<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission File Number 0-20288
COLUMBIA BANKING SYSTEM, INC.
(Exact name of small business issuer as specified in its charter)
Washington 91-1422237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1102 Broadway Plaza
Tacoma, Washington 98402
(Address of principal executive offices) (Zip Code)
(253) 305-1900
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the issuer: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares of the issuer's Common Stock outstanding at
July 31, 1998 was 10,039,332.
<PAGE>
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Page
Item 1. Financial statements
Consolidated Statements of Operations - three months and
six months ended June 30, 1998 and 1997 2
Consolidated Balance Sheets - June 30, 1998
and December 31, 1997 3
Consolidated Statements of Shareholders' Equity -
twelve months ended December 31, 1997 and
six months ended June 30, 1998 4
Consolidated Statements of Cash Flows -
six months ended June 30, 1998 and 1997 5
Notes to consolidated financial statements 6
Item 2. Management Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 3. Interest Rate Sensitivity 17
PART II -- OTHER INFORMATION
Item 4. Submission of matters to a vote of shareholders 18
Item 6. Exhibits and reports on Form 8-K 19
Signatures 19
1
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands except per share) 1998 1997 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Loans $16,522 $13,729 $32,375 $25,957
Securities available for sale 1,100 925 2,158 1,784
Securities held to maturity 110 196 246 364
Deposits with banks 153 333 513 806
- -----------------------------------------------------------------------------
Total interest income 17,885 15,183 35,292 28,911
Interest Expense
Deposits 7,023 6,056 13,872 11,717
Federal Home Loan Bank advances 549 429 1,076 890
Other borrowings 20 41
- -----------------------------------------------------------------------------
Total interest expense 7,572 6,505 14,948 12,648
Net Interest Income 10,313 8,678 20,344 16,263
Provision for loan losses 450 1,259 1,000 1,708
- -----------------------------------------------------------------------------
Net interest income after
provision for loan losses 9,863 7,419 19,344 14,555
Noninterest Income
Service charges and other fees 1,416 1,059 2,701 1,927
Mortgage banking 412 191 810 295
Gains on sale of loans, net 1,035 1,035
Other fees 1,043 810 1,880 1,557
- -----------------------------------------------------------------------------
Total noninterest income 2,871 3,095 5,391 4,814
Noninterest Expense
Compensation and employee benefits 3,889 3,175 7,660 6,302
Occupancy 1,206 1,164 2,329 2,260
Advertising and promotion 371 306 737 543
Data processing 453 350 860 694
Other 2,918 2,423 5,509 4,523
- -----------------------------------------------------------------------------
Total noninterest expense 8,837 7,418 17,095 14,322
Income before income taxes 3,897 3,096 7,640 5,047
Provision for income taxes 1,349 918 2,679 1,492
- -----------------------------------------------------------------------------
Net Income $ 2,548 $ 2,178 $ 4,961 $ 3,555
=============================================================================
Net income per common share:
Basic $ 0.25 $ 0.22 $ 0.50 $ 0.36
Diluted 0.25 0.22 0.48 0.35
Average number of common shares
outstanding 10,028 9,806 10,013 9,804
Average number of diluted common
shares oustanding 10,387 10,066 10,353 10,060
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands) 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 57,626 $ 47,604
Interest-earning deposits with banks 26,313 28,108
Securities available for sale 61,497 56,279
Securities held to maturity 7,254 9,679
FHLB stock 5,343 5,144
Loans held for sale 9,043 4,377
Loans 752,968 685,889
Less: allowance for loan losses 8,877 8,440
- -----------------------------------------------------------------------------
Loans, net 744,091 677,449
Interest Receivable 5,649 5,023
Premises and equipment, net 32,583 27,246
Real estate owned 921 231
Other 3,402 3,415
- -----------------------------------------------------------------------------
Total Assets $953,722 $864,555
=============================================================================
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing $169,304 $146,063
Interest-bearing 660,655 594,367
- -----------------------------------------------------------------------------
Total Deposits 829,959 740,430
Federal Home Loan Bank advances 34,000 39,000
Other liabilities 5,891 6,772
- ----------------------------------------------------------------------------
Total liabilities 869,940 786,202
Shareholders' equity:
Preferred stock (no par value)
Authorized, 2,000,000 shares;
None outstanding
June 30, December 31,
Common stock (no par value) 1998 1997
--------- ----------
<S> <C> <C>
Authorized shares 45,000 16,500
Issued and outstanding 10,035 9,880 68,442 67,901
Retained Earnings 15,376 10,415
Unrealized gains (losses) on securities
available for sale, net of tax (36) 37
- -----------------------------------------------------------------------------
Total shareholders' equity 83,782 78,353
- -----------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $953,722 $864,555
=============================================================================
</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, 1996 9,332 $62,980 $5,282 ($38) $68,224
Net income 9,275 9,275
Issuance of shares
of common stock, net 117 779 779
Issuance of shares
of common stock -
5% stock dividend 391 4,142 (4,142)
Change in unrealized gains
(losses)on securities
available for sale, net of tax 75 75
- -----------------------------------------------------------------------------
Balance at
December 31, 1997 9,880 67,901 10,415 37 78,353
Net income 4,961 4,961
Issuance of shares
of common stock, net 155 541 541
Change in unrealized gains
(losses)on securities
available for sale, net of tax (73) (73)
- -----------------------------------------------------------------------------
Balance at
June 30, 1998 10,035 $68,442 $15,376 ($36) $83,782
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(in thousands) 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 4,961 $ 3,555
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 1,000 1,708
Losses on real estate owned (5) 85
Depreciation and amortization 900 1,426
Deferred income taxes 102
Net realized losses (gains) on sale of assets 2 (772)
(Increase) decrease in loans held for sale (4,666) 8,062
Increase in interest receivable (626) (531)
Increase in interest payable 91 250
Net changes in other assets and liabilities (876) (1,498)
- -----------------------------------------------------------------------------
Net cash provided by operating activities 781 12,387
Investing Activities
Proceeds from maturities of securities
available for sale 20,849 4,041
Purchases of securities available for sale (31,423) (7,985)
Proceeds from maturities of mortgage-backed
securities available for sale 5,065 850
Proceeds from maturities of securities
held to maturity 2,750 1,406
Purchases of securities held to maturity (325) (694)
Loans originated and acquired, net of
principal collected (68,148) (107,711)
Proceeds from sales of loans 10,177
Purchases of premises and equipment (6,486) (6,187)
Proceeds from disposal of premises and equipment 1 393
Proceeds from sale of real estate owned 46 63
Other, net 47
- -----------------------------------------------------------------------------
Net cash used by investing activities (77,624) (105,647)
Financing Activities
Net increase in deposits 89,529 59,446
Net increase in other borrowings (484)
Proceeds from FHLB advances and other long-term debt 25,000
Repayment of FHLB advances and other long-term debt (5,000) (20,000)
Repurchase of common stock (101)
Proceeds from issuance of common stock 541 350
- -----------------------------------------------------------------------------
Net cash provided by financing activities 85,070 64,211
- -----------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 8,227 (29,049)
Cash and cash equivalents at beginning of period 75,712 83,258
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 83,939 $ 54,209
=============================================================================
Supplemental information:
Cash paid for interest $ 14,857 $ 15,692
Cash paid for income taxes 2,776 2,079
Loans foreclosed and transferred to real estate owned 731 409
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Columbia Banking System, Inc.
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 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. Basis of Presentation
The interim unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments including normal recurring accruals necessary for
a fair presentation of results of operations for the interim periods included
herein have been made. The results of operations for the six months ended
June 30, 1998, are not necessarily indicative of results to be anticipated
for the year ending December 31, 1998. Certain amounts in the 1997 financial
statements have been reclassified to conform with the 1998 presentation. For
additional information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1997.
2. Subsequent Event - Stock Split
On April 22, 1998, the Company announced a three shares for two stock split
payable on May 20, 1998, to shareholders of record on May 6, 1998. Common
shares authorized, issued and outstanding, average shares outstanding and net
income per share for all periods presented have been retroactively adjusted
to give effect to this transaction.
3. Comprehensive Income
Beginning in 1998, the Company adopted the Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 requires
the reporting of comprehensive income in addition to net income from
operations. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income.
The Company holds securities classified as available-for-sale, which had
gross unrealized losses of $82,000 for the three months ended June 30, 1998
and gross unrealized gains of $345,000 for the three months ended June 30,
1997. For the six months ended June 30, 1998 and 1997, the Company had
gross unrealized losses of $111,000 and $50,000, respectively. The before
tax and after tax amounts for each of these categories, as well as the tax
benefit of each period is summarized below.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 1998 1997 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unrealized gain (loss) on securities:
Gain (loss) arising during the period $ (82) $ 345 $(111) $ (50)
- ------------------------------------------------------------------------------
Other comprehensive income before tax (82) 345 (111) (50)
- ------------------------------------------------------------------------------
Provision for income taxes 28 (117) 38 17
- ------------------------------------------------------------------------------
Other comprehensive income after tax $ (54) $ 228 $ (73) $ (33)
=============================================================================
6
<PAGE>
CONSOLIDATED AVERAGE BALANCES--NET CHANGES
Columbia Banking System, Inc.
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Increase Six Months Ended Increase
June 30, (Decrease) June 30, (Decrease)
(in thousands) 1998 1997 Amount 1998 1997 Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans $731,906 $596,242 $135,664 $716,119 $571,183 $144,936
Securities 78,753 72,093 6,660 76,960 69,836 7,124
Interest-earning
deposits with banks 11,085 25,303 (14,218) 18,683 30,691 (12,008)
- --------------------------------------------------------------------------------
Total interest-earning
assets 821,744 693,638 128,106 811,762 671,710 140,052
Noninterest-earning
assets 73,413 59,711 13,702 69,891 55,743 14,148
- --------------------------------------------------------------------------------
Total assets $895,157 $753,349 $141,808 $881,653 $727,453 $154,200
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing
deposits $624,253 $535,633 $ 88,620 $617,875 $517,385 $100,490
Federal Home Loan Bank
advances 39,707 31,217 8,490 39,398 31,992 7,406
Other borrowings 1,537 (1,537) 1,668 (1,668)
- --------------------------------------------------------------------------------
Total interest-bearing
liabilities $663,960 568,387 95,573 657,273 551,045 106,228
Noninterest-bearing
deposits 142,320 107,004 35,316 136,565 100,407 36,158
Other noninterest-bearing
liabilities 5,506 5,905 (399) 5,718 5,393 325
Shareholders' Equity 83,371 72,053 11,318 82,097 70,608 11,489
- --------------------------------------------------------------------------------
Total liabilities and
shareholders'equity $895,157 $753,349 $141,808 $881,653 $727,453 $154,200
================================================================================
</TABLE>
7
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Columbia Banking System, Inc.
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.
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 theforward-
looking statements due to a number of factors. Specific factors include,
among others, the effect of interest rate changes, risk associated with bank
acquisitions or opening new branches, expense control and general economic
conditions.
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 23 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 June 30, 1998, the Company had total assets of $953.7 million.
Management believes the ongoing consolidation among financial institutions in
Washington 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 Company's business strategy 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.
The Company's goal over the next several years is to create a well-
capitalized, customer focused, Pacific Northwest commercial banking
institution with a significant presence in selected markets. 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 Auburn and Bellevue), south into Thurston County (the location of
the state capitol, Olympia) and northwest into Kitsap County (the location of
Bremerton and Port Orchard). Expansion by acquisition into other markets
will be considered as promising situations arise. 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 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
8
<PAGE>
deposit base. In order to support its strategy of growth, 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 its 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 strategy and emphasis on convenience and personal
service.
The Company completed its first bank acquisitions during the fourth quarter
of 1997, merging Cascade Bancorp, Inc. ("Cascade") and Bank of Fife ("Fife")
into Columbia Bank, thereby adding three branch office locations. Cascade
operated three banking offices in the south King County market area. Two of
the branches are located in Auburn (a market in which Columbia did not have
a branch) and the third in downtown Kent. Columbia consolidated its Kent
branch office into the Cascade branch location. Fife operated one banking
office in downtown Fife, a commercial market in which Columbia did not have
a branch.
During the first quarter of 1998, Columbia Bank opened two new branches. The
Westgate branch in north Tacoma opened in January, and the 176th and Meridian
branch in eastern Pierce County opened in February. Both are newly
constructed, full-service facilities. The Company plans to open several new
branches before year-end 1998. Upcoming locations include a full-service
facility in Port Orchard (Kitsap County) and a branch in the Triangle Mall
Thriftway store of Longview (Cowlitz County). Additionally, management
continues to pursue opportunities for branching in the Stadium district and
near 84th and Pacific Avenue, both in Tacoma (Pierce County), and in Olympia
(Thurston County) and Forest Villa (King County). New branches normally
do not contribute to net income for many months after opening.
At June 30 1998, the Company had 23 branches, 14 in Pierce County, 6 in King
County, and 3 in Cowlitz County. Since beginning its major Pierce County
expansion in August 1993, the Company has grown from four to twenty-three
branches through a combination of internal and external growth by acquisition.
In addition to the ongoing expansion of its branch network, the Company
continuously reviews new products and services to give its customers more
banking options. In addition, new technology and services are reviewed for
business development and cost saving.
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 Washington economy and that
of the Puget Sound region generally have experienced strong growth and
stability in recent years. The Pierce County Economic Index, a regional
publication providing economic forecasts and commentary reports, "The 1997
growth rate was almost twice the twenty-year average growth rate of the local
economy. Continued expansion will take place in 1998, but not at the gallop-
like pace of 1997. When 1998 comes to a close, economic activity in Pierce
County's economy will have increased by 10% in just three years."
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 and
other 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.
9
<PAGE>
Net income for the second quarter of 1998 was $2.5 million, or $0.25 per
share, compared to $2.2 million, or $0.22 per share, for the second quarter
of 1997, an increase in net income of 17%. Net income for the six months
ended June 30, 1998, was $5.0 million, or $0.50 per share, up 39% compared
with $3.6 million, or $0.36 per share for the same period in 1997. The
earnings increases for the quarter and six month periods reflect strong
growth in loans coupled with continued increases in noninterest income.
During the second quarter of 1997, an additional loan loss provision of
$800,000 was recorded due to the rapid loan growth experienced in the second
quarter, and a one-time gain of $1.0 million was realized from the sale of
the Company's VISA (Trade Mark) credit card portfolio.
With the completion of the Company's first acquisitions in December 1997,
Cascade Community Bank and Bank of Fife were merged into Columbia Bank. The
mergers were accounted for on a pooling of interests basis, and Company
financial statements for all reported periods have been restated to reflect
the mergers.
Additionally, on April 22, 1998, the Company announced a three shares for
two stock split payable on May 20, 1998, to shareholders of record on May 6,
1998. Common shares issued and outstanding, average shares outstanding and
net income per share for all periods presented have been retroactively
adjusted to give effect to this transaction.
Net Interest Income
Net interest income for the second quarter of 1998 increased 19% to $10.3
million, from $8.7 million in the second quarter of 1997. For the first six
months of 1998, net interest income increased 25% to $20.3 million, from
$16.3 million for the same period in 1997. The 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. During the
first six months of 1998, average interest-earning assets increased
$140.1 million, while average interest-bearing liabilities increased only
$106.2 million, compared with the same period in 1997.
Net interest margin (net interest income divided by average interest-earning
assets) increased to 5.03% in the second quarter of 1998 from 5.02% in the
second quarter of 1997. Average interest-earning assets grew to
$821.7 million during the second quarter of 1998, compared with
$693.6 million at June 30, 1997. The average yield on interest-earning
assets decreased 0.05% to 8.73% during the second quarter of 1998 from 8.78%
in the same period of 1997. In comparison, the average cost of interest-
bearing liabilities decreased 0.02% to 4.57% during the second quarter of
1998 from 4.59% in the same period of 1997.
For the first six months of 1998, net interest margin increased to 5.05% from
4.88% for the same period in 1997. Average interest-earning assets grew to
$811.8 million during the first six months of 1998, compared with $671.7
million at June 30, 1997. The average yield on interest-earning assets
increased 0.09% to 8.77% during the first six months of 1998 from 8.68% in
the same period of 1997. In comparison, the average cost of interest-bearing
liabilities decreased 0.04% to 4.59% during the first six months of 1998
from 4.63% in the same period of 1997. The increase in net interest margin
was primarily due to a combination of higher yields obtained on loans and to
decreasing deposit rates. The increase in loan yields was primarily caused
by a change in loan mix whereby commercial business loans and multi-family
and commercial real estate loans increased as a percentage of total loans.
The decrease in deposit rates is primarily a result of decreasing rates in
the markets in which the Company competes for funds. Interest rates, in
general, exhibited a downward trend during the past year due to a variety of
factors such as low inflation.
10
<PAGE>
Noninterest Income
Noninterest income, adjusted to reflect a nonrecurring gain of $1.0 million
on sale of loans in the second quarter of 1997, increased $811,000, or 39%,
in the second quarter of 1998, and $1.6 million, or 43%, for the first six
months of 1998, compared with the same periods in 1997. Increases during
the second quarter were primarily centered in account service charges and
mortgage banking income. In general, increases in account service charges
are due to the growth of the Company, and increases in mortgage banking
income reflect lower long-term interest rates with corresponding greater
volumes as compared with the first six months of 1997.
During the second quarter of 1997, the Company sold its VISA (Trade Mark)
credit card portfolio realizing a one-time gain of $1.0 million from the
sale.
Noninterest Expense
Total noninterest expense increased $1.4 million, or 19%, in the second
quarter of 1998, and $2.8 million, or 19%, for the first six months of 1998,
compared with the same periods in 1997. The increase was primarily due to
personnel costs associated with the Company's expansion as well as
advertising, data processing and other expenses. The Company's efficiency
ratio (noninterest expense, excluding unusual and nonrecurring items, divided
by the sum of net interest income plus noninterest income, excluding unusual
and nonrecurring items) was 67.0% and 66.4% for the second quarter and
first six months of 1998, respectively, and 69.1% and 71.5% for the same
periods in 1997, 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.
Income Taxes
For the second quarter and first six months of 1998, the Company recorded
income tax provisions of $1.3 million and $2.7 million, respectively.
11
<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 Private Banking services to high income and high net worth
individuals.
Loan Portfolio
The following table sets forth at the dates indicated the Company's loan
portfolio composition by type of loan:
<TABLE>
<CAPTION>
June 30, % of December 31 % of
(in thousands) 1998 Total 1997 Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $322,358 42.8% $270,946 39.5%
Real estate:
One-to four-family residential 67,062 8.9 71,095 10.4
Five or more family residential and
commercial properties 228,404 30.3 206,628 30.1
- -----------------------------------------------------------------------------
Total real estate 295,466 39.2 277,723 40.5
Real estate construction:
One-to four-family residential 22,291 3.0 29,695 4.3
Five or more family residential and
commercial properties 33,642 4.5 33,806 4.9
- -----------------------------------------------------------------------------
Total real estate construction 55,933 7.5 63,501 9.2
Consumer 80,144 10.6 74,710 10.9
- -----------------------------------------------------------------------------
Sub-total loans 753,901 100.1 686,880 100.1
Less: Deferred loan fees (933) (0.1) (991) (0.1)
- -----------------------------------------------------------------------------
Total loans $752,968 100.0% $685,889 100.0%
=============================================================================
Loans held for sale $ 9,043 $ 4,377
=============================================================================
</TABLE>
Total loans increased $67.1 million, or 9.8%, to $753.0 million from year-end
1997. All categories contributed to the increase except for the one-to four
family residential and real estate construction loans, which decreased during
the first six months of 1998.
Commercial and Private Banking Lending
Commercial loans increased to $322.4 million at June 30, 1998, representing
42.8% of total loans, from $270.9 million at December 31, 1997. 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 to emphasize in
particular its relationship banking with businesses, business owners and
professional individuals.
Real Estate Lending
One- to Four-Family Residential: Residential one- to four-family loans
decreased $4.0 million to $67.1 million at June 30, 1998, representing 8.9%
of total loans, compared with $71.1 million at December 31, 1997. The
decrease is attributable to maturities and prepayments of the portfolio.
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
12
<PAGE>
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.
Five or More Family Residential and Commercial Properties: The Company makes
multi-family and commercial real estate loans in its primary market areas.
Multi-family and commercial real estate lending increased to $228.4 million
at June 30, 1998, representing 30.3% of total loans, from $206.6 million at
December 31, 1997. 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. Underwriting standards can be
influenced by competition. The Company endeavors to maintain the highest
practical underwriting standards while balancing the need to remain
competitive in its lending practices.
Construction Loans
The Company originates a variety of real estate construction loans. One- to
four-family residential construction loans are originated 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. Construction loans on one- to four-
family residences decreased to $22.3 million at June 30, 1998, representing
3.0% of total loans, from $29.7 million at December 31, 1997. Multi-family
and commercial real estate construction loans decreased to $33.6 million at
June 30, 1998, representing 4.5% of total loans, from $33.8 million at
December 31, 1997. The decrease is a result of growing competition fueled
in part by declining interest rates during the first six months of 1998 as
well as management's intention to focus on commercial loans.
The Company endeavors to limit its construction lending risk through
adherence to strict underwriting procedures.
Consumer Lending
At June 30, 1998, the Company had $80.1 million of consumer loans outstanding,
representing 10.6% of total loans, as compared with $74.7 million at
December 31, 1997. Consumer loans made by the Company include automobile
loans, boat and recreational vehicle financing, home equity and home
improvement loans and miscellaneous personal loans.
13
<PAGE>
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>
June 30, December 31,
(in thousands) 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual:
One-to four-family residential $ 400 $ 661
Commercial business 1,490 728
Consumer 200 73
- -----------------------------------------------------------------------------
Total 2,090 $1,462
- -----------------------------------------------------------------------------
Restructured:
One-to four-family residential 18 $ 20
- -----------------------------------------------------------------------------
Total 18 $ 20
- -----------------------------------------------------------------------------
Total nonperforming loans $2,108 $1,482
=============================================================================
Real estate owned:
Five or more family residential and
commercial properties $ 921 $ 231
- -----------------------------------------------------------------------------
Total real estate owned $ 921 $ 231
=============================================================================
Total nonperforming assets $3,029 $1,713
=============================================================================
</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.
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. 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.
Nonperforming loans increased to $2.1 million, or 0.28% of total loans
(excluding loans held for sale), at June 30, 1998, from $1.5 million, or
0.22% of total loans at December 31, 1997 due to increases in the
"commercial business" and "consumer" loans.
Real estate owned ("REO") increased $690,000 to $921,000 at June 30, 1998,
from $231,000 at December 31, 1997. During the first six months of 1998,
the Company foreclosed on $731,000 of loans collateralized by real estate
and transferred the real estate to REO. Also, the Company reduced REO by
$41,000 through a sale and recorded a gain of $5,000.
Total nonperforming assets increased to $3.0 million, or 0.32% of period-end
assets at June 30, 1998, from $1.7 million, or 0.20% of period-end assets
at December 31, 1997.
14
<PAGE>
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 that 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 June 30, 1998 increased $437,000 to $8.9
million from $8.4 million at December 31, 1997 (excluding loans held for
sale at each date). The allowance for loan losses as a percentage of loans
at June 30, 1998 decreased 0.05% to 1.18% form 1.23% of loans at December 31,
1997. The decrease in the allowance as a percentage of loans was due to net
loan charge-offs of $560,000 during the second quarter of 1998 and to the
$67.1 million increase in loans outstanding during the six months ended
June 30, 1998.
During the first six months of 1998, the Company set aside $1.0 million as
a provision for loan losses as compared with $1.7 million during the first
six months of 1997. During the second quarter of 1997, an additional loan
loss provision of $800,000 was recorded due to the rapid loan growth
experienced in the second quarter.
Net loan charge-offs amounted to $563,000 for the first six months of 1998
compared with net loan charge-offs of $533,000 for the same period in 1997.
The following table sets forth at the dates indicated the changes in the
Company's allowance for loan losses:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 1998 1997 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance $8,987 $5,608 $8,440 $5,282
Charge offs:
One-to-four family residential (1) (1)
Commercial business (458) (425) (495) (430)
Consumer (178) (30) (243) (167)
- ----------------------------------------------------------------------------
Total charge-offs (636) (456) (738) (598)
Recoveries:
Commercial business 31 7 126 25
Consumer 45 39 49 40
- ----------------------------------------------------------------------------
Total recoveries 76 46 175 65
- ----------------------------------------------------------------------------
Net (charge-offs) recoveries (560) (410) (563) (533)
Provision charged to expense 450 1,259 1,000 1,708
- ----------------------------------------------------------------------------
Ending balance $8,877 $6,457 $8,877 $6,457
============================================================================
</TABLE>
15
<PAGE>
Liquidity and Sources of Funds
The Company's primary sources of funds are customer deposits, advances from
the Federal Home Loan Bank of Seattle (the "FHLB") and brokered deposits.
These funds, together with loan repayments, loan sales, retained earnings,
equity and other borrowed funds, are used to make loans, to acquire
securities and other assets and to fund continuing operations.
Deposit Activities
The Company's deposit products include a wide variety of transaction accounts,
savings accounts and time deposit accounts. Total deposits increased
$89.5 million, or 12.1%, to $830.0 million at June 30, 1998, from $740.4
million at December 31, 1997.
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. Management anticipates continued use of such
deposits, as needed, to fund increasing loan demand. Brokered and other
wholesale deposits (excluding public deposits) increased $4.4 million to
$7.9 million, or 0.96% of total deposits, at June 30, 1998.
Borrowings
The Company relies on advances from the FHLB to supplement its funding
sources. FHLB advances decreased $5.0 million to $34.0 million during the
first six months of 1998. FHLB advances are secured by one- to four-family
real estate mortgages and certain other assets.
Capital
Shareholders' equity at June 30, 1998, was $83.8 million compared with
$78.4 million at December 31, 1997. The increase is due to improved net
income during the first six months of 1998. Shareholders' equity was 8.79%
and 9.06% of total period-end assets at June 30, 1998, and December 31, 1997,
respectively.
Banking regulations require bank holding companies and banks to maintain a
minimum "leverage" ratio of core capital to adjusted quarterly average total
assets of at least 3%. At June 30, 1998, the Company's leverage ratio was
9.35%, compared with 9.33% at December 31, 1997. 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 10.37% and 11.47%,
respectively, at June 30, 1998, compared with 10.77% and 11.93%, respectively,
at December 31, 1997.
16
<PAGE>
The Federal Deposit Insurance Corporation (the "FDIC") established the
qualifications necessary to be classified as a "well-capitalized" bank,
primarily for assignment of FDIC insurance premium rates. To qualify as
"well-capitalized," banks must have a Tier I risk-adjusted capital ratio
of at least 6%, a total risk-adjusted capital ratio of at least 10%, and a
leverage ratio of at least 5%. Columbia Bank qualified as "well-capitalized"
at June 30, 1998. 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, including dividends by institutions such as Columbia Bank.
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 22, 1998, the Company announced a three shares for two stock split
payable on May 20, 1998, to shareholders of record on May 6, 1998. Common
shares issued and outstanding, average shares outstanding and net income per
share for all periods presented have been retroactively adjusted to give
effect to this transaction.
Interest Rate Sensitivity
A number of measures are used to monitor and manage interest rate risk,
including income simulations and interest sensitivity (gap) analyses. An
income simulation model is the primary tool used to assess the direction and
magnitude of changes in net interest income resulting from changes in
interest rates. Key assumptions in the model include prepayment speeds
on mortgage-related assets, cash flows and maturities of other investment
securities, loan and deposit volumes and pricing. These assumptions are
inherently uncertain and, as a result, the model cannot precisely estimate
net interest income or precisely predict the impact of higher or lower
interest rates on net interest income. Actual results will differ from
simulated results due to timing, magnitude and frequency of interest rate
changes, changes in market conditions and management strategies, among other
factors. At June 30, 1998, based on the measures used to monitor and manage
interest rate risk, there has not been a material change in the Company's
interest rate risk since December 31, 1997. For additional information,
refer to the Company's annual report on Form 10-K for the year ended
December 31, 1997.
Impact of the Year 2000 Issue
Many existing computer systems, including the systems used by the Company,
use only two digits to identify a year in the date field. These programs
were designed and developed without considering the impact of the upcoming
change in the century. If not corrected, many computer applications could
fail or create erroneous results by or at the Year 2000. The Company
currently is preparing its operations for the year 2000 and also has begun
to identify which customers and their respective operations will not be in
compliance with the Year 2000. The Company also has received assurances
from its data processing service provider that it has dedicated substantial
resources to assure its Year 200 compliance. The data processing service
provider has completed the inventory and project scoping phases of their
compliance program and testing of code renovation is scheduled for completion
in the third quarter of 1998. Software installation and testing is scheduled
for the fourth quarter of 1998 and the first quarter of 1999. The Company
expects its data processing to be fully compliant by March 31, 1999.
17
<PAGE>
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Company held its annual shareholders meeting on April 22, 1998, for
the purpose of electing a Board of Directors and to approve an amendment to
Columbia's Articles of Incorporation.
All fifteen persons nominated were elected to hold office for the ensuing year.
Nominee Votes "For" Votes "Withheld"
- ----------------------------------------------------------------------------
W. Barry Connoley 5,552,212 8,529
Richard S. DeVine 5,560,535 103
Jack Fabulich 5,560,620 121
Jonathan Fine 5,560,666 75
John P. Folsom 5,560,699 42
Margel S. Gallagher 5,560,640 92
W. Kelso Gillenwater 5,560,306 435
John A. Halleran 5,560,402 339
Thomas L. Matson 5,560,688 53
William W. Philip 5,560,662 79
John H. Powell 5,560,647 94
Robert E. Quoidbach 5,560,658 83
Donald Rodman 5,560,700 41
Frank H. Russell 5,560,257 484
Sidney R. Snyder 5,541,257 19,484
William T. Weyerhaeuser 5,560,707 34
James M. Will 5,560,724 17
A proposal to amend Columbia's Articles of Incorporation to increase the
number of authorized common shares from 11,000,000 to 30,000,000 was
approved by the following vote of the shareholders:
Shares Shares Shares
Voted Voted Shares Not
"FOR" "AGAINST" "ABSTAINING" Voted
5,129,335 709,974 32,080 660,853
18
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit 3(i) - Restated Articles of Incorporation of Columbia
Banking System, Inc.
See Exhibit 11 - Computation of Fully Diluted Earnings per Common
Share
See Exhibit 27 - Financial Data Schedule
(b) On May 4, 1998, the Company filed Form 8-K, announcing a three
shares for two shares stock split payable on May 20, 1998 to
shareholders of record on May 6, 1998. Also, the Company announced
the appointment of J. James Gallagher as Vice Chairman and a member
of the Board. Mr. Gallagher will be responsible for strategic
planning, mergers and acquisitions, and legal and regulatory
compliance.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COLUMBIA BANKING SYSTEM, INC.
(Registrant)
Date August 13, 1998 By /s/ W. W. Philip
----------------------------- --------------------------------
W. W. Philip
Chairman and
Chief Executive Officer
Date August 13, 1998 By /s/ Gary R. Schminkey
----------------------------- ---------------------------------
Gary R. Schminkey
Senior Vice President and
Chief Financial Officer
19
<PAGE>
Exhibit 3(i)
Restated Articles of Incorporation of Columbia Banking System, Inc.
<PAGE>
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 45,000,000 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 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.
1
<PAGE>
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
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.
2
<PAGE>
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.
(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
of 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 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;
3
<PAGE>
(d) The term "Substantial Part" shall mean more than 10% of the total assets
of 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.
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.
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(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 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.
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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 28 day of May, 1998.
COLUMBIA BANKING SYSTEM, INC.
By: /s/ Jill L. Myers
-------------------------
Jill L. Myers.
Secretary
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Exhibit 11
Statement re computation of per share net income
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except per share data) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income applicable to common stock $2,548 $2,178 $4,961 $3,555
- --------------------------------------------------------------------------------
Average number of basic common shares
outstanding 10,028 9,806 10,013 9,804
Dilutive effect of stock options
unexercised 387 200 340 238
- --------------------------------------------------------------------------------
Average number of diluted common shares
outstanding 10,387 10,066 10,353 10,060
================================================================================
Diluted net income per share $ 0.25 $ 0.22 $ 0.48 $ 0.35
================================================================================
</TABLE>
On April 22, 1998, the Company announced a three shares for two stock split
payable on May 20, 1998, to shareholders of record on May 6, 1998. Common
shares issued and outstanding, average shares outstanding and net income
per share for all periods presented have been retroactively adjusted to
give effect to this transaction.
For additional information on earnings per share, please see the "Capital"
section of the "Management Discussion and Analysis of Financial Condition
and Results of Operations".
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
FINANCIAL DATA SCHEDULE
Columbia Banking System, Inc.
(in thousands except per share)
</LEGEND>
<CIK> 0000887343
<NAME> COLUMBIA BANKING SYSTEM, INC.
<MULTIPLIER> 1000
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 57626
<INT-BEARING-DEPOSITS> 26313
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 61497
<INVESTMENTS-CARRYING> 7254
<INVESTMENTS-MARKET> 0
<LOANS> 752968
<ALLOWANCE> 8877
<TOTAL-ASSETS> 953722
<DEPOSITS> 829959
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5981
<LONG-TERM> 34000
0
0
<COMMON> 68442
<OTHER-SE> 15340
<TOTAL-LIABILITIES-AND-EQUITY> 953722
<INTEREST-LOAN> 32375
<INTEREST-INVEST> 2404
<INTEREST-OTHER> 513
<INTEREST-TOTAL> 35292
<INTEREST-DEPOSIT> 13872
<INTEREST-EXPENSE> 14948
<INTEREST-INCOME-NET> 20344
<LOAN-LOSSES> 1000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 17095
<INCOME-PRETAX> 7640
<INCOME-PRE-EXTRAORDINARY> 7640
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4961
<EPS-PRIMARY> .50
<EPS-DILUTED> .48
<YIELD-ACTUAL> 5.05
<LOANS-NON> 2090
<LOANS-PAST> 0
<LOANS-TROUBLED> 18
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8440
<CHARGE-OFFS> 738
<RECOVERIES> 175
<ALLOWANCE-CLOSE> 8877
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<ALLOWANCE-UNALLOCATED> 1542
</TABLE>
