%
AS OF DECEMBER 31, 1997
Columbia River Bank
Total capital to risk
weighted assets $24,190 14.5% $13,382 >=8.0% $16,728 >=10.0%
Tier I capital to risk
weighted assets 22,551 13.5% 6,691 >=4.0% 10,037 >=6.0%
Tier I capital to
average assets 22,551 10.0% 9,028 >=4.0% 11,285 >=5.0%
</TABLE>
NOTE 22 -- STOCK OFFERING
During November 1998, Columbia registered 1,000,000 shares of common stock
for sale to the public at a price of $9 per share, for an aggregate offering
price of $9,000,000. All shares were sold, resulting in net proceeds of
$8,126,115, after deducting $873,885 for underwriting discounts and commissions,
legal, accounting, printing fees, and other offering expenses. Net proceeds were
used in connection with Columbia's expansion plans, including the acquisition of
Valley Community Bancorp (see Note 2). Pending such use, the net proceeds were
invested in short-term, investment-grade securities.
INDEPENDENT
AUDITOR'S REPORT
To the Board of Directors of Columbia Bancorp
We have audited the accompanying consolidated balance sheets of Columbia
Bancorp and Subsidiaries as of December 31, 1998 and 1997, and the related
statements of income and comprehensive income, changes in stockholders' equity,
and cash flows for the years ended December 31, 1998, 1997, and 1996. These
financial statements are the responsibility of Columbia Bancorp's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Columbia
Bancorp and Subsidiaries as of December 31, 1998 and 1997, and the results of
its operations and cash flows for the years ended December 31, 1998, 1997, and
1996, in conformity with generally accepted accounting principles.
Moss Adams LLP
Portland, Oregon
January 28, 1999
<PAGE> 27
[26]
COLUMBIA BANCORP AND COLUMBIA RIVER BANK BOARD OF DIRECTORS
The directors of Columbia Bancorp and Columbia River Bank bring their
experience in business and community projects to their work as board members.
ROBERT L.R. BAILEY has been a director of Columbia Bancorp since its formation
and a director of Columbia River Bank since 1977. Mr. Bailey is the president
and general manager of Orchard View Farms, Inc., a fruit growing and packing
company headquartered in The Dalles, Oregon.
DENNIS CARVER was elected to the Columbia Bancorp Board in 1997 and was
previously a director of Klickitat Valley Bank since 1984. He was elected to the
Board of Columbia River Bank in 1996. He has worked as a chiropractor in
Goldendale, Washington, since 1973, and presently runs the Goldendale
Chiropractic Clinic.
DONALD T. MITCHELL has been a director of Columbia Bancorp since its inception
and has served as Chairman since December 18, 1998. He was a director of Juniper
Banking Company. Since 1982, he has been a partner in Lacy Forest Products, a
lumber brokerage firm.
CHARLES F. BEARDSLEY has served as a director of Columbia Bancorp since its
formation, and as a director of Columbia River Bank since April 1994. Since 1972
Mr. Beardsley has been a principal owner of Hershner & Bell Realty, a real
estate brokerage firm, and of Hershner & Bell-Farrell Agency, an insurance
agency, both in Hood River, Oregon.
WILLIAM A. BOOTH has served as a director of Columbia Bancorp since its
formation, and as a director of Columbia River Bank since 1977. Since 1968 Mr.
Booth has been a principal in Booth & Kelly Insurance and Real Estate, a real
estate and insurance agency in The Dalles, Oregon.
TERRY L. COCHRAN has been a director and Chief Executive Officer of Columbia
Bancorp since its inception and has been Columbia River Bank's Chief Executive
Officer and a director since 1981. After Columbia Bancorp acquired Valley
Community Bank in 1998, he was elected to the board of that bank.
JANE F. LEE was elected to the Columbia Bancorp Board in 1977 and has been a
director of Klickitat Valley Bank since 1987. She was elected to the board of
Columbia River Bank in 1996. She has worked in cattle ranching and hay
operations since 1972, and is the president of the Washington State Association
of Cattle Women.
JEAN MCKINNEY has been a director of Columbia Bancorp since its formation, and
has been a director of Columbia River Bank since April 1994. Ms. McKinney has
served for over 20 years as president and business manager of McKinney Ranches,
Inc., a grain farming business in Wasco, Oregon.
JAMES B. ROBERSON was elected to the Columbia Bancorp Board in 1998 and has been
a director of Klickitat Valley Bank since 1977. He became a director of Columbia
River Bank in 1996. Prior to his retirement in 1996, Mr. Roberson was an
optometrist in the Bingen/White Salmon, Washington area for 34 years.
GREG WALDEN has been a director of Columbia Bancorp since its formation, and has
been director of Columbia River Bank since April 1994. Congressman Walden was
elected to the U.S. House of Representatives in 1998. Since 1986, he has served
as president of Columbia Gorge Broadcasters, Inc. in Hood River, Oregon.
TED M. FREEMAN was director of Juniper Banking Company for eight years. He
served as chairman of its Board for a number of years prior to its merger with
Columbia River Bank, and became a director of Columbia River Bank following the
merger. Prior to his retirement in 1993, Mr. Freeman managed a seed, fertilizer,
and grain business for 35 years.
[PHOTOGRAPH]
Pictured from left to right, front row: Ted Freeman and Jane Lee. 2nd row: Jean
McKinney, James Roberson, Donald Mitchell. 3rd row: Charles Beardsley, Terry
Cochran, Greg Walden, William Booth. Back row; Dennis Carver and Robert Bailey.
<PAGE> 28
[27]
[PHOTOGRAPH]
Pictured from left to right, Terry L. Cochran, Dan Corrigan, Ward Eason, Jim
Doran, Ray Kauer and Bruce G. Bryant.
VALLEY COMMUNITY BANK BOARD OF DIRECTORS
DAN CORRIGAN, founding Board Member since 1983 and original Board Chairman. Mr.
Corrigan has lived in the area for several years and operates an insurance
agency and financial planning firm.
JIM DORAN has been a director since 1986 and serves as Vice Chairman. Mr. Doran
operates three local new car dealerships and has been in the McMinnville area
since the early 1980's.
WARD EASON has been a director since 1986 and currently serves as Board
Chairman. Mr. Eason is a part-time farmer and real estate salesman.
RAY KAUER, founding Board member since 1983 and has been actively involved in
the area as a farmer and a real estate developer.
TERRY L. COCHRAN has been a director and Chief Executive Officer of Columbia
Bancorp since its inception and has been Columbia River Bank's Chief Executive
Officer and a director since 1981. After Columbia Bancorp acquired Valley
Community Bank in 1998, he was elected to the Valley Community Bank Board of
Directors.
NORMAN BERNARDS, (not pictured) founding Board Member since 1983 and lifetime
resident of the McMinnville area with extensive family ties in the county.
Formerly owned a local John Deere dealership and has since retired.
[PHOTOGRAPH]
VALLEY COMMUNITY BANK MANAGEMENT TEAM
BRUCE G. BRYANT, (on left) President. Mr. Bryant joined Valley Community Bank in
April 1987 as president and director. He also serves as the loan administrator
and investment officer. He is a graduate of the University of Oregon and has a
MBA from Portland State University.
JON R. JOHNSON, (on right) Vice President & Cashier. Mr. Johnson has been part
of senior management since June 1993, and is responsible for overall operating
activities including data processing and human resources. He is a graduate of
the University of North Dakota with a business degree.
RICK A. ANDERSEN, (not pictured) Vice President/Loans. Mr. Andersen joined the
bank in 1997 as a lending officer. He holds a business degree from Iowa State
University.
<PAGE> 29
[28]
COLUMBIA BANCORP AND COLUMBIA RIVER BANK EXECUTIVE OFFICERS
TERRY L. COCHRAN, President and Chief Executive Officer. Mr.
Cochran has been a director and Chief Executive Officer of Columbia
Bancorp since its inception and has been Columbia River Bank's Chief
Executive Officer and a director since 1981. After Columbia Bancorp
acquired Valley Community Bank in 1998, he was elected to the board
of Valley Community Bank. He holds an A.A. degree from Yakima Valley
College, a B.A. degree in Business Administration from Washington State
University, and is a graduate of Pacific Coast Banking School at the
University of Washington.
JAMES C. MC CALL, Executive Vice President and Chief Lending
Officer of Columbia River Bank. Mr. McCall has been employed by CRB
since April 1982, and performed the duties of Chief Lending Officer
Since November 1988. He holds a B.S. degree in Business from Oregon
State University, and is a 1993 graduate of the Pacific Coast Banking
School at the University of Washington. Mr. McCall has 29 years of
banking experience. He presently is a director of Network of Oregon
Affordable Housing, and is past Chairman of the Oregon Bankers
Association Lending Committee.
CRAIG J. ORTEGA, Executive Vice President and Head of Community
Banking of Columbia River Bank. Mr. Ortega has performed these
duties since July of 1997. Prior to that, he was manager of CRB's Hood
River branch. He attended Blue Mountain Community College and holds
a B.S. degree in Business Administration from Eastern Oregon State
College, and is a graduate of the Pacific Coast Banking School at the
University of Washington.
NEAL T. MC LAUGHLIN, Executive Vice President and Chief Financial
Officer of Columbia Bancorp and Columbia River Bank. Mr.
McLaughlin has performed these duties since July of 1997. He has held
a number of positions with CRB and most recently was Vice President
and Controller. He holds a B.S. degree in Accounting from the University
of Oregon, and is also a Certified Public Accountant in the State of
Oregon. He is a graduate of the Northwest Intermediate Banking School
and the Northwest Intermediate Commercial Lending School, and has
attended the Pacific Coast Banking School at the University of Washing-
ton. Mr. McLaughlin is a member of the Financial Officers/Investment
Committee of the Oregon Bankers Association.
Pictured from left to right, Terry L. Cochran, James C. McCall, Craig J. Ortega
and Neal T. McLaughlin.
[PHOTOGRAPH]
<PAGE> 30
[29]
[PHOTOGRAPH]
Pictured from left to right, Ann Marie Jelderks, Regena Kepler, Phil Hamilton,
Tom McDonald and Charla Herman.
COLUMBIA RIVER BANK DEPARTMENT HEADS
PHIL S. HAMILTON, Vice President of Residential Lending and Manager of Columbia
River Bank Mortgage Group. Phil organized the Mortgage Group in 1997 and is
recognized for his strategic and business planning expertise, team building and
organizational development. Phil's keen understanding and structuring of
strategic real estate alliances has been a proven success in Central Oregon.
Phil is a member of the Board of Realtors, Oregon Mortgage Bankers Association,
National Mortgage Bankers Association and Mount Bachelor Rotary Club.
CHARLA L. HERMAN, Assistant Vice President and Human Resource Director. Charla
was instrumental in setting up the operations of a Human Resource Department in
1992. She has been in banking for 20 years and has extensive knowledge in human
resource management. Charla is currently involved as the Secretary of the
Wahtonka High School Booster Club and Treasurer for the Society of Human
Resource Management.
TOM P. MC DONALD, Vice President & Lending Group Manager. Tom helped organize
the Bend lending group for Columbia River Bank which specializes in construction
and small business lending and relationship management. Tom is a Board member of
the Bend Little League program.
REGENA E. KEPLER, Assistant Vice President and Bankcard Manager. Regena
spearheaded the organization of the bankcard department in 1994. She has been in
banking for 22 years and through this experience has a broad range of knowledge
in operations and management. Regena is an Ambassador for The Dalles Chamber of
Commerce and a Board member of the Northwest Credit Card Association.
ANN MARIE JELDERKS, Vice President and Manager of Financial Services. Ann Marie
helped organize the financial services department in 1990 and is a joint
employee of Primevest. She has 18 years in the investment services area. Her
real estate, business, and teaching background enable her to take an educational
approach to investing. She is currently involved in Rotary and is director of
citizens for the Columbia Gorge Discovery Center.
<PAGE> 31
[30]
COLUMBIA RIVER BANK BRANCH MANAGERS
MIKE TESTERMAN, Asst. Vice President & Branch Manager, Bend. Mike has 11 years
experience in banking including branch operations, internal auditing,
management, consumer, construction and commercial lending. He has been with
Columbia River Bank since 1997. He is active in the COIC Finance Committee,
Central Oregon Economic Development Council and has taught classes for the
American Institute of Banking.
NORM GLOVER, Sr. Vice President & Branch Manager, Goldendale. Norm has 33 years
of banking experience. He is responsible for overall management of the branch's
operations with a primary focus on lending. Norm is an active member of the
Goldendale Chamber of Commerce and Kiwanas Club.
MARSHALL CORNETT, Vice President & Branch Manager, Hood River. With 25 years of
banking experience, Marshall provides key knowledge for reaching sales goals and
optimizing market development. His supervision includes personnel, planning and
results management. Marshall is actively involved with the Hood River Memorial
Hospital Board of Directors and many community volunteer groups.
KYLE SAGER, Vice President & Branch Manager, Redmond. Kyle has nearly 40 years
of banking experience. His extensive background provides a large network of
knowledge, benefiting his co-workers and customers. Kyle is a member of the
Executive Committee for the Redmond Economic Development Assistance Partnership,
and a board member of the Redmond Rotary Club.
GARY HERTEL, Sr. Vice President & Branch Manager, The Dalles. Gary puts his 30
years of banking experience to use as he effectively manages a large
commercial/agricultural loan portfolio. Gary has been a member of the Lions Club
for 27 years, a member of The Dalles Chamber of Commerce, and an active
supporter of local youth sport programs.
BILL HUMPHREYS, Vice President & Branch Manager, White Salmon. Bill is a fourth
generation banker, with eight years banking experience. A graduate of the
University of Oregon, he is now attending the University of Wisconsin Graduate
School of Banking. Bill joined Klickitat Valley Bank as its manager in April
1997. He serves on the Skyline Hospital Foundation Board and is a member of the
White Salmon Rotary.
PETE MCCABE, Vice President & Branch Manager, Madras. Pete is a native Central
Oregonian with 14 years banking experience. He graduated with honors from the
Northwest Agriculture Credit School. He is also a graduate of the Northwest
Intermediate Banking School. Pete is an active member of the Lions Club and an
advisory board member for Madras High School's business department. He is also
chairman for the Oregon Banker's Association Ag Committee.
Sandi Olson, Asst. Vice President & Branch Manager, The Dalles, Westside Branch.
Sandi has 17 years experience in the banking industry and provides her expertise
in customer relations, sales and loans. She is a member of the Regional
Strategies Board, serves on the budget committees for Columbia Gorge Community
College and the Port of The Dalles and is a director of citizens for the
Columbia Gorge Discovery Center.
SHANE CORREA, Vice President & Branch Manager, Hermiston. Shane was instrumental
in setting up and opening the Hermiston branch, and leads his team in commercial
and agricultural lending as well as overall management of the branch. Shane is
involved in the Pendleton Rotary Club and is a member of the Greater Eastern
Oregon Development Corporation Loan Committee.
HAP COOLEY, Vice President & Branch Manager, Pendleton. Hap was instrumental in
setting up and opening the Pendleton branch. He has 27 years of banking
experience and provides extensive experience in management, sales and
operations. Hap is currently on the Board of St. Anthony Hospital, the executive
committee for the City of Pendleton Economic Development, and a member of the
Pendleton Chamber of Commerce.
Pictured from left to right, front: Gary Hertel, Sandi Olson, Marshall Cornett.
Back: Hap Cooley, Pete McCabe, Bill Humphreys, Shane Correa and Kyle Sager. Not
pictured: Norman Glover and Mike Testerman.
[PHOTOGRAPH]
<PAGE> 32
[31]
BANKING SERVICES OTHER SERVICE LOCATIONS
<TABLE>
<S> <C> <C>
PERSONAL DEPOSIT BUSINESS DEPOSIT SERVICES MAUPIN (ATM Only)
SERVICES Regular Business Checking Deschutes Avenue
Regular Checking Interest Business Checking Maupin, Oregon 97037
Interest Checking Merchant Visa and Mastercard
Budget Checking Business Money Market VALLEY COMMUNITY BANK
Senior Citizen Checking Analysis Checking Hillside Manor Retirement Center
Money Market Account 900 NW Hill Road
Statement Savings CONVENIENCE SERVICES McMinnville, Oregon 97128
Minor Savings 24 Hour ATM 503/435-0371
Time Certificates of Deposit 24 Hour Telephone Banking
Safe Deposit Boxes Mail Banking COLUMBIA RIVER BANK MORTGAGE GROUP
Visa Check Card (Debit Card) Automatic Direct Deposit 1701 NE Third Street, Suite B
Official Checks Automatic Loan Payments Bend, Oregon 97701
Overdraft Protection Drive-Up Tellers 541/330-0261
Wire Transfers
LOAN SERVICES COLUMBIA RIVER BANK LENDING GROUP
Personal Loans 1701 NE Third Street, Suite C
Line Plus+ Bend, Oregon 97701
Credit Life Insurance 541/617-6061
Mortgage Loans
Business Loans PRIMEVEST FINANCIAL SERVICES, INC.
Term Loans 316 E. Third Street
Credit Lines The Dalles, Oregon 97058
Equipment Financing 541/298-6646
Construction Financing
Equity Lines of Credit SHEVLIN CENTER BRANCH (Opening mid-1999)
Automobile Loans 925 SW Emkay Drive
Bend, Oregon 97701
</TABLE>
<PAGE> 33
[32]
CORPORATE AND SHAREHOLDER INFORMATION
<TABLE>
<S> <C> <C>
STOCK TRADING MARKET ADMINISTRATION VALLEY COMMUNITY BANK
ADMINISTRATIVE OFFICE
Columbia Bancorp common stock is quoted COLUMBIA BANCORP AND 723 N. Baker
on the NASDAQ National Market under the COLUMBIA RIVER BANK McMinnville, Oregon 97128
symbol CBBO. ADMINISTRATIVE OFFICE 503/472-0534
420 E. Third Street, Suite 200 fax: 503/472-0538
TRANSFER AGENT PO Box 1050
The Dalles, Oregon 97058 MCMINNVILLE --
Shareholder Relations 541/298-6649 VALLEY COMMUNITY BANK
Norwest Bank Minnesota, NA fax: 541/298-3157 723 N. Baker
PO Box 64854 McMinnville, Oregon 97128
St. Paul, Minnesota 55164-0854 BANKING OFFICES 503/472-0534
1-800-468-9716
OREGON HERMISTON
OUTSIDE COUNSEL THE DALLES 1055 S. Hwy. 395, Suite 323
Bennett H. Goldstein 316 E. Third Street PO Box 827
Attorney At Law PO Box 1030 Hermiston, Oregon 97838
2548 SW St. Helens Court The Dalles, Oregon 97058 541/564-6800
Portland, Oregon 97201 541/298-6647
PENDLETON
INDEPENDENT AUDITORS THE DALLES WESTSIDE 16 SE Court Avenue
Moss Adams, LLP 520 Mt. Hood Street PO Box 848
1001 SW Fifth Avenue, Suite 1700 PO Box 1030 Pendleton, Oregon 97801
Portland, Oregon 97204-1152 The Dalles, Oregon 97058 541/278-1796
541/296-1157
INVESTOR RELATIONS WASHINGTON
Len Cereghino & Company, Oregon HOOD RIVER WHITE SALMON
928 SE 35th Avenue 2650 Cascade Avenue 390 NE Tohomish Street
Portland, Oregon 97214 PO Box 980 PO Box 279
Hood River, Oregon 97031 White Salmon, Washington 98672
541/387-2444 509/493-2500
MADRAS GOLDENDALE
624 SW Fourth Street 202 W. Main Street
PO Box 0 Madras, Oregon 97741 PO Box 167
541/475-7221 Goldendale, Washington 98620
509/773-5716
BEND
1701 NE Third Street
Bend, Oregon 97701
541/330-1701
REDMOND
434 N. Fifth Street
PO Box 520
Redmond, Oregon 97756
541/923-3702
</TABLE>
<PAGE> 34
[COLUMBIA BANCORP LOGO]
420 EAST THIRD STREET, SUITE 200
PO BOX 1050
THE DALLES, OREGON 97058
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of Bancorp
Columbia Bancorp's wholly-owned subsidiaries as of December 31, 1998
were Columbia River Bank, Valley Community Bank, and Valley Community Mortgage
Services, Inc.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES CONTAINED IN THE 1998 ANNUAL REPORT
TO SHAREHOLDERS OF COLUMBIA BANCORP AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 53,218,907
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,554,775
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,583,969
<INVESTMENTS-CARRYING> 17,310,222
<INVESTMENTS-MARKET> 0
<LOANS> 209,715,962
<ALLOWANCE> 2,380,220
<TOTAL-ASSETS> 342,413,249
<DEPOSITS> 295,680,389
<SHORT-TERM> 9,434,095
<LIABILITIES-OTHER> 2,242,545
<LONG-TERM> 300,000
0
0
<COMMON> 14,125,315
<OTHER-SE> 20,630,905
<TOTAL-LIABILITIES-AND-EQUITY> 342,413,249
<INTEREST-LOAN> 17,938,902
<INTEREST-INVEST> 3,059,333
<INTEREST-OTHER> 329,615
<INTEREST-TOTAL> 21,327,850
<INTEREST-DEPOSIT> 6,766,166
<INTEREST-EXPENSE> 7,204,754
<INTEREST-INCOME-NET> 14,123,096
<LOAN-LOSSES> 1,000,000
<SECURITIES-GAINS> 103,833
<EXPENSE-OTHER> 6,059,177
<INCOME-PRETAX> 7,167,752
<INCOME-PRE-EXTRAORDINARY> 4,717,853
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,717,853
<EPS-PRIMARY> .67
<EPS-DILUTED> .65
<YIELD-ACTUAL> 9.25
<LOANS-NON> 1,082,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 825,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,638,633
<CHARGE-OFFS> 767,000
<RECOVERIES> 98,000
<ALLOWANCE-CLOSE> 2,380,000
<ALLOWANCE-DOMESTIC> 2,380,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
