<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended DECEMBER 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
[No Fee Required]
Commission File Number 0-20288
-------
COLUMBIA BANKING SYSTEM, INC.
(Exact name of registrant 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)
Registrant's Telephone Number, Including Area Code: (253) 305-1900
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of class)
Indicate by check mark whether the registrant (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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (17 C.F.R. 229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
The aggregate market value of Common Stock held by non-affiliates of registrant
at February 28, 1998 was $204,949,093.
The number of shares of registrant's Common Stock outstanding
at February 28, 1998 was 6,532,242
Documents incorporated by reference and parts of Form 10-K
into which incorporated:
Registrant's Annual Report to Shareholders Parts I and II
for the year ended December 31, 1997
Registrant's definitive Proxy Statement Part III
dated March 18, 1998
<PAGE>
CROSS REFERENCE SHEET
Location in Annual Report to Shareholders and Definitive Proxy Statement
of Items required by Form 10-K
<TABLE>
<CAPTION>
Annual Report to Shareholders and
Form 10-K Definitive Proxy Statement
- -------------------------------------------------------- -------------------------------------------------------
Part and Page
Item No. Caption Caption Number
- ----------- ---------------------------------------- ------------------------------------------- --------
<S> <C> <C> <C>
PART I ANNUAL REPORT TO SHAREHOLDERS
Item 1 Business
Consolidated Average Balance Sheet Consolidated Five-Year Summary of
and Analysis of Net Interest Income Average Balances and Net Interest Revenue 86
and Expense
Management Discussion and Analysis of
Financial Condition and Results of
Operations ("Management Discussion") 26
Investments Note 4, Notes to Consolidated Financial
Statements 63
Management Discussion - Securities 36
Lending Activities Management Discussion - Loan Portfolio 31
Management Discussion - Nonperforming
Assets 34
Note 5, Notes to Consolidated Financial
Statements 65
Summary of Loan Loss Experience Note 6, Allowance for Loan Losses 66
Management Discussion - Provision and
Allowance for Loan Losses 35
Supervision and Regulation Management Discussion - Capital 43
Item 2 Properties Note 7, Notes to Consolidated Financial
Statements 66
Item 3 Legal Proceedings Note 13, Notes to Consolidated Financial
Statements 73
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Annual Report to Shareholders and
Form 10-K Definitive Proxy Statement
- -------------------------------------------------------- -------------------------------------------------------
Part and Page
Item No. Caption Caption Number
- ----------- ---------------------------------------- ------------------------------------------- --------
<S> <C> <C> <C>
PART II ANNUAL REPORT TO SHAREHOLDERS
Item 5 Market for the Registrant's Common Management's Discussion - Quarterly Common
Stock and Related Stockholder Matters Stock Prices and Dividend Payments 46
Item 6 Selected Financial Data Consolidated Highlights 16
Consolidated Five-Year Statements of
Operations 84
Consolidated Five-Year Summary of Average
Balances and Net Interest Revenue 86
Item 7 Management's Discussion and Analysis Management Discussion 26
of Financial Condition and Results
of Operations Consolidated Five-Year Summary of Average
Balances and Net Interest Revenue 86
Item 8 Financial Statements and Audited Financial Statements 50
Supplementary Data Note 18, Summary of Quarterly Financial
Information (Unaudited) 80
Item 9 Changes in and Disagreements With Change in Accounting Firms 46
Accountants on Accounting and
Financial Disclosure
PART III DEFINITIVE PROXY STATEMENT
Item 10 Directors and Executive Officers Election of Directors 4
of the Registrant Section 16(a) Beneficial Ownership
Reporting Compliance 15
Item 11 Executive Compensation Executive Compensation 7
Item 12 Security Ownership of Certain Security Ownership of Management 2
Beneficial Owners and
Management
Item 13 Certain Relationships and Related Interest of Management in Certain
Transactions Transactions 15
</TABLE>
<PAGE>
COLUMBIA BANKING SYSTEM, INC.
FORM 10-K
December 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I Page
----
<S> <C> <C>
Item 1. Business
General.................................................................................... 1
Strategy................................................................................... 1
Market Area................................................................................ 3
Competition................................................................................ 4
Employees.................................................................................. 4
Executive Officers of the Company.......................................................... 5
Effects of Governmental Monetary Policies.................................................. 6
Consolidated Average Balance Sheet and Analysis of Net Interest Income and Expense......... 6
Consolidated Analysis of Changes in Interest Income and Expense............................ 7
Investments................................................................................ 7
Lending Activities......................................................................... 10
Summary of Loan Loss Experience............................................................ 12
Deposits................................................................................... 13
Significant Financial Ratios............................................................... 14
Short-term Borrowings...................................................................... 14
Supervision and Regulation................................................................. 14
Item 2. Properties................................................................................. 18
Item 3. Legal Proceedings.......................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders........................................ 18
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters................... 18
Item 6. Selected Financial Data.................................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................ 18
Item 8. Financial Statements and Supplementary Data................................................ 19
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure....... 19
PART III
Item 10 Directors and Executive Officers of the Registrant......................................... 19
Item 11. Executive Compensation..................................................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 19
Item 13. Certain Relationships and Related Transactions............................................. 19
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 20
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Columbia Banking System, Inc. ("the Company"), 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 21 banking offices
located in the Tacoma metropolitan area and contiguous parts of the Puget Sound
region of Washington, as well as the Longview and Woodland communities in
southwestern Washington. At December 31, 1997, based on total assets of $864.6
million, the Company was the largest publicly traded bank holding company
headquartered in Washington engaged primarily in commercial banking.
The Company was reorganized and additional management was added in 1993 in order
to take advantage of commercial banking business opportunities resulting from
increased consolidation of banks in the Company's principal market area,
primarily through acquisitions by out-of-state holding companies, and the
resulting dislocation of customers. Since the reorganization, Columbia Bank has
grown from four branch offices at January 1, 1993 to its present 21 branch
offices and has regulatory approval to open four additional branch offices in
its market area. Between January 1, 1993 and December 31, 1997, the Company
increased its consolidated assets to $864.6 million from $198.2 million, its
loans to $685.9 million from $146.2 million and its deposits to $740.4 million
from $151.9 million. While accomplishing this expansion, the Company's asset
quality has improved. At December 31, 1997, the Company's nonperforming assets
constituted 0.20% of total assets, as compared with 0.39%, 0.73%, and 0.94% at
December 31, 1996, 1995 and 1994, respectively. Although nonperforming assets
are currently low, rapid growth could increase future losses. Accordingly, the
Company increased the loan loss provision by $2.0 million in the fourth quarter
of 1997, as well as adding $1.0 million in the second quarter of 1997, and
increasing the monthly provision to $130,000 from $110,000 in April 1997.
The Company's sole subsidiary, Columbia Bank, is a Washington state-chartered
commercial bank, the deposits of which are insured by the Federal Deposit
Insurance Corporation (the "FDIC"). Columbia Bank is subject to regulation by
the FDIC and the Washington State Department of Financial Institutions, Division
of Banks (the "Division"). Although Columbia Bank is not a member of the
Federal Reserve System, the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board") has certain supervisory authority over the Company
which can also affect Columbia Bank.
STRATEGY
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.
1
<PAGE>
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 order to fund its commercial and consumer lending activities
and to allow for increased contact with customers, the Company is establishing a
branch system catering primarily to retail depositors, supplemented by business
banking customer deposits and other borrowings. The Company believes this mix
of funding sources will enable it to expand its commercial lending activities
rapidly while attracting a stable core deposit base. In order to support its
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.
In November and December 1996, the Company issued approximately 1.445 million
additional shares of common stock in a public offering. The issuance raised
approximately $20.7 million in new capital. The Company contributed
approximately $10.0 million of these proceeds to Columbia Bank primarily to
fund additional expansion in Pierce County, and, over the next several years,
into neighboring south King, Thurston, and Kitsap Counties. The remainder was
used to repay a $3.0 million borrowing and for general corporate purposes.
During the first quarter of 1997, the Company opened a second Bellevue branch
and a new branch in the south King County commercial market of downtown Kent.
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.
At the end of 1997, the Company had twenty-one branches, twelve in Pierce
County, six in King County and three in Cowlitz County. Since beginning its
major Pierce County expansion in August 1993, the Company has grown from four
to twenty-one branches through a combination of internal and external growth by
acquisition. Also, at the end of the year, construction was nearing completion
on two more offices in Tacoma.
The Company opened its twenty-second branch in mid-January 1998, located in the
Westgate area of north Tacoma. The Westgate branch is the thirteenth location
in Pierce County. The next Pierce County branch will open in February 1998,
located at 176th and Meridian in Puyallup. The Company currently has regulatory
approval to open one additional branch in Pierce County and one in King County.
Management continues to pursue opportunities for expansion via a combination of
internal and external growth by acquisition. New branches normally do not
contribute to net income for many months after opening.
In addition to the ongoing expansion of its branch network, the Company
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.
2
<PAGE>
MARKET AREA
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 that "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."
Pierce County, the area in which the Company's expansion is primarily focused,
is located in the South Puget Sound region. With 12 branch offices in Pierce
County at the end of 1997, and two new branch offices opening during the first
quarter of 1998, the Company is positioning itself to increase its market share
in this County of approximately 674,000 residents, the second largest populated
county in Washington State. Over a year ago, Forbes magazine published its
prediction that the Tacoma area would be among the top twenty-five cities in the
United States in terms of job growth, especially in the area of computers and
semiconductors.
Bellevue, where the Company has two banking offices, is located in an area known
as the "Eastside," a metropolitan area with a population of approximately
215,000 that includes several King County cities located east of Seattle. A
large portion of the Eastside economy is linked to aerospace, construction,
computer software and biotechnology industries. Microsoft is headquartered just
north of Bellevue and several biotech firms are located on the Eastside. In
recent years, the Eastside has experienced relatively rapid growth in population
and employment, and household incomes in the Eastside are among the highest in
Washington.
During 1997, the Company further expanded into neighboring south King County, an
area of several residential communities whose employment base is supported by
light industrial, aerospace, and forest products industries. In early 1997, the
Company opened a branch office in Kent and with the merger of Cascade added two
branches in Auburn, a market where Columbia had no branch offices, and merged
its newly opened Kent branch into Cascade's Kent branch location. The merger
brings the Company's branch office total in south King County to four, including
the Federal Way office which opened during 1995. With its close proximity to
Tacoma, the south King County market area is considered an important natural
extension of the Company's Pierce County market area. The Weyerhaeuser
Corporation maintains its world headquarters in Federal Way, which is located in
south King County adjacent to the King/Pierce County line. The Auburn and Kent
Valley areas to the east of Federal Way are high residential and commercial
growth markets and considered by management to be natural areas of expansion for
the Company.
The Company's market area also includes the Longview and Woodland communities in
southwest Washington. The population of Cowlitz County, in which Longview and
Woodland are located, is approximately 91,000. Cowlitz County's economy has
become more diversified in recent years, but remains materially dependent on the
forest products industry and, as a result, is relatively vulnerable to the
cyclical downturns of that industry as well as environmental disputes.
The Company anticipates continued expansion in Pierce County, north into King
County, south into Thurston County (the location of the state capitol, Olympia),
and northwest into Kitsap County (the location of Bremerton and Port Orchard).
3
<PAGE>
Olympia, with a population of approximately 39,000, and the neighboring
community of Lacey, with a population of approximately 28,000, are the principal
cities in Thurston County. The county has an approximate population of 198,000.
The area enjoys a stable economic climate due largely to state government
employment and the proximity of the Fort Lewis Army Base and McChord Air Force
Base. According to the Washington State Almanac (an annual publication of
demographic information of Washington State counties and cities), approximately
40% of the average employment was through federal, state, and local government
agencies. The area also has a significant population of retired military
personnel.
Kitsap County, with a population of approximately 229,000 (sixth largest in the
State), is home to the Bremerton Naval shipyard and the Trident Submarine Base.
Directly west of Seattle across Puget Sound, commuters and visitors are able to
travel by ferry in 30 to 60 minutes to jobs and entertainment in Seattle from
residences in Kitsap County. According to the Washington State Almanac,
approximately 39% of the average employment was government related.
COMPETITION
The Company anticipates that the substantial consolidation among financial
institutions in Washington that has occurred to date will continue, due in part
to recent federal legislation concerning interstate banking. Federal law (see
"Supervision and Regulation -- Other Regulatory Developments") allows mergers or
other combinations, relocations of a bank's main office and branching across
state lines. Many other financial institutions, most of which have greater
resources than the Company, compete with the Company for banking business in the
Company's market area. Among the advantages of some of these institutions are
their ability to make larger loans, finance extensive advertising campaigns,
access international money markets and allocate their investment assets to
regions of highest yield and demand. The Company currently does not have a
significant market share of the deposit-taking or lending activities in the
areas in which it conducts operations, however, its share of commercial bank
deposits in Pierce County has grown substantially over the last several years.
The Company's strategy involves significant expansion throughout the
Tacoma/Pierce County metropolitan area and contiguous parts of the Puget Sound
region of Washington. Although, the Company has been able to compete
effectively in its market areas to date, there can be no assurance that it will
be able to continue to do so in the future.
EMPLOYEES
At December 31, 1997, the Company had 327 full-time equivalent employees. The
Company has placed an increased emphasis and high priority on staff development.
This development involves selective hiring and extensive training (including
customer service training). New hires are selected on the basis of both
technical skills and customer service capabilities. Emphasis has been placed
upon hiring and retaining additional key officers in areas such as lending,
administration and finance. None of the Company's employees are covered by a
collective bargaining agreement with the Company, and management believes that
its relationship with its employees is satisfactory.
4
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information about the executive officers
of the Company.
<TABLE>
<CAPTION>
Has Served as an
Executive Officer of
the Company
Name Age Position Since
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
W. W. Philip/1/ 71 Director, Chairman, President and Chief Executive 1993
Officer
Melanie J. Dressel/2/ 45 Executive Vice President - Retail Banking 1997
H. R. Russell/3/ 43 Executive Vice President - Commercial Banking 1996
Donald A. Andersen/4/ 52 Senior Vice President, Senior Loan Production 1996
Officer - Columbia Bank
Julie A. Healy/5/ 42 Senior Vice President, Operations Manager - 1994
Columbia Bank
Gary R. Schminkey/6/ 40 Senior Vice President and Chief Financial Officer 1993
Evans Q. Whitney/7/ 54 Senior Vice President, Human Resources Director 1994
</TABLE>
1 Mr. Philip has been a director of the Company since July 1993. He became
President and Chief Operating Officer of the Company and President and Chief
Executive Officer of Columbia Bank in August 1993 when the Company's
reorganization was completed and the Company began operations in Tacoma. In
November 1997, Mr. Philip was appointed Chairman, President and Chief
Executive Officer of the Company and Columbia Bank. Until his retirement in
December 1992, Mr. Philip was Chairman of the Board and Chief Executive
Officer of Puget Sound Bancorp ("PSB") since its inception in 1981 and was
Chairman of the Board and Chief Executive Officer of Puget Sound National
Bank prior to and after the inception of PSB, having served with that
institution for more than 40 years.
2 Ms. Dressel joined Columbia Bank as Senior Vice President -- Private Banking
in June 1993. She was appointed Executive Vice President - Retail Banking for
Columbia Bank in November 1997. Ms. Dressel served as Senior Vice President
and directed the private banking division of Puget Sound National Bank for
nearly five years and was employed by Bank of California for over 14 years.
3 Mr. Russell joined Columbia Bank as Senior Vice President -- Commercial Loans
in October 1993. He was appointed Executive Vice President - Senior Credit
Officer for Columbia Bank in November 1997. Mr. Russell was employed by Puget
Sound National Bank and its successor institution for nearly 14 years, having
served as Vice President -- Commercial Loan Officer from 1991 to 1993.
4 Mr. Andersen joined Columbia Bank as Senior Vice President -- Commercial
Loans in January 1995. Mr. Andersen was employed by Puget Sound National Bank
and its successor institution for nearly 25 years, having served as Vice
President -- Commercial Loan Officer from 1991 to 1995.
5 Ms. Healy joined Columbia Bank as Senior Vice President -- Operations in June
1993. Ms. Healy was employed by Puget Sound National Bank for nearly 12
years, having served as Vice President -- Operations from 1991 to 1993.
6 Mr. Schminkey joined Columbia Bank as Vice President and Controller in March
1993. He was appointed Senior Vice President -- Chief Financial Officer of
Columbia Bank and the Company in 1994. Mr. Schminkey was employed by PSB,
Puget Sound National Bank and its successor institution for nearly 10 years,
having served from 1991 to 1993 as Assistant Vice President -- Assistant
Controller for PSB and during that same period as Vice President --
Accounting and Finance for Puget Sound National Bank and its successor
institution.
5
<PAGE>
7 Mr. Whitney joined Columbia Bank as Senior Vice President -- Human Resources
in March 1993. Mr. Whitney is also the Senior Vice President -- Human
Resources of the Company. Mr. Whitney was employed by PSB and Puget Sound
National Bank for nearly 27 years, having served as Senior Vice President --
Human Resources for PSB and Puget Sound National Bank from 1991 to 1993.
All officers are elected by the Board of Directors and serve at the pleasure of
the Board for an unspecified term.
EFFECTS OF GOVERNMENTAL MONETARY POLICIES
Profitability in banking depends on interest rate differentials. In general,
the difference between the interest earned on a bank's loans, securities and
other interest-earning assets and the interest paid on a bank's deposits and
other interest-bearing liabilities is the major source of a bank's earnings.
Thus, the earnings and growth of the Company are affected not only by general
economic conditions, but also by the monetary and fiscal policies of the United
States and its agencies, particularly the Federal Reserve. The Federal Reserve
implements national monetary policy for such purposes as controlling inflation
and recession by its open-market operations in United States government
securities, control of the discount rate applicable to borrowings from the
Federal Reserve and the establishment of reserve requirements against certain
deposits. The actions of the Federal Reserve in these areas influence growth of
bank loans, investments and deposits and also affect interest rates charged on
loans and paid on deposits. The nature and impact of future changes in monetary
policies and their impact on the Company are not predictable.
CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME AND
EXPENSE
For information concerning consolidated daily average balances, along with
average yields for earning assets and average interest rates for interest-
bearing liabilities, see "Consolidated Five-Year Summary of Average Balances and
Net Interest Revenue" at page 86 of the Annual Report to Shareholders for the
year ended December 31, 1997 ("Annual Report"), which is incorporated herein by
reference. See also "Management Discussion and Analysis of Financial Condition
and Results of Operations" ("Management Discussion") beginning at page 26 of the
Annual Report for additional details on various asset and liability categories.
6
<PAGE>
CONSOLIDATED ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
The following table sets forth the amounts of the changes in consolidated net
interest income attributable to changes in volume and changes in interest rates
for the Company. Changes attributable to the combined effect of volume and
interest rates have been allocated proportionately to the changes due to volume
and the changes due to interest rates.
<TABLE>
<CAPTION>
1997 Compared to 1996 1996 Compared to 1995
Increase (Decrease) Due to Increase (Decrease) Due to
----------------------------- -------------------------------
(in thousands) Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------------------------------
INTEREST INCOME
<S> <C> <C> <C> <C> <C> <C>
Loans:
Commercial business $ 5,532 $ 487 $ 6,019 $ 4,170 $ (872) $3,298
One- to four-family residential (293) 761 468 (34) (359) (393)
Five or more family residential and
commercial properties 6,199 (945) 5,254 3,770 (239) 3,531
Consumer 916 279 1,195 1,059 (268) 791
- ---------------------------------------------------------------------------------------------------------------
Total loans 12,354 582 12,936 8,965 (1,738) 7,227
Securities 1,284 103 1,387 773 112 885
Interest-earning deposits with banks (204) 77 (127) 988 (72) 916
- ---------------------------------------------------------------------------------------------------------------
Total interest revenue $13,434 $ 762 $14,196 $10,726 $(1,698) $9,028
===============================================================================================================
<CAPTION>
INTEREST EXPENSE
<S> <C> <C> <C> <C> <C> <C>
Deposits:
Certificates of deposit $ 2,414 $(168) $ 2,246 $ 2,077 $ 14 $2,091
Savings accounts 158 (47) 111 (21) (7) (28)
Interest-bearing demand 2,185 (137) 2,048 2,192 (254) 1,938
- ---------------------------------------------------------------------------------------------------------------
Total interest on deposits 4,757 (352) 4,405 4,248 (247) 4,001
Federal Home Loan Bank advances 83 (26) 57 506 (95) 411
Other borrowings (106) (67) (173) 12 (57) (45)
- ---------------------------------------------------------------------------------------------------------------
Total interest expense $ 4,734 $(445) $ 4,289 $ 4,766 $ (399) $4,367
===============================================================================================================
</TABLE>
INVESTMENTS
For additional information concerning securities (securities available for sale
and held to maturity), see Note 4 of "Notes to Consolidated Financial
Statements" at page 63 of the Annual Report and "Management Discussion -
Securities" at page 36 of the Annual Report, all of which are incorporated
herein by reference.
Securities to be held for indefinite periods of time and not intended to be held
to maturity or on a long-term basis are classified as available for sale and
carried at market value. Unrealized gains and losses are recorded directly to a
component of shareholders' equity. Securities available for sale include
securities that management intends to use as part of its asset/liability
management strategy and that may be sold in response to changes in interest
rates and/or significant prepayment risk.
Securities held to maturity are those securities which the Company has the
ability and intent to hold to maturity. Events which may be reasonably
anticipated are considered when determining the Company's intent to hold
investment securities until maturity. Investment securities are carried at
cost, adjusted for amortization of premiums and accretion of discounts using a
method that approximates the interest method. Gains and losses on the sale of
all securities are determined using the specific identification method.
At December 31, 1997, there were no securities of any issuer that exceeded ten
percent of shareholders' equity.
7
<PAGE>
The following table summarizes the amortized cost, gross unrealized gains and
losses and the resulting market value of Company's securities available for sale
for the years ended December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE Gross Gross
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1997:
U.S. Treasury & government agency $48,178 $ 78 $48,256
Mortgage-backed 7,046 $ (27) 7,019
Other securities 990 14 1,004
- ---------------------------------------------------------------------------------------------------------------
Total $56,214 $ 92 $ (27) $56,279
===============================================================================================================
December 31, 1996:
U.S. Treasury & government agency $40,562 $104 $ (19) $40,647
Mortgage-backed 10,874 (114) 10,760
FHLMC preferred stock 250 8 258
Other securities 249 (3) 246
State and municipal securities 130 3 133
- ---------------------------------------------------------------------------------------------------------------
Total $52,065 $115 $(136) $52,044
===============================================================================================================
December 31, 1995:
U.S. Treasury & government agency $13,891 $ 38 $ (6) $13,923
Mortgage-backed 12,572 (126) 12,446
FHLMC preferred stock 250 8 258
Other securities
State and municipal securities 130 4 134
- ---------------------------------------------------------------------------------------------------------------
Total $26,843 $ 50 $(132) $26,761
===============================================================================================================
</TABLE>
The following table provides the carrying values, maturities and weighted
average yields of the Company's securities available for sale at December 31,
1997.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE Maturing
-------------------------------------------------------------------------------
After 5 But
After 1 But Within 10
(dollars in thousands) Within 1 Year Within 5 Years Years After 10 Years Total
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury
Balance $15,967 $ 3,515 $19,482
Weighted Average Yield 5.76% 6.19% 5.83%
U.S. government agency
Balance 701 19,256 $6,938 $1,879 28,774
Weighted Average Yield 5.96% 6.49% 7.70% 7.39% 6.82%
Mortgage-backed (1)
Balance 5,037 1,982 7,019
Weighted Average Yield 5.37% 6.36% 5.65%
Other Securities
Balance 1,004 1,004
Weighted Average Yield 6.75% 6.75%
- -----------------------------------------------------------------------------------------------------------------------
Total
Balance $21,705 $23,775 $8,920 $1,879 $56,279
Weighted Average Yield 5.67% 6.45% 7.40% 7.39% 6.33%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The maturities reported for mortgage-backed securities are based on
contractual maturities and principal amortization.
8
<PAGE>
The following table summarizes the recorded value, gross unrealized gains and
losses and the resulting market value of securities held to maturity for the
years ended December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
SECURITIES HELD TO MATURITY Gross Gross
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1997:
U.S. Treasury & government agency $ 4,743 $ 8 $ 4,751
State and municipal securities 4,191 54 4,245
Other Securities 495 6 501
FHLMC preferred stock 250 7 257
- --------------------------------------------------------------------------------------------------
Total $ 9,679 $75 $ 9,754
==================================================================================================
December 31, 1996:
U.S. Treasury & government agency $ 8,484 $15 $(56) $ 8,443
State and municipal securities 2,482 31 (2) 2,511
Other Securities 655 1 656
- --------------------------------------------------------------------------------------------------
Total $11,621 $47 $(58) $11,610
==================================================================================================
December 31, 1995:
U.S. Treasury & government agency $ 6,731 $40 $(25) $ 6,746
State and municipal securities 2,275 20 (7) 2,288
Other Securities 1,063 4 (5) 1,062
- --------------------------------------------------------------------------------------------------
Total $10,069 $64 $(37) $10,096
==================================================================================================
</TABLE>
The following table provides the carrying values, maturities and weighted
average yields of the Company's securities held to maturity at December 31,
1997.
<TABLE>
<CAPTION>
SECURITIES HELD TO MATURITY Maturing
-------------------------------------------------------------------------------
After 5 But
After 1 But Within 10
(dollars in thousands) Within 1 Year Within 5 Years Years After 10 Years Total
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. government agency
Balance $ 998 $3,495 $ 250 $4,743
Weighted Average Yield 6.20% 6.41% 7.00% 6.40%
State and municipal securities *
Balance 441 1,972 1,778 4,191
Weighted Average Yield 7.34% 7.16% 7.02% 7.12%
Other securities
Balance 495 495
Weighted Average Yield 6.77% 6.77%
FHLMC stock
Balance 250 250
Weighted Average Yield 6.72% 6.72%
-----------------------------------------------------------------------------------------------------------------------
Total
Balance $1,689 $5,962 $2,028 $9,679
Weighted Average Yield 5.92% 5.88% 5.19% 5.75%
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Yields on fully taxable equivalent basis, based on a marginal tax rate of
34%.
9
<PAGE>
LENDING ACTIVITIES
The following table sets forth the composition of the Company's loan portfolio
by type of loan at the dates indicated.
<TABLE>
<CAPTION>
(in thousands) December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial business $270,946 $194,843 $133,885 $ 89,546 $ 56,631
Real estate:
One-to four-family residential 71,095 77,359 77,603 83,582 59,738
Five or more family residential and
commercial properties 206,628 151,179 113,784 80,010 54,796
- -------------------------------------------------------------------------------------------------------------------
Total real estate 277,723 228,538 325,272 253,138 171,165
Real estate construction:
One- to four-family residential 29,695 31,446 32,819 23,462 22,227
Five or more family residential and
commercial properties 33,806 10,724 8,985 4,307 4,945
- -------------------------------------------------------------------------------------------------------------------
Total real estate construction 63,501 42,170 41,804 27,769 27,172
Consumer 74,710 58,249 51,788 38,120 20,436
- -------------------------------------------------------------------------------------------------------------------
Subtotal 686,880 523,800 418,864 319,027 218,773
Less deferred loan fees and other (991) (649) (807) (953) (328)
- -------------------------------------------------------------------------------------------------------------------
Total loans $685,889 $523,151 $418,057 $318,074 $218,445
===================================================================================================================
Loans held for sale $ 4,377 $ 11,341 $ 1,367 $ 1,612 $ 1,777
===================================================================================================================
</TABLE>
NOTE: During 1994, as part of its focus on loan quality, management developed
more detailed statistical information on various types of lending. In this
connection, the December 31, 1994 through December 31, 1997 loan balances
in the table above reflect changes in classifications from prior periods.
Due to the impracticality of developing similar information for prior
period balances, prior period balances have not been restated and, as a
result, are not comparable with balances at December 31, 1994 through
December 31, 1997.
The following table presents at December 31, 1997, (i) the aggregate maturities
of loans in each major category of the Company's loan portfolio and (ii) the
aggregate amounts of variable and fixed rate loans that mature after one year.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE Maturing
------------------------------------------------------------
After 1 But
(in thousands) Within 1 Year Within 5 Years After 5 Years Total
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial business $169,382 $87,771 $13,793 $270,946
Real estate construction 59,299 1,866 2,335 63,501
- ------------------------------------------------------------------------------------------------------
Total $228,681 $89,637 $16,128 $334,447
======================================================================================================
Fixed rate loans $38,722 $ 4,331 $ 43,053
Variable rate loans 50,915 11,797 62,712
- ------------------------------------------------------------------------------------------------------
Total $89,637 $16,128 $105,765
======================================================================================================
</TABLE>
10
<PAGE>
Risk Elements
Risk elements consist of: (i) nonaccrual loans, which are loans placed on a
nonaccrual basis generally when the loan becomes past due 90 days or when there
are otherwise serious doubts about the collectibility of principal or interest;
(ii) restructured loans, for which concessions, including the reduction of
interest rates below a rate otherwise available to that borrower or the deferral
of interest or principal, have been granted due to the borrower's weakened
financial condition (interest on restructured loans is accrued at the
restructured rates when it is anticipated that no loss of original principal
will occur); (iii) accruing loans which are contractually past due ninety days
or more as to interest or principal payments; and (iv) potential problem loans,
which are currently performing and are not included in nonaccrual or
restructured loans, but about which there are serious doubts as to the
borrower's ability to comply with present repayment terms and, therefore, will
likely be included later in nonaccrual, past due or restructured loans.
The following table sets forth, at the dates indicated, information with respect
to nonaccrual loans, restructured loans, total nonperforming loans (nonaccrual
loans plus restructured loans), real estate owned ("REO"), total nonperforming
assets, accruing loans past-due 90 days or more and potential problem loans of
the Company.
<TABLE>
<CAPTION>
(in thousands) December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual $1,462 $2,256 $ 449 $ 452 $1,631
Restructured 20 25 29 44 94
- ------------------------------------------------------------------------------------------------------------------
Total nonperforming loans $1,482 $2,281 $ 478 496 1,725
Real estate owned 231 484 3,304 3,227 3,305
- ------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $1,713 $2,765 $3,782 $3,723 $5,030
==================================================================================================================
Accruing loans past-due 90 days or more $ 111 $ 154 $ 82 $ 2
==================================================================================================================
Potential problem loans $ 669 $ 346 $ 239
==================================================================================================================
</TABLE>
For information pertaining to risk elements, see the appropriate sections in
"Management Discussion - Loan Portfolio" beginning at page 31 of the Annual
Report, "Management Discussion - Nonperforming Assets" beginning at page 34 of
the Annual Report and Note 5 of "Notes to Consolidated Financial Statements"
beginning at page 65 of the Annual Report, all of which are incorporated herein
by reference.
11
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
The following table provides an analysis of net losses by loan type for the last
five years.
<TABLE>
<CAPTION>
(dollars in thousands) December 31, 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total loans, net at end of period $685,889 $523,151 $418,057 $318,075 $218,448
Daily average loans 613,671 473,887 373,560 264,761 170,701
- ----------------------------------------------------------------------------------------------------------------------
Balance of allowance for loan losses
at beginning of period $ 5,282 $ 4,340 $ 3,175 $ 2,354 $ 1,792
Charge-offs:
One- to four-family residential (364) (7)
Commercial business (1,025) (514) (148) (258) (87)
Consumer (270) (199) (119) (111) (47)
- ----------------------------------------------------------------------------------------------------------------------
Total charge-offs (1,659) (720) (267) (369) (134)
Recoveries:
One- to four-family residential 1 7
Commercial business 43 17 45 83 56
Consumer 47 3 5 5
- ----------------------------------------------------------------------------------------------------------------------
Total recoveries 91 27 50 83 61
- ----------------------------------------------------------------------------------------------------------------------
Net charge-offs (1,568) (693) (217) (286) (73)
Provision charged to expense 4,726 1,635 1,382 1,107 635
- ----------------------------------------------------------------------------------------------------------------------
Balance of allowance for loan losses
at end of period $ 8,440 $ 5,282 $ 4,340 $ 3,175 $ 2,354
======================================================================================================================
Ratio of net charge-offs during period
to average loans outstanding 0.26% 0.15% 0.06% 0.11% 0.04%
======================================================================================================================
</TABLE>
In determining the adequacy of the allowance, management considered numerous
factors including the level of nonperforming loans, loan loss experience, credit
concentrations, a review of the quality of the loan portfolio, collateral values
and uncertain economic conditions.
For additional information, see "Management Discussion - Provision and Allowance
for Loan Losses" at page 35 of the Annual Report and Note 6 of "Notes to
Consolidated Financial Statements" beginning at page 66 of the Annual Report,
both of which are incorporated herein by reference.
12
<PAGE>
The table below shows the allocation of the Allowance for Loan Losses for the
last five years. The allocation is based on an evaluation of defined loan
problems, historical ratios of loan losses and other factors which may affect
future loan losses in the categories of loans shown.
<TABLE>
<CAPTION>
(dollars in thousands)
December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
Balance at End of Period % of Total % of Total % of Total % of Total % of Total
Applicable to: Amount Loans* Amount Loans* Amount Loans* Amount Loans* Amount Loans*
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial business $4,109 39.4% $3,403 37.2% $2,006 32.0% $1,537 28.1% $ 421 25.9%
Real estate and
construction:
One- to four-family
residential 1,041 14.7 1,115 20.8 699 26.3 773 33.6 513 37.5
Five or more family
residential and
commercial properties 1,414 35.0 490 30.9 330 29.3 249 26.4 560 27.3
Consumer 334 10.9 499 11.1 386 12.4 295 11.9 144 9.3
Unallocated 1,542 (225) 919 321 716
- ------------------------------------------------------------------------------------------------------------------------------
Total $8,440 100.0% $5,282 100.0% $4,340 100.0% $3,175 100.0% $2,354 100.0%
==============================================================================================================================
</TABLE>
*Represents the total of all outstanding loans in each category as a percent of
total loans outstanding.
DEPOSITS
The following table presents the average balances outstanding and weighted
average interest rate for each major category of deposits:
<TABLE>
<CAPTION>
years ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
(dollars in thousands) Balance Rate Paid Balance Rate Paid Balance Rate Paid
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing demand and
money market accounts $223,514 3.45% $160,020 3.53% $ 97,326 3.82%
Savings accounts 38,301 2.75 32,438 2.91 33,145 2.93
Certificates of deposit 282,899 5.66 240,214 5.73 203,978 5.73
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 544,714 4.55 432,672 4.71 334,449 4.89
Demand and other noninterest-bearing 111,492 74,940 54,878
- --------------------------------------------------------------------------------------------------------------------
Total deposits $656,206 $507,612 $389,327
====================================================================================================================
</TABLE>
The following table shows the amount and maturity of certificates of deposit
that had balances of more than $100,000:
<TABLE>
<CAPTION>
(in thousands) December 31, 1997
- -----------------------------------------------------------
Remaining maturity
<S> <C>
Three months or less $ 42,432
Over three through six months 21,879
Over six through twelve months 28,288
Over twelve months 8,686
- -----------------------------------------------------------
Total $101,285
===========================================================
</TABLE>
13
<PAGE>
SIGNIFICANT FINANCIAL RATIOS
Ratios for the last three years, based on daily average balances, are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Return on assets 1.21% 0.78% 0.81%
Return on equity 14.41 10.15 9.86
Dividend payout ratio
Equity to assets 8.42 7.67 8.17
</TABLE>
SHORT-TERM BORROWINGS
At December 31, 1997, 1996 and 1995, there were no short-term (original maturity
of one year or less) borrowings that exceeded 30 percent of shareholders' equity
at the end of the period.
SUPERVISION AND REGULATION
The Company and Columbia Bank are subject to extensive federal and Washington
state legislation, regulation and supervision. These laws and regulations are
primarily intended to protect depositors and the FDIC rather than shareholders
of the Company. The laws and regulations affecting banks and bank holding
companies have changed significantly over recent years, and there is reason to
expect that similar changes will continue in the future. Any change in
applicable laws, regulations or regulatory policies may have a material effect
on the business, operations and prospects of the Company. The Company is unable
to predict the nature or extent of the effects on its business and earnings that
any fiscal or monetary policies or new federal or state legislation may have in
the future. The following information is qualified in its entirety by reference
to the particular statutory and regulatory provisions described herein.
THE COMPANY
The Company is subject to regulation as a bank holding company within the
meaning of the Bank Holding Company Act of 1956 (the "BHCA"), as amended. As
such, the Company is supervised by the Federal Reserve Board.
The Federal Reserve Board has the authority to order bank holding companies to
cease and desist from unsound practices and violations of conditions imposed by
the Board. The Federal Reserve Board is also empowered to assess civil money
penalties against companies and individuals who violate the BHCA or orders or
regulations thereunder in amounts up to $1.0 million per day or order
termination of non-banking activities of non-banking subsidiaries of bank
holding companies, and to order termination of ownership and control of a non-
banking subsidiary by a bank holding company. Certain violations may also
result in criminal penalties. The FDIC is authorized to exercise comparable
authority under the Federal Deposit Insurance Act and other statutes with
respect to state nonmember banks such as Columbia Bank.
The Federal Reserve Board takes the position that a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Board's position that in serving as a source of
strength to its subsidiary banks, bank holding companies should be prepared to
use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary banks
will generally be considered by the Board to be an unsafe and unsound banking
practice or a violation of the Board's regulations of both. The Federal Deposit
Insurance Act requires an undercapitalized institution to submit to the Federal
Reserve Board a capital restoration plan with a guarantee by each company having
control of the bank's compliance with the plan.
14
<PAGE>
The BHCA prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of any company which is not a
bank or from engaging in any activities other than those of banking, managing or
controlling banks and certain other subsidiaries, or furnishing services to or
performing services for its subsidiaries. One principal exception to these
prohibitions allows a bank holding company to acquire an interest in companies
whose activities are found by the Federal Reserve Board, by order or by
regulation, to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. The Company must obtain the approval of the
Federal Reserve before it acquires all, or substantially all, of any bank, or
ownership or control of more than 5 percent of the voting shares of a bank.
The Company is required under the BHCA to file an annual report and periodic
reports with the Federal Reserve Board and such additional information as the
Federal Reserve Board may require pursuant to the BHCA. The Board may examine a
bank holding company and any of its subsidiaries and charge the company for the
cost of such an examination.
The Company and any subsidiaries which it may control are deemed "affiliates"
within the meaning of the Federal Reserve Act, and transactions between bank
subsidiaries of the Company and its affiliates are subject to certain
restrictions. With certain exceptions, the Company and its subsidiaries also
are prohibited from tying the provision of certain services, such as extensions
of credit, to other services offered by the Company or its affiliates.
Banking regulations require bank holding companies and banks to maintain a
minimum "leverage ratio" of core capital to adjusted quarterly average total
assets of a least 3%. 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 intangible assets, while Tier II capital includes the allowance for
loan losses and subordinated debt, both subject to certain limitations.
Regulatory risk-based capital guidelines require Tier I capital of 4% of risk-
adjusted assets and minimum total capital ratio (combined Tier I and Tier II) of
8%. At December 31, 1997, the Company's leverage ratio was 9.33% compared with
10.17% at December 31, 1996. The Company's Tier I and total capital ratios were
10.77% and 11.93%, respectively, at December 31, 1997, compared with 12.51% and
13.48%, respectively, at December 31, 1996.
BANKING SUBSIDIARY
Columbia Bank is a Washington state-chartered commercial bank, the deposits of
which are insured by the FDIC. It is subject to regulation by the FDIC and the
Division. Although Columbia Bank is not a member of the Federal Reserve System,
the Federal Reserve Board's supervisory authority over the Company can also
affect Columbia Bank.
Among other things, applicable federal and state statutes and regulations which
govern a bank's operations relate to minimum capital requirements, required
reserves against deposits, investments, loans, legal lending limits, mergers and
consolidations, borrowings, issuance of securities, payment of dividends,
establishment of branches and other aspects of its operations. The Division and
the FDIC also have authority to prohibit banks under their supervision from
engaging in what they consider to be unsafe and unsound practices.
Columbia Bank is required to file periodic reports with the FDIC and the
Division and is subject to periodic examinations and evaluations by those
regulatory authorities. Based upon such an evaluation, the regulators may
revalue the assets of an institution and require that it establish specific
reserves to compensate for the differences between the regulator-determined
value and the book value of such assets. These examinations must be conducted
every 12 months, except that certain well-capitalized banks may be examined
every 18 months. The FDIC and the Division may each accept the results of an
examination by the other in lieu of conducting an independent examination.
15
<PAGE>
As a subsidiary of a bank holding company, Columbia Bank is subject to certain
restrictions in its dealings with the Company and with other companies that may
become affiliated with the Company.
Columbia Bank's deposits are insured by the FDIC through the Bank Insurance Fund
(the "BIF") and the Savings Association Insurance Fund (the "SAIF"). Prior to
enactment of recent legislation and promulgation of regulations thereunder, the
FDIC's annual assessment rate for deposits ranged from 0.0% to 0.27% of insured
deposits for the BIF and 0.23% to 0.31% of insured deposits for the SAIF,
depending on an institution's risk classification. The recent legislation was
enacted to resolve the difference in rates between the two funds. Pursuant to
this legislation, the FDIC adopted regulations lowering the SAIF assessment
rates to a range of 0.04% to 0.31% and then through application of an adjustment
factor further reducing SAIF assessment rates to an effective range of 0.0% to
0.27%. The FDIC has also proposed to maintain the BIF assessment rate within a
range of 0.0% and 0.27% of covered deposits. These rates essentially became
effective October 1, 1996 for certain institutions, such as Columbia Bank. The
legislation also resulted in a one-time special assessment of $612,000 for the
Company. The special assessment, which is tax deductible, was recognized during
the third quarter of 1996. Moreover, the legislation requires assessments on
both SAIF and BIF members in order to service bonds issued in connection with
the government resolution of the savings and loan crisis. This assessment is
not tied to an institution's risk classification. The FDIC has estimated that
through December 31, 1999, an annual assessment of approximately 0.064% of
covered deposits and 0.013% of covered deposits will be assessed upon SAIF- and
BIF-insured deposits, respectively, and from January 1, 2000 through December
31, 2017, the assessment rate will be 0.024% of covered deposits for all insured
institutions. If the deposit insurance funds are merged on January 1, 1999
pursuant to the legislation, then the uniform assessment rate to service the
bonds will apply from that date forward. Management anticipates that its total
assessment rate for deposits deemed to be SAIF-insured will be 0.062% for the
year 1998. Management also anticipates that its total assessment rate for BIF-
insured deposits will be 0.012% for the year 1998. At December 31, 1997,
approximately $253.4 million, or 34.2%, of Columbia Bank's deposits were deemed
to be SAIF-insured under the allocation formula.
Other Regulatory Developments
Congress has enacted significant federal banking legislation in recent years.
Included in this legislation have been the Financial Institution Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). FIRREA, among other
things, (i) created two deposit insurance pools within the FDIC; (ii) permitted
commercial banks that meet certain housing-related asset requirements to secure
advances and other financial services from local Federal Home Loan Banks; (iii)
restructured the federal regulatory agencies for savings associations; and (iv)
greatly enhanced the regulators' enforcement powers over financial institutions
and their affiliates.
FDICIA went substantially farther than FIRREA in establishing a more rigorous
regulatory environment. Under FDICIA, regulatory authorities are required to
enact a number of new regulations, substantially all of which are now effective.
These regulations include, among other things, (i) a new method for calculating
deposit insurance premiums based on risk, (ii) restrictions on acceptance of
brokered deposits except by well-capitalized institutions, (iii) additional
limitations on loans to executive officers and directors of banks, (iv) the
employment of interest rate risk in the calculation of risk-based capital, (v)
safety and soundness standards that take into consideration, among other things,
management, operations, asset quality, interest rate sensitivity, earnings and
compensation, (vi) a five-tiered rating system from well-capitalized to
critically undercapitalized, along with the prompt corrective action the
agencies may take depending on the category, and (vii) new disclosure and
advertising requirements with respect to interest paid on savings accounts.
FDICIA and regulations adopted by the FDIC impose additional requirements for
annual independent audits and reporting when a bank begins a fiscal year with
assets of $500 million or more. Such banks, or their holding companies, are
also required to establish audit committees comprised of directors who are
independent of management. The Company had $588.9 million in assets at December
31, 1996, and thus became subject to the FDIC regulations on January 1, 1997.
The Bank has an Audit Committee of independent directors which meets the audited
financial statement requirements of applicable regulations.
16
<PAGE>
Also, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act") provides banks with greater opportunities to
merge with other institutions and to open branches nationwide. The Interstate
Banking Act also allows a bank holding company whose principal operations are in
one state to apply to the Federal Reserve for approval to acquire a bank that is
headquartered in a different state. States cannot "opt out" but may impose
minimum time periods, not to exceed five years, for the target bank's existence.
The Interstate Banking Act also allows bank subsidiaries of bank holding
companies to establish "agency" relationships with their depository institution
affiliates. In an agency relationship, a bank can accept deposits, renew time
deposits, close and service loans, and receive payments for a depository
institution affiliate. States cannot "opt out."
In addition, the Interstate Banking Act allows banks whose principal operations
are located in different states to apply to federal regulators to merge. This
provision took effect June 1, 1997, unless states enact laws to either (i)
authorize such transactions at an earlier date or (ii) prohibit such
transactions entirely. The Interstate Banking Act also allows banks to apply to
establish de novo branches in states in which they do not already have a branch
office. This provision took effect June 1, 1997, but (i) states must enact laws
to permit such branching and (ii) a bank's primary federal regulator must
approve any such branch establishment. The Washington legislature passed
legislation that allows, subject to certain conditions, mergers or other
combinations, relocations of banks' main offices and branching across state
lines in advance of the June 1, 1997 date established by federal law.
Further effects on the Company may result from the Riegle Community Development
and Regulatory Improvement Act of 1994 (the "Community Development Act"). The
Community Development Act (i) establishes and funds institutions that are
focused on investing in economically distressed areas and (ii) streamlines the
procedures for certain transactions by financial institutions with federal
banking agencies.
Among other things, the Community Development Act requires the federal banking
agencies to (i) consider the burdens that are imposed on financial institutions
when new regulations are issued or new compliance burdens are created and (ii)
coordinate their examinations of financial institutions when more than one
agency is involved. The Community Development Act also streamlines the
procedures for forming certain one-bank holding companies and engaging in
authorized non-banking activities.
In addition to the changes to the BIF and SAIF assessment rates implemented by
the legislation which was recently passed as part of the 1996 Omnibus spending
bill, various regulatory relief provisions were enacted. The new legislation
includes, among other things, changes to (I) the Truth in Lending Act and the
Real Estate Settlement Procedures Act to coordinate and simplify the disclosure
requirements of the two laws; (ii) eliminate civil liability for violations of
the Truth in Savings Act after five years; and (iii) streamline the application
process for a number of bank holding company and bank applications; (iv)
establish a privilege from discovery in any civil or administrative proceeding
or bank examination for any fair lending self-test results conducted by, or on
behalf of, a financial institution in certain circumstances; (v) repeal the
FDICIA requirement that independent public accountants attest to compliance with
designated safety and soundness regulations; (vi) impose a continuous regulatory
review of regulations to identify and eliminate outdated and unnecessary rules;
and (vii) various other miscellaneous provisions to reduce bank regulatory
burden.
The foregoing is just a brief summary of certain important statutes and
regulations. It is impossible to determine with any certainty the impact, both
operationally and financially, that enacted and proposed statutes and
regulations will have on the Company and its subsidiary. Implementation of the
new regulations has resulted and will result in initial costs to financial
institutions. In addition, many of the new regulations include additional
reporting requirements which will result in increased and recurring personnel
and other costs.
17
<PAGE>
ITEM 2. PROPERTIES
The Company's executive offices and the Main Office of Columbia Bank are located
in approximately 42,000 square feet of leased space in downtown Tacoma. The
lease of the downtown Tacoma office has an initial lease term of seven years.
With an expiration of August 2000, the lease agreement provides for one renewal
option for three years and two additional renewal options for five years each.
The base rent is approximately $38,000 per month for the first four years,
subject to certain increases for landlord operating expenses. Beginning in the
sixth year of the lease and at each five-year renewal date, the base rent may be
adjusted pursuant to a formula which limits the adjustments to an average of 3%
of the base rent per year or 15% of the base rent over the five-year renewal
term. The downtown lease also includes customer and employee parking spaces at
rates at or below current market rates for downtown parking. As of December 31,
1997, Columbia Bank had 12 offices in Pierce County, including the Main Office
(7 leased and 5 owned), two offices in Longview (both owned), two offices in
Bellevue (1 leased and 1 owned), two offices in Auburn (both owned), one office
in Federal Way (owned), one office in Kent (owned) and one office in Woodland
(owned). Commerce Plaza, one of Columbia Bank's banking offices in Longview,
houses a retail banking office and numerous retail and other tenants.
For additional information pertaining to properties, see Note 7 of "Notes to
Consolidated Financial Statements" at page 66 of the Annual Report, which is
incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
For information concerning legal proceedings, see Note 13 of "Notes to
Consolidated Financial Statements" at page 73 of the Annual Report, which is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
For information concerning the Company's common stock and related security
holder matters, see "Quarterly Common Stock Prices and Dividend Payments" at
page 46 of the Annual Report, which is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
For selected financial data concerning the Company, see "Consolidated
Highlights," "Consolidated Five-Year Statements of Operations" and "Consolidated
Five-Year Summary of Average Balances and Net Interest Revenue" at pages 16, 84
and 86, respectively, of the Annual Report, which are incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For management's discussion and analysis, see "Consolidated Analysis of Changes
in Interest Income and Expense" in Part I of this report, "Management Discussion
and Analysis of Financial Condition and Results of Operations" at pages 26
through 47 of the Annual Report and "Consolidated Five-Year Summary of Average
Balances and Net Interest Revenue" at page 86 of the Annual Report, all of which
are incorporated herein by reference.
18
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For consolidated financial statements of the Company, see "Audited Financial
Statements" beginning at page 50 of the Annual Report which is incorporated
herein by reference. Note 18, the "Summary of Quarterly Financial Information
(Unaudited)" on page 80 of the Annual Report is also incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
For information concerning a change in the Company's independent accountant ,
see "Change in Accounting Firms" on page 46 of the Annual Report, which is
incorporated herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors of the registrant is incorporated herein by
reference to the section entitled "Election of Directors" beginning at page 4 of
the Company's definitive Proxy Statement dated March 18, 1998 (the "Proxy
Statement") for the annual meeting of shareholders to be held April 22, 1998.
The required information with respect to the executive officers of the Company
is included under the caption "Executive Officers of the Company" in Part I of
this report. Part I of this report is incorporated herein by reference.
The required information with respect to compliance with Section 16(a) of the
Exchange Act is incorporated herein by reference to the section entitled
"Section 16(a) Beneficial Ownership Reporting Compliance" beginning at page 15
of the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
For information concerning executive compensation see "Executive Compensation"
beginning at page 7 of the Proxy Statement, which is incorporated herein by
reference. Neither the Report of the Personnel and Compensation Committee on
Executive Compensation nor the Stock Performance Graph, both of which are
contained in the Proxy Statement, are incorporated by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning security ownership of certain beneficial owners and
of management see "Security Ownership of Management" beginning at page 2 of the
Proxy Statement, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning certain relationships and related transactions, see
"Interest of Management in Certain Transactions" beginning at page 15 of the
Proxy Statement, which is incorporated herein by reference.
19
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
List of Financial Statements and Financial Statement Schedules.
(a) (1) Financial Statements:
The following consolidated financial statements of the Company,
included in the Annual Report of the registrant to its shareholders
for the year ended December 31, 1997, are incorporated by reference in
Item 8:
Page
----
Consolidated Statements of Operations--Years ended
December 31, 1997, 1996 and 1995 50
Consolidated Balance Sheets--December 31, 1997 and 1996 52
Consolidated Statements of Shareholders' Equity--Years ended
December 31, 1997 and 1996 54
Consolidated Statements of Cash Flows--Years ended
December 31, 1997, 1996 and 1995 56
Notes to Consolidated Financial Statements 58
Report of Independent Auditors 49
(2) Exhibits:
See "Index to Exhibits" at page 23 of this Form 10-K.
(b) Reports on Form 8-K:
None
20
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 19th day of March,
1998.
Columbia Banking System, Inc.
(Registrant)
By /s/ W. W. Philip
--------------------------
W. W. Philip
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated, on the 19th day of March, 1998.
Principal Executive Officer:
/s/ W. W. Philip
--------------------------
W. W. Philip
Chairman, President and
Chief Executive Officer
Principal Financial Officer:
/s/ Gary R. Schminkey
--------------------------
Gary R. Schminkey
Senior Vice President and
Chief Financial Officer
21
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W. W. Philip, pursuant to powers of attorney which are being filed with this
Annual Report on Form 10-K, has signed this report on March 19, 1998, as
attorney-in-fact for the following directors who constitute a majority of the
board of directors.
Richard S. DeVine John H. Powell
Jack Fabulich Robert E. Quoidbach
Jonathan Fine Donald Rodman
John P. Folsom Frank H. Russell
Margel S. Gallagher Sidney R. Snyder
John A. Halleran James M. Will
Thomas L. Matson
/s/ W. W. Philip
----------------------
W. W. Philip
Attorney-in-fact
March 19, 1998
22
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INDEX TO EXHIBITS
Exhibit
No.
- --------
3 (a) Restated Articles of Incorporation of the Company.(5)
(b) Restated Bylaws of the Company.(3)
10 (a) Lease dated May 7, 1993 between the Company and William B. Swensen
Enterprises for Tacoma Main Office premises of Columbia Bank.(1)
(b) Stock Option Plan as amended and restated effective April 23, 1997.(4)
*(c) Employment agreement between the Company and W. W. Philip effective
January 1, 1998, except with respect to sections 4.3 and 4.4
(granting restricted stock awards) which are effective August 28,
1996 and January 28, 1998, respectively.
(d) Data processing servicing agreement dated May 3, 1993 between the
Company and M&I Data Services.(2)
(e) Deferred Compensation Plan for directors and certain key employees
effective April 1, 1995.
11 Statement re computation of per share earnings.
13 The Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1997.(6)
21 Subsidiaries of the Company
23
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24 Powers of Attorney dated February 25, 1998.
27 Financial Data Schedule
(1) Incorporated by reference to the Form SB-2 (Registration No. 33-66224)
previously filed by the Company, declared effective on August 16, 1993.
(2) Incorporated by reference to the Annual Report on Form 10-KSB for the
year ended December 31, 1993 previously filed by the Company.
(3) Incorporated by reference to the Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997 previously filed by the Company.
(4) Incorporated by reference to the definitive Proxy Statement dated March
20, 1997 for the Annual Meeting of Shareholders held April 23, 1997.
(5) Incorporated by reference to the Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997 previously filed by the
Company.
(6) Portions of the Annual Report to Shareholders have been specifically
incorporated by reference elsewhere in this report.
* The listed documents are management contracts which contain compensatory
arrangements.
24
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EXHIBIT 10(c)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into by and
between Columbia State Bank, a Washington banking corporation ("Columbia Bank")
together with Columbia Banking System, Inc., a Washington corporation ("CBSI")
(collectively, the "Employer"), and W. W. PHILIP (the "Executive"). Except for
the provisions of Section 4.3 and 4.4, this Agreement shall become effective as
of January 1, 1998.
RECITALS
1. The terms and conditions of an Employment Agreement effective January
1, 1997 provide for Executive's service as the President and Chief Executive
Officer of Columbia Bank and the President and Chief Operating Officer of CBSI.
The term of that Employment Agreement expires on December 31, 1998 (the
"Original Agreement").
2. On November 19, 1997, and following the passing of Mr. A. G. Espe, Mr.
Philip was appointed by the Board of Directors to serve as the Chairman,
President and Chief Executive Officer of Columbia Bank and CBSI.
3. Executive and the Board of Directors of CBSI and Columbia Bank have
both indicated their desire to extend the term of Executive's service from
December 31, 1998 to December 31, 1999, and to enter into this Agreement on the
terms and conditions as set forth below, all of which shall supersede and
replace the terms and conditions of the Original Agreement.
In consideration of the mutual promises made in this Agreement, the parties
agree as follows:
AGREEMENT
1. EMPLOYMENT.
Employer employs Executive and Executive accepts employment with Employer
on the terms and conditions set forth in this Agreement.
2. TERM.
The term of this Agreement will commence as of January 1, 1998 and will
continue until December 31, 1999, unless extended or sooner terminated as
provided in this Agreement; provided that the 1996 Restricted Stock Award
described in Section 4.3 shall be granted effective August 28, 1996 and the 1998
Restricted Stock Award described in Section 4.4 shall be granted effective
January 28, 1998.
3. DUTIES.
(a) Executive will be Chairman, President and Chief Executive Officer
of Columbia Bank and CBSI. In such capacities, and subject to the authority of
the Board of Directors of Columbia Bank and CBSI, as appropriate, Executive will
render the executive management and perform the tasks in connection with the
affairs of Columbia Bank and CBSI that are normal and customary to the positions
that he will hold.
(b) Executive will perform such other duties as may be appropriate to
his position and as may be prescribed from time to time by the Board, or that
are provided in the Bylaws, of Columbia Bank or CBSI. He will be the person to
whom all other officers of Columbia Bank and CBSI report.
1
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(c) Executive will devote his best efforts and all necessary time,
attention, and effort to the business and affairs of Employer and its
affiliates, as such business and affairs now exist or hereafter may be changed
or supplemented, in order to properly discharge his responsibilities under this
Agreement. He may delegate such of his duties as he sees fit to the other
officers of CBSI or its subsidiaries.
4. SALARY, BONUS, AND OTHER COMPENSATION.
4.1 SALARY.
(a) During the term of this Agreement, Employer will pay Executive an
annual base salary of not less than $225,000 per year beginning January 1, 1998.
(b) CBSI will guarantee payment of any portion of Executive's
compensation that may be allocated to a subsidiary of CBSI.
(c) If this Agreement terminates prior to December 31, 1999, then
Employer will pay Executive such greater or lesser amount of the agreed
compensation as provided in Section 5.
4.2 BONUS. Executive will be eligible to participate in the bonus
pools, if any, that the Board of Columbia Bank or CBSI may establish for senior
executives, either under an executive incentive plan or otherwise.
4.3 1996 RESTRICTED STOCK AWARD.
(a) Grant of Restricted Stock Award. In order to reward Executive for
his outstanding prior service and to incent Executive to continue as a director
following his employment as a senior executive officer, CBSI has granted to the
Executive as a Restricted Stock Award a total of Twenty Thousand (20,000) shares
of the no par value common stock of CBSI (the "1996 Shares"). The date of grant
was August 28, 1996.
(b) Consideration for Issuance of 1996 Shares. In consideration for
the issuance of the 1996 Shares, the Executive agrees to remain as an active
executive officer and/or Board member of CBSI and Columbia Bank from August 28,
1996 through the period the 1996 Shares are subject to the escrow, as provided
herein. Should the Executive fail, without the express approval of the Board of
Directors or the Personnel and Compensation Committee of the Board of Directors
(the "Committee"), to remain in such capacity, the 1996 Shares will be
redelivered by the Escrow Agent to CBSI and will be canceled. CBSI will have no
other remedy for such a breach.
(c) Escrow. The certificate(s) evidencing the 1996 Shares shall be
deposited in escrow immediately upon issuance by CBSI. Columbia Bank shall act
as Escrow Agent and, as such, shall hold the 1996 Shares subject to delivery to
the Executive or redelivery to CBSI in its corporate capacity, all in accordance
with the terms of this Agreement. The Executive hereby grants an irrevocable
power of attorney to the Escrow Agent to transfer and deliver the 1996 Shares
and the stock certificate(s) evidencing the same in accordance with the terms
and provisions of this Agreement and the directions of the Board of Directors or
the Committee.
(d) Escrow Stock Not Transferable. No transfer, pledge or other
disposition of the 1996 Shares may be made by the Executive so long as they are
held under and remain subject to the escrow.
(e) Term of Escrow. The 1996 Shares shall be subject to escrow until
August 28, 2001 unless sooner terminated in accordance with the terms of this
Employment Agreement.
2
<PAGE>
(f) Dividends and Voting Rights. During the period while the 1996
Shares are held in escrow, all dividends payable with respect the such 1996
Shares shall be paid by the Escrow Agent directly to the Executive and the
Executive shall be entitled to exercise all voting rights with respect to such
1996 Shares, all in the same manner and to the full extent as though such 1996
Shares were held by the Executive free of the escrow.
(g) Release of Stock From Escrow. 1996 Shares held in escrow pursuant
to this Agreement shall be released from such escrow by the delivery of the
stock certificate(s) evidencing such 1996 Shares to the Executive (or, in the
case of death or disability of the Executive, to the Executive's estate or legal
guardian) at the earlier of:
(i) August 28, 2001;
(ii) The death or disability (as defined below) of the
Executive;
(iii) The determination by the Board of Directors or the
Committee to authorize the release of such 1996 Shares to the Executive upon the
occurrence of any event that the Board or Committee determines to warrant such
release; or
(iv) The occurrence of a change in control, as defined in
Section 7.2 of this Agreement.
(h) Termination of Service/Forfeiture of 1996 Shares. In the event of
the termination of service as an active executive officer and/or Board member of
CBSI or Columbia Bank during the period that the 1996 Shares are held in escrow
(and the 1996 Shares are not then released pursuant to the provisions of Section
4.3(g) above), such 1996 Shares shall be forfeited to CBSI and all rights of the
Executive with respect thereto terminated, unless, in the case of termination by
act of Employer, the Board of Directors or the Committee, within thirty (30)
days following such termination, authorizes the release of such 1996 Shares to
Executive. Upon the expiration of such thirty (30) day period without action by
the Board or Committee to release such 1996 Shares to the Executive, the 1996
Shares shall be deemed forfeited and the stock certificate(s) evidencing the
same shall be redelivered to CBSI, whereupon they shall be canceled and retired.
(i) Reliance by Escrow Agent. The Escrow Agent shall have no liability
for action in reliance upon any instructions delivered to it and believed in
good faith by it to be from the Board or the Committee.
4.4 1998 RESTRICTED STOCK AWARD.
(a) Grant of Restricted Stock Award. In order to reward Executive for
his service as Chairman, President and Chief Executive Officer for an extended
term and to incent Executive to continue as a director following his employment
as a senior executive officer, CBSI hereby grants and issues to and in the name
of the Executive as a Restricted Stock Award a total of Twenty Thousand (20,000)
shares of the no par value common stock of CBSI (the " 1998 Shares"). The date
of grant is January 28, 1998.
(b) Consideration for Issuance of 1998 Shares. In consideration for
the issuance of the 1998 Shares, the Executive agrees to remain as an active
executive officer and/or Board member of CBSI and Columbia Bank from January 28,
1998 through the period the 1998 Shares are subject to the escrow, as provided
herein. Should the Executive fail, without the express approval of the
Committee, to remain in such capacity, the 1998 Shares will be redelivered by
the Escrow Agent to CBSI and will be canceled. CBSI will have no other remedy
for such a breach.
3
<PAGE>
(c) Escrow. The certificate(s) evidencing the 1998 Shares shall be
deposited in escrow immediately upon issuance by CBSI. Columbia Bank shall act
as Escrow Agent and, as such, shall hold the 1998 Shares subject to delivery to
the Executive or redelivery to CBSI in its corporate capacity, all in accordance
with the terms of this Agreement. The Executive hereby grants an irrevocable
power of attorney to the Escrow Agent to transfer and deliver the 1998 Shares
and the stock certificate(s) evidencing the same in accordance with the terms
and provisions of this Agreement and the directions of the Board of Directors or
the Committee.
(d) Escrow Stock Not Transferable. No transfer, pledge or other
disposition of the 1998 Shares may be made by the Executive so long as they are
held under and remain subject to the escrow.
(e) Term of Escrow. The 1998 Shares shall be subject to escrow until
January 28, 2003 unless sooner terminated in accordance with the terms of this
Employment Agreement.
(f) Dividends and Voting Rights. During the period while the 1998
Shares are held in escrow, all dividends payable with respect the such 1998
Shares shall be paid by the Escrow Agent directly to the Executive and the
Executive shall be entitled to exercise all voting rights with respect to such
1998 Shares, all in the same manner and to the full extent as though such 1998
Shares were held by the Executive free of the escrow.
(g) Release of Stock From Escrow. 1998 Shares held in escrow pursuant
to this Agreement shall be released from such escrow by the delivery of the
stock certificate(s) evidencing such 1998 Shares to the Executive (or, in the
case of death or disability of the Executive, to the Executive's estate or legal
guardian) at the earlier of:
(i) January 28, 2003;
(ii) The mandatory retirement of Executive from service as a
director, as provided in Section 2.3 of CBSI's Bylaws and Section 2.1 of
Columbia Bank's Bylaws;
(iii) The death or disability (as defined below) of the
Executive;
(iv) The determination by the Board of Directors or the
Committee to authorize the release of such 1998 Shares to the Executive upon the
occurrence of any event that the Board or Committee determines to warrant such
release; or
(iv) The occurrence of a change in control, as defined in Section
7.2 of this Agreement.
(h) Termination of Service/Forfeiture of 1998 Shares. In the event of
the termination of service as an active executive officer and/or Board member of
CBSI or Columbia Bank during the period that the 1998 Shares are held in escrow
(and the 1998 Shares are not then released pursuant to the provisions of Section
4.4(g) above), such 1998 Shares shall be forfeited to CBSI and all rights of the
Executive with respect thereto terminated, unless, in the case of termination by
act of Employer, the Board of Directors or the Committee, within thirty (30)
days following such termination, authorizes the release of such 1998 Shares to
Executive. Upon the expiration of such thirty (30) day period without action by
the Board or Committee to release such 1998 Shares to the Executive, the 1998
Shares shall be deemed forfeited and the stock certificate(s) evidencing the
same shall be redelivered to CBSI, whereupon they shall be canceled and retired.
(i) Reliance by Escrow Agent. The Escrow Agent shall have no liability
for action in reliance upon any instructions delivered to it and believed in
good faith by it to be from the Board or the Committee.
4
<PAGE>
4.5 BENEFITS. In addition to the base salary and bonus payable or
potentially payable to Executive pursuant to this Section 4, Executive will be
entitled to receive benefits similar to those offered to other senior executives
of Employer.
5. TERMINATION OF AGREEMENT.
5.1 EARLY TERMINATION.
(a) This Agreement may be terminated at any time by the Board of
Employer or by Executive, and it shall terminate upon Executive's death or
disability. Any termination by the Board of Employer other than termination for
cause (as defined below) shall not prejudice Executive's right to compensation
or other benefits under this Agreement. Except as provided in Section 7, if
Executive voluntarily terminates his employment before December 31, 1999 he will
be entitled to such payments as he would have the right to receive upon
termination for cause under subsection 5.1 (b).
(b) Except as provided in Section 7, if Employer terminates this
Agreement without cause, Employer shall pay Executive upon the effective date of
such termination all salary earned and all reimbursable expenses hereunder
incurred through such termination date and, in addition, liquidated damages in
an amount equal to the greater of two years' salary or salary for the then-
remaining term of the Agreement (without regard to the term) payable hereunder;
in such event, all forfeiture provisions regarding the Restricted Stock Award
shall lapse. If Employer terminates this Agreement for cause, Employer shall pay
Executive upon the effective date of such termination only such salary earned
and expenses reimbursable hereunder incurred through such termination date.
Executive shall have no right to receive compensation or other benefits for any
period after termination for cause.
(c) For purposes of this Agreement, the term "cause" shall mean
willful misfeasance or gross negligence in the performance of his duties,
conduct demonstrably and significantly harmful to Employer (including
willful violation of any final cease and desist order applicable to
Employer or a financial institution subsidiary), or conviction of a felony.
For purposes of this Agreement, "disability" shall mean a medically
reimbursable physical or mental impairment that may be expected to result
in death, or to be of long, continued duration, and that renders Executive
incapable of performing the duties required under this Agreement. The Board
or the Committee, acting in good faith, shall make the final determination
of whether Executive is suffering under any disability as herein defined
and, for purposes of making such determination, may require Executive to
submit himself to a physical examination by a physician mutually agreed
upon by Executive and the Board or the Committee at Employer's expense.
(d) In the event of termination of this Agreement by reason of
Executive's death or disability, all forfeiture provisions regarding the
Restricted Stock Award shall lapse.
5.2 OBLIGATIONS. Except as otherwise provided in Section 7 or in a
particular option grant, Executive's rights, if any, to vested but unexercised
stock options will continue for a period of one year after early termination,
other than termination for cause. In the case of termination for cause,
Executive's unvested stock options, if any, shall terminate immediately.
5
<PAGE>
6. RESTRICTIVE COVENANT.
6.1 NONCOMPETITION. (a) Executive agrees that except as otherwise set
forth in this Agreement, he will not, during the term of this Agreement and for
a period of two years after the later of (i) expiration of the term of this
Agreement, or (ii) completion of service as an active executive officer and/or
Board member of CBSI or Columbia Bank pursuant to Section 4.3(b) of this
Agreement, directly or indirectly, become interested in, as principal
shareholder, director, or officer, any financial institution (other than an
institution controlled by, controlling, or under common control with Employer
and its affiliates) that competes within the State of Washington with Employer
or any of its affiliates, with respect to activities of the type performed by
such companies within such service area immediately prior to Executive's
termination.
(b) The restrictions concerning competition after termination as
contained in this Section 6.1 shall apply only in the event that Executive
voluntarily terminates his employment with Employer without good reason. For
purposes of this Agreement, termination for "good reason" shall mean termination
by Executive as a result of any material breach of this Agreement by Employer,
or any diminution of duties of Executive by the Board of either Columbia Bank or
CBSI. The provisions restricting competition by Executive may be waived by the
Employer.
6.2 NONINTERFERENCE. During the noncompetition period described in
Section 6.1, Executive shall not solicit or attempt to solicit any other
employee of Employer or its affiliates to leave the employ of those companies,
or in any way interfere with the relationship between Employer and any other
employee of Employer or its affiliates.
6.3 INTERPRETATION. If a court or any other administrative body with
jurisdiction over a dispute related to this Agreement should determine that the
restrictive covenants set forth above is unreasonably broad, the parties
authorize such court or administrative body to narrow the covenants so as to
make it reasonable, given all relevant circumstances, and to enforce such
revised covenants. The covenants in this paragraph shall survive termination of
this Agreement.
7. CHANGE OF CONTROL.
7.1 BENEFITS. The parties recognize that a "change of control" of
Employer (as defined in Section 7.2) could be detrimental to Executive's
continued employment. Accordingly, in order to give further assurances to the
Executive to enter into this Agreement, if:
(a) There is a change of control of CBSI; and either
(b) Within 730 days of such change in control, Executive terminates
his employment with Employer; or
(c) At any time from and after sixty days prior to the public
announcement by Employer of a transaction that will result in the change of
control, Employer (or its successor) terminates Executive's employment without
cause, then Executive, as of the date of termination of his employment, subject
to the remaining provisions of this Section 7.1, shall be paid or provided with:
(i) continued payment of his base salary and all benefits provided for in this
Agreement for a period of two years following termination; and (ii) vesting of
all stock options and lapse of all restrictions with respect to the Restricted
Stock Award shall occur. The provisions of this Section 7.1 shall survive
expiration of the term of the Agreement.
6
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7.2 DEFINITION. For purposes of this Agreement, the term "change of
control" shall mean the occurrence of one or more of the following events:
(a) One person or entity acquiring or otherwise becoming the owner of
twenty-five percent or more of CBSI's outstanding common stock;
(b) Replacement of a majority of the incumbent directors of CBSI or
Columbia Bank by directors whose elections have not been supported by a majority
of the Board of either company, as appropriate; or
(c) Dissolution, or sale of fifty percent or more in value of the
assets, of either CBSI or Columbia Bank.
7.3 REIMBURSEMENT. In the event the provisions of this Section 7.3
result in imposition of a tax on Executive under the provisions of Internal
Revenue Code (S) 4999, Employer agrees to reimburse Executive for the same,
exclusive of any tax imposed by reason of receipt of reimbursement under this
Section 7.3.
8. DEFERRED COMPENSATION ARRANGEMENT. Executive will be entitled to defer
the entire salary and bonus, if any, provided in Sections 4.1 and 4.2 of this
Agreement, for the years 1997, 1998 and 1999, which amounts shall accrue
interest at the rate paid on 2-year Treasury bills at January 1 of each year,
until paid, plus 2% compounded annually, all in accordance with a nonqualified
deferred compensation agreement to be entered into between the parties.
9. MISCELLANEOUS.
9.1 This Agreement contains the entire agreement between the parties
with respect to Executive's employment with Employer and his covenant not to
compete with Employer and its affiliates, and is subject to modification or
amendment only upon amendment in writing signed by both parties.
9.2 This Agreement shall bind and inure to the benefit of the heirs,
legal representatives, successors, and assigns of the parties, except that
Employer's rights and obligations may not be assigned. The provisions of Section
6.1 of this Agreement are intended to confer upon CBSI and its subsidiaries and
affiliates the benefits of Executive's covenant not to compete.
9.3 If any provision of this Agreement is invalid or otherwise
unenforceable, all other provisions shall remain unaffected and shall be
enforceable to the fullest extent permitted by law.
9.4 This Agreement is made with reference to and is intended to be
construed in accordance with the laws of the State of Washington. Venue for any
action arising out of or concerning this Agreement shall lie in Pierce County,
Washington. In the event of a dispute under this Agreement not involving
injunctive relief, the dispute shall be arbitrated pursuant to the Superior
Court Mandatory Arbitration Rules ("MAR") adopted by the Washington State
Supreme Court, irrespective of the amount in controversy. This Agreement shall
be deemed as stipulation to that effect pursuant to MAR 1.2 and 8.1. The
arbitrator, in his or her discretion, may award attorney's fees to the
prevailing party or parties.
7
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9.5 Any notice required to be given under this Agreement to either
party shall be given by personal service or by depositing a copy thereof in the
United States registered or certified mail, postage prepaid, addressed to the
following address, or such other address as addressee shall designate in
writing:
Employer: 1102 Broadway
Tacoma, WA 98402
Executive: 100 Shore Acres Road S.W.
Tacoma, WA 98498
This Agreement is dated as of January 1, 1998.
COLUMBIA STATE BANK
By: /s/ Richard S. DeVine
----------------------------------
Richard S. DeVine, Chairman,
Personnel & Compensation Committee
COLUMBIA BANKING SYSTEM, INC.
By: /s/ Richard S. DeVine /s/ W. W. Philip
---------------------------------- --------------------------------
Richard S. DeVine, Chairman, W. W. Philip
Personnel & Compensation Committee Executive
Compensation Committee
8
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EXHIBIT 10(e)
COLUMBIA BANKING SYSTEM, INC.
[401 PLUS]
DEFERRED COMPENSATION PLAN
ARTICLE I
PURPOSE; EFFECTIVE DATE
The purpose of this Deferred Compensation Plan ("Plan") is to provide a
means for Directors and certain key employees of Columbia Banking System, Inc.
and its subsidiaries ("Company") to defer future compensation for retirement and
to allow the Company to augment those deferrals. It is intended that the Plan
will aid in retaining and attracting Directors and employees of exceptional
ability by providing such individuals with these benefits. This Plan is
effective April 1, 1995.
ARTICLE II
DEFINITIONS
For the purposes of this Plan, the following words and phrases shall have
the meanings indicated, unless the context clearly indicates otherwise:
2.1 ACCOUNTS the records maintained by the Company for each Participant in
accordance with Article IV with respect to any deferral of Compensation and
401(k) Augmentation pursuant to this Plan.
2.2 BENEFICIARY means the person, persons or entity entitled under Article
VI to receive any Plan Benefits payable after a Participant's death.
2.3 BOARD means the Board of Directors of the Columbia Banking System,
Inc.
2.4 CHANGE IN CONTROL. A "Change In Control" shall occur:
(a) upon the Company's knowledge that any person (as such term is used
in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as
amended ) is or becomes the "beneficial owner" (as defined in Rule 13d-3 of
the Exchange Act), directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the then
outstanding securities; or
(b) upon the first purchase of the common stock of the Company
pursuant to a tender or exchange offer (other than a tender or exchange
offer made by the Company); or
(c) upon the approval by the stockholders of the Company of a merger
or consolidation (other than a merger or consolidation in which the Company
is the surviving corporation and which does not result in any
reclassification or reorganization of the Company's then outstanding
securities), a sale or disposition of all or substantially all of the
Company's assets or a plan of liquidation or dissolution of the Company; or
(d) if, during any period of two consecutive years, individuals who at
the beginning of such period constitute the board of directors of the
Company cease for any reason to constitute at least a majority thereof,
unless the election or nomination for the election by the stockholders of
the Company of each new director was approved by a vote of at least two-
thirds of the directors then still in office who were directors at the
beginning of the period.
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2.5 CODE means the Internal Revenue Code of 1986, as amended.
2.6 COMMITTEE means the Compensation Committee appointed by the Board.
2.7 COMPANY means Columbia Banking System, Inc., a Washington
corporation, its subsidiaries and also any other entity affiliated with the
Company as may be designed by the Board.
2.8 COMPENSATION in the case of an Employee-Participant means the salary
and bonuses paid to such Participant by the Company during the calendar year and
considered to be "wages" for purposes of federal income tax withholding,
calculated before reduction for any amounts deferred pursuant to this Plan or
the 401(k) Plan. "Compensation" in the case of a Director-Participant means the
retainer, meeting and committee fees paid to such Participant by the Company
during the calendar year, with respect to duties performed as a member of the
Board, before reduction for any amounts deferred pursuant to this Plan.
Compensation does not include expense reimbursements, or any form of non-cash
compensation or benefits.
2.9 DECLARED RATE means interest credited to an Account at the rate of
100% of the 120-month rolling average of the 10-year treasury note rate,
credited as simple interest monthly from the date the Elective Deferred
Compensation would have been paid, and compounded annually as of each December
31. The Declared Rate is established on each October 1 for the next calendar
year.
2.10 DEFERRAL COMMITMENT means a written commitment made by a Participant
and submitted to the Committee pursuant to Article III.
2.11 DEFERRAL PERIOD means the period during which a Participant has
elected to defer a portion of his unearned Compensation. The Deferral Period
shall be a calendar year, except for the initial Deferral Period which is April
1, 1995 through December 31, 1995.
2.12 DETERMINATION DATE means the last day of each calendar month.
2.13 DIRECTOR means a member of the Board, who is not also an employee of
the Company.
2.14 DISABILITY means as defined under the Company's Long Term Disability
Plan. The Committee will make a determination of disability based on that
definition.
2.15 EARLY RETIREMENT DATE means the date on which a Participant
terminates employment with the Company, if termination occurs on or after age 55
and completion of five years of Credited Service (whichever occurs last), but
prior to his Normal Retirement Date.
2.16 ELECTIVE DEFERRED COMPENSATION. The amount of Compensation that a
Participant elects to defer pursuant to a Deferral Commitment.
2.17 EMPLOYEE means an employee of the Company.
2.18 FINANCIAL HARDSHIP means an unforeseeable, immediate and heavy
financial need of the Participant, determined by the Committee on the basis of
information supplied by the Participant in accordance with the "safe-harbor"
standards set forth in the applicable treasury regulations promulgated under
Section 401(k) of the Code, or such other standards as are, from time to time,
established by the Committee.
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2.19 401 (k) PLAN means the Columbia Bank 401(k) Plan, a profit-sharing
plan established by the Company and qualified under Section 401(a) of the Code,
and containing a qualifying Code Section 401(k) arrangement.
2.20 401(k) AUGMENTATION CONTRIBUTION means the Company contribution
credited to the Participant's Account under paragraph 4.4.
2.21 NORMAL RETIREMENT DATE means the date on which a Participant
terminates employment with the Company, if such termination occurs on or after
he attains age 65 and completes 10 years of Credited Service (whichever occurs
last).
2.22 PARTICIPANT means any individual who is deferring (or has previously
deferred) Compensation in this Plan, and who has not yet received his full Plan
Benefit.
2.23 PAYMENT DATE means the first business day of a calendar month on
which a Participant is eligible to commence and elects (or the Committee so
elects per the Plan) to commence or receive full payment of his Plan Benefit,
and which date is 30 days after the Valuation Date.
2.24 PLAN BENEFIT means the benefit payable to a Participant as calculated
pursuant to Article V.
2.25 RETIREMENT means an Employee-Participant's termination from
employment with the Company, on or following the Participant's Early Retirement
Date or Normal Retirement Date, and, in the case of a Director-Participant
termination, at any time, of service on the Board.
2.26 RETIREMENT RATE means interest credited to an Account at the rate of
115% of the Declared Rate.
2.27 VALUATION DATE means the Determination Date which precedes the
Payment Date by 30 days. The Valuation Date must follow the Participant's
Retirement or other termination of employment with the Company.
2.28 YEARS OF CREDITED SERVICE in the case of an Employee-Participant,
means the Participant's number of completed calendar years (with more than 6
calendar months counting as 1 year) of employment with the Company. "Years of
Credited Service" in the case of a Director-Participant, means the number of
months during which the Participant served on the Board for at least 15 days,
divided by 12, with any fractional amount in excess of one-half counting as 1
year.
ARTICLE III
PARTICIPATION AND DEFERRAL COMMITMENTS
3.1 ELIGIBILITY AND PARTICIPATION.
(a) ELIGIBILITY. Eligibility to participate in the Plan is limited to
Directors and those key Employees of the Company who are designated, from
time to time, by the Committee, as Participants. Where a distinction is
appropriate, employees participating are "Employee-Participants" and
directors participating are "Director-Participants."
(b) PARTICIPATION. A Participant may elect to defer unearned
Compensation under the Plan with respect to any Deferral Period by
submitting a Deferral Commitment to the Committee not later than December
15th of the calendar year immediately preceding the Deferral Period for
which the Deferral Commitment is to become effective. The Deferral
Commitment shall specify the Participant's Elective Deferred Compensation.
No Deferral Commitment under this Plan may be submitted by a Participant or
accepted by the Committee as to Compensation already earned at the time of
submission.
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(C) PART-YEAR PARTICIPATION. In the event that an Employee or
Director first becomes eligible to participate during a Deferral Period and
wishes to defer a portion of his Compensation for such Deferral Period, a
Deferral Commitment must be submitted to the Committee no later than 30
days following notification to that individual by the Committee of his
eligibility to participate. Any such Deferral Commitments shall be
effective only with regard to Compensation earned following the submission
thereof to the Committee, and, as to an Employee-Participant, must meet the
minimum commitment amount specified in Section 3.2(a).
3.2 FORM OF DEFERRAL; MINIMUM AND MAXIMUM DEFERRAL. A Deferral Commitment
may be made in whole dollar or percentage increments of Compensation and shall
specify the pay periods to which the deferral (reduction in pay) will be
applied; provided, that deferrals of salary by Employee-Participants must be
made uniformly from each pay period for which the Deferral Commitment is in
effect. A Deferral Commitment may apply to the following elements of
Compensation:
(a) SALARY DEFERRAL COMMITMENT. An Employee-Participant may elect to
defer any portion of his salary; provided, (i) that the minimum deferral to
the Plan must equal or exceed $20,000 (as further described below), and
(ii) that not more than 50% of salary during a single Deferral Period may
be deferred. In satisfying Section 3.2(a)(i) above, the Employee-
Participant may make the minimum required $20,000 Deferral Commitment in a
single Deferral Period or in consecutive Deferral Periods, not exceeding
four, and at a minimum rate of $5,000 per Deferral Period. Once having
made the initial Deferral Commitment(s) equaling or exceeding $20,000, the
Employee-Participant may make additional Deferral Commitments without
regard to the $5,000 minimum amount for a single Deferral Period.
(b) BONUS DEFERRAL COMMITMENT. An Employee-Participant may elect to
defer all or a portion of the bonus amounts to be paid by the Company in
the Deferral Period following the calendar year in which the Deferral
Commitment is submitted.
(c) RETAINER FEE DEFERRAL COMMITMENT. A Director-Participant may
elect to defer all or any portion of his Board retainer fees (including
committee fees) for the Deferral Period following the calendar year in
which the Deferral Commitment is submitted.
(d) MEETING FEE DEFERRAL COMMITMENT. A Director-Participant may elect
to defer all or any portion of his Board meeting fees for the Deferral
Period following the calendar year in which the Deferral Commitment is
submitted.
3.3 LIMITATION ON DEFERRAL. Notwithstanding Section 3.2, the Committee
may increase the minimum deferral amount or impose a maximum deferral amount
from time to time by giving written notice to all Participants, provided,
however, that no such change may affect a Deferral Commitment made prior to the
Committee's action.
3.4 DURATION, MODIFICATION OF DEFERRAL COMMITMENT. A Deferral Commitment
shall be irrevocable for the Deferral Period(s) specified therein, or if no
Deferral Period is specified, until timely modified by the Participant
prospectively as to the next Deferral Period or such other Deferral Period(s) as
specified by the Participant. A Deferral Commitment may not be modified as to
the Deferral Period(s) for which it is in effect, except that the Committee may,
in its sole discretion, permit a Participant to terminate or reduce the amount
of Elective Deferred Compensation under a Deferral Commitment, prospectively as
to Compensation not yet earned, upon a finding that the Participant has suffered
a Financial Hardship during such Deferral Period.
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ARTICLE IV
DEFERRED COMPENSATION ACCOUNTS
4.1 PARTICIPANT'S ACCOUNT. The amount of the Elective Deferred
Compensation and any 401(k) Augmentation shall be credited to the Participant's
Account.
4.2 ELECTIVE DEFERRED COMPENSATION. A Participant's Elective Deferred
Compensation shall be credited to the Participant's Account at the same time as
the corresponding non-deferred portion of his Compensation becomes or would have
become payable. Any withholding of taxes or other amounts with respect to
Elective Deferred Compensation which is required by state, federal or local law
shall be withheld from the Participant's non-deferred Compensation.
4.3 TYPES OF ACCOUNTS. For record-keeping purposes only, and not as an
increase in the overall Account, a Retirement Account (with interest credited at
the Retirement Rate) and a Termination Account (with interest credited at the
Declared Rate) shall be maintained for each Employee-Participant. The Elective
Deferred Compensation and 401(k) Augmentation of an Employee-Participant shall
be credited to both the Retirement Account and the Termination Account. A
Director-Participant shall have only a Retirement Account which shall be
credited with the Director-Participant's Elective Deferred Compensation and
interest at the Retirement Rate.
4.4 401(k) AUGMENTATION CONTRIBUTION. An Employee-Participant's Elective
Deferred Compensation reduces "compensation" for purposes of the Participant's
401(k) contributions and the Company's match, which are both made to the 401(k)
Plan. The Company will credit to the Participant's Account, during each
Deferral Period, the dollar amount of the match to the 401(k) Plan which is
foregone by the Participant, as a result of his participation in this Plan
("401(k) Augmentation Contribution"). 401(k) Augmentation Contributions shall
be credited to the Participant's Account as of December 31 each year. Any
withholding of taxes or other amounts with respect to 401(k) Augmentation
Contributions which is required by state, federal or local law shall be withheld
from the Participant's nondeferred Compensation.
4.5 DETERMINATION OF ACCOUNTS; INTEREST. Each Participant's Retirement
Account and Termination Account (as to Employee-Participants) as of each
Determination Date shall consist of the balance of the Participant's Account as
of the immediately preceding Determination Date, plus the Participant's Elective
Deferred Compensation credited, any 401(k) Augmentation Contributions credited
and any interest earned, minus the amount of any distributions made since the
immediately preceding Determination Date. Interest earned shall be calculated
as of each Determination Date based upon the average daily balance of the
Account since the preceding Determination Date and shall be credited to the
Participants' Accounts at that time. Interest shall be simple interest monthly
and compounded annually as of each December 31.
4.6 VESTING OF ACCOUNTS. An Employee-Participant shall at all times be
completely vested in the amounts credited to his Account and the interest
credited thereto either at the Retirement or Declared Rate, but not both,
depending upon the event under which the Participant terminates employment with
the Company. A Director-Participant shall at all times be completely vested in
the amounts credited to his Account.
4.7 STATEMENT OF ACCOUNTS. The Committee shall submit to each
Participant, at least once each calendar year, and at such other times as
determined by the Committee, a statement setting forth the balance then credited
to each Account maintained for the Participant.
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ARTICLE V
PLAN BENEFITS
5.1 RETIREMENT BENEFIT. The Company shall pay a Plan Benefit equal to the
amount of the Participant's Retirement Account to each Participant who incurs
Retirement. If the Participant elects an installment payout, interest at the
Retirement Rate in effect on the Valuation Date, shall continue to be credited
to and paid on the Account until the Participant's Plan Benefit is fully paid.
5.2 TERMINATION BENEFIT. The Company shall pay a Plan Benefit equal to
the amount of the Employee-Participant's Termination Account to each Employee-
Participant who terminates employment with the Company other than on account of
Retirement, death, or Change In Control. If the Employee-Participant elects an
installment payout, interest at the Declared Rate in effect on the Valuation
Date, shall continue to be credited to and paid on the Account until the
Participant's Plan Benefit is fully paid.
5.3 DEATH BENEFIT. Upon the death of a Participant, his Plan Benefit
shall be distributed as follows:
(a) If the Participant dies after commencement of payment of his
Retirement or Termination Account, the Participant's remaining Account
shall, be paid to his designated Beneficiary, in accordance with the payout
method in effect at Participant's death.
(b) If the Participant dies prior to commencement of payment of his
Plan Benefit, the Participant's Retirement Account shall be paid to his
designated Beneficiary, in accordance with the method previously elected by
the Participant, but commencing on the first Payment Date following the
Participant's death.
5.4 DISABILITY BENEFIT. The Company shall pay to each Employee-
Participant who terminates employment with the Company by reason of Disability,
his Retirement Account, in accordance with the timing (commencement) and method
previously elected by the Participant. Such a Participant may request a
hardship distribution under Section 5.6.
5.5 UNSCHEDULED WITHDRAWALS. Notwithstanding any other provisions of the
Plan, a Participant or Beneficiary may elect at any time to receive an immediate
lump sum payment of the balance of his Account, reduced by penalty, which shall
be forfeited to the Company, equal to ten percent (10%) (or five percent (5%)
within two years after a Change in Control) of the balance of such Account(s),
in lieu of payments previously elected by the Participant. However, the penalty
shall not apply if the Committee determines, based on advice of counsel or a
final determination by the Internal Revenue Service or any court of competent
jurisdiction, that by reason of the foregoing provision the Participant has
recognized or will recognize gross income for federal income tax purposes under
this Plan in advance of payment to him of Plan benefits.
Whenever a Participant receives a lump sum payment under this Section 5.5,
the Participant will be deemed to elect to discontinue all current Deferral
Commitments under the Plan effective as of the date of the lump sum payment.
The Participant will not be permitted to elect a new Deferral Commitment for a
period of one year following receipt of the lump sum payment.
5.6 HARDSHIP DISTRIBUTIONS. Upon a finding by the Committee that a
Participant has suffered a Financial Hardship, the Committee may, in its sole
discretion, at any time, distribute to the Participant an amount of his Account
which does not exceed the amount required to meet the immediate financial needs
created by the Financial Hardship and not reasonably available from other
sources of the Participant.
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5.7 COMMENCEMENT AND METHOD OF PLAN BENEFIT. In accordance with paragraph
5.8, a Participant may elect the commencement and method of payment of his Plan
Benefit from among the options provided herein:
(a) COMMENCEMENT. A Participant's Plan Benefit shall commence or be
paid following his Retirement or other termination of employment with the
Company, on the first Payment Date elected by the Participant or as
otherwise determined by the Plan. A Participant may elect to postpone
commencement of his Plan Benefit for up to 10 years following Retirement or
other termination of employment, but not beyond the Payment Date next
following his 70th birthday.
(b) DETERMINATION OF ACCOUNT. A Participant's Account, for purposes
of distribution of his Plan Benefit, shall be determined as of the
Valuation Date. Interest shall be thereafter credited, in the case of an
installment payout, as provided herein.
(c) METHOD OF PAYOUT. A Participant may elect to have the Company
commence or pay his Plan Benefit in a lump sum, or in 60 or 120
substantially equal monthly installments.
(d) NO ELECTION. If a Participant has not made a valid election as to
the commencement of payout of his Plan Benefit, the Committee shall
commence distribution on the first Payment Date which follows Retirement or
other termination of employment. If no valid election is in effect as to
the method of payout, distribution shall be made in 120 substantially equal
monthly installments.
5.8 ELECTION BY PARTICIPANT. Commencing at the time of initial
participation in the Plan, a Participant may provide the Committee with a
written designation of his election as to the timing (commencement) and method
of payment of his Plan Benefits. A Participant's election under this paragraph
5.8 becomes irrevocable (may be changed only by incurring a penalty) 12 months
prior to Retirement (or other termination of employment in the case of an
Employee-Participant). Any change made by a Participant within the above 12
months may be dishonored by the Committee and if honored, requires a 10%
reduction (forfeiture) of the Plan Benefit applied to the Participant's Account
on the applicable Determination Date) otherwise payable to the electing
Participant.
Once payment of a Participant's Plan Benefit commences, the Committee
retains discretion to alter the method of payout on the written request of a
Participant or Beneficiary, but may refuse a request in its sole discretion. In
addition, the Committee may elect, notwithstanding any contrary Participant
election, to pay in a lump sum, any Account (or to accelerate payment of the
balance thereof) which is less than $5,000 as of any date it otherwise becomes
payable in whole or in part.
5.9 WITHHOLDING; PAYROLL TAXES. The Company shall withhold from payments
made hereunder any taxes or other amounts required to be withheld from such
payments under federal, state or local law.
ARTICLE VI
BENEFICIARY DESIGNATION
6.1 BENEFICIARY DESIGNATION. Each participant shall have the right, at
any time, to designate any person or persons (including trusts and other
entities) as his Beneficiary or Beneficiaries (both primary as well as
secondary) to whom benefits under this Plan shall be paid in the event of the
Participant's death prior to complete distribution of his Plan Benefit. Each
Beneficiary designation shall be in a written form prescribed by the Committee,
and will be effective only when filed with the Committee during the
Participant's lifetime. Any married Participant who designates someone other
than his spouse as the sole primary Beneficiary of his Plan Benefit, must obtain
written consent of the spouse.
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6.2 AMENDMENTS. Any Beneficiary designation may be changed by a
Participant (without spousal consent if required under paragraph 6.1), by the
filing of a new Beneficiary designation with the Committee. The filing of a new
Beneficiary designation form will cancel all Beneficiary designations previously
filed.
6.3 NO BENEFICIARY DESIGNATION. In the absence of an effective
Beneficiary designation or if all designated Beneficiaries predecease the
Participant or die prior to complete distribution of the Participant's Plan
Benefit, then the Participant's designated Beneficiary shall be deemed to be the
Participant's estate.
6.4 PAYMENT TO GUARDIAN. If a Plan Benefit is payable to a minor or a
person legally declared incompetent, the Committee may direct payment of such
Plan benefit to the guardian, legal representative or person having the care and
custody of such minor or incompetent. The Committee may require proof of
incompetency, minority, incapacity or guardianship as it may deem appropriate
prior to distribution of the Plan Benefit. Such distribution shall completely
discharge the Committee and the Company from all liability with respect to such
benefit.
6.5 EFFECT OF PAYMENT. Payment to the proper Beneficiary as determined in
this Article VI, shall completely discharge the Company's obligations under this
Plan as to the affected Participant's Account.
ARTICLE VII
ADMINISTRATION
7.1 COMMITTEE; DUTIES. This Plan shall be administered by the Committee.
Members of the Committee may be Participants under this Plan. The Committee
shall have such powers and duties as may be necessary to discharge its
responsibilities. These power shall include, but not be limited to,
interpretation of the Plan provisions, determination of amounts due to any
Participant, the rights of any Participant or Beneficiary under this Plan, the
right to require any necessary information from any Participant, and any other
activities the Committee deems necessary or helpful.
7.2 AGENTS. The Committee may, from time to time, employ other agents and
delegate to them such administrative duties as it sees fit, and may from time to
time consult with counsel who may be counsel to the Company.
7.3 BINDING EFFECT OF DECISIONS. The decision or action of the Committee
related to the administration, interpretation and application of the Plan and
any rules and regulations promulgated hereunder shall be final and conclusive
and binding upon all persons having any interest in the Plan.
7.4 INDEMNITY OF COMMITTEE. To the extent permitted by applicable law,
the Company shall indemnify, hold harmless and defend the members of the
Committee against any and all claims, loss, damage, expense or liability arising
from any action or failure to act with respect to this Plan, except with respect
to acts of gross negligence on the part of any Committee member.
ARTICLE VIII
CLAIMS PROCEDURE
8.1 CLAIM. Any person claiming a benefit, requesting an interpretation or
ruling under the Plan, or requesting information under the Plan shall present
the request in writing to the Committee which shall respond in writing as soon
as practicable.
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8.2 DENIAL OF CLAIM. If the claim or request is denied, the written
notice of denial shall state:
(a) The reasons for denial, with specific reference to the Plan
provisions on which the denial is based;
(b) A description of any additional material or information required
and an explanation of why it is necessary; and
(c) An explanation of the Plan's claim review procedure.
8.3 REVIEW OF CLAIM. Any person whose claim or request is denied or who
has not received a response within 30 days may request review by notice given in
writing to the Committee. The claim or request shall be reviewed by the
Committee who may, but shall not be required to, grant the claimant a hearing.
On review the claimant may have representation, examine pertinent documents and
submit issues and comments in writing.
8.4 FINAL DECISION. The decision on review shall normally be made within
60 days. If an extension of time is required for a hearing or other special
circumstances, the claimant shall be notified and the time limit shall be 120
days. The decision shall be in writing and shall state the reasons and the
relevant plan provisions. All decisions on review shall be final and bind all
parties concerned.
ARTICLE IX
AMENDMENT AND TERMINATION OF PLAN
9.1 AMENDMENT. The Board may at any time amend the Plan in whole or in
part, provided, however that no amendment shall be effective to decrease or
restrict the amount credited to any Account maintained under the Plan as of the
date of Amendment. Changes in the rate or computation of interest shall be
subject to the following restrictions:
(a) NOTICE. A change shall not become effective before adoption by
the Board and at least 30 days written notice of the amendment to the
affected Participant, whichever occurs last.
(b) CHANGE IN CONTROL. Any change in the definition of Interest after
a Change In Control shall apply only to those amounts credited to a
Participant's Account after the Change In Control.
9.2 COMPANY'S RIGHT TO TERMINATE. The Board may at any time partially or
completely terminate the Plan if, in its judgment, the tax, accounting, or other
effects of the continuance of the Plan, or potential payments thereunder, would
not be in the best interests of the Company.
(a) PARTIAL TERMINATION. The Board may partially terminate the Plan
by instructing the Committee not to accept any additional Deferral
commitments. In the event of such a partial termination, the Plan shall
continue to operate and be effective with regard to Deferral Commitments
entered into prior to the effective date of such partial termination.
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(b) COMPLETE TERMINATION. The Board may completely terminate the Plan
by instructing the Committee not to accept any additional Deferral
Commitments, and terminate all ongoing Deferral Commitments. In the event
of such a complete termination, the Plan shall cease to operate and the
Committee shall payout to each Participant the balance in his Retirement
Account in substantially equal monthly installments, including interest at
the Retirement Date, amortized over the period listed below based on the
Retirement Account balance on the Determination Date immediately preceding
the effective date of such complete termination:
Account Balance Payout Period
----------------------------- -------------
Less than $10,000 2 Years
$10,000 but less than $50,000 5 Years
$50,000 or more 10 Years
Notwithstanding the foregoing, any properly elected Unscheduled Withdrawal,
made prior to the Plan's termination date, shall be paid in accordance with
Section 5.5.
ARTICLE X
MISCELLANEOUS
10.1 UNFUNDED PLAN. This Plan is intended to be an unfunded plan
maintained primarily to provide deferred compensation benefits for a select
group of "management or highly-compensated employees" within the meaning of
Sections 201, 301 and 401 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and therefore to be exempt from the Provisions of
Parts 2, 3 and 4 of Title I of ERISA. Accordingly, the Plan shall terminate and
no further benefits shall accrue hereunder in the event it is determined by a
court of competent jurisdiction or by an opinion of counsel that the Plan
constitutes an employee pension benefit plan within the meaning of Section 3(2)
of ERISA which is not so exempt. In the event of a termination under this
Section 10.1, all ongoing Deferral Commitments shall terminate, no additional
Deferral Commitments will be accepted by the Committee, and the amount of each
Participant's Account shall be distributed to such participant at such time and
in such manner as the Committee, in its sole discretion, determines.
10.2 UNSECURED GENERAL CREDITOR. Participants and their Beneficiaries,
heirs, successors and assigns shall have no legal or equitable rights, interest
or claims in any property or assets of Company, nor shall they be Beneficiaries
of, or have any rights, claims or interests in any life insurance policies,
annuity contracts or the proceeds therefrom owned or which may be acquired by
Company. Such policies, annuity contracts or other assets of the Company shall
not be held under any trust for the benefit of Participants, their
Beneficiaries, heirs, successors or assigns, or held in any way as collateral
security for the fulfilling of the obligations of the Company's assets and
policies shall be, and remain, the general, unpledged, unrestricted assets of
the Company. The Company's obligation under the Plan shall be that of an
unfunded and unsecured promise to pay money in the future.
10.3 NONASSIGNABILITY. Neither a Participant nor any other person shall
have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage
or otherwise encumber, transfer, hypothecate or convey in advance of actual
receipt, the Participant's Account, which is expressly declared to be
unassignable and non-transferable. No part of a Participant's Account shall,
prior to actual payment, be subject to seizure or sequestration for the payment
of any debts, judgments, alimony or separate maintenance owed by a Participant
or any other person, nor be transferable by operation of law in the event of a
Participant's or any other person's bankruptcy or insolvency.
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10.4 NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this Plan
shall not be deemed to constitute a contract of employment between the Company
and the Participant, and the Participant (or his Beneficiary) shall have no
rights against the Company except as may otherwise be specifically provided
herein. Moreover, nothing in this Plan shall be deemed to give a Participant
the right to be retained in the service of the Company or to interfere with the
right of the Company to discipline or discharge him at any time.
10.5 PROTECTIVE PROVISIONS. A Participant will cooperate with the Company
by furnishing any and all information requested by the Company, in order to
facilitate the payment of benefits hereunder, and by taking such physical
examinations as the Company may deem necessary and taking such other action as
may be requested by the Company.
10.6 GOVERNING LAW. The provisions of this Plan shall be construed and
interpreted according to the laws of the State of Washington.
10.7 VALIDITY. In case any provision of this Plan shall be held illegal
or invalid for any reason, said illegality or invalidity shall not affect the
remaining parts hereof, but this Plan shall be construed and enforced as if such
illegal and invalid provision had never been inserted herein.
10.9 NOTICE. Any notice or filing required or permitted to be given to
the Committee under the Plan shall be sufficient if in writing and hand
delivered, or sent by registered or certified mail, to any member of the
Committee. Such notice shall be deemed given as of the date of delivery or, if
delivery is made by mail, as of the date shown on the postmark on the receipt
for registration or certification.
10.10 SUCCESSORS. The provisions of this Plan shall bind and inure to the
benefit of the Company and its successors and assigns. The term successors as
used herein shall include any corporate or other business entity which shall,
whether by merger, consolidation, purchase or otherwise acquire all or
substantially all of the business and assets of the Company, and successors of
any such corporation or other business entity.
COLUMBIA BANKING SYSTEM, INC.
By: /s/ Evans Q. Whitney
---------------------------------------
Evans Q. Whitney,
Senior Vice President - Human Resources
11
<PAGE>
EXHIBIT 11
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
(in thousands, except per share data) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
EARNINGS
<S> <C> <C> <C>
Net income (loss) applicable to common stock $9,275 $4,635 $3,691
Interest on convertible subordinated notes, net of
income tax effects--Note 1
- -----------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) available to common stock $9,275 $4,635 $3,691
=======================================================================================================================
SHARES
Average number of diluted common shares outstanding 6,777 4,931 4,385
Additional shares assuming conversion of convertible
subordinated notes--Note 1
- -----------------------------------------------------------------------------------------------------------------------
Pro forma shares 6,777 4,931 4,385
=======================================================================================================================
Diluted earnings (loss) per share $ 1.37 $ 0.93 $ 0.84
=======================================================================================================================
</TABLE>
Note 1. At December 31, 1995, the Company convertible subordinated notes of
$2.7 million. The inclusion of convertible subordinated notes would produce an
antidilutive effect and therefore have not been included in the above
presentation. Additional average shares, assuming the conversion of convertible
subordinated notes which are not included, represent 268,000 shares for the year
ended December 31, 1995. The related interest expense on these notes (net of
income tax effects) was $270,000 for the years ended December 31, 1995.
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 on 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" beginning at page 43 of the Annual Report, which is
incorporated herein by reference.
<PAGE>
Columbia Banking System
1997 annual report
the people
the numbers
<PAGE>
[NASDAQ STOCK MARKET SYMBOL]
COLB
Columbia Banking System, Inc. is a Tacoma, Washington-based bank holding company
which operates Columbia Bank, a state-chartered full-service commercial bank
with 21 banking offices in Pierce, King and Cowlitz counties. The cornerstone
of Columbia Bank's business approach is a return to friendly, old-fashioned
banking, coupled with modern convenience and technology. Columbia Bank is a
local bank, strongly committed to its customers and the communities it serves.
<PAGE>
Loyalty
The market demands that we have the right locations, the right products and the
right services. It also demands something that has become rare in banking
today: loyalty. For the fifth consecutive year, Columbia Banking System achieved
record results, proof that our commitment to the communities and customers we
serve may be one of the most distinguishing characteristics of our company.
Proof that loyalty is rewarded.
1
<PAGE>
[$865 million]
2
<PAGE>
Assets
With new branches and growing regional awareness of our business style, plus
highly tailored product offerings, asset growth continued on pace - growing 22%
for the year.
1995 1996 1997
------------------------
dollars in millions
$520 $706 $865
3
<PAGE>
[PICTURE OF MAN]
4
<PAGE>
Customer Focus
[PICTURE OF MOTHER AND BABY]
Now it's popular for banks to claim that they are customer-oriented, despite the
trends to industry consolidation, more automation and fewer real bankers.
Columbia's claim is unique. The whole reason we exist comes from a commitment
to serve people as individuals. And even though we offer as much technology as
any competitor, we'll never lose sight of what our business is really about:
helping our customers in their businesses and in their personal lives.
5
<PAGE>
[GRAPHIC: 21 BRANCHES]
6
<PAGE>
21 Branches
During 1997 we completed our first acquisitions: Cascade Community Bank and Bank
of Fife. These banks were selected because each fit well with our culture and
our style of business. And we've applied everything we know in maintaining the
continuity and the relationships already established with existing customers.
16* 13*
1996 1995
* these numbers do not reflect the 1997 mergers which have been accounted for
on a pooling of interests basis.
7
<PAGE>
[PICTURE OF VIOLIN]
8
<PAGE>
Community Spirit
It's another measure of our loyalty to our customers: giving back for the
greater good. Because being a member of our communities means more than
providing outstanding service and personalized products. Our giving is focused
on youth programs and education, health programs, community revitalization and
the arts. And it's Columbia volunteers participating in programs as diverse as
the people and businesses we serve.
9
<PAGE>
Deposits
A strong regional economy, growing awareness of our banking style, a larger
branch system and customized product offerings - all delivered with highly
personalized service - contributed to our growth in deposits: a 24% increase
over last year.
1995 1996 1997
-------------------
dollars in millions
$447 $597 $740
10
<PAGE>
(GRAPHIC: $740 MILLION)
11
<PAGE>
Effective
Nothing beats experience. Experience and talent means decentralized decision
making, enabling us to work much closer to our customers. Not to mention
faster, with more flexibility and accuracy. And experience means more than
efficiency: it translates into effectiveness. For our company and for our
customers we've built our bank around our bankers: nothing beats real people,
doing a job they love, for people they know.
12
<PAGE>
[PICTURE OF THREE PEOPLE]
13
<PAGE>
[GRAPHIC: $686 MILLION]
14
<PAGE>
Loans
Columbia Bank. A community bank with big bank resources. No canned responses.
No hypothetical formulas. Decisions made in context, instead of in a vacuum.
Treating customers as individuals. Making the extra effort to establish and
maintain face-to-face relationships. Nothing beats the interest we show in our
customers.
<TABLE>
<CAPTION>
1997 1996 1995
------------------------
millions
<S> <C> <C> <C>
$686 $523 $418
</TABLE>
15
<PAGE>
Consolidated Highlights/1/
<TABLE>
<CAPTION>
1997 1996 percent change
---------------------------------------------
dollars in thousands except per share amounts
<S> <C> <C> <C>
for the year
Net interest income $ 35,231 $ 25,344 39.0%
Provision for loan losses 4,726 1,635 189.1
Net income 9,275 4,635 100.1
Net income excluding
unusual items/2/ 8,165 5,247 55.6
per share
Net income (basic) $ 1.41 $ 0.97 45.4%
Net income excluding
unusual items2 (basic) 1.24 1.09 13.8
Book value 11.90 10.48 13.5
at year-end
Assets $864,555 $706,448 22.4%
Loans 685,889 523,151 31.1
Allowance for loan losses 8,440 5,282 59.8
Deposits 740,430 596,504 24.1
Shareholders' equity 78,353 68,224 14.8
Number of full-time
equivalent employees 327 294
Number of banking offices 21 20
financial ratios
Net interest margin 4.96% 4.58%
Return on average assets 1.21 0.78
Return on average equity 14.41 10.15
Return on average assets
excluding unusual items/2/ 1.07 0.88
Return on average equity
excluding unusual items/2/ 12.68 11.49
Average equity to average assets 8.42 7.67
risk-based capital ratios
Tier I capital 10.77% 12.51%
Total capital 11.93 13.48
Leverage ratio 9.33 10.17
</TABLE>
/1/ All numbers reflect the 1997 mergers which have been accounted for on a
pooling of interests basis.
/2/ Unusual items include: Key Man Life Insurance proceeds of $3.5 million
(non-taxable), additional loan loss provision of $1.3 million (net of tax),
and merger related expenses of $1.1 million (net of tax).
16
<PAGE>
To Our Shareholders
[INDIVIDUAL PICTURES/SIGNATURES OF W.W. PHILIP, MELANIE DRESSEL AND H. R.
RUSSELL]
At Columbia Bank, we are not solely in the business of money, checking accounts
or business loans. We are in the business of people. Our people, and the way
they relate to our customers, is what makes us successful. Our people are the
foundation of your Company.
With the strength of that foundation, our momentum did not slow in 1997.
Rather, I am pleased to announce record earnings growth for the year. Comparing
1997 earnings with 1996, excluding certain nonrecurring items in both years, net
income from operations increased 56 percent. Including these items, our profit
for the year was $9.3 million, an increase of 100 percent over 1996, or $1.41 on
a per share basis.
We generated strong earnings while continuing substantial investments in
expanding the franchise. Columbia Bank's network of 16 offices at the end of
1996 grew to 21 at the end of 1997, through a combination of internal branching
and external growth. Three new offices were added with the completion of our
first two bank acquisitions during the fourth quarter. Cascade Community Bank
in Auburn and Bank of Fife were natural market extensions for Columbia Bank, and
attractive opportunities given their similar management styles and philosophies
of service.
Since year-end, we have opened two more offices in Pierce County, and we plan to
continue building our presence in selected markets at a similar pace.
Specifically, we are now seeking opportunities in Thurston County (south of
Pierce County) and northwest along the Kitsap Peninsula.
17
<PAGE>
[PICTURE OF W.W. PHILIP, CHAIRMAN AND CHIEF EXECUTIVE OFFICER]
Our expansion is timed to match the market demand for our approach to banking.
So far, we have seized the opportunities available, serving customers who are
disillusioned by industry consolidation and its effect on customer service. Our
employees operate with the individual authority to make decisions and respond to
customers with minimal delay. We offer the products and technology to compete
with the big banks, but as far as our ability to know our customers and exceed
their expectations, there really is no competition. So we continue to branch
out in order to fill that need.
The overall size of this organization, however, is not a top priority. We have
not identified a specific target. Although aggressive growth is a part of our
business plan, our growth is careful and well planned, as evidenced by our asset
quality. While total assets reached $864.6 million at December 31, 1997, non-
performing assets represent just 0.20 percent of that total, down from a low
0.39 percent last year.
Our operating efficiency has also improved, down to 69.0 percent for 1997, from
76.7 percent for 1996. However, this too, is not a priority measure of our
performance. Our challenge is to balance expense control while maximizing our
expansion during this period of opportunity available due to the bank merger and
acquisition trend. Also, we are recognizing certain economies of scale as our
branches continue to grow, improving their efficiency. As we add branches, we
add convenience and strengthen our competitive position.
In May of 1997, your Company announced two particularly significant executive
promotions. Melanie J. Dressel and H. R. "Hal" Russell were appointed Executive
Vice Presidents, assuming responsi-
18
<PAGE>
bility for all of the operational and lending functions of Columbia Bank.
Melanie oversees the operations, investments, private banking and
marketing/communications divisions of Columbia Bank, as well as the branch
network. Hal directs credit production and administration, including all
commercial, consumer and real estate lending functions, as well as the cash
management, risk management, and compliance/CRA (Community Reinvestment Act)
departments. These two appointments are important to the future of Columbia
Bank. I believe these individuals solidly represent the culture and business
philosophy that has brought this organization to where it is today. They are
positioned to manage the direction of this Company guided by the same corporate
vision that our recently deceased Chairman Arne Espe and I originally developed.
This brings me to a sad chapter in our 1997 story. Arnold G. Espe passed away
on November 9, following a year-long battle with cancer. Arne's immeasurable
contributions to Columbia Banking System go without saying. Following his
vision, this organization has achieved great success over the years. In 1990,
he led a group of investors who acquired the predecessor to what is now Columbia
Bank and Columbia Banking System. After recapitalizing and strengthening that
organization, he moved its headquarters to Tacoma in 1993, and he and I joined
forces to supervise the reorganization and expansion of Columbia Bank.
Strategically, he saw a void in Pierce County left by massive industry
consolidation, a gap where a new local, customer-focused, community-style bank
should be. This began the rapid growth of your Company. Arne was a truly
gifted entrepreneur, and a highly respected colleague. As we go forward,
Columbia's progress will be an ongoing celebration of Arnold Espe's legacy.
19
<PAGE>
In closing, I wish to express my appreciation to all of the employees of
Columbia Bank for their talent and commitment to the success of this
organization. They are an outstanding team, and they are responsible for
Columbia's strong image, quality and performance. They are proud of what they
have accomplished and proud of their association with Columbia Bank.
Thank you, our shareholders, for your contributions to our progress and support
of our goals.
/s/ W.W. Philip
W. W. Philip
Chairman and Chief Executive Officer
A Message from Melanie J. Dressel
Columbia Bank's deposit generation continued at a healthy pace last year. Total
deposits grew 24 percent to $740.4 million at year-end 1997. Importantly, all
of this increase occurred in "core deposits," while brokered and other wholesale
deposits decreased to just $3.5 million at year-end 1997, as compared with $30.3
million at year-end 1996. Our stable core deposit base is indicative of both
the Bank's growing visibility and consumer acceptance of our banking style.
Demand for our service translates into our growing share of the retail market.
This strong demand supports the aggressive expansion of our branch system. With
each new location, we add convenience for our existing customer base which
strengthens our overall growth potential. We listen to specific location
suggestions from our customers, identifying targets for profitable branch-
20
<PAGE>
ing through market studies and research. Branch expansion, of course, is
predicated on putting the right bankers in place to ensure our ongoing success.
While management remains focused on expanding the branch system, we are equally
focused on our responsibility to provide the highest quality products and
services to our customers. We continuously review our existing product menu,
while investigating new options and enhancements. Technology plays a major role
in executing our growth strategy, for the purposes of both business development
and cost savings.
The Bank is committed to constructing a sound infrastructure to support
electronic commerce. An example of this is our Cash Management division,
operating with one of the most sophisticated systems available. Our diversified
programs are tailored to the requirements of each organization to efficiently
and effectively manage cash flows, and the system is highly responsive to the
unique structure of each business account relationship.
Columbia Bank's ability to remain competitive, efficient and effective requires
us to be a technologically sound organization. This commitment is exemplified
by information technology projects currently in motion. An example of this is a
new check imaging method which is being developed as an alternative to returning
checks with statements, whereby users can view a check image via CD-ROM. This
should be particularly beneficial in our competition for commercial
relationships.
Another project deals with the Internet. The Bank's website is being
comprehensively redesigned, and the new version will be live on the Internet in
April of this year. With this new website,
21
<PAGE>
we are researching web banking as a home banking option. Although we have
reviewed and tested numerous PC software based applications for home banking,
none have met the standard of quality we wish to make available to our
customers. Accordingly, we are considering transactional banking on the
Internet. Customers would be able to obtain account balances and transfer funds
from their home or office by accessing our website at www.columbiabank.com.
Columbia Bank has developed a project plan to address the Year 2000 issue. In
addition to our internal preparations, our data processing service provider is
allocating substantial investments and resources to address the issue of Year
2000 compliance.
While we strive for excellence in each of these areas, we hold our civic
obligation in high esteem. Columbia contributes significant resources back to
the communities we serve. Through a combination of charitable donations, as
well as volunteer and fund-raising efforts, we aim to make a recognizable impact
on the vitality of our cities. With local roots, we take responsibility for
helping to improve educational, health and youth services in the areas where we
operate. That is what it means to be a community bank.
In all that we do, we are committed to making a difference for our customers and
our communities. This is the true measure of our success.
/s/ Melanie J. Dressel
Melanie J. Dressel
Executive Vice President
Retail Banking
22
<PAGE>
A Message from H. R. Russell
From the lending perspective, Columbia Bank's growth remains impressive.
Looking at loan totals, our portfolio increased 31 percent to $685.9 million at
year-end, after accounting for our 1997 acquisitions. This momentum shows no
signs of subsiding, given our healthy Northwest regional economy and our
strategic position in the marketplace.
Perhaps our greatest strength relative to loan production is Columbia Bank's
ability to take a proactive approach to making loans, which differentiates us
from the larger out-of-state banks we compete with so closely. At the same
time, with higher lending limits than the community banks in our markets, we are
positioned to be more flexible to the needs of our customers. Whether it be our
prompt response time, local management or breadth of experience, I believe our
performance shows that we have a strong advantage over our competitors.
Our commercial bankers work with the autonomy to tailor credit accommodations to
each unique client profile. This is not a cookie-cutter process - our lenders
possess the talent and authority to operate outside of such boundaries.
Evidence is found in the quality of our earning assets, which continued to
improve in 1997 despite the robust growth in our portfolio.
Columbia's ratio of nonperforming loans to total loans (0.22 percent) is really
a measure of the quality of our people and their knowledge of this business.
Controlling credit risk is paramount to the Company's overall growth strategy.
Therefore, management's selection of qualified bankers is our top priority.
23
<PAGE>
We choose lenders who have a high degree of familiarity with their market areas.
On average, our lenders and branch managers bring 15 years of in-market banking
experience to their positions. With such knowledge of our markets and well-
established relationships within those markets, Columbia Bank maintains the
decision making process as close to the customer as possible. This style of
doing business gives us the opportunity to attract successful commercial
clientele. Focused on relationship banking to small and medium-sized businesses,
our client mix is well diversified in terms of product and industry, also giving
strength to the portfolio.
Our net interest margin improved to 4.96 percent for 1997, compared with 4.58
percent for 1996. Loans are generating higher yields as we continue to increase
the commercial business loan category within our portfolio, now at 39.5 percent
of total loans. Emphasis is also being placed on production in our private
banking division as well as the higher-earning consumer sector.
We have begun to view consumer lending as a somewhat untapped resource for the
Bank. Now that we have built a larger retail branch system, it makes sense to
devote more attention to this area of lending while taking measures to reduce
our exposure to risk on the consumer side. With expanded and competitive
consumer lending activities, we are adding another attractive element to the
complete banking relationship.
With the above-mentioned strategies in place, I believe Columbia Bank is
positioned to increase its lending market share. We will continue working hard
to make the most of our business opportunities.
/s/ H.R. Russell
H. R. Russell
Executive Vice President
Commercial Banking
March 2, 1998
24
<PAGE>
<TABLE>
<CAPTION>
Consolidated
Report of Consolidated Consolidated Statements of Consolidated
Report of Independent Statements of Balance Shareholders' Statements
MD&A Management Auditors Operations Sheets Equity of Cash Flows Notes
- ---- ---------- ----------- ------------- ------------ ------------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
26 48 49 50 52 54 56 58
---------------------------------------------------------------------
|
audited financial statements
</TABLE>
<TABLE>
<CAPTION>
Consolidated Consolidated
Five-Year Five-Year Summary
Statements of Average Balances Corporate Shareholder Branch
of Operations and Net Interest Revenues Directory Information Locations
- ------------- ------------------------- --------- ----------- ---------
<S> <C> <C> <C> <C>
84 86 88 89 90
- ----------------------------------------------
|
Supplemental Financial
Data (Unaudited)
</TABLE>
25
<PAGE>
Management Discussion and Analysis of Financial Condition and Results of
Operations
This discussion should be read in conjunction with the consolidated financial
statements of Columbia Banking System, Inc. (the "Company"), and notes thereto
presented elsewhere in this report. In the following discussion, unless
otherwise noted, references to increases or decreases in average balances in
items of income and expense for a particular period and balances at a particular
date refer to the comparison with corresponding amounts for the period or date
one year earlier.
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. 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 21 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 commu-nities in southwestern
Washington. At December 31, 1997, based on total assets of $864.6 million, the
Company was the largest publicly traded bank holding company headquartered in
Washington engaged primarily in commercial banking.
The Company was reorganized and additional management was added in 1993 in order
to take advantage of commercial banking business opportunities resulting from
increased consolidation of banks in the Company's principal market area,
primarily through acquisitions by out-of-state holding companies, and the
resulting dislocation of customers. Since the reorganization, Columbia Bank has
grown from four branch offices at January 1, 1993 to its present twenty-one
branch offices and currently has regulatory approval to open four additional
branch offices in its market area. Between January 1, 1993 and December 31,
1997, the Company increased its consolidated assets to $864.6 million from
$198.2 million, its loans to $685.9 million from $146.2 million and its deposits
to $740.4 million from $151.9 million. While accomplishing this expansion, the
Company's asset quality has improved. At December 31, 1997, the Company's
nonperforming assets constituted 0.20% of total assets, as compared with 0.39%,
0.73% and 0.94% at December 31, 1996, 1995 and 1994, respectively. Although
nonperforming assets are currently low, rapid growth could increase future
losses. Accordingly, the Company increased the loan loss provision by $2.0
million in the fourth quarter of 1997, as well as adding $1.0 million in the
second quarter of 1997, and increasing the monthly provision to $130,000 from
$110,000 in April 1997.
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
Columbia Banking System ...................................MD&A
26
<PAGE>
business strategy is to provide its customers with the financial sophisti-cation
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 Seattle 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). In
order to fund its commercial and consumer lending activities and to allow for
increased contact with customers, the Company is establishing a branch system
catering primarily to retail depositors, supplemented by business banking
customer deposits and other borrowings. The Company believes this mix of
funding sources will enable it to expand its commercial lending activities
rapidly while attracting a stable core deposit base. In order to support its
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.
During the first quarter of 1997, the Company opened a second Bellevue branch
and a new branch in the south King County commercial market of downtown Kent.
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.
At the end of 1997, the Company had twenty-one branches, twelve in Pierce
County, six in King County, and three in Cowlitz County. Since beginning its
major Pierce County expansion in August 1993, the Company has grown from four to
twenty-one branches through a combination of internal and external growth by
acquisition. Also, at the end of the year, construction was nearing completion
on two more offices in Tacoma.
Columbia Banking System ...................................MD&A
27
<PAGE>
The Company opened its twenty-second branch in mid-January 1998, located in the
Westgate area of north Tacoma. The Westgate branch is the thirteenth location
in Pierce County. The twenty-third branch (fourteenth in Pierce County) opened
in February 1998, located at 176th and Meridian in Puyallup. Management
continues to pursue opportunities for expansion via a combination of internal
and external growth by acquisition. New branches normally do not contribute to
net income for many months after opening.
In addition to the ongoing expansion of its branch network, the Company
continuously reviews new products and services to provide its customers with
more banking options. In addition, new technology is reviewed continuously for
business development and cost savings.
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 operations.
The Company's operating expenses consist primarily of compensation and employee
benefit expense and occupancy expense. Like most financial institutions, the
Company's interest income and cost of funds are affected significantly by
general economic conditions, particularly changes in market interest rates, and
by government policies and actions of regulatory authorities.
For 1997, the Company recorded net income of $9.3 million, compared with net
income of $4.6 million in 1996 and net income of $3.7 million in 1995. Net
income per share amounted to $1.41 in 1997, compared with $0.97 per share in
1996 and $0.86 per share in 1995.
Excluding certain unusual items which occurred in 1997 and 1996, net income from
operations was $8.2 million compared with $5.2 million in 1996 and $3.7 million
in 1995, increases of 56% and 41% for the years ended December 31, 1997 and
1996, respectively. On a per share basis, net income from operations excluding
unusual items for 1997 was $1.24 per share compared with $1.09 per share and
$0.86 per share in 1996 and 1995, respectively.
Columbia Banking System ...................................MD&A
28
<PAGE>
The 1997 unusual items consisted of proceeds from a Key Man Life Insurance
policy upon the passing of Chairman A. G. Espe and expenses associated with two
recently completed mergers. Also, excluded was an additional loan loss
provision made in the fourth quarter to reflect the continued rapid growth of
the loan portfolio during 1997. In third quarter 1996, federal legislation
designed to recapitalize the Savings Association Insurance Fund ("SAIF") of the
FDIC resulted in a one-time charge to earnings of $612,000.
With the completion of the Company's first acquisitions during the fourth
quarter, 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.
Net Interest Income
Net interest income increased $9.9 million, or 39%, in 1997 compared with $4.6
million, or 22%, in 1996. The 1997 increase in net interest income was largely
due to the overall growth of the Company. Net interest income was favorably
affected by average interest-earning assets increasing more rapidly than average
interest-bearing liabilities, with the difference funded by noninterest-bearing
deposits and shareholders' equity. Average interest-earning assets increased
$156.5 million and $132.0 million in 1997 and 1996, respectively, while average
interest-bearing liabilities increased only $111.8 million and $107.5 million,
respectively.
Net interest margin (net interest income divided by average interest-earning
assets) increased to 4.96% for 1997, compared with 4.58% in 1996 and 4.91% in
1995. While interest-earning assets grew during fiscal year 1997, the average
yield on interest-earning assets increased to 8.73%, from 8.64% in fiscal year
1996. In comparison, the average cost of interest-bearing liabilities decreased
to 4.61% in 1997 from 4.79% in 1996. The increase in net interest margin was
primarily due to a combination of higher yields obtained on loans and decreasing
deposit rates. The increase in loan yields was primarily caused by a change in
the loan mix whereby multi-family and commercial real estate loans increased to
35% of total loans at December 31, 1997, from 31% at December 31, 1996. 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,
have exhibited a downward trend for much of 1997 due to a variety of factors
such as low inflation.
Provision for Loan Losses
For the years ended December 31, 1997, 1996 and 1995, net loan charge-offs
amounted to $1.6 million, $693,000 and $217,000, respectively. The Company's
provision for loan losses was $4.7 million for 1997, compared with $1.6 million
for 1996 and $1.4 million for 1995. During 1997, the allowance for loan losses
increased by $3.2 million to 1.23%
Columbia Banking System ...................................MD&A
29
<PAGE>
of loans (excluding loans held for sale) at December 31, 1997, as compared with
1.01% and 1.04% of loans at December 31, 1996 and 1995, respectively. At year-
end 1997, the allowance for loan losses to nonperforming loans was 569.50%
compared with 231.57% at December 31, 1996. The 1997 increase in the loan loss
provision is a result of the Company's rapid loan growth. Although nonperforming
loans are currently low, rapid growth could increase future losses. Accordingly,
the Company increased the loan loss provision by $2.0 million in the fourth
quarter of 1997.
Noninterest Income
Total noninterest income, excluding proceeds from a Key Man Life Insurance
policy, increased $3.0 million, or 47% in 1997, and $1.5 million, or 32%, in
1996. Increases in noninterest income during 1997 were centered in account
service charges, mortgage banking income, and gains on sales of loans. In
general, increases in account service charges are due to the growth of the
Company.
Noninterest Expense
Excluding non-recurring items (merger expenses in 1997 and SAIF assess-ment in
1996), total noninterest expense increased $5.7 million, or 23.5%, in 1997 and
$4.3 million, or 21.6%, in 1996. 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 (the sum of net
interest income plus noninterest income excluding unusual and nonrecurring
items, divided by noninterest expense excluding unusual and nonrecurring items)
was 69.0% for 1997 compared with 76.7% and 78.4% for 1996 and 1995,
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.
Columbia Banking System ...................................MD&A
30
<PAGE>
Set forth below is a schedule showing additional detail concerning increases and
decreases in the Company's noninterest expense.
<TABLE>
<CAPTION>
In Thousands Increase/ Increase/
Years Ended December 31, 1997 (Decrease) 1996 (Decrease) 1995
- ------------------------ --------- ---------- ---- ---------- ----
<S> <C> <C> <C> <C> <C>
Compensation and
employee benefits $15,256 $2,671 $12,585 $2,608 $ 9,977
Less: loan
origination costs 1,927 (373) 2,300 1,212 1,088
- --------------------------------------------------------------------------------
Net compensation and
employee benefits
(as reported) 13,329 3,044 10,285 1,396 8,889
Occupancy 4,488 240 4,248 747 3,501
Professional services 598 (73) 671 164 507
Advertising and
promotion 1,264 458 806 140 666
Printing and supplies 739 192 547 85 462
Regulatory assessments 245 (97) 342 (244) 586
Data processing 1,544 322 1,222 209 1,013
Losses (gains) on
real estate owned 124 124 400 (400)
Telephone and network 500 127 373 68 305
Postage and delivery 531 175 356 85 271
ATM network 221 12 209 125 84
Bank card 1,994 513 1,481 450 1,031
Taxes, licenses and fees 990 202 788 (33) 821
Other 3,433 468 2,965 722 2,243
SAIF special assessment (612) 612 612
Merger expenses 1,234 1,234
- --------------------------------------------------------------------------------
Total noninterest
expense $31,234 $6,329 $24,905 $4,926 $19,979
- --------------------------------------------------------------------------------
------- ------ ------- ------ -------
</TABLE>
Lending Activities
The Company originates a wide variety of loans. Consistent with the trend begun
in 1993, the Company continues to increase commercial business loans as a
percentage of its total loan portfolio. The Company also emphasizes its Private
Banking services to high income and high net worth individuals.
Columbia Banking System ...................................MD&A
31
<PAGE>
Loan Portfolio
The following table sets forth the Company's loan portfolio by type of loan for
the dates indicated:
<TABLE>
<CAPTION>
In Thousands % of % of
December 31, 1997 Total 1996 Total
- ------------ ---- ----- ---- -----
<S> <C> <C> <C> <C>
Commercial business $270,946 39.5% $194,843 37.2%
Real estate:
One- to four-family
residential 71,095 10.4 77,359 14.8
Five or more family
residential and
commercial
properties 206,628 30.1 151,179 28.9
-------- ---- -------- ----
Total real estate 277,723 40.5 228,538 43.7
Real estate
construction:
One- to four-family
residential 29,695 4.3 31,446 6.0
Five or more family
residential and
commercial
properties 33,806 4.9 10,724 2.1
-------- ---- -------- ----
Total real estate
construction 63,501 9.2 42,170 8.1
Consumer 74,710 10.9 58,249 11.1
Subtotal 686,880 100.1 523,800 100.1
Less deferred loan
fees and other (991) (0.1) (649) (0.1)
-------- ----- -------- -----
Total loans $685,889 100.0% $523,151 100.0%
======== ===== ======== =====
Loans held for sale $ 4,377 $ 11,341
======== ========
</TABLE>
Total loans at year-end increased $162.7 million, or 31.1%, from year end 1996.
All loan categories except for one- to four-family loans con-tributed
significantly to the increase.
Commercial and Private Banking Lending
Commercial loans increased to $270.9 million at December 31, 1997, representing
39.5% of total loans, from $194.8 million at December 31, 1996. This increase
reflects management's commitment to provide competitive commercial lending in
the Company's primary market area. The Company expects to continue to expand
its commercial lending products and to emphasize in particular its relationship
banking with businesses, business owners and professional individuals.
Columbia Banking System ...................................MD&A
32
<PAGE>
Real Estate Lending
One- to Four-Family Residential. Residential one- to four-family loans decreased
$6.3 million to $71.1 million at December 31, 1997, representing 10.4% of total
loans, compared with $77.4 million at December 31, 1996. The decrease is
attributable to maturities and prepayments of the portfolio. These loans are
used by the Company to collateralize advances from the Federal Home Loan Bank
("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.
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 $206.6 million at
December 31, 1997, representing 30.1% of total loans, from $151.2 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
the 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 provide financing to
builders for the construction of pre-sold homes and speculative residential
construction. Construction loans on one- to four-family residences decreased to
$29.7 million at December 31, 1997, representing 4.3% of total loans, from $31.4
million at December 31, 1996. Multi-family and commercial real estate
construction loans increased to $33.8 million at December 31, 1997, representing
4.9% of total loans, from $10.8 million at December 31, 1996. The increase is a
result of the growing commercial business economy in Pierce County and the Puget
Sound region.
The Company endeavors to limit its construction lending risk through adherence
to strict underwriting procedures.
Consumer Lending
At December 31, 1997, the Company had $74.7 million of consumer loans
outstanding, representing 10.9% of total loans, as compared with
Columbia Banking System ...................................MD&A
33
<PAGE>
$58.2 million at December 31, 1996. Consumer loans made by the Company include
automobile loans, boat and recreational vehicle financing, home equity and home
improvement loans and miscellaneous personal loans.
At December 31, 1997, the Company had no foreign loans.
Management's growth strategy has concentrated on the Tacoma/Pierce County
market. The results of that strategy are evident in the following summary of
loan growth by market area:
<TABLE>
<CAPTION>
In Thousands Increase
December 31, 1997 1996 amount percent
- ------------ ---- ---- -------------------
<S> <C> <C> <C> <C>
Pierce County $485,863 $346,353 $139,510 40.3%
All other counties 200,026 176,798 23,228 13.1
-------- -------- -------- ----
Total $685,889 $523,151 $162,738 31.1%
======== ======== ======== ====
</TABLE>
Nonperforming Assets
Nonperforming assets consist of nonaccrual loans, restructured loans and real
estate owned. The following tables set forth, at the dates indicated,
information with respect to nonaccrual loans, restructured loans, total
nonperforming loans (nonaccrual loans plus restructured loans), real estate
owned and total nonperforming assets of the Company:
<TABLE>
<CAPTION>
In Thousands
December 31, 1997 1996 1995
- ------------ ---- ---- ----
<S> <C> <C> <C>
Nonaccrual:
One- to four-family
residential $ 661 $1,645 $ 329
Commercial business 728 385 86
Consumer 73 226 34
------ ------ -----
Total 1,462 2,256 449
Restructured:
One- to four-family
residential 20 25 29
------ ------ ------
Total nonperforming loans $1,482 $2,281 $ 478
====== ====== ======
Real estate owned 231 484 3,304
------ ------ ------
Total nonperforming assets $1,713 $2,765 $3,782
====== ====== ======
Accruing loans past-due
90 days or more $ 111 $ 154
Impaired loans $ 728 385 86
Potential problem loans 669 346 239
Allowance for loan losses 8,440 5,282 4,340
Nonperforming loans to loans 0.22% 0.44% 0.11%
Allowance for loan losses to loans 1.23 1.01 1.04
Allowance for loan losses to
nonperforming loans 569.50 231.57 907.95
Nonperforming assets
to total assets 0.20 0.39 0.73
======= ====== ======
</TABLE>
Columbia Banking System ...................................MD&A
34
<PAGE>
The consolidated financial statements are prepared according to the accrual
basis of accounting. This includes the recognition of interest income on the
loan portfolio, unless a loan is placed on a nonaccrual basis, which occurs when
there are serious doubts about the collectibility of principal or interest.
Generally, the Company's policy is to place a loan on nonaccrual status when the
loan is past due 90 days. Restruc-tured 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.
Impaired loans, generally, refer to loans that are restructured in a troubled
debt restructuring involving a modification of terms, nonaccrual loans and loans
past due 90 days and still accruing.
Potential problem loans are loans which are currently performing and are not
included in nonaccrual or restructured loans above, but about which there are
serious doubts as to the borrower's ability to comply with present repayment
terms. Therefore, these loans will likely be included later in nonaccrual, past
due or restructured loans and are considered by management in assessing the
adequacy of the allowance for loan losses.
Nonperforming loans decreased to $1.5 million at December 31, 1997, from $2.3
million at December 31, 1996. At December 31, 1997, nonperforming loans were
0.22% of period-end loans (excluding loans held for sale) compared with 0.44%
and 0.11% at December 31, 1996 and 1995, respectively. Total nonperforming
assets decreased $1.1 million to $1.7 million, or 0.20% of total assets at
December 31, 1997. In February 1996, the Company sold the majority of its "real
estate owned" (which consisted of one property in the state of Washington), thus
reducing total nonperforming assets to $2.8 million, or 0.39% of total assets at
December 31, 1996, from $3.8 million, or 0.73% of total assets at year end 1995.
Provision and Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered by management
to be adequate to provide for anticipated loan losses based on management's
assessment of various factors affecting the loan portfolio. This includes a
review of problem loans, business conditions and loss experience and overall
evaluation of the quality of the underlying collateral, holding and disposal
costs and costs of capital. The allowance is increased by provisions charged to
operations, and is reduced by loans charged off, net of recoveries.
While management believes it uses the best information available to determine
the allowance for loan losses, unforeseen market conditions could result in
adjustments to the allowance for loan losses, and net income could be
significantly affected, if circumstances differ substantially from the
assumptions used in determining the allowance.
Columbia Banking System ...................................MD&A
35
<PAGE>
The allowance for loan losses at December 31, 1997 increased to 1.23%, from
1.01% of loans at December 31, 1996 (excluding loans held for sale at each
date). The increase was due to a $3.1 million increase in loan loss provisions
during 1997 compared to 1996. The 1997 increase in the loan loss provision is a
result of the Company's rapid loan growth. Although nonperforming loans are
currently low, rapid growth could increase future losses. Accordingly, the
Company increased the loan loss provision by $2.0 million in the fourth quarter
of 1997. For the years ended December 31, 1997, 1996 and 1995, net loan charge-
offs amounted to $1.6 million, $693,000 and $217,000, respectively. The
Company's provision for loan losses was $4.7 million for 1997, compared with
$1.6 million for 1996 and $1.4 million for 1995.
The following table summarizes the changes in the allowance for loan losses:
<TABLE>
<CAPTION>
In Thousands
December 31, 1997 1996 1995
- ------------ ---- ---- ----
<S> <C> <C> <C>
Total loans,
net at end of period/1/ $685,889 $523,151 $418,057
Daily average loans 613,671 473,887 373,560
Beginning balance of
allowance for loan losses 5,282 4,340 3,175
Charge-offs:
One- to four-family residential (364) (7)
Commercial business (1,025) (514) (148)
Private banking (11) (115)
Consumer (259) (199) (4)
-------- -------- --------
Total charge-offs (1,659) (720) (267)
Recoveries:
One- to four-family residential 1 7
Commercial business 43 17 45
Consumer 47 3 5
Total recoveries 91 27 50
Net charge-offs (1,568) (693) (217)
Provision charged to expense 4,726 1,635 1,382
-------- -------- --------
Ending balance $ 8,440 $ 5,282 $ 4,340
======== ======== ========
Ratio of net charge-offs
during period to average
loans outstanding 0.26% 0.15% 0.06%
1 Excludes loans held for sale.
</TABLE>
Securities
The Company's securities (securities available for sale and securities held to
maturity) increased by $2.3 million to $66.0 million from year-end 1996 to year-
end 1997. The Company had no sales of securities during 1997. Purchases during
the year totaled $35.9 million while
Columbia Banking System ...................................MD&A
36
<PAGE>
maturities and prepayments totaled $33.6 million. U.S. Treasury and government
agency securities comprised 80.4% of the investment portfolio, with mortgage-
backed securities at 10.6% and state and municipal securities at 6.4%. The
average maturity of the securities portfolio was 2 years, 6 months at December
31, 1997.
Approximately 85.3% of the Company's securities are classified as available for
sale and carried at market value. These securities are used by management as
part of its asset/liability management strategy and may be sold in response to
changes in interest rates and/or significant prepayment risk. For further
information on investment securities, including gross unrealized gains and
losses in the portfolio and gross realized gains and losses on sales of
securities, see Note 4 to the consolidated financial statements.
Premises and Equipment
In 1997, fixed assets increased $8.5 million, or 45% from 1996. The net change
includes purchases of $11.0 million, disposals of $500,000 and depreciation
expense of $2.1 million. The Company's capital expenditures in 1998 are
anticipated to be approximately $5.3 million. Such expenditures are expected to
include approximately $2.1 million for new buildings and for remodeling existing
structures, and $3.2 million for new furniture and equipment.
Liquidity and Sources of Funds
The Company's primary sources of funds are customer deposits and advances from
the FHLB. These funds, together with loan repayments, loan sales, retained
earnings, equity and other borrowed funds, are used to make loans, to acquire
securities and other assets, and to fund continuing operations.
Deposit Activities
The Company experienced overall average deposit growth of 29.3% and 30.4%
in 1997 and 1996, respectively. All categories of deposits increased during
both years. Interest-bearing and noninterest-bearing demand deposits
increased 39.7% and 48.8% in 1997, and 64.4% and 36.6% in 1996,
respectively.
Average deposits are summarized in the following table:
<TABLE>
<CAPTION>
In Thousands
years ended December 31, 1997 1996 1995
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Demand and other
noninterest-bearing $111,492 $ 74,940 $ 54,878
Interest-bearing demand 223,514 160,020 97,326
Savings 38,301 32,438 33,145
Certificates of deposit 282,899 240,214 203,978
-------- -------- --------
Total average deposits $656,206 $507,612 $389,327
======== ======== ========
</TABLE>
Columbia Banking System ...................................MD&A
37
<PAGE>
The Company is establishing a branch system catering primarily to retail
depositors, supplemented by business banking customer deposits and other
borrowings. While that stable core deposit base is being established,
management's strategy for funding growth has been to make use of brokered and
other wholesale deposits. The Company's use of brokered and other wholesale
deposits decreased in 1997, though management anticipates continued use of such
deposits to fund increasing loan demand. The deposit increase of $143.9 million
during 1997 occurred entirely in "core deposits." Brokered and other wholesale
deposits (excluding public deposits) decreased $26.8 million to $3.5 million, or
0.47% of total deposits, at December 31, 1997, from $30.3 million, or 5.1% of
total deposits, at December 31, 1996.
Brokered and other wholesale deposits are summarized below. The average
interest rate for these deposits was 5.77% and 5.63% at December 31, 1997 and
1996, respectively.
<TABLE>
<CAPTION>
1997 1996
---- ----
Percent Percent
December 31, of Total of Total
dollars in thousands amount deposits amount deposits
- -------------------- ------ -------- ------ --------
<S> <C> <C> <C> <C>
Maturing within
one year $1,486 0.20% $28,863 4.8%
Maturing after
one year but
within three years 2,000 0.27 1,387 0.3
------ ---- ------- ---
Total brokered
and other
wholesale deposits $3,486 0.47% $30,250 5.1%
------ ---- ------- ---
</TABLE>
The increase in deposits is largely due to management's growth strategy
emphasizing the Tacoma/Pierce County market area. Following is a summary of
year-end deposits by county:
<TABLE>
<CAPTION>
in thousands increase
December 31, 1997 1996 amount percent
- ------------ ---- ---- -----------------
<S> <C> <C> <C> <C>
Pierce County $505,212 $402,938 $102,274 25.4%
All other counties 235,218 193,566 41,652 21.5
-------- -------- -------- ----
Total $740,430 $596,504 $143,926 24.1%
======== ======== ======== ====
</TABLE>
Borrowings
The Company relies on FHLB advances to supplement its funding sources, and the
FHLB serves as the Company's primary source of long-term borrowings. FHLB
advances are secured by one- to four-family real estate mortgages and certain
other assets. At December 31, 1997, the Company had total advances of $39.0
million at interest rates ranging from 5.20% to 6.14%. The weighted average
interest rate on such advances was 5.43%. At December 31, 1997, the maximum
borrowing line from the FHLB was $113.3 million. Management anticipates
Columbia Banking System ...................................MD&A
38
<PAGE>
that the Company will continue to rely on the same sources of funds in the
future, and will use those funds primarily to make loans and purchase
securities.
Interest Rate Sensitivity
Columbia Bank is exposed to interest rate risk, which is the risk that changes
in prevailing interest rates will adversely affect assets, liabilities, capital
income and expenses at different times or in different amounts. Generally,
there are four sources of interest rate risk, as described below:
Repricing Risk. Generally, repricing risk is the risk of adverse consequence
from a change in interest rates that arise because of differences in the timing
of when those interest rate changes affect an institution's assets and
liabilities.
Basis Risk. Basis risk is the risk of adverse consequence resulting from
unequal changes in the spread between two or more rates for different
instruments with the same maturity.
Yield Curve Risk. Yield curve risk is the risk of adverse consequence resulting
from unequal changes in the spread between two or more rates for different
maturities for the same instrument.
Option Risk. In banking, option risks are known as borrower options to prepay
loans and depositor options to make deposits, withdrawals, and early
redemptions. Option risk arises whenever bank products give customers the right,
but not the obligation, to alter the quantity of the timing of cash flows.
The Company maintains an asset/liability management policy that provides
guidelines for controlling exposure to interest rate risk. The guidelines
direct management to assess the impact of changes in interest rates upon both
earnings and capital. The guidelines further provide that in the event of an
increase in interest rate risk beyond preestablished limits, management will
consider steps to reduce interest rate risk to acceptable levels.
The analysis of an institution's interest rate gap (the difference between the
repricing of interest-earning assets and interest-bearing liabilities during a
given period of time) is one standard tool for the measurement of the exposure
to interest rate risk. The Company believes that because interest rate gap
analysis does not address all factors that can affect earnings performance, it
should be used in conjunction with other methods of evaluating interest rate
risk.
The following table sets forth the estimated maturity or repricing, and the
resulting interest rate gap of the Company's interest-earning assets and
interest-bearing liabilities at December 31, 1997. The amounts in the table are
derived from the Company's internal data and are based upon regulatory reporting
formats. Therefore, they may not be consistent with financial information
appearing elsewhere herein that has been prepared in accordance with generally
accepted accounting principles. The amounts could be significantly affected by
external factors such as
Columbia Banking System ...................................MD&A
39
<PAGE>
changes in prepayment assumptions, early withdrawal of deposits and competition.
For example, although certain assets and liabilities may have similar maturities
or periods to repricing, they may react in different degrees to changes in
market interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
other types may lag behind changes in market interest rates. Additionally,
certain assets, such as adjustable-rate mortgages, have features which restrict
changes in the interest rates of such assets both on a short-term basis and over
the lives of such assets. Further, in the event of a change in market interest
rates, prepayment and early withdrawal levels could deviate significantly from
those assumed in calculating the tables. Finally, the ability of many borrowers
to service their adjustable-rate debt may decrease in the event of a substantial
increase in market interest rates.
<TABLE>
<CAPTION>
Estimated Maturity or Repricing
Dollars in Thousands 0-3 4-12 1-5 5-10 More Than
December 31, 1997 months months years years 10 years Total
- -------------------- ------ ------ ----- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Interest-earning
deposits $ 28,108 $ 28,108
Securities 1,578 $ 21,394 $ 31,235 $16,092 $ 803 71,102
Loans:
Business and
commercial
real estate 252,795 31,947 111,143 3,088 3,835 402,808
One- to
four-family 70,780 60,761 62,883 3,150 10,724 208,298
Consumer 14,908 27,828 31,888 3,016 244 77,884
-------- -------- -------- ------ ------- --------
Total interest-
earning assets $368,169 $141,930 $237,149 $25,346 $15,606 $788,200
======== ======== ======== ======= ======= ========
Noninterest-
earning assets 1,276 75,079 76,355
-------- -------- -------- ------- ------- --------
Total assets $368,169 $143,206 $237,149 $25,346 $90,685 $864,555
======== ======== ======== ======= ======= ========
Percent of total
interest-earning
assets 46.71% 18.00% 30.09% 3.22% 1.98% 100.00%
</TABLE>
Columbia Banking System ...................................MD&A
40
<PAGE>
<TABLE>
<CAPTION>
Estimated Maturity or Repricing
Dollars in Thousands 0-3 4-12 1-5 5-10 More Than
December 31, 1997 months months years years 10 years Total
- -------------------- ------ ------ ----- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing liabilities
Deposits:
Money market checking $174,298 $174,298
NOW accounts 14,788 $ 59,154 73,942
Savings accounts 12,816 $ 12,815 $ 12,815 38,446
Time certificates
of deposit 94,373 $169,652 44,636 308,661
FHLB advances 2,000 12,000 25,000 39,000
------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities $298,275 $181,652 $128,790 $ 12,815 $ 12,815 $634,347
======== ======== ======== ======== ======== ========
Noninterest-bearing
liabilities and equity 116,450 29,112 84,646 230,208
======== ======== ======== ======== ======== ========
Total liabilities and equity $414,725 $181,652 $157,902 $ 12,815 $ 97,461 $864,555
======== ======== ======== ======== ======== ========
Percent of total
interest-earning assets 37.84% 23.04% 16.34% 1.63% 1.63% 80.48%
======== ======== ======== ======== ======== ========
Rate sensitivity gap $ 69,894 $(39,722) $108,359 $ 12,531 $ 2,791 $153,853
Cumulative rate sensitivity gap 68,894 30,172 138,531 151,062 153,853
-------- -------- -------- -------- -------- --------
Rate sensitivity gap as a percentage
of interest-earning assets 8.87% (5.04)% 13.75% 1.59% 0.35% 19.52%
Cumulative rate sensitivity gap
as a percentage of interest-
earning assets 8.87% 3.83% 17.58% 19.17% 19.52%
======== ======== ======== ======== ========
</TABLE>
Columbia Banking System ...................................MD&A
41
<PAGE>
Interest Rate Sensitivity On Net Interest Income
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 and changes in market conditions and
management strategies, among other factors.
Based on the results of the simulation model as of December 31, 1997, the
Company would expect an increase in net interest income of $332,000 and a
decrease in net interest income of $333,000 if interest rates gradually decrease
or increase, respectively, from current rates by 100 basis points over a twelve-
month period.
Income Tax
Prior to December 31, 1996, for federal income tax purposes, the Company had net
operating loss ("NOL") carryforwards. The carry-forwards 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 years ending December 31, 1997 and 1996, the Company recorded income tax
provisions of $2.8 million and $500,000, respectively.
Columbia Banking System ...................................MD&A
42
<PAGE>
Capital
Shareholders' equity increased to $78.4 million at December 31, 1997,from $68.2
million at December 31, 1996. The increase is due primarily to net income for
the year of $9.3 million. Shareholders' equity was 9.06% and 9.66% of total
assets at December 31, 1997 and December 31, 1996, respectively.
Banking regulations require bank holding companies to maintain a minimum
"leverage" ratio of core capital to adjusted quarterly average total assets of
at least 3%. At December 31, 1997, the Company's leverage ratio was 9.33%,
compared with 10.17% 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, 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 10.77% and 11.93%, respectively, at December 31, 1997,
compared with 12.51% and 13.48%, 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
December 31, 1997. Failure to qualify as "well capitalized" can negatively
impact a bank's ability to expand and to engage in certain activities.
Applicable federal and Washington state regulations restrict capital
distributions by institutions such as Columbia Bank, including dividends. Such
restrictions are tied to the institution's capital levels after giving effect to
distributions. The Company's ability to pay cash dividends is substantially
dependent upon receipt of dividends from the Bank.
On April 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 for all periods presented have been retroactively
adjusted to give effect to this transaction.
Columbia Banking System ...................................MD&A
43
<PAGE>
In November and December 1996, the Company issued 1.445 million shares of common
stock in a public offering, raising approximately $20.7 million in new capital.
The Company contributed approximately $10 million of these proceeds to Columbia
Bank primarily to fund additional expansion in Pierce County, and, over the next
several years, into south King and Thurston Counties. The remainder was used to
repay a $3.0 million borrowing and for general corporate purposes.
On June 3, 1996, the Company gave notice that it would redeem all of its issued
and outstanding 7.85% Convertible Subordinated Notes (the "Notes") on August 1,
1996. The Notes were convertible in whole or in part, in multiples of $1,000
principal amount, at 100% of the principal amount of the Note (or portion
thereof), at the conversion price per share of common stock of $10.56. As of
August 1, 1996, all of the Notes were converted into 223,743 shares of common
stock.
Impact of Inflation and Changing Prices
The impact of inflation on the Company's operations is increased operating
costs. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than the effect of general levels of inflation.
Although interest rates do not necessarily move in the same direction or to the
same extent as the prices of goods and services, increases in inflation
generally have resulted in increased interest rates.
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 is currently 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 is aggressively addressing its capacity to achieve Year 2000
compliance.
Columbia Banking System ...................................MD&A
44
<PAGE>
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 requires the Company to elect to
account for stock-based compensation on a fair value basis or an intrinsic value
basis. The intrinsic value basis is currently used by the Company and is the
accounting principle prescribed by Accounting Principles Board No. 25
"Accounting for Stock Issued to Employees" (APB No. 25). SFAS No. 123 requires
among other things, disclosure in the footnotes of the pro forma impact on net
income and earnings per share of the difference between compensation expense
using the intrinsic value method and the fair value method if the fair value
method of accounting is not used. The adoption of SFAS No. 123 is required for
the fiscal year ended December 31, 1997. The Company elected to continue to
apply APB No. 25 for measurement of stock compensation and has provided
disclosure required by SFAS No. 123 in Note 10 accompanying the consolidated
financials of the Company.
In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 125 requires the
Company to recognize all financial assets and servicing that it controls and
liabilities that it has incurred after a transfer of financial assets. The
Company must also "derecognize" financial assets when control has been
surrendered and must derecognize liabilities when extinguished. SFAS No. 125 is
not expected to have a significant impact on the Company.
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("SFAS No. 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.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). This statement provides
standards for reporting comprehensive, or all inclusive, income. In the
Company's case, based on current operations, it would include as an addition or
deduction to reported net income, the change in the securities valuation
reserve. This statement will not affect reported net income of the Company.
SFAS No. 130 will be effective in the Company's 1998 financial statements and
will require restatement of all prior periods shown on the financial statements.
45
<PAGE>
Change in Accounting Firms
On February 26, 1997, the Company engaged Deloitte & Touche LLP as the Company's
principal independent accountant. Prior to Deloitte & Touche's engagement,
Price Waterhouse LLP, independent certified public accountants, had served as
the principal independent accountant for the Company and rendered their report
with respect to the Company's financial statements for the year ended December
31, 1996. The recommendation to change accountants was made by management of
the Company and was approved by the Audit Committee and the Board of Directors.
For more information please refer to the Company's Form 8K/A filed with the
Securities and Exchange Commission on March 17, 1997.
In the two most recent fiscal years preceding the Board's actions, there were no
disagreements with Price Waterhouse LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to Price Waterhouse's satisfaction, would have caused
them to make reference to the subject matter of the disagreement in connection
with their report. Price Waterhouse's reports on the Company's financial
statements for such fiscal years did not contain any adverse opinion or
disclaimer of opinion, nor were such reports qualified in any respect.
Quarterly Common Stock Prices and Dividend payments
The Company's common stock trades on The Nasdaq Stock Market under the symbol
COLB. Price information generally appears daily in the Nasdaq National Market
Issues section of The Wall Street Journal and in most major Pacific Northwest
metropolitan newspapers. On December 31, 1997, the last sale price for the
Company's stock in the over-the-counter market was $27.
The Company presently intends to retain earnings to support antici-pated growth.
Accordingly, the Company does not intend to pay cash dividends on its common
stock in the foreseeable future. Please refer to the "Capital" section of the
"Management Discussion and Analysis of Financial Condition and Results of
Operations" and Note 3 to the consolidated financial statements, contained
elsewhere in this report, for regulatory capital requirements and restrictions
on dividends to shareholders.
Columbia Banking System ...................................MD&A
46
<PAGE>
The Company is aware that large blocks of its stock are held in street name by
brokerage firms. At December 31, 1997, the number of shareholders of record was
1,124.
The following are high and low sales prices as reported in The Nasdaq National
Market System according to information furnished by the National Association of
Securities Dealers. Prices do not include retail mark-ups, mark-downs or
commissions.
<TABLE>
<CAPTION>
high low
---- ---
<S> <C> <C>
1997
First quarter $18 1/4 $15 1/2
Second quarter 20 5/8 14 3/4
Third quarter 25 3/4 19 3/4
Fourth quarter 28 1/4 22 1/2
For the year 28 1/4 15 1/2
1996
First quarter $14 3/4 $11 1/8
Second quarter 16 1/2 13
Third quarter 16 14 1/4
Fourth quarter 17 1/4 14 1/2
For the year 17 1/4 11 1/8
</TABLE>
Columbia Banking System ...................................MD&A
47
<PAGE>
Report of Management
The consolidated financial statements have been prepared by management in
accordance with generally accepted accounting principles and include, where
necessary, amounts based on the best estimates and judgments of management. The
primary responsibility for the integrity of data in these financial statements
is that of management. The other financial information in the Annual Report is
consistent with that contained in the consolidated financial statements.
The consolidated financial statements for 1997 have been audited by Deloitte &
Touche LLP, the Company's independent auditors. In planning and performing
their audit, Deloitte & Touche LLP considered the Company's internal control
structure in order to determine their auditing procedures for the purpose of
expressing their opinion on the financial statements and not to provide
assurance on the internal control structure. Their consideration of the internal
control structure would not necessarily disclose all matters in the internal
control structure that might be material weaknesses under standards established
by the American Institute of Certified Public Accountants.
Management maintains an internal control structure which is deemed adequate to
provide reasonable assurance as to the reliability of financial records and the
protection of assets. In establishing the internal control structure,
management weighs the cost of control procedures against the benefits that it
believes can be derived. The Board of Directors monitors the internal control
structure through its Audit Committee. The membership of the Committee is
composed of directors who are not officers or employees of the Company. The
independent and internal auditors have free access to the Audit Committee, and
they meet with the Committee regularly, with and without management present, to
discuss accounting, auditing, internal controls and financial reporting matters.
In the opinion of management, the Company has a capable and aggressive internal
audit department which serves as an integral part of the internal control
structure.
(signatures)
/s/ W.W. Philip /s/ Gary R. Schminkey
W. W. Philip Gary R. Schminkey
Chairman, President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
Columbia Banking System
48
<PAGE>
Report of Independent Auditors
To the Board of Directors
and Shareholders of
Columbia Banking System, Inc.
We have audited the accompanying consolidated balance sheet of Columbia Banking
System, Inc. and its subsidiaries (the Company) as of December 31, 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly in all
material respects, the financial position of the Company at December 31, 1997,
and the results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements give retroactive effect to
the mergers of the Company and Cascade Bancorp, Inc. and the Company and Bank of
Fife, which have been accounted for as poolings of interests as described in
Note 2 to the consolidated financial statements.
The consolidated financial statements of the Company for the years ended
December 31, 1996 and 1995, prior to their restatement for the 1997 poolings of
interests were audited by other auditors whose report dated January 22, 1997,
expressed an unqualified opinion on those statements. The contribution of the
Company represented 81% and 80% of restated net interest income in 1996 and 1995
respectively, and 77% and 75% of restated net income in 1996 and 1995,
respectively. Separate financial statements of the other companies included in
the Company's restated consolidated financial statements for the years ended
December 31, 1996 and 1995, were audited and reported on separately by other
auditors. We have audited the combination of the accompanying consolidated
balance sheet as of December 31, 1996, and the related statements of operations,
shareholders' equity and cash flows for the years ended December 31, 1996 and
1995, after restatement for the 1997 poolings of interests; in our opinion, such
consolidated statements have been properly combined on the basis described in
Note 2 to the consolidated financial statements.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Seattle, Washington
January 30, 1998
49
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
In Thousands Except
Per Share Amounts
Years Ended December 31, 1997 1996 1995
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Interest income
Loans $56,176 $43,240 $36,013
Securities available for sale 3,800 2,360 705
Securities held to maturity 628 702 1,491
Deposits with banks 1,457 1,583 667
------- ------- -------
Total interest income 62,061 47,885 38,876
Interest expense
Deposits 24,775 20,370 16,369
FHLB advances 1,971 1,938 1,503
Other borrowings 84 233 302
------- ------- -------
Total interest expense 26,830 22,541 18,174
Net interest income 35,231 25,344 20,702
Provision for loan losses 4,726 1,635 1,382
------- ------- -------
Net interest income after
provision for loan losses 30,505 23,709 19,320
Noninterest income
Service charges and other fees 4,234 2,837 2,331
Mortgage banking 1,032 701 462
Losses on sales of securities
available for sale (8)
Gains on sales of loans, net 1,035 39
Other fees 2,973 2,772 1,942
Key Man Life Insurance 3,518
------- ------- -------
Total noninterest income 12,792 6,310 4,766
</TABLE>
Columbia Banking System Financial Statements
50
<PAGE>
<TABLE>
<CAPTION>
In Thousands
Except Per Share Amounts
Years Ended December 31, 1997 1996 1995
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
noninterest expense
Compensation and
employee benefits $13,329 $10,285 $ 8,889
Occupancy 4,488 4,248 3,501
Advertising and promotion 1,264 806 666
Data processing 1,544 1,222 1,013
Other 9,375 7,732 5,910
SAIF special assessment 612
Merger expenses 1,234
------- ------- -------
Total noninterest expense 31,234 24,905 19,979
------- ------- -------
Income before income taxes 12,063 5,114 4,107
Provision for income taxes 2,788 479 416
------- ------- -------
Net Income $ 9,275 $ 4,635 $ 3,691
======= ======= =======
Net income per common share:
Basic $1.41 $0.97 $0.86
Diluted 1.37 0.93 0.84
Average number of common
shares outstanding 6,583 4,794 4,307
Average number of diluted
common shares outstanding 6,777 4,931 4,385
</TABLE>
See accompanying notes to consolidated financial statements
Columbia Banking System Financial Statements
51
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
In Thousands
December 31, 1997 1996
- ------------ ---- ----
<S> <C> <C>
Assets
Cash and due from banks $ 47,604 $ 38,286
Interest-earning deposits with banks 28,108 44,972
Securities available for sale 56,279 52,044
Securities held to maturity 9,679 11,621
FHLB stock 5,144 4,599
Loans held for sale 4,377 11,341
Loans 685,889 523,151
Less: allowance for loan losses 8,440 5,282
-------- --------
Loans, net 677,449 517,869
Interest receivable 5,023 4,120
Premises and equipment, net 27,246 18,751
Real estate owned 231 484
Other 3,415 2,361
-------- --------
Total Assets $864,555 $706,448
======== ========
</TABLE>
Columbia Banking System Financial Statements
52
<PAGE>
<TABLE>
<CAPTION>
In Thousands
December 31, 1997 1996
- ------------ ---- ----
<S> <C> <C>
Liabilities and shareholders' equity
Deposits:
Noninterest-bearing $146,063 $101,401
Interest-bearing 594,367 495,103
-------- --------
Total deposits 740,430 596,504
Federal Home Loan Bank advances 39,000 34,000
Securities sold under agreements
to repurchase 2,126
Other liabilities 6,772 5,594
-------- --------
Total liabilities 786,202 638,224
Commitments and
contingent liabilities (Note 13)
Shareholders' equity:
Preferred stock (no par value)
Authorized, 2,000,000 shares;
none outstanding
December 31,
Common stock 1997 1996
(no par value)
Authorized shares 11,000 10,000
Issued and outstanding 6,587 6,248 67,901 62,980
Retained earnings 10,415 5,282
Unrealized gains (losses) on securities
available for sale, net of tax 37 (38)
-------- --------
Total shareholders' equity 78,353 68,224
-------- --------
Total Liabilities and Shareholders' Equity $864,555 $706,448
</TABLE>
See accompanying notes to consolidated financial statements
Columbia Banking System Financial Statements
53
<PAGE>
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock
Number
In Thousands of Shares Amount
- ------------ --------- ------
<S> <C> <C>
Balance at December 31, 1995 4,337 $37,414
Net income 4,635 4,635
Issuance of shares of common stock, net 1,492
Issuance of shares of common stock
5% stock dividend 164 2,157
Conversion of Convertible Subordinated Notes 255 2,509
Change in unrealized gains and (losses)
----- -------
Balance at December 31, 1996 6,248 62,980
Net income 9,275 9,275
Issuance of shares of common stock, net 78 779
Issuance of shares of common stock
5% stock dividend 261 4,142
Change in unrealized gains and (losses)
----- ------
Balance at December 31, 1997 6,587 $67,901
</TABLE>
Columbia Banking System Financial Statements
54
<PAGE>
<TABLE>
<CAPTION>
Unrealized Total
Retained Gains and Shareholders'
In Thousands earnings (losses) equity
- ------------ -------- ---------- -------------
<S> <C> <C> <C>
Balance at December 31, 1995 $ 2,804 $(98) $40,120
Net income
Issuance of shares of common stock, net 4,635 4,635
Issuance of shares of common stock 20,900
5% stock dividend (2,157)
Conversion of Convertible Subordinated Notes 2,509
Change in unrealized gains and (losses) 60 60
------- ---- --------
Balance at December 31, 1996 5,282 (38) 68,224
Net income
Issuance of shares of common stock, net 9,275 9,275
Issuance of shares of common stock 779
5% stock dividend (4,142)
Change in unrealized gains and (losses) 75 75
------- ---- -------
Balance at December 31, 1997 $10,415 $ 37 $78,353
</TABLE>
See accompanying notes to consolidated financial statements
Columbia Banking System Financial Statements
55
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
In Thousands 1997 1996 1995
- ------------ ---- ---- ----
<S> <C> <C> <C>
Operating Activities
Net income $9,275 $ 4,635 $3,691
Adjustments to reconcile
net income to net cash
provided (used) by
operating activities:
Provision for loan losses 4,726 1,635 1,382
Deferred income tax
expense (benefit) 956 (12) 48
Losses on real estate owned 105 41 29
Depreciation and amortization 2,189 2,681 1,589
Net realized losses (gains)
on sale of investments (971) 218 (53)
(Increase) decrease in
loans held for sale 6,964 (9,974) 245
Increase in interest receivable (903) (1,109) (881)
Increase in interest payable 528 423 554
Net changes in other assets
and liabilities (3,546) 208 1,344
-------- ------- ------
Net cash provided (used)
by operating activities 19,323 (1,254) 7,948
Investing activities
Proceeds from maturities of
securities available for sale 25,337 17,885 2,120
Proceeds from sales of
securities available for sale 5,980
Purchase of securities
available for sale (34,831) (46,770) (8,408)
Proceeds from maturities
of mortgage-backed
securities available for sale 3,814 1,682
Proceeds from maturities
of securities held to maturity 4,414 1,471 8,828
Purchases of securities
held to maturity (1,470) (3,014) (11,627)
Loans originated and acquired,
net of principal collected (173,877) (106,888) (104,477)
Proceeds from sales of loans 10,177 4,756
Purchases of premises
and equipment (11,043) (7,181) (7,000)
Proceeds from disposal of
premises and equipment 400 1,273 241
Proceeds from sale of
real estate owned 588 3,307 13
Other, net (83) (495) (119)
-------- -------- --------
Net cash used by
investing activities (176,574) (138,730) (109,693)
</TABLE>
Columbia Banking System Financial Statements
56
<PAGE>
<TABLE>
<CAPTION>
In Thousands 1997 1996 1995
- ------------ ---- ---- ----
<S> <C> <C> <C>
Net increase in deposits $143,926 $149,605 $111,027
Proceeds from FHLB advances
and other long-term debt 25,000 32,800 17,000
Repayment of FHLB advances
and other long-term debt (20,000) (23,800) (9,000)
Increase in securities sold under
repurchase agreements 1,366 179
Proceeds from issuance
of common stock, net 779 20,900 97
-------- -------- --------
Net cash provided
by financing activities 149,705 180,871 119,303
-------- -------- --------
Increase (decrease)
in cash and
cash equivalents (7,546) 40,887 17,558
Cash and cash equivalents
at beginning of period 83,258 42,371 24,813
-------- -------- --------
Cash and cash equivalents
at end of period $ 75,712 $ 83,258 $ 42,371
======== ======== ========
supplemental information
Cash paid for interest $26,302 $ 22,117 $ 17,620
Cash paid for income taxes 3,380 460 189
Transfer from securities
held to maturity
to available for sale 23,162
Transfer from securities
available for sale
to held to maturity 996
Loans foreclosed and transferred
to real estate owned 440 528
Issuance of common stock from
conversion of convertible
subordinated notes 2,509 40
</TABLE>
See accompanying notes to consolidated financial statements
Columbia Banking System Financial Statements
57
<PAGE>
Notes to Consolidated Financial Statements
Columbia Banking System, Inc. (the "Company") is a registered bank holding
company whose wholly owned subsidiary, Columbia State Bank ("Columbia Bank"),
conducts a full-service commercial banking business. Headquartered in Tacoma,
Washington, the Company provides a full range of commercial banking services to
small and medium-sized businesses, professionals and other individuals through
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.
Note 1. Summary of Significant Accounting Policies
The financial statements have been prepared in accordance with generally
accepted accounting principles. Accordingly, they include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments including normal recurring accruals necessary for a fair
presentation of results of operations for all periods included herein have been
made. The results of operations for the year ending December 31, 1997, are not
necessarily indicative of results to be anticipated for future periods.
Consolidation
The consolidated financial statements of the Company include the accounts of the
corporation and its wholly owned subsidiaries after the elimination of all
material intercompany transactions and accounts.
Accounting Treatment of Mergers
All mergers during the reported periods qualify for "pooling of interests"
accounting treatment. Under the pooling of interests method of accounting, the
historical basis of the assets, liabilities, and equity are combined and carried
forward at their previously recorded amounts. Income and other financial
statements after the mergers are restated retroactively as if the mergers had
taken place prior to the periods covered by such financial statements. No
recognition of goodwill arising from the mergers is required under the pooling
of interests accounting method.
Securities Available For Sale
Securities to be held for indefinite periods of time and not intended to be held
to maturity or on a long-term basis are classified as available for sale and
carried at market value. Unrealized gains and losses are recorded directly to a
component of shareholders' equity. Securities available for sale include
securities that management intends to use as part of its asset/liability
management strategy and that may be sold in response to changes in interest
rates and/or significant prepayment risk.
Securities Held to Maturity
Securities held to maturity are those securities which the Company has the
ability and intent to hold to maturity. Events which may be reasonably
anticipated are considered when determining the Company's intent to hold
investment securities until maturity. Investment securities are carried at
cost, adjusted for amortization of premiums and
Columbia Banking System Notes
58
<PAGE>
accretion of discounts using a method that approximates the interest method.
Gains and losses on the sale of all securities are determined using the specific
identification method.
Loans
Loans are stated at their principal amount outstanding, less any unamortized
discounts and deferred net loan fees. Loans held for sale are carried at the
lower of cost or market value. The amount by which cost exceeds market for
loans held for sale is accounted for as a valuation allowance, and changes in
the allowance are included in the determination of net income in the period in
which the change occurs.
The current policy of the Company generally is to discontinue the accrual of
interest on all loans past due 90 days or more and place them on nonaccrual
status.
The Bank evaluates commercial real estate and commercial business loans for
impairment on an individual basis. A loan is considered impaired when it is
probable that a creditor will be unable to collect all amounts due according to
the terms of the loan agreement. Factors involved in determining impairment
include, but are not limited to, the financial condition of the borrower, value
of the underlying collateral, and current economic conditions. The valuation of
impaired loans is based on either the present value of expected future cash
flows discounted at the loan's effective interest rate or at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. The amount by which the recorded investment in the loan
exceeds either the present value of expected future cash flows or the value of
the impaired loan's collateral when applicable, would be a specifically
allocated reserve for loan losses. Any portion of an impaired loan classified
as loss under regulatory guidelines is charged off.
Premiums or discounts on loans purchased and sold are amortized, using the
interest method, over periods which approximate the average life of the loans.
Loan Fee Income
Loan origination fees and certain direct loan origination costs are deferred and
the net amount recognized as an adjustment to yield over the contractual life of
the related loans. Costs related to origination of credit cards are expensed as
incurred. Fees related to lending activity other than the origination or
purchase of loans are recognized as noninterest income during the period the
related services are performed.
Allowance For Loan Losses
The allowance for loan losses is maintained at a level believed to be sufficient
to absorb potential losses in the portfolio. Management's determination of the
adequacy of the allowance is based on a number of factors, including the level
of nonperforming loans, loan loss experience, credit concentrations, a review of
the quality of the loan portfolio, collateral values and uncertainties in
economic conditions.
Premises and Equipment
Premises and equipment are recorded at cost and depreciated over the estimated
useful lives of the assets. Depreciation and amortization are computed using the
straight-line method. Gains or losses on dispositions are reflected in
operations. Expenditures for improvements and major renewals are capitalized,
and ordinary maintenance, repairs and small purchases are charged to operations
as incurred.
Columbia Banking System Notes
59
<PAGE>
Real Estate Owned
All real estate acquired in satisfaction of a loan is considered held for sale
and reported as "real estate owned." Real estate owned is carried at the lower
of cost or fair value less estimated cost of disposal. Cost at the time of
foreclosure is defined as the fair value of the asset less estimated disposal
costs.
Income Tax
The provision for income tax, generally, is based on income and expense reported
for financial statement purposes, using the "asset and liability method" for
accounting for deferred income tax. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A
valuation allowance is recorded against any deferred tax assets for which it is
more likely than not that the deferred tax asset will not be realized.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
No. 128"). This statement established standards for computing and presenting
earnings per share ("EPS"). The statement simplified the standards for
computing EPS and made them comparable to international EPS standards. It
replaced the presentation of primary EPS with a presentation of basic EPS.
Basic EPS is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period.
Diluted EPS reflected the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock. Diluted EPS is computed similarly to previously reported fully diluted
EPS. This statement required restatement of all prior period EPS data
presented.
The only reconciling item affecting the calculation of earnings per share is the
inclusion of stock options affecting the shares outstanding in diluted earnings
per share of 194,000, 137,000, and 78,000 in 1997,1996, and 1995 respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates are
used in determining the level of the allowance for loan losses, valuation
allowance on deferred tax assets, depreciation of premises and equipment and
others.
Columbia Banking System Notes
60
<PAGE>
Statement of Cash Flows
The accompanying consolidated statements of cash flows has been prepared using
the "indirect" method for presenting cash flows from operating activities. For
purposes of this statement, cash and cash equivalents include cash and due from
banks, interest-earning deposits with banks and federal funds sold.
Reclassification
Certain amounts in the 1996 and 1995 consolidated financial statements have been
reclassified to conform with the 1997 presentation. These reclassifications had
no effect on net income (loss).
Prospective Accounting Pronouncement
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). This statement provides
standards for reporting comprehensive, or all inclusive, income. In the
Company's case, based on current operations, it would include as an addition or
deduction to reported net income, the change in the securities valuation
reserve. This statement will not affect reported net income of the Company. SFAS
No. 130 will be effective in the Company's 1998 financial statements and will
require restatement of all prior periods shown on the financial statements.
Note 2. Business Combinations/Restructuring
On December 1, 1997, the Company merged with Cascade Bancorp, Inc. ("Cascade")
and Bank of Fife ("Fife"). At December 1, 1997, Cascade had assets of $90.3
million, deposits of $78.7 million and shareholders' equity of $6.8 million. At
December 1, 1997, Fife had assets of $34.0 million, deposits of $30.2 million
and shareholders' equity of $3.5 million. The Company issued 752,505 shares of
common stock to complete the merger with Cascade and 310,184 shares to complete
the merger with Fife. The mergers were treated as poolings of interests. The
financial information presented in this document reflects the pooling of
interests method of accounting for both mergers. Accordingly, under generally
accepted accounting principles, the assets, liabilities and shareholders' equity
of Cascade and Fife were recorded on the books of the resulting institution at
their values as reported on the books of Cascade and Fife immediately prior to
the consummation of the mergers. No goodwill was created in the mergers. This
presentation required the restatement of prior periods as if the companies had
been combined for all years presented.
The following information represents the results of operations of the Company,
Cascade and Fife for the nine months ended September 30, 1997. These results
are included in the results of operations for the year ended December 31, 1997,
presented in the accompanying consolidated statements of income.
<TABLE>
<CAPTION>
In Thousands
Nine Months Ended
September 30, 1997 The Company Cascade Fife Restated
- ------------------ ----------- ------- ------ --------
<S> <C> <C> <C> <C>
Net interest income
and other income $27,521 $3,439 $1,525 $32,485
Net income 4,812 510 471 5,793
</TABLE>
Columbia Banking System Notes
61
<PAGE>
The following information represents a reconciliation of revenue and net income
previously presented by the Company with the combined amounts presented in the
accompanying consolidated statements of income for the years ended December 31,
1996 and 1995.
<TABLE>
<CAPTION>
In Thousands
Year Ended December 31, 1996 The Company Cascade Fife Restated
- ---------------------------- ----------- ------- ------ --------
<S> <C> <C> <C> <C>
Net interest income
and other income $25,852 $4,095 $1,707 $31,654
Net income 3,577 618 440 4,635
<CAPTION>
In Thousands
Year Ended December 31, 1995 The Company Cascade Fife Restated
- ---------------------------- ----------- ------- ------ --------
<S> <C> <C> <C> <C>
Net interest income
and other income $20,552 $3,532 $1,384 $25,468
Net income 2,755 568 368 3,691
</TABLE>
Note 3. Restrictions on Subsidiary Cash, Loans and Dividends
Columbia Bank is required to maintain reserve balances with the Federal Reserve
Bank. The average required reserves for the year ended December 31, 1997, were
approximately $3.0 million. The required reserves are based on specified
percentages of the Bank's total average deposits, which are established by the
Federal Reserve Board.
Under Federal Reserve regulations, Columbia Bank, generally, is limited as to
the amount it may loan to the Company, to 10% of its capital stock and
additional paid-in capital. Such loans must be collateralized by specified
obligations.
Under Washington state banking regulations, Columbia Bank is limited as to the
ability to declare or pay dividends to the Company up to the amount of the
Columbia Bank's net profits then on hand, less any required transfers to
additional paid-in capital.
Columbia Banking System Notes
62
<PAGE>
Note 4. Securities
The following table summarizes the amortized cost, gross unrealized gains and
losses and the resulting market value of securities available for sale.
Securities Available For Sale
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
In Thousands Cost Gains Losses Value
- ------------ --------- ---------- ---------- ------
<S> <C> <C> <C> <C>
December 31, 1997
U.S. Treasury and
government agency $48,178 $ 78 $48,256
Mortgage-backed 7,046 $ (27) 7,019
Other securities 990 14 1,004
------- ---- ------ -------
Total $56,214 $ 92 $ (27) $56,279
======= ==== ====== =======
December 31, 1996
U.S. Treasury and
government agency $40,562 $104 $ (19) $40,647
Mortgage-backed 10,874 (114) 10,760
FHLMC preferred stock 250 8 258
Other securities 249 (3) 246
State and municipal securities 130 3 133
------- ---- ------ -------
Total $52,065 $115 $ (136) $52,044
======= ==== ====== =======
</TABLE>
There were no sales of securities available for sale during the year ended
December 31, 1997.
At December 31, 1997 and 1996, securities available for sale with a fair value
of $4.3 million and $10.9 million, respectively, were pledged to secure public
deposits and for other purposes as required or permitted by law.
The following table summarizes the amortized cost and market values of
securities available for sale by contractual maturity groups:
<TABLE>
<CAPTION>
In Thousands Amortized Market
December 31, 1997 Cost Value
- ----------------- --------- ------
<S> <C> <C>
Amount maturing:
Within one year $27,017 $27,001
Greater than one year and
less than five years 18,410 18,479
Greater than five years and
less than ten years 8,890 8,920
After ten years 1,897 1,879
------- -------
Total $56,214 $56,279
======= =======
</TABLE>
Columbia Banking System Notes
63
<PAGE>
The following table summarizes the amortized cost, gross unrealized gains and
losses and the resulting market value of securities held to maturity:
Securities Held To Maturity
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
In Thousands Cost Gains Losses Value
- ------------ --------- ---------- ---------- ------
<S> <C> <C> <C> <C>
December 31, 1997
U.S. Treasury and
government agency $ 4,743 $ 8 $ 4,751
State and municipal
securities 4,191 54 4,245
Other securities 495 6 501
FHLMC preferred stock 250 7 257
------- ---- -------
Total $ 9,679 $ 75 $ 9,754
======= ==== ======= =======
</TABLE>
The following table summarizes the amortized cost and market values of
securities held to maturity by contractual maturity groups:
<TABLE>
<CAPTION>
December 31, 1996
<S> <C> <C> <C> <C>
U.S. Treasury and
government agency $ 8,484 $ 15 $ (56) $ 8,443
State and municipal
securities 2,482 31 (2) 2,511
Other securities 655 1 656
------- ---- ----- -------
Total $11,621 $ 47 $ (58) $11,610
======= ==== ===== =======
</TABLE>
<TABLE>
<CAPTION>
Amortized Market
In Thousands Cost Value
- ------------ --------- ------
<S> <C> <C>
December 31, 1997
Amount maturing:
Within one year $ 1,706 $ 1,717
Greater than one year
and less than five years 5,945 5,986
Greater than five years
and less than ten years 2,028 2,051
After ten years
------- -------
Total $ 9,679 $ 9,754
======= =======
</TABLE>
There were no sales of securities held to maturity during the year ended
December 31, 1997.
Columbia Banking System Notes
64
<PAGE>
Note 5. Loans
The following is an analysis of the loan portfolio by major types of loans:
<TABLE>
<CAPTION>
In Thousands
December 31, 1997 1996
- ------------ ---- ----
<S> <C> <C>
Commercial business $270,946 $194,843
Real estate:
One- to four-family residential 71,095 77,359
Five or more family residential
and commercial properties 206,628 151,179
-------- --------
Total real estate 277,723 228,538
Real estate construction:
One- to four-family residential 29,695 31,446
Five or more family residential
and commercial properties 33,806 10,724
-------- --------
Total real estate construction 63,501 42,170
Consumer 74,710 58,249
-------- --------
Subtotal 686,880 523,800
Less deferred loan fees, net and other (991) (649)
Total loans $685,889 $523,151
======== ========
Loans held for sale $ 4,377 $ 11,341
======== ========
</TABLE>
At December 31, 1997 and 1996, residential real estate loans with recorded
values of $46.8 million and $40.8 million, respectively, were pledged to secure
Federal Home Loan Bank ("FHLB") advances and for other purposes. The following
table summarizes certain information related to nonperforming loans:
<TABLE>
<CAPTION>
In Thousands
December 31, 1997 1996 1995
- ------------ ---- ---- ----
<S> <C> <C> <C>
Loans accounted for on
a nonaccrual basis $1,462 $2,256 $ 449
Restructured loans 20 25 29
Total nonperforming loans $1,482 $2,281 $ 478
====== ====== =====
Originally contracted interest $ 68 $ 219 $ 49
Recorded interest 12 102 38
Reduction in interest income $ 56 $ 117 $ 11
====== ====== =====
</TABLE>
At December 31, 1997 and 1996, the recorded investment in impaired loans was
$728,000 and $385,000, respectively. No specific allocated allowance for loan
losses has been made for impaired loans. The average recorded investment in
impaired loans for the periods ended December 31, 1997 and 1996 was $570,000 and
$504,000, respectively.
Columbia Banking System Notes
65
<PAGE>
At December 31, 1997 and 1996, there were no commitments for additional funds
for loans accounted for on a nonaccrual basis.
At December 31, 1997 and 1996, the Company had no foreign loans.
The Company's banking subsidiary has granted loans to officers and directors of
the Company and their associates. These loans are made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with unrelated persons and do not involve more
than the normal risk of collectibility. The aggregate dollar amount of these
loans was $5.9 million and $7.1 million at December 31, 1997 and 1996,
respectively. During 1997, $2.6 million of new related party loans were made,
and repayments and transfers totaled $3.8 million.
Note 6. Allowance For Loan Losses
Transactions in the allowance for loan losses are summarized as
follows:
<TABLE>
<CAPTION>
In Thousands
Years Ended December 31, 1997 1996 1995
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $ 5,282 $4,340 $3,175
Loans charged off (1,659) (720) (267)
Recoveries 91 27 50
------- ------ ------
Net charge-offs (1,568) (693) (217)
Provision charged to
operating expense 4,726 1,635 1,382
------- ------ ------
Balance at end of period $ 8,440 $5,282 $4,340
======= ====== ======
</TABLE>
Note 7. Premises and Equipment
Land, buildings, and furniture and equipment, less accumulated
depreciation and amortization, were as follows:
<TABLE>
<CAPTION>
In Thousands
December 31, 1997 1996
- ------------ ---- ----
<S> <C> <C>
Land $ 5,452 $ 3,282
Buildings 17,762 10,731
Leasehold improvements 1,424 2,303
Furniture and equipment 9,303 8,087
Automobiles 118 140
Computer software 1,360 743
------- -------
Total cost 35,419 25,286
Less accumulated depreciation and amortization (8,173) (6,535)
------- -------
Total $27,246 $18,751
======= =======
</TABLE>
Columbia Banking System Notes
66
<PAGE>
Total depreciation and amortization expense on buildings and furniture and
equipment was $2.1 million, $2.1 million, and $1.9 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
The Company is obligated under various noncancellable lease agreements for
property and equipment (primarily for land and buildings) which require future
minimum rental payments, exclusive of taxes and other charges, as follows:
<TABLE>
<CAPTION>
In Thousands
Years Ending December 31,
- -------------------------
<S> <C>
1998 $1,187
1999 1,024
2000 746
2001 483
2002 371
2003 and thereafter 2,627
------
Total minimum payments $6,438
======
</TABLE>
Total rental expense on buildings and equipment was $1.2 million for each of the
years ended December 31, 1997, 1996 and 1995, respectively.
Note 8. Federal Home Loan Bank Advances and Long-Term Debt
The Company had FHLB advances of $39.0 million and $34.0 million at December 31,
1997 and 1996, respectively.
FHLB advances are at the following interest rates:
<TABLE>
<CAPTION>
In Thousands
December 31, 1997 1996
- ------------ ---- ----
<S> <C> <C>
6.14% $ 2,000 $12,000
6.07 2,000
5.79 2,000
5.45 10,000
5.39 25,000
5.32 5,000 5,000
5.20 5,000 5,000
------- -------
Total $39,000 $34,000
======= =======
</TABLE>
Columbia Banking System Notes
67
<PAGE>
Aggregate maturities of FHLB advances due in years ending after
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
In Thousands Amount
- ------------ ------
<S> <C>
1998 $12,000
2000 2,000
2002 25,000
-------
Total $39,000
=======
</TABLE>
FHLB advances are collateralized by residential real estate loans with a
recorded value of approximately $46.8 million at December 31, 1997, and $40.8
million at December 31, 1996 (see Note 5). Penalties are generally required for
prepayments of certain long-term FHLB advances.
Note 9. Income Tax
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
In Thousands
Years Ended December 31, 1997 1996 1995
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Current $ 4,258 $ 491 $ 368
Deferred (benefit) (1,470) (12) 48
------- ----- -----
Total $ 2,788 $ 479 $ 416
======= ===== =====
</TABLE>
Significant components of the Company's deferred tax assets and liabilities at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
In Thousands
December 31, 1997 1996
- ------------ ---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 2,914 $1,724
Other 177
Total deferred tax assets 2,914 1,901
Less: valuation allowance (768)
------- ------
Subtotal 2,914 1,133
Deferred tax liabilities:
FHLB stock dividends (775) (657)
Depreciation (157) (111)
Other (260) (261)
------- ------
Total deferred tax liabilities (1,192) 1,029
------- ------
Net deferred tax assets $ 1,722 $ 104
======= ======
</TABLE>
Columbia Banking System Notes
68
<PAGE>
A reconciliation of the Company's effective income tax rate with the federal
statutory tax rate is as follows:
<TABLE>
<CAPTION>
In Thousands 1997 1996 1995
years ended December 31, amount percent amount percent amount percent
- ------------------------ ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Income tax based on
statutory rate $ 4,101 34% $ 1,739 34% $1,396 34%
Increase (reduction)
resulting from:
Tax-exempt income (1,252) (10) (40) (1) (30) (1)
Other nondeductible
items 707 5 23 24 1
Valuation allowance (768) (6) (1,243) (24) (974) (24)
------- --- ------- --- ------ ---
Income tax $ 2,788 23% $ 479 9% $ 416 10%
======= === ======= === ====== ===
</TABLE>
Note 10. Stock Options and Warrants
The Company has an employee stock option plan ("the Plan") to provide additional
incentives to key employees, thereby helping to attract and retain the best
available personnel. The Company applies Accounting Principles Board ("APB")
Opinion No. 25 and related interpretations in accounting for the Plan.
Accordingly, no compensation cost has been recognized for the Plan.
At December 31, 1997 and 1996, the Company had stock options outstanding of
348,149 shares and 336,385 shares, respectively, for the purchase of common
stock at options prices ranging from $3.63 to $27.00 per share. The Company's
policy is to recognize compensation expense at the date the options were granted
due to the difference, if any, between the then market value of the Company's
common stock and the stated option price. At December 31, 1997, a maximum of
593,250 shares were authorized under the stock option plan.
Additionally, at December 31, 1997 and 1996, the Company had options outstanding
granted to a company controlled by a director (now controlled by the estate of
that director) for the purchase of 38,133 and 14,551 shares of common stock at
exercise prices of approximately $5.86 and $8.39 per share, respectively. These
options are generally exercisable in whole or in part at any time before
September 26, 2000.
At December 31, 1996 and 1995, the Company had stock warrants outstanding to
purchase 19,651 shares of common stock at $9.66 per share. These warrants were
exercised on April 16, 1997, and at December 31, 1997, there were no stock
warrants outstanding.
Columbia Banking System Notes
69
<PAGE>
The following table outlines the stock option activity for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Weighted
Number of Average Price of
Option Shares Option Shares
------------- ----------------
<S> <C> <C>
Balance at December 31, 1994 349,874 $ 7.96
Issued 15,988 9.32
Exercised (8,000) 2.50
Terminated (6,250) 11.35
------- ------
Balance at December 31, 1995 351,612 8.08
Issued 82,401 14.90
Exercised (18,530) 4.13
Terminated (6,763) 10.47
------- ------
Balance at December 31, 1996 408,720 9.60
Issued 62,820 17.39
Exercised (70,182) 8.02
Terminated (525) 9.29
------- ------
Balance at December 31, 1997 400,833 11.10
======= ======
Total Vested at December 31, 1997 280,974 $9.48
======= ======
</TABLE>
Financial data pertaining to outstanding stock options were as follows:
<TABLE>
<CAPTION>
December 31, 1997
Weighted Average
Weighted Average Exercise
Weighted Average Exercise Number of Price of
Ranges of Number of Remaining Price of Exercisable Exercisable
Exercise Prices Option Shares Contractual Life Option Shares Option Shares Option Shares
--------------- ------------- ---------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$2.50 - $ 3.63 23,098 0.6 years $ 3.63 23,098 $ 3.63
5.51 - 8.05 61,490 3.2 years 5.81 61,490 5.81
8.39 - 11.96 198,694 4.7 years 10.07 173,886 10.04
12.75 - 18.33 95,051 8.3 years 15.47 31,500 16.43
20.24 - 27.00 22,500 8.5 years 23.85 22,500 23.85
- --------------- ------- --------- ------ ------- ------
400,833 5.3 years $11.10 312,474 $10.37
======= ========= ====== ======= ======
</TABLE>
Columbia Banking System Notes
70
<PAGE>
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based
Compensation." The statement requires expanded disclosures of stock-based
compensation arrangements with employees. Under SFAS No. 123, companies may
continue to follow the rules, as outlined in APB Opinion No. 25, but are now
required to disclose the pro forma amounts of net income and earnings per share
that would have been reported had the company elected to follow the fair value
provisions of SFAS No. 123. Had compensation cost for the Company's Plan been
determined based on the fair value at the grant dates consistent with SFAS No.
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
In Thousands Except Per Share
Year Ended December 31, 1997 1996 1995
- ----------------------------- ---- ---- ----
<S> <C> <C> <C>
Net income attributable
to common stock:
As reported $9,275 $4,635 $3,691
Pro forma 9,163 4,601 3,683
Net income per common share:
Basic:
As reported $1.41 $0.97 $0.86
Pro forma 1.39 0.96 0.86
Diluted:
As reported $1.37 $0.93 $0.84
Pro forma 1.35 0.93 0.84
</TABLE>
The fair value of options granted under the Company's stock option plan is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 1997, 1996 and
1995; expected volatility of 36.95% in 1997, 40.11% in 1996 and 45.69% in 1995;
risk-free rates of 5.56% for 1997, 6.00% for 1996 and 5.28% for 1995; no annual
dividend yields; and expected lives of five years for all years.
Note 11. Regulatory Capital Requirements
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory practices. The Company's capital amounts and classification are also
subject to qualitative judgement by the regulators about components, risk
weightings, and other factors.
Columbia Banking System Notes
71
<PAGE>
The FDIC has established minimum amounts and ratios of total and Tier 1 capital
to risk-weighted assets, and of Tier 1 capital to average assets. The
regulations set forth the definitions of capital, risk-weighted and average
assets. Management believes, as of December 31, 1997, that the Bank meets all
capital adequacy requirements. The Bank's actual capital amounts and ratios are
as follows:
<TABLE>
<CAPTION>
Adequately Well
Actual Capitalized Capitalized
As of December 31, 1997 Amount Ratio Amount Ratio Amount Ratio
- ----------------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) $86,629 11.9% $58,073 8.0% $72,591 10.0%
Tier 1 capital
(to risk-weighted assets) 78,189 10.8 29,036 4.0 43,555 6.0
Tier 1 capital
(to average assets) 78,189 9.3 33,504 4.0 41,880 5.0
As of December 31, 1996
Total capital
(to risk-weighted assets) $73,410 13.5% $43,559 8.0% $54,448 10.0%
Tier 1 capital
(to risk-weighted assets) 68,128 12.5 21,779 4.0 32,669 6.0
Tier 1 capital
(to average assets) 68,128 10.2 26,783 4.0 33,477 5.0
</TABLE>
Note 12. Employee Benefit Plan
The Company maintains a defined contribution plan which allows employees to
contribute up to 15% of their compensation to the plan. Employees who are at
least 201/2 years of age and have completed six months of service are eligible
to participate in the plan. The Company is required to match 50% of employee
contributions up to 3% of each employee's total compensation. The Company
contributed approximately $211,000, $153,000 and $126,000 in matching funds to
the plan during the years ended December 31, 1997, 1996 and 1995, respectively.
The Company's amended defined contribution plan provides for a nonmatching,
discretionary contribution as determined annually by the Board of Directors of
the Company. In January 1998 and 1997, the Company announced discretionary
contributions of approximately $439,000 and $358,000 for the years ended 1997
and 1996, respectively.
Columbia Banking System Notes
72
<PAGE>
The Company maintains an Employee Stock Purchase Plan ("ESPP"). Substantially
all employees of the Company who have been continuously employed for six months
are eligible to participate in the ESPP under which common stock is issued at
quarterly intervals for cash at a price of 90% of the fair market value of the
stock. Under the ESPP, 8,411 shares were acquired by employees for $153,000 in
1997. There is no charge to income as a result of issuance of stock under this
plan. The discount offered to employees approximates the cost of raising
capital and does not have a material effect on net income and earnings per
share. At December 31, 1997, shares of common stock were reserved for issuance
under this plan.
Note 13. Commitments and Contingent Liabilities
An employment agreement with A. G. Espe (Chairman and Chief Executive Officer
until his death in November 1997) originally provided for an annual salary of
$150,000 in 1994 through 1996. As part of the agreement, the Company provides a
Supplementary Employee Retirement Plan ("SERP") based on a contribution of 10%
of total compensation per year and earnings at a stated rate on that amount.
The agreement was amended, effective January 1, 1997, to extend the term to
December 31, 2001, and to establish the minimum salary at $160,000. Also, an
employment agreement with Mr. W. W. Philip (Chairman, President and Chief
Executive Officer) was amended, effective January 1, 1997, to extend the term to
December 31, 1998, and to establish his minimum annual salary at $175,000, and
was further amended after the death of Mr. Espe in November 1997, to extend the
term to December 1, 1999, and to establish his minimum salary at $225,000.
In 1993, Messrs. Espe and Philip, each purchased 30,000 shares of the Company's
common stock at the fair value of $12.00 per share at the date of purchase. The
purchase of stock was financed by the Company with annual interest-only payable
at 6% and principal due in April and July 2000. The loan to Mr. Espe was paid
in full by his estate in December 1997.
Columbia Banking System Notes
73
<PAGE>
The Company had Long Term Incentive Plan Awards with Messrs. Espe and Philip.
Under the arrangements, specific compensation and allowance payments were agreed
to be made for work performed since 1993 if the Company achieved certain
performance objectives by December 31, 1996. At December 31, 1996, the terms of
the incentive plan were fulfilled, and in January 1997, $706,000 was paid under
the terms of the plan.
In the normal course of business, the Company makes loan commitments (unfunded
loans and unused lines of credit) and issues standby letters of credit to
accommodate the financial needs of its customers. Standby letters of credit
commit the Company to make payments on behalf of customers under specified
conditions. Historically, no significant losses have been incurred by the
Company under standby letters of credit. Both arrangements have credit risk
essentially the same as that involved in extending loans to customers and are
subject to the Company's normal credit policies, including the obtaining of
collateral, where appropriate. At December 31, 1997 and 1996, the Company's
loan commitments amounted to $206.3 million and $138.9 million, respectively.
Standby letters of credit were $6.1 million and $1.7 million at December 31,
1997 and 1996, respectively. In addition, commitments under commercial letters
of credit used to facilitate customers' trade transactions amounted to $3.1
million and $2.5 million at December 31, 1997 and 1996, respectively.
The Company and its subsidiaries are from time to time defendants in and are
threatened with various legal proceedings arising from their regular business
activities. Management, after consulting with legal counsel, is of the opinion
that the ultimate liability, if any, resulting from these and other pending or
threatened actions and proceedings will not have a material effect on the
financial position or results of operations of the Company and its subsidiaries.
Columbia Banking System Notes
74
<PAGE>
Note 14. Fair Value of Financial Instruments
The FASB's SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
("SFAS No. 107"), requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. Fair value is defined in SFAS No. 107 as
the amount at which an instrument could be exchanged in a current transaction
between willing parties, other than a forced or liquidation sale. The following
table summarizes carrying amounts and estimated fair values of selected
financial instruments as well as assumptions used by the Company in estimating
fair value:
<TABLE>
<CAPTION>
Assumptions Used 1997 1996
In Thousands In Estimating Carrying Fair Carrying Fair
December 31, Fair Value Amount Value Amount Value
- ------------ ---------------- -------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Assets
Cash and due Approximately
from banks equal to
carrying value $47,604 $ 47,604 $ 38,286 $ 38,286
Interest-
earning Approximately
deposits equal to
with banks carrying value 28,108 28,108 44,972 44,972
Securities
available Quoted
for sale market prices 61,423 61,423 56,643 56,643
Securities
held Quoted
for sale market prices 9,679 9,754 11,621 11,610
Loans held Approximately
for sale equal to
carrying value 4,377 4,377 11,341 11,341
Loans Discounted expected
future cash flows,
net of allowance
for loan losses 677,449 739,687 517,869 530,604
Liabilities
Deposits Fixed-rate
certificates
of deposit:
Discounted
expected future
cash flows
All other deposits:
Approximately equal
to carrying value $740,430 $740,803 $596,504 $592,488
Federal Home Discounted
Loan Bank expected future
advances cash flows 39,000 39,032 34,000 33,362
Other borrowings 2,126 2,126
</TABLE>
Columbia Banking System Notes
75
<PAGE>
Off-Balance-Sheet Financial Instruments
The fair value of commitments is estimated based upon fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For fixed
rate commitments, the fair value estimation takes into consideration an interest
rate risk factor. The fair value of guarantees and letters of credit is based
on fees currently charged for similar agreements. The fair value of these off-
balance sheet items at December 31, 1997, approximates the recorded amounts of
the related fees.
Note 15. 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 for all periods presented have been retroactively
adjusted to give effect to this transaction.
On April 24, 1996, the Company announced a 5% stock dividend payable on May 22,
1996, to shareholders of record on May 8, 1996. On May 22, 1996, 164,051 common
shares were issued to shareholders. Average shares outstanding, net income per
share and book value per share for all periods presented have been retroactively
adjusted to give effect to this transaction.
Note 16. SAIF Special Assessment
Columbia Bank's deposits are insured by the FDIC through the Bank Insurance Fund
and through the Savings Association Insurance Fund (the "SAIF"). SAIF-insured
deposits of Columbia Bank are a result of a so-called Oakar transaction in which
deposits were acquired from a savings bank. Legislation was enacted in 1996 for
the purpose of recapitalizing the SAIF fund. The legislation required a special
assessment on SAIF-insured deposits of approximately 65.7 cents per $100 of
insured deposits at March 31, 1995 (SAIF deposits then $116.5 million) with a
discount of 20% on the special assessment of Oakar institutions, such as
Columbia Bank, which meet certain tests. The one-time special assessment of
$612,000, which was tax deductible, was recognized in third quarter 1996
earnings.
Columbia Banking System Notes
76
<PAGE>
Note 17. Parent Company Financial Information
Condensed Balance Sheets
Parent Company Only
<TABLE>
<CAPTION>
In Thousands
December 31, 1997 1996
- ------------ ---- ----
<S> <C> <C>
Assets
Cash and due from banks:
Subsidiary banks $ 479 $ 6
Unrelated banks
Interest-earning deposits with banks:
Subsidiary banks
Unrelated banks 1,878 4,021
Securities available for sale 6,794 4,007
Loans 360 720
Investments in bank subsidiaries 68,785 59,215
Premises and equipment, net 11 28
Real estate owned
Other assets 256 429
------- -------
Total assets $78,563 $68,426
======= =======
Liabilities and shareholders' equity
Other liabilities $ 210 $ 202
Borrowed funds
Convertible subordinated notes
------- -------
Total liabilities 210 202
Shareholders' equity 78,353 68,224
------- -------
Total liabilities and
shareholders' equity $78,563 $68,426
======= =======
</TABLE>
Columbia Banking System Notes
77
<PAGE>
Condensed Statements of Operations
Parent Company Only
<TABLE>
<CAPTION>
In Thousands
Years Ended December 31, 1997 1996 1995
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Income
Interest on loans $ 44 $ 48 $ 54
Interest on securities
available for sale 322 20
Interest-earning deposits:
Subsidiary banks 6
Unrelated banks 177 53 16
Other 3,518 55 533
------ ------ ------
Total income 4,061 176 609
Expense
Compensation and
employee benefits 313 346 341
Interest 204 377
Other 330 309 612
------ ------ ------
Total expenses 643 859 1,330
====== ====== ======
Income (loss) before income
tax benefit and equity in
undistributed net income
of subsidiaries 3,418 (683) (721)
Income tax benefit 14
------ ------ ------
Income (loss) before equity
in undistributed net
income of subsidiaries 3,432 (683) (721)
Equity in undistributed net
income of subsidiaries 5,843 5,318 4,412
------ ------ ------
Net Income $9,275 $4,635 $3,691
====== ====== ======
</TABLE>
Columbia Banking System Notes
78
<PAGE>
Condensed Statements of Cash Flows
Parent Company Only
<TABLE>
<CAPTION>
In Thousands
Years Ended December 31, 1997 1996 1995
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Operating Activities
Net income $ 9,275 $ 4,635 $ 3,691
Adjustments to reconcile net income
to net cash provided (used)
by operating activities:
Equity in undistributed earnings
of subsidiaries (5,843) (5,318) (4,412)
Loss on sale of real estate owned 41
Provision for depreciation
and amortization 31 35 34
Net changes in other assets and
liabilities 181 (140) 2,698
------- ------- ------
Net cash provided (used) by
operating activities 3,644 (747) 2,011
Investing Activities
Purchase of securities available for sale (9,792) (4,000)
Proceeds from maturities of
securities available for sale 7,000
Loans originated or acquired,
net of principal collected 360 134
Contribution of capital - bank subsidiaries (3,500) (16,800) (3,100)
Return of capital to parent 3,800
Proceeds from sale of real estate owned 3,263
Other, net (161)
------ ------- ------
Net cash provided (used) by
investing activities (6,093) (13,603) (3,100)
Financing Activities
Proceeds from other borrowings 7,000
Repayment of other borrowings (9,600)
Proceeds from issuance of common stock 779 20,868 103
------ ------- ------
Net cash provided by financing activities 779 18,268 103
Increase (decrease) in cash
and cash equivalents (1,670) 3,918 (986)
Cash and cash equivalents
at beginning of period 4,027 109 1,095
------ ------- ------
Cash and cash equivalents at
end of period $ 2,357 $ 4,027 $ 109
======= ======== =======
Supplemental information:
Cash paid for interest $ 204 $ 377
Issuance of common stock from
conversion of convertible
subordinated notes 2,509 40
</TABLE>
Columbia Banking System Notes
79
<PAGE>
Note 18. Summary of Quarterly Financial Information - Unaudited
The results of operations on a quarterly basis have been restated to give effect
to the business combinations with Cascade and Fife. Results of operations on a
quarterly basis were as follows for the years 1997 and 1996.
<TABLE>
<CAPTION>
Year Ended December 31, 1997
In Thousands, First Quarter
Except Per Share Amounts The Company Cascade Fife Restated
- ---------------------------- ----------- ------- ------ --------
<S> <C> <C> <C> <C>
1997
Total interest income $11,353 $1,663 $ 712 $13,728
Total interest expense 5,079 759 305 6,143
------- ------ ------ -------
Net interest income 6,274 904 407 7,585
Provision for loan losses 400 34 15 449
Noninterest income 1,490 179 50 1,719
Noninterest expense 5,885 791 228 6,904
------- ------ ------ -------
Income before income tax 1,479 258 214 1,951
Provision for income tax 426 77 71 574
------- ------ ------ -------
Net income $ 1,053 $ 181 $ 143 $ 1,377
======= ====== ====== =======
Per share:
Net income/1/ $ 0.20 $ 0.22
======= =======
<CAPTION>
Year Ended December 31, 1997
In Thousands, Third Quarter
Except Per Share Amounts The Company Cascade Fife Restated
- ---------------------------- ----------- ------- ------ --------
<S> <C> <C> <C> <C>
1997
Total interest income $13,701 $1,811 $ 810 $16,322
Total interest expense 5,843 793 331 6,967
------- ------ ------ -------
Net Interest Income 7,858 1,018 479 9,355
Provision for loan losses 499 83 582
Noninterest income 1,814 175 64 2,053
Noninterest expense 6,339 913 355 7,607
------- ------ ------ -------
Income before income tax 2,834 197 188 3,219
Provision for income tax 908 60 13 981
------- ------ ------ -------
Net income $ 1,926 $ 137 $ 175 $ 2,238
======= ====== ====== =======
Per share:
Net income/1/ $ 0.35 $ 0.34
======= =======
</TABLE>
/1/ Net income per share has been restated to reflect the adoption of SFAS No.
128.
Columbia Banking System Notes
80
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
In Thousands, Second Quarter
Except Per Share Amounts The Company Cascade Fife Restated
- ---------------------------- ----------- ------- ------ --------
<S> <C> <C> <C> <C>
1997
Total interest income $12,675 $ 1,715 $ 793 $15,183
Total interest expense 5,425 762 318 6,505
------- ------- ----- -------
Net interest income 7,250 953 475 8,678
Provision for loan losses 1,206 36 17 1,259
Noninterest income 2,835 210 50 3,095
Noninterest expense 6,278 863 277 7,418
------- ------- ----- -------
Income before income tax 2,601 264 231 3,096
Provision for income tax 768 72 78 918
------- ------- ----- -------
Net income $ 1,833 $ 192 $ 153 $ 2,178
======= ======= ===== =======
Per share:
Net income/1/ $ 0.33 $ 0.33
======= =======
</TABLE>
year ended December 31, 1997
in thousands, third quarter fourth quarter
except per share amounts the company cascade fife restated the company
<TABLE>
<CAPTION>
Year Ended December 31, 1997
In Thousands, Fourth Quarter
Except Per Share Amounts The Company
- ---------------------------- -----------
<S> <C>
1997
Total interest income $16,828
Total interest expense 7,215
-------
Net interest income 9,613
Provision for loan losses 2,436
Noninterest income 5,925
Noninterest expense 9,305
-------
Income before income tax 3,797
Provision for income tax 315
-------
Net income $ 3,482
=======
Per share:
Net income/1/ $ 0.53
=======
</TABLE>
Columbia Banking System Notes
81
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
In Thousands, First Quarter
Except Per Share Amounts The Company Cascade Fife Restated
- ---------------------------- ----------- ------- ------ --------
<S> <C> <C> <C> <C>
1996
Total interest income $ 8,786 $ 1,454 $ 637 $10,877
Total interest expense 4,296 666 268 5,230
------- ------- ------ -------
Net interest income 4,490 788 369 5,647
Provision for loan losses 330 30 10 370
Noninterest income 1,165 203 30 1,398
Noninterest expense 4,517 725 190 5,432
------- ------- ------ -------
Income before income tax 808 236 199 1,243
Provision for income tax 74 68 142
------- ------- ------ -------
Net income $ 808 $ 162 $ 131 $ 1,101
======= ======= ====== =======
Per share:
Net income/1/ $ 0.25 $ 0.25
======= =======
<CAPTION>
Year Ended December 31, 1996
In Thousands, Third Quarter
Except Per Share Amounts The Company Cascade Fife Restated
- ---------------------------- ----------- ------- ------ --------
<S> <C> <C> <C> <C>
1996
Total interest income $10,041 $ 1,547 $ 698 $12,286
Total interest expense 4,780 746 300 5,826
------- ------- ------ -------
Net interest income 5,261 801 398 6,460
Provision for loan losses 330 31 20 381
Noninterest income 1,390 227 36 1,653
Noninterest expense 5,838 802 229 6,869
------ ------- ------ -------
Income before income tax 483 195 185 863
Provision for income tax 58 59 117
------ ------- ------ -------
Net income $ 483 $ 137 $ 126 $ 746
====== ======= ====== =======
Per share:
Net income/1/ $ 0.14 $ 0.16
====== =======
</TABLE>
/1/ Net income per share has been restated to reflect the adoption of SFAS No.
128.
Columbia Banking System Notes
82
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
In Thousands, Second Quarter
Except Per Share Amounts The Company Cascade Fife Restated
- ---------------------------- ----------- ------- ------ --------
<S> <C> <C> <C> <C>
1996
Total interest income $ 9,311 $ 1,468 $ 631 $11,410
Total interest expense 4,306 689 266 5,261
------- ------- ------ -------
Net interest income 5,005 779 365 6,149
Provision for loan losses 430 36 7 473
Noninterest income 1,308 209 31 1,548
Noninterest expense 4,851 805 200 5,856
------- ------- ------ -------
Income before income tax 1,032 147 189 1,368
Provision for income tax 41 62 103
Net income $ 1,032 $106 $ 127 $ 1,265
======= ======= ====== =======
Per share:
Net income/1/ $ 0.30 $ 0.28
======= =======
<CAPTION>
Year Ended December 31, 1996
In Thousands, Fourth Quarter
Except Per Share Amounts The Company Cascade Fife Restated
- ---------------------------- ----------- ------- ------ --------
<S> <C> <C> <C> <C>
Total interest income $10,924 $ 1,645 $ 743 $13,312
Total interest expense 5,136 768 320 6,224
------- ------- ------ -------
Net interest income 5,788 877 423 7,088
Provision for loan losses 330 22 59 411
Noninterest income 1,445 211 55 1,711
Noninterest expense 5,649 759 340 6,748
------- ------- ------ -------
Income before income tax 1,254 307 79 1,640
Provision for income tax 94 23 117
------- ------- ------ -------
Net income $ 1,254 $ 213 $ 56 $ 1,523
======= ======= ====== =======
Per share:
Net income/1/ $ 0.28 $ 0.28
======= =======
</TABLE>
Columbia Banking System Notes
83
<PAGE>
Consolidated Five-Year Statements of Operations/1/
<TABLE>
<CAPTION>
Dollars In Thousands,
Except Per Share Amounts
Years Ended December 31, 1997 1996 1995 1994 1993
- ------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest Income
Loans $56,176 $43,240 $36,013 $23,199 $15,299
Securities held to
maturity 628 702 1,491 1,547 1,325
Securities available
for sale 3,800 2,360 705 319 232
Deposits with banks 1,457 1,583 667 650 642
------- ------- ------ ------- -------
Total interest income 62,061 47,885 38,876 25,715 17,498
Interest expense
Deposits 24,775 20,370 16,369 9,121 6,205
Federal Home Loan
Bank advances 1,971 1,938 1,503 1,160 1,788
Other borrowings 84 233 302 625 876
------- ------- ------- ------- -------
Total interest expense 26,830 22,541 18,174 10,906 8,869
======= ======= ======= ======= =======
Net interest income 35,231 25,344 20,702 14,809 8,629
Provision for loan losses 4,726 1,635 1,382 1,107 635
------- ------- ------- ------- -------
Net interest income
after provision
for loan losses 30,505 23,709 19,320 13,702 7,994
Noninterest income 9,274 6,310 4,766 3,530 2,548
Key Man Life
Insurance proceeds 3,518
Noninterest expense 30,000 24,293 19,979 17,061 12,878
SAIF special assessment 612
Merger expenses 1,234
------- ------- ------- ------- -------
Noninterest expense 31,234 24,905 19,979 17,061 12,878
======= ======= ======= ======= =======
Income (loss) from
continuing operations
before income tax 12,063 5,114 4,107 171 (2,336)
Provision for income tax 2,788 479 416 156 98
------- ------- ------- ------- -------
Income (loss) from
continuing operations 9,275 4,635 3,691 15 (2,434)
Extraordinary loss on
extinguishment
of debt, net (154)
Cumulative effect of
accounting change 252
------- ------- ------- ------- -------
Net income (loss) $ 9,275 $ 4,635 $ 3,691 $ (139) $(2,182)
======= ======= ======= ======= =======
</TABLE>
Columbia Banking System Notes
84
<PAGE>
<TABLE>
<CAPTION>
Dollars In Thousands,
Except Per Share Amounts
Years Ended December 31, 1997 1996 1995 1994 1993
- ------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest Income
Net Income Per
Common Share:
Income (loss) from
continuing
operations $ 1.41 $ 0.97 $ 0.86 $ 0.00 $ (0.80)
Extraordinary loss on
extinguishment of
debt, net (0.03)
Cumulative effect of
accounting change 0.08
Net Income (loss)
Basic 1.41 0.97 0.86 (0.03) (0.72)
Net Income (loss)
Diluted 1.37 0.93 0.84 (0.03) (0.70)
Average number of
common shares
outstanding (basic): 6,583 4,794 4,307 4,180 3,020
Average number of
common shares
outstanding (diluted): 6,777 4,931 4,385 4,252 3,107
-------- -------- -------- -------- --------
Total assets at end
of period $864,555 $706,448 $520,059 $394,365 $293,830
Long-term obligations 39,000 34,000 27,695 19,735 39,081
Cash dividends
======== ======== ======== ======== ========
</TABLE>
1 These unaudited schedules provide selected financial information
concerning the Company which should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and
Results of Operations in this Annual Report.
Columbia Banking System Notes
85
<PAGE>
Consolidated Five-Year Summary of
Average Balances and Net Interest Revenue
<TABLE>
<CAPTION>
1997 1996
Average Average Average Average
Dollars In Thousands Balances/1/ Interest Rate Balances/1/ Interest Rate
- -------------------- ----------- -------- ------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans:
Commercial business $218,560 $ 20,172 9.23% $158,460 $ 14,153 8.93%
Real estate/2/:
One- to four-family
residential 109,659 10,936 9.97 112,986 10,468 9.26
Five or more family
residential and
commercial properties 217,412 18,727 8.61 144,340 13,473 9.33
Consumer 68,040 6,341 9.32 58,101 5,146 8.86
-------- -------- ------ -------- -------- ----
Total loans 613,671 56,176 9.15 473,887 43,240 9.12
Securities/3/ 71,424 4,513 6.32 51,056 3,126 6.12
Interest-earning
deposits with banks 26,389 1,456 5.52 29,998 1,583 5.28
-------- -------- ------ -------- ------- ----
Total interest-earning
assets 711,484 62,145 8.73 554,941 47,949 8.64
Noninterest-earning assets 53,244 40,311
-------- -------- ------ -------- ------- ----
Total assets $764,728 $595,252
======== ========
Interest-bearing liabilities
Certificates of deposit $282,899 $16,017 5.66% $240,214 $13,771 5.73%
Savings accounts 38,301 1,054 2.75 32,438 943 2.91
Interest-bearing
demand and money
market accounts 223,514 7,704 3.45 160,020 5,656 3.53
-------- ------- ------ -------- ------- ------
Total interest-bearing
deposits 544,714 24,775 4.55 432,672 20,370 4.71
Federal Home Loan
Bank advances 35,597 1,971 5.54 34,096 1,914 5.61
Other borrowings 1,681 84 5.02 3,454 257 7.44
-------- ------- ------ -------- ------- ------
Total interest-bearing
liabilities 581,992 26,830 4.61 470,222 22,541 4.79
Demand and other
noninterest-bearing
deposits 111,492 74,940
Other noninterest-
bearing liabilities 6,860 4,421
Shareholders' equity 64,384 45,669
-------- -------- ------ -------- -------- ----
Total liabilities and
shareholders' equity $764,728 $595,252
======== ========
Net interest revenue $35,315 $25,408
======= =======
Net interest spread 4.12% 3.85%
====== ======
Net interest margin 4.96% 4.58%
====== ======
Average interest-earning
assets to average
interest-bearing liabilities 122.25% 118.02%
====== ======
</TABLE>
1 Loans on a nonaccrual status have been included in the computation of
average balances.
2 Real estate average balances include real estate construction loans.
3 Tax equivalent basis.
Columbia Banking System Notes
86
<PAGE>
Consolidated Five-Year Summary of
Average Balances and Net Interest Revenue
<TABLE>
<CAPTION>
1995 1994 1993
Average Average Average Average Average Average
Dollars In Thousands Balances/1/ Interest Rate Balances/1/ Interest Rate Balances/1/ Interest Rate
- -------------------- ----------- -------- ------- ----------- -------- ------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans:
Commercial business $110,500 $ 10,855 9.82% $ 77,279 $ 6,561 8.49% $ 33,332 $ 2,550 7.65%
Real estate/2/:
One- to four-family
residential 113,341 10,861 9.58 90,123 7,722 8.57 82,069 7,007 8.54
Five or more family
residential and
commercial properties 103,878 9,942 9.57 68,584 6,418 9.36 42,062 4,527 10.76
Consumer 45,841 4,355 9.50 28,775 2,498 8.68 13,238 1,215 9.18
-------- -------- ------ -------- -------- ------ -------- ------- ------
Total loans 373,560 36,013 9.64 264,761 23,199 8.76 170,701 15,299 8.96
Securities/3/ 38,353 2,241 5.84 35,316 1,891 5.36 25,784 1,570 6.09
Interest-earning
deposits with banks 11,055 667 6.03 16,172 650 4.02 21,930 642 2.93
-------- -------- ------ -------- -------- ------ -------- ------- ------
Total interest-earning
assets 422,968 38,921 9.20 316,249 25,740 8.14 218,415 17,511 8.02
Noninterest-earning assets 35,370 29,805 19,689
-------- -------- ------ -------- -------- ------ -------- ------- ------
Total assets $458,338 $346,054 $238,104
======== ======== ========
interest-bearing liabilities
Certificates of deposit $203,978 $ 11,680 5.73% $148,229 $ 6,795 4.58% $ 93,640 $ 4,331 4.63%
Savings accounts 33,145 971 2.93 41,448 1,104 2.66 34,266 1,175 3.43
Interest-bearing
demand and money
market accounts 97,326 3,718 3.82 54,789 1,222 2.23 29,696 699 2.35
-------- -------- ------ -------- -------- ------ -------- ------- ------
Total interest-bearing
deposits 334,449 16,369 4.89 244,466 9,121 3.73 157,602 6,205 3.94
Federal Home Loan
Bank advances 24,915 1,503 6.03 21,452 1,160 5.41 25,875 1,788 6.91
Other borrowings 3,331 302 9.07 6,329 625 9.88 9,868 876 8.88
-------- -------- ------ -------- -------- ------ -------- ------- ------
Total interest-bearing
liabilities 362,695 18,174 5.01 272,247 10,906 4.01 193,345 8,869 4.59
Demand and other
noninterest-bearing
deposits 54,878 36,819 18,760
Other noninterest-
bearing liabilities 3,315 2,063 1,303
Shareholders' equity 37,450 34,925 24,696
-------- -------- ------ -------- -------- ------ -------- ------- -----
Total liabilities and
shareholders' equity $458,338 $346,054 $238,104
======== ======== ========
Net interest revenue $ 20,747 $ 14,834 $ 8,642
======== ======== ========
Net interest spread 4.19% 4.13% 3.43%
====== ====== ======
Net interest margin 4.91% 4.69% 3.96%
====== ====== ======
Average interest-earning
assets to average
interest-bearing liabilities 116.62% 116.16% 112.97%
====== ====== ======
</TABLE>
Columbia Banking System Notes
87
<PAGE>
Corporate Directory
Board of Directors
W. Barry Connoley
President and Chief Executive Officer,
MultiCare Health System
Richard S. DeVine
President,
Chinook Resources, Inc.
Chairman, Raleigh, Schwartz & Powell, Inc.
Jack Fabulich
Chairman, Parker Paint Manufacturing Co., Inc.
President and Commissioner, Port of Tacoma
Jonathan Fine
Chief Executive Officer,
American Red Cross,
Seattle-King County Chapter
John P. Folsom
President and Chief Executive Officer,
Raleigh, Schwartz & Powell, Inc.
Margel S. Gallagher
President, Viva Imports, Ltd.
John A. Halleran
Private Investor
Thomas L. Matson*
Owner and President,
Tom Matson Dodge, Inc.
W. W. Philip
Chairman, President and
Chief Executive Officer,
Columbia Banking System, Inc.
and Columbia Bank
John H. Powell
President and Co-owner,
Sound Oil Company
Robert E. Quoidbach
Private Investor
Donald Rodman
Owner and Vice President,
Rodman Realty, Inc.
Frank H. Russell
President,
Professional Services Unified, Inc.
and Quality Meal Expediters
Sidney R. Snyder
Washington State Senator,
Owner of Sid's Food Market and Midtown Market
James M. Will
President, Titus-Will Enterprises
Executive Officers
W. W. Philip
Chairman, President and
Chief Executive Officer
Melanie J. Dressel
Executive Vice President,
Retail Banking
H. R. Russell
Executive Vice President,
Commercial Banking
Donald A. Andersen
Senior Vice President,
Loan Production
Julie A. Healy
Senior Vice President,
Operations
Gary R. Schminkey
Senior Vice President,
Chief Financial Officer
Evans Q. Whitney
Senior Vice President,
Human Resources
Senior Officers
Stan Ausmus
Senior Vice President,
Puyallup Branch Manager
Bret M. Gagliardi
Senior Vice President,
Commercial Loans,
Kent Valley
Gary Gahan
Senior Vice President,
Private Banking,
Pierce County
Kurt Graff
Senior Vice President,
Lakewood Branch Manager
Janet D. Hildebrand
Senior Vice President,
Credit Administration
Eugene Horan
Senior Vice President,
Fircrest Branch Manager
Trent Jonas
Senior Vice President,
Commercial Loans, Gig Harbor
Gary Lindberg
Senior Vice President,
Commercial Loans, Pierce County
Donald W. Lisko
Executive Vice President,
Auburn / Puyallup Valley
Richard B. Martinez
Senior Vice President,
Private Banking, Bellevue
Linda S. McKeag
Senior Vice President,
Private Banking Manager
Samuel R. Noel
Executive Vice President,
Southwest Region
Richard Plummer
Senior Vice President,
Commercial Loans,
Auburn Valley
Ronald D. Staples
Senior Vice President,
Allenmore Branch Manager
Loran W. Todd
Senior Vice President,
General Auditor
Rick W. Tunnell
Senior Vice President,
Real Estate
Brett R. Willis
Senior Vice President,
Commercial Loans,
Pierce County
Kenneth M. Yokoyama
Senior Vice President,
Commercial Loans, Bellevue
* Appointed in January 1998
Columbia Banking System Corporate Directory
88
<PAGE>
Shareholder Information
Corporate Headquarters
Columbia Banking System, Inc.
1102 Broadway Plaza
P.O. Box 2156
Tacoma, WA
98401-2156
(253) 305-1900
Independent Auditors
Deloitte & Touche LLP
Transfer Agent and Registrar
American Stock Transfer
& Trust Company
Market Makers
BT Alex. Brown Inc.
Dain Bosworth, Inc.
Everen Securities, Inc.
Herzog, Heine, Geduld, Inc.
Keefe, Bruyette & Woods, Inc.
Ragen MacKenzie Inc.
Ryan, Beck & Co., Inc.
Legal Counsel
Gordon, Thomas,
Honeywell,
Malanca, Peterson
& Daheim, PLLC
Annual Meeting
Sheraton Tacoma Hotel
1320 Broadway Plaza
Tacoma, Washington
Wednesday,
April 22, 1998
1:00 p.m.
Stock Listing
The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market/sm/ under the symbol: COLB.
Form 10-K Report
Upon request, Columbia Banking System provides to shareholders a copy of the
1997 Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission. There is no charge for this information.
Quarterly Reporting
In the interest of providing financial results in a timely and cost-effective
manner, the Company does not publish a formal quarterly report. A copy of the
quarterly earnings news release is available upon request.
Immediate access to the Company's quarterly earnings news release via facsimile
is provided by Company News On Call:
(800) 758-5804, access #152519
For shareholder information, please contact:
Kristen Kopay
Assistant Vice President, Marketing and
Corporate Communications
P.O. Box 2156, MS 8300
Tacoma, WA
98401-2156
tel (253) 305-1965
fax (253) 305-0317
E-mail: [email protected]
Columbia Banking System Shareholder Information
89
<PAGE>
Branch Locations
[GRAPHIC; MAP ART]
PIERCE COUNTY
1 MAIN OFFICE
1102 Broadway Plaza
Tacoma, WA 98402
(253) 305-1940
John Collins
2 ALLENMORE
1959 South Union
Tacoma, WA 98405
(253) 627-6909
Ron Staples
3 EDGEWOOD/MILTON
900 Meridian E.
Suite 17
Milton, WA 98354
(253) 952-6646
Michael Butcher
4 FIFE
5501 Pacific Hwy. E.
Fife, WA 98424
(253) 922-7870
Ron Mason
5 FIRCREST
2401 Mildred St. w.
Fircrest, WA 98466
(253) 566-1172
Gene Horan
6 GIG HARBOR
5303 Point Fosdick Dr. NW
Gig Harbor, WA 98335
(253) 858-5105
Marilyn Naylor
7 LAKEWOOD
6202 Mount Tacoma Dr. SW
Lakewood, WA 98499
(253) 581-4232
Kurt Graff
8 OLD TOWN
2200 North 30th St.
Tacoma, WA 98403
(253) 272-0412
Priscilla May
9 176TH & MERIDIAN
(February 1998)
17208 Meridian E.
Puyallup, WA 98373
(253) 445-6748
Pat Horan
10 PUYALLUP
4220 S. Meridian
Puyallup, WA 98373
(253) 770-0770
Stan Ausmus
11 SOUTH HILL MALL
3500 S. Meridian
Suite 503
Puyallup, WA 98373
(253) 770-8161
Robin Conrads
Stacy Gibson
12 SPANAWAY
17502 Pacific Ave. S.
Spanaway, WA 98387
(253) 539-3094
Joy Johnson
13 SUMMIT
10409 Canyon Road E.
Puyallup, WA 98373
(253) 770-9323
Mike Williams
14 WESTGATE
(January 1998)
5727 N. 21st St.
Tacoma, WA 98406
(253) 761-8170
Priscilla May
KING COUNTY
15 AUBURN
25 16th St. NE
Auburn, WA 98002
(253) 939-9600
Patty Osthus
16 BELLEVUE
777 108th Ave. NE
Suite 100
Bellevue, WA 98004
(425) 646-9696
Stacy Sullivan
17 BELLWVUE WAY
10350 NE 10th St.
Bellevue, WA 98004
(425) 452-7323
Stacy Sullivan
18 FEDERAL WAY
33370 Pacific Highway S.
Federal Way, WA 98003
(253) 925-9323
Chuck Folsom
19 KENT
504 W. Meeker
Kent, WA 98032
(253) 852-8400
Dolores Ehli
20 SOUTH AUBURN
4101 A St. SE
Auburn, WA 98002
(253) 939-9800
Rod Clemmer
COWLITZ COUTNY
21 COMMERCE
1338 Commerce Ave.
Longview, WA 98632
(360) 636-9200
Faith Pacheco
22 30TH AVENUE
2207 30th Ave.
Longview, WA 98632
(360) 423-8760
Sheryl Vlach
23 WOODLAND
782 Goerig St.
Woodland, WA 98674
(360) 225-9421
Carol Rounds
Columbia Banking System Locations
90
<PAGE>
[LOGO OF COLUMBIA BANKING SYSTEM]
Columbia Banking System, Inc.
1102 Broadway Plaza
Tacoma, Washington 98402
www.columbiabank.com
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Columbia State Bank, Tacoma, Washington, a Washington state-chartered commercial
bank.
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
The director of Columbia Banking System, Inc. (the "Company"), whose
signature appears below, hereby appoints W. W. Philip and J. James Gallagher, or
either of them, as his attorney to sign, in his name and behalf and in any and
all capacities stated below, the Company's Form 10-K Annual Report pursuant to
Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and
all amendments and other documents relating thereto as shall be necessary, such
person hereby granting to each such attorney power to act with or without the
other and full power of substitution and revocation, and hereby ratifying all
that any such attorney or his substitute may do by virtue hereof.
This Power of Attorney has been signed by the following person in the
capacity indicated, on the 25 day of February, 1998.
Signature Title
/s/ Richard S. DeVine Director
- -----------------------------
Richard S. DeVine
<PAGE>
POWER OF ATTORNEY
The director of Columbia Banking System, Inc. (the "Company"), whose
signature appears below, hereby appoints W. W. Philip and J. James Gallagher, or
either of them, as his attorney to sign, in his name and behalf and in any and
all capacities stated below, the Company's Form 10-K Annual Report pursuant to
Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and
all amendments and other documents relating thereto as shall be necessary, such
person hereby granting to each such attorney power to act with or without the
other and full power of substitution and revocation, and hereby ratifying all
that any such attorney or his substitute may do by virtue hereof.
This Power of Attorney has been signed by the following person in the
capacity indicated, on the 25 day of February, 1998.
Signature Title
/s/ Jack Fabulich Director
- -----------------------------
Jack Fabulich
<PAGE>
POWER OF ATTORNEY
The director of Columbia Banking System, Inc. (the "Company"), whose
signature appears below, hereby appoints W. W. Philip and J. James Gallagher, or
either of them, as his attorney to sign, in his name and behalf and in any and
all capacities stated below, the Company's Form 10-K Annual Report pursuant to
Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and
all amendments and other documents relating thereto as shall be necessary, such
person hereby granting to each such attorney power to act with or without the
other and full power of substitution and revocation, and hereby ratifying all
that any such attorney or his substitute may do by virtue hereof.
This Power of Attorney has been signed by the following person in the
capacity indicated, on the 25 day of February, 1998.
Signature Title
/s/ Jonathan Fine Director
- -----------------------------
Jonathan Fine
<PAGE>
POWER OF ATTORNEY
The director of Columbia Banking System, Inc. (the "Company"), whose
signature appears below, hereby appoints W. W. Philip and J. James Gallagher, or
either of them, as his attorney to sign, in his name and behalf and in any and
all capacities stated below, the Company's Form 10-K Annual Report pursuant to
Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and
all amendments and other documents relating thereto as shall be necessary, such
person hereby granting to each such attorney power to act with or without the
other and full power of substitution and revocation, and hereby ratifying all
that any such attorney or his substitute may do by virtue hereof.
This Power of Attorney has been signed by the following person in the
capacity indicated, on the 25 day of February, 1998.
Signature Title
/s/ John P. Folsom Director
- -----------------------------
John P. Folsom
<PAGE>
POWER OF ATTORNEY
The director of Columbia Banking System, Inc. (the "Company"), whose
signature appears below, hereby appoints W. W. Philip and J. James Gallagher, or
either of them, as his attorney to sign, in his name and behalf and in any and
all capacities stated below, the Company's Form 10-K Annual Report pursuant to
Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and
all amendments and other documents relating thereto as shall be necessary, such
person hereby granting to each such attorney power to act with or without the
other and full power of substitution and revocation, and hereby ratifying all
that any such attorney or his substitute may do by virtue hereof.
This Power of Attorney has been signed by the following person in the
capacity indicated, on the 25 day of February, 1998.
Signature Title
/s/ Margel S. Gallagher Director
- -----------------------------
Margel S. Gallagher
<PAGE>
POWER OF ATTORNEY
The director of Columbia Banking System, Inc. (the "Company"), whose
signature appears below, hereby appoints W. W. Philip and J. James Gallagher, or
either of them, as his attorney to sign, in his name and behalf and in any and
all capacities stated below, the Company's Form 10-K Annual Report pursuant to
Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and
all amendments and other documents relating thereto as shall be necessary, such
person hereby granting to each such attorney power to act with or without the
other and full power of substitution and revocation, and hereby ratifying all
that any such attorney or his substitute may do by virtue hereof.
This Power of Attorney has been signed by the following person in the
capacity indicated, on the 25 day of February, 1998.
Signature Title
/s/ John A. Halleran Director
- -----------------------------
John A. Halleran
<PAGE>
POWER OF ATTORNEY
The director of Columbia Banking System, Inc. (the "Company"), whose
signature appears below, hereby appoints W. W. Philip and J. James Gallagher, or
either of them, as his attorney to sign, in his name and behalf and in any and
all capacities stated below, the Company's Form 10-K Annual Report pursuant to
Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and
all amendments and other documents relating thereto as shall be necessary, such
person hereby granting to each such attorney power to act with or without the
other and full power of substitution and revocation, and hereby ratifying all
that any such attorney or his substitute may do by virtue hereof.
This Power of Attorney has been signed by the following person in the
capacity indicated, on the 25 day of February, 1998.
Signature Title
/s/ Thomas L. Matson Director
- -----------------------------
Thomas L. Matson
<PAGE>
POWER OF ATTORNEY
The director of Columbia Banking System, Inc. (the "Company"), whose
signature appears below, hereby appoints W. W. Philip and J. James Gallagher, or
either of them, as his attorney to sign, in his name and behalf and in any and
all capacities stated below, the Company's Form 10-K Annual Report pursuant to
Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and
all amendments and other documents relating thereto as shall be necessary, such
person hereby granting to each such attorney power to act with or without the
other and full power of substitution and revocation, and hereby ratifying all
that any such attorney or his substitute may do by virtue hereof.
This Power of Attorney has been signed by the following person in the
capacity indicated, on the 25 day of February, 1998.
Signature Title
/s/ John H. Powell Director
- -----------------------------
John H. Powell
<PAGE>
POWER OF ATTORNEY
The director of Columbia Banking System, Inc. (the "Company"), whose
signature appears below, hereby appoints W. W. Philip and J. James Gallagher, or
either of them, as his attorney to sign, in his name and behalf and in any and
all capacities stated below, the Company's Form 10-K Annual Report pursuant to
Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and
all amendments and other documents relating thereto as shall be necessary, such
person hereby granting to each such attorney power to act with or without the
other and full power of substitution and revocation, and hereby ratifying all
that any such attorney or his substitute may do by virtue hereof.
This Power of Attorney has been signed by the following person in the
capacity indicated, on the 25 day of February, 1998.
Signature Title
/s/ Robert E. Quoidbach Director
- -----------------------------
Robert E. Quoidbach
<PAGE>
POWER OF ATTORNEY
The director of Columbia Banking System, Inc. (the "Company"), whose
signature appears below, hereby appoints W. W. Philip and J. James Gallagher, or
either of them, as his attorney to sign, in his name and behalf and in any and
all capacities stated below, the Company's Form 10-K Annual Report pursuant to
Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and
all amendments and other documents relating thereto as shall be necessary, such
person hereby granting to each such attorney power to act with or without the
other and full power of substitution and revocation, and hereby ratifying all
that any such attorney or his substitute may do by virtue hereof.
This Power of Attorney has been signed by the following person in the
capacity indicated, on the 25 day of February, 1998.
Signature Title
/s/ Donald Rodman Director
- -----------------------------
Donald Rodman
<PAGE>
POWER OF ATTORNEY
The director of Columbia Banking System, Inc. (the "Company"), whose
signature appears below, hereby appoints W. W. Philip and J. James Gallagher, or
either of them, as his attorney to sign, in his name and behalf and in any and
all capacities stated below, the Company's Form 10-K Annual Report pursuant to
Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and
all amendments and other documents relating thereto as shall be necessary, such
person hereby granting to each such attorney power to act with or without the
other and full power of substitution and revocation, and hereby ratifying all
that any such attorney or his substitute may do by virtue hereof.
This Power of Attorney has been signed by the following person in the
capacity indicated, on the 25 day of February, 1998.
Signature Title
/s/ Frank H. Russell Director
- -----------------------------
Frank H. Russell
<PAGE>
POWER OF ATTORNEY
The director of Columbia Banking System, Inc. (the "Company"), whose
signature appears below, hereby appoints W. W. Philip and J. James Gallagher, or
either of them, as his attorney to sign, in his name and behalf and in any and
all capacities stated below, the Company's Form 10-K Annual Report pursuant to
Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and
all amendments and other documents relating thereto as shall be necessary, such
person hereby granting to each such attorney power to act with or without the
other and full power of substitution and revocation, and hereby ratifying all
that any such attorney or his substitute may do by virtue hereof.
This Power of Attorney has been signed by the following person in the
capacity indicated, on the 25 day of February, 1998.
Signature Title
/s/ Sidney R. Snyder Director
- -----------------------------
Sidney R. Snyder
<PAGE>
POWER OF ATTORNEY
The director of Columbia Banking System, Inc. (the "Company"), whose
signature appears below, hereby appoints W. W. Philip and J. James Gallagher, or
either of them, as his attorney to sign, in his name and behalf and in any and
all capacities stated below, the Company's Form 10-K Annual Report pursuant to
Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and
all amendments and other documents relating thereto as shall be necessary, such
person hereby granting to each such attorney power to act with or without the
other and full power of substitution and revocation, and hereby ratifying all
that any such attorney or his substitute may do by virtue hereof.
This Power of Attorney has been signed by the following person in the
capacity indicated, on the 25 day of February, 1998.
Signature Title
/s/ James M. Will Director
- -----------------------------
James M. Will
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 47,604
<INT-BEARING-DEPOSITS> 28,108
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 56,279
<INVESTMENTS-CARRYING> 9,679
<INVESTMENTS-MARKET> 0
<LOANS> 685,889
<ALLOWANCE> 8,440
<TOTAL-ASSETS> 864,555
<DEPOSITS> 740,430
<SHORT-TERM> 0
<LIABILITIES-OTHER> 6,772
<LONG-TERM> 39,000
0
0
<COMMON> 67,901
<OTHER-SE> 10,452
<TOTAL-LIABILITIES-AND-EQUITY> 864,555
<INTEREST-LOAN> 56,176
<INTEREST-INVEST> 4,428
<INTEREST-OTHER> 1,457
<INTEREST-TOTAL> 62,061
<INTEREST-DEPOSIT> 24,775
<INTEREST-EXPENSE> 26,830
<INTEREST-INCOME-NET> 35,231
<LOAN-LOSSES> 4,726
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 31,234
<INCOME-PRETAX> 12,063
<INCOME-PRE-EXTRAORDINARY> 9,275
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,275
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.37
<YIELD-ACTUAL> 4.96
<LOANS-NON> 1,462
<LOANS-PAST> 0
<LOANS-TROUBLED> 20
<LOANS-PROBLEM> 669
<ALLOWANCE-OPEN> 5,282
<CHARGE-OFFS> 1,659
<RECOVERIES> 91
<ALLOWANCE-CLOSE> 8,440
<ALLOWANCE-DOMESTIC> 8,440
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,542
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 38,286
<INT-BEARING-DEPOSITS> 44,972
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 52,044
<INVESTMENTS-CARRYING> 11,621
<INVESTMENTS-MARKET> 0
<LOANS> 523,151
<ALLOWANCE> 5,282
<TOTAL-ASSETS> 706,448
<DEPOSITS> 596,504
<SHORT-TERM> 0
<LIABILITIES-OTHER> 7,720
<LONG-TERM> 34,000
0
0
<COMMON> 62,980
<OTHER-SE> 5,244
<TOTAL-LIABILITIES-AND-EQUITY> 706,448
<INTEREST-LOAN> 43,240
<INTEREST-INVEST> 3,062
<INTEREST-OTHER> 1,583
<INTEREST-TOTAL> 47,885
<INTEREST-DEPOSIT> 20,370
<INTEREST-EXPENSE> 22,541
<INTEREST-INCOME-NET> 25,344
<LOAN-LOSSES> 1,635
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 24,905
<INCOME-PRETAX> 5,114
<INCOME-PRE-EXTRAORDINARY> 4,635
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,635
<EPS-PRIMARY> 0.97
<EPS-DILUTED> 0.93
<YIELD-ACTUAL> 4.58
<LOANS-NON> 2,256
<LOANS-PAST> 0
<LOANS-TROUBLED> 25
<LOANS-PROBLEM> 346
<ALLOWANCE-OPEN> 4,340
<CHARGE-OFFS> 720
<RECOVERIES> 27
<ALLOWANCE-CLOSE> 5,282
<ALLOWANCE-DOMESTIC> 5,282
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> (225)
</TABLE>
