<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission File Number 0-20288
COLUMBIA BANKING SYSTEM, INC.
(Exact name of small business issuer as specified in its charter)
Washington 91-1422237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1102 Broadway Plaza
Tacoma, Washington 98402
(Address of principal executive offices) (Zip Code)
(206) 305-1900
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the issuer: (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
The number of shares of the issuer's Common Stock outstanding at
October 31, 1996 was 3,711,289.
<PAGE>
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Page
Item 1. Financial statements
Consolidated Statements of Operations - three months and
nine months ended September 30, 1996 and 1995 2
Consolidated Balance Sheets - September 30, 1996
and December 31, 1995 3
Consolidated Statements of Shareholders' Equity -
twelve months ended December 31, 1995 and
nine months ended September 30, 1996 4
Consolidated Statements of Cash Flows -
nine months ended September 30, 1996 and 1995 5
Notes to consolidated financial statements 6
Item 2. Management Discussion and Analysis of Financial 9
Condition and Results of Operations
PART II -- OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 17
Signatures 17
1
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands except per share) 1996 1995 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Loans $ 9,275 $ 7,967 $26,218 $21,945
Investment securities 311 882
Securities available for sale 491 49 1,317 148
Deposits with banks 275 46 603 115
- -----------------------------------------------------------------------------
Total interest income 10,041 8,373 28,138 23,090
Interest Expense
Deposits 4,230 3,567 11,823 9,557
Federal Home Loan Bank advances 526 457 1,410 1,121
Other borrowings 24 68 149 206
- -----------------------------------------------------------------------------
Total interest expense 4,780 4,092 13,382 10,884
Net Interest Income 5,261 4,281 14,756 12,206
Provision for loan losses 330 320 1,090 920
- -----------------------------------------------------------------------------
Net interest income after
provision for loan losses 4,931 3,961 13,666 11,286
Noninterest Income
Service charges and other fees 611 467 1,759 1,372
Mortgage banking 152 99 460 290
Gains on sale of loans 39 39
Credit card fees and other 627 473 1,644 1,210
- -----------------------------------------------------------------------------
Total noninterest income 1,390 1,078 3,863 2,911
Noninterest Expense
Compensation and employee benefits 2,205 2,009 5,832 5,746
Occupancy 889 711 2,505 2,055
Professional Services 146 100 424 320
Advertising and promotion 209 161 583 499
Printing and supplies 102 72 294 264
Regulatory premiums and assessments 130 155 314 475
Data processing 211 155 574 450
Gains on, and net cost of,
real estate owned (103) (367)
Other 1,334 1,007 4,068 2,936
SAIF special assessment 612 612
- -----------------------------------------------------------------------------
Total noninterest expense 5,838 4,267 15,206 12,378
Income before income taxes 483 772 2,323 1,819
Provision for income taxes
- -----------------------------------------------------------------------------
Net Income $ 483 $ 772 $ 2,323 $ 1,819
=============================================================================
Per share (on average shares outstanding):
Net Income $ 0.13 $ 0.22 $ 0.64 $ 0.52
Fully diluted net income 0.13 0.22 0.64 0.52
Average number of common and common
equivalent shares outstanding 3,699 3,504 3,606 3,497
Fully diluted average common and common
equivalent shares oustanding 3,699 3,761 3,606 3,754
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 22,165 $ 18,244
Interest-earning deposits with banks 27,109 12,635
Securities available for sale:
U.S. Treasury & Government Agencies 18,799 6,948
Mortgage-backed 11,130 12,446
FHLB stock 4,164 3,281
- -----------------------------------------------------------------------------
Total securities available for sale 34,093 22,675
Loans held for sale 1,820 1,367
Loans 431,772 353,093
Less: allowance for loan losses 4,348 3,748
- -----------------------------------------------------------------------------
Loans, net 427,424 349,345
Interest Receivable 2,836 2,469
Premises and equipment, net 13,865 13,736
Real estate owned 3,304
Other 1,542 1,431
- -----------------------------------------------------------------------------
Total Assets $530,854 $425,206
=============================================================================
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing $ 72,030 $ 52,991
Interest-bearing 382,470 308,884
- -----------------------------------------------------------------------------
Total Deposits 454,500 361,875
Federal Home Loan Bank advances 32,000 25,000
Other borrowings 3,000
Other liabilities 4,478 3,669
Convertible subordinated notes 2,695
- ----------------------------------------------------------------------------
Total liabilities 493,978 393,239
Shareholders' equity:
Preferred stock (no par value)
Authorized, 2,000,000 shares;
None outstanding
September 30, December 31,
Common stock (no par value) 1996 1995
--------- ----------
<S> <C> <C>
Authorized shares 10,000 10,000
Issued and outstanding 3,710 3,274 35,603 30,806
Retained Earnings 1,440 1,274
Unrealized losses on securities available for sale (167) (113)
- -----------------------------------------------------------------------------
Total shareholders' equity 36,876 31,967
- -----------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $530,854 $425,206
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Common stock Unrealized Total
Number of Retained Gains and Shareholders'
(in thousands) Shares Amount Earnings (Losses) Equity
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1994 3,258 $30,703 ($1,481) ($361) $28,861
Net income 2,755 2,755
Issuance of shares
of common stock, net 12 66 66
Conversion of Convertible
Subordinated Notes 4 37 37
Change in unrealized
gains and (losses) 248 248
- -----------------------------------------------------------------------------
Balance at
December 31, 1995 3,274 30,806 1,274 (113) 31,967
Net income 2,323 2,323
Issuance of shares
of common stock, net 17 131 131
Issuance of shares
of common stock -
5% stock dividend 164 2,157 (2,157)
Conversion of Convertible
Subordinated Notes 255 2,509 2,509
Change in unrealized
gains and (losses) (54) (54)
- -----------------------------------------------------------------------------
Balance at
September 30, 1996 3,710 $35,603 $1,440 ($167) $36,876
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(in thousands) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 2,323 $ 1,819
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 1,090 920
Losses (gains) on real estate owned 41 (11)
Provision for depreciation and amortization 1,736 900
Net losses (gains) on sale of investing assets 183 (61)
(Increase) decrease in loans held for sale (453) 86
Increase in interest receivable (367) (520)
(Decrease) increase in interest payable 214 431
Net changes in other assets and liabilities 426 372
- -----------------------------------------------------------------------------
Net cash provided by operating activities 5,193 3,936
Investing Activities
Proceeds from maturities of securities
available for sale 9,367
Proceeds from maturities of investment securities 1,535
Proceeds from maturities of mortgage-backed
securities available for sale 1,224
Proceeds from maturities of mortgage-backed securities 2,069
Purchases of securities available for sale (21,936)
Purchases of investment securities (4,674)
Loans originated and acquired, net of principal collected (79,621) (69,096)
Purchases of premises and equipment (2,003) (5,595)
Proceeds from disposal of premises and equipment 338
Proceeds from sale of real estate owned 3,263 13
Other, net (119)
- -----------------------------------------------------------------------------
Net cash used by investing activities (89,368) (75,867)
Financing Activities
Net increase in deposits 92,625 72,097
Net increase in other borrowings 3,000
Proceeds from FHLB advances and other long-term debt 30,800 17,000
Repayment of FHLB advances and other long-term debt (23,800) (7,020)
Proceeds from issuance of common stock 131 51
Other, net (186)
- -----------------------------------------------------------------------------
Net cash provided by financing activities 102,570 82,128
- -----------------------------------------------------------------------------
Increase in cash and cash equivalents 18,395 10,197
Cash and cash equivalents at beginning of period 30,879 13,658
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 49,274 $ 23,855
=============================================================================
Supplemental information:
Cash paid for interest $ 13,168 $ 10,453
Loans foreclosed and transferred to real estate owned
Issuance of common stock from conversion of
convertible subordinated notes 2,509 19
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Columbia Banking System, Inc.
1. Basis of Presentation
The interim unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments including normal recurring accruals
necessary for a fair presentation of results of operations for the interim
periods included herein have been made. The results of operations for the
nine months ended September 30, 1996 are not necessarily indicative of results
to be anticipated for the year ending December 31, 1996. Certain amounts in
the 1995 financial statements have been reclassified to conform with the 1996
presentation. For additional information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 1995.
2. Summary of Significant Accounting Changes
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
requires the Company to elect to account for stock-based compensation on a
fair value basis or an intrinsic value basis. The intrinsic value basis is
currently used by the Company and is the accounting principle prescribed by
Accounting Principles Board No. 25 "Accounting for Stock Issued to Employees"
(APB 25). SFAS 123 requires among other things, disclosure in the footnotes
of the pro forma impact on net income and earnings per share of the
difference between compensation expense using the intrinsic value method
and the fair value method if the fair value method of accounting is not used.
The adoption of SFAS 123 is required for the fiscal year ended December 31,
1996. The Company expects to continue to apply APB 25 for measurement of
stock compensation and will provide disclosure required by SFAS 123 beginning
in fiscal year 1996.
In June 1996, the FASB issued Statement of Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"). SFAS 125 requires the Company
to recognize all financial assets and servicing that it controls and
liabilities that it has incurred after a transfer of financial assets. The
Company must also "derecognize" financial assets when control has been
surrendered and must derecognize liabilities when extinguished. SFAS 125 is
not expected to have a significant impact on the Company.
3. Stock Dividend
On April 24, 1996, the Company announced a 5% stock dividend payable on
May 22, 1996, to shareholders of record on May 8, 1996. On May 22, 1996,
164,051 common shares were issued to shareholders. Average shares
outstanding, net income per share and book value per share have been
adjusted to give retroactive effect to all periods presented.
4. Redemption of Convertible Subordinated Notes
On June 3, 1996, the Company gave notice that it would redeem all of its
issued and outstanding 7.85% Convertible Subordinated Notes (the "Notes")
on August 1, 1996. The Notes were convertible in whole or in part, in
multiples of $1,000 principal amount, at 100% of the principal amount of
the Note (or portion thereof), at the conversion price per share of
common stock of $10.56. Prior to August 1, 1996 all of the Notes were
converted into 223,743 shares of common stock.
6
<PAGE>
5. SAIF Special Assessment
The Company's sole subsidiary, Columbia State Bank (the "Bank"), has deposits
insured by the FDIC through the Bank Insurance Fund (the "BIF") and through
the Savings Association Insurance Fund (the "SAIF"). Approximately 39% of the
Bank's deposits are deemed to be SAIF-insured under an allocation formula that
applies because certain deposits were previously acquired from a savings bank
in a so called "Oakar" transaction. Legislation was recently enacted to
resolve the difference in rates between the two funds. The legislation
requires a special assessment on SAIF-insured deposits held by the Bank at
March 31, 1995. Management has calculated the effect of the one-time special
assessment to be $612,000. That amount was charged to earnings during the
third quarter of 1996, substantially reducing third quarter earnings. The
current charge to earnings is expected to be recovered within approximately
three years through reduced assessment rates.
6. Public Offering to Issue Common Stock
The Company recently filed all necessary documents for a public offering of
1,285,000 shares of Common Stock, no par value per share (the "Common Stock").
The Common Stock became available for purchase on November 12, 1996. The net
proceeds (after deducting underwriting discounts, commissions and estimated
offering expenses) to the Company from the sale of the Common Stock are
estimated to be $18.4 million based on an offering price of $15.50 per share.
The Company plans to contribute approximately $10.0 million of the net
proceeds to Columbia Bank primarily to fund additional loan growth. The
remainder will be used to repay $3.0 million borrowed under a line of credit
and for general corporate purposes. In connection with this public offering,
the Company has granted the Underwriters a 30-day option to purchase up to
192,750 additional shares of Common Stock solely to cover over-allotments, if
any. To the extent the option is exercised, the Underwriters will offer the
additional shares at the Price to Public of $15.50 per share.
7
<PAGE>
CONSOLIDATED AVERAGE BALANCES--NET CHANGES
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Three Months Ended Increase Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
(in thousands) 1996 1995 Amount 1996 1995 Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans $421,009 $333,423 $87,586 $392,590 $309,160 $83,430
Securities 32,469 24,187 8,282 29,716 23,536 6,180
Interest-earning
deposits with banks 20,902 2,950 17,952 15,197 2,483 12,714
- --------------------------------------------------------------------------------
Total interest-earning
assets 474,380 360,560 113,820 437,503 335,179 102,324
Noninterest-earning
assets 31,222 29,997 1,245 29,921 27,243 2,678
- --------------------------------------------------------------------------------
Total assets $505,602 $390,537 $115,065 $467,424 $362,422 $105,002
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing
deposits $364,295 $281,316 $82,979 $337,683 $263,364 $ 74,319
Federal Home Loan Bank
advances 36,778 29,752 7,026 33,719 24,763 8,956
Other borrowings 370 370 181 181
Convertible subordinated
notes 657 2,719 (2,062) 1,984 2,729 (745)
- --------------------------------------------------------------------------------
Total interest-bearing
liabilities $402,100 313,787 88,313 $373,567 290,856 82,711
Noninterest-bearing
deposits 64,327 44,227 20,100 57,241 39,881 17,360
Other noninterest-bearing
liabilities 3,632 2,405 1,227 3,115 2,333 782
Shareholders' Equity 35,543 30,118 5,425 33,501 29,352 4,149
- --------------------------------------------------------------------------------
Total liabilities and
shareholders'equity $505,602 $390,537 $115,065 $467,424 $362,422 $105,002
================================================================================
</TABLE>
8
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Columbia Banking System, Inc.
Earnings Summary
Net income for the three months ended September 30, 1996 was $483,000, or $0.13
per share, compared to $772,000, or $0.22 per share, for the same period in
1995, a decrease of 37.4% and 40.9% in net income and earnings per share,
respectively. The decrease was attributable to the $612,000 special assessment
on SAIF-insured deposits (see Note 5 to consolidated financial statements).
Net income for the nine months ended September 30, 1996 was $2.3 million, or
$0.64 per share, compared to $1.8 million, or $0.52 per share, for the same
period in 1995. Excluding the special SAIF assessment, net income for the three
months ended September 30, 1996 increased 41.8% to $1.1 million, or $0.30 per
share, compared to $772,000, or $0.22 per share, for the same period in the
prior year. Net income for the nine months ended September 30, 1996, excluding
the special SAIF assessment, increased 61.4% to $2.9 million, or $0.81 per
share, from $1.8 million, or $0.52 per share, for the same period in 1995. The
increase in net income was primarily due to increased revenue resulting from
continued loan and deposit growth.
The Company continued to benefit from utilization of its net operating loss
carryforwards for federal income tax purposes. Therefore, the Company had no
federal income tax provision for the nine months ending September 30, 1996.
Had the earnings been fully taxable, net income would have been $1.5 million,
or $0.42 per share.
The Company's goal is to create, over the next several years, a
well-capitalized, customer focused, Pacific Northwest commercial banking
institution with a significant presence in selected markets and total assets in
excess of $1.0 billion. The Company intends to effect this growth strategy
through a combination of growth at existing branch offices, new branch openings
(usually following the hiring of an experienced branch manager and/or lending
officer with strong community ties and banking relationships) and acquisitions.
In particular, the Company anticipates continued expansion in Pierce County and
expansion into additional parts of neighboring King County and Thurston County.
In order to fund its commercial and consumer lending activities and to allow for
increased contact with customers, the Company is establishing a branch system
catering primarily to retail depositors, supplemented by business banking
customer deposits and other borrowings. The Company believes this mix of
funding sources will enable it to expand its commercial lending activities
rapidly while attracting a stable core deposit base.
Construciton began in the first quarter of 1996 on a permanent facility for the
Gig Harbor branch. During the second quarter of 1996 a new Spanaway branch
opened in a temporary facility. The Spanaway branch office is the tenth branch
to open since Columbia Bank's major Pierce County expansion began in August
1993, and the Puyallup branch, which opened in September 1996, is the eleventh
branch to open since that time, bringing Columbia Bank's total number of
branches to 15. The Company currently has regulatory approval to open four
additional branches in Pierce County, and anticipates opening several more
branches in the next few years to strengthen its local market position and
capitalize on expansion opportunities resulting from the strong demand for a
locally based banking institution. The Company plans to effect its growth
strategy through a combination of growth at existing branch facilities, new
branch openings and acquisitions. Typically, expansion into new markets will
be in connection with the hiring of an experienced branch manager and/or lending
officers with strong community ties and banking relationships.
In addition to the ongoing expansion of its branch network, the Company has
added new products and services to give its customers more banking options.
During the second quarter, the Bank introduced "Columbia Free Checking". Free
checking includes no monthly fees, no minimum balance, no per check charges,
free use of any ATM in Washington state, and upon approval, a personalized no
fee VISA (registered trademark) debit card. The Company also launched an
alternative investments program through a new department of the Bank,
Columbia Financial Services, which will make available mutual funds,
annuities, and other investment products through a contractual arrangement
with PrimeVest Financial Services, Inc.
9
<PAGE>
Net Interest Income
Net interest income for the third quarter of 1996 increased to $5.3 million,
or 22.9%, from $4.3 million in the third quarter of 1995. For the nine months
ended September 30, 1996, net interest income increased to $14.8 million, or
20.9%, from $12.2 million for the same period in 1995. The increase in net
interest income in the third quarter and for the first nine months of 1996 is
largely due to the overall growth of the Company.
Net interest margin (net interest income divided by average interest-earning
assets) decreased to 4.40% in the third quarter of 1996 from 4.71% in the
third quarter of 1995. For the nine months ended September 30, 1996, net
interest margin decreased to 4.49% in 1996 from 4.87% for the same period
in 1995. The decrease in net interest margin is primarily due to lower
yields obtained on loans as a result of a planned change in loan mix from
higher yielding comercial real estate loans to high quality, but lower
yielding, commercial loans and to increased competition in the Company's
market area. Also affecting net interest margin was a one-time adjustment
to the amortization of deferred loan origination fees in the three months
ended September 30, 1996, amounting to approximately $100,000.
Noninterest Income and Expense
Total noninterest income increased $312,000, or 28.9%, in the third quarter
of 1996, and $952,000, or 32.7%, for the nine months ended September 30,
1996, compared with the same periods in 1995. Increases in noninterest income
through the first nine months of 1996 were centered in account service charges,
bank card revenue, and mortgage banking income.
Excluding the special SAIF assessment, total noninterest expense increased
$959,000, or 22.5%, in the third quarter of 1996, and $2.2 million, or 17.9%,
for the nine months ended September 30, 1996 compared with the same periods in
1995. The increase is primarily due to expenses associated with the expansion
of Columbia Bank. Total noninterest expense was 78.6% and 78.4% of total
revenues (the sum of net interest income plus noninterest income less
nonrecurring gains) for the third quarter and nine months ended September 30,
1996, respectively, and 80.2% and 82.1% for the same periods in 1995. The
portion of compensation expense related to loan originations is deferred and
deducted from interest income over the life of the related loans. Increases in
noninterest expense are centered in compensation (substantially offset by
deferrals related to loan originations), occupancy, advertising, business &
occupation taxes, data processing and other expense. In general, increases in
noninterest expense are due to the growth of the Company and the associated
"volume driven" expenses. Total noninterest expense for the Company is expected
to decline in relation to revenues as the Company pursues its commitment to more
efficient operations and as projected asset growth materializes.
Management is currently evaluating a proposed sale of the Bank's credit card
portfolio which, if consummated, will result in a one-time gain. The sale of
the business is not expected to have a material effect on results of operations
in future periods.
In February 1996, the Company recorded a loss of $41,000 on the sale of its
only "real estate owned" property. Also, in March 1996, the Company recorded a
loss of $38,000 on a branch real estate transaction. In June 1996, the Company
wrote-off $135,000 due to the abandonment of a potential branch site.
10
<PAGE>
Income Taxes
Effective January 1, 1993, the Company adopted the FASB's Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which
requires the use of the "asset and liability" method of accounting for income
taxes. Deferred income tax represents the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Upon adoption
of SFAS 109, the Company recorded a deferred tax asset with an equal valuation
allowance due to uncertainties regarding the ability to ultimately recognize the
tax benefits from the net operating losses and certain tax credits. The Company
did not record an income tax expense from that date through September 30, 1996
since the expected income tax expense, calculated by applying statutory tax
rates to income before income taxes, was offset by a reduction in the valuation
allowance established when the Company adopted SFAS 109.
The deferred tax asset is measured by applying tax rates to the difference
between the carrying value and the tax basis of assets and liabilities.
Management anticipates that expected income tax expense for 1996 will be
substantially offset by a reduction in the valuation allowance established when
the Company adopted SFAS 109. Management anticipates that the Company will
record a provision for income taxes during 1997.
Lending Activities
The Company originates a wide variety of loans. Consitent with the trend begun
in 1993, the Company continues to increase commercial business loans and
consumer loans as a percentage of its total loan portfolio. The Company also
emphasizes its private banking services to high income and high net worth
individuals.
Loan Portfolio
The following table sets forth at the dates indicated the Company's loan
portfolio composition by type:
<TABLE>
<CAPTION>
September 30, % of December 31, % of
(in thousands) 1996 Total 1995 Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $152,040 35.2% $113,775 32.2%
Real estate:
One-to four-family residential 69,492 16.1 67,991 19.3
Five or more family residential and
commercial properties 121,531 28.2 97,103 27.5
- -----------------------------------------------------------------------------
Total real estate 191,023 44.3 165,094 46.8
Real estate construction:
One-to four-family residential 23,342 5.4 22,741 6.5
Five or more family residential and
commercial properties 11,819 2.7 8,884 2.5
- -----------------------------------------------------------------------------
Total real estate construction 35,161 8.1 31,625 9.0
Consumer 54,115 12.5 43,343 12.2
- -----------------------------------------------------------------------------
Sub-total loans 432,339 100.1 353,837 100.2
Less: Deferred loan fees (567) (0.1) (744) (0.2)
- -----------------------------------------------------------------------------
Total loans $431,772 100.0% $353,093 100.0%
=============================================================================
Loans held for sale $ 1,820 $ 1,367
=============================================================================
</TABLE>
11
<PAGE>
Total loans increased $78.7 million, or 22.3%, to $431.8 million at September
30, 1996 from year-end 1995. All categories contributed to the increase.
Commercial and Private Banking
Commercial loans increased $152.0 million at Septemebr 30, 1996, representing
35.2% of its total loans, from $113.8 million at December 31, 1995. This
increase reflects management's commitment to provide competitive commercial
lending in the Company's primary market area. The Company expects to continue
to expand its commercial lending products and emphasize in particular its
relationship banking with businesses, business owners and professional
individuals.
Real Estate Lending
One- to Four-Family Residential Real Estate Lending: Residential one- to
four-family loans amounted to $69.5 million at September 30, 1996, representing
16.1% of total loans, compared to $68.0 million at December 31, 1995. These
loans are used by the Company to collateralize advances from the FHLB. The
Company's underwriting standards require that one- to four-family portfolio
loans generally be owner-occupied and that loan amounts not exceed 80% (90%
with private mortgage insurance) of the appraised value or cost, whichever
is lower, of the underlying collateral at origination. Generally, management's
policy is to originate for sale to third parties loans secured by properties
located within the Company's primary market areas.
Multi-family and Commercial Real Estate Lending: The Company makes multi-family
and commercial real estate loans in its primary market areas. Multi-family and
commercial real estate lending increased to $121.5 million at September 30,
1996, representing 28.2% of total loans, from $97.1 million at December 31,
1995. The Company's underwriting standards generally require that the
loan-to-value ratio for multi-family and commercial loans not exceed 75% of
appraised value or cost, whichever is lower, and that commercial properties
maintain debt coverage ratios (net operating income divided by annual debt
servicing) of 1.2 or better.
Construction Loans: The Company originates one- to four-family residential
construction loans for the construction of custom homes (where the home buyer
is the borrower) and provides financing to builders for the construction of
pre-sold homes and speculative residential construction. The Company endeavors
to limit its construction lending risk through adherence to strict underwriting
procedures. Construction loans on one- to four-family residences increased to
$23.3 at September 30, 1996, representing 5.4% of total loans, from $22.7
million at December 31, 1995.
Consumer Lending: At September 30, 1996, the Company had $54.1 million of
consumer loans outstanding, representing 12.5% of total loans, as compared
with $43.3 million at December 31, 1995. Consumer loans made by the Company
include automobile loans, boat and recreational vehicle financing, home equity
and home improvement loans and miscellaneous personal loans.
At September 30, 1996, the Company had no foreign loans or loans related to
highly leveraged transactions.
12
<PAGE>
Nonperforming Assets
The following table sets forth at the dates indicated an analysis of the
composition of the Company's nonperforming assets:
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual:
One-to four-family residential $ 743 $ 329
Commercial business 500 86
Consumer 136 20
- -----------------------------------------------------------------------------
Total $1,379 $ 435
- -----------------------------------------------------------------------------
Restructured:
One-to four-family residential $ 26 $ 29
Commercial business 41
Consumer 85
- -----------------------------------------------------------------------------
Total $ 152 $ 29
- -----------------------------------------------------------------------------
Total Nonperforming loans $1,531 $ 464
=============================================================================
Real estate owned:
Five or more family residential and
commercial properties $3,304
- -----------------------------------------------------------------------------
Total $3,304
=============================================================================
Total nonperforming assets $1,531 $3,768
=============================================================================
</TABLE>
The current policy of the Company generally is to discontinue the accrual of
interest on all loans past due 90 days or more and place them on nonaccrual
status.
Nonperforming loans increased to $1.5 million, or 0.35%, of total loans
(excluding loans held for sale) at September 30, 1996, from $464,000, or
0.13% of total loans at December 31, 1995 due principally to the inclusion
of loans which, though nonperforming, are secured by real estate. In the
fourth quarter of 1996, management anticipates charge-offs of those
nonperforming loans which are unsecured or undersecured, although the amount
of such charge-offs is not expected to be material. The balance of such loans
are expected to be paid or to return to performing status in the near future.
In February 1996, the Company sold its only "real estate owned" property, thus
reducing total nonperforming assets to $1.5 million or 0.35% of total loans
(excluding loans held for sale) at September 30, 1996, from $3.8 million,
or 1.1% of total loans at year-end 1995.
Analysis of Allowance for Loan Losses
The allowance for loan losses at Septemebr 30, 1996 decreased to 1.01% from
1.06% of loans at December 31, 1995 (excluding loans held for sale at each
date) due to a $273,000 increase in charge-offs compared with the first nine
months of 1995 and a $78.7 million, or 22.3%, increase in loans since
year-end 1995. Net loan charge-offs amounted to $397,000 and $508,000 for the
third quarter and for the first nine months of 1996, respectively, compared
with net loan charge-offs of $60,000 and $235,000 for the same periods in
1995. The Company's provision for loan losses was $330,000 for the third
quarter of 1996, compared with $320,000 for the third quarter of 1995. For
the first nine months of 1996, the provision amounted to $1.1 million,
compared with $920,000 for the same period in 1995.
13
<PAGE>
The following table sets forth at the dates indicated the changes in the
Company's allowance for loan losses:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 1996 1995 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance $4,411 $3,169 $3,748 $2,711
Charge offs:
Commercial business (315) (359) (145)
Consumer (82) (60) (149) (90)
- ----------------------------------------------------------------------------
Total charge-offs (397) (60) (508) (235)
Recoveries:
Commercial business 2 4 15 32
Consumer 2 3 5
- ----------------------------------------------------------------------------
Total recoveries 4 4 18 37
- ----------------------------------------------------------------------------
Net (charge-offs) recoveries (393) (56) (490) (198)
Provision charged to expense 330 320 1,090 920
- ----------------------------------------------------------------------------
Ending balance $4,348 $3,433 $4,348 $3,433
============================================================================
</TABLE>
The allowance for loan losses is maintained at a level considered adequate by
management to provide anticipated loan losses based on management's
assessment of various factors affecting the loan portfolio, including a review
of problem loans, business combinations and loss experience and an overall
evaluation of the quality of the underlying collateral, holding and disposal
costs and costs of capital. The allowance is increased by provisions charged
to operations and reduced by loans charged off, net of recoveries.
While management believes that it uses the best information available to
determine the allowance for loan losses, unforseen market conditions could
result in adjustments to the allowance for loan losses, and net income could
be significantly affected, if circumstances differ substantially from the
assumptions used in determining the allowance.
Liquidity and Sources of Funds
The Company's primary sources of funds are customer deposits, brokered
deposits and advances from the Federal Home Loan Bank of Seattle (the "FHLB").
These funds, together with loan repayments, loan sales, retained earnings,
equity and other borrowed funds, are used to make loans, to acquire securities
and other assets and to fund continuing operations.
Deposit Activities:
The Comapany's deposit products include a wide variety of transaction
accounts, savings accounts and certificates of deposit. The Company is
continuing to expand the deposit products that it offers. The Company
introduced "Colubia Free Checking," which includes no monthly fees, no
minimum balance, no per check charges, free use of any ATM in Washington, and,
upon approval, a personalized no fee VISA (registered trademark) debit card.
Total deposits increased 25.6% to $454.5 million, at September 30, 1996, from
$361.9 million at December 31, 1995.
To fund the growth of the Company, management's strategy has been to make use
of brokered and other wholesale deposits while working to build core deposits
as rapidly as possible through the Company's development of commercial banking
relationships and its branch network. The Company's use of brokered and other
wholesale deposits has decreased since year-end 1995, though management
anticipates continued, and perhaps increasing, use if such deposits to fund
increasing loan demand. However, management anticipates use of brokered
deposits will decrease over time as a percent of total deposits. The deposit
14
<PAGE>
increase of $92.6 million during the first nine months of 1996 occurred
entirely in "core deposits". Brokered and other wholesale deposits (excluding
public deposits) decreased $8.0 million to $40.3 million, or 8.9% of total
deposits, at September 30, 1996, from $48.3 million, or 13.3% of total
deposits, at December 31, 1995.
Borrowings:
The Company relies on advances from the FHLB to supplement its funding sources.
FHLB advances increased $7.0 million during the first nine months of 1996 to
$32.0 million. FHLB advances are secured by one- to four-family real estate
mortgages and certain other assets.
On June 3, 1996, the Company gave notice of its intent to redeem all of its
issued and oustanding 7.85% Convertible Subordinated Notes on August 1, 1996.
Prior to August 1, 1996, all of the Notes were converted into 223,743 shares
of common stock.
Capital
Shareholders' equity at September 30, 1996 was $36.9 million compared with
$32.0 million at December 31, 1995. The increase is primarily due to
improved net income during the first nine months of 1996 and the conversion
of Convertible Subordinated Notes into common stock (see Notes to Consolidated
Financial Statements). Shareholders' equity was 6.9% and 7.5% of total
period-end assets at September 30, 1996 and December 31, 1995, respectively.
Banking regulations require bank holding companies and banks to maintain a
minimum "leverage" ratio of core capital to adjusted quarterly average total
assets of at least 3%. At September 30, 1996, the Company's leverage ratio
was 7.31%, compared with 7.72% at December 31, 1995. In addition, banking
regulators have adopted risk-based capital guidelines, under which risk
percentages are assigned to various categories of assets and off-balance
sheet items to calculate a risk-adjusted capital ratio. Tier I capital
generally consists of common shareholders' equity (which does not include
unrealized gains and losses on securities), less goodwill and certain
identifiable assets, while Tier II capital includes the allowance for loan
losses and subordianted debt, both subject to certain limitations.
Regulatory minimum risk-based capital guidelines require Tier I capital of
4% of risk-adjusted assets and total capital (combined Tier I and Tier II)
of 8%. The Company's Tier I and total capital ratios were 8.69% and 9.71%,
respectively, at September 30, 1996, compared with 9.10% and 10.95%,
respectively, at December 31, 1995.
During 1992, the Federal Deposit Insurance Corporation (the "FDIC") published
the qualifications necessary to be classified as a "well capitalized" bank,
primarily for assignment of FDIC insurance premium rates beginning in 1993.
To qualify as "well capitalized," banks must have a Tier I risk-adjusted
capital ratio of at least 6%, a total risk-adjusted capital ratio of at least
10%, and a leverage ratio of at least 5%. Columbia Bank qualified as "well
capitalized" at September 30, 1996. Federal laws generally bar institutions
which are not well-capitalized from accepting brokered deposits. The FDIC has
issued rules which prohibit under-capitalized institutions from soliciting or
accepting such deposits. Adequately capitalized institutions are allowed to
solicit such deposits, but only to accept them if a waiver is obtained from
the FDIC
Applicable federal and Washington state regulations restrict capital
distributions by institutions such as Columbia Bank, including dividends.
Such restrictions are tied to the institution's capital levels after giving
effect to distributions. The Company's ability to pay cash dividends is
substantially dependent upon receipt of dividends from the Bank. The Company
presently intends to retain earnings to support anticipated growth.
Accordingly, the Company does not intend to pay cash dividends on its common
stock in the foreseeable future.
15
<PAGE>
On April 24, 1996, the Company announced a 5% stock dividend payable on
May 22, 1996, to shareholders of record on May 8, 1996. On May 22, 1996,
164,051 common shares were issued to shareholders. Average shares outstanding
and net income per share have been adjusted to give retroactive effect to the
three and nine month periods ended September 30, 1995. The retroactive impact
on earnings per share for the three months and nine months ended September 30,
1995, is a reduction of $.01 per share and $.03 per share, respectively.
On June 3, 1996, the Company gave notoce that it would redeem all of its
issued and outstanding 7.85% Convertible Subordinated Notes ( the "Notes").
The Notes were convertible in whole or in part, in multiples of $1,000
principal amount, at 100% of the principal amount of the Note (or portion
thereof), at the conversion price per share of common stock of $10.56. Prior
to August 1, 1996 all of the Notes were converted into 223,743 shares of
common stock.
16
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit 11 - Computation of Fully Diluted Earnings per Common Share
See Exhibit 27 - Financial Data Schedule
(b) On October 11, 1996, the Company filed a Form 8-K announcing the effect
on the Company's third quarter 1996 earnings of federal legislation
recently enacted with the intent of recapitalizing the Savings Association
Insurance Fund.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COLUMBIA BANKING SYSTEM, INC.
(Registrant)
Date November 13, 1996 By /s/ A. G. Espe
----------------------------- -----------------------------
A. G. Espe
Chairman and
Chief Executive Officer
Date November 13, 1996 By /s/ Gary R. Schminkey
----------------------------- -----------------------------
Gary R. Schminkey
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
17
<PAGE>
Exhibit 11
Computation of Fully Diluted Earnings per Common Share
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share data) 1996 1995 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earnings
Net income applicable to common stock $ 483 $772 $2,323 $1,819
Interest on convertible subordinated notes,
net of income tax effects--Note 1 16 61 134 184
- --------------------------------------------------------------------------------
Pro forma net income available to common stock $ 499 $833 $2,457 $2,003
================================================================================
Shares
Weighted average number of common and common
equivalent shares outstanding 3,699 3,504 3,606 3,497
Additional shares assuming conversion of
convertible subordinated notes--Note 1 257 257
- --------------------------------------------------------------------------------
Pro forma shares 3,699 3,761 3,606 3,754
================================================================================
Fully diluted earnings per share - as reported $0.13 $0.22 $0.64 $0.52
================================================================================
Fully diluted earnings per share - as calculated $0.14 $0.22 $0.68 $0.53
================================================================================
</TABLE>
Note 1. Earnings per share and fully diluted earnings per share are reported
as the same for the three months ended September 30, 1996, and the nine months
ended September 30, 1996 and 1995. The inclusion of convertible subordinated
notes would produce an antidilutive effect. Additional average shares,
assuming the conversion of convertible subordinated notes, represent 257,057
and 257,056 shares for the three months and nine months ended September 30,
1995, respectively. The related interest expense on these notes (net of
income tax effects) was $15,647 and $133,532 for the three months and nine
months ended September 30, 1996, and $61,145 and $184,159 for the three
months and nine months ended September 30, 1995, respectively.
On June 3, 1996, the Company gave notoce that it would redeem all of its
issued and outstanding 7.85% Convertible Subordinated Notes ( the "Notes")
on August 1, 1996.
The Notes were convertible in whole or in part, in multiples of $1,000
principal amount, at 100% of the principal amount of the Note (or portion
thereof), at the conversion price per share of common stock of $10.56. Prior
to August 1, 1996 all of the Notes were converted into 223,743 shares of
common stock.
For additional information on earnings per share, please see the "Capital"
section of the "Management Discussion and Analysis of Financial Condition and
Results of Operations".
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
FINANCIAL DATA SCHEDULE
Columbia Banking System, Inc.
(in thousands except per share)
</LEGEND>
<CIK> 0000887343
<NAME> COLUMBIA BANKING SYSTEM, INC.
<MULTIPLIER> 1000
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 22165
<INT-BEARING-DEPOSITS> 27109
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34093
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 431772
<ALLOWANCE> 4348
<TOTAL-ASSETS> 530854
<DEPOSITS> 454500
<SHORT-TERM> 3000
<LIABILITIES-OTHER> 4478
<LONG-TERM> 32000
0
0
<COMMON> 35603
<OTHER-SE> 1273
<TOTAL-LIABILITIES-AND-EQUITY> 530854
<INTEREST-LOAN> 26218
<INTEREST-INVEST> 1317
<INTEREST-OTHER> 603
<INTEREST-TOTAL> 28138
<INTEREST-DEPOSIT> 11823
<INTEREST-EXPENSE> 13382
<INTEREST-INCOME-NET> 14756
<LOAN-LOSSES> 1090
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 15206
<INCOME-PRETAX> 2323
<INCOME-PRE-EXTRAORDINARY> 2323
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2323
<EPS-PRIMARY> .64
<EPS-DILUTED> .64
<YIELD-ACTUAL> 4.49
<LOANS-NON> 1379
<LOANS-PAST> 0
<LOANS-TROUBLED> 152
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3748
<CHARGE-OFFS> 508
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 4348
<ALLOWANCE-DOMESTIC> 4348
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
