<PAGE> 1
SCHEDULE 14A - INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE
14A-6(E)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
Columbia Banking System, Inc.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
J. James Gallagher, Esq.
Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C.
2200 First Interstate Plaza, Post Office Box 1157
Tacoma, Washington 98401-1157
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing
fee is calculated and state how it was determined):
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
5) Total fee paid:
------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------------------
4) Date Filed:
------------------------------------------------------------------------
<PAGE> 2
[COLUMBIA BANKING SYSTEM - LOGO]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 23, 1997
NOTICE IS HEREBY GIVEN that, pursuant to call of its directors, the Annual
Meeting of Shareholders of Columbia Banking System, Inc. ("Columbia") will be
held at the Sheraton Tacoma Hotel, 1320 Broadway Plaza, Tacoma, Washington, on
April 23, 1997 at 1:00 p.m., for the purpose of considering and voting upon the
following matters:
1. ELECTION OF DIRECTORS. Electing fifteen (15) persons to serve on
the Board of Directors.
2. APPROVAL OF AMENDED AND RESTATED STOCK OPTION PLAN. A proposal
to approve Columbia's Stock Option Plan, as amended and restated.
3. WHATEVER OTHER BUSINESS as may properly be brought before the
Annual Meeting or any adjournment thereof.
Only those shareholders of record at the close of business on February 28, 1997
will be entitled to notice of and to vote at the Annual Meeting or any
adjournment thereof.
By Order of the Board of Directors
/s/ JILL L. MYERS
----------------------------------
Jill L. Myers
Secretary
Tacoma, Washington
March 20, 1997
WE URGE YOU TO SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE,
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON. IF YOU DO ATTEND
THE ANNUAL MEETING, YOU MAY THEN WITHDRAW YOUR PROXY. THE PROXY MAY BE REVOKED
AT ANY TIME PRIOR TO ITS EXERCISE.
<PAGE> 3
COLUMBIA BANKING SYSTEM, INC.
1102 BROADWAY PLAZA
TACOMA, WASHINGTON 98402
-------------------
PROXY STATEMENT
-------------------
SOLICITATION, VOTING AND
REVOCABILITY OF PROXIES
This Proxy Statement and the accompanying Proxy are being first sent to
shareholders on or about March 20, 1997, for use in connection with the Annual
Meeting of Shareholders of Columbia Banking System, Inc. ("Columbia") to be held
on Wednesday, April 23, 1997 (the "Annual Meeting"). Only those shareholders of
record of Columbia's no par value common stock at the close of business on
February 28, 1997, will be entitled to notice of and to vote at the Annual
Meeting. The number of shares of common stock outstanding and entitled to vote
at the Annual Meeting is 5,203,926.
The enclosed Proxy is solicited by and on behalf of the Board of Directors of
Columbia and the costs of solicitation will be borne by Columbia. In addition to
the use of the mails, solicitation may be made, without additional compensation,
by directors and officers of Columbia and regular employees of Columbia and/or
its banking subsidiary, Columbia State Bank ("Columbia Bank"), by telephone,
facsimile and/or personal contact. Columbia does not expect to pay any
compensation for the solicitation of proxies, except to brokers, nominees, and
similar recordholders for reasonable expenses in mailing proxy materials to
beneficial owners.
On each matter before the Annual Meeting, including the election of directors,
shareholders have one vote for each share of common stock held. Shareholders are
not entitled to cumulate their votes in the election of directors. Under
Washington law, if a quorum is present at the Annual Meeting, the fifteen
nominees for election as directors who receive the greatest number of votes cast
for the election of directors by the holders of shares entitled to vote and
present in person or by proxy at the Annual Meeting will be elected directors.
Approval of the Amended and Restated Stock Option Plan requires the affirmative
vote of holders of a majority of the shares of Columbia common stock present and
entitled to vote at the Annual Meeting.
With regard to the election of directors, votes may be cast in favor of some or
all of the nominees or withheld as to some or all of the nominees. Votes
withheld will have the effect of a negative vote. Abstentions may be specified
on all proposals except the election of directors. An abstention from voting
will have the practical effect of voting against the proposal since such shares
are present at the Meeting and entitled to vote but are not voting in favor of
the proposal. A broker non-vote (which results when a broker holding shares for
a beneficial owner has not received timely voting instructions on certain
matters from such beneficial owner) will have no effect on the outcome of the
election of directors or on approval of the Amended and Restated Stock Option
Plan, since they are not considered shares entitled to vote on the proposal.
If the enclosed Proxy is duly executed and received in time for the Annual
Meeting, it is the intention of the persons named in the Proxy to vote the
shares represented by the Proxy "FOR" the fifteen nominees for director listed
in this Proxy Statement and "FOR" the approval of the Amended and Restated Stock
Option Plan, unless otherwise directed. Any proxy given by a shareholder may be
revoked before its exercise by notice to Columbia in writing, by a subsequently
dated proxy, or in open meeting prior to the taking of the shareholder vote. The
shares represented by properly executed proxies that are not revoked will be
voted in accordance with the specifications in such proxies, or, if no
preference is specified, in accordance with the recommendation of management as
specified above.
1
<PAGE> 4
PROPOSAL 1: ELECTION OF DIRECTORS
Columbia's Bylaws provide that the number of directors to be elected by the
shareholders shall be not less than five (5) nor more than twenty-five (25). The
Bylaws also provide that the exact number of directors within the minimum and
maximum limit will be fixed and determined by resolution of the Board of
Directors. The Board of Directors has fixed the number of directors to be
elected at this Annual Meeting at fifteen (15) and has nominated the individuals
listed on the following pages for election as directors for the ensuing year or
until their successors are elected and qualified.
If any nominee should refuse or be unable to serve, the Proxy will be voted for
such person as is designated by the Board of Directors to replace any such
nominee. The Board of Directors presently has no knowledge that any of the
nominees will refuse or be unable to serve.
INFORMATION WITH RESPECT TO NOMINEES
The following table provides certain information with respect to the nominees
for director, including their ages, their principal occupations during the past
five years, the year first elected a director of Columbia or its predecessor
corporation or one of its former or current subsidiaries, the number of shares
of Columbia common stock beneficially owned by each as of February 28, 1997, and
the number of shares of Columbia common stock beneficially owned by the
directors and executive officers as a group as of February 28, 1997. With the
exception of Mr. John P. Folsom, all of the nominees are presently directors of
Columbia and Columbia Bank.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Shares of Columbia
Common Stock and
Name, Age, Address and Year Percent of Class
Principal Occupation of Nominee First Became Beneficially Owned
During Past Five Years(1) a Director(2) as of February 28, 1997(3)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
W. BARRY CONNOLEY, 55 1993 1,050
President and Chief Executive Officer
of MultiCare Medical Center,
Tacoma, Washington.
RICHARD S. DEVINE, 69 1993 23,242
President of Chinook Resources, Inc. (timber (3.13%)
acquisition and sales); Chairman of Raleigh,
Schwarz & Powell, Inc. (insurance brokers),
Tacoma, Washington.
A. G. ESPE, 60 1990 164,525(4)
Chairman and Chief Executive Officer of
Columbia; Chairman of Columbia Bank;
Chairman of Northrim Bank, Anchorage,
Alaska; Chairman of NorCap, L.L.C.
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Shares of Columbia
Common Stock and
Name, Age, Address and Year Percent of Class
Principal Occupation of Nominee First Became Beneficially Owned
During Past Five Years(1) a Director(2) as of February 28, 1997(3)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
JACK FABULICH, 68 1993 4,375
Chairman and former President of Parker Paint
Manufacturing Co., Inc., Tacoma, Washington;
President and Commissioner of Port of Tacoma.
JONATHAN FINE, 42 1993 14,045(5)
Chief Operating Officer of the American Red
Cross, Seattle-King County Chapter; private
investor from 1993 to 1996; Senior Vice
President and Treasurer of Puget Sound
Bancorp and Puget Sound Savings Bank, and
Managing Director of Puget Sound Securities,
Tacoma, Washington, until December of 1992.
JOHN P. FOLSOM, 53 Director 3,050
President and Chief Executive Officer of Nominee
Raleigh, Schwarz & Powell, Inc. (insurance
brokers),Tacoma, Washington.
MARGEL S. GALLAGHER, 49 1993 60,461(6)
President of Viva Imports, Ltd. (retail women's (1.16%)
clothing), Tacoma and Seattle, Washington.
JOHN A. HALLERAN, 68 1992 9,235
Private investor; retired general contractor,
Bellevue, Washington.
WILLIAM W. PHILIP, 70 1993 120,435(7)
President and Chief Operating Officer of (2.31%)
Columbia; President and Chief Executive
Officer of Columbia Bank; Chairman and Chief
Executive Officer of Puget Sound Bancorp and
Puget Sound National Bank, Tacoma,
Washington, until December of 1992.
JOHN H. POWELL, 72 1991 11,688
President and co-owner of Sound Oil Company
(heating oil distributor), Seattle, Washington;
Director of NorCap, L.L.C.
ROBERT E. QUOIDBACH, 71 1988 3,579(8)
Private investor and tree farmer; retired
industrial contractor, Longview, Washington.
</TABLE>
3
<PAGE> 6
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Shares of Columbia
Common Stock and
Name, Age, Address and Year Percent of Class
Principal Occupation of Nominee First Became Beneficially Owned
During Past Five Years(1) a Director(2) as of February 28, 1997(3)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
DONALD RODMAN, 58 1991 4,583(9)
Owner and Vice President of Rodman Realty,
Inc., Longview, Washington.
FRANK H. RUSSELL, 66 1993 1,812
President of Professional Services Unified, Inc.
(full facility services, including food service,
janitorial, and electronic access systems) and
Quality Meal Expeditors (food catering),
Tacoma, Washington.
SIDNEY R. SNYDER, 70 1988 16,200
Owner of Sid's Food Market, Seaview,
Washington, and Midtown Market, Long
Beach, Washington; Chairman of the Board of
Bank of the Pacific, Long Beach, Washington;
Washington State Senate Democratic Leader.
JAMES M. WILL, 50 1993 1,924
President of Titus-Will Enterprises, Tacoma,
Washington; former President of Tam
Manufacturing Co., Tacoma, Washington.
DIRECTORS AND EXECUTIVE 475,841
OFFICERS AS A GROUP (19 persons) (8.97%)
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Unless otherwise provided, the address for all of the nominees is 1102
Broadway Plaza, Tacoma, Washington 98402.
(2) Reflects year each nominee first became a director of Columbia, its (1)
predecessor corporation, (2) former subsidiary, Columbia Savings Bank, FSB
(which was merged into Columbia Bank in March, 1994), or (3) current
subsidiary, Columbia Bank.
(3) Unless otherwise indicated, represents shares over which each nominee
exercises sole voting and investment power. In all cases where a percentage
figure is not reflected, the nominee beneficially owns less than one
percent of the shares deemed outstanding. The percentages shown are based
on the number of shares of Columbia common stock deemed to be outstanding
under applicable regulations (including options exercisable within 60
days).
(4) Includes 62,752 shares beneficially owned by NorCap, L.L.C. Also includes
50,175 shares issuable upon exercise of options granted to NorCap, L.L.C.,
which options became exercisable on September 25, 1993 (and until September
26, 2000) at $6.15 per share as to 36,317 shares and $8.81 per share as to
13,858 shares.
(5) Includes 3,908 shares owned by a family trust for which Mr. Fine is co-
trustee and shares voting and investment power.
(6) Includes 3,641 shares held by C&G Partnership, a Washington General
Partnership, in which Ms. Gallagher's spouse, J. James Gallagher, is a
general partner. Also includes 10,424 shares held by the J. James Gallagher
& Co. Profit Sharing Trust, for which Ms. Gallagher's spouse, J. James
Gallagher, is the trustee.
4
<PAGE> 7
(7) Includes 51,184 shares held by Kelcin, a limited partnership, in which Mr.
Philip is a general partner. Also includes 20,000 shares issued to Mr.
Philip as a restricted stock award and held in escrow until certain
conditions are met. See "EXECUTIVE COMPENSATION - Restricted Stock Award."
(8) Includes 80 shares owned by a living trust for which Mr. Quoidbach is the
trustee with sole voting and investment power.
(9) All shares are owned by a living trust for which Mr. Rodman and his spouse
are co-trustees and share voting and investment power.
The Board of Directors recommends a vote "FOR" these nominees.
INFORMATION REGARDING THE BOARD AND ITS COMMITTEES
The Board of Directors of Columbia has established certain standing committees,
including an Audit Committee and a Personnel and Compensation Committee. There
presently is no standing nominating committee.
AUDIT COMMITTEE. The main functions performed by the Audit Committee include
reviewing and approving the services of the independent auditors, reviewing the
plan, scope, and audit results of the internal auditors and the independent
auditors, and reviewing the reports of bank regulatory authorities. The Audit
Committee also reviews the annual and other reports to the Securities and
Exchange Commission and the annual report to the shareholders. Current members
of the Committee, none of whom are officers or employees of Columbia or Columbia
Bank, are: Messrs. Fine (Chairman), Connoley, Fabulich, Quoidbach, Rodman,
Snyder and Will. There were five (5) meetings of the Audit Committee during
1996.
PERSONNEL AND COMPENSATION COMMITTEE. The Personnel and Compensation Committee
reviews and recommends remuneration arrangements for senior management. Current
members of the Compensation Committee, none of whom are officers or employees of
Columbia or Columbia Bank are: Messrs. DeVine (Chairman), Halleran, Powell, and
Russell, and Ms. Gallagher. There were four (4) meetings of the Personnel and
Compensation Committee during 1996.
There were ten (10) regular meetings of the Board of Directors of Columbia
during 1996. All directors attended at least 75% of the total meetings of the
Board and all committees of which they were members in 1996, except Messrs.
Connoley and Will.
DIRECTOR COMPENSATION. During 1996, Columbia's non-officer directors received an
annual retainer of $1,600. In addition, for the first six months of 1996, such
directors received fees of $100 for each Board and committee meeting attended.
Commencing in July 1996, such directors received $200 for each Board meeting
attended and $150 for each committee meeting attended, in addition to their
annual retainer.
As part of Proposal 2 being presented to shareholders at the Annual Meeting,
Columbia's Stock Option Plan would be amended to expand the eligibility
provisions of the Plan to allow the grant of options to directors as well as
employees. No options have been granted to non-employee directors of Columbia or
Columbia Bank to date.
PERSONNEL AND COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION
During Columbia's 1996 fiscal year, Mr. Philip served as Chairman of the Board
and a member of the Compensation Committee of MultiCare Medical Center of which
Mr. Connoley, one of Columbia's directors, is President and Chief Executive
Officer.
5
<PAGE> 8
SHAREHOLDER NOMINATIONS FOR 1997
ANNUAL MEETING OF SHAREHOLDERS
In accordance with Columbia's Articles of Incorporation, shareholder nominations
for the 1997 Annual Meeting of Shareholders, if any, must be made in writing not
less than 14 nor more than 50 days prior to the Annual Meeting, and must be
delivered or mailed to the Chairman of Columbia; provided, however, that if less
than 21 days notice of the Annual Meeting is given to shareholders, the
notification must be mailed or delivered to the Chairman not later than the
close of business on the seventh day following the day on which notice of the
Annual Meeting was mailed. Such notification should contain the following
information to the extent known to the notifying shareholder: (a) the name and
address of each proposed nominee; (b) the principal occupation of each proposed
nominee; (c) the total number of shares of stock of Columbia that will be voted
for each proposed nominee; (d) the name and address of the notifying
shareholder; and (e) the number of shares of stock of Columbia owned by the
notifying shareholder. Nominations not made in accordance with the above
requirements may, in his discretion, be disregarded by the Chairman of the
Annual Meeting, and upon the Chairman's instruction, the vote teller may
disregard all votes cast for such a nominee.
EXECUTIVE COMPENSATION
REPORT OF THE PERSONNEL AND COMPENSATION
COMMITTEE ON EXECUTIVE COMPENSATION
The Personnel and Compensation Committee of the Board of Directors of
Columbia (the "Committee") is composed of Richard S. DeVine (Chairman),
Margel S. Gallagher, John A. Halleran, John H. Powell, and Frank H. Russell.
None of the members are officers or employees of Columbia or Columbia Bank.
Mr. DeVine has served on the Compensation Committee of Columbia or Columbia
Bank since 1993. Mr. Powell has served on the Compensation Committee of
Columbia or Columbia Bank since 1991. Messrs. Halleran and Russell and Ms.
Gallagher were appointed to the Compensation Committee in 1994.
This Committee report is intended to describe in general terms the process the
Committee undertakes and the matters it considers in determining the appropriate
compensation for Columbia's executive officers, including the executive officers
who are named in the enclosed Summary Compensation Table (the "Named
Executives").
Columbia, acting through the Committee, believes that compensation of its Named
Executives and other key personnel should reflect and support the goals and
strategies that Columbia has established and enunciated. Columbia's long-term
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
billion. Management believes that the ongoing consolidation in its principal
market area affords an opportunity for aggressive growth in loans and deposits.
Columbia's growth strategy consists of the following elements:
- Focus on relationship lending to small and medium-sized businesses,
professionals and other individuals whom Columbia believes are
underserved by larger banks in its market area and are attracted by
Columbia's emphasis on relationship banking.
- Fund loan growth through the creation of a branch system catering
primarily to retail depositors, supplemented by business banking
customer deposits and other borrowings.
- Continue growth in the Tacoma metropolitan area and selectively expand
into neighboring King and Thurston Counties.
6
<PAGE> 9
- Control credit risk through established loan underwriting and
monitoring procedures, loan concentration limits, product and industry
diversification, and the hiring of experienced lending personnel with
a high degree of familiarity with their market area.
The achievement of these goals is intended to create long-term value for
Columbia's shareholders, consistent with protecting the interest of depositors.
The Committee believes that these goals are best supported by attracting and
retaining well-qualified executive officers and other personnel through
competitive compensation arrangements, with emphasis on rewards for outstanding
contributions to Columbia's success and with a special emphasis on aligning the
interest of the executive officers and other personnel with those of Columbia's
shareholders.
Since Columbia's significant reorganization in 1993, the Committee has followed
a compensation philosophy that emphasizes options and other stock-based
compensation. This emphasis was undertaken in an effort to create a close link
between the interests of employees and shareholders and to focus on exceptional
growth in assets and earnings and superior asset quality, with the intent of
producing significant increases in shareholder value. Columbia's performance
since 1993 has, in the Committee's opinion, shown the value of this approach. In
particular, the Committee has taken note that the total annual returns to
Columbia's shareholders for 1996 and 1995 were 42% and 32%, respectively, as
compared to total annual returns for the Nasdaq Total Return of 23% and 41% and
for the Columbia Peer Group of 38% and 22%, respectively.
The Committee anticipates that it will continue to emphasize stock-based
compensation in the future and will expand the number of persons who will
receive options to include essentially all employees of Columbia who meet
certain minimum requirements for length of service and performance.
Consequently, the Committee expects that the Board will periodically request
shareholder approval for additional shares to be made available for issuance
upon exercise of options, as is being done in Proposal 2 presented to
shareholders at this Annual Meeting.
The philosophy of the Committee has been implemented through compensation
arrangements for the Named Executives which place great emphasis on achievement
of targeted performance goals. In the case of Mr. Espe, a portion of the
allowance payments contracted for in his 1993 Amended Employment Agreement were
deferred pending achievement of the performance objectives, and in the case of
Mr. Philip, all compensation was deferred pending the performance of those
objectives. Further, in lieu of the grant of stock options to either Mr. Espe or
Mr. Philip, the Committee determined in 1993 to give each of them the right to
acquire 30,000 shares of Columbia stock by purchase at the then fair market
value of $12 per share, with the assistance of a fixed rate loan in the full
principal amount of the purchase which is due on or before March 1, 2000. Both
Mr. Espe and Mr. Philip elected to make such purchases, thus becoming owners of
the stock, rather than becoming holders of option interests, personally liable
for repayment of the sums represented by the loans.
In addition, the Committee recently approved the grant to Mr. Espe of so-called
"premium options" to purchase 40,000 shares which vest at the rate of 10,000
shares per year beginning August 1997, at option prices increasing from $15.25
per share, in 1997, to $21.25 per share in August 2000. The grant of these
premium options (which acquire value only if the market price of Columbia's
common stock increases) was intended to further align the interests of senior
management and the shareholders to continue building shareholder value in future
years. During 1996, the Board of Directors, acting on recommendations of the
Committee, also approved a restricted stock award to Mr. Philip for 20,000
shares of common stock. The shares will remain in escrow until Mr. Philip has
served as an active officer or Board member for a period of five years, unless
that time is reduced by the Board. The restricted stock award was intended to
reflect the Board's and the Committee's appreciation for the work performed by
Mr. Philip since 1993 and to preserve his close contact with Columbia after his
retirement at year-end 1998.
7
<PAGE> 10
The Committee believes that the compensation terms for Messrs. Espe and Philip
are clearly related to the realization of the goals and strategies established
by Columbia and provide strong incentives for achievement of those goals. The
Committee notes that as of December 31, 1996, Columbia achieved all of the
performance objectives required for certain incentive payments to be made to
Messrs. Espe and Philip (see "Long Term Incentive Plan Awards"). The Committee
also notes that the return to shareholders (as evidenced by the Stock
Performance Graph measurement of Columbia's performance against the Nasdaq and
its peer group) is a further indication of what the Committee considers the
highly satisfactory performance of the Named Executives and other key employees
during the period that Columbia is carrying out its very aggressive growth
strategy, principally in the Tacoma-Pierce County area.
Richard S. DeVine, Chairman
Margel S. Gallagher
John A. Halleran
John H. Powell
Frank H. Russell
STOCK PERFORMANCE GRAPH
The chart shown below depicts the total return to shareholders during the period
beginning August 10, 1992, when Columbia first issued its shares publicly, and
ending December 31, 1996. The definition of total return includes appreciation
in market value of the stock as well as the actual cash and stock dividends paid
to shareholders. The comparable indices utilized are the Nasdaq U.S. Stock
Index, which is a broad nationally recognized index of stock performance by
companies traded on the Nasdaq National Market and the Nasdaq Small Cap Market,
and the SNL Securities Western Bank Stock Index, comprised of publicly-traded
banks with assets of $250 million to $1 billion, all of which are located in the
western United States. The chart assumes that the value of the investment in
Columbia's common stock and each of the two indices was $100 on August 10, 1992,
and that all dividends were reinvested.
<TABLE>
<CAPTION>
PERIOD ENDING
--------------------------------------------------------------
INDEX 6/16/92 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Columbia Banking System, Inc. 100.00 107.05 118.32 102.82 135.22 192.26
Nasdaq Total Return 100.00 121.05 138.96 135.83 192.09 236.29
Columbia Peer Group 100.00 70.71 73.26 73.93 90.27 124.39
</TABLE>
8
<PAGE> 11
COMPENSATION TABLES
SUMMARY COMPENSATION TABLE. The following table sets forth the aggregate
compensation for services rendered to Columbia or its subsidiaries in all
capacities paid or accrued for the fiscal years ended December 31, 1996,
December 31, 1995 and December 31, 1994, to each person serving as an executive
officer of Columbia whose aggregate cash and cash equivalent forms of
compensation exceeded $100,000 (the "Named Executives").
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
------------------------------ ------------------------------
Restricted Securities All
Name and Stock Underlying Other
Principal Position Year Salary(1) Bonus(1) Awards ($)(2) Options (#) Compensation
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
A.G. Espe, 1996 $170,000 $45,000 0 40,000 $89,008(3)
Chairman and
Chief Executive 1995 168,623 50,000 0 0 25,995
Officer
1994 165,000 0 0 0 18,715
W.W. Philip, 1996 $638,116 $45,000 $305,000 0 0
President and
Chief Operating 1995 0 0 0 0 0
Officer
1994 0 0 0 0 0
</TABLE>
(1) Represents for Mr. Espe total cash compensation earned, including amounts
deferred under a Supplemental Executive Retirement Plan. The salary and bonus
for Mr. Philip represents compensation for work performed since July 1993, but
not fully earned until year-end 1996. The contingent compensation and other
payments, which were not fully earned until year-end 1996, were previously
disclosed as potentially payable under long term incentive awards.
(2) At year-end 1996, the value of the aggregate restricted stock holdings
outstanding was $325,000.
(3) Includes a profit sharing contribution of $7,500 by Columbia for the
benefit of Mr. Espe, $67,413 in certain allowances accrued over a period
beginning in 1994, but not fully earned until year-end 1996, and $14,095 for
premiums on life insurance payable to Mr. Espe's estate.
OPTION GRANTS IN 1996. The following table sets forth certain information on
option grants in 1996 to the Named Executives:
<TABLE>
<CAPTION>
Grant Date
Individual Grants Value
---------------------------------------------------------------------------------------------
Number of Percentage of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Per Expiration Grant Date
Name Granted 1996 Share Date Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A.G. Espe 40,000(1) 66% $15.25-$21.25 8/28/2007-8/28/2010 $14,233(2)
W.W. Philip 0 N/A N/A N/A N/A
</TABLE>
(1) The option was granted August 28, 1996, subject to shareholder approval of
additional shares being made available for issuance upon exercise of options
granted pursuant to the Plan and certain other amendments to the Plan. 10,000
shares vest in August, 1997 at an option price of $15.25 per share (the fair
market value of Columbia's common stock on the date of grant) and 10,000
additional shares vest each year beginning August 1998 and continuing through
August 2000, at option prices of $17.25, $19.25 and $21.25, respectively. Vested
options remain exercisable for ten years from the date of vesting even in the
event of Mr. Espe's retirement (as approved by the Board), death or disability,
or in the event of a change in control of Columbia or Columbia Bank (as defined
in Mr. Espe's employment agreement).
(2) Calculated using the Black-Scholes option valuation method.
9
<PAGE> 12
OPTION EXERCISES AND YEAR-END OPTION VALUES. The following table summarizes
option exercises by and the value of unexercised options granted to the Named
Executives:
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised Unexercised
Options at In-the-Money Options
December 31, 1996 at December 31, 1996
Shares Acquired Value (Exercisable/ (Exercisable/
Name on Exercise Realized Unexercisable) (Unexercisable)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A.G. Espe 0 0 0/40,000 0/$10,000
W.W. Philip 0 0 0/0 0/0
- --------------------------------------------------------------------------------------------------
</TABLE>
RESTRICTED STOCK AWARD
In August 1996, the Board of Directors of Columbia approved the grant to Mr. W.
W. Philip, Columbia's President and Chief Operating Officer, for no cash
consideration of a restricted stock award of 20,000 shares of common stock. The
market value of the common stock at the date of grant to Mr. Philip was $15.25
per share. The restricted stock award to Mr. Philip provides for the immediate
issuance of 20,000 shares of Columbia common stock to Mr. Philip in escrow. The
shares are to remain in escrow until Mr. Philip has served as an active officer
or Board member of Columbia and/or Columbia Bank for a period of five years from
the date of the grant, unless the shares are forfeited by reason of failure to
meet the conditions or that term is reduced (i) by action of the Board or the
Committee; (ii) by reason of a change of control of Columbia or Columbia Bank
(as defined in Mr. Philip's employment agreement); or (iii) by Mr. Philip's
death or disability. Mr. Philip will have the right to vote the shares and to
receive any dividends or other distributions on the shares while they remain in
escrow.
LONG TERM INCENTIVE PLAN AWARDS
Long term incentive arrangements were entered into with Mr. Espe and Mr. Philip
in 1993 and amended, as to Mr. Philip only, in 1995. Under the arrangements,
specific compensation and allowance payments were agreed to be fully earned by
December 31, 1996, if Columbia achieved certain performance objectives in 1995
and 1996. These objectives were: (1) Growth - by June 30, 1995 Columbia must
have assets, loans and deposits of at least $325 million, $200 million and $230
million, respectively; (2) Asset Quality - at December 31, 1995 and 1996,
problem assets of Columbia (excluding those existing at September 1, 1993) must
not exceed 1.5% of Columbia's total assets at those dates; and (3) Profitability
- - Columbia must report positive net income of at least 50 basis points on
average assets for calendar year 1995, and must achieve net income of at least
75 basis points on average assets for calendar year 1996. All performance
objectives were achieved and the compensation and allowance payments were thus
earned by Messrs. Espe and Philip. The payments are reported in the Summary
Compensation Table.
OTHER EMPLOYEE BENEFITS
Columbia also maintains a defined contribution plan, in the form of a 401(k)
plan, that allows employees, including executive officers, to contribute up to
15% of their compensation each year. Columbia currently makes matching
contributions to the extent of 50% of employee's contributions up to 3% of each
employee's total compensation and is authorized to make a discretionary
contribution as determined by the Committee each year. Columbia contributed
approximately $154,800 in matching funds to the 401(k) Plan during 1996, and
made a discretionary contribution of approximately $346,000 for the year 1996.
Columbia also maintains an Employee Stock Purchase Plan (the "ESPP") that was
adopted in 1995. The ESPP allows eligible employees to purchase shares of
Columbia common stock at 90% of the then current market price by means of
payroll deductions.
Beginning in 1994, Columbia established a discretionary Incentive Bonus Plan for
the benefit of employees. Contributions by Columbia are based upon year-end
results of operations for Columbia and attainment of goals by individuals. In
1996, Columbia contributed $453,000 to the Plan.
Columbia provides a group health insurance plan along with the normal vacation
and sick pay benefits.
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<PAGE> 13
EXECUTIVE EMPLOYMENT AGREEMENTS
Mr. Espe entered into an employment agreement with Columbia effective December
30, 1993. The agreement had an original term expiring December 31, 1997. Mr.
Espe's annual salary under the Agreement was at least $150,000. In addition,
Columbia agreed to provide Mr. Espe with a Supplemental Employee Retirement Plan
which will provide him with a benefit payable after retirement calculated on the
basis of ten percent of his salary being contributed each year, the amount
contributed increasing in value based on an assumed interest rate. At the time
of entering into the agreement, Mr. Espe was offered and purchased 30,000 shares
of common stock at $12.00 per share (the then fair market value). In connection
with that transaction Columbia loaned Mr. Espe $360,000 to purchase the shares
with interest payable annually at six percent per annum and the full principal
amount due on or before March 1, 2000. The principal payment may be accelerated
under certain circumstances. Mr. Espe also receives life and disability
benefits, will be reimbursed for certain reasonable expenses incurred in
carrying out his duties, and may participate in Columbia's health and welfare
plan available to employees in general. Mr. Espe also became entitled to receive
certain allowances in the amount of $59,400 plus interest, when certain
performance targets (as more fully discussed under "Long-Term Incentive Plan
Awards") were met. The agreement has recently been amended, effective January 1,
1997 (the "amended agreement") to extend the term of Mr. Espe's employment to
December 31, 2001 and to establish his minimum annual salary at $160.000. Other
terms were changed consistent with the new term of the amended agreement. In the
event Columbia terminates the amended agreement without cause (as defined
therein), Mr. Espe would be entitled to the greater of two years' salary or
salary payable for the remainder of the term of the agreement. Both the
agreement and the amended agreement contain a covenant by Mr. Espe not to
compete with Columbia in its market area for two years after voluntarily
terminating employment without "good cause" (as defined). Columbia is the
beneficiary under a key-person life insurance policy on the life of Mr. Espe in
the amount of $3.5 million.
Mr. Philip also entered into an employment agreement with Columbia effective
December 31, 1993, as further amended effective December 29, 1995. Mr. Philip's
salary for the term of the agreement was subject to the attainment of
performance targets as more fully discussed under "Long-Term Incentive Plan
Awards." Those targets were met at year end 1996 and Mr. Philip became entitled
to receive $638,116 for his work performed since July 1993. Other provisions of
the agreement with Mr. Philip are on substantially the same terms as that of Mr.
Espe's described above. In connection with his employment, Mr. Philip also was
offered and purchased 30,000 shares of common stock at $12.00 per share (the
then fair market value). In connection with that transaction, Columbia loaned
Mr. Philip $360,000 to purchase the shares on terms and conditions similar to
those for the loan to Mr. Espe described above. Mr. Philip's agreement recently
has been amended effective January 1, 1997 ("amended agreement") to extend the
term to December 31, 1998 and to establish his minimum annual salary at
$175,000. Other terms were changed consistent with the new term of the amended
agreement. Both the agreement and the amended agreement contain a covenant by
Mr. Philip not to compete with Columbia in its market area for two years after
voluntarily terminating employment without "good cause" (as defined therein).
Columbia is the beneficiary under a key-person life insurance policy on the life
of Mr. Philip in the amount of $2.0 million.
The employment agreements for both Messrs. Espe and Philip as now in effect and
as amended effective January 1, 1997 contain provisions that require payments in
the event of a change in control (as defined therein) and termination of
employment without cause (as defined therein). The payments would be due if such
termination followed by up to two years and in certain cases preceded the change
in control. Generally, in such circumstances, all contingent payments payable to
each of Messrs. Espe and Philip are deemed earned. Under the terms of their
amended agreements, Messrs. Espe and Philip are entitled to receive their base
salary for three and two years, respectively, following such termination or
until the term of their amended agreements whichever is longer. In such
circumstances, each is also entitled to all benefits provided for in his amended
agreement, to be fully vested as to any nonvested options and to have
restrictions lapse with regard to any restricted stock or other restricted
securities. In the event either executive receives an amount under these
provisions which result in imposition of a tax on the executive under the
provisions of Internal Revenue Code Section 4999 (relating to Golden Parachute
payments) the
11
<PAGE> 14
Company is obligated to reimburse the executive for that amount exclusive of any
tax imposed by reason of receipt of reimbursement under the employment
agreement.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Columbia is a reporting company pursuant to Section 12 of the Securities
Exchange Act of 1934 (the "Exchange Act"). Pursuant to Section 16(a) of the
Exchange Act, and the rules promulgated thereunder, directors, officers, greater
than ten percent shareholders, and certain other key personnel are required to
report their ownership and any change in ownership of Columbia securities with
the Securities and Exchange Commission (the "SEC") and the National Association
of Securities Dealers (the "NASD"). Except as described below, Columbia believes
that all Section 16(a) filing requirements applicable to its directors, officers
and greater than ten percent shareholders were complied with.
In making these disclosures, Columbia has relied solely on written
representations of its directors and executive officers, and copies of the
reports that they have filed with the SEC and NASD.
During 1996, directors and executive officers A. G. Espe and W. W. Philip
each filed one untimely report regarding one transaction, but each promptly
reported the transaction after the oversight was discovered.
PRINCIPAL SHAREHOLDERS
The following table sets forth information as of February 28, 1997 with respect
to all shareholders known by Columbia to be the beneficial owners of more than
5% of the outstanding shares of Columbia common stock. Except as noted, Columbia
believes that the beneficial owners of the shares listed below, based on
information furnished by such owners, have sole voting and investment power with
respect to such shares.
<TABLE>
<CAPTION>
Shares Beneficially Owned
-------------------------
Name and Address Number Percentage
- --------------------------------------------------------------------------------
<S> <C> <C>
Artisan Partners Limited 343,000 6.59%
Partnership; Artisan Investment
Corporation; Andrew A. Ziegler;
Carlene Murphy Ziegler(1)
1000 North Water Street
Suite 1770
Milwaukee, WI 53202
- --------------------------------------------------------------------------------
</TABLE>
(1) Artisan Partners Limited Partnership is an Investment Adviser registered
under Section 203 of the Investment Advisers Act of 1940; Artisan Investment
Corporation is the General Partner of Artisan Partners Limited Partnership; Mr.
and Mrs. Ziegler are the principal stockholders of Artisan Investment
Corporation. Voting and investment power are shared with respect to the shares
listed as beneficially owned.
12
<PAGE> 15
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
In conjunction with the rapid expansion of Columbia into the Tacoma-Pierce
County, Washington area, and the relocation of Columbia's headquarters to Tacoma
in late 1993, Mr. Espe relocated his place of residence to the Tacoma area in
1994. To assist Mr. Espe in relocating, Columbia loaned to Mr. Espe the sum of
$185,000 for the purchase of real property. The terms of the loan call for
interest at a fixed rate determined by the prime rate at the date of the loan
(six percent) payable annually, with the full amount of principal and interest
due in 1996. The loan was paid in full as agreed.
As compensation for the costs and risks associated with its efforts in
facilitating the 1990 acquisition of Columbia by a group of investors that
included Mr. Espe, NorCap, L.L.C. was granted an option to purchase 36,317
shares of Columbia common stock at a price of $6.15 per share. As part of that
same transaction, NorCap was granted an option to purchase shares of common
stock of Columbia National Bancshares, Inc. ("CNBI"). The option to purchase
CNBI shares was converted into an option to purchase 13,858 Columbia shares at a
price of $8.81 per share, as part of the merger of CNBI with and into Columbia
that was completed in August, 1993. The NorCap options are exercisable at any
time between September 25, 1993 and September 26, 2000. NorCap is controlled by
Mr. Espe, who owns 60% of NorCap's common units, subject to conversion and
limited voting rights of holders of its convertible Series A units. Mr. Powell,
a current director of Columbia, is a director of NorCap. NorCap is a shareholder
of Columbia.
During 1996, certain directors and executive officers of Columbia and Columbia
Bank, and their associates, were customers of Columbia Bank, and it is
anticipated that such individuals will continue to be customers of Columbia Bank
in the future. All transactions between Columbia Bank and its executive officers
and directors, and their associates, were made in the ordinary course of
business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and, in the opinion of management, did not involve more than the
normal risk of collectibility or present other unfavorable features.
PROPOSAL 2: APPROVAL OF AMENDED AND RESTATED STOCK OPTION PLAN
BACKGROUND
Columbia adopted its Employee Stock Option Plan (the "Plan") in 1988, and
subsequently amended it with shareholder approval, in July, 1993. Columbia is
presently authorized to issue 315,000 shares of common stock upon the exercise
of incentive stock options and nonqualified stock options granted under the Plan
to officers and key employees of Columbia and its present and any future
subsidiaries.
AMENDMENTS
Subject to shareholder approval, the Board of Directors has approved several
amendments to and the restatement of the Plan. Specifically, shareholders will
be requested at the Annual Meeting to approve the plan as amended and restated
to reflect the following changes: (1) expanding the eligibility provisions of
the plan to allow the grant of options to directors as well as employees; (2)
adding a definition of Director and a definition of Nonqualified Stock Options;
(3) increasing the number of shares available for issuance under the Plan from
315,000 to 565,000 shares of common stock; (4) clarifying the qualifications of
those able to serve on the Committee administering the Plan (currently the
Personnel and Compensation Committee); (5) limiting the number of shares subject
to grants of options to any one participant in any fiscal year in order to
assure compliance with Section 162(m) of the Internal Revenue Code; (6)
empowering the Committee to determine whether to accept consideration other than
cash in connection with the exercise of an option; (7) clarifying that the
Committee may approve cashless exercises of Options; (8) allowing the Committee
discretion to establish, at the date of grant, later expiration dates for
options following the termination of employment or service of an optionee; (9)
clarifying the treatment of Nonqualified Stock Options following termination of
employment; (10) modifying the shareholder approval requirement for Plan
amendments so as to be consistent with recent changes in the securities laws;
and (11) implementing miscellaneous technical changes throughout the Plan.
13
<PAGE> 16
The Board believes that these amendments and the restatement of the Plan will
enhance the effectiveness of the Plan in attracting and retaining the services
of individuals who are likely to make significant contributions to Columbia's
success. The purpose of the Plan is to promote Columbia's success by aligning
employee financial interest with long-term shareholder value. A copy of the
proposed Plan, as amended and restated (the "Amended and Restated Plan"), is
attached to this Proxy Statement as EXHIBIT A.
DESCRIPTION OF AMENDED AND RESTATED PLAN
The following is a summary of the principal provisions of the Amended and
Restated Plan and is subject to and qualified by reference to such Plan.
PURPOSE. The purpose of the Plan is to (i) enhance the long-term profitability
and shareholder value of Columbia by offering stock-based incentives to
employees and directors of Columbia and its subsidiaries; (ii) attract and
retain the best available personnel for positions of responsibility with
Columbia and its subsidiaries; and (iii) encourage employees and directors to
acquire and maintain stock ownership in Columbia.
ADMINISTRATION. The Plan is presently administered by Columbia's Personnel and
Compensation Committee (the "Committee"). The Committee has been authorized by
the Board of Directors to act in this capacity, and all members of the Committee
serve for such terms as the Board of Directors determines and are appointed and
may be removed by the Board of Directors. In addition to its authority to grant
options, as described elsewhere hereunder, the Committee is authorized to
administer and interpret the Plan, subject to its express provisions. To be
consistent with recent changes to the securities laws, the Amended and Restated
Plan directs that the Board consider appointing individuals to the Committee who
qualify as "non-employee directors" and "outside directors" as defined in the
securities laws and the Internal Revenue Code of 1986, as amended (the "Code"),
respectively.
SHARES SUBJECT TO THE PLAN. The number shares of common stock currently subject
to the Plan is 315,000. As of December 31, 1996, options to purchase 281,905
shares (at prices ranging from $3.81 to $21.25 per share) were outstanding, and
there are no shares of common stock available for future grants. Option grants
to purchase a total of 47,000 shares have been made subject to the approval by
shareholders of additional shares to be made available pursuant to the Plan.
Approval of the Amended and Restated Plan would increase the number of shares
currently available for issuance under the Plan from 315,000 to 565,000. Not
more than 50,000 shares may be subject to grants of options under the Plan to
any one participant in any one fiscal year.
PERSONS WHO MAY PARTICIPATE. Options may be granted under the Plan to those
employees and directors as the Committee from time to time selects, provided
that non-employee directors may not be granted Incentive Stock Options. If the
Amended and Restated Plan is approved by shareholders at the Annual Meeting,
there will be approximately 225 employees eligible to participate in the Plan,
and all 15 directors to be elected at the Annual Meeting will be eligible to
participate.
TYPES OF OPTIONS. Options granted under the Plan may include incentive stock
options ("ISOs") intended to meet all of the requirements of an "Incentive Stock
Option" as defined in Section 422 of the Code and nonqualified stock options
("NSOs"). Each option granted under the Plan must be evidenced by an agreement
duly executed on behalf of Columbia. Each agreement will comply with and be
subject to the terms and conditions of the Plan. Any agreement may also contain
such other terms, provisions and conditions not inconsistent with the Plan as
may be determined by the Committee.
TERMS AND CONDITIONS OF OPTIONS. The option price for each option granted under
the Plan will be determined by the Committee, but will not be less than 100% of
the fair market value of Columbia's common stock on the date of grant. For
purposes of the Plan, "fair market value" means the average of the bid and asked
trading prices of the common stock as of the date of grant as reported on the
Nasdaq National Market. As of December 31, 1996, the closing sales price for
Columbia's common stock as reported on the Nasdaq National Market was $16.25 per
share.
The exercise price for shares purchased upon the exercise of an option must be
paid in cash, except that the Board may authorize other consideration, including
already owned shares of Columbia common stock, to be paid upon the exercise of
an option. The Amended and Restated Plan would also specifically empower the
Committee to authorize such other forms of consideration.
14
<PAGE> 17
The term of outstanding options will be fixed by the Committee. No ISO granted
pursuant to the Plan will be exercisable after 10 years from the date of grant.
Each option will be exercisable pursuant to a vesting schedule to be determined
by the Committee.
The Plan currently sets forth various expiration dates in the event of
termination of employment by an optionee. Currently, the Plan provides that
options generally will be exercisable for up to one year after termination of
service as a result of disability or death, and for up to three months after all
other terminations (except for terminations for "cause" (as defined in the Plan)
in which case an option will immediately terminate). The terms of the Amended
and Restated Plan will authorize the Committee to establish, at the date of
grant, later expiration dates for expiration of options in such circumstances,
provided that the Committee may not extend an option beyond the original term of
such option. Expiration dates for options granted to non-employee Directors who
cease to be directors will be established in the option agreements entered into
at the date of grant of such options.
TRANSFERABILITY. No option will be assignable or otherwise transferable other
than by will or the laws of descent and distribution and, during the optionee's
lifetime, may be exercised only by the optionee.
AMENDMENT AND TERMINATION OF THE PLAN. The Plan may be modified, amended or
terminated by the Board of Directors, except that shareholder approval is
required for any amendment which (i) increases the number of shares subject to
the Plan (other than in connection with certain automatic adjustments such as
changes in capitalization); (ii) changes the class of employees who may be
granted options; or (iii) makes a "material change" to the Plan. The Amended and
Restated Plan will amend clause (iii) of the foregoing to require a shareholder
vote whenever applicable law requires that a proposed amendment to the Plan
receive shareholder approval.
ADJUSTMENT OF SHARES. In the event of any changes in the outstanding stock of
Columbia by reason of stock dividends, stock splits, or any other increase or
decrease in the number of shares of Columbia's common stock, the Committee,
subject to any required action by the shareholders, shall make proportional
adjustments in (i) the maximum number of shares subject to the Plan; (ii) the
number of securities subject to any outstanding option; and (iii) the per share
price of such securities.
CORPORATE TRANSACTION. In the event of a merger or consolidation or a sale of
substantially all the assets or a liquidation or dissolution of Columbia, the
Committee may, in certain circumstances and in its sole discretion, terminate
all outstanding options after proper notice affording optionees a 60 day
period in which to exercise their options.
FEDERAL INCOME TAX CONSEQUENCES
The federal income tax consequences to Columbia and to any person granted an
option under the Plan under the existing applicable provisions of the Code and
the regulations thereunder are substantially as follows:
NSOS. No income will be recognized by a participant upon the grant of NSO. On
the exercise of an NSO, the optionee will recognize taxable ordinary income in
an amount equal to the excess of the fair market value of the shares acquired
over the option price and Columbia will be allowed a deduction. Upon a later
sale of those shares, the optionee will have short-term or long-term capital
gain or loss, as the case may be in an amount equal to the difference between
the amount realized on such sale and the tax basis of the shares sold. If
payment of the option price is made entirely in cash, the tax basis of the
shares will be equal to their fair market value on the exercise date (but not
less than the option price), and the shares' holding period will begin on the
day after the exercise date. If the optionee uses already-owned shares to
exercise an option in whole or in part, the transaction will not be considered
to be a taxable disposition of the already owned shares. The optionee's tax
basis of the already-owned shares will be carried over to the equivalent number
of shares received upon exercise. The tax basis of the additional shares
received upon exercise will be the fair market value of the shares on the
exercise date (but not less than the amount of cash, if any, used in payment),
and the holding period for such additional shares will begin on the date after
the exercise date.
Under Section 162(m) of the Code, certain compensation payments in excess of $1
million are subject to a limitation on deductibility for Columbia. The
limitation on deductibility applies with respect to that portion of a
compensation payment for a taxable year in excess of $1 million to either
Columbia's Chief Executive Officer or any one of the other four most highly
compensated executive officers. Certain performance-based compensation is not
subject to the limitation on deductibility. Options can qualify for this
performance-based exception, but only if they are granted at fair market value,
the total number of shares that can be granted to
15
<PAGE> 18
an executive for any period is stated, and stockholder and Board approval is
obtained. The Amended and Restated Plan has been drafted to allow compliance
with those performance-based criteria.
ISOs. The same rules apply to an ISO that is exercised more than three months
after the optionee's termination of employment (or more than twelve months
thereafter in the case of permanent and total disability, as defined in the
Code). Upon the exercise of an ISO during employment or within three months
after the optionee's termination of employment (or within twelve months
thereafter in the case of permanent and total disability as defined in the
Code), for regular tax purposes the optionee will recognize no income at the
time of exercise (although the optionee will have income for alternative minimum
income tax purposes at that time as if the option were an ISO) and no deduction
will be allowed to Columbia for federal income tax purposes in connection with
the grant or exercise of the option. If the acquired shares are sold or
exchanged after the later of (a) one year from the date of exercise of the
option and (b) two years from the date of grant of the option, the difference
between the amount realized by the optionee on that sale or exchange and the
option price will be taxed to the optionee as a long-term capital gain or loss.
If the shares are disposed of before such holding period requirements are
satisfied, then the optionee will recognize taxable ordinary income in the year
of disposition in an amount equal to the excess, on the date of exercise of the
option, of the fair market value of the shares received over the option price
paid (or generally, if less, the excess of the amount realized on the sale of
the shares over the price), and the optionee will have capital gain or loss,
long-term or short-term as the case may be, in an amount equal to the difference
between (i) the amount realized by the optionee upon that disposition of the
shares; and (ii) the option price paid by the optionee increased by the amount
of ordinary income, if any, so recognized by the optionee.
OPTIONS GRANTED
Since options granted under the Plan are discretionary, Columbia cannot
currently determine the number of options which will be issued pursuant to the
Plan in the future. During 1996, options to purchase an aggregate of 43,150
shares at an average exercise price of $17.83 per share were granted under the
Plan to all executive officers as a group; and options to purchase an aggregate
of 17,375 shares at an average exercise price of $14.40 per share were granted
to all other employees of Columbia or Columbia Bank as a group (including
officers who are not executive officers). Of the options granted to executive
officers in 1996, the grant to Mr. Espe to purchase 40,000 shares was in the
form of a "premium stock option" whereby the options vest over a period of time
at increasing prices. Specifically, these "premium options" vest at 10,000
shares per year. The initial grant price was the fair market value of the shares
at the date of grant and that price will increase as to subsequently vesting
options at the rate of $2 per share per year. Of the total options granted
during 1996, options to purchase an aggregate of 47,000 shares were granted
subject to shareholder approval of an amendment to the Plan increasing the
number of shares available for issuance upon the exercise of options granted
pursuant to the Plan. Options granted during 1996 to Columbia's Named Executives
are set forth under "EXECUTIVE COMPENSATION -- Option Grants in 1996."
The Board of Directors recommends a vote "FOR" approval of the Amended and
Restated Plan.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
On February 26, 1997, Columbia engaged Deloitte & Touche LLP as its principal
independent accountant. Prior to Deloitte & Touche's engagement, Price
Waterhouse LLP, independent certified public accountants, had served as the
principal independent accountant for Columbia and rendered their report with
respect to Columbia's financial statements for the year ended December 31, 1996.
The recommendation to change accountants was made by management of Columbia and
was approved by the Audit Committee and the Board of Directors.
In the two most recent fiscal years preceding the Board's actions, there were no
disagreements with Price Waterhouse LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to Price Waterhouse's satisfaction, would have caused
them to make reference to the subject matter of the disagreement in connection
with their report. Price Waterhouse's reports on Columbia's financial statements
for such fiscal years did not contain any adverse opinion or disclaimer of
opinion, nor were such reports qualified in any respect. A representative of
Price Waterhouse LLP is expected to be present at the Annual Meeting to make a
statement, if desired, and to be available to respond to appropriate questions.
Columbia does not anticipate that a representative of Deloitte & Touche LLP will
be present at the Meeting.
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<PAGE> 19
INFORMATION CONCERNING SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the Annual Meeting of
Shareholders of Columbia, scheduled to be held on April 22, 1998, must be
received by Columbia for inclusion in the Proxy Statement and form of Proxy
relating to that meeting by November 14, 1997.
OTHER MATTERS
The Board of Directors knows of no other matters to be brought before this
Annual Meeting. However, if other matters should properly come before the Annual
Meeting, it is the intention of the persons named in the Proxy to vote the Proxy
in accordance with the recommendations of management on such matters.
WE URGE YOU TO SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE,
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON. IF YOU DO
ATTEND THE ANNUAL MEETING, YOU MAY THEN WITHDRAW YOUR PROXY. THE PROXY MAY
BE REVOKED AT ANY TIME PRIOR TO ITS EXERCISE.
17
<PAGE> 20
EXHIBIT A
AMENDED AND RESTATED
STOCK OPTION PLAN
OF
COLUMBIA BANKING SYSTEM, INC.
RECITAL
The original Employee Stock Option Plan (the "Plan") of First Federal
Corporation, the predecessor to Columbia Banking System, Inc., was adopted by
the Board of Directors and shareholders on August 2, 1988. The Plan was
subsequently amended and approved by the Shareholders on July 19, 1993. The Plan
is now being amended and restated, subject to shareholder approval, for the
purpose of (1) expanding the eligibility provisions of the Plan to allow the
grant of options to directors, as well as employees (by amending Section 5 and
various other provisions governing participants in the Plan); (2) adding a
definition of Director (by adding a new subsection 2(e) and renumbering the
remainder of Section 2); (3) adding a definition of Nonqualified Stock Options
(by adding a new subsection 2(h) and renumbering the remainder of Section 2);
(4) increasing the number of shares available for issuance under the Plan to
565,000 shares of Common Stock (by amending subsection 3(a)); (5) clarifying the
qualifications of those able to serve on the Committee administering the Plan
(by amending Section 4); (6) limiting the number of shares subject to grants of
options to any participant in any one fiscal year in order to assure compliance
with Section 162(m) of the Internal Revenue Code (by amending subsection 6(a));
(7) empowering the Committee to determine whether to accept consideration other
than cash in connection with the exercise of an option (by amending subsection
6(b)); (8) clarifying that the Committee may approve cashless exercises of
options (by amending subsection 6(d)); (9) allowing the Committee discretion to
establish, at the date of grant, later expiration dates for options following an
optionee's termination of employment or service (by amending subsection 6(e));
(10) clarifying the treatment of Nonqualified Stock Options following
termination of employment (by amending subsection 6(g)); (11) modifying the
shareholder approval requirement for Plan amendments so as to be consistent with
recent changes in the securities laws (by amending subsection 8(a)(3)); and (12)
implementing miscellaneous technical changes throughout the Plan.
In all other respects, this Amended and Restated Stock Option Plan is as adopted
by the Board and approved by the shareholders on July 19, 1993.
PLAN
1. Purpose of the Plan. The purpose of this Plan is to provide additional
incentives to Employees and Directors of Columbia Banking System, Inc. and its
present and future Subsidiaries, thereby helping to attract and retain the best
available personnel for positions of responsibility with said corporations and
otherwise promoting the success of the business activities of said corporations.
It is intended that Options issued pursuant to this Plan shall constitute either
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code or nonqualified stock options.
2. Definitions. As used herein, the following definitions shall apply:
a. "Board" shall mean the Board of Directors of the Employer.
b. "Common Stock" shall mean the Employer's no par value common
stock.
c. "Committee" shall mean the Board or the Committee appointed by
the Board in accordance with subsection 4(a) of the Plan.
d. "Continuous Status as an Employee" shall mean the absence of any
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of sick leave, military
leave, or any other approved leave of absence.
19
<PAGE> 21
e. "Director" shall mean any person who has been elected or appointed
as a member of the Board of Directors of the Employer and who occupied that
position at the date an Option was granted to such person.
f. "Employee" shall mean any person employed by the Employer or any
Parent or Subsidiary of the Employer which now exists or is hereafter organized
or is acquired by the Employer.
g. "Employer" shall mean Columbia Banking System, Inc., a Washington
corporation.
h. "Nonqualified Stock Option" shall mean an Option other than an
Incentive Stock Option.
i. "Option" shall mean a stock option granted pursuant to the Plan.
Options shall include both Incentive Stock Options under Section 422 of the
Internal Revenue Code and Nonqualified Stock Options, as the context requires.
j. "Optioned Stock" shall mean the Common Stock subject to an Option.
k. "Optionee" shall mean an Employee or Director who receives an
Option.
l. "Plan" shall mean this Amended and Restated Stock Option Plan.
m. "Parent" shall mean any corporation having a relationship with
the Employer as described in Section 424(e) of the Internal Revenue Code.
n. "Shareholder-Employee" shall mean an Employee who owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Employer or of any Parent or Subsidiary. For this
purpose, the attribution of stock ownership rules provided in Section 424(d) of
the Internal Revenue Code shall apply.
o. "Subsidiary" shall mean any corporation having a relationship
with the Employer as described in Section 424(f) of the Internal Revenue Code.
3. Stock Subject to Options.
a. Number of Shares Reserved. The maximum number of shares available
pursuant to the Plan is 565,000 shares of the Common Stock of the Employer
(subject to adjustment as provided in subsection 6(i) of the Plan). During the
term of this Plan, the Employer will at all times reserve and keep available a
sufficient number of shares of its Common Stock to satisfy the requirements of
the Plan.
b. Expired Options. If any outstanding Option expires or becomes
unexercisable for any reason without having been exercised in full, the shares
of Common Stock allocable to the unexercised portion of such Option shall again
become available for other Options.
4. Administration of the Plan.
a. The Committee. The Plan shall be administered by the Board directly,
acting as a Committee of the whole, or if the Board elects, by a separate
Committee appointed by the Board for that purpose and consisting of at least
three Board members. All references in the Plan to the "Committee" shall refer
to such separate Committee, if any is established, or if none is then in
existence, shall refer to the Board as a whole. Once appointed, any such
Committee shall continue to serve until otherwise directed by the Board. From
time to time the Board may increase the size of the Committee and appoint
additional members thereof, remove members (with or without cause), appoint new
members in substitution there for, and fill vacancies however caused. In
appointing members to such Committee, the Board shall consider whether to
appoint individuals qualifying as (a) "outside directors," as such term is used
in Section 162(m) of the Internal Revenue Code, and (b) "non-employee directors"
as such term is used in Rule 16b-3 under the Securities
20
<PAGE> 22
Exchange Act of 1934 (the "Exchange Act").
The Committee shall select one of its members as chairman, and shall hold
meetings at such times and places as the chairman or a majority of the Committee
may determine.
At least annually, the Committee shall present a written report to the Board
indicating the persons to whom Options have been granted since the date of the
last such report, and in each case the date or dates of Options granted, the
number of shares optioned, and the Option price per share.
At all times, the Board shall have the power to remove all members of the
Committee and thereafter to directly administer the Plan as a Committee of the
whole.
b. Powers of the Committee. Except for the terms and conditions
explicitly set forth in the Plan, the Committee shall have the authority and
discretion:
(1) to determine the persons to whom Options are to be granted,
the times of grant, and the number of shares to be represented by each Option;
(2) to determine the Option price for the shares of Common Stock to
be issued pursuant to each Option, subject to the provisions of subsection 6(b)
of the Plan;
(3) to determine all other terms and conditions of each Option
granted under the Plan, which need not be identical;
(4) to modify or amend the terms of any Option previously granted,
or to grant substitute Options, subject to the provisions of subsections 6(l)
and 6(m) of the Plan;
(5) to interpret the Plan;
(6) to authorize any person or persons to execute and deliver
Option agreements or to take any other actions deemed by the Committee to be
necessary or appropriate to effectuate the grant of Options;
(7) to make all other determinations and take all other actions
which the Committee deems necessary or appropriate to administer the Plan in
accordance with its terms and conditions.
All actions of the Committee shall be either by (i) a majority vote of the
members of the full Committee at a meeting of the Committee, or (ii) by
unanimous written consent of all members of the full Committee without a meeting
thereof, or in such other manner as is authorized by Rule 16b-3 under the
Exchange Act.
All decisions, determinations and interpretations of the Committee shall be
final and binding upon all persons, including all Optionees and any other
holders or persons interested in any Options, unless otherwise expressly
determined by a vote of the majority of the entire Board. No member of the
Committee or of the Board shall be liable for any action or determination made
in good faith with respect to the Plan or any Option.
5. Eligibility. Options may be granted only to Employees and Directors who
the Committee, in its discretion, from time to time selects; provided that
Directors who are not also Employees may not be granted Incentive Stock Options.
Granting of Options pursuant to the Plan shall be entirely discretionary with
the Committee, and the adoption of this Plan shall not confer upon any person
any right to receive any Option or Options pursuant to the Plan unless and until
said Options are granted by the Committee, in its sole discretion. Neither the
adoption of the Plan nor the granting of any Options pursuant to the Plan shall
confer upon any Employee any right with respect to continuation of employment,
nor shall the same interfere in any way with the Employee's right or with the
right of the Employer or any Subsidiary to terminate the employment relationship
at any time.
21
<PAGE> 23
6. Terms and Conditions of Options. All Options granted pursuant to the Plan
must be authorized by the Committee, and must be documented in written
agreements in such form as the Committee shall from time to time approve, which
agreements shall comply with and be subject to all of the following terms and
conditions, unless waived or modified by the Committee:
a. Number of Shares; Annual Limitation. Each Option agreement shall state
whether the Option is an Incentive Stock Option or a Nonqualified Stock Option
and the number of shares subject to Option. Any number of Options may be granted
to a single eligible person at any time and from time to time, except that (i)
in the case of Incentive Stock Options, the aggregate fair market value
(determined as of the time each Option is granted) of all shares of Common Stock
with respect to which Incentive Stock Options become exercisable for the first
time by an Employee in any one calendar year (under all incentive stock option
plans of the Employer, its Parent and all of its Subsidiaries taken together)
shall not exceed $100,000; and (ii) not more than 50,000 shares of Common Stock
in the aggregate may be made subject to grants under the Plan to any participant
in any one fiscal year.
b. Option Price and Consideration. The Option price for the shares of
Common Stock to be issued pursuant to the Option shall be such price as is
determined by the Committee, but shall in no event be less than the fair market
value of the Common Stock on the date of grant of the Option. In the case of an
Incentive Stock Option granted to an Employee who, immediately before the grant
of such Incentive Stock Option, is a Shareholder-Employee, the Incentive Stock
Option price shall be at least 110% of the fair market value of the Common Stock
on the date of grant of the Incentive Stock Option. The fair market value shall
be determined by the Committee in its discretion; provided, however, that in the
event that there is a public market for the Common Stock, the fair market value
shall be the mean of the bid and asked prices of the Common Stock as of the date
of grant as reported on the National Association of Securities Dealers Automatic
Quotation System (NASDAQ), or, in the event the Common Stock is listed on a
stock exchange, the fair market value shall be the closing price on the exchange
as of the date of grant of the Option.
The Option price shall be payable either (i) in United States dollars upon
exercise of the Option, or (ii) such other consideration of comparable value
deemed to be acceptable by the Committee, including without limitation Common
Stock of the Employer, services, or other property.
c. Term of Option. No Incentive Stock Option granted pursuant to the Plan
shall in any event be exercisable after the expiration of ten (10) years from
the date such Option is granted, except that the term of an Incentive Stock
Option granted to an Employee who, immediately before such Incentive Stock
Option is granted, is a Shareholder-Employee shall be for not more than five (5)
years from the date of grant thereof. Subject to the foregoing and other
applicable provisions of the Plan including but not limited to subsection 6(e)
herein, the term of each Option shall be determined by the Committee in its
discretion.
d. Manner of Exercise; Cashless Exercise. An Option shall be deemed to be
exercised when written notice of exercise has been given to the Employer in
accordance with the terms of the Option by the person entitled to exercise the
Option, together with full payment for the shares of Common Stock subject to
said notice. The Committee may, in its discretion, allow for the cashless
exercise of an Option whereby an Optionee, subject to (i) the requirements of
Rule 16b-3, Regulations of the Federal Reserve Board, federal income tax laws,
and any other applicable laws, (ii) the terms of any written agreements executed
in connection with the grant of any such Options, and (iii) any procedures and
policies established from time to time by the Committee, can exercise an Option
or a portion thereof without making a direct payment of the Option price to the
Employer.
e. Death of Optionee. In the event of the death of an Optionee who at the
time of his death was an Employee and who had been in Continuous Status as an
Employee since the date of grant of the Option, the Option shall terminate on
the earlier of (1)(a) one year after the date of death of the Optionee or (b)
such later date as may be set in the discretion of the Committee; or (2) the
expiration date otherwise provided in the Option agreement, except that if the
expiration date of an Option should occur during the 90-day period immediately
following the Optionee's death, such Option shall terminate at the end of such
90-day period. The Option shall be exercisable at any time prior to such
termination by the Optionee's estate, or by such person or persons who have
acquired the right to exercise the Option by bequest or by inheritance or by
reason
22
<PAGE> 24
of the death of the Optionee.
f. Disability of Optionee. If an Optionee's status as an Employee is
terminated at any time during the Option period by reason of a disability
(within the meaning of Section 22(e) (3) of the Internal Revenue Code) and if
said Optionee had been in Continuous Status as an Employee at all times between
the date of grant of the Option and the termination of his status as an
Employee, his Incentive Stock Option shall terminate on the earlier of (i) one
year after the date of termination of his status as an Employee, or (ii) the
expiration date otherwise provided in his Option agreement.
g. Termination of Status as an Employee. If an Optionee's status as an
Employee is terminated at any time after the grant of his Option for any reason
other than death or disability, as provided in subparagraphs (e) and (f) above,
and not by reason of fraud or willful misconduct, as provided below:
(1) His Incentive Stock Option shall terminate on the earlier of (i)
the same day of the third month after the date of termination of his status as
an Employee, or (ii) the expiration date otherwise provided in his Option
agreement;
(2) His Nonqualified Stock Option shall terminate on the expiration
date as provided in his Option Agreement, or if no such expiration date is
provided, then such Option shall terminate on the same day of the third month
after the date of termination of his status as an Employee.
If an Optionee's status as an Employee is terminated at any time after the grant
of his Option by reason of fraud or willful misconduct, then his Option shall
terminate on the date of termination of his status as an Employee.
h. Non-transferability of Options. No Option granted pursuant to the Plan
may be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee.
i. Adjustments Upon Changes in Capitalization. Subject to any required
action by the shareholders of the Employer, the number of shares of Common Stock
covered by each outstanding Option, the number of shares of Common Stock
available for grant of additional Options, and the price per share of Common
Stock specified in each outstanding Option, shall be proportionately adjusted
for any increase or decrease in the number of issued shares of Common Stock
resulting from any stock split or other subdivision or consolidation of shares,
the payment of any stock dividend (but only on the Common Stock) or any other
increase or decrease in the number of such shares of Common Stock effected
without receipt of consideration by the Employer; provided, however, that
conversion of any convertible securities of the Employer shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Committee, whose determination in that respect shall be final,
binding and conclusive.
No Incentive Stock Option shall be adjusted by the Committee pursuant to this
subparagraph 6(i) in a manner which causes the Incentive Stock Option to fail to
continue to qualify as an incentive stock option within the meaning of Section
422 of the Internal Revenue Code.
Except as otherwise expressly provided in this subsection 6(i), no Optionee
shall have any rights by reason of any stock split or the payment of any stock
dividend or any other increase or decrease in the number of shares of Common
Stock. Except as otherwise expressly provided in this subsection 6(i), any issue
by the Employer of shares of stock of any class, or securities convertible into
shares of stock of any class, shall not affect the number of shares or price of
Common Stock subject to any Options, and no adjustments in Options shall be made
by reason thereof. The grant of an Option pursuant to the Plan shall not affect
in any way the right or power of the Employer to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure.
j. Date of Grant of Option. The date of grant of an Option shall, for
all purposes, be the date on which the Committee makes the determination
granting such Option. Said date of grant shall be specified in the Option
agreement.
k. Conditions Upon Issuance of Shares. Shares of Common Stock shall not
be issued with respect
23
<PAGE> 25
to an Option granted under the Plan unless the exercise of such Option and the
issuance and delivery of such shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, as amended, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the Common Stock may then be listed, and shall be further subject to the
approval of counsel for the Employer with respect to such compliance.
As a condition to the exercise of an Option, the Employer may require the person
exercising such Option to represent and warrant at the time of exercise that the
shares of Common Stock are being purchased only for investment and without any
present intention to sell or distribute such Common Stock if, in the opinion of
counsel for the Employer, such a representation is required by any of the
aforementioned relevant provisions of law.
l. Merger, Sale of Assets, Etc. Except as otherwise provided in the
written agreement that evidences an Option, in the event of the merger or other
reorganization of the Employer with or into any other corporation, or in the
event of a proposed sale of substantially all of the assets of the Employer, or
in the event of a proposed dissolution or liquidation of the Employer, (i) all
outstanding and unexercised Options shall become immediately exercisable, and
(ii) such Options shall either be assumed by the successor corporation, or
parent thereof, in the reorganization transaction described above or be replaced
with a comparable award for the purchase of shares of the capital stock of the
successor corporation, except that if such Options are not so assumed or
replaced, then (iii) the Committee may, in the exercise of its sole discretion,
terminate all outstanding Options as of a date fixed by the Committee which may
be sooner than the originally stated option term. The Committee shall notify
each Optionee of such action in writing not less than sixty (60) days prior to
the termination date fixed by the Committee, and each Optionee shall have the
right to exercise his Option to and including said termination date.
m. Substitute Stock Options. In connection with the acquisition or
proposed acquisition by the Employer or any Subsidiary, whether by merger,
acquisition of stock or assets, or other reorganization transaction, of a
business any employees of which have been granted Incentive Stock Options, the
Committee is authorized to issue, in substitution of any such unexercised stock
option, a new Option under this Plan which confers upon the Optionee
substantially the same benefits as the old option; provided, however, that the
issuance of any new Option for an old Incentive Stock Option shall satisfy the
requirements of Section 424(a) of the Internal Revenue Code.
n. Tax Compliance. The Employer, in its sole discretion, may take any
actions reasonably believed by it to be required to comply with any local,
state, or federal tax laws relating to the reporting or withholding of taxes
attributable to the grant or exercise of any Option or the disposition of any
shares of Common Stock issued upon exercise of an Option, including, but not
limited to, (i) withholding from any person exercising an Option a number of
shares of Common Stock having a fair market value equal to the amount required
to be withheld by Employer under applicable tax laws, and (ii) withholding from
any form of compensation or other amount due an Optionee or holder of shares of
Common Stock issued upon exercise of an Option any amount required to be
withheld by Employer under applicable tax laws. Withholding or reporting shall
be considered required for purposes of this subparagraph if any tax deduction or
other favorable tax treatment available to Employer is conditioned upon such
reporting or withholding.
o. Other Provisions. Option agreements executed pursuant to the Plan may
contain such other provisions as the Committee shall deem advisable, provided in
the case of Incentive Stock Options that the provisions are not inconsistent
with the provisions of Section 422(b) of the Internal Revenue Code or with any
of the other terms and conditions of this Plan.
p. Director Options. Notwithstanding the terms and conditions set forth
above in this section 6, (i) no Director who is not also an Employee shall be
granted an Incentive Stock Option, and (ii) Non-Qualified Stock Options granted
to a Director who ceases to be a member of the Board of Employer or any
Subsidiary shall be exercisable on such terms and conditions as the Committee
shall determine.
24
<PAGE> 26
7. Term of the Plan. The Plan shall become effective on the earlier of (a) the
date of adoption of the Plan by the Board; or (b) the date of shareholder
approval of the Plan as provided in Section 9 of the Plan. Unless sooner
terminated as provided in subsection 8(a) of the Plan, the Plan shall terminate
on the tenth anniversary of its effective date. Options may be granted at any
time after the effective date and prior to the date of termination of the Plan.
8. Amendment or Early Termination of the Plan.
a. Amendment or Early Termination. The Board may terminate the Plan at any
time. The Board may amend the Plan at any time and from time to time in such
respects as the Board may deem advisable, except that, without approval of the
holders of a majority of the outstanding shares of the Common Stock, no such
revision or amendment shall:
(1) increase the number of shares of Common Stock subject to the
Plan other than in connection with an adjustment under subsection 6(i) of the
Plan; or
(2) change the designation of the class of persons eligible to
be granted Options, as provided in Section 5 of the Plan; or
(3) make any amendments to the Plan which would require shareholder
approval under any applicable law or regulation.
b. Effect of Amendment or Termination. No amendment or termination of the
Plan shall affect Options granted prior to such amendment or termination, and
all such Options shall remain in full force and effect notwithstanding such
amendment or termination.
9. Shareholder Approval. The Plan, as amended and restated, shall be
subject to approval by a majority of the outstanding shares of Common Stock
of the Employer present and entitled to vote at a duly convened meeting of
the shareholders of the Employer.
CERTIFICATE OF ADOPTION
I certify that the foregoing Plan was adopted by the Board of Directors of
Columbia Banking System, Inc., effective as of February 26, 1997, and approved
by the shareholders of Columbia Banking System, Inc. on
- ---------------------.
-------------------------------
Secretary
25
<PAGE> 27
COLUMBIA BANKING SYSTEM, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
APRIL 23, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF
COLUMBIA BANKING SYSTEM, INC.
PLEASE SIGN AND RETURN IMMEDIATELY
----------------------------------
The undersigned shareholder of COLUMBIA BANKING SYSTEM, INC.
("Columbia") hereby nominates, constitutes and appoints A.G. Espe, J. James
Gallagher and W.W. Philip and each of them (with full power to act alone), the
true and lawful attorneys and proxies, each with full power of substitution,
for me and in my name, place and stead, to act and vote all the common stock of
Columbia standing in my name and on its books on February 28, 1997 at the
Annual Meeting of Shareholders to be held at the Sheraton Tacoma Hotel, Tacoma,
Washington, on April 23, 1997, at 1:00 p.m., and at any adjournment thereof,
with all the powers the undersigned would possess if personally present, as
follows:
1. ELECTION OF DIRECTORS. A proposal to elect as directors the persons
listed below to serve until the 1998 Annual Meeting of Shareholders or
until their successors are duly elected and qualified.
[ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY
below TO VOTE for all nominees
listed below (in the manner
described below)
INSTRUCTIONS: To withhold authority to vote for any individual nominee, strike
a line through the nominee's name listed below.
W. Barry Connoley, Richard S. DeVine, A.G Espe, Jack Fabulich, Jonathan
Fine, John P. Folsom, Margel S. Gallagher, John A. Halleran, William W.
Philip, John H. Powell, Robert E. Quoidbach, Donald Rodman, Frank H.
Russell, Sidney R. Snyder, James M. Will, Jr.
2. APPROVAL OF AMENDED AND RESTATED STOCK OPTION PLAN. A proposal to
approve Columbia's Stock Option Plan, as amended and restated.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
<PAGE> 28
COLUMBIA BANKING SYSTEM 1996 ANNUAL REPORT
[4 GRAPHICS]
COLUMBIA BANKING SYSTEM
1996 ANNUAL REPORT
[2 GRAPHICS]
<PAGE> 29
PROFILE
Columbia Banking System, Inc. is a Tacoma, Washington-based bank holding company
which operates Columbia Bank, a state-chartered full-service commercial bank
with 17 banking offices in Pierce, King and Cowlitz counties. The cornerstone of
Columbia Bank's approach to banking is a return to friendly, old-fashioned
banking, coupled with modern convenience and technology. Columbia Bank is a
local bank, strongly committed to its customers and the communities it serves.
Columbia Banking System trades on The Nasdaq Stock Market under the symbol COLB.
Columbia Banking System achieved record results in 1996, thanks to a balanced
combination of strategy, skill, and opportunity. With growing assets, a
commitment to earn our customers' loyalty every day, and a market that continues
to benefit from the vacuum created by industry consolidation, 1997 represents
the opportunity for continued profitable growth.
<PAGE> 30
CONTENTS
2 1996
16 letter to shareholders
19 financial review
64 corporate directory
65 shareholder information
66 branch locations
<PAGE> 31
Page 2
[Graphic display of the total assets of Columbia Banking System, Inc. at
December 31, 1996]
$588,916,000
<PAGE> 32
record growth
A MAJOR MILESTONE.
<TABLE>
<CAPTION>
MEASURES
<S> <C>
38.9% average annual growth rate for total assets, 1992 - 1996
39.0% average annual growth rate for total loans, 1992-1996
43.4% average annual growth rate for total deposits, 1992-1996
</TABLE>
Think of it as more than a measure of success. Think of it as a measure of just
how much customers have come to value our personal approach to banking. In 1996
we crossed the one half-billion dollar mark in assets, increasing 38.5% from one
year ago. And we believe that there is plenty of room to grow.
<PAGE> 33
people and places
BANKS AROUND BANKERS.
<TABLE>
<CAPTION>
MEASURES
<S> <C>
15 years average in-market experience for our loan officers
14 years average in-market experience for our branch managers
17 branches total, up from 13 in 1995
</TABLE>
It's simple. Banks are best managed by bankers. We build our branch
network by first finding the right banker for the market, and then building
around their experience, skills and relationships with customers and the
community. And it works. After all, wouldn't you rather do business with a
banker you know?
<PAGE> 34
Page 5
[Photograph of four bank employees symbolizing the narrative on the preceeding
page #4]
<PAGE> 35
Page 6
[Graphic display of the side profile of a human head symbolizing the narrative
on page #7]
<PAGE> 36
complete service
CUSTOMERS FIRST.
SERVICES
- Columbia Financial Services - investing through a third party
broker-dealer relationship
- Pronto - delivers mortgage closings within 10 days or less in most
cases
- Save For America(TM) - government endorsed savings program for
students
Too often technology is being used to dehumanize banking and to keep
contact with customers to a minimum. While we're just as technologically
sophisticated as any other bank, we use technology to enhance our customer
relationships, not to replace them. In other words, we give our customers the
best of both worlds.
<PAGE> 37
customer focus
ALL TOGETHER NOW.
FOCUS
We are committed to our customers and our communities, offering a return to
friendly, old-fashioned banking, in addition to providing our customers with all
the modern conveniences and technology of banking today.
At Columbia, banking is what banking was. People who listen and respond. Who
work with our customers and see them as individuals instead of mere numbers.
This approach may be the single biggest reason for our record-setting growth.
Because, when you treat people as individuals, the word gets around.
<PAGE> 38
Page 9
Photograph of two sets of hands working together raising an American flag up a
flag pole symbolizing the narrative on the preceding page #8.
<PAGE> 39
Page 10
Graphic display of the mathematical function of "6 times" symbolizing the
narrative on page #11.
<PAGE> 40
high performance
WAY ABOVE AVERAGE.
<TABLE>
<CAPTION>
MEASURES
<S> <C>
31.3% Total asset growth vs. 4.6% industry average*
27.6% Total loan growth vs. 6.7% industry average*
33.4% Total deposit growth vs. 4.2% industry average*
* Average based on all FDIC-insured institutions, 9-95 through
9-96
</TABLE>
Not only compared to the county, or the state or the region. Compared to all the
FDIC-insured institutions, everywhere in the country. Our balance sheet growth
outpaced the industry average by an average of six times based on above
measures, while non-performing loans reached an all time low of 0.39 percent.
<PAGE> 41
continued growth
THE TIME IS NOW.
<TABLE>
<CAPTION>
MEASURES
<S> <C>
29.8% increase in net income
26.3% increase in loans
36.3% increase in deposits
</TABLE>
Combine our strategy, performance, skill and dedication to customers with a
marketplace that is looking for a better way to bank in the aftermath of
industry consolidation, and our window for growth is wide open. And that is
where our focus remains: making the most of our business and our opportunity.
<PAGE> 42
Page 13
Photograph of an eight-pane window with a view of blue sky and clouds
symbolizing the narrative on the preceding page #12
<PAGE> 43
Page 14
financial charts
<TABLE>
<CAPTION>
December 31,
(dollars in
thousands) 1992 1993 1994 1995 1996
- ------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Assets 158,694 235,944 319,072 $425,206 $588,916
Loans 120,797 181,016 268,996 $353,093 $446,095
Deposits 118,014 165,339 268,692 $361,875 $493,222
</TABLE>
<PAGE> 44
consolidated highlights
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
DOLLARS IN THOUSANDS PERCENT
EXCEPT PER SHARE AMOUNTS 1996 1995 CHANGE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Year
Net interest income $ 20,544 $ 16,561 24.1%
Provision for loan losses 1,420 1,250 13.6
Net income 3,577 2,755 29.8
Net income excluding SAIF
special assessment 4,189 52.1
Per Share:
Net income 0.93 0.79 17.7
Net income excluding SAIF
special assessment 1.09 38.0
Fully diluted net income 0.92 0.79 16.5
Fully diluted net income excluding
SAIF special assessment 1.07 35.4
Book value 11.37 9.76 16.5
At Year-end
Assets 588,916 425,206 38.5
Loans 446,095 353,093 26.3
Deposits 493,222 361,875 36.3
Shareholders' equity 58,960 31,967 84.4
Number of full-time
equivalent employees 247 201 22.9
Number of banking offices 16 13 23.1
Financial Ratios
Net interest margin 4.48% 4.78%
Return on average assets 0.73 0.74
Return on average assets excluding SAIF
special assessment 0.86
Return on average equity 9.68 9.25
Return on average equity excluding SAIF
special assessment 11.34
Average equity to average assets 7.55 7.95
Risk-based capital ratios:
Tier I capital 12.81 9.10
Total capital 13.79 10.95
Leverage ratio 10.62 7.72
</TABLE>
COLUMBIA BANKING SYSTEM, INC.
PAGE 15.
<PAGE> 45
TO OUR SHAREHOLDERS
Over the past several years, your Company has grown substantially while pursuing
aggressive strategies. We have focused on the rapid expansion of Columbia Bank
in order to establish a competitive presence in our markets. In the process, we
have experienced growth rates well above-average for the banking industry, and
have achieved strong earnings momentum.
<PAGE> 46
In 1996, our achievements were the result of successful implementation of our
business plan. Continuing to build your Company's solid foundation while
increasing the value of your investment remains our top priority.
We sought to keep pace with market demand in 1996 through ongoing
development of our branch network, now numbering 17 branches in 3 counties.
Accordingly, Columbia Banking System's asset size has tripled since opening the
Tacoma Main Office in August 1993, entirely the result of internal growth.
Surpassing one-half billion dollars in total assets during the third quarter of
1996 marked an important milestone. This measure of success was realized earlier
than we had originally anticipated. As of December 31, 1996, your Company's
assets totaled $588.9 million.
Our capital position supports our plan for continued growth. Completion
of a secondary equity offering of 1,445,000 shares of common stock during the
fourth quarter resulted in net proceeds of approximately $21 million. Of this
amount, $10 million was contributed to the capital of Columbia Bank to finance
further expansion in Pierce County, and, over the next several years, north into
King County and south into Thurston County. Additionally, $3 million was used to
repay a borrowing, and $8 million will be used for general corporate purposes.
As your Company grows in size, we are also pleased to report consistent
growth in earnings, in spite of major investments in our expansion. Net income
for 1996 was $3.6 million, a 30% increase from $2.8 million for 1995. On a per
share basis, earnings were $0.93 for 1996 compared with $0.79 for 1995. In the
third quarter, federal legislation designed to recapitalize the Savings
Association Insurance Fund (SAIF) resulted in a one-time charge to earnings. If
not for this SAIF special assessment, 1996 net income would have been $4.2
million, or $1.09 per share, up 52% from the prior year.
Our approach to the business of banking is what sets us apart from our
competitors. We believe that banking is a people business. This philosophy is
what drives our organization, from back-room operations to front-line
management, and it is what sets us apart from the mega-bank mentality. Our
strategy is to provide our customers with the sophisticated systems and products
of a regional bank while offering the superior service of a locally-managed
community bank. Relationship banking and personal attention to detail make the
difference.
There are a number of factors influencing the successful implementation
of our strategy. First of all, Columbia Bank's knowledgeable management team has
considerable depth of experience: the average banking experience in market is 15
years for our loan officers and 14 years for our branch officers. Secondly,
potential expansion opportunities are determined by our ability to hire the
right banker to serve each community. We call it "building banks around
bankers." The right people working together as a team is paramount to our rapid
accumulation of loans and deposits and timely capture of market share.
Additionally, we're benefiting from a market supportive of our banking
style. Well-received in the areas in which we operate, we provide an alternative
to the impersonal out-of-state financial institutions dominating western
Washington's banking industry. We appeal to customers disillusioned by
large-scale bank consolidations and the inconveniences associated with computer
conversions, product changes and staff turnover. Our decentralized management
system gives us the flexibility to provide prompt, local decision-making and to
manage customer relationships with a superior quality of service.
Although we have grown rapidly, we remain focused on maintaining sound
asset quality while building a diversified loan portfolio. In 1996, we
deemphasized commercial real estate lending activity in order to lessen our risk
profile and to concentrate on meeting strong demand for lower-risk commercial
business loans. We are also in the process of selling our VISA(R) credit card
loans which will devote more resources to our commercial portfolio.
Our future plans involve continued expansion in Pierce County and
gradually north and south along the I-5 corridor in western Washington (see map
on page 66). Having just opened a second Bellevue branch in February, and a new
branch in Kent later this month, both in King County, we expect to open our
Westgate office in north Tacoma later this year, and we have regulatory approval
for branches in the Stadium and Lincoln districts of Tacoma.
<PAGE> 47
With a strong, well-diversified economy, Washington ranks among the top
ten states in the nation in terms of both population and job growth. In
accordance with our growth objectives for Columbia Bank, the Puget Sound Region
made up of Pierce, King and Thurston counties is projected to expand at nearly
twice the national rate through the end of this century.
An important factor to our competitive position is our commitment to
technological advancement while keeping our primary focus on the personal
aspects of banking. Our product and service mix matches that of most multi-state
financial institutions. However, more and more we're seeing an industry trend
toward automation which is replacing front-line people. Our customers like to
work with people, but they also like to have the choice of up-to-date products,
systems, services and conveniences. We'll continue to provide both because
that's what customers want.
We note with sadness the passing of Columbia Banking System Director
Emeritus Stanley B. Rose in July 1996. As one of your Company's original Board
members, Mr. Rose was a staunch supporter of this organization since its
beginning. He will be greatly missed.
In closing, it is our distinctive business style and our prospects for
ongoing growth which reinforce the value of Columbia Banking System. 1996 was a
great year, and we're meeting future challenges with the same enthusiasm and
energy that has created strong performance so far. We thank our employees,
shareholders and customers, all of whom have contributed to our success.
[Photograph of Chairman and Chief Executive Officer,
A. G. Espe sitting, and President and Chief Operating Officer,
W. W. Phillip Standing]
/s/ W. W. Philip /s/ A. G. Espe
------------------ ---------------------
W. W. PHILIP A. G. ESPE
President and Chairman and
Chief Operating Officer Chief Executive Officer
MARCH 1, 1997
Page 18.
<PAGE> 48
financial review
20 management discussion and analysis of financial condition
and results of operations
34 report of management
35 report of independent accountants
audited financial statements
36 consolidated statements of operations
38 consolidated balance sheets
40 consolidated statements of shareholders' equity
42 consolidated statements of cash flows
44 notes to consolidated financial statements
supplemental financial data (unaudited)
59 summary of quarterly financial information
60 consolidated five-year statements of operations
62 consolidated five-year summary of average balances and net
interest revenue
<PAGE> 49
management discussion and analysis of financial condition and results of
operations
This discussion should be read in conjunction with the consolidated financial
statements of Columbia Banking System, Inc. (the "Company") and notes thereto
presented elsewhere in this report. In the following discussion, unless
otherwise noted, references to increases or decreases in average balances in
items of income and expense for a particular period and balances at a particular
date refer to the comparison with corresponding amounts for the period or date
one year earlier.
Overview
Columbia Banking System, Inc., a Washington corporation, is a registered bank
holding company whose wholly owned subsidiary, Columbia State Bank ("Columbia
Bank"), conducts a full-service commercial banking business. Headquartered in
Tacoma, Washington, the Company serves small and medium-sized businesses,
professionals and other individuals through 16 banking offices located in the
Tacoma metropolitan area and contiguous parts of the Puget Sound region of
Washington, as well as the Longview and Woodland communities in southwestern
Washington. At December 31, 1996, based on total assets of $588.9 million, the
Company was the largest publicly traded bank holding company headquartered in
Washington engaged primarily in commercial banking.
In 1993, the Company reorganized in preparation for its aggressive
expansion in Tacoma-Pierce County, and raised approximately $17.2 million in net
proceeds in a public offering of common stock. Columbia Bank then began a rapid
expansion in order to take advantage of opportunities resulting from increased
consolidation of banks in the Company's principal market area, primarily through
acquisitions by out-of-state holding companies, and the resulting dislocation of
customers. Management believes this industry consolidation has created
significant gaps in the ability of large banks operating in Washington to serve
certain customers, particularly the Company's target customer base of small and
medium-sized businesses, professionals and other individuals.
The business strategy of the Company is to provide its customers with
the financial sophistication and breadth of products of a regional bank while
retaining the appeal and service level of a community bank. Management believes
that as a result of the Company's strong commitment to highly personalized
relationship-oriented customer service, its varied products, its strategic
branch locations and the long-standing community presence of its managers,
lending officers and branch personnel, it is well positioned to attract new
customers and to increase its market share of loans and deposits.
Since its reorganization, the Company has experienced rapid growth and
has greatly expanded its commercial lending activities. The Company has grown
from four banking offices at January 1, 1993 to its present sixteen banking
offices, and currently has regulatory approval to open four additional banking
offices. From January 1, 1993 to December 31, 1996, the Company increased its
consolidated assets from $158.7 million to $588.9 million, its loans from $120.8
million to $446.1 million and its deposits from $118.0 million to $493.2
million. While experiencing this growth, the Company's asset quality, measured
by total nonperforming assets as a percentage of total assets, has improved. At
December 31, 1996, the Company's nonperforming assets constituted 0.39% of total
assets, as compared to 0.89%, 1.17%, and 2.13% at December 31, 1995, 1994 and
1993, respectively. Although the Company incurred anticipated losses in the four
quarters
COLUMBIA BANKING SYSTEM, INC.
page 20.
<PAGE> 50
following its 1993 reorganization, the Company has been profitable in each of
the last ten consecutive quarters beginning with the third quarter 1994.
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
(coupled with 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.
In order to support its growth strategy, without compromising its
personalized banking approach or its commitment to asset quality, the Company
has made significant investments in experienced branch, lending and
administrative personnel and has incurred significant costs related to branch
expansion. Although the Company's expense ratios have improved since 1993,
management anticipates that the ratios will remain relatively high by industry
standards for the foreseeable future due to the Company's aggressive growth and
emphasis on convenience and personal service.
The economy of the Company's principal market area, while primarily
dependent upon aerospace, foreign trade and natural resources, including
agriculture and timber, has become more diversified over the past decade as a
result of the success of software companies such as Microsoft and the
establishment of numerous research and biotechnology firms. The economies of
Washington and the Puget Sound region generally have experienced moderate growth
and stability in recent years. Pierce County is projected to have the strongest
economic performance in the Puget Sound region through 1999 according to the
Puget Sound Economic Forecaster, a regional publication providing economic
forecasts and commentary. According to the same publication, the greater Puget
Sound economy is projected to expand at nearly twice the national rate for the
years 1997 through 1999.
In November and December 1996, the Company issued 1.445 million shares
of common stock in a public offering, raising approximately $20.7 million in new
capital. The Company contributed approximately $10.0 million of these proceeds
to Columbia Bank primarily to fund additional expansion in Pierce County, and,
over the next several years, into south King and Thurston Counties. The
remainder was used to repay a $3.0 million borrowing and for general corporate
purposes.
In November of 1996, the Gig Harbor branch moved into a new, permanent,
full service facility. During the second quarter of 1996 a new branch in
Spanaway opened in a temporary facility. Also, in September and December, two
new branches were opened in Puyallup and Edgewood/Milton. Columbia Bank has
opened 12 branch locations since beginning its major Pierce County expansion in
August 1993, and the Company currently has regulatory approval to open three
additional branches in Pierce County and one in King County. During 1997, the
Company anticipates the establishment of new branches and the relocation of the
Spanaway branch from a temporary to a permanent facility. New branches normally
do not contribute to net income for many months after opening.
In addition to the ongoing expansion of its branch network, the Company
has added new products and services to give its customers more banking options
and to keep current with industry trends and technology. During the second
quarter of 1996, Columbia Bank introduced "Columbia Free Checking," with no
monthly fee, no minimum balance, no per-check charges and free use of any ATM in
Washington state (exclusive of surcharges assessed by other financial
institutions). Columbia Bank also launched "Columbia Financial Services," an
alternative investments department which makes available mutual funds,
annuities, and other investment products through a contractual arrangement with
PrimeVest Financial Services, Inc.
COLUMBIA BANKING SYSTEM, INC.
page 21.
<PAGE> 51
Results of Operations
The results of operations of the Company are dependent to a large degree on the
Company's net interest income. The Company also generates noninterest income
through service charges and fees and income from mortgage banking operations.
The Company's operating expenses consist primarily of compensation and employee
benefit expense and occupancy expense. Like most financial institutions, the
Company's interest income and cost of funds are affected significantly by
general economic conditions, particularly changes in market interest rates, and
by government policies and actions of regulatory authorities.
For 1996, the Company recorded net income of $3.6 million, compared
with net income of $2.8 million in 1995 and a net loss of $614,000 in 1994. Net
income per share amounted to $0.93 in 1996, compared with $0.79 per share in
1995 and a net loss per share of $0.18 in 1994. Excluding a one-time special
assessment on SAIF-insured deposits of $612,000 recorded in the third quarter of
1996, (see Note 15 to consolidated financial statements), net income for 1996
would have been $4.2 million, or $1.09 per share. The increase in net income in
1996 was primarily due to increased revenue from continued loan and deposit
growth. Additionally, the Company continued to benefit from utilization of its
net operating loss carryforwards for federal income tax purposes and therefore,
the Company had no federal income tax provision for the year ended December 31,
1996. Had earnings been fully taxable, net income would have been $2.4 million,
or $0.61 per share.
Net Interest Income
Net interest income increased $4.0 million, or 24%, in 1996 compared with $5.0
million, or 43%, in 1995. The 1996 increase in net interest income was largely
due to the overall growth of the Company. Net interest income was favorably
affected by average interest-earning assets increasing more rapidly than average
interest-bearing liabilities, with the difference funded by noninterest-bearing
deposits and shareholders' equity. Average interest-earning assets increased
$111.4 million and $91.8 million in 1996 and 1995, respectively, while average
interest-bearing liabilities increased only $87.9 million and $77.7 million,
respectively.
Net interest margin (net interest income divided by average
interest-earning assets) decreased to 4.48% for 1996, compared with 4.78% in
1995 and 4.54% in 1994. The decrease in net interest margin was primarily the
result of reduced spreads on earning assets. While interest-earning assets grew
during fiscal year 1996, the average yield on interest-earning assets decreased
to 8.53%, from 9.15% in fiscal year 1995. In comparison, the average cost of
interest-bearing liabilities decreased to 4.77% in 1996, from 5.05% in 1995. The
decrease in net interest margin was primarily due to lower yields obtained on
loans as a result of a planned change in loan mix from higher yielding
commercial 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 during the third quarter of 1996, amounting to
approximately $100,000.
Provision for Loan Losses
For the years ended December 31, 1996, 1995 and 1994, net loan charge-offs
amounted to $664,000, $213,000 and $281,000, respectively. The Company's
provision for loan losses was $1.4 million for 1996, compared with $1.3 million
for 1995 and $1.0 million for 1994. During 1996, the allowance for loan losses
increased by $756,000 to 1.01% of loans (excluding loans held for sale) at
December 31, 1996 as compared with 1.06% and 1.01% of loans at December 31, 1995
and 1994, respectively.
COLUMBIA BANKING SYSTEM, INC.
page 22.
<PAGE> 52
Noninterest Income
Total noninterest income increased $1.3 million, or 33.0% in 1996, and $995,000,
or 33.2% in 1995. Increases in noninterest income during 1996 were made up of
account service charges, bank card revenue, and mortgage banking income.
Noninterest Expense
Excluding the SAIF special assessment during the third quarter, total
noninterest expense increased $3.7 million, or 22.3%, in 1996, and $2.5 million,
or 17.9% in 1995. The increase was primarily due to personnel and occupancy
costs associated with the Company's expansion as well as bank card, data
processing and other expenses. Total noninterest expense was 78.3% of adjusted
revenue (the sum of net interest income plus noninterest income, less
nonrecurring items) for 1996 compared with 80.5% and 96.3% for 1995 and 1994,
respectively. The portion of compensation expense related to loan originations
is deferred and deducted from interest income over the life of the related
loans. Other categories of expense are volume driven and reflect the Company's
rapid growth. Total noninterest expense for the Company is expected to decline
in relation to revenues as the Company's asset base grows. Regulatory
assessments increased $612,000 in the third quarter of 1996 due to a one-time
special assessment, required by recently enacted legislation, to recapitalize
the SAIF fund of the FDIC (see Note 15 to consolidated financial statements).
Management is currently evaluating a proposed sale of Columbia Bank's credit
card portfolio which, if consummated, will result in a one-time gain. The sale
of the bank card business is not expected to have a material effect on results
of operations in future periods.
Set forth below is a schedule showing additional detail concerning increases
and decreases in the Company's noninterest expense.
<TABLE>
<CAPTION>
in thousands Increase/ Increase/
year ended December 31, 1996 (Decrease) 1995 (Decrease) 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Compensation and employee benefits $ 10,737 $ 2,310 $ 8,427 $ 1,339 $ 7,088
Less: loan origination costs 2,300 1,212 1,088 219 869
Net compensation and
employee benefits (as reported) 8,437 1,098 7,339 1,120 6,219
Occupancy 3,388 543 2,845 43 2,802
Professional services 574 138 436 9 427
Advertising and promotion 772 138 634 126 508
Printing and supplies 414 39 375 (22) 397
Regulatory assessments 323 (159) 482 7 475
Data processing 807 192 615 152 463
Gains on real estate owned 400 (400) (86) (314)
Telephone and network 338 67 271 (49) 320
Postage and delivery 297 74 223 76 147
ATM network 176 125 51 (21) 72
Bank card 1,473 454 1,019 346 673
Taxes, licenses and fees 659 (52) 711 386 325
Other 2,585 639 1,946 424 1,522
SAIF special assessment 612 612
-------- -------- -------- -------- --------
Total noninterest expense $ 20,855 $ 4,308 $ 16,547 $ 2,511 $ 14,036
======== ======== ======== ======== ========
</TABLE>
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.
COLUMBIA BANKING SYSTEM, INC.
page 23
<PAGE> 53
Lending Activities
The Company originates a wide variety of loans. Consistent with the trend begun
in 1993, the Company continues to increase commercial business 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 by type of loan:
<TABLE>
<CAPTION>
in thousands % of % of
December 31, 1996 Total 1995 Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Commercial business $ 169,318 38.0% $ 113,775 32.2%
Real estate:
One- to four-family residential 67,709 15.1 67,991 19.3
Five or more family residential
and commercial properties 128,803 28.9 97,103 27.5
--------- --------- --------- ---------
Total real estate 196,512 44.0 165,094 46.8
Real estate construction:
One- to four-family residential 21,380 4.8 22,741 6.5
Five or more family residential
and commercial properties 10,680 2.4 8,884 2.5
--------- --------- --------- ---------
Total real estate construction 32,060 7.2 31,625 9.0
Consumer 48,807 10.9 43,343 12.2
--------- --------- --------- ---------
Subtotal 446,697 100.1 353,837 100.2
Less deferred loan fees and other (602) (0.1) (744) (0.2)
--------- --------- --------- ---------
Total loans $ 446,095 100.0% $ 353,093 100.0%
========= ========= ========= =========
Loans held for sale $ 11,341 $ 1,367
========= ========= ========= =========
</TABLE>
Total loans at year end increased $93.0 million, or 26.3%, from year end 1995.
All loan categories except for one-to four-family loans contributed
significantly to the increase.
Commercial and Private Banking Lending
Commercial loans increased to $169.3 million at December 31, 1996, representing
38.0% of 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
COLUMBIA BANKING SYSTEM, INC.
page 24
<PAGE> 54
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 $67.7 million at December 31, 1996, representing
15.1% of total loans, compared with $68.0 million at December 31, 1995. These
loans are used by the Company to collateralize advances from the Federal Home
Loan Bank of Seattle (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.
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 $128.8 million at December 31, 1996,
representing 28.9% 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 decreased to $21.4 million
at December 31, 1996, representing 4.8% of total loans, from $22.7 million at
December 31, 1995.
Consumer Lending
At December 31, 1996, the Company had $48.8 million of consumer loans
outstanding, representing 10.9% 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. Excluded from the $48.8 million at
December 31, 1996 are $7.3 million of bank card loans that have been transferred
to "Loans Held For Sale," due to a pending transaction for the sale of all bank
card loans. The corresponding balance of consumer loans at December 31, 1995,
excluding bank card loans, would have been $37.3 million which translates into
an $11.5 million, or 30.8% increase in consumer loans for 1996.
COLUMBIA BANKING SYSTEM, INC.
page 25
<PAGE> 55
At December 31, 1996, the Company had no foreign loans or loans related to
highly leveraged transactions.
Management's growth strategy has concentrated on the Tacoma/Pierce County
market. The results of that strategy are evident in the following summary of
loans:
<TABLE>
<CAPTION>
in thousands Increase
December 31, 1996 1995 Amount Percent
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Pierce County $324,132 $238,763 $ 85,369 35.8%
All other counties 121,963 114,330 7,633 6.7
-------- -------- -------- --------
Total $446,095 $353,093 $ 93,002 26.3%
-------- -------- -------- --------
</TABLE>
Nonperforming Assets
Nonperforming assets consist of nonaccrual loans, restructured loans and real
estate owned. The following tables set forth, at the dates indicated,
information with respect to nonaccrual loans, restructured loans, total
nonperforming loans (nonaccrual loans plus restructured loans), real estate
owned and total nonperforming assets of the Company:
<TABLE>
<CAPTION>
in thousands
December 31, 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Nonaccrual:
One-to four-family residential $1,645 $ 329 $ 299
Commercial business 385 86 143
Consumer 197 20 10
------ ------ ------
Total 2,227 435 452
Restructured:
One-to four-family residential 25 29 44
------ ------ ------
Total nonperforming loans $2,252 $ 464 $ 496
====== ====== ======
Real estate owned 40 3,304 3,227
------ ------ ------
Total nonperforming assets $2,292 $3,768 $3,723
====== ====== ======
Accruing loans past-due 90 days or more $ 152 $ 82
Potential problem loans $ 213 37 23
Allowance for loan losses 4,504 3,748 2,711
Nonperforming loans to loans 0.50% 0.13% 0.18%
Allowance for loan losses to loans 1.01 1.06 1.01
Nonperforming assets to total assets 0.39 0.89 1.17
------ ------ ------
</TABLE>
The consolidated financial statements are prepared according to the accrual
basis of accounting. This includes the recognition of interest income on the
loan portfolio, unless a loan is placed on a nonaccrual basis, which occurs when
there are serious doubts about the collectibility of principal or interest.
Generally, the Company's policy is to place a loan on nonaccrual status when the
loan is past due 90 days. Restructured loans are those for which concessions
have been granted due to the borrower's weakened financial condition. This
includes the reduction of interest rates below a rate otherwise available to
that borrower, or the deferral of interest or principal. Interest on
restructured loans is accrued at the restructured rates when it is anticipated
that no loss of original principal will occur.
Potential problem loans are loans which are currently performing and are not
included in nonaccrual or restructured loans above, but about which there are
serious doubts as to the borrower's ability to comply with present repayment
terms. Therefore, these loans will likely be included later in nonaccrual, past
due or restructured loans and are considered by management in assessing the
adequacy of the allowance for loan losses.
COLUMBIA BANKING SYSTEM, INC.
page 26.
<PAGE> 56
Nonperforming loans increased to $2.3 million at December 31, 1996 from
$464,000 at December 31, 1995 due principally to the inclusion of loans which,
though nonperforming, are secured by real estate. Management anticipates some
charge-offs of those unsecured or undersecured nonperforming loans, although the
amount of such charge-offs is not expected to be material. At December 31, 1996,
nonperforming loans were 0.50% of period-end loans (excluding loans held for
sale). 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 $2.3 million, or 0.39% of total assets at December 31,
1996, from $3.8 million, or 0.89% of total assets at year-end 1995.
Provision and 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 it uses the best information available 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 December 31, 1996 decreased to 1.01%, from
1.06% of loans at December 31, 1995 (excluding loans held for sale at each
date). The decrease was due to a $421,000 increase in charge-offs compared with
1995, and a $93.0 million, or 26.3%, increase in loans since year-end 1995. For
the years ended December 31, 1996, 1995 and 1994, net loan charge-offs amounted
to $664,000, $213,000 and $281,000, respectively. The Company's provision for
loan losses was $1.4 million for 1996, compared with $1.3 million for 1995 and
$1.0 million for 1994.
The following table summarizes the changes in the allowance for loan losses:
<TABLE>
<CAPTION>
in thousands
December 31, 1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Total loans, net at end of period(1) $ 446,095 $ 353,093 $ 268,996
Daily average loans 405,131 318,039 222,236
Beginning balance of allowance for loan losses 3,748 2,711 1,992
Charge-offs:
Commercial business (514) (148) (258)
Consumer (170) (115) (106)
--------- --------- ---------
Total charge-offs (684) (263) (364)
Recoveries:
Commercial business 17 45 83
Consumer 3 5
--------- --------- ---------
Total recoveries 20 50 83
--------- --------- ---------
Net charge-offs (664) (213) (281)
Provision charged to expense 1,420 1,250 1,000
--------- --------- ---------
Ending balance $ 4,504 $ 3,748 $ 2,711
========= ========= ========
Ratio of net charge-offs during period
to average loans outstanding 0.16% 0.07% 0.13%
========= ========= ========
</TABLE>
(1) Excludes loans held for sale
COLUMBIA BANKING SYSTEM, INC.
page 27.
<PAGE> 57
Securities
The Company's securities (securities available for sale) increased by $22.8
million to $45.5 million from year end 1995 to year end 1996. The investment
portfolio is comprised primarily of U.S. Treasury and government agency
securities. The average maturity of the securities portfolio was 2 years, 6
months at December 31, 1996. In November 1995, the Financial Accounting
Standards Board ("FASB") issued a Special Report permitting a one-time
opportunity for institutions to reassess the appropriateness of the designations
of all securities. Accordingly, in December 1995, the Company reclassified all
"investment securities" as "securities available for sale." For further
information on investment securities, including gross unrealized gains and
losses in the portfolio and gross realized gains and losses on sales of
securities, see Note 4 to the consolidated financial statements.
Premises and Equipment
In 1996, fixed assets increased $1.5 million, or 11.0% from 1995. The net change
includes purchases of $4.8 million, disposals of $1.5 million and depreciation
expense of $1.8 million. The Company's capital expenditures in 1997 are
anticipated to be approximately $5.3 million. Such expenditures are expected to
include approximately $4.1 million for new buildings and for remodeling existing
structures, and $1.2 million for new furniture and equipment.
Liquidity and Sources of Funds
The Company's primary sources of funds are customer deposits and advances from
the FHLB. These funds, together with loan repayments, loan sales, retained
earnings, equity and other borrowed funds, are used to make loans, to acquire
securities and other assets, and to fund continuing operations.
Deposit Activities The Company experienced overall average deposit growth of
31.4% and 42.2% in 1996 and 1995, respectively. All categories of deposits
increased during both years, except for savings accounts which decreased 11.7%
and 27.7% in 1996 and 1995, respectively. Interest-bearing and
noninterest-bearing demand deposits increased 78.3% and 43.9% in 1996, and
104.6% and 60.7% in 1995, respectively.
Average deposits are summarized in the following table:
<TABLE>
<CAPTION>
in thousands
years ended December 31, 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Demand and other noninterest-bearing $ 60,691 $ 42,167 $ 26,238
Interest-bearing demand 142,103 79,706 38,962
Savings 21,673 24,547 33,938
Certificates of deposit 189,122 168,351 122,198
-------- -------- --------
Total average deposits $413,589 $314,771 $221,336
======== ======== ========
</TABLE>
The Company is establishing a branch system catering primarily to retail
depositors, supplemented by business banking customer deposits and other
borrowings. While that stable core deposit base is being established,
management's strategy for funding growth has been to make use of brokered and
other wholesale deposits. The Company's use of brokered and other wholesale
deposits decreased in 1996, though management anticipates continued use of 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 increase of $131.3 million during 1996 occurred entirely in "core
deposits." Brokered and other wholesale deposits (excluding public deposits)
decreased $18.0 million to $30.3 million, or 6.1% of total deposits at December
31, 1996, from $48.3 million, or 13.3% of total deposits at December 31, 1995.
COLUMBIA BANKING SYSTEM, INC.
page 28.
<PAGE> 58
Brokered and other wholesale deposits are summarized below. The average interest
rate for these deposits was 5.63% and 5.94% at December 31, 1996 and 1995,
respectively.
<TABLE>
<CAPTION>
in thousands
December 31, 1996 1995
Percent Percent
of Total of Total
Amount Deposits Amount Deposits
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maturing within one year $28,863 5.8% $41,546 11.5%
Maturing after one year but
within three years 1,387 0.3 5,633 1.5
Maturing after three years
but within ten years 1,091 0.3
------- ------- ------- -------
Total brokered and other
wholesale deposits $30,250 6.1% $48,270 13.3%
------- ------- ------- -------
</TABLE>
The increase in deposits is largely due to management's growth strategy
emphasizing the Tacoma/Pierce County market area. Following is a summary of
year-end deposits by county:
<TABLE>
<CAPTION>
in thousands Increase
December 31, 1996 1995 Amount Percent
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Pierce County $373,380 $264,848 $108,532 41.0%
All other counties 119,842 97,027 22,815 23.5
-------- -------- -------- ----
Total $493,222 $361,875 $131,347 36.3%
======== ======== ======== ====
</TABLE>
Borrowings The Company relies on FHLB advances to supplement its funding
sources, and the FHLB serves as the Company's primary source of long-term
borrowing. FHLB advances are secured by one- to four-family real estate
mortgages and certain other assets. At December 31, 1996, the Company had total
advances of $32 million at interest rates ranging from 5.20% to 6.14%. The
weighted average interest rate on such advances was 5.63%. At December 31, 1996
the maximum borrowing line from the FHLB was $99.6 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.
Interest Rate Sensitivity
The mismatch between maturities and interest-rate sensitivities of balance sheet
items results in interest rate risk. The Company maintains an asset/liability
management policy that provides guidelines for controlling exposure to that
risk. The guidelines direct management to assess the impact of changes in
interest rates upon both earnings and capital. The guidelines further provide
that in the event of an increase in interest rate risk beyond preestablished
limits, management will consider steps intended to reduce interest rate risk to
acceptable levels.
Analysis of an institution's interest rate gap (the difference between the
repricing of interest-earning assets and interest-bearing liabilities during a
given period of time) is one standard tool for the measurement of the exposure
to interest rate risk. The Company believes that, because interest rate gap
analysis does not address all factors that can effect earnings performance, it
should be used in conjunction with other methods of evaluating interest rate
risk.
COLUMBIA BANKING SYSTEM, INC.
page 29.
<PAGE> 59
The following table sets forth the estimated maturity or repricing, and the
resulting interest rate gap of the Company's interest-earning assets and
interest-bearing liabilities at December 31, 1996. The amounts in the table are
derived from the Company's internal data and are based upon regulatory reporting
formats. Therefore, they may not be consistent with financial information
appearing elsewhere herein that has been prepared in accordance with generally
accepted accounting principles. The amounts could be significantly affected by
external factors such as changes in prepayment assumptions, early withdrawal of
deposits and competition.
<TABLE>
<CAPTION>
Estimated Maturity or Repricing
in thousands 0-3 4-12 1-5 5-10 More than
December 31, 1996 months months years years 10 years Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Interest-earning deposits $ 38,086 $ 38,086
Securities 1,863 $ 15,539 $ 22,763 $ 1,077 $ 4,247 45,489
Loans:
Business and commercial
real estate 188,667 5,201 31,018 1,842 1,822 228,550
One- to four-family 73,816 25,074 58,703 2,151 11,012 170,756
Consumer 5,079 26,847 21,593 1,859 525 55,903
-------------------------------------------------------------------------------------------
Total interest-
earning assets $ 307,511 $ 72,661 $ 134,077 $ 6,929 $ 17,606 $ 538,784
===========================================================================================
Noninterest-earning assets 2,227 47,905 50,132
-------------------------------------------------------------------------------------------
Total assets $ 307,511 $ 74,888 $ 134,077 $ 6,929 $ 65,511 $ 588,916
===========================================================================================
Percent of total interest-
earning assets 57.08% 13.48% 24.89% 1.29% 3.26% 100.00%
===========================================================================================
Interest-Bearing Liabilities
Deposits:
Money market checking $ 125,428 $ 125,428
NOW accounts 8,922 $ 35,689 44,611
Savings accounts 7,456 $ 7,456 $ 7,456 22,368
Time certificates of deposit 66,470 $ 106,309 44,042 11 216,832
FHLB advances 12,000 20,000 32,000
-------------------------------------------------------------------------------------------
Total interest-
bearing liabilities $ 220,276 $ 106,309 $ 99,731 $ 7,467 $ 7,456 $ 441,239
===========================================================================================
Noninterest-bearing liabilities
and equity 67,218 16,771 63,688 147,677
-------------------------------------------------------------------------------------------
Total liabilities
and equity $ 287,494 $ 106,309 $ 116,502 $ 7,467 $ 71,144 $ 588,916
===========================================================================================
Percent of total interest-
earning assets 40.88% 19.73% 18.52% 1.39% 1.38% 81.90%
===========================================================================================
Rate sensitivity gap $ 87,235 $ (33,648) $ 34,346 $ (538) $ 10,150 $ 97,545
Cumulative rate sensitivity gap 87,235 53,587 87,933 87,395 97,545
-------------------------------------------------------------------------------------------
Rate sensitivity gap as
a percentage of
interest-earning assets 16.20% (6.25)% 6.37% (0.10)% 1.88% 18.10%
Cumulative rate sensitivity gap
as a percentage of interest-
earning assets 16.20% 9.95% 16.32% 16.22% 18.10%
===========================================================================================
</TABLE>
COLUMBIA BANKING SYSTEM, INC.
page 30
<PAGE> 60
As stated above, certain shortcomings are inherent in the method of analysis
presented in the foregoing tables. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market interest rates. Additionally, certain assets, such as
adjustable-rate mortgages, have features which restrict changes in the interest
rates of such assets both on a short-term basis and over the lives of such
assets. Further, in the event of a change in market interest rates, prepayment
and early withdrawal levels could deviate significantly from those assumed in
calculating the tables. Finally, the ability of many borrowers to service their
adjustable-rate debt may decrease in the event of a substantial increase in
market interest rates.
Income Tax
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 December 31, 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 the Company will record a provision for income taxes
during 1997.
Capital
Shareholders' equity increased to $59.0 million at December 31, 1996 from $32.0
million at December 31, 1995. The increase is due primarily to the issuance of
1.445 million shares of common stock with net proceeds of $20.7 million.
Shareholders' equity was also enhanced by net income for the year of $3.6
million, conversion of convertible subordinated notes of $2.5 million, and a
decrease in the reserve for unrealized gains and losses on securities available
for sale. Shareholders' equity was 10.0% and 7.5% of total assets at December
31, 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 December 31, 1996, the Company's leverage ratio was 10.62%,
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 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 12.81% and 13.79%, respectively, at December 31, 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 December 31, 1996. Failure to qualify as
"well-capitalized" can negatively impact a bank's ability to expand and to
engage in certain activities.
COLUMBIA BANKING SYSTEM, INC.
page 31
<PAGE> 61
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.
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 for all periods presented have been
retroactively adjusted to give effect to this transaction.
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. As of
August 1, 1996, all of the Notes were converted into 223,743 shares of common
stock.
In connection with the public offering of common stock in 1996, the Company
contributed approximately $10 million of the net proceeds to Columbia Bank
primarily to finance additional expansion in Pierce County, and, over the next
several years, into south King and Thurston Counties. The remainder was used to
repay a $3.0 million borrowing and for general corporate purposes.
Impact of Inflation and Changing Prices
The impact of inflation on the Company's operations is increased operating
costs. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than the effect of general levels of inflation.
Although interest rates do not necessarily move in the same direction or to the
same extent as the prices of goods and services, increases in inflation
generally have resulted in increased interest rates.
Recent Accounting Pronouncements
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 elected to
continue to apply APB 25 for measurement of stock compensation and has provided
disclosure required by SFAS 123 in footnote No. 10 accompanying the consolidated
financials of the Company.
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.
COLUMBIA BANKING SYSTEM, INC.
page 32
<PAGE> 62
Recent Change in Accounting Firms
On February 26, 1997, the Company engaged Deloitte & Touche LLP as the Company's
principal independent accountant. Prior to Deloitte & Touche's engagement, Price
Waterhouse LLP, independent certified public accountants, had served as the
principal independent accountant for the Company and rendered their report with
respect to the Company's financial statements for the year ended December 31,
1996. The recommendation to change accountants was made by management of the
Company and was approved by the Audit Committee and the Board of Directors.
In the two most recent fiscal years preceding the Board's actions, there
were no disagreements with Price Waterhouse LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which, if not resolved to Price Waterhouse's satisfaction, would have
caused them to make reference to the subject matter of the disagreement in
connection with their report. Price Waterhouse's reports on the Company's
financial statements for such fiscal years did not contain any adverse opinion
or disclaimer of opinion, nor were such reports qualified in any respect. A
representative of Price Waterhouse is expected to be present at the Annual
Meeting to make a statement, if desired, and to be available to respond to
appropriate questions. The Company does not anticipate that a representative of
Deloitte & Touche will be present at the Meeting.
Quarterly Common Stock Prices and Dividend Payments
The Company's common stock trades on The Nasdaq Stock Market under the symbol
COLB. Price information generally appears daily in the Nasdaq National Market
Issues section of The Wall Street Journal and in most major Pacific Northwest
metropolitan newspapers. On December 31, 1996, the last sale price for the
Company's stock in the over-the-counter market was $16 1/4.
The Company presently intends to retain earnings to support anticipated
growth. Accordingly, the Company does not intend to pay cash dividends on its
common stock in the foreseeable future. Please refer to the "Capital" section of
the Management Discussion and Analysis of Financial Condition and Results of
Operations, and Note 3 to the consolidated financial statements, contained
elsewhere in this report, for regulatory capital requirements and restrictions
on dividends to shareholders.
The Company is aware that large blocks of its stock are held in street name
by brokerage firms. At December 31, 1996, the number of shareholders of record
was 872.
The following are high and low sales prices as reported on the Nasdaq
National Market according to information furnished by the National Association
of Securities Dealers. Prices do not include retail mark-ups, mark-downs or
commissions.
<TABLE>
<CAPTION>
1996 High Low
------- -------
<S> <C> <C>
First quarter $14 3/4 $11 1/2
Second quarter 16 1/2 13
Third quarter 16 14 1/4
Fourth quarter 17 1/4 14 1/2
For the year 17 1/4 11 1/2
1995
First quarter $12 $ 9 1/8
Second quarter 12 1/2 9 7/8
Third quarter 12 3/8 11 1/8
Fourth quarter 12 3/4 11 1/4
For the year 12 3/4 9 1/8
</TABLE>
COLUMBIA BANKING SYSTEM, INC.
page 33.
<PAGE> 63
report of management
The consolidated financial statements have been prepared by management in
accordance with generally accepted accounting principles and include, where
necessary, amounts based on the best estimates and judgments of management. The
primary responsibility for the integrity of data in these financial statements
is that of management. The other financial information in the Annual Report is
consistent with that contained in the consolidated financial statements.
The consolidated financial statements for 1996 have been audited by Price
Waterhouse LLP, the Company's independent accountants. In planning and
performing their audit, Price Waterhouse LLP considered the Company's internal
control structure in order to determine their auditing procedures for the
purpose of expressing their opinion on the financial statements and not to
provide assurance on the internal control structure. Their consideration of the
internal control structure would not necessarily disclose all matters in the
internal control structure that might be material weaknesses under standards
established by the American Institute of Certified Public Accountants.
Management maintains an internal control structure which is deemed adequate
to provide reasonable assurance as to the reliability of financial records and
the protection of assets. In establishing the internal control structure,
management weighs the cost of control procedures against the benefits that it
believes can be derived. The Board of Directors monitors the internal control
structure through its Audit Committee. The membership of the Committee is
composed of directors who are not officers or employees of the Company. The
independent and internal auditors have free access to the Audit Committee, and
they meet with the Committee regularly, with and without management present, to
discuss accounting, auditing, internal controls and financial reporting matters.
In the opinion of management, the Company has a capable and aggressive internal
audit department which serves as an integral part of the internal control
structure.
/s/ A. G. Espe /s/ W. W. Philip /s/ Gary R. Schminkey
A. G. Espe W. W. Philip Gary R. Schminkey
Chairman and President and Senior Vice President and
Chief Executive Officer Chief Operating Officer Chief Financial Officer
COLUMBIA BANKING SYSTEM, INC.
page 34.
<PAGE> 64
report of independent accountants
To the Board of Directors and Shareholders of Columbia Banking System, Inc.
In our opinion, the accompanying consolidated balance sheets as of December 31,
1996 and 1995, and the related consolidated statements of operations, of
shareholders' equity and of cash flows for each of the three years in the period
ended December 31, 1996, present fairly, in all material respects, the financial
position of Columbia Banking System, Inc. and its subsidiaries, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ Price Waterhouse LLP
Seattle, Washington
January 22, 1997
COLUMBIA BANKING SYSTEM, INC.
page 35.
<PAGE> 65
consolidated statements of operations
<TABLE>
<CAPTION>
in thousands except per share
years ended December 31, 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Interest Income
Loans $ 36,048 $ 30,038 $ 18,990
Investment securities 1,078 1,127
Securities available for sale 1,878 290 205
Deposits with banks 1,136 314 334
-------- -------- --------
Total interest income 39,062 31,720 20,656
Interest Expense
Deposits 16,469 13,385 7,304
Federal Home Loan Bank advances 1,865 1,503 1,160
Other borrowings 184 271 612
-------- -------- --------
Total interest expense 18,518 15,159 9,076
-------- -------- --------
Net Interest Income 20,544 16,561 11,580
Provision for loan losses 1,420 1,250 1,000
Net interest income after
provision for loan losses 19,124 15,311 10,580
Noninterest Income
Service charges and other fees 2,381 1,895 1,242
Mortgage banking 636 394 782
Gains (losses) on sales of
securities available for sale (8)
Gains on sales of loans, net 39
Credit card fees and other fees 2,291 1,671 972
-------- -------- --------
Total noninterest income 5,308 3,991 2,996
</TABLE>
COLUMBIA BANKING SYSTEM, INC.
page 36.
<PAGE> 66
<TABLE>
<CAPTION>
in thousands except per share
years ended December 31, 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Noninterest Expense
Compensation and employee benefits $ 8,437 $ 7,339 $ 6,219
Occupancy 3,388 2,845 2,802
Professional services 574 436 427
Advertising and promotion 772 634 508
Printing and supplies 414 375 397
Regulatory assessments 323 482 475
Data processing 807 615 463
Gains on, and net cost of, real estate owned (400) (314)
Other 5,528 4,221 3,059
SAIF special assessment 612
-------- -------- --------
Total noninterest expense 20,855 16,547 14,036
Income (loss) from
continuing operations
before income tax 3,577 2,755 (460)
-------- -------- --------
Provision for income tax
Income (loss) from continuing
operations before
extraordinary item 3,577 2,755 (460)
Extraordinary loss on
extinguishment of debt, net (154)
-------- -------- --------
Net Income (Loss) $ 3,577 $ 2,755 $ (614)
======== ======== ========
Per Share (On Average Shares Outstanding)
Income (loss) from continuing operations $ 0.93 $ 0.79 $ (0.13)
Extraordinary loss on
extinguishment of debt, net (0.05)
Net income (loss) 0.93 0.79 (0.18)
Fully diluted net income (loss) 0.92 0.79 (0.18)
Average number of common and common
equivalent shares outstanding 3,866 3,496 3,481
Fully diluted average common and common
equivalent shares outstanding 4,047 3,752 3,740
</TABLE>
see accompanying notes to consolidated financial statements
COLUMBIA BANKING SYSTEM, INC.
page 37
<PAGE> 67
consolidated balance sheets
<TABLE>
<CAPTION>
in thousands
December 31, 1996 1995
-------- --------
<S> <C> <C>
Assets
Cash and due from banks $ 32,092 $ 18,244
Interest-earning deposits with banks 38,086 12,635
Securities available for sale:
U.S. Treasury & government agencies 30,481 6,948
Mortgage-backed 10,760 12,446
FHLB stock 4,248 3,281
-------- --------
Total securities available for sale 45,489 22,675
Loans held for sale 11,341 1,367
Loans 446,095 353,093
Less: allowance for loan losses 4,504 3,748
-------- --------
Loans, net 441,591 349,345
Interest receivable 3,347 2,469
Premises and equipment, net 15,250 13,736
Real estate owned 40 3,304
Other 1,680 1,431
-------- --------
Total Assets $588,916 $425,206
======== ========
</TABLE>
COLUMBIA BANKING SYSTEM, INC.
page 38
<PAGE> 68
<TABLE>
<CAPTION>
December 31,
in thousands 1996 1995
-------- --------
<S> <C> <C>
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing $ 83,983 $ 52,991
Interest-bearing 409,239 308,884
-------- --------
Total deposits 493,222 361,875
Federal Home Loan Bank advances 32,000 25,000
Other liabilities 4,734 3,669
Convertible subordinated notes 2,695
-------- --------
Total liabilities 529,956 393,239
Commitments and contingent liabilities (Note 12)
Shareholders' equity:
Preferred stock (no par value)
Authorized, 2,000,000 shares; none outstanding
</TABLE>
<TABLE>
<CAPTION>
December 31,
1996 1995
--------- ---------
<S> <C> <C> <C> <C>
Common stock (no par value)
Authorized shares 10,000 10,000
Issued and outstanding 5,185 3,274 56,340 30,806
Retained earnings 2,694 1,274
Unrealized losses on securities available for sale (74) (113)
Total shareholders' equity 58,960 31,967
--------- ---------
Total Liabilities and Shareholders' Equity $ 588,916 $ 425,206
========= =========
</TABLE>
see accompanying notes to consolidated financial statements
COLUMBIA BANKING SYSTEM, INC.
page 39
<PAGE> 69
consolidated statements of shareholders' equity
<TABLE>
<CAPTION>
Common Stock
Number
in thousands of Shares Amount
--------- --------
<S> <C> <C>
Balance at December 31, 1993 3,250 $ 30,668
Adjustment to beginning balance
for change in accounting method, net
Net loss
Issuance of shares of common stock, net 8 35
----- -------
Change in unrealized losses
Balance at December 31, 1994 3,258 30,703
Net income
Issuance of shares of common stock, net 16 103
----- -------
Change in unrealized gains and (losses)
Balance at December 31, 1995 3,274 30,806
Net income
Issuance of shares of common stock, net 1,492 20,868
Issuance of shares of common stock
5% stock dividend 164 2,157
Conversion of Convertible
Subordinated Notes 255 2,509
----- --------
Change in unrealized gains and (losses)
Balance at December 31, 1996 5,185 $ 56,340
===== ========
</TABLE>
see accompanying notes to consolidated financial statements
COLUMBIA BANKING SYSTEM, INC.
page 40
<PAGE> 70
<TABLE>
<CAPTION>
Unrealized Total
Retained Gains and Shareholders'
in thousands Earnings (Losses) Equity
-------- ---------- -------------
<S> <C> <C> <C>
Balance at December 31, 1993 $ (867) $ 29,801
Adjustment to beginning balance
for change in accounting method, net $ (32) (32)
Net loss (614) (614)
Issuance of shares of common stock, net 35
Change in unrealized losses (329) (329)
-------- -------- --------
Balance at December 31, 1994 (1,481) (361) 28,861
Net income 2,755 2,755
Issuance of shares of common stock, net 103
Change in unrealized gains and (losses) 248 248
-------- -------- --------
Balance at December 31, 1995 1,274 (113) 31,967
Net income 3,577 3,577
Issuance of shares of common stock, net 20,868
Issuance of shares of common stock
5% stock dividend (2,157)
Conversion of Convertible
Subordinated Notes 2,509
Change in unrealized gains and (losses) 39 39
-------- -------- --------
Balance at December 31, 1996 $ 2,694 $ (74) $ 58,960
======== ======== ========
</TABLE>
COLUMBIA BANKING SYSTEM, INC.
page 41
<PAGE> 71
consolidated statements of cash flows
<TABLE>
<CAPTION>
in thousands 1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 3,577 $ 2,755 $ (614)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Provision for loan losses 1,420 1,250 1,000
Losses (gains) on real estate owned 41 29 (30)
Depreciation and amortization 2,327 1,365 1,610
Net realized losses (gains) on sale of investments 185 (53) (12)
(Increase) decrease in loans held for sale (9,974) 245 165
Increase in interest receivable (878) (735) (635)
Increase in interest payable 368 388 538
Net changes in other assets and liabilities 184 1,317 (352)
--------- -------- --------
Net cash provided (used) by operating activities (2,750) 6,561 1,670
Investing Activities
Proceeds from maturities of securities available for sale 11,347 215 537
Proceeds from sales of securities available for sale 5,980
Purchase of securities available for sale (35,686) (6,000)
Proceeds from maturities of mortgage-backed
securities available for sale 1,682
Proceeds from maturities of investment securities 4,243 2,557
Purchases of investment securities (4,675) (266)
Loans originated and acquired, net of principal collected (94,294) (88,579) (88,286)
Proceeds from sales of loans 4,756
Purchases of premises and equipment (4,751) (6,660) (3,544)
Proceeds from disposal of premises and equipment 1,273 240 412
Proceeds from sale of real estate owned 3,263 13 536
Other, net (119)
--------- -------- --------
Net cash used by investing activities (117,166) (90,586) (88,054)
</TABLE>
COLUMBIA BANKING SYSTEM, INC.
page 42
<PAGE> 72
<TABLE>
<CAPTION>
in thousands 1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Financing Activities
Net increase in deposits 131,347 93,183 103,353
Proceeds from FHLB advances
and other long-term debt 30,800 17,000 17,000
Repayment of FHLB advances
and other long-term debt (23,800) (9,000) (32,000)
Repayment of other borrowings (4,600)
Proceeds from issuance of common stock, net 20,868 63 35
--------- --------- ---------
Net cash provided by financing activities 159,215 101,246 83,788
--------- --------- ---------
Increase (decrease) in cash
and cash equivalents 39,299 17,221 (2,596)
Cash and cash equivalents at
beginning of period 30,879 13,658 16,254
--------- --------- ---------
Cash and cash equivalents at end of period $ 70,178 $ 30,879 $ 13,658
========= ========= =========
Supplemental Information
Cash paid for interest $ 18,149 $ 14,771 $ 8,538
Transfer from investment securities
to securities available for sale 19,912
Loans foreclosed and transferred to real estate owned 40 428
Issuance of common stock from conversion
of convertible subordinated notes 2,509 40
</TABLE>
see accompanying notes to consolidated financial statements
COLUMBIA BANKING SYSTEM, INC.
page 43
<PAGE> 73
notes to consolidated financial statements
Columbia Banking System, Inc. (the "Company") is a registered bank
holding company whose wholly owned subsidiary, Columbia State Bank
("Columbia Bank"), conducts a full-service commercial banking business.
Headquartered in Tacoma, Washington, the Company provides a full range
of commercial banking services to small and medium-sized businesses,
professionals and other individuals through 16 banking offices located
in the Tacoma metropolitan area and contiguous parts of the Puget Sound
region of Washington, as well as the Longview and Woodland communities
in southwestern Washington. Substantially all of the Company's loans,
loan commitments and core deposits are geographically concentrated in
its service areas.
1. summary of significant accounting policies
The financial statements have been prepared in accordance with
generally accepted accounting principles. Accordingly, they 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 all
periods included herein have been made. The results of operations for
the year ending December 31, 1996 are not necessarily indicative of
results to be anticipated for future periods.
Consolidation
The consolidated financial statements of the Company include the
accounts of the corporation and its wholly-owned subsidiaries after the
elimination of all material intercompany transactions and accounts.
Securities
Securities to be held for indefinite periods of time and not intended
to be held to maturity or on a long-term basis are classified as
available for sale and carried at market value. Unrealized gains and
losses are recorded directly to a component of shareholders' equity.
Securities held for indefinite periods of time include securities that
management intends to use as part of its asset/liability management
strategy and that may be sold in response to changes in interest rates
and/or significant prepayment risk.
Investment securities are those securities which the Company
has the ability and intent to hold to maturity. Events which may be
reasonably anticipated are considered when determining the Company's
intent to hold investment securities until maturity. Investment
securities are carried at cost, adjusted for amortization of premiums
and accretion of discounts using a method that approximates the
interest method. Gains and losses on the sale of all securities are
determined using the specific identification method.
Loans
Loans are stated at their principal amount outstanding, less any
unamortized discounts and deferred net loan fees. Loans held for sale
are carried at the lower of cost or market value. The amount by which
cost exceeds market for loans held for sale is accounted for as a
valuation allowance, and changes in the allowance are included in the
determination of net income in the period in which the change occurs.
The 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.
Premiums or discounts purchased and sold are amortized, using
the interest method, over periods which approximate the average life of
the loans.
Loan Fee Income
Loan origination fees and certain direct loan origination costs are
deferred and the net amount recognized as an adjustment to yield over
the contractual life of the related loans. Costs related to origination
of credit cards are expensed as incurred. Fees related to lending
activity other than the origination or purchase of loans are recognized
as noninterest income during the period the related services are
performed.
COLUMBIA BANKING SYSTEM, INC.
page 44
<PAGE> 74
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed to be sufficient
to absorb potential losses in the portfolio. Management's determination of the
adequacy of the allowance is based on a number of factors, including the level
of nonperforming loans, loan loss experience, credit concentrations, a review of
the quality of the loan portfolio, collateral values and uncertainties in
economic conditions.
Premises and Equipment
Premises and equipment are recorded at cost and depreciated over the estimated
useful lives of the assets. Depreciation and amortization are computed using the
straight-line method. Gains or losses on dispositions are reflected in
operations. Expenditures for improvements and major renewals are capitalized,
and ordinary maintenance, repairs and small purchases are charged to operations
as incurred.
Real Estate Owned
All real estate acquired in satisfaction of a loan is considered held for sale
and reported as "real estate owned." Real estate owned is carried at the lower
of cost or fair value less estimated cost of disposal. Cost at the time of
foreclosure is defined as the fair value of the asset less estimated disposal
costs.
Intangible Assets
Intangible assets represent assets purchased by the Company in mergers and
acquisitions. The recorded cost of each asset is amortized using the
straight-line method over its estimated useful life (up to 15 years for core
deposit intangible assets and 25 years for goodwill).
At December 31, 1996 and 1995, intangible assets amounted to $188,000
and $266,000, respectively, net of accumulated amortizations.
Income Tax
The provision for income tax, generally, is based on income and expense reported
for financial statement purposes, using the "asset and liability method" for
accounting for deferred income tax. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is recorded against any deferred tax assets for which it is more
likely than not that the deferred tax asset will not be realized.
Earnings Per Share
Earnings per share is computed using the weighted average number of shares of
common and common equivalent shares outstanding during the period. Common
equivalent shares result from the assumed exercise of outstanding stock options,
if dilutive. Fully diluted earnings per share assumes conversion of convertible
subordinated notes, if dilutive.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates are used
in determining the level of the allowance for loan losses, valuation allowance
on deferred tax assets, depreciation of premises and equipment and others.
Statement of Cash Flows
The accompanying consolidated statements of cash flows have been prepared using
the "indirect" method for presenting cash flows from operating activities. For
purposes of this statement, cash and cash equivalents include cash and due from
banks, interest-earning deposits with banks and federal funds sold.
Reclassification
Certain amounts in the 1995 and 1994 consolidated financial statements have been
reclassified to conform with the 1996 presentation. These reclassifications had
no effect on net income (loss).
COLUMBIA BANKING SYSTEM, INC.
page 45
<PAGE> 75
2. termination of assistance agreement and extinguishment of debt
In connection with the acquisition of the Savings Bank in 1988, the
Savings Bank and the Company entered into an agreement (the "Assistance
Agreement"), pursuant to which the Federal Savings and Loan Insurance
Corporation (the "FSLIC") provided various forms of financial and other
assistance to the Savings Bank, including the purchase of a $5 million
subordinated debenture due August 2, 1998. On September 30, 1994,
Columbia Bank entered into an agreement with the FDIC, as successor to
the FSLIC, to terminate the Assistance Agreement and to settle the
obligations under the subordinated debenture for $4.6 million,
resulting in an extraordinary nonrecurring loss of approximately
$154,000.
3. restrictions on subsidiary cash, loans and dividends
Columbia Bank is required to maintain reserve balances with the Federal
Reserve Bank. The average required reserves for the year ended December
31, 1996 were approximately $1.1 million. The required reserves are
based on specified percentages of the Bank's total average deposits
which are established by the Federal Reserve Board.
Under Federal Reserve regulations, Columbia Bank, generally,
is limited as to the amount it may loan to the Company to 10% of its
capital stock and additional paid-in capital. Such loans must be
collateralized by specified obligations.
Under Washington state banking regulations, Columbia Bank is
limited as to the ability to declare or pay dividends to the Company up
to the amount of the Columbia Bank's net profits then on hand, less any
required transfers to additional paid-in capital.
4. securities
The following table summarizes the amortized cost, gross unrealized
gains and losses and the resulting market value of securities available
for sale.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
in thousands Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
December 31, 1996
U.S. Treasury and government agency $ 30,441 $ 40 $ 30,481
Mortgage-backed 10,874 $ (114) 10,760
FHLB stock 4,248 4,248
-------- -------- -------- --------
Total $ 45,563 $ 40 $ (114) $ 45,489
======== ======== ======== ========
December 31, 1995
U.S. Treasury and government agency $ 6,935 $ 13 $ 6,948
Mortgage-backed 12,572 $ (126) 12,446
FHLB stock 3,281 3,281
-------- -------- -------- --------
Total $ 22,788 $ 13 $ (126) $ 22,675
======== ======== ======== ========
</TABLE>
In November 1995, the FASB issued a Special Report, "A Guide
to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities." In addition to the report,
the FASB permitted a one-time opportunity for institutions to reassess
the appropriateness of the designations of all securities. Accordingly,
in December 1995, the Company reclassified all "investment securities"
to "securities available for sale" resulting in additional net
unrealized losses of $113,000.
COLUMBIA BANKING SYSTEM, INC.
page 46
<PAGE> 76
At December 31, 1996 and 1995, securities available for sale
with a fair value of $3.7 million and $3.0 million, respectively, were
pledged to secure public deposits and for other purposes as required or
permitted by law.
The following table summarizes the amortized cost and market
values of securities available for sale by contractual maturity groups:
<TABLE>
<CAPTION>
in thousands Amortized Market
December 31, 1996 Cost Value
--------- ---------
<S> <C> <C>
Amount maturing:
Within one year $15,015 $15,040
Greater than one year and less than five years 22,613 22,529
Greater than five years and less than ten years 2,011 1,959
After ten years 5,924 5,961
-----------------------
Total $45,563 $45,489
=======================
</TABLE>
5. loans
The following is an analysis of the loan portfolio by major types of
loans:
<TABLE>
<CAPTION>
in thousands
December 31, 1996 1995
--------- ---------
<S> <C> <C>
Commercial business $ 169,318 $ 113,775
Real estate:
One- to four-family residential 67,709 67,991
Five or more family residential and commercial properties 128,803 97,103
--------- ---------
Total real estate 196,512 165,094
Real estate construction:
One- to four-family residential 21,380 22,741
Five or more family residential and commercial properties 10,680 8,884
--------- ---------
Total real estate construction 32,060 31,625
Consumer 48,807 43,343
--------- ---------
Subtotal 446,697 353,837
Less deferred loan fees, net and other (602) (744)
--------- ---------
Total loans $ 446,095 $ 353,093
========= =========
Loans held for sale $ 11,341 $ 1,367
========= =========
</TABLE>
At December 31, 1996 and 1995, residential real estate loans
with recorded values of $38.4 million and $30.0 million, respectively,
were pledged to secure Federal Home Loan Bank advances and for other
purposes.
COLUMBIA BANKING SYSTEM, INC.
page 47
<PAGE> 77
The following table summarizes certain information related to
nonperforming loans:
<TABLE>
<CAPTION>
in thousands
December 31, 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis $2,227 $ 435 $ 452
Restructured loans 25 29 44
------------------------------
Total nonperforming loans $2,252 $ 464 $ 496
==============================
Originally contracted interest $ 219 $ 49 $ 50
Recorded interest 102 38 27
------------------------------
Reduction in interest income $ 117 $ 11 $ 23
==============================
</TABLE>
In May 1993, the FASB issued Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
("SFAS 114"), which requires that impaired loans (as defined) be
measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or the fair value of
the collateral. In October 1994, the Board issued Statement No. 118
("SFAS 118"), amending SFAS 114 with regard to income recognition and
disclosure related to impaired loans. Impaired loans generally refer to
all loans that are restructured in a troubled debt restructuring
involving a modification of terms, nonaccrual loans and loans past due
90 days and still accruing. The Company adopted the new standard in
1995.
At December 31, 1996 and 1995, the recorded investment in
impaired loans was $2.3 million and $616,000, respectively. No specific
allocated allowance for loan losses has been made for impaired loans.
The average recorded investment in impaired loans for the periods ended
December 31, 1996 and 1995 was $1.4 million and $513,000 respectively.
At December 31, 1996 and 1995, there were no commitments for
additional funds for loans accounted for on a nonaccrual basis.
At December 31, 1996 and 1995, the Company had no foreign
loans or loans related to highly leveraged transactions.
The Company's banking subsidiaries have granted loans to
officers and directors of the Company and their associates. These loans
are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions
with unrelated persons and do not involve more than the normal risk of
collectibility. The aggregate dollar amount of these loans were $4.4
million and $4.6 million at December 31, 1996 and 1995, respectively.
During 1996, $2.9 million of new related party loans were made and
repayments and transfers totaled $3.1 million.
6. allowance for loan losses
Transactions in the allowance for loan losses are summarized as
follows:
<TABLE>
<CAPTION>
in thousands
years ended December 31, 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of period $ 3,748 $ 2,711 $ 1,992
Loans charged off (684) (263) (364)
Recoveries 20 50 83
------- ------- -------
Net charge-offs (664) (213) (281)
Provision charged to operating expense 1,420 1,250 1,000
-----------------------------------
Balance at end of period $ 4,504 $ 3,748 $ 2,711
===================================
</TABLE>
COLUMBIA BANKING SYSTEM, INC.
page 48
<PAGE> 78
7. premises and equipment
Land, buildings, and furniture and equipment, less accumulated
depreciation and amortization, were as follows:
<TABLE>
<CAPTION>
in thousands
December 31, 1996 1995
-------- --------
<S> <C> <C>
Land $ 2,914 $ 1,748
Buildings 9,419 8,589
Leasehold improvements 1,434 1,509
Furniture and equipment 6,339 5,533
Automobiles 102 101
Computer software 583 691
-----------------------
Total cost 20,791 18,171
Less accumulated depreciation and amortization (5,541) (4,435)
-----------------------
Total $ 15,250 $ 13,736
=======================
</TABLE>
Total depreciation and amortization expense on buildings and
furniture and equipment was $1.8 million, $1.7 million and $1.6 million
for the years ended December 31, 1996, 1995 and 1994, respectively.
The Company is obligated under various noncancellable lease
agreements for property and equipment (primarily for land and
buildings) which require future minimum rental payments, exclusive of
taxes and other charges, as follows:
<TABLE>
<CAPTION>
in thousands
years ending December 31,
<S> <C>
1997 $1,151
1998 1,055
1999 888
2000 634
2001 394
2002 and thereafter 2,757
------
Total minimum payments $6,879
======
</TABLE>
Total rental expense on buildings and equipment was $983,000,
$946,000 and $909,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
8. federal home loan bank advances and long-term debt
Federal Home Loan Bank ("FHLB") advances and long-term debt consisted
of the following:
<TABLE>
<CAPTION>
in thousands
December 31, 1996 1995
------- -------
<S> <C> <C>
Federal Home Loan Bank advances $32,000 $25,000
7.85% Convertible Subordinated Notes due June 30, 2002 2,695
--------------------
Total FHLB advances and other long-term debt $32,000 $27,695
====================
</TABLE>
COLUMBIA BANKING SYSTEM, INC.
page 49
<PAGE> 79
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. As of August 1, 1996 all of
the Notes were converted into 223,743 shares of common stock.
FHLB advances are at the following interest rates:
<TABLE>
<CAPTION>
in thousands
December 31, 1996 1995
------- -------
<S> <C> <C>
6.90% $ 5,000
6.20 2,000
6.14 $10,000
6.09 8,000
5.79 2,000
5.45 10,000
5.32 5,000 5,000
5.20 5,000 5,000
------------------------
Total $32,000 $25,000
========================
</TABLE>
Aggregate maturities of FHLB advances due in years ending after
December 31, 1996, are as follows:
<TABLE>
<CAPTION>
in thousands Amount
-------
<S> <C>
1997 $10,000
1998 20,000
2000 2,000
-------
Total $32,000
=======
</TABLE>
FHLB advances are collateralized by residential real estate
loans with a recorded value of approximately $38.4 million at December
31, 1996, and $30.0 million at December 31, 1995 (see Note 5).
Penalties are generally required for prepayments of certain long-term
FHLB advances.
9. income tax
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
in thousands
years ended December 31, 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current
Deferred
---- ---- ----
Total None None None
==== ==== ====
</TABLE>
Effective January 1, 1993, the Company adopted the FASB's
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). This Statement 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.
COLUMBIA BANKING SYSTEM, INC.
page 50
<PAGE> 80
Significant components of the Company's deferred tax assets
and liabilities at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
in thousands
December 31, 1996 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 1,478
Allowance for loan losses $ 1,531 1,274
Contributions 164 97
------- -------
Total deferred tax assets 1,695 2,849
Less: valuation allowance (768) (2,011)
------- -------
Subtotal 927 838
Deferred tax liabilities:
FHLB stock dividends (657) (551)
Depreciation (18) (35)
------- -------
Total deferred tax liabilities (675) (586)
------- -------
Net deferred tax assets $ 252 $ 252
======= =======
</TABLE>
A reconciliation of the Company's effective income tax rate with the
federal statutory tax rate is as follows:
<TABLE>
<CAPTION>
dollars in thousands 1996 1995 1994
------------------ ------------------ ------------------
years ended December 31, Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Income tax based
on statutory rate $(1,216) (34)% $ (937) (34)% $ 209 34%
Increase (reduction)
resulting from:
Other nondeductible
items (27) (1) (37) (1) (27) (4)
Valuation allowance 1,243 35 974 35 (182) (30)
------- ------- ------- ------- ------- -------
Income tax $ 0 0% $ 0 0% $ 0 0%
======= ======= ======= ======= ======= =======
</TABLE>
10. stock options and warrants
At December 31, 1996 and 1995, the Company had stock options
outstanding of 275,168 shares and 247,433 shares, respectively, for the
purchase of common stock at option prices ranging from $2.38 to $21.25
per share. The Company's policy is to recognize compensation expense at
the date the options were granted due to the difference, if any,
between the then market value of the Company's common stock and the
stated option price.
At December 31, 1996 and 1995, the Company had options
outstanding granted to a company controlled by a director for the
purchase of 36,317 and 13,858 shares of common stock at exercise prices
of approximately $6.45 and $8.81 per share, respectively. These options
are generally exercisable in whole or in part at any time before
September 26, 2000.
At December 31, 1996 and 1995, the Company had stock warrants
outstanding to purchase 18,716 shares of common stock at $10.14 per
share, which expires in 1997.
COLUMBIA BANKING SYSTEM, INC.
page 51
<PAGE> 81
The following table outlines the stock option activity for 1996 and
1995:
<TABLE>
<CAPTION>
in thousands Balance Price Range
------- -------------
<S> <C> <C>
Balance at December 31, 1994 316,061 $ 2.38-$11.19
Issued 15,225 9.29- 10.71
Exercised (8,400) 2.38
Terminated (6,562) 9.29- 11.19
------- -------------
Balance at December 31, 1995 316,324 2.38- 11.19
Issued 53,525 12.56- 21.25
Exercised (18,970) 2.38- 11.19
Terminated (6,820) 9.29- 11.19
------- -------------
Balance at December 31, 1996 344,059 $ 3.81-$21.25
======= =============
Total Vested at December 31, 1996 194,716 $ 3.81-$11.19
======= =============
</TABLE>
In August 1996, the Personnel and Compensation Committee of
the Board of Directors of the Company approved the grant to Mr. A. G.
Espe (Chairman of the Board and Chief Executive Officer) of an option
to purchase 40,000 shares of Common Stock at prices ranging from $15.25
to $21.25. The Board also approved the grant to Mr. W. W. Philip
(Director, President and Senior Operating Officer) of a restricted
stock award for 20,000 shares of Common Stock. The market value of the
Common Stock at the date of grants to both Messrs. Espe and Philip was
$15.25 per share.
The option to Mr. Espe, which is subject to approval by the
shareholders of additional shares to be available pursuant to the Plan
and certain other amendments to the Plan, provides for 10,000 shares to
vest (become exercisable) in August 1997 at an option price of $15.25,
and 10,000 additional shares to vest each year beginning in August 1998
and continuing through August 2000 at option prices of $17.25, $19.25
and $21.25, respectively. Earlier vesting of the options may be
approved at the sole discretion of the Board or the Compensation
Committee of the Board and will occur in the event of termination of
employment without cause (as defined) following a change in control (as
defined) of the Company. Vested options will remain exercisable for ten
years from the date of vesting in the event of Mr. Espe's retirement
(as approved by the Board), death or disability, or a change in control
of the Company or Columbia Bank (as the term is defined in Mr. Espe's
Employment Agreement).
The restricted stock award to Mr. Philip provides for the
immediate issuance of 20,000 shares of the Company's Common Stock to
Mr. Philip in escrow. The shares are to remain in escrow until Mr.
Philip has served as an active officer or Board member of the Company
and/or Columbia Bank for a period of five years from the date of the
grant, unless that term is reduced (i) by action of the Board or the
Personnel and Compensation Committee, (ii) by reason of a change of
control of the Company or Columbia Bank (as defined in Mr. Philip's
Employment Agreement), or (iii) by Mr. Philip's death or disability.
Mr. Philip will have the right to vote shares and to receive any
dividends or other distributions on the shares while they remain in
escrow.
The Company has an employee stock option plan ("the Plan") to
provide additional incentives to key employees, thereby helping to
attract and retain the best available personnel. The Company applies
APB Opinion 25 and related interpretations in accounting for the Plan.
Accordingly, no compensation cost has been recognized for the Plan. The
Company estimates the fair value of its stock options using the
Black-Scholes option-pricing model. Had compensation cost for the
Company's Plan been determined based on the fair value at the grant
dates consistent with the FASB's Statement of Accounting Standards No.
123, "Accounting for Stock-Based Compensation," the impact on net
income and earnings per share would not have been significant for the
years ended December 31, 1996 and 1995.
COLUMBIA BANKING SYSTEM, INC.
page 52
<PAGE> 82
11. employee benefit plan
The Company maintains a defined contribution plan which allows
employees to contribute up to 15% of their compensation to the plan.
Employees who are at least 20 1/2 years of age and have completed 6
months of service are eligible to participate in the plan. The Company
is required to match 50% of employee contributions up to 3% of each
employee's total compensation. The Company contributed approximately
$153,000, $126,000 and $80,000 in matching funds to the plan during the
years ended December 31, 1996, 1995 and 1994, respectively.
The Company amended the defined contribution plan effective
April 1, 1990 to add a nonmatching, discretionary contribution as
determined by the Board of Directors of the Company. In January 1997
and 1996, the Company announced discretionary contributions of
approximately $348,000 and $290,000 for the years ended 1996 and 1995
respectively.
The Company maintains an "Employee Stock Purchase Plan"
("ESPP"). Substantially all employees of the Company who have been
continuously employed for six months are eligible to participate in the
ESPP under which Common Stock is issued at quarterly intervals for cash
at a price of 90% of the fair market value of the stock. Under the
ESPP, 7,955 shares were acquired by employees for $110,000 in 1996.
There is no charge to income as a result of issuance of stock under
this plan. The discount offered to employees approximates the cost of
raising capital and does not have a material effect on net income and
earnings per share. At December 31, 1996, 88,296 shares of common stock
were reserved for issuance under this plan.
12. commitments and contingent liabilities
The employment agreement with Mr. Espe originally provided for an
annual salary of $150,000 in 1994 through 1996. As part of the
agreement, the Company provides a Supplementary Employee Retirement
Plan ("SERP") based on a contribution of 10% of total compensation per
year and earnings at a stated rate on that amount. The agreement has
recently been amended, effective January 1, 1997, to extend the term to
December 31, 2001 and to establish the minimum salary at $160,000.
Also, the employment agreement with Mr. Philip has recently been
amended, effective January 1, 1997, to extend the term to December 31,
1998 and to establish his minimum annual salary at $175,000.
In 1993, Messrs. Espe and Philip each purchased 30,000 shares
of the Company's common stock at the fair value of $12.00 per share at
the date of purchase. The purchase of stock was financed by the Company
with annual interest-only payments at 6% and principal due in April and
July 2000.
The Company had Long Term Incentive Plan arrangements with
Messrs. Espe and Philip. Under the arrangements, specific compensation
and allowance payments were agreed to be made for work performed since
1993 if the Company achieved certain performance objectives by December
31, 1996. At December 31, 1996, the terms of the incentive plan were
fulfilled, and in January 1997, $706,000 was paid under the terms of
the plan. From 1993 through 1996, Mr. Philip received no salary or
bonus payments.
In the normal course of business, the Company makes loan
commitments (unfunded loans and unused lines of credit) and issues
standby letters of credit to accommodate the financial needs of its
customers. Standby letters of credit commit the Company to make
payments on behalf of customers under specified conditions.
Historically, no significant losses have been incurred by the Company
under standby letters of credit. Both arrangements have credit risk
essentially the same as that involved in extending loans to customers
and are subject to the Company's normal credit policies, including the
obtaining of collateral, where appropriate. At December 31, 1996 and
1995, the Company's loan commitments amounted to $122.9 million and
$72.8 million, respectively. Standby letters of credit were $1.6
million and $1.5 million at December 31, 1996 and 1995, respectively.
In addition, commitments under commercial letters of credit used to
facilitate customers' trade transactions amounted to $2.5 million at
December 31, 1996 and 1995.
The Company and its subsidiaries are from time to time
defendants in and are threatened with various legal proceedings arising
from their regular business activities. Management, after consulting
with legal counsel, is of the opinion that the ultimate liability, if
any, resulting from these and other pending or threatened actions and
proceedings will not have a material effect on the financial position
or results of operations of the Company and its subsidiaries.
COLUMBIA BANKING SYSTEM, INC.
page 53
<PAGE> 83
13. fair value of financial instruments
The FASB's Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments" ("SFAS 107"),
requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value. "Fair Value" is defined in
SFAS 107 as the amount at which an instrument could be exchanged in a
current transaction between willing parties, other than a forced or
liquidation sale.
The following table summarizes carrying amounts and estimated
fair values of selected financial instruments as well as assumptions
used by the Company in estimating fair value:
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
in thousands Assumptions Used in Carrying Fair Carrying Fair
December 31, Estimating Fair Value Amount Value Amount Value
--------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Assets
Cash and due Approximately equal
from banks to carrying value $ 32,092 $ 32,092 $ 18,244 $ 18,244
Interest-earning Approximately equal
deposits with banks to carrying value 38,086 38,086 12,635 12,635
Securities available Quoted market prices
for sale 45,489 45,489 22,675 22,675
Loans held for sale Approximately equal
to carrying value 11,341 11,341 1,367 1,367
Loans Discounted expected
future cash flows,
net of allowance
for loan losses 441,591 454,326 349,345 371,720
Liabilities
Deposits Fixed-rate certificates
of deposit: Discounted
expected future
cash flows
All other deposits:
Approximately
equal to
carrying value $493,222 $489,206 $361,875 $360,609
Federal Home Discounted
Loan Bank expected future
advances cash flows 32,000 31,362 25,000 24,585
Convertible Discounted
subordinated expected future
notes cash flows 2,695 2,695
</TABLE>
COLUMBIA BANKING SYSTEM, INC.
page 54
<PAGE> 84
Off-Balance-Sheet Financial Instruments
The fair value of commitments is estimated based upon fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of
the counterparties. For fixed rate commitments, the fair value
estimation takes into consideration an interest rate risk factor. The
fair value of guarantees and letters of credit is based on fees
currently charged for similar agreements. The fair value of these
off-balance sheet items at December 31, 1996 approximates the recorded
amounts of the related fees.
14. stock dividend
On April 24, 1996, the Company announced a 5% stock dividend payable on
May 22, 1996, to holders 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 for all
periods presented have been retro-actively adjusted to give effect to
this transaction.
15. SAIF special assessment
Columbia Bank's deposits are insured by the FDIC through the Bank
Insurance Fund and through the Saving Association Insurance Fund (the
"SAIF"). SAIF-insured deposits of Columbia Bank are a result of a
so-called Oakar transaction in which deposits were acquired from a
savings bank. Legislation was enacted in 1996 for the purpose of
recapitalizing the SAIF fund. The legislation required a special
assessment on SAIF-insured deposits of approximately 65.7 cents per
$100 of insured deposits at March 31, 1995 (SAIF deposits then $116.5
million) with a discount of 20% on the special assessment of Oakar
institutions, such as Columbia Bank, which meet certain tests. The
one-time special assessment of $612,000, which is tax deductible, was
recognized in third quarter 1996 earnings.
COLUMBIA BANKING SYSTEM, INC.
page 55
<PAGE> 85
16. parent company financial information
condensed balance sheets
parent company only
<TABLE>
<CAPTION>
in thousands
December 31, 1996 1995
------- -------
<S> <C> <C>
Assets
Cash and due from banks:
Subsidiary banks $ 6 $ 41
Unrelated banks 68
Interest-earning deposits with banks:
Subsidiary banks
Unrelated banks 4,021
Securities available for sale 4,007
Loans 720 905
Investments in bank subsidiaries 49,951 32,660
Premises and equipment, net 28 49
Real estate owned 3,304
Other assets 429 354
------- -------
Total Assets $59,162 $37,381
======= =======
Liabilities and Shareholders' Equity
Other liabilities $ 202 $ 119
Borrowed funds 2,600
Convertible subordinated notes 2,695
------- -------
Total liabilities 202 5,414
Shareholders' equity 58,960 31,967
------- -------
Total Liabilities and Shareholders' Equity $59,162 $37,381
======= =======
</TABLE>
COLUMBIA BANKING SYSTEM, INC.
page 56
<PAGE> 86
condensed statements of operations
parent company only
<TABLE>
<CAPTION>
in thousands
years ended December 31, 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Income
Interest on loans $ 48 $ 54 $ 54
Interest on securities available for sale 20 188
Gains (losses) on securities available for sale (1) (270)
Interest-earning deposits:
Subsidiary banks 6 9
Unrelated banks 53 16 31
Other 55 533 470
------- ------- -------
Total income 176 609 482
Expense
Compensation and employee benefits 346 341 234
Interest 204 377 246
Other 309 612 493
------- ------- -------
Total expenses 859 1,330 973
------- ------- -------
Loss before income tax benefit and equity
in undistributed net income (loss) of subsidiaries (683) (721) (491)
------- ------- -------
Income tax benefit
Loss before equity in undistributed
net income (loss) of subsidiaries (683) (721) (491)
Equity in undistributed
net income (loss) of subsidiaries: 4,260 3,476 (123)
------- ------- -------
Net Income (Loss) $ 3,577 $ 2,755 $ (614)
======= ======= =======
</TABLE>
(1) In November 1994, the Parent Company sold a mortgage-backed security to
Columbia Bank. A loss was recognized by the Parent Company while the
security was recorded at fair value by Columbia Bank. The proceeds from
the sale were subsequently contributed to the capital of Columbia Bank.
On a consolidated basis the loss recorded by the Parent Company is
eliminated as if no transaction had occurred.
COLUMBIA BANKING SYSTEM, INC.
page 57
<PAGE> 87
condensed statements of cash flows
parent company only
<TABLE>
<CAPTION>
in thousands
years ended December 31, 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 3,577 $ 2,755 $ (614)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Equity in undistributed (earnings) losses
of subsidiaries (4,260) (3,476) 123
Loss on sale of real estate owned 41
Provision for depreciation and amortization 35 34 40
Loss on sale of security available for sale 270
Net changes in other assets and liabilities (140) 2,698 80
-------- -------- --------
Net cash provided (used) by operating activities (747) 2,011 (101)
Investing Activities
Proceeds from sales of securities available for sale 2,808
Purchase of securities available for sale (4,000)
Proceeds from maturities of securities available
for sale 209
Loans originated or acquired, net of principal
collected 134
Contribution of capital - bank subsidiaries (16,800) (3,100) (2,813)
Return of capital to parent 3,800
Proceeds from sale of real estate owned 3,263
Purchases of premises and equipment 34
-------- -------- --------
Net cash provided (used) by investing activities (13,603) (3,100) 238
Financing Activities
Proceeds from other borrowings 7,000
Repayment of other borrowings (9,600)
Proceeds from issuance of common stock 20,868 103 35
-------- -------- --------
Net cash provided by financing activities 18,268 103 35
-------- -------- --------
Increase (decrease) in
cash and cash equivalents 3,918 (986) 172
Cash and cash equivalents
at beginning of period 109 1,095 923
-------- -------- --------
Cash and cash equivalents at end of period $ 4,027 $ 109 $ 1,095
======== ======== ========
Supplemental Information
Cash paid for interest $ 204 $ 377 $ 246
Issuance of common stock from
conversion of convertible subordinated notes 2,509 40
</TABLE>
COLUMBIA BANKING SYSTEM, INC.
page 58
<PAGE> 88
summary of quarterly financial information (1)
Quarterly financial information for the years ended December 31, 1996 and 1995
is summarized as follows:
<TABLE>
<CAPTION>
in thousands First Second Third Fourth Year Ended
except per share amounts Quarter Quarter Quarter Quarter December 31,
------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
1996
Total interest income $ 8,786 $ 9,311 $10,041 $10,924 $39,062
Total interest expense 4,296 4,306 4,780 5,136 18,518
------- ------- ------- ------- -------
Net interest income 4,490 5,005 5,261 5,788 20,544
Provision for loan losses 330 430 330 330 1,420
Noninterest income 1,165 1,308 1,390 1,445 5,308
Noninterest expense 4,517 4,851 5,226 5,649 20,243
SAIF special assessment 612 612
------- ------- ------- ------- -------
Income before income tax 808 1,032 483 1,254 3,577
------- ------- ------- ------- -------
Provision for income tax
Net income $ 808 $ 1,032 $ 483 $ 1,254 $ 3,577
------- ------- ------- ------- -------
Per share:
Net income $ 0.23 $ 0.29 $ 0.13 $ 0.28 $ 0.93
======= ======= ======= ======= =======
1995
Total interest income $ 6,942 $ 7,775 $ 8,373 $ 8,630 $31,720
Total interest expense 3,093 3,699 4,092 4,275 15,159
------- ------- ------- ------- -------
Net interest income 3,849 4,076 4,281 4,355 16,561
Provision for loan losses 300 300 320 330 1,250
Noninterest income 883 950 1,078 1,080 3,991
Noninterest expense 3,987 4,124 4,267 4,169 16,547
------- ------- ------- ------- -------
Income before income tax 445 602 772 936 2,755
------- ------- ------- ------- -------
Provision for income tax
Net income $ 445 $ 602 $ 772 $ 936 $ 2,755
------- ------- ------- ------- -------
Per share:
Net income $ 0.13 $ 0.17 $ 0.22 $ 0.27 $ 0.79
======= ======= ======= ======= =======
</TABLE>
(1) These unaudited schedules provide selected financial information
concerning the Company which should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results
of Operations in this Annual Report.
COLUMBIA BANKING SYSTEM, INC.
page 59
<PAGE> 89
consolidated five-year
statements of operations(1)
<TABLE>
<CAPTION>
dollars in thousands,
except per share amounts
years ended December 31, 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest Income
Loans $ 36,048 $ 30,038 $ 18,990 $ 12,258 $ 10,649
Investment securities 1,078 1,127 1,108 59
Securities available for sale 1,878 290 205 227 639
Deposits with banks 1,136 314 334 362 236
-------- -------- -------- -------- --------
Total interest income 39,062 31,720 20,656 13,955 11,583
Interest Expense
Deposits 16,469 13,385 7,304 4,867 4,860
Federal Home Loan Bank advances 1,865 1,503 1,160 1,788 1,328
Other borrowings 184 271 612 876 735
-------- -------- -------- -------- --------
Total interest expense 18,518 15,159 9,076 7,531 6,923
-------- -------- -------- -------- --------
Net Interest Income 20,544 16,561 11,580 6,424 4,660
Provision for loan losses 1,420 1,250 1,000 502 170
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 19,124 15,311 10,580 5,922 4,490
Noninterest income 5,308 3,991 2,996 2,043 1,021
Noninterest expense 20,243 16,547 14,036 10,656 4,488
SAIF special assessment 612
-------- -------- -------- -------- --------
Noninterest expense 20,855 16,547 14,036 10,656 4,488
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income tax 3,577 2,755 (460) (2,691) 1,023
Provision for income tax
-------- -------- -------- -------- --------
Income (loss) from
continuing operations 3,577 2,755 (460) (2,691) 1,023
Extraordinary loss on
extinguishment of debt, net (154)
Cumulative effect of
accounting change 252
-------- -------- -------- -------- --------
Net Income (Loss) $ 3,577 $ 2,755 $ (614) $ (2,439) $ 1,023
======== ======== ======== ======== ========
</TABLE>
COLUMBIA BANKING SYSTEM, INC.
page 60
<PAGE> 90
<TABLE>
<CAPTION>
dollars in thousands,
except per share amounts
years ended December 31, 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Per share (on average
shares outstanding):
Income (loss) from
continuing operations $ 0.93 $ 0.79 $ (0.13) $ (1.17) $ 0.89
Extraordinary loss on
extinguishment
of debt, net (0.05)
Cumulative effect of
accounting change 0.11
Net income (loss) 0.93 0.79 (0.18) (1.06) 0.89
Fully diluted net income (loss) 0.92 0.79 (0.18) (1.06) 0.76
Average number of common
and common equivalent
shares outstanding:
Primary 3,866 3,496 3,481 2,301 1,155
Fully diluted 4,047 3,752 3,740 2,560 1,700
----------- ----------- ----------- ----------- -----------
Total assets at end of period $588,916 $425,206 $319,072 $235,944 $158,694
Long-term obligations 32,000 27,695 19,735 39,081 27,975
Cash dividends
----------- ----------- ----------- ----------- -----------
</TABLE>
(1) These unaudited schedules provide selected financial information
concerning the Company which should be read in conjunction with the
Management Discussion and Analysis of Financial Condition and Results
of Operations in this Annual Report.
COLUMBIA BANKING SYSTEM, INC.
page 61
<PAGE> 91
consolidated five-year summary of average
<TABLE>
<CAPTION>
1996 1995
Average Average Average Average
dollars in thousands Balances(1) Interest Rate Balances(1) Interest Rate
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans:
Commercial business $ 136,386 $ 11,782 8.64% $ 92,831 $ 8,986 9.68%
Real estate (2):
One- to four-family
residential 93,471 8,420 9.01 97,280 9,073 9.33
Five or more family
residential and
commercial properties 126,061 11,556 9.17 90,135 8,411 9.33
Consumer 49,213 4,290 8.72 37,793 3,568 9.44
----------- ----------- ----------- ----------- ----------- -----------
Total loans 405,131 36,048 8.90 318,039 30,038 9.44
Securities 31,527 1,878 5.96 23,266 1,368 5.89
Interest-earning deposit with banks 21,416 1,136 5.31 5,336 314 5.88
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets 458,074 39,062 8.53 346,641 31,720 9.15
Noninterest-earning assets 31,177 28,007
----------- -----------
Total assets $ 489,251 $ 374,648
----------- -----------
Interest-Bearing Liabilities
Certificates of deposit $ 189,122 $ 10,712 5.66% $ 168,351 $ 9,565 5.68%
Savings accounts 21,673 608 2.80 24,547 669 2.73
Interest-bearing demand 142,103 5,149 3.62 79,706 3,151 3.95
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing
deposits 352,898 16,469 4.67 272,604 13,385 4.91
Federal Home Loan Bank advances 33,287 1,865 5.60 24,915 1,503 6.03
Other borrowings 1,990 184 9.25 2,744 271 9.88
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities 388,175 18,518 4.77 300,263 15,159 5.05
Demand and other noninterest-bearing
deposits 60,691 42,167
Other noninterest-bearing
liabilities 3,439 2,444
Shareholders' equity 36,946 29,774
----------- -----------
Total liabilities and
shareholders' equity $ 489,251 $ 374,648
----------- ----------- ----------- ----------- ----------- -----------
Net interest revenue $ 20,544 $ 16,561
----------- ----------- ----------- ----------- ----------- -----------
Net interest spread 3.76% 4.10%
----------- ----------- ----------- ----------- ----------- -----------
Net interest margin 4.48% 4.78%
----------- ----------- ----------- ----------- ----------- -----------
Average interest-earning assets to average
interest-bearing liabilities 118.01% 115.45%
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
COLUMBIA BANKING SYSTEM, INC.
page 62.
<PAGE> 92
balances and net interest revenue
<TABLE>
<CAPTION>
1994 1993
Average Average Average Average
dollars in thousands Balances(1) Interest Rate Balances(1) Interest Rate
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans:
Commercial business $ 63,541 $ 5,272 8.30% $ 23,894 $ 1,690 7.07%
Real estate (2):
One- to four-family
residential 78,408 6,495 8.28 73,076 6,221 8.51
Five or more family
residential and
commercial properties 57,952 5,324 9.19 35,255 3,608 10.23
Consumer 22,335 1,899 8.50 8,128 739 9.09
----------- ----------- ----------- ----------- ----------- -----------
Total loans 222,236 18,990 8.54 140,353 12,258 8.73
Securities 24,045 1,332 5.54 20,940 1,335 6.38
Interest-earning deposits with banks 8,597 334 3.89 12,800 362 2.83
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets 254,878 20,656 8.10 174,093 13,955 8.02
Noninterest-earning assets 24,384 15,825
----------- -----------
Total assets $ 279,262 $ 189,918
----------- -----------
Interest-Bearing Liabilities
Certificates of deposit $ 122,198 $ 5,595 4.58% $ 75,682 $ 3,459 4.57%
Savings accounts 33,938 895 2.64 29,743 1,039 3.49
Interest-bearing demand 38,962 814 2.09 18,090 369 2.04
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing
deposits 195,098 7,304 3.74 123,515 4,867 3.94
Federal Home Loan Bank advances 21,452 1,160 5.41 25,875 1,788 6.91
Other borrowings 6,017 612 10.17 9,868 876 8.88
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities 222,567 9,076 4.08 159,258 7,531 4.73
Demand and other noninterest-bearing deposits 26,238 10,621
Other noninterest-bearing liabilities 1,476 923
Shareholders' equity 28,981 19,116
----------- -----------
Total liabilities and
shareholders' equity $ 279,262 $ 189,918
----------- ----------- ----------- ----------- ----------- -----------
Net interest revenue $ 11,580 $ 6,424
----------- ----------- ----------- ----------- ----------- -----------
Net interest spread 4.02% 3.29%
----------- ----------- ----------- ----------- ----------- -----------
Net interest margin 4.54% 3.69%
----------- ----------- ----------- ----------- ----------- -----------
Average interest-earning assets to average
interest-bearing liabilities 114.52% 109.32%
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
1992
Average Average
dollars in thousands Balances(1) Interest Rate
----------- ----------- -----------
<S> <C> <C> <C>
Interest-Earning Assets
Loans:
Commercial business $ 15,949 $ 1,501 9.41%
Real estate (2):
One- to four-family
residential 61,461 6,120 9.96
Five or more family
residential and
commercial properties 24,086 2,463 10.23
Consumer 5,686 565 9.94
----------- ----------- -----------
Total loans 107,182 10,649 9.94
Securities 9,382 698 7.44
Interest-earning deposits with banks 6,416 236 3.68
----------- ----------- -----------
Total interest-earning assets 122,980 11,583 9.42
Noninterest-earning assets 14,295
-----------
Total assets $ 137,275
-----------
Interest-Bearing Liabilities
Certificates of deposit $ 57,072 $ 3,331 5.84%
Savings accounts 25,087 1,059 4.22
Interest-bearing demand 12,976 470 3.62
----------- ----------- -----------
Total interest-bearing
deposits 95,135 4,860 5.11
Federal Home Loan Bank advances 16,282 1,328 8.16
Other borrowings 7,730 735 9.51
----------- ----------- -----------
Total interest-bearing
liabilities 119,147 6,923 5.81
Demand and other noninterest-bearing deposits 3,416
Other noninterest-bearing liabilities 5,673
Shareholders' equity 9,039
-----------
Total liabilities and
shareholders' equity $ 137,275
----------- ----------- -----------
Net interest revenue $ 4,660
----------- ----------- -----------
Net interest spread 3.61%
----------- ----------- -----------
Net interest margin 3.79%
----------- ----------- -----------
Average interest-earning assets to average
interest-bearing liabilities 103.22%
----------- ----------- -----------
</TABLE>
1 Loans on a nonaccrual status have been included in the computation of
average balances.
2 Real estate average balances include real estate construction loans.
COLUMBIA BANKING SYSTEM, INC.
page 63.
<PAGE> 93
corporate directory
Board of
Directors
W. Barry Connoley
President and
Chief Executive Officer,
MultiCare Medical Center
Richard S. DeVine
President,
Chinook Resources, Inc.
Chairman, Raleigh,
Schwarz & Powell, Inc.
A. G. Espe
Chairman and
Chief Executive Officer,
Columbia Banking System, Inc.
Chairman, Columbia Bank
Jack Fabulich
Chairman, Parker Paint
Manufacturing Co., Inc.
President and Commissioner,
Port of Tacoma
Jonathan Fine
Chief Operating Officer,
American Red Cross,
Seattle-King County Chapter
Margel S. Gallagher
President, Viva Imports, Ltd.
John A. Halleran
Private Investor
W. W. Philip
President and
Chief Operating Officer,
Columbia Banking System, Inc.
President and Chief Executive
Officer, Columbia Bank
John H. Powell
President and Co-owner,
Sound Oil Company
Robert E. Quoidbach
Private Investor
Donald Rodman
Owner and Vice President,
Rodman Realty, Inc.
Frank H. Russell
President, Professional Services
Unified, Inc. and
Quality Meal Expeditors
Sidney R. Snyder
Washington State Senator,
Owner of Sid's Food Market
and Midtown Market
James M. Will
President,
Titus-Will Enterprises
Executive
Officers
A. G. Espe
Chairman and
Chief Executive Officer
W. W. Philip
President and
Chief Operating Officer
Donald A. Andersen
Senior Vice President,
Loan Administration
Julie A. Healy
Senior Vice President,
Operations Manager
H. R. Russell
Senior Vice President,
Loan Production
Gary R. Schminkey
Senior Vice President,
Chief Financial Officer
Evans Q. Whitney
Senior Vice President,
Human Resources Director
Senior Officers
Stan Ausmus
Senior Vice President,
Puyallup Branch Manager
Melanie J. Dressel
Senior Vice President,
Private Banking Manager
Alan W. Fulp
Senior Vice President,
Bellevue Branch Manager
Bret M. Gagliardi
Senior Vice President,
Commercial Loans,
Kent Valley
Gary Gahan
Senior Vice President,
Private Banking
Kurt Graff
Senior Vice President,
Lakewood Branch Manager
Eugene Horan
Senior Vice President,
Fircrest Branch Manager
Trent Jonas
Senior Vice President,
Commercial Loans,
Gig Harbor
Gary Lindberg
Senior Vice President,
Commercial Loans
Richard B. Martinez
Senior Vice President,
Private Banking, Bellevue
Samuel R. Noel
Executive Vice President,
Southwest Region
Ronald D. Staples
Senior Vice President,
Allenmore Branch Manager
Loran W. Todd
Senior Vice President,
General Auditor
Rick W. Tunnell
Senior Vice President,
Real Estate
Brett R. Willis
Senior Vice President,
Commercial Loans
Kenneth M. Yokoyama
Senior Vice President,
Commercial Loans, Bellevue
COLUMBIA BANKING SYSTEM, INC.
page 64.
<PAGE> 94
shareholder information
Corporate
Headquarters
Columbia Banking System, Inc.
1102 Broadway Plaza
P.O. Box 2156
Tacoma, WA 98401-2156
(206) 305-1900*
Independent
Accountants
Price Waterhouse LLP
Transfer Agent
and Registrar
American Stock Transfer &
Trust Company
Market
Makers
Alex. Brown & Sons Inc.
Dain Bosworth, Inc.
Dean Witter Reynolds, Inc.
Everen Securities, Inc.
Herzog, Heine, Geduld, Inc.
Keefe, Bruyette & Woods, Inc.
Ragen MacKenzie Inc.
Legal Counsel
Gordon, Thomas, Honeywell,
Malanca, Peterson & Daheim,
PLLC
Annual Meeting
Sheraton Tacoma Hotel
1320 Broadway Plaza
Tacoma, Washington
Wednesday, April 23, 1997
1:00 p.m.
Stock
Listing
The Company's common
stock trades on the Nasdaq
National Market tier of
The Nasdaq Stock Market(sm)
under the symbol: COLB.
Form 10-K Report
Upon request, Columbia
Banking System provides to
shareholders a copy of the
1996 Annual Report on
Form 10-K, as filed with
the Securities and Exchange
Commission. There is no
charge for this information.
Quarterly
Reporting
In the interest of providing
financial results in a timely
and cost-effective manner,
the Company does not
publish a formal quarterly
report. A copy of the
quarterly earnings news
release is available upon
request.
Immediate access to
the Company's quarterly
earnings news release via
facsimile is provided by
Company News On Call:
(800) 758-5804,
access #152519
For shareholder information,
please contact:
Kristen Kopay
Marketing Officer
Corporate Communications
P.O. Box 2156, MS 8300
Tacoma, WA 98401-2156
tel (206) 305-1965*
fax (206) 305-0317*
E-mail: [email protected]
* area code will change
to (253) effective
April 25, 1997
COLUMBIA BANKING SYSTEM, INC.
page 65
<PAGE> 95
locations
Pierce County
Main Office
1102 Broadway Plaza
Tacoma, WA 98402
(206) 305-1920*
John Collins
Allenmore
1959 South Union
Tacoma, WA 98405
(206) 627-6909*
Ron Staples
Edgewood/Milton
900 Meridian E., Suite 17
Milton, WA 98354
(206) 952-6646*
Michael Butcher
[A map of Western Washington
indicating the Company's market
area with existing and approved
branch locations marked by
location.]
Fircrest
2401 Mildred Street W.
Fircrest, WA 98466
(206) 566-1172*
Gene Horan
Gig Harbor
5311 Point Fosdick Dr. N.W.
Gig Harbor, WA 98335
(206) 858-5105*
Marilyn Naylor
Lakewood
6202 Mount Tacoma Dr. S.W.
Lakewood, WA 98499
(206) 581-4232*
Kurt Graff
Old Town
2200 North 30th Street
Tacoma, WA 98403
(206) 272-0412*
Priscilla May
Puyallup
4220 S. Meridian
Puyallup, WA 98373
(206) 770-0770*
Stan Ausmus
South Hill Mall
3500 S. Meridian, Suite 503
Puyallup, WA 98373
(206) 770-8161*
Robin Conrads
Stacy Gibson
Spanaway
220 South 175th
Spanaway, WA 98387
(206) 539-3094*
Joy Johnson
Summit
10409 Canyon Road E.
Puyallup, WA 98373
(206) 770-9323*
Mike Williams
King County
Bellevue
777 108th Avenue N.E., Suite 100
Bellevue, WA 98004
(206) 646-9696+
Alan Fulp
Bellevue Way (February 1997)
10350 N.E. 10th Street
Bellevue, WA 98004
(206) 452-7323+
Stacy Sullivan
Federal Way
33370 Pacific Highway S.
Federal Way, WA 98003
(206) 925-9323
Chuck Folsom
Kent (March 1997)
112 Washington Avenue N.
Kent, WA 98032
(206) 852-0475*
Patty Osthus
Cowlitz County
Commerce
1338 Commerce Avenue
Longview, WA 98632
(360) 636-9200
Barbara Perret-Brusco
30th Avenue
2207 30th Avenue
Longview, WA 98632
(360) 423-8760
Sheryl Vlach
Woodland
782 Goerig Street
Woodland, WA 98674
(360) 225-9421
Carol Rounds
* area code will change
to (253) effective
April 25, 1997
+ area code will change
to (425) effective
April 25, 1997
COLUMBIA BANKING SYSTEM, INC.
page 66
<PAGE> 96
[ COLUMBIA BANK LOGO ]
1102 BROADWAY PLAZA
TACOMA, WASHINGTON 98402
www.columbiabank.com
<PAGE> 97
19-Mar-97
1 YEAR T-BILL
FEBRUARY 28, 1997
<TABLE>
<CAPTION>
Balance Rate
---------------------
Past Due ERR
<S> <C> <C> <C>
97 Mar 14,100,458.03 7.990% 1,126,654.20
Apr 1,781,307.91 8.023% 142,917.34
May 2,827,311.01 8.333% 235,585.98
June 2,350,130.38 8.035% 188,841.36
July 5,003,068.09 8.829% 441,720.88
Aug 3,591,791.43 8.143% 292,479.58
Sept 4,548,909.29 8.411% 382,606.29
Oct 1,297,785.68 8.824% 114,521.89
Nov 1,239,669.78 8.116% 100,612.62
Dec 3,603,790.00 8.357% 301,178.42
98 Jan 3,127,504.39 8.420% 263,346.20
Feb 2,030,802.60 7.951% 161,467.10
Mar 3,990,973.56 8.075% 322,261.73
Apr 0.000% 0.00
May 0.000% 0.00
June 0.000% 0.00
July 0.000% 0.00
Aug 0.000% 0.00
Sept 0.000% 0.00
Oct 0.000% 0.00
Nov 77,238.91 6.875% 5,310.18
Dec 103,423.56 6.259% 6,472.82
99 Jan 572,714.42 7.807% 44,711.81
YRMO Feb 423,380.92 6.896% 29,196.35
9903 Yr3 Q1 1,579,711.88 7.015% 110,824.55
9906 Q2 2,568,663.16 7.501% 192,664.74
9909 Q3 1,495,870.09 7.928% 118,586.46
9912 Q4 1,192,506.74 8.221% 98,030.13
0003 Yr4 Q1 471,326.50 7.687% 36,229.77
0006 Q2 0.000%
0009 Q3 79,568.52 8.500% 6,763.32
0012 Q4 0.000%
0103 Yr5 Q1 0.000%
0106 Q2 735,308.86 7.578% 55,720.15
0109 Q3 0.000%
0112 Q4 284,000.00 7.875% 22,365.00
0203 Yr6 Q1 0.000%
0206 Q2 0.000%
0209 Q3 0.000%
0212 Q4 0.000%
0303 Yr 7-10 0.000%
0703 Yr 11-20 0.000%
1703 Yr 21+ 0.000%
TOTAL 58,057,906.85 8.135% 4,722,983.72
Total T-Bill 59,077,215.71 8.127% 4,801,205.32
Less: 5yr & over
included in fixed (1,019,308.86) 7.661% (78,085.15)
(58,057,906.85) 8.135% 4,723,120.17
</TABLE>
<PAGE> 98
LOAN REPRICING
February 28, 1997
<TABLE>
<CAPTION>
Loan Types Variable Rate W/A Fixed Rate W/A Non-Accruals
- ----------------------------------------------------------- ---------------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1-4 Family 4,808,796 9.053% 435,339 19,205,132 8.455% 1,623,800 1,141,545
Residential Constr 15,674,135 9.699% 1,520,300
Land Residential 10,062,586 9.350% 940,852 3,122,568 9.47% 295,611
Own-Occ Commercial 17,960,149 8.996% 1,615,780 23,007,874 8.832% 2,032,109 621,463
Comm'l Constr 11,890,025 8.963% 1,065,682
Income Property 20,493,073 9.438% 1,934,116 40,789,624 9.177% 3,743,307
Land Commercial 5,263,411 9.151% 481,662 135,639 10.165% 13,788 60,892
Business 148,844,366 9.177% 13,658,783 27,579,205 8.893% 2,452,531 422,731
Consumer 4,540,845 9.278% 421,280 26,162,945 9.258% 2,422,205 164,388
BankCard 6,995,065 9.750% 682,019 0.000% 0
Equity LOC & Private 18,630,374 9.112% 1,630,099 0.000% 0 2,065
6 mo LIBOR 3,324,774 8.577% 285,166
1 Yr T-BILL 45,502,529 8.246% 3,751,932 13,574,687 7.729% 1,049,137
Held for Sale (Inc Val) 1,072,287 7.596% 81,451
Loans in Process 1,996,104 8.500% 169,669
PRA 48,607 15.000% 7,291 0
TOTAL 310,713,960 9.058% 28,145,134 159,970,839 8.857% 14,168,774 2,413,084
473,097,883
8.944%
</TABLE>
