<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 June 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
July 31, 1996 was 3,464,952.
<PAGE>
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Page
Item 1. Financial statements
Consolidated Statements of Operations - three months and
six months ended June 30, 1996 and 1995 2
Consolidated Balance Sheets - June 30, 1996
and December 31, 1995 3
Consolidated Statements of Shareholders' Equity -
twelve months ended December 31, 1995 and
six months ended June 30, 1996 4
Consolidated Statements of Cash Flows -
six months ended June 30, 1996 and 1995 5
Notes to consolidated financial statements 6
Item 2. Management Discussion and Financial Review 8
PART II -- OTHER INFORMATION
Item 4. Submission of matters to a vote of security holders 14
Item 6. Exhibits and reports on Form 8-K 15
Signatures 15
1
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands except per share) 1996 1995 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Loans $ 8,745 $ 7,395 $16,943 $13,948
Investment securities 301 571
Securities available for sale 416 49 826 99
Deposits with banks 150 30 328 69
- -----------------------------------------------------------------------------
Total interest income 9,311 7,775 18,097 14,717
Interest Expense
Deposits 3,798 3,225 7,593 5,990
Federal Home Loan Bank advances 447 408 884 664
Other borrowings 61 66 125 138
- -----------------------------------------------------------------------------
Total interest expense 4,306 3,699 8,602 6,792
Net Interest Income 5,005 4,076 9,495 7,925
Provision for loan losses 430 300 760 600
- -----------------------------------------------------------------------------
Net interest income after
provision for loan losses 4,575 3,776 8,735 7,325
Noninterest Income
Service charges and other fees 597 464 1,148 905
Mortgage banking 148 103 308 191
Credit card fees and other 563 383 1,017 737
- -----------------------------------------------------------------------------
Total noninterest income 1,308 950 2,473 1,833
Noninterest Expense
Compensation and employee benefits 1,808 1,865 3,627 3,737
Occupancy 800 663 1,616 1,344
Professional Services 154 104 278 220
Advertising and promotion 194 207 374 338
Printing and supplies 103 90 192 192
Regulatory premiums and assessments 120 160 184 320
Data processing 205 153 363 295
Gains on, and net cost of,
real estate owned (154) (264)
Other 1,467 1,036 2,734 1,929
- -----------------------------------------------------------------------------
Total noninterest expense 4,851 4,124 9,368 8,111
Income before income taxes 1,032 602 1,840 1,047
Provision for income taxes
- -----------------------------------------------------------------------------
Net Income $ 1,032 $ 602 $ 1,840 $ 1,047
=============================================================================
Per share (on average shares outstanding):
Net Income $ 0.29 $ 0.17 $ 0.52 $ 0.30
Fully diluted net income 0.29 0.17 0.52 0.30
Average number of common and common
equivalent shares outstanding 3,580 3,488 3,566 3,484
Fully diluted average common and common
equivalent shares oustanding 3,804 3,746 3,790 3,742
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 22,326 $ 18,244
Interest-earning deposits with banks 10,415 12,635
Securities available for sale:
U.S. Treasury & Government Agencies 16,734 6,948
Mortgage-backed 11,268 12,446
FHLB stock 4,082 3,281
- -----------------------------------------------------------------------------
Total securities available for sale 32,084 22,675
Loans held for sale 1,950 1,367
Loans 401,554 353,093
Less: allowance for loan losses 4,411 3,748
- -----------------------------------------------------------------------------
Loans, net 397,143 349,345
Interest Receivable 2,893 2,469
Premises and equipment, net 13,532 13,736
Real estate owned 3,304
Other 1,269 1,431
- -----------------------------------------------------------------------------
Total Assets $481,612 $425,206
=============================================================================
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing $ 63,208 $ 52,991
Interest-bearing 339,706 308,884
- -----------------------------------------------------------------------------
Total Deposits 402,914 361,875
Federal Home Loan Bank advances 37,000 25,000
Other borrowings 2,300
Other liabilities 3,252 3,669
Convertible subordinated notes 2,363 2,695
- ----------------------------------------------------------------------------
Total liabilities 447,829 393,239
Shareholders' equity:
Preferred stock (no par value)
Authorized, 2,000,000 shares;
None outstanding
June 30, December 31,
Common stock (no par value) 1996 1995
--------- ----------
<S> <C> <C>
Authorized shares 10,000 10,000
Issued and outstanding 3,482 3,274 33,354 30,806
Retained Earnings 957 1,274
Unrealized losses on securities available for sale (528) (113)
- -----------------------------------------------------------------------------
Total shareholders' equity 33,783 31,967
- -----------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $481,612 $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 16 103 103
Change in unrealized
gains and (losses) 248 248
- -----------------------------------------------------------------------------
Balance at
December 31, 1995 3,274 30,806 1,274 (113) 31,967
Net income 1,840 1,840
Issuance of shares
of common stock, net 44 391 391
Issuance of shares
of common stock -
5% stock dividend 164 2,157 (2,157)
Change in unrealized
gains and (losses) (415) (415)
- -----------------------------------------------------------------------------
Balance at
June 30, 1996 3,482 $33,354 $ 957 ($528) $33,783
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Six Months Ended
March 31,
(in thousands) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 1,840 $ 1,047
Adjustments to reconcile net income
to net cash provided (used) by operating activities:
Provision for loan losses 760 600
Losses (gains) on real estate owned 41 (11)
Provision for depreciation and amortization 1,057 588
Net losses (gains) on sale of investing assets 196 (22)
Increase in loans held for sale (583) (716)
Increase in interest receivable (424) (444)
(Decrease) increase in interest payable (12) 438
Net changes in other assets and liabilities (282) 249
- -----------------------------------------------------------------------------
Net cash provided by operating activities 2,593 1,729
Investing Activities
Proceeds from maturities of securities
available for sale 9,428
Proceeds from maturities of mortgage-backed
securities available for sale 807
Proceeds from maturities of mortgage-backed securities 1,220
Purchases of securities available for sale (19,937)
Purchases of investment securities (3,546)
Loans originated and acquired, net of principal collected (48,785) (54,319)
Purchases of premises and equipment (1,045) (4,434)
Proceeds from disposal of premises and equipment 140
Proceeds from sale of real estate owned 3,263 13
Other, net (71)
- -----------------------------------------------------------------------------
Net cash used by investing activities (56,129) (61,137)
Financing Activities
Net increase in deposits 41,039 45,016
Net increase in other borrowings 2,300
Proceeds from FHLB advances and other long-term debt 20,800 17,000
Repayment of FHLB advances and other long-term debt (8,800)
Proceeds from issuance of common stock 59 16
- -----------------------------------------------------------------------------
Net cash provided by financing activities 55,398 62,032
- -----------------------------------------------------------------------------
Increase in cash and cash equivalents 1,862 2,624
Cash and cash equivalents at beginning of period 30,879 13,658
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of period $32,741 $16,282
=============================================================================
Supplemental information:
Cash paid for interest $ 8,614 $ 6,354
Loans foreclosed and transferred to real estate owned
Issuance of common stock from conversion of
convertible subordinated notes 332 15
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
six months ended June 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 Policies
In December 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The
statement 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. As of June 30, 1996, the Company had not decided which method will be
used for fiscal year ending December 31, 1996.
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
and net income per share have been adjusted to give retroactive effect to the
three and six month periods ending June 30, 1995.
4. Redemption of Convertible Subordinated Notes
On June 3, 1996, the Company gave notice that it will redeem all of its issued
and outstanding 7.85% Convertible Subordinated Notes (Notes). The date of
redemption of the Notes is August 1, 1996. Holders of the Notes have the
option to convert their Notes into shares of Columbia common stock until
5:00 p.m. Seattle time, on August 1, 1996. The Notes may be converted 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.
6
<PAGE>
CONSOLIDATED AVERAGE BALANCES--NET CHANGES
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Three Months Ended Increase Six Months Ended Increase
June 30, (Decrease) June 30, (Decrease)
(in thousands) 1996 1995 Amount 1996 1995 Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans $392,018 $310,274 $81,744 $378,281 $296,862 $81,419
Securities 27,959 24,027 3,932 28,329 23,202 5,127
Interest-earning
deposits with banks 11,549 1,894 9,655 12,352 2,264 10,088
- --------------------------------------------------------------------------------
Total interest-earning
assets 431,526 336,195 95,331 418,962 322,328 96,634
Noninterest-earning
assets 29,483 27,471 2,012 29,271 25,851 3,420
- --------------------------------------------------------------------------------
Total assets $461,009 $363,666 $97,343 $448,233 $348,179 $100,054
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits $331,894 $263,415 $68,479 $324,327 $254,283 $ 70,044
Federal Home Loan Bank
advances 33,095 26,869 6,226 32,170 22,211 9,959
Other borrowings 77 77 84 84
Convertible subordinated
notes 2,619 2,734 (115) 2,651 2,735 (84)
- --------------------------------------------------------------------------------
Total interest-bearing
liabilities $367,685 293,018 74,667 $359,232 279,229 80,003
Noninterest-bearing
deposits 57,529 38,814 18,715 53,673 37,687 15,986
Other noninterest-bearing
liabilities 2,849 2,487 362 2,854 2,298 556
Shareholders' Equity 32,946 29,347 3,599 32,474 28,965 3,509
- --------------------------------------------------------------------------------
Total liabilities and
shareholders'equity $461,009 $363,666 $97,343 $448,233 $348,179 $100,054
================================================================================
</TABLE>
7
<PAGE>
MANAGEMENT DISCUSSION AND FINANCIAL REVIEW
Columbia Banking System, Inc.
Earnings Summary
For the second quarter of 1996 the Company recorded net income of
$1.0 million, compared with net income of $602,000 in the second quarter of
1995. For the first six months of 1996, net income was $1.8 million, compared
with net income of $1.0 million in the first six months of 1995. Second quarter
1996 net income per share was $0.29 increasing from net income per share of
$0.17 in the second quarter of 1995, and for the first six months of 1996, the
Company recorded net income of $0.52 per share, compared with net income of
$0.30 per share for the same period in 1995. Net income for the first half of
1996 was positively affected by an increase in met interest income, service
charges on deposit accounts and bank card fees.
The Company continues to benefit from utilization of its net operating loss
carryforwards for federal income tax purposes. Therefore, the Company has no
federal income tax provision for the six months ending June 30, 1996. Had
the earnings been fully taxable, net income would have been $1.2 million.
Management has determined that in order to successfully pursue the perceived
potential for Columbia Bank, it is necessary to establish strategic branch
coverage in the Tacoma/Pierce County area. Columbia Bank opened four new
branches during 1995, three in Pierce County and one in south King County.
Construction began in the first quarter of 1996 on a permanent facility for
the Gig Harbor branch. During the second quarter a new Spanaway branch at
176th and Pacific Avenue opened in a temporary facility. The Spanaway office
is the tenth branch to open since Columbia Bank's major Pierce County expansion
in August 1993, bringing the Company's total number of branches to 14.
Columbia Bank will open its next new branch, the Puyallup branch, at the end of
the third quarter of 1996. A branch will also be built at Northwest Landing in
Dupont, an area of recently announced business expansion. Additional expansion
opportunities may include another Puyallup location, the Edgewood/Milton area,
and the Stadium and Lincoln business districts of Tacoma. Establishment of new
branches and relocation of existing temporary branches can be expected to
utilize considerable resources in 1996 and beyond. New branches normally do
not contribute to net income for many months after opening.
In addition to the ongoing expansion of its branch network, the Bank 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 Bank also launched an alternative
investments program through a new department, Columbia Financial Services, which
will make available mutual funds, annuities, and other investment products
through a contractual arrangement with PrimeVest Financial Services, Inc.
Net Interest Income
Net interest income for the second quarter of 1996 increased to $5.0 million,
or 22.8%, from $4.1 million in the second quarter of 1995. For the first six
months of 1996, net interest income increased to $9.5 million, or 19.8%, from
$7.9 million for the first six months of 1995. The increase in net interest
income in the second quarter and for the first six months of 1996 is largely due
to the overall growth of the Company. Net interest income in the first half of
1996 was favorably affected by average interest-earning assets increasing more
rapidly than average interest-bearing liabilities, with the difference funded by
noninterest-bearing deposits and shareholders' equity. Specifically, average
interest-earning assets for the second quarter and for the first six months of
1996 increased $95.3 million and $96.6 million, respectively, compared with the
same periods in 1995, while average interest-bearing liaiblities increased only
$74.7 million and $80.0 million, compared with the same periods in 1995. The
1996 increase in average interest-earning assets and average interest-bearing
liabilities is primarily due to the ongoing expansion of Columbia Bank.
8
<PAGE>
Net interest margin (net interest income divided by average interest-earning
assets) decreased to 4.65% in the second quarter of 1996 from 5.03% in the
second quarter of 1995. For the first six months, net interest margin decreased
to 4.55% in 1996 from 4.96% in 1995. The decrease in net interest margin is
primarily the result of growth in earning assets at reduced spreads. While
interest-earning assets grew, the average yield decreased to 8.65%, or 0.63%
for the second quarter of 1996 from 9.28% in the same period in 1995. For the
first six months of 1996, the average yield decreased to 8.66%, or 0.55% from
9.21% in the same period in 1995. In comparison, the average cost of
interest-bearing liabilities decreased to 4.70%, or 0.36% for the second quarter
of 1996 from 5.06% in the same period of 1995, and during the first six months
of 1996, the average cost of interest-bearing liabilities decreased to 4.80%,
or 0.10% from 4.90% in the same period of 1995. The decrease in net interest
margin and spread is the result of increased competition in the Company's
market.
Noninterest Income and Expense
Total noninterest income increased $358,000, or 37.7%, in the second quarter
of 1996, and $640,000, or 34.9%, for the first six months of 1996, compared
with the same periods in 1995. Increases in noninterest income in the first
half of 1996 were centered in account service charges, bank card revenue, and
mortgage banking income.
Total noninterest expense increased $727,000, or 17.6%, in the second quarter
of 1996, and $1.3 million, or 15.5%, in the first six months of 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
76.8% and 78.3% of total revenues (the sum of net interest income plus
noninterest income less nonrecurring gains) for the second quarter and first six
months of 1996, respectively, and 82.1% and 83.1% for the same periods in 1995.
Increases in noninterest expense are centered in 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.
In February 1996, the Company recorded a loss of $41,000 on the sale of its
"real estate owned" (which consisted of one property in the state of
Washington). 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.
9
<PAGE>
Loan Portfolio
Following is a summary of loans by type:
<TABLE>
<CAPTION>
June 30, December 31
(in thousands) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Real estate:
One-to four-family residential $ 69,364 $ 67,991
Five or more family residential and
commercial properties 117,486 97,103
- -----------------------------------------------------------------------------
Total real estate 186,850 165,094
Real estate construction:
One-to four-family residential 23,870 22,741
Five or more family residential and
commercial properties 10,466 8,884
- -----------------------------------------------------------------------------
Total real estate construction 34,336 31,625
Commercial business 132,251 113,775
Consumer 48,547 43,343
- -----------------------------------------------------------------------------
Sub-total loans 401,984 353,837
Less: Deferred loan fees (430) (744)
- -----------------------------------------------------------------------------
Total loans $401,554 $353,093
=============================================================================
Loans held for sale $ 1,950 $ 1,367
=============================================================================
</TABLE>
Total loans increased $48.5 million, or 13.7%, to $401.6 million at
June 30, 1996 from year-end 1995. All loan categories contributed to the
increase. The category of five or more family residential and commercial
real estate loans increased $20.4 million, or 21.0%, from year-end, while
five or more family residential and commercial real estate construction loans
increased $1.6 million, or 17.8%, from year-end. Commercial business loans
increased $18.5 million, or 16.2%, to $132.3 million at June 30, 1996 from
$113.8 million at December 31, 1995. Consumer loans increased $5.2 million,
or 12.0%, from year-end. The increases are primarily the result of
Columbia Bank's continued expansion in the Tacoma/Pierce County
market, accompanied by strong loan demand. Commercial business loans and
consumer loans will likely continue to represent an increasing proportion of
the total loan portfolio as a result of the expansion of Columbia Bank in
Pierce County.
At June 30, 1996, the Company had no foreign loans or loans related to
highly leveraged transactions.
10
<PAGE>
Nonperforming Assets
Below is an analysis of the composition of the Company's nonperforming assets
which consist of nonaccrual loans, restructured loans and real estate owned
("REO").
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual:
One-to four-family residential $ 123 $ 329
Commercial business 472 86
Consumer 81 20
- -----------------------------------------------------------------------------
Total $ 676 $ 435
=============================================================================
Restructured:
One-to four-family residential $ 27 $ 29
Commercial business 42
- -----------------------------------------------------------------------------
Total $ 69 $ 29
=============================================================================
Real estate owned:
Five or more family residential and
commercial properties $3,304
- -----------------------------------------------------------------------------
Total $3,304
=============================================================================
Total nonperforming assets $ 745 $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.
Total nonperforming loans were $745,000, or 0.19%, of total loans (excluding
loans held for sale) at June 30, 1996, compared with $464,000, or 0.13%, of
total loans at December 31, 1995. In February 1996, the Company sold all of
its "real estate owned" (which consisted of one property in the state of
Washington), thus reducing total nonperforming assets to $745,000 or 0.19% of
total loans (excluding loans held for sale) at June 30, 1996, from $3.8 million,
or 1.1% of total loans at year-end 1995.
11
<PAGE>
Provision and Allowance for Loan Losses
Net loan charge-offs amounted to $31,000 and $94,000 for the second quarter
and for the first six months of 1996, respectively, compared with net loan
charge-offs of $141,000 and $142,000 for the same periods in 1995. The
Company's provision for loan losses was $430,000 for the second quarter of
1996, compared with $300,000 for the second quarter of 1995. For the first
six months of 1996, the provision amounted $760,000, compared with $600,000
for the first six months of 1995. During the first six months, the allowance
for loan losses increased by $663,000, increasing to 1.10% of loans at
June 30, 1996 from 1.06% of loans (excluding loans held for sale) at
December 31, 1995.
Management considers the allowance for loan losses at June 30, 1996 to be
adequate to cover anticipated loan losses based on management's assessment of
various factors affecting the loan portfolio, including the level of problem
loans, business conditions, estimated collateral values, loss experience and
credit concentrations.
The following table summarizes the changes in the allowance for loan losses
for the six months ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 1996 1995 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance $4,015 $3,010 $3,748 $2,711
Charge offs:
Commercial business (18) (145) (44) (144)
Consumer (24) (17) (63) (31)
- ----------------------------------------------------------------------------
Total charge-offs (42) (162) (107) (175)
Recoveries:
Commercial business 11 16 13 28
Consumer 5 5
- ----------------------------------------------------------------------------
Total recoveries 11 21 13 33
- ----------------------------------------------------------------------------
Net (charge-offs) recoveries (31) (141) (94) (142)
Provision charged to expense 430 300 760 600
- ----------------------------------------------------------------------------
Ending balance $4,414 $3,169 $4,414 $3,169
============================================================================
</TABLE>
Liquidity and Sources of Funds
The Company's primary sources of funds are customer deposits and advances
from the Federal Home Loan Bank (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. Total deposits increased 11.3% to $402.9 million at
June 30, 1996 from $361.9 million at December 31, 1995. FHLB advances
increased $12.0 million during the first six months of 1996 to $37.0 million.
Management anticipates that the Company will continue to rely on the same
sources of funds in the future and will use those funds primarily to make loans
and purchase securities.
Management determined that in order to successfully pursue the perceived
potential for Columbia Bank, it is necessary to establish broad branch
coverage in the Tacoma/Pierce County area and hire experienced bank
personnel. 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 practical. Brokered and wholesale deposits can
be more expensive and more volatile in comparison with core deposits obtained in
the Company's market area. The deposit increase of $41.0 million during the
first six months of 1996 occurred entirely in "core deposits". Brokered and
other wholesale deposits (excluding public deposits) decreased $13.2 million
to $35.1 million, or 8.7% of total deposits at June 30, 1996, from
$48.3 million, or 13.3% of total deposits at December 31, 1995.
12
<PAGE>
Capital
Shareholders' equity at June 30, 1996 was $33.8 million compared with
$32.0 million at December 31, 1995. The increase is primarily due to
improved net income during the first six months of 1996. Shareholders'
equity was 7.0% and 7.5% of total period-end assets at June 30, 1996 and
December 31, 1995, respectively.
Banking regulations require bank holding companies to maintain a minimum
"leverage" ratio of core capital to adjusted quarterly average total assets
of at least 3%. At June 30, 1996, the Company's leverage ratio was 7.30%,
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, 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 8.58% and 10.30%, respectively, at June 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 June 30, 1996. In addition, in accordance with the 1993 order
by the FDIC granting insurance for the deposits of Columbia Bank, the Bank is
required to obtain a leverage ratio of 8% by August 16, 1996. Management is
confident that this required ratio will be achieved.
Under Washington State banking regulations, Columbia Bank's ability to
declare or pay dividends to the Company is limited to the amount of the
Bank's profits then on hand, less any required transfers to additional
paid-in capital. The Company's ability to pay 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.
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 six month periods ended June 30, 1995. The retroactive impact on
earnings per share for the three months and six months ended June 30, 1995, is
a reduction of $.01 per share and $.02 per share, respectively.
At June 3, 1996, the Company gave notoce that it will redeem all of its issued
and outstanding 7.85% Convertible Subordinated Notes (Notes). The date of
redemption of the Notes is August 1, 1996. Holders of the Notes have the option
to convert their Notes into shares of Columbia common stock until 5:00 p.m.
Seattle time, on August 1, 1996. The Notes may be converted 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. If all the Notes outstanding at June 30, 1996 are
converted to common stock, approximately 223,769 new shares will be issued.
13
<PAGE>
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual shareholders meeting on April 24, 1996, for
the purpose of electing a Board of Directors.
All fourteen persons nominated were elected to hold office for the ensuing year.
<TABLE>
<CAPTION>
Nominee Votes in Favor Votes Withheld
- --------------------------------------------------------------------------------
<S> <C> <C>
W. Barry Connoley 2,958,977 1,407
Richard S. DeVine 2,959,377 1,007
A. G. Espe 2,960,377 7
Jack Fabulich 2,960,377 7
Jonathan Fine 2,960,377 7
Margel S. Gallagher 2,959,377 1,007
John A. Halleran 2,960,377 7
W. W. Philip 2,960,377 7
John H. Powell 2,959,964 420
Richard E. Quoidbach 2,959,927 457
Donald Rodman 2,960,376 8
Frank H. Russell 2,959,377 1,007
Sidney R. Snyder 2,959,977 407
James M. Will 2,960,377 7
</TABLE>
14
<PAGE>
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 April 30, 1996, the Company filed a Form 8-K reporting that
W.W. Philip, the Company's President and Chief Operating Officer had
agreed to remain in his present position with the Company and its
subsidiary bank for two additional years, through the end of calendar
year 1998.
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 July 31, 1996 By /s/ A. G. Espe
----------------------------- -----------------------------
A. G. Espe
Chairman and
Chief Executive Officer
Date July 31, 1996 By /s/ Gary R. Schminkey
----------------------------- -----------------------------
Gary R. Schminkey
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
15
<PAGE>
Exhibit 11
Computation of Fully Diluted Earnings per Common Share
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except per share data) 1996 1995 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earnings
Net income applicable to common stock $1,032 $602 $1,840 $1,047
Interest on convertible subordinated notes,
net of income tax effects--Note 1 58 62 118 123
- --------------------------------------------------------------------------------
Pro forma net income available to common stock $1,090 $664 $1,958 $1,170
================================================================================
Shares
Weighted average number of common and common
equivalent shares outstanding 3,580 3,488 3,566 3,484
Additional shares assuming conversion of
convertible subordinated notes--Note 1 224 258 224 258
- --------------------------------------------------------------------------------
Pro forma shares 3,804 3,746 3,790 3,742
================================================================================
Fully diluted earnings per share - as reported $0.29 $0.17 $0.52 $0.30
================================================================================
Fully diluted earnings per share - as calculated $0.29 $0.18 $0.52 $0.31
================================================================================
</TABLE>
Note 1. Earnings per share and fully diluted earnings per share are reported
as the same for the three months and six months ended June 30, 1995. The
inclusion of convertible subordinated notes would produce an antidilutive
effect. Additional average shares, assuming the conversion of convertible
subordinated notes, represent 257,529 shares for the three months and six
months ended June 30, 1995. The related interest expense on these notes
(net of income tax effects) was $61,500 and $123,002 for the three months
and six months ended June 30, 1995.
For additional information on earnings per share, please see the "Capital"
section of the "Management Discussion and Financial Review".
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 22326
<INT-BEARING-DEPOSITS> 10415
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32084
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 401554
<ALLOWANCE> 4411
<TOTAL-ASSETS> 481612
<DEPOSITS> 402914
<SHORT-TERM> 4663
<LIABILITIES-OTHER> 3252
<LONG-TERM> 37000
0
0
<COMMON> 33354
<OTHER-SE> 429
<TOTAL-LIABILITIES-AND-EQUITY> 481612
<INTEREST-LOAN> 16943
<INTEREST-INVEST> 826
<INTEREST-OTHER> 328
<INTEREST-TOTAL> 18097
<INTEREST-DEPOSIT> 7593
<INTEREST-EXPENSE> 1009
<INTEREST-INCOME-NET> 8602
<LOAN-LOSSES> 760
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9368
<INCOME-PRETAX> 1840
<INCOME-PRE-EXTRAORDINARY> 1840
<EXTRAORDINARY> 0
<CHANGES> 0
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<EPS-PRIMARY> .52
<EPS-DILUTED> .52
<YIELD-ACTUAL> 4.55
<LOANS-NON> 676
<LOANS-PAST> 260
<LOANS-TROUBLED> 69
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3748
<CHARGE-OFFS> 107
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 4414
<ALLOWANCE-DOMESTIC> 4414
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 766
</TABLE>
