<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, 1997.
/ / 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)
(253) 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, 1997 was 5,498,186.
<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, 1997 and 1996 2
Consolidated Balance Sheets - June 30, 1997
and December 31, 1996 3
Consolidated Statements of Shareholders' Equity -
twelve months ended December 31, 1996 and
six months ended June 30, 1997 4
Consolidated Statements of Cash Flows -
six months ended June 30, 1997 and 1996 5
Notes to consolidated financial statements 6
Item 2. Management Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II -- OTHER INFORMATION
Item 4. Submission of matters to vote of security
holders 17
Item 6. Exhibits and reports on Form 8-K 18
Signatures 18
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) 1997 1996 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Loans $11,672 $ 8,745 $21,965 $16,943
Securities available for sale 771 416 1,454 826
Deposits with banks 232 150 609 328
- -----------------------------------------------------------------------------
Total interest income 12,675 9,311 24,028 18,097
Interest Expense
Deposits 5,027 3,798 9,676 7,593
Federal Home Loan Bank advances 398 447 828 884
Other borrowings 61 125
- -----------------------------------------------------------------------------
Total interest expense 5,425 4,306 10,504 8,602
Net Interest Income 7,250 5,005 13,524 9,495
Provision for loan losses 1,206 430 1,606 760
- -----------------------------------------------------------------------------
Net interest income after
provision for loan losses 6,044 4,575 11,918 8,735
Noninterest Income
Service charges and other fees 919 597 1,646 1,148
Mortgage banking 202 148 295 308
Gains on sale of loans 1,035 1,035
Credit card fees and other 679 563 1,349 1,017
- -----------------------------------------------------------------------------
Total noninterest income 2,835 1,308 4,325 2,473
Noninterest Expense
Compensation and employee benefits 2,634 1,808 5,272 3,627
Occupancy 921 800 1,800 1,616
Professional Services 113 154 225 278
Advertising and promotion 281 194 502 374
Printing and supplies 145 103 300 192
Regulatory premiums and assessments 47 120 86 184
Data processing 267 205 536 363
Gains on, and net cost of,
real estate owned 87 84
Other 1,783 1,467 3,358 2,734
- -----------------------------------------------------------------------------
Total noninterest expense 6,278 4,851 12,163 9,368
Income before income taxes 2,601 1,032 4,080 1,840
Provision for income taxes 768 1,194
- -----------------------------------------------------------------------------
Net Income $ 1,833 $ 1,032 $ 2,886 $ 1,840
=============================================================================
Per share (on average shares outstanding):
Net Income $ 0.32 $ 0.27 $ 0.51 $ 0.49
Fully diluted net income 0.32 0.27 0.51 0.49
Average number of common and common
equivalent shares outstanding 5,643 3,760 5,639 3,745
Fully diluted average common and common
equivalent shares oustanding 5,668 3,995 5,667 3,980
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) 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 30,111 $ 32,092
Interest-earning deposits with banks 10,724 38,086
Securities available for sale:
U.S. Treasury & Government Agencies 33,058 30,481
Mortgage-backed 9,927 10,760
FHLB stock 4,450 4,248
- -----------------------------------------------------------------------------
Total securities available for sale 47,435 45,489
Loans held for sale 3,279 11,341
Loans 541,388 446,095
Less: allowance for loan losses 5,614 4,504
- -----------------------------------------------------------------------------
Loans, net 535,774 441,591
Interest Receivable 3,882 3,347
Premises and equipment, net 19,718 15,250
Real estate owned 301 40
Other 3,836 1,680
- -----------------------------------------------------------------------------
Total Assets $655,060 $588,916
=============================================================================
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing $ 97,282 $ 83,983
Interest-bearing 452,641 409,239
- -----------------------------------------------------------------------------
Total Deposits 549,923 493,222
Federal Home Loan Bank advances 37,000 32,000
Other liabilities 5,874 4,734
- ----------------------------------------------------------------------------
Total liabilities 592,797 529,956
Shareholders' equity:
Preferred stock (no par value)
Authorized, 2,000,000 shares;
None outstanding
June 30, December 31,
Common stock (no par value) 1997 1996
--------- ----------
<S> <C> <C>
Authorized shares 10,000 10,000
Issued and outstanding 5,494 5,185 60,832 56,340
Retained Earnings 1,438 2,694
Unrealized losses on securities
available for sale, net of tax (7) (74)
- -----------------------------------------------------------------------------
Total shareholders' equity 62,263 58,960
- -----------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $655,060 $588,916
=============================================================================
</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, 1995 3,274 $30,806 $1,274 ($113) $31,967
Net income 3,577 3,577
Issuance of shares
of common stock, net 1,492 20,868 20,868
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) 39 39
- -----------------------------------------------------------------------------
Balance at
December 31, 1996 5,185 56,340 2,694 (74) 58,960
Net income 2,886 2,886
Issuance of shares
of common stock, net 48 350 350
Issuance of shares
of common stock - 261 4,142 (4,142)
5% stock dividend
Change in unrealized gains
and (losses),net of tax 67 67
- -----------------------------------------------------------------------------
Balance at
June 30, 1997 5,494 $60,832 $1,438 ($ 7) $62,263
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(in thousands) 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 2,886 $ 1,840
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 1,606 760
Losses on real estate owned 85 41
Depreciation and amortization 1,221 1,057
Deferred income taxes 102
Net realized losses (gains) on sale of investments (1,032) 196
(Increase) decrease in loans held for sale 8,062 (583)
Increase in interest receivable (535) (424)
Increase (decrease) in interest payable 261 (12)
Net changes in other assets and liabilities (1,412) (282)
- -----------------------------------------------------------------------------
Net cash provided (used) by operating activities 11,244 2,593
Investing Activities
Proceeds from maturities of securities
available for sale 3,041 9,428
Purchases of securities available for sale (5,818) (19,937)
Proceeds from maturities of mortgage-backed
securities available for sale 850 807
Loans originated and acquired, net of
principal collected (105,606) (48,785)
Proceeds from sales of loans 10,177
Purchases of premises and equipment (5,738) (1,045)
Proceeds from disposal of premises and equipment 393 140
Proceeds from sale of real estate owned 63 3,263
- -----------------------------------------------------------------------------
Net cash used by investing activities (102,638) (56,129)
Financing Activities
Net increase in deposits 56,701 41,039
Net increase in other borrowings 2,300
Proceeds from FHLB advances and other long-term debt 25,000 20,800
Repayment of FHLB advances and other long-term debt (20,000) (8,800)
Proceeds from issuance of common stock 350 59
- -----------------------------------------------------------------------------
Net cash provided by financing activities 62,051 55,398
- -----------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (29,343) 1,862
Cash and cash equivalents at beginning of period 70,178 30,879
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 40,835 $ 32,741
=============================================================================
Supplemental information:
Cash paid for interest $ 13,537 $ 8,614
Loans foreclosed and transferred to real estate owned 409
Issuance of common stock from conversion of convertible
subordinated notes 332
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, 1997, are not necessarily indicative of results to be anticipated
for the year ending December 31, 1997. Certain amounts in the 1996 financial
statements have been reclassified to conform with the 1997 presentation. For
additional information, refer to the consolidated financial statements and
footnotes thereto included in the Columbia Banking System's (the Company)
annual report on Form 10-K for the year ended December 31, 1996.
2. Summary of Significant Accounting Changes
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). The statement is effective for years ending after December 15,
1997, for both interim and annual periods, and replaces the presentation of
primary and fully diluted earnings per share with a presentation of basic and
diluted earnings per share. The adoption of this Statement is not expected
to have a material impact on earnings per share reported by the Company.
3. Sale of Bank Card Operations
During the second quarter, the Company sold its VISA( credit card portfolio.
The sale was negotiated in 1996, signed in the first quarter of 1997 and
closed in the second quarter of this year. A one-time gain of $1.0 million
was realized from the sale. The sale of the business is not expected to
have a material effect on results of operations in future periods. The
proceeds of the sale have been invested principally in loans to local
businesses and consumers.
4. Stock Dividend
On April 23, 1997, the Company announced a 5% stock dividend payable on
May 22, 1997, to shareholders of record on May 8, 1997. On May 22, 1997,
260,899 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.
5. Subsequent Events - Merger
On July 1, 1997, the Company announced an agreement to merge Cascade
Community Bank, a wholly owned subsidiary of Cascade Bancorp, Inc. and
Columbia Bank, a wholly owned subsidiary of Columbia Banking System, Inc.
The terms of the agreement also provide that Cascade Bancorp, Inc. will be
merged into CBSI. The Agreement provides that stockholders of Cascade
Bancorp will receive 2.27 shares of CBSI common stock for each share of
Cascade common stock. As of June 30, 1997, there were 330,000 shares of
Cascade common stock issued and outstanding. In addition, outstanding
options to purchase shares of Cascade common stock will become options to
acquire up to 25,880 shares of CBSI common stock. Cascade operates three
banking offices in the Auburn/Kent valley with assets of approximately
$87 million. The agreement, which was unanimously approved by the
respective Boards of Directors of the parties, is subject to a number of
conditions, including approval by the shareholders of Cascade Bancorp and
various regulatory agencies. The parties anticipate closing the transaction
in the fourth quarter of 1997.
6
<PAGE>
On July 30, 1997, the Company announced an agreement to merge the Bank of Fife
with and into Columbia Bank. Under terms of the agreement, Bank of Fife
stockholders will receive between 1.45 to 1.77 shares of CBSI common stock
for each share of Fife common stock, based on the average price of CBSI
shares for a period of 20 days shortly before the closing of the transaction.
The transaction will result in the issuance of up to 391,000 shares of CBSI
common stock. The Bank of Fife operates one banking office in downtown Fife
with assets of approximately $34 million. The agreement, which was
unanimously approved by the respective Boards of Directors of the parties,
is subject to a number of conditions, including approval by the shareholders
of Bank of Fife and various regulatory agencies. The parties anticipate
closing the transaction in the fourth quarter of 1997.
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) 1997 1996 Amount 1997 1996 Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans $518,751 $392,018 $126,733 $494,083 $378,281 $115,802
Securities 49,133 27,959 21,174 47,244 28,329 18,915
Interest-earning
deposits with banks 17,044 11,549 5,495 23,015 12,352 10,663
- --------------------------------------------------------------------------------
Total interest-earning
assets 584,928 431,526 153,402 564,342 418,962 145,380
Noninterest-earning
assets 49,200 29,483 19,717 45,156 29,271 15,885
- --------------------------------------------------------------------------------
Total assets $634,128 $461,009 $173,119 $609,498 $448,233 $161,265
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing
deposits $447,930 $331,894 $116,036 $430,451 $324,327 $106,124
Federal Home Loan Bank
advances 29,217 33,095 (3,878) 29,992 32,170 (2,178)
Other borrowings 77 (77) 84 (84)
Convertible subordinated
notes 2,619 (2,619) 2,651 (2,651)
- --------------------------------------------------------------------------------
Total interest-bearing
liabilities $477,147 367,685 109,462 $460,443 359,232 101,211
Noninterest-bearing
deposits 89,745 57,529 32,216 83,685 53,673 30,012
Other noninterest-bearing
liabilities 4,852 2,849 2,003 4,309 2,854 1,455
Shareholders' Equity 62,384 32,946 29,438 61,061 32,474 28,587
- --------------------------------------------------------------------------------
Total liabilities and
shareholders'equity $634,128 $461,009 $173,119 $609,498 $448,233 $161,265
================================================================================
</TABLE>
7
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Columbia Banking System, Inc.
This discussion contains certain forward-looking statements within the
meaning of the federal securities laws. Actual results and the timing of
certain events could differ materially from those projected in the
forward-looking statements due to a number of factors.
Earnings Summary
Net income for the second quarter of 1997 was $1.8 million, or $0.32 per share,
compared to $1.0 million, or $0.27 per share, for the second quarter of 1996,
an increase in net income of 80%. During 1996, the Company had no federal
income tax provision for the three months ended June 30 due to utilization of
net operating loss carryforwards. On a comparable fully taxed basis, net
income in the second quarter of 1997 was $1.8 million, or $0.32 per share,
compared with $681,000, or $0.18 per share for the second quarter of 1996, a
more than twofold increase in net income. The increase in net income was
primarily due to increased revenue resulting from continued loan and deposit
growth. As a result of the continued loan growth, during the second quarter
of 1997, an additional loan loss provision of $800,000 was recorded.
Net income for the six months ended June 30, 1997 was $2.9 million, $0.51 per
share, compared with $1.8 million, or $0.49 per share for the same period in
1996. On a comparable fully taxed basis for the six months, net income was
$2.9 million, or $0.51 per share, compared with $1.2 million, or $0.32 per
share, for the first six months of 1996. Per share income in 1997 reflects
the issuance by the Company of 1,445,000 shares of Common Stock in the fourth
quarter of 1996.
During the second quarter, the Company sold its VISA( credit card portfolio.
The sale was negotiated in 1996, signed in the first quarter of 1997 and
closed in the second quarter of this year. A one-time gain of $1.0 million
was realized from the sale.
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, north into King County (the location of
Seattle and Bellevue) and south into Thurston County (the location of the
state capital, Olympia).
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.
On July 1, 1997, an announcement was made that the Company will acquire
Cascade Community Bank, a wholly owned subsidiary of Cascade Bancorp, Inc.,
through a merger with Columbia Bank, a wholly owned subsidiary of Columbia
Banking System. The terms of the agreement provide that stockholders of
Cascade Bancorp will receive 2.27 shares of Columbia's common stock for each
share of Cascade common stock. The merger will add three additional branches
to Columbia Bank in its south King County market area. Two of the branches
are located in Auburn with the third in downtown Kent. The parties anticipate
closing the transaction in the fourth quarter of 1997.
8
<PAGE>
On July 30, 1997, the Company announced an agreement to merge the Bank of Fife
with and into Columbia Bank. The Bank of Fife stockholders will receive
between 1.45 to 1.77 shares of CBSI common stock for each share of Fife
common stock, based on the average price of CBSI shares for a period of 20
days shortly before the closing of the transaction. The Bank of Fife
operates one banking office in downtown Fife, a commercial market in which
Columbia does not have a branch. The parties anticipate closing the
transaction in the fourth quarter of 1997.
During the first quarter of 1997, the Company opened a second Bellevue branch
and a new branch in Kent. Columbia Bank has opened 14 branch locations
since beginning its major Pierce County expansion in August 1993, and now has
18 branches, 3 in Cowlitz County, 4 in King County and 11 in Pierce County.
The Company has regulatory approval to open three additional branches in
Pierce County and one in King County. During 1997, the Company anticipates
the establishment of two new branches in addition to the three branches to
be acquired in the merger with Cascade. New branches normally do not
contribute to net income for many months after opening.
Net Interest Income
Net interest income for the second quarter of 1997 increased to $7.3 million,
or 46%, from $5.0 million in the second quarter of 1996. For the first six
months of 1997, net interest income increased to $13.5 million, or 42%, from
$9.5 million for the same period in 1996. The increase in net interest income
during the first six months of 1997 is largely due to the overall growth of
the Company. Net interest income was favorably affected by average
interest-earning assets increasing more rapidly than average interest-bearing
liabilities, with the difference funded by noninterest-bearing deposits and
shareholders' equity. During the first six months of 1997, average
interest-earning assets increased $145.4 million, while average
interest-bearing liabilities increased $101.2 million compared with the same
period in 1996.
Net interest margin (net interest income divided by average interest-earning
assets) increased to 4.97% in the second quarter of 1997 from 4.65% in the
second quarter of 1996. The increase in net interest margin is primarily the
result of the growth in earning assets at increased spreads. While
interest-earning assets grew, the average yield increased 0.04% to 8.69% for
the second quarter of 1997 from 8.65% in the same period of 1996. The
average cost of interest-bearing liabilities decreased to 4.56%, or 0.14% from
4.70% in the same period of 1996.
For the first six months of 1997, net interest margin increased to 4.83% from
4.55% for the same period in 1996. The average yield on interest-earning
assets decreased to 8.59%, or 0.07% from 8.66% for the six months ending
June 30, 1996. In comparison, the average cost of interest-bearing
liabilities decreased to 4.60 or 0.20% from 4.80 in the same period of 1996.
9
<PAGE>
Noninterest Income and Expense
Total noninterest income increased $1.5 million, or 115%, in the second
quarter of 1997, and $1.9 million, or 76%, for the first six months of 1997,
compared with the same periods in 1996. The increase was primarily due to a
one-time gain of $1.0 million on the sale of the Company's VISA (Trade Mark)
Credit card portfolio during the second quarter. Excluding the one-time
gain, noninterest income increased $484,000, or 37%, in the second quarter of
1997, and $809,000, or 33%, for the first six months of 1997, compared with
the same periods in 1996. Increases in recurring noninterest income during
the first six months of 1997 were centered in account service charges, and
bank card revenue.
Total noninterest expense increased $1.4 million, or 29% in the second quarter
of 1997, and $2.8 million, or 30%, in the first six months of 1997 compared
with the same periods in 1996. The increase is primarily due to expenses
associated with the expansion of Columbia Bank. Total noninterest expense
was 69.4% and 72.4% of total revenues (the sum of net interest income plus
noninterest income less nonrecurring gains) for the second quarter and first
six months of 1997, respectively, and 76.8% and 78.3% for the same periods
in 1996, respectively. Increases in noninterest expense are centered in
compensation, other expense, and data processing. In general, increases in
noninterest expense are due to the growth of the Company, establishment of
branches, 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.
During the second quarter, the Company sold its VISA (Trade Mark) credit card
portfolio. The sale was negotiated in 1996, signed in the first quarter of
1997 and closed in the second quarter of this year. A one-time gain of
$1.0 million was realized from the sale. The sale of the business is not
expected to have a material effect on results of operations in future periods.
The proceeds of the sale have been invested principally in loans to local
businesses and consumers.
Income Taxes
Prior to December 31, 1996, for federal income tax purposes, the Company had
net operating loss ("NOL") carryforwards. The carryforwards were used,
subject to certain restrictions and limitations, to offset taxable income and
the tax liability of the Company. At December 31, 1996, all available NOL
carryforwards had been utilized to offset taxable income and the Company is
now fully taxable.
For the second quarter and first six months of 1997, the Company recorded
income tax provisions of $768,000 and $1.2 million, respectively.
.
10
<PAGE>
Lending Activities
The Company originates a wide variety of loans. Consistent with the trend
beginning 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 of loan:
<TABLE>
<CAPTION>
June 30, % of December 31, % of
(in thousands) 1997 Total 1996 Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $214,149 39.5% $169,318 38.0%
Real estate:
One-to four-family residential 59,014 10.9 67,709 15.1
Five or more family residential and
commercial properties 160,893 29.7 128,803 28.9
- -----------------------------------------------------------------------------
Total real estate 219,907 40.6 196,512 44.0
Real estate construction:
One-to four-family residential 24,190 4.5 21,380 4.8
Five or more family residential and
commercial properties 21,813 4.0 10,680 2.4
- -----------------------------------------------------------------------------
Total real estate construction 46,003 8.5 32,060 7.2
Consumer 62,108 11.5 48,807 10.9
- -----------------------------------------------------------------------------
Sub-total loans 542,167 100.1 446,697 100.1
Less: Deferred loan fees (779) (0.1) (602) (0.1)
- -----------------------------------------------------------------------------
Total loans $541,388 100.0% $446,095 100.0%
=============================================================================
Loans held for sale $ 3,279 $ 11,341
=============================================================================
</TABLE>
Total loans increased $95.3 million, or 21%, to $541.4 million from year-end
1996. All categories contributed to the increase except for the one- to
four-family residential category which experienced declines during the first
quarter and early into the second quarter.
Commercial and Private Banking Lending
Commercial loans increased to $214.1 million at June 30, 1997, representing
39.5% of total loans, from $169.3 million at December 31, 1996. 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 $59.0 million at June 30, 1997, representing
10.9% of total loans, compared to $67.7 million at December 31, 1996. These
loans are used by the Company to collateralize advances from the FHLB. The
Company's underwriting standards require that one- to four-family portfolio
loans generally be owner-occupied and that loan amounts not exceed 80% (90%
with private mortgage insurance) of the appraised value or cost, whichever is
lower, of the underlying collateral at origination. Generally, management's
policy is to originate for sale to third parties residential loans secured by
properties located within the Company's primary market areas.
11
<PAGE>
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 $160.9 million at
June 30, 1997, representing 29.7% of total loans, from $128.8 million at
December 31, 1996. 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 Lending.
One- to Four-Family Residential Real Estate Construction Lending. 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
$24.2 million at June 30, 1997, representing 4.5% of total loans, from
$21.4 million at December 31, 1996.
Multi-family and Commercial Real Estate Construction Lending. Multi-family
and commercial real estate construction loans increased $11.1 million to
$21.8 million at June 30, 1997, representing 4.0% of total loans, from
$10.7 million at December 31, 1996.
Consumer Lending.
At June 30, 1997, the Company had $62.1 million of consumer loans outstanding,
representing 11.5% of total loans, as compared with $48.8 million at
December 31, 1996. 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 June 30, 1997, 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>
June 30, December 31,
(in thousands) 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual:
One-to four-family residential $ 248 $1,645
Commercial business 844 385
Consumer 62 197
- -----------------------------------------------------------------------------
Total $1,154 $2,227
- -----------------------------------------------------------------------------
Restructured:
One-to four-family residential $ 23 $ 25
- -----------------------------------------------------------------------------
Total $ 23 $ 25
- -----------------------------------------------------------------------------
Total nonperforming loans $1,177 $2,252
=============================================================================
Real estate owned:
Five or more family residential and
commercial properties $ 301 $ 40
- -----------------------------------------------------------------------------
Total $ 301 $ 40
=============================================================================
Total nonperforming assets $1,478 $2,292
=============================================================================
</TABLE>
The policy of the Company generally is to discontinue the accrual of interest
on all loans past due 90 days or more and place them on nonaccrual status.
Nonperforming loans decreased to $1.2 million, or 0.22% of total loans
(excluding loans held for sale), at June 30, 1997 from $2.3 million, or 0.51%
of total loans at December 31, 1996 due principally to the reduction of
nonperforming loans secured by real estate.
During the first six months of 1997, the Company foreclosed on $409,000 of
loans collaterlalized by real estate and transferred them to real estate
owned. During the second quarter of 1997, a $20,000 write-down of REO was
recorded as well as a loss on sale of REO of $65,000.
Total nonperforming assets decreased to $1.5 million, or 0.23% of period-end
assets at June 30, 1997 from $2.3 million, or 0.39% of period-end assets at
December 31, 1996.
13
<PAGE>
Analysis of Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered by management
to be adequate to provide for anticipated loan losses based on management's
assessment of various factors affecting the loan portfolio. This includes a
review of problem loans, business conditions and loss experience, and 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 is reduced by loans charged off, net of recoveries.
While management believes that it uses reasonable information to determine
the allowance for loan losses, unforeseen 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.
The allowance for loan losses at June 30, 1997 increased $1.1 million to
1.04%, from 1.01% of loans at December 31, 1996 (excluding loans held for
sale at each date). Due to the rapid loan growth experienced by the
Company $1.6 million was added to provisions for loan losses during the
first six months of 1997 compared with $760,000 for the same period in 1996.
Net loan charge-offs amounted to $398,000 and $496,000 for the second
quarter and for the first six months of 1997, respectively, compared
with net loan charge-offs of $34,000 and $97,000 for the same periods
in 1996.
The following table sets forth at the dates indicated the changes in the
Company's allowance for loan losses:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 1997 1996 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance $4,806 $4,015 $4,504 $3,748
Charge offs:
Commercial business (425) (18) (425) (44)
Consumer (14) (27) (131) (67)
- ----------------------------------------------------------------------------
Total charge-offs (439) (45) (556) (111)
Recoveries:
Commercial business 2 11 20 14
Consumer 39 40
- ----------------------------------------------------------------------------
Total recoveries 41 11 60 14
- ----------------------------------------------------------------------------
Net (charge-offs) recoveries (398) (34) (496) (97)
Provision charged to expense 1,206 430 1,606 760
- ----------------------------------------------------------------------------
Ending balance $5,614 $4,411 $5,614 $4,411
============================================================================
</TABLE>
14
<PAGE>
Liquidity and Sources of Funds
The Company's primary sources of funds are customer deposits, advances from the
Federal Home Loan Bank of Seattle (the "FHLB") and brokered deposits. These
funds, together with loan repayments, loan sales, retained earnings, equity
and other borrowed funds, are used to make loans, to acquire securities and
other assets and to fund continuing operations.
Deposit Activities
The Company's deposit products include a wide variety of transaction accounts,
savings accounts and certificates of deposit. Total deposits increased
$56.7 million, or 11.5%, to $549.9 million at June 30, 1997, from
$493.2 million at December 31, 1996.
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 1996, though management
anticipates continued, and perhaps increasing, use of such deposits to fund
increasing loan demand when necessary. The deposit increase during the first
six months of 1997 occurred entirely in "core deposits". Brokered and other
wholesale deposits (excluding public deposits) decreased $25.5 million to
$4.8 million, or .87% of total deposits, at June 30, 1997, from $30.3 million,
or 6.1% of total deposits, at December 31, 1996.
Borrowings
The Company relies on advances from the FHLB to supplement its funding sources.
FHLB advances increased $5.0 million during the first six months of 1997 to
$37.0 million. FHLB advances are secured by one- to four-family real estate
mortgages and certain other assets.
15
<PAGE>
Capital
Shareholders' equity at June 30, 1997 was $62.3 million compared with
$59.0 million at December 31, 1996. The increase is due to improved net
income during the first six months of 1997. Shareholders' equity was 9.5%
and 10.0% of total period-end assets at June 30, 1997 and December 31, 1996,
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 June 30, 1997, the Company's leverage ratio was
9.80%, compared with 10.62% at December 31, 1996. 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 intangible assets, while Tier II capital includes the allowance
for loan losses and subordinated debt, both subject to certain limitations.
Regulatory minimum risk-based capital guidelines require Tier I capital of
4% of risk-adjusted assets and total capital (combined Tier I and Tier II) of
8%. The Company's Tier I and total capital ratios were 11.22% and 12.23%,
respectively, at June 30, 1997, compared with 12.81% and 13.79%, respectively,
at December 31, 1996.
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, 1997. 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.
On April 23, 1997, the Company announced a 5% stock dividend payable on
May 22, 1997, to shareholders of record on May 8, 1997. Average shares
outstanding, net income per share and book value per share have been adjusted
to give retroactive effect to all periods presented. The retroactive impact
on earnings per share for the three months and six months ended June 30, 1996,
is a reduction of $0.02 and $0.03 per share, respectively.
16
<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 23, 1997, for
the purpose of electing a Board of Directors and to approve Columbia's Stock
Option Plan, as amended and restated.
All fifteen persons nominated were elected to hold office for the ensuing
year.
Nominee Votes "For" Votes "Withheld"
- ----------------------------------------------------------------------------
W. Barry Connoley 4,629,010 10,117
Richard S. DeVine 4,638,189 938
A. G. Espe 4,639,071 56
Jack Fabulich 4,639,029 98
Jonathan Fine 4,639,064 63
John P. Folsom 4,638,218 909
Margel S. Gallagher 4,639,064 63
John A. Halleran 4,638,139 988
W. W. Philip 4,638,161 966
John H. Powell 4,639,029 98
Robert E. Quoidbach 4,638,175 952
Donald Rodman 4,639,070 57
Frank H. Russell 4,639,043 84
Sidney R. Snyder 4,638,161 966
James M. Will 4,629,075 10,052
The amended and restated "Stock Option Plan" was approved by the following
vote of the shareholders:
Shares Shares Shares
Voted Voted Shares Not
"FOR" "AGAINST" "ABSTAINING" Voted
4,107,106 362,952 57,782 676,086
17
<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 July 7, 1997, the Company filed Form 8-K, announcing an agreement to
merge Cascade Community Bank, a wholly owned subsidiary of Cascade
Bancorp, Inc. and Columbia Bank, a wholly owned subsidiary of Columbia
Banking System, Inc. The terms of the agreement also provide that
Cascade Bancorp, Inc. will be merged into CBSI.
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 August 1, 1997 By /s/ A. G. Espe
----------------------------- -----------------------------
A. G. Espe
Chairman and
Chief Executive Officer
Date August 1, 1997 By /s/ Gary R. Schminkey
----------------------------- -----------------------------
Gary R. Schminkey
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
18
<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) 1997 1996 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earnings
Net income applicable to common stock $1,833 $1,032 $2,886 $1,840
Interest on convertible subordinated notes,
net of income tax effects--Note 1 58 118
- --------------------------------------------------------------------------------
Pro forma net income available
to common stock $1,833 $1,090 $2,886 $1,958
================================================================================
Shares
Weighted average number of common and common
equivalent shares outstanding 5,668 3,760 5,667 3,745
Additional shares assuming conversion of
convertible subordinated notes--Note 1 235 235
- --------------------------------------------------------------------------------
Pro forma shares 5,668 3,995 5,667 3,980
================================================================================
Fully diluted earnings per share -
as reported $0.32 $0.27 $0.51 $0.49
================================================================================
Fully diluted earnings per share -
as calculated $0.32 $0.27 $0.51 $0.49
================================================================================
</TABLE>
On April 23, 1997, the Company announced a 5% stock dividend payable on
May 22, 1997, to shareholders of record on May 8, 1997. Average shares
outstanding, net income per share and book value per share have been adjusted
to give retroactive effect to all periods presented. The retroactive impact on
earnings per share for the three months and six months ended June 30, 1996, is
a reduction of $0.02 and $0.03 per share respectively.
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.
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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 30111
<INT-BEARING-DEPOSITS> 10724
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 47435
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 541388
<ALLOWANCE> 5614
<TOTAL-ASSETS> 655060
<DEPOSITS> 549923
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5874
<LONG-TERM> 37000
0
0
<COMMON> 60832
<OTHER-SE> 1431
<TOTAL-LIABILITIES-AND-EQUITY> 655060
<INTEREST-LOAN> 21965
<INTEREST-INVEST> 1454
<INTEREST-OTHER> 609
<INTEREST-TOTAL> 24028
<INTEREST-DEPOSIT> 9676
<INTEREST-EXPENSE> 10504
<INTEREST-INCOME-NET> 13524
<LOAN-LOSSES> 1606
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 12163
<INCOME-PRETAX> 4080
<INCOME-PRE-EXTRAORDINARY> 2886
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2886
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
<YIELD-ACTUAL> 4.83
<LOANS-NON> 1154
<LOANS-PAST> 0
<LOANS-TROUBLED> 23
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4504
<CHARGE-OFFS> 556
<RECOVERIES> 60
<ALLOWANCE-CLOSE> 5614
<ALLOWANCE-DOMESTIC> 5614
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 283
</TABLE>
