<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission File Number 0-20288
COLUMBIA BANKING SYSTEM, INC.
(Exact name of small business issuer as specified in its charter)
Washington 91-1422237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1102 Broadway Plaza
Tacoma, Washington 98402
(Address of principal executive offices) (Zip Code)
(253) 305-1900
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the issuer: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares of the issuer's Common Stock outstanding at
October 31, 1997 was 5,510,926.
<PAGE>
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Page
Item 1. Financial statements
Consolidated Statements of Operations - three months
and nine months ended September 30, 1997 and 1996 2
Consolidated Balance Sheets - September 30, 1997
and December 31, 1996 3
Consolidated Statements of Shareholders' Equity -
twelve months ended December 31, 1996 and
nine months ended September 30, 1997 4
Consolidated Statements of Cash Flows -
nine months ended September 30, 1997 and 1996 5
Notes to consolidated financial statements 6
Item 2. Management Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II -- OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 17
Signatures 17
1
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands except per share) 1997 1996 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Loans $12,730 $ 9,275 $34,694 $26,218
Securities available for sale 773 491 2,228 1,317
Deposits with banks 198 275 807 603
- -----------------------------------------------------------------------------
Total interest income 13,701 10,041 37,729 28,138
Interest Expense
Deposits 5,334 4,230 15,010 11,823
Federal Home Loan Bank advances 509 526 1,337 1,410
Other borrowings 24 149
- -----------------------------------------------------------------------------
Total interest expense 5,843 4,780 16,347 13,382
Net Interest Income 7,858 5,261 21,382 14,756
Provision for loan losses 499 330 2,105 1,090
- -----------------------------------------------------------------------------
Net interest income after
provision for loan losses 7,359 4,931 19,277 13,666
Noninterest Income
Service charges and other fees 818 611 2,464 1,759
Mortgage banking 224 152 519 460
Gains on sale of loans 1,035
Merchant services and other 772 627 2,121 1,644
- -----------------------------------------------------------------------------
Total noninterest income 1,814 1,390 6,139 3,863
Noninterest Expense
Compensation and employee benefits 2,927 2,205 8,199 5,832
Occupancy 786 889 2,586 2,505
Professional Services 135 146 360 424
Advertising and promotion 256 209 758 583
Printing and supplies 129 102 429 294
Regulatory premiums and assessments 48 130 134 314
Data processing 350 211 886 574
Gains on, and net cost of,
real estate owned (2) 82
Other 1,710 1,334 5,068 4,068
SAIF special assessment 612 612
- -----------------------------------------------------------------------------
Total noninterest expense 6,339 5,838 18,502 15,206
- -----------------------------------------------------------------------------
Income before income taxes 2,834 483 6,914 2,323
Provision for income taxes 908 2,102
- -----------------------------------------------------------------------------
Net Income $ 1,926 $ 483 $ 4,812 $ 2,323
=============================================================================
Per share (on average shares outstanding):
Net Income $ 0.34 $ 0.12 $ 0.85 $ 0.61
Fully diluted net income 0.34 0.12 0.85 0.61
Average number of common and common
equivalent shares outstanding 5,703 3,884 5,668 3,786
Fully diluted average common and common
equivalent shares oustanding 5,703 3,884 5,697 3,786
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 38,993 $ 32,092
Interest-earning deposits with banks 23,734 38,086
Securities available for sale:
U.S. Treasury & Government Agencies 38,540 30,481
Mortgage-backed 9,216 10,760
- -----------------------------------------------------------------------------
Total securities available for sale 47,756 41,241
FHLB stock 4,540 4,248
Loans held for sale 4,790 11,341
Loans 565,498 446,095
Less: allowance for loan losses 5,625 4,504
- -----------------------------------------------------------------------------
Loans, net 559,873 441,591
Interest Receivable 4,276 3,347
Premises and equipment, net 20,439 15,250
Real estate owned 301 40
Other 5,626 1,680
- -----------------------------------------------------------------------------
Total Assets $710,328 $588,916
=============================================================================
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing $116,963 $ 83,983
Interest-bearing 484,541 409,239
- -----------------------------------------------------------------------------
Total Deposits 601,504 493,222
Federal Home Loan Bank advances 37,000 32,000
Other liabilities 7,478 4,734
- ----------------------------------------------------------------------------
Total liabilities 645,982 529,956
Shareholders' equity:
Preferred stock (no par value)
Authorized, 2 million shares;
None outstanding
September 30, December 31,
Common stock (no par value) 1997 1996
--------- ----------
<S> <C> <C>
Authorized shares 11,000 10,000
Issued and outstanding 5,511 5,185 60,975 56,340
Retained Earnings 3,364 2,694
Unrealized losses on securities
available for sale, net of tax 7 (74)
- -----------------------------------------------------------------------------
Total shareholders' equity 64,346 58,960
- -----------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $710,328 $588,916
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Common stock Unrealized Total
Number of Retained Gains and Shareholders'
(in thousands) Shares Amount Earnings (Losses) Equity
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 3,274 $30,806 $1,274 ($113) $31,967
Net income 3,577 3,577
Issuance of shares
of common stock, net 1,492 20,868 20,868
Issuance of shares
of common stock -
5% stock dividend 164 2,157 (2,157)
Conversion of Convertible
Subordinated Notes 255 2,509 2,509
Change in unrealized
gains and (losses) 39 39
- -----------------------------------------------------------------------------
Balance at
December 31, 1996 5,185 56,340 2,694 (74) 58,960
Net income 4,812 4,812
Issuance of shares
of common stock, net 65 493 493
Issuance of shares
of common stock - 261 4,142 (4,142)
5% stock dividend
Change in unrealized gains
and (losses),net of tax 81 81
- -----------------------------------------------------------------------------
Balance at
September 30, 1997 5,511 $60,975 $3,364 $ 7 $64,346
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(in thousands) 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 4,812 $ 2,323
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 2,105 1,090
Losses on real estate owned 85 41
Depreciation and amortization 1,636 1,736
Deferred income taxes 102
Net realized losses (gains) on sale of assets (1,048) 183
(Increase) decrease in loans held for sale 6,551 (453)
Increase in interest receivable (929) (367)
Increase in interest payable 451 214
Net changes in other assets and liabilities (1,806) (426)
- -----------------------------------------------------------------------------
Net cash provided by operating activities 11,959 5,193
Investing Activities
Proceeds from maturities of securities
available for sale 14,951 9,367
Purchases of securities available for sale (23,340) (21,936)
Proceeds from maturities of mortgage-backed
securities available for sale 1,599 1,224
Loans originated and acquired, net of
principal collected (130,303) (79,621)
Proceeds from sales of loans 10,177
Purchases of premises and equipment (6,355) (2,003)
Proceeds from disposal of premises and equipment 5 338
Proceeds from sale of real estate owned 83 3,263
Other, net (2)
- -----------------------------------------------------------------------------
Net cash used by investing activities (133,185) (89,368)
Financing Activities
Net increase in deposits 108,282 92,625
Net increase in other borrowings 3,000
Proceeds from FHLB advances and other long-term debt 25,000 30,800
Repayment of FHLB advances and other long-term debt (20,000) (23,800)
Proceeds from issuance of common stock 493 131
Other,Net (186)
- -----------------------------------------------------------------------------
Net cash provided by financing activities 113,775 102,570
- -----------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (7,451) 18,395
Cash and cash equivalents at beginning of period 70,178 30,879
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 62,727 $ 49,274
=============================================================================
Supplemental information:
Cash paid for interest $ 15,896 $ 13,168
Loans foreclosed and transferred to real estate owned 429
Issuance of common stock from conversion of convertible
subordinated notes 2,509
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Columbia Banking System, Inc.
1. Basis of Presentation
The interim unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with instructions to Form 10-Q. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments including normal recurring accruals necessary for a fair
presentation of results of operations for the interim periods included herein
have been made. The results of operations for the nine months ended
September 30, 1997, are not necessarily indicative of results to be
anticipated for the year ending December 31, 1997. Certain amounts in the
1996 financial statements have been reclassified to conform with the 1997
presentation. For additional information, refer to the consolidated financial
statements and footnotes thereto included in the Columbia Banking System's
(the Company) annual report on Form 10-K for the year ended December 31, 1996.
2. Summary of Significant Accounting Changes
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). The statement is effective for years ending after December 15,
1997, for both interim and annual periods, and replaces the presentation of
primary and fully diluted earnings per share with a presentation of basic and
diluted earnings per share. The adoption of this Statement is not expected
to have a material impact on earnings per share reported by the Company.
3. Sale of Bank Card Operations
During the second quarter, the Company sold its VISA (Trade Mark) credit card
portfolio. The sale was negotiated in 1996, signed in the first quarter of
1997 and closed in the second quarter of this year. A one-time gain of
$1.0 million was realized from the sale. The sale of the business is not
expected to have a material effect on results of operations in future periods.
The proceeds of the sale have been invested principally in loans to local
businesses and consumers.
4. Stock Dividend
On April 23, 1997, the Company announced a 5% stock dividend payable on
May 22, 1997, to shareholders of record on May 8, 1997. On May 22, 1997,
260,899 common shares were issued to shareholders. Average shares outstanding,
net income per share and book value per share have been adjusted to give
retroactive effect to all periods presented.
5. Pending Mergers
On July 1, 1997, the Company announced an agreement to merge Cascade Community
Bank, a wholly owned subsidiary of Cascade Bancorp, Inc. and Columbia Bank, a
wholly owned subsidiary of Columbia Banking System, Inc. The terms of the
agreement also provide that Cascade Bancorp, Inc. will be merged into CBSI.
The Agreement provides that stockholders of Cascade Bancorp will receive 2.27
shares of CBSI common stock for each share of Cascade common stock. The
aggregate number of shares of CBSI Stock to be issued in the merger is 774,978,
assuming the outstanding options for 11,400 shares of Cascade Common Stock
are exercised prior to closing of the merger. Cascade operates three banking
offices in the Auburn/Kent valley and at September 30, 1997, had assets of
approximately $90.6 million. The agreement, which was unanimously approved by
the respective Boards of Directors of the parties, is subject to a number of
conditions, including approval by the shareholders of Cascade Bancorp and
various regulatory agencies. The parties anticipate closing the transaction
in the fourth quarter of 1997.
6
<PAGE>
On July 30, 1997, the Company announced an agreement to merge the Bank of Fife
with and into Columbia Bank. Under terms of the agreement, Bank of Fife
stockholders will receive between 1.45 to 1.77 shares of CBSI common stock
for each share of Fife common stock, based on the average price of CBSI shares
for a period of 20 days shortly before the closing of the transaction. The
aggregate number of shares of CBSI Common Stock to be issued in the merger is
329,034, assuming the outstanding options for 24,000 shares of Fife Common
Stock are exercised prior to closing of the merger and assuming the Fife
Exchange Ratio is 1.45. The Bank of Fife operates one banking office in
downtown Fife and had assets of approximately $35.6 million at September 30,
1997. The agreement, which was unanimously approved by the respective Boards
of Directors of the parties, is subject to a number of conditions, including
approval by the shareholders of Bank of Fife and various regulatory agencies.
The parties anticipate closing the transaction in the fourth quarter of 1997.
CONSOLIDATED AVERAGE BALANCES--NET CHANGES
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Three Months Ended Increase Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
(in thousands) 1997 1996 Amount 1997 1996 Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans $559,735 $421,009 $138,726 $516,183 $392,590 $123,593
Securities 49,866 32,469 17,397 48,131 29,716 18,415
Interest-earning
deposits with banks 14,308 20,902 (6,594) 20,051 15,197 4,854
- --------------------------------------------------------------------------------
Total interest-earning
assets 623,909 474,380 149,529 584,365 437,503 146,862
Noninterest-earning
assets 53,210 31,222 21,988 47,863 29,921 17,942
- --------------------------------------------------------------------------------
Total assets $677,119 $505,602 $171,517 $632,228 $467,424 $164,804
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing
deposits $468,826 $364,295 $104,531 $443,344 $337,683 $105,661
Federal Home Loan Bank
advances 37,095 36,778 317 32,385 33,719 (1,334)
Other borrowings 370 (370) 181 (181)
Convertible subordinated
notes 657 (657) 1,984 (1,984)
- --------------------------------------------------------------------------------
Total interest-bearing
liabilities $505,921 402,100 103,821 $475,729 373,567 102,162
Noninterest-bearing
deposits 100,927 64,327 36,600 89,482 57,241 32,241
Other noninterest-bearing
liabilities 6,410 3,632 2,778 5,015 3,115 1,900
Shareholders' Equity 63,861 35,543 28,318 62,002 33,501 28,501
- --------------------------------------------------------------------------------
Total liabilities and
shareholders'equity $677,119 $505,602 $171,517 $632,228 $467,424 $164,804
================================================================================
</TABLE>
7
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Columbia Banking System, Inc.
This discussion contains certain forward-looking statements within the
meaning of the federal securities laws. Actual results and the timing of
certain events could differ materially from those projected in the
forward-looking statements due to a number of factors.
Earnings Summary
Net income for the third quarter of 1997 was $1.9 million, or $0.34 per share,
compared to $483,000 or $0.12 per share, for the third quarter of 1996. Net
income for the nine months ended September 30, 1997 was $4.8 million, or $.85
per share, compared with $2.3 million, or $0.61 per share, for the same period
in 1996. Per share income in 1997 reflects the issuance by the Company of
1,445,000 shares of Common Stock in the fourth quarter of 1996.
During 1996, the Company had no federal income tax provision for the three
months and nine months ended September 30 due to utilization of net operating
loss carryforwards. Additionally, during the third quarter of last year,
federal legislation designed to recapitalize the Savings Association Insurance
Fund ("SAIF") of the FDIC resulted in a one-time charge to Columbia's third
quarter 1996 earnings of $612,000. On a comparable fully taxed basis, net
income in the third quarter of 1997 increased to $1.9 million from $723,000
in 1996, excluding the SAIF assessment. Using the same basis for comparison,
net income for the nine months ended September 30, 1997, more than doubled to
$4.8 million from $1.9 million. The increase in net income was primarily due
to increased revenue resulting from continued loan and deposit growth.
The Company's goal is to create, over the next several years, a
well-capitalized, customer focused, Pacific Northwest commercial banking
institution with a significant presence in selected markets and total assets
in excess of $1.0 billion. The Company intends to effect this growth strategy
through a combination of growth at existing branch offices, new branch openings
(usually following the hiring of an experienced branch manager and/or lending
officer with strong community ties and banking relationships) and acquisitions.
In particular, the Company anticipates continued expansion in Pierce County,
north into King County (the location of Seattle and Bellevue) and south into
Thurston County (the location of the state capital, Olympia).
In order to fund its commercial and consumer lending activities and to allow
for increased contact with customers, the Company is establishing a branch
system catering primarily to retail depositors, supplemented by business
banking customer deposits and other borrowings. The Company believes this
mix of funding sources will enable it to expand its commercial lending
activities rapidly while attracting a stable core deposit base.
On July 1, 1997, an announcement was made that the Company will acquire
Cascade Community Bank, a wholly owned subsidiary of Cascade Bancorp, Inc.,
through a merger with Columbia Bank, a wholly owned subsidiary of Columbia
Banking System. The terms of the agreement provide that stockholders of
Cascade Bancorp will receive 2.27 shares of Columbia's common stock for each
share of Cascade common stock. The aggregate number of shares of CBSI Stock
to be issued in the merger is 774,978, assuming the outstanding options for
11,400 shares of Cascade Common Stock are exercised prior to closing of the
merger. Cascade operates three banking offices in the south King County
market area. Two of the branches are located in Auburn with the third in
downtown Kent. The parties anticipate closing the transaction in the fourth
quarter of 1997.
8
<PAGE>
On July 30, 1997, the Company announced an agreement to merge the Bank of Fife
with and into Columbia Bank. The Bank of Fife stockholders will receive
between 1.45 to 1.77 shares of CBSI common stock for each share of Fife
common stock, based on the average price of CBSI shares for a period of 20 days
shortly before the closing of the transaction. The aggregate number of shares
of CBSI Common Stock to be issued in the merger is 329,034, assuming the
outstanding options for 24,000 shares of Fife Common Stock are exercised prior
to closing of the merger and assuming the Fife Exchange Ratio is 1.45. The
Bank of Fife operates one banking office in downtown Fife, a commercial market
in which Columbia does not have a branch. The parties anticipate closing the
transaction in the fourth quarter of 1997.
Columbia Bank has opened 14 branch locations since beginning its major Pierce
County expansion in August 1993. With the acquisitions of the Cascade
Community Bank and the Bank of Fife in the fourth quarter, the Company will
have 21 branches, 3 in Cowlitz County, 6 in King County and 12 in Pierce
County. Also, by the end of the year, construction will be nearing
completion on 2 more offices in Tacoma. The Company has regulatory approval
to open three additional branches in Pierce County and one in King County.
New branches normally do not contribute to net income for many months after
opening.
Net Interest Income
Net interest income for the third quarter of 1997 increased to $7.9 million,
a 49% increase from $5.3 million in the third quarter of 1996. For the nine
months ended September 30, 1997, net interest income increased to $21.4
million, a 45% increase from $14.8 million for the same period in 1996. The
increase in net interest income during the first nine months of 1997 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. During the first nine
months of 1997, average interest-earning assets increased $146.9 million,
while average interest-bearing liabilities increased $101.2 million compared
with the same period in 1996.
Net interest margin (net interest income divided by average interest-earning
assets) increased to 5.00% in the third quarter of 1997 from 4.40% in the
third quarter of 1996. The increase in net interest margin is primarily the
result of the growth in earning assets at increased spreads. The average
yield on interest-earning assets increased 0.31% to 8.71% for the third
quarter of 1997 from 8.40% in the same period of 1996. The average cost
of interest-bearing liabilities decreased to 4.58%, or 0.14%, from 4.72% in
the same period of 1996.
For the first nine months of 1997, net interest margin increased to 4.89% from
4.49% for the same period in 1996. The average yield on interest-earning
assets increased to 8.63%, or 0.06%, from 8.57% for the nine months ended
September 30, 1996. In comparison, the average cost of interest-bearing
liabilities decreased to 4.59 or 0.18%, from 4.77 in the same period of 1996.
9
<PAGE>
Noninterest Income and Expense
Total noninterest income increased $424,000, or 31%, in the third quarter of
1997, and $2.3 million, or 59%, for the first nine months of 1997, compared
with the same periods in 1996. The increase during the first nine months of
1997 is primarily due to a one-time gain of $1.0 million on the sale of the
Company's VISA (Trade Mark) credit card portfolio during the second quarter.
Excluding the one-time gain, noninterest income increased $1.2 million, or 32%,
during the first nine months of 1997, compared with the same period in 1996.
Increases in recurring noninterest income during the three and nine months
ended September of 1997 were centered primarily in account service charges.
Total noninterest expense increased $501,000 in the third quarter of 1997,
and $3.3 million during the first nine months of 1997, compared with the same
periods in 1996. Without the one-time SAIF assessment of $612,000 in the
third quarter of 1996, noninterest expense increased $1.1 million in the
third quarter of 1997, and $3.9 million during the first nine months of 1997
compared with the same periods in 1996. The increase is primarily due to
expenses associated with the expansion of Columbia Bank. Total noninterest
expense was 65.6% and 69.9% of total revenues (the sum of net interest income
plus noninterest income less nonrecurring gains) for the third quarter and
first nine months of 1997, respectively, and 78.6% and 78.4% for the same
periods in 1996, respectively. Increases in noninterest expense are centered
in compensation, other expense, and data processing. In general, increases
in noninterest expense are due to the growth of the Company, establishment
of branches, and the associated "volume driven" expenses. Total noninterest
expense for the Company is expected to decline in relation to revenues as
the Company pursues its commitment to more efficient operations and as
projected asset growth materializes.
Income Taxes
Prior to December 31, 1996, for federal income tax purposes, the Company had
net operating loss ("NOL") carryforwards. The carryforwards were used,
subject to certain restrictions and limitations, to offset taxable income and
the tax liability of the Company. At December 31, 1996, all available NOL
carryforwards had been utilized to offset taxable income and the Company is
now fully taxable.
For the third quarter and first nine months of 1997, the Company recorded
income tax provisions of $908,000 and $2.1 million, respectively.
10
<PAGE>
Lending Activities
The Company originates a wide variety of loans. Consistent with the trend
beginning in 1993, the Company continues to increase commercial business
loans as a percentage of its total loan portfolio. The Company also
emphasizes consumer loans and private banking services to high income and
high net worth individuals.
Loan Portfolio
The following table sets forth at the dates indicated the Company's loan
portfolio composition by type of loan:
<TABLE>
<CAPTION>
September 30, % of December 31, % of
(in thousands) 1997 Total 1996 Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $226,513 40.1% $169,318 38.0%
Real estate:
One-to four-family residential 57,726 10.2 67,709 15.1
Five or more family residential and
commercial properties 171,990 30.4 128,803 28.9
- -----------------------------------------------------------------------------
Total real estate 229,716 40.6 196,512 44.0
Real estate construction:
One-to four-family residential 23,401 4.1 21,380 4.8
Five or more family residential and
commercial properties 26,432 4.7 10,680 2.4
- -----------------------------------------------------------------------------
Total real estate construction 49,833 8.8 32,060 7.2
Consumer 60,389 10.7 48,807 10.9
- -----------------------------------------------------------------------------
Sub-total loans 566,451 100.2 446,697 100.1
Less: Deferred loan fees (953) (0.2) (602) (0.1)
- -----------------------------------------------------------------------------
Total loans $565,498 100.0% $446,095 100.0%
=============================================================================
Loans held for sale $ 4,790 $ 11,341
=============================================================================
</TABLE>
Total loans increased $119.4 million, or 27%, to $565.5 million from year-end
1996. All categories contributed to the increase except for the one- to
four-family residential category which experienced declines during the first
quarter and early into the second quarter.
Commercial and Private Banking Lending
Commercial loans increased to $226.5 million at September 30, 1997,
representing 40.1% of total loans, from $169.3 million at December 31, 1996.
This increase reflects management's commitment to provide competitive
commercial lending in the Company's primary market areas. The Company
expects to continue to expand its commercial lending products and emphasize
in particular its relationship banking with businesses, business owners and
professional individuals.
Real Estate Lending
One- to Four-Family Residential Real Estate Lending. Residential one- to
four-family loans amounted to $57.7 million at September 30, 1997,
representing 10.2% of total loans, compared to $67.7 million at
December 31, 1996. These loans are used by the Company to collateralize
advances from the FHLB. The Company's underwriting standards require that
one- to four-family portfolio loans generally be owner-occupied and that
loan amounts not exceed 80% (90% with private mortgage insurance) of the
appraised value or cost, whichever is lower, of the underlying collateral
at origination. Generally, management's policy is to originate for sale to
third parties residential loans secured by properties located within the
Company's primary market areas.
11
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 $172.0 million
at September 30, 1997, representing 30.4% of total loans, from $128.8 million
at December 31, 1996. The Company's underwriting standards generally require
that the loan-to-value ratio for multi-family and commercial loans not exceed
75% of appraised value or cost, whichever is lower, and that commercial
properties maintain debt coverage ratios (net operating income divided by
annual debt servicing) of 1.2 or better.
Construction Lending.
One- to Four-Family Residential Real Estate Construction Lending. The Company
originates one- to four-family residential construction loans for the
construction of custom homes (where the home buyer is the borrower) and
provides financing to builders for the construction of pre-sold homes and
speculative residential construction. The Company endeavors to limit its
construction lending risk through adherence to strict underwriting procedures.
Construction loans on one- to four-family residences increased to $23.4 million
at September 30, 1997, representing 4.1% of total loans, from $21.4 million
at December 31, 1996.
Multi-family and Commercial Real Estate Construction Lending. Multi-family
and commercial real estate construction loans increased to $26.4 million at
September 30, 1997, representing 4.7% of total loans, from $10.7 million at
December 31, 1996.
Consumer Lending.
At September 30, 1997, the Company had $60.4 million of consumer loans
outstanding, representing 10.7% of total loans, as compared with $48.8 million
at December 31, 1996. Consumer loans made by the Company include automobile
loans, boat and recreational vehicle financing, home equity and home
improvement loans and miscellaneous personal loans. During the second
quarter, the Company sold its VISA (Trade Mark) credit card portfolio with
an approximate balance $7.1 million.
At September 30, 1997, the Company had no foreign loans or loans related to
highly leveraged transactions.
12
<PAGE>
Nonperforming Assets
The following table sets forth at the dates indicated an analysis of the
composition of the Company's nonperforming assets:
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual:
One-to four-family residential $ 184 $1,645
Commercial business 256 385
Consumer 52 197
- -----------------------------------------------------------------------------
Total $ 492 $2,227
- -----------------------------------------------------------------------------
Restructured:
One-to four-family residential $ 22 $ 25
- -----------------------------------------------------------------------------
Total $ 22 $ 25
- -----------------------------------------------------------------------------
Total nonperforming loans $ 514 $2,252
=============================================================================
Real estate owned:
Five or more family residential and
commercial properties $ 301 $ 40
- -----------------------------------------------------------------------------
Total $ 301 $ 40
=============================================================================
Total nonperforming assets $ 815 $2,292
=============================================================================
</TABLE>
The policy of the Company generally is to discontinue the accrual of interest
on all loans past due 90 days or more and place them on nonaccrual status.
Nonperforming loans decreased to $514,000, or 0.09% of total loans (excluding
loans held for sale), at September 30, 1997 from $2.3 million, or 0.51% of
total loans at December 31, 1996 due principally to "one-to four-family
residential" loans being brought current.
During the first nine months of 1997, the Company foreclosed on $429,000 of
loans collaterlalized by real estate and transferred them to real estate owned
("REO"). For the nine months ended September 30, 1997, the Company recorded
to REO a $20,000 write-down, a loss on sale of $65,000, and recoveries of
$83,000.
Total nonperforming assets decreased to $815,000, or 0.11% of period-end assets
at September 30, 1997 from $2.3 million, or 0.39% of period-end assets at
December 31, 1996.
13
<PAGE>
Analysis of Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered by management
to be adequate to provide for anticipated loan losses based on management's
assessment of various factors affecting the loan portfolio. This includes a
review of problem loans, business conditions and loss experience, and overall
evaluation of the quality of the underlying collateral, holding and disposal
costs and costs of capital. The allowance is increased by provisions charged
to operations, and is reduced by loans charged off, net of recoveries.
While management believes that it uses reasonable information to determine
the allowance for loan losses, unforeseen market conditions could result in
adjustments to the allowance for loan losses, and net income could be
significantly affected, if circumstances differ substantially from the
assumptions used in determining the allowance.
The allowance for loan losses at September 30, 1997 increased $1.1 million
to $5.6 million, or 0.99% of loans (excluding loans held for sale at each
date), from $4.5 million or 1.01% of loans at December 31, 1996 (excluding
loans held for sale at each date). Due to the rapid loan growth experienced
by the Company $2.1 million was added to provisions for loan losses during
the first nine months of 1997 compared with $1.1 million for the same period
in 1996. Net loan charge-offs amounted to $488,000 and $984,000 for the
third quarter and for the first nine months of 1997, respectively, compared
with net loan charge-offs of $393,000 and $490,000 for the same periods in
1996.
The following table sets forth at the dates indicated the changes in the
Company's allowance for loan losses:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 1997 1996 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance $5,614 $4,411 $4,504 $3,748
Charge-offs:
Commercial business (475) (315) (900) (359)
Consumer (33) (82) (164) (149)
- ----------------------------------------------------------------------------
Total charge-offs (508) (397) (1,064) (508)
Recoveries:
One-to-four family residential 1 1 15
Commercial business 19 2 39 3
Consumer 2 40
- ----------------------------------------------------------------------------
Total recoveries 20 4 80 18
- ----------------------------------------------------------------------------
Net (charge-offs) recoveries (488) (393) (984) (490)
Provision charged to expense 499 330 2,105 1,090
- ----------------------------------------------------------------------------
Ending balance $5,625 $4,348 $5,625 $4,348
============================================================================
</TABLE>
14
<PAGE>
Liquidity and Sources of Funds
The Company's primary sources of funds are customer deposits, advances from
Federal Home Loan Bank of Seattle (the "FHLB") and brokered deposits. These
funds, together with loan repayments, loan sales, retained earnings, equity
and other borrowed funds, are used to make loans, to acquire securities and
other assets and to fund continuing operations.
Deposit Activities
The Company's deposit products include a wide variety of transaction accounts,
savings accounts and certificates of deposit. Total deposits increased
$108.3 million, or 22%, to $601.5 million at September 30, 1997, from
$493.2 million at December 31, 1996.
To fund the growth of the Company, management's strategy has been to make use
of brokered and other wholesale deposits while working to build core deposits
as rapidly as possible through the Company's development of commercial banking
relationships and its branch network. The Company's use of brokered and other
wholesale deposits has decreased since year-end 1996, though management
anticipates continued, and perhaps increasing, use of such deposits to fund
increasing loan demand when necessary. The deposit increase during the first
nine months of 1997 occurred entirely in "core deposits." Brokered and other
wholesale deposits (excluding public deposits) decreased $27.9 million to
$2.4 million, or 0.40% of total deposits, at September 30, 1997, from
$30.3 million, or 6.1% of total deposits, at December 31, 1996.
Borrowings
The Company relies on advances from the FHLB to supplement its funding sources.
FHLB advances increased $5.0 million during the first nine months of 1997 to
$37.0 million. FHLB advances are secured by one- to four-family real estate
mortgages and certain other assets.
15
<PAGE>
Capital
Shareholders' equity at September 30, 1997 was $64.3 million compared with
$59.0 million at December 31, 1996. The increase is due to improved net
income during the first nine months of 1997. Shareholders' equity was 9.06%
and 10.0% of total period-end assets at September 30, 1997 and
December 31, 1996, respectively.
Banking regulations require bank holding companies and banks to maintain a
minimum "leverage" ratio of core capital to adjusted quarterly average total
assets of at least 3%. At September 30, 1997, the Company's leverage ratio
was 9.48%, compared with 10.62% at December 31, 1996. In addition, banking
regulators have adopted risk-based capital guidelines, under which risk
percentages are assigned to various categories of assets and off-balance
sheet items to calculate a risk-adjusted capital ratio. Tier I capital
generally consists of common shareholders' equity (which does not include
unrealized gains and losses on securities), less goodwill and certain
identifiable intangible assets, while Tier II capital includes the allowance
for loan losses and subordinated debt, both subject to certain limitations.
Regulatory minimum risk-based capital guidelines require Tier I capital of 4%
of risk-adjusted assets and total capital (combined Tier I and Tier II) of 8%.
The Company's Tier I and total capital ratios were 10.90% and 11.86%,
respectively, at September 30, 1997, compared with 12.81% and 13.79%,
respectively, at December 31, 1996.
During 1992, the Federal Deposit Insurance Corporation (the "FDIC") published
the qualifications necessary to be classified as a "well-capitalized" bank,
primarily for assignment of FDIC insurance premium rates beginning in 1993.
To qualify as "well-capitalized," banks must have a Tier I risk-adjusted
capital ratio of at least 6%, a total risk-adjusted capital ratio of at least
10%, and a leverage ratio of at least 5%. Columbia Bank qualified as
"well-capitalized" at September 30, 1997. Federal laws generally bar
institutions which are not well-capitalized from accepting brokered deposits.
The FDIC has issued rules which prohibit under-capitalized institutions from
soliciting or accepting such deposits. Adequately capitalized institutions
are allowed to solicit such deposits, but only to accept them if a waiver is
obtained from the FDIC.
Applicable federal and Washington state regulations restrict capital
distributions by institutions such as Columbia Bank, including dividends.
Such restrictions are tied to the institution's capital levels after giving
effect to distributions. The Company's ability to pay cash dividends is
substantially dependent upon receipt of dividends from the Bank. The Company
presently intends to retain earnings to support anticipated growth.
Accordingly, the Company does not intend to pay cash dividends on its common
stock in the foreseeable future.
On April 23, 1997, the Company announced a 5% stock dividend payable on
May 22, 1997, to shareholders of record on May 8, 1997. Average shares
outstanding, net income per share and book value per share have been adjusted
to give retroactive effect to all periods presented. The retroactive impact
on earnings per share for the three months and nine months ended September 30,
1996, is a reduction of $0.01 and $0.03 per share, respectively.
16
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit 11 - Computation of Fully Diluted Earnings per Common Share
See Exhibit 3(i) - Restated Articles of Incorporation of Columbia Banking
System, Inc.
See Exhibit 27 - Financial Data Schedule
(b) On July 7, 1997, the Company filed Form 8-K, announcing an agreement to
merge Cascade Community Bank, a wholly owned subsidiary of Cascade
Bancorp, Inc. and Columbia Bank, a wholly owned subsidiary of Columbia
Banking System, Inc. The terms of the agreement also provide that
Cascade Bancorp, Inc. will be merged into CBSI.
(c) On October 24, 1997, the Company filed Form 8-K, announcing that
Mr. A.G. Espe, Chairman of the Board and Chief Executive Officer of
Columbia Banking System, Inc. is in serious condition. Mr. Espe was
diagnosed with lung cancer in late 1996. In addition, the Company
announced strong third quarter results with record earnings and solid
balance sheet growth.
(d) On November 12, 1997, the Company filed Form 8-K, announcing that its
Chairman and Chief Executive Officer, Mr. A.G. Espe, has died
following a year-long battle with cancer, and that Mr. W.W. Philip,
CBSI's Vice Chairman, President and Chief Operating Officer, has
assumed all duties of the Chief Executive Officer.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COLUMBIA BANKING SYSTEM, INC.
(Registrant)
Date November 20, 1997 By /s/ W. W. Philip
----------------------------- -----------------------------
W. W. Philip
Vice Chairman, President and
Acting Chief Executive Officer
Date November 20, 1997 By /s/ Gary R. Schminkey
----------------------------- -----------------------------
Gary R. Schminkey
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
17
<PAGE>
Exhibit 11
Computation of Fully Diluted Earnings per Common Share
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share data) 1997 1996 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earnings
Net income applicable to common stock $1,926 $ 483 $4,812 $2,323
Interest on convertible subordinated notes,
net of income tax effects 16 134
- --------------------------------------------------------------------------------
Pro forma net income available
to common stock $1,926 $ 499 $4,812 $2,457
================================================================================
Shares
Weighted average number of common and common
equivalent shares outstanding 5,703 3,884 5,697 3,786
Additional shares assuming conversion of
convertible subordinated notes
- --------------------------------------------------------------------------------
Pro forma shares 5,703 3,884 5,697 3,786
================================================================================
Fully diluted earnings per share -
as reported $0.34 $0.12 $0.85 $0.61
================================================================================
Fully diluted earnings per share -
as calculated $0.34 $0.13 $0.85 $0.65
================================================================================
</TABLE>
On April 23, 1997, the Company announced a 5% stock dividend payable on
May 22, 1997, to shareholders of record on May 8, 1997. Average shares
outstanding, net income per share and book value per share have been adjusted
to give retroactive effect to all periods presented. The retroactive impact on
earnings per share for the three months and nine months ended September 30,
1996, is a reduction of $0.01 and $0.03 per share respectively.
On June 3, 1996, the Company gave notice that it would redeem all of its
issued and outstanding 7.85% Convertible Subordinated Notes (the "Notes") on
August 1, 1996. The Notes were convertible in whole or in part, in multiples
of $1,000 principal amount, at 100% of the principal amount of the Note
(or portion thereof), at the conversion price per share of common stock of
$10.56. Prior to August 1, 1996, all of the Notes were converted into
223,743 shares of common stock.
For additional information on earnings per share, please see the "Capital"
section of the "Management Discussion and Analysis of Financial Condition
and Results of Operations."
<PAGE>
Exhibit 3(i)
RESTATED ARTICLES OF INCORPORATION
OF
COLUMBIA BANKING SYSTEM, INC.
The undersigned, being the Secretary of Columbia Banking System, Inc., executes
in duplicate the following Restated Articles of Incorporation for the
corporation.
ARTICLE 1
Section 1.1 The name of the corporation shall be COLUMBIA BANKING SYSTEM, INC.
ARTICLE 2
Section 2.1 The corporation's period of duration shall be perpetual.
ARTICLE 3
Section 3.1 The purpose for which the corporation is organized is the
transaction of any and all lawful business for which corporations may be
incorporated under the Washington Business Corporation Act.
ARTICLE 4
Section 4.1 The aggregate number of shares which the corporation shall have
authority to issue is 11,000,000 common shares with no par value (hereinafter
referred to as "the common stock") and 2,000,000 preferred shares with no par
value (hereinafter referred to as "the preferred stock"). The preferred stock
is senior to the common stock, and the common stock is subject to the rights
and preferences of the preferred stock as provided in the following section.
Section 4.2 The board of directors is hereby vested with authority to divide
any or all of the preferred stock into one or more series and, within the
limitations set forth in the Washington Business Corporation Act (as amended
from time to time), to fix and determine or to amend the relative rights and
preferences of the shares of any series so established.
ARTICLE 5
Section 5.1 No shareholder shall have the preemptive right to acquire unissued
shares of the corporation.
ARTICLE 6
Section 6.1 Each shareholder entitled to vote at any election for directors
shall have the right to vote, in person or by proxy, the number of shares owned
by him for as many
1
<PAGE>
persons as there are directors to be elected and for whose election he has a
right to vote, and no shareholder shall be entitled to cumulate his votes.
ARTICLE 7
Section 7.1 The corporation reserves the right to amend, alter, change or
repeal any provision of its Articles of Incorporation to the extent permitted
by the laws of the State of Washington. All rights of shareholders are
granted subject to this reservation.
ARTICLE 8
Section 8.1 The address of the initial registered office of the corporation is
1301 Fifth Avenue, Suite 3400, Seattle, Washington 98101. The name of its
initial registered agent at that address is J. James Gallagher.
ARTICLE 9
Section 9.1 The corporation may enter into a contract and otherwise transact
business as vendor, purchaser, or otherwise, with its directors, officers and
shareholders, and with corporations, associations, firms and entities in which
they are or may become interested as directors, officers, shareholders, members
or otherwise, as freely as though such adverse interest did not exist, even
though the vote, action or presence of such director, officer or shareholder
may be necessary to obligate the corporation upon such contract or transaction;
and in the absence of fraud, no such contract or transaction shall be avoided
and no such director, officer or shareholder shall be held liable to account to
the corporation, by reason of such adverse interest or any fiduciary
relationship to the corporation arising out of such office or stock ownership,
for any profit or benefit realized by him through any such contract or
transaction; provided that the nature of the interest of such director, officer
or shareholder, though not necessarily the details or extent thereof, be
disclosed or known to the board of directors or shareholders of the
corporation, at the meeting thereof at which such contract or transaction is
authorized or confirmed. A general notice that a director, officer or
shareholder of the corporation is interested in any corporation, association,
firm or entity shall be sufficient disclosure as to such director, officer or
shareholder with respect to all contracts and transactions with that
corporation, association, firm or entity.
ARTICLE 10
Section 10.1 Nominations for election to the board of directors may be made by
the board of directors or by any stockholder of any outstanding class of stock
of the corporation entitled to vote for the election of directors. Nominations,
other than those made by the board of directors, shall be made in writing and
shall be delivered or mailed, U.S. mail, postage prepaid, to the Chairman of
the corporation not less than fourteen (14) days nor more than fifty (50) days
prior to any meeting of shareholders called for the election of directors;
provided, however, that if less than twenty-one days' notice of the meeting is
given to shareholders, such nomination shall be delivered or mailed, U.S. mail,
postage prepaid, to the Chairman of the corporation not later than the close of
business on the seventh day following
2
<PAGE>
the day on which the notice of meeting was mailed. Such notification shall
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 the corporation that will be
voted for each proposed nominee;
(d) The name and address of the notifying shareholder; and
(e) The number of shares of common stock of the corporation owned by the
notifying shareholder.
Nominations not made in accordance herewith may, in his discretion, be
disregarded by the Chairman of the meeting, and upon his instructions, the vote
teller may disregard all votes cast for such nominee.
ARTICLE 11
Section 11.1 In addition to the requirements of any applicable statute, and
notwithstanding any other provisions of any other articles of these Articles of
Incorporation, the affirmative vote of not less than 66 2/3% of the total
shares attributable to persons other than a Control Person (as defined below),
considered for the purposes of this Article 11 as one class, which are entitled
to be voted in an election of directors shall be required for the approval of
any Business Combination (as defined below) between the corporation and any
Control Person.
Section 11.2 The approval requirements of Section 11.1 shall not apply if
either:
(a) The Business Combination is approved by at least a majority of
Continuing Directors (as defined below) of the corporation; or
(b) All the following conditions are satisfied:
(i) The cash or fair market value of the property, securities or
other consideration to be received per share in the Business Combination by
holders of the common stock of the corporation is not less than the higher of:
(A) the highest price per share (including brokerage commissions, soliciting
dealers, fees and dealer-management compensation) paid by such Control Person
in acquiring any of its holdings of the corporation's common stock; (B) the
highest per share market price of the common stock during the three-month
period immediately preceding the date of the proxy statement described in
(iii) below; or (C) the per share value of the common stock at the end of the
fiscal quarter immediately prior to the Business Combination, as determined
by an appraisal prepared by persons, selected by the Continuing Directors,
who are independent of the corporation and the Control Person, and who are
experienced and expert in the area of corporate appraisal.
3
<PAGE>
(ii) After becoming a Control Person and prior to the consummation
of such Business Combination (A) such Control Person shall not have acquired
any newly issued shares of capital stock, directly or indirectly, from the
corporation (except upon conversion of convertible securities acquired by it
prior to becoming a Control Person or upon compliance with the provisions of
this Article 11 or as a result of a pro rata stock dividend or stock split),
and (B) such Control Person shall not have received the benefit, directly or
indirectly (except proportionately as a stockholder), of any loans, advances,
guarantees, pledges or other financial assistance or tax credits provided by
the corporation, or made any major changes in the corporation's business or
equity capital structure; and
(iii) A proxy statement responsive to the requirements of the
Securities Exchange Act of 1934, whether or not the corporation is then
subject to such requirements, shall be mailed to the public stockholders of
the corporation for the purpose of soliciting stockholder approval of such
Business Combination.
Section 11.3 For the purpose of this Article 11
(a) The term "Business Combination" shall mean (i) any merger or
consolidation the corporation with or into a Control Person, (ii) any sale,
lease, exchange, transfer or other disposition, including without limitation
a mortgage or any other security device, of all or any Substantial Part
(as defined below) of the assets of the corporation (including without
limitation any voting securities of a subsidiary) or of a subsidiary, to a
Control Person, (iii) any merger or consolidation of a Control Person with or
into the corporation or a subsidiary of the corporation, (iv) any sale, lease,
exchange, transfer or other disposition of all or any Substantial Part of the
assets of a Control Person to the corporation or a subsidiary of the
corporation, (v) the issuance of any securities of the corporation or a
subsidiary of the corporation to a Control Person, (vi) the acquisition by
the corporation or a subsidiary of the corporation of any securities of a
Control Person, (vii) any reclassification of common stock of the corporation,
or any recapitalization involving common stock of the corporation, consummated
within five years after a Control Person becomes a Control Person, or (viii)
any agreement, contract or other arrangement providing for any of the
transactions described in this definition of Business Combination;
(b) The term "Continuing Director" shall mean (i) a director who was a
member of the board of directors of the corporation immediately prior to the
time that a Control Person became the beneficial owner (as this term is defined
in Rule 13d-3 of the General Rules and Regulations under the Securities
Exchange Act of 1934 on the date on which this amendment becomes effective)
of 10% or more of the outstanding shares of common stock of the corporation
or (ii) a person so designated before initially becoming a director by a
majority of the then Continuing Directors.
(c) The term "Control Person" shall mean and include any individual,
corporation, partnership or other person or entity which, together with their
Affiliates and Associates (as those terms are defined on the date on which this
amendment becomes effective in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934) is the
4
<PAGE>
beneficial owner in the aggregate of 20% or more of the outstanding shares of
common stock of the corporation, and any Affiliate or Associate of any such
individual, corporation, partnership or other person or entity;
(d) The term "Substantial Part" shall mean more than 10% of the total
assets the corporation in question, as of the end of its most recent fiscal
year prior to the time the determination is being made;
(e) Without limitation, any shares of common stock of the corporation which
any Control Person has the right to acquire at any time pursuant to any
agreement, or upon exercise of conversion rights, warrants or options, or
otherwise, shall be deemed outstanding and beneficially owned by such Control
Person for purposes of this Article 11; and
(f) For the purposes of Section 11.2(b)(i) of this Article 11, the phrase
"other consideration to be received" shall include, without limitation, common
stock of the corporation retained by its existing public stockholders in the
event of a Business Combination with such Control Person in which the
corporation is the surviving corporation.
Section 11.4 For the purposes of this Article 11, a majority of the Continuing
Directors shall have the power and duty to determine on the basis of
information known to them (a) whether a proposed transaction is subject to the
provisions of this Article 11, (b) the amount of shares of the corporation
Beneficially Owned by any person, (c) whether a person is an Affiliate or
Associate of another, and (d) such other matters as to which a determination
may be required by the provisions of this Article 11.
Section 11.5 The provisions set forth in this Article 11 may not be repealed or
amended in any respect or in any manner including any merger or consolidation
of the corporation with any other corporation unless the surviving
corporation's Articles of Incorporation contain an article to the same effect
as this Article 11, except by the affirmative vote of the holders of not less
than 66 2/3% of the outstanding shares of common stock of the corporation,
subject to the provisions of any series of preferred stock which may at the
time be outstanding; provided, however, that if there is a Control Person such
action must be approved by not less than 66 2/3% of the total shares entitled
to be voted in an election of directors attributable to shares owned by person
other than the Control Persons.
ARTICLE 12
Section 12.1 The board of directors of the corporation, when evaluating any
offer of another party to (a) make a tender or exchange offer for any equity
security of the corporation, (b) merge or consolidate the corporation with
another corporation, or (c) purchase or otherwise acquire all or substantially
all of the properties and assets of the corporation, shall, in connection with
the exercise of its judgment in determining what is in the best interests of
the corporation and its stockholders, give due consideration to all relevant
factors, including without limitation the social and economic effects on the
employees, customers, suppliers and other constituents of the corporation and
its subsidiaries and on the communities in which the corporation and its
subsidiaries operate or are located.
5
<PAGE>
ARTICLE 13
Section 13.1 Defined Terms. As used in this Article 13:
(a) "Egregious conduct" by a person shall mean acts or omissions that
involve intentional misconduct or a knowing violation of law, conduct violating
section 23B. of the Revised Code of Washington, or participation in any
transaction from which the person will personally receive a benefit in money,
property, or services to which the person is not legally entitled.
(b) "Finally adjudged" shall mean stated in a judgment based upon clear and
convincing evidence by a court having jurisdiction, from which there is no
further right to appeal.
(c) "Director" shall mean any person who is a director of the corporation
and any person who, while a director of the corporation, is serving at the
request of the corporation as a director, officer, partner, trustee, employee,
or agent of another foreign or domestic corporation, partnership, joint venture,
trust, or other enterprise, or is a fiduciary or party in interest in relation
to any employee benefit plan covering any employee of the corporation or of any
employer in which it has an ownership interest; and "conduct as a director"
shall include conduct while a director is acting in any of such capacities.
(d) "Officer-director" shall mean any person who is simultaneously both an
officer and director of the corporation and any person who, while
simultaneously both an officer and director of the corporation, is serving at
the request of the corporation as a director, officer, partner, trustee,
employee, or agent of another foreign or domestic corporation, partnership,
joint venture, trust, or other enterprise, or is a fiduciary or party in
interest in relation to any employee benefit plan covering any employee of
the corporation or of any employer in which it has an ownership interest; and
"conduct as an officer-director" shall include conduct while an
officer-director is acting as an officer of the corporation or in any of such
other capacities.
(e) "Subsidiary corporation" shall mean any corporation at least eighty
percent of the voting stock of which is held beneficially by this corporation.
Section 13.2 - Liability of Directors. No director, officer-director, former
director or former officer-director of the corporation shall be personally
liable to the corporation or its shareholders for monetary damages for conduct
as a director or officer-director occurring after the effective date of this
Article 13 unless the conduct is finally adjudged to have been egregious
conduct, as defined herein.
Section 13.3 - Liability of Subsidiary Directors. No director,
officer-director, former director, or former officer-director of a subsidiary
corporation shall be personally liable in any action brought directly by this
corporation as a shareholder of the subsidiary corporation or derivatively on
behalf of the subsidiary corporation (or by any shareholder of this corporation
double-derivatively on behalf of this corporation and the subsidiary
corporation) for monetary damages for conduct as a director or officer-director
of such subsidiary
6
<PAGE>
corporation occurring after the effective date of this Article 13 unless the
conduct is finally adjudged to have been egregious conduct, as defined herein.
Section 13.4 - Indemnification of Directors. The corporation shall indemnify
any person who is, or is threatened to be made, a party to any action, suit, or
proceeding, whether civil, criminal, administrative, or investigative, and
whether by or in the right of the corporation or its shareholders or by any
other party, by reason of the fact that the person is or was a director or
officer-director of the corporation or of a subsidiary corporation against
judgments, penalties or penalty taxes, fines, settlements (even if paid or
payable to the corporation or its shareholders or to a subsidiary corporation)
and reasonable expenses, including attorneys' fees, actually incurred in
connection with such proceeding unless the liability and expenses were on
account of conduct finally adjudged to be egregious conduct, as defined
herein. The reasonable expenses, including attorneys' fees, of such person
incurred in connection with such proceeding shall be paid or reimbursed by
the corporation, upon request of such person, in advance of the final
disposition of such proceeding upon receipt by the corporation of a written,
unsecured promise by the person to repay such amount if it shall be finally
adjudged that the person is not eligible for indemnification. All expenses
incurred by such person in connection with such proceeding shall be considered
reasonable unless finally adjudged to be unreasonable.
Section 13.5 - Procedure. No action by the board of directors, the
shareholders, independent counsel, or any other person or persons shall be
necessary or appropriate to the determination of the corporation's
indemnification obligation in any specific case, to the determination of the
reasonableness of any expenses incurred by a person entitled to indemnification
under this Article 13, nor to the authorization of indemnification in any
specific case.
Section 13.6 Internal Claims Expected. Notwithstanding section 13.4, the
corporation shall not be obligated to indemnify any person for any expenses,
including attorneys' fees, incurred to assert any claim against the corporation
(except a claim based on section 13.7) or any person related to or associated
with it, including any person who would be entitled hereby to indemnification
in connection with the claim.
Section 13.7 - Enforcement of Rights. The corporation shall indemnify any
person granted indemnification rights under this Article 13 against any
reasonable expenses incurred by the person to enforce such rights.
Section 13.8 - Set-off of Claims. Any person granted indemnification rights
herein may directly assert such rights in set-off of any claim raised against
the person by or in the right of the corporation and shall be entitled to
have the same tribunal which adjudicates the corporation's claim adjudicate
the person's entitlement to indemnification by the corporation.
Section 13.9 - Continuation of Rights. The indemnification rights provided in
this Article 13 shall continue as to a person who has ceased to be a director
or officer-director and shall inure to the benefit of the heirs, executors,
and administrators of such person.
7
<PAGE>
Section 13.10 - Effect of Amendment or Repeal. Any amendment or repeal of this
Article 13 shall not adversely affect any right or protection of a director,
officer-director, former director or former officer-director existing at the
time of such amendment or repeal with respect to acts or omissions occurring
prior to such amendment or repeal.
Section 13.11 - Severability of Provisions. Each of the substantive provisions
of this Article 13 is separate and independent of the others, so that if any
provision hereof shall be held to be invalid or unenforceable for any reason,
such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions.
ARTICLE 14
Section 14.1 The name and address of the incorporator is Mark C. Lewington,
1301 Fifth Avenue, Suite 3400, Seattle, WA 98101.
These Restated Articles of Incorporation correctly set forth without change the
corresponding provisions of the Articles of Incorporation as heretofore
amended, and supersede the original Articles of Incorporation and all
amendments thereto.
Executed in duplicate this 2nd day of October, 1997.
----- -------------
COLUMBIA BANKING SYSTEM, INC.
By: /s/ Jill L. Myers
---------------------------
Jill L. Myers.
Secretary
8
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