<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
[Fee Required]
For the fiscal year ended December 31, 1998 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 26, 1999 was $172,462,210.
The number of shares of registrant's Common Stock outstanding at February 26,
1999 was 10,070,786
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, 1998
Registrant's definitive Proxy Statement Part III
Dated March 26, 1999
<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
and Expense Revenue 48
Management Discussion and Analysis of
Financial Condition and Results of
Operations ("Management Discussion") 13
Investments Note 5, Notes to Consolidated Financial
Statements 35
Management Discussion - Securities 20
Lending Activities Management Discussion - Loan Portfolio 16
Management Discussion - Nonperforming
Assets 17
Note 6, Notes to Consolidated Financial
Statements 36
Summary of Loan Loss Experience Note 7, Allowance for Loan Losses 37
Management Discussion - Provision and
Allowance for Loan Losses 18
Supervision and Regulation Management Discussion - Capital 24
Item 2 Properties Note 8, Notes to Consolidated Financial
Statements 37
Item 3 Legal Proceedings Note 14, Notes to Consolidated Financial
Statements 42
Part II Annual Report to Shareholders
Item 5 Market for the Registrant's Common Management Discussion - Quarterly Common
Stock and Related Stockholder Stock Prices and Dividend
Matters Payments 26
</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>
Item 6 Selected Financial Data Consolidated Highlights 2
Consolidated Five-Year Statements of
Operations 47
Consolidated Five-Year Summary of
Average Balances and Net Interest
Revenue 48
Item 7 Management's Discussion and Management Discussion 13
Analysis of Financial Condition and
Results of Operations Consolidated Five-Year Summary of
Average Balances and Net Interest
Revenue 48
Item 7a Market Risk Disclosure Management Discussion- 16
Credit Risk Management
Item 8 Financial Statements and Audited Financial Statements 28
Supplementary Data
Note 17, Summary of Quarterly Financial
Information (Unaudited) 46
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 16
</TABLE>
<PAGE>
COLUMBIA BANKING SYSTEM, INC.
FORM 10-K
December 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I Page
----------
Item 1. Business
<S> <C> <C>
General 1
Strategy 1
Market Area 2
Competition 4
Employees 4
Executive Officers of the Company 4
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 11
Deposits 12
Significant Financial Ratios 12
Short-term Borrowings 12
Supervision and Regulation 12
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 14
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 15
Item 7a. Market Risk Disclosure 15
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 15
PART III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners and Management 15
Item 13. Certain Relationships and Related Transactions 16
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 16
</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 25 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, 1998, the Company had total assets of
$1.1 billion.
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 25 branch
offices and has regulatory approval to open three additional branch offices in
its market area. Between January 1, 1993 and December 31, 1998, the Company
increased its consolidated assets to $1.1 billion from $198.2 million, its loans
to $828.6 million from $146.2 million and its deposits to $938.3 million from
$151.9 million. Net interest income per year increased to $42.0 million from
$14.8 million and net income per year increased to $10.2 million from a loss of
$139,000 during the 5 year period ending December 31, 1998. 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. Although
Columbia Bank is not a member of the Federal Reserve System, the Board of
Governors of the Federal Reserve System 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.
The Company's goal over the next several years is to create a well-capitalized,
customer focused, Pacific Northwest banking institution with a significant
presence in selected markets. The Company intends to effect this growth
strategy through a combination of growth at existing branch offices, new branch
openings (usually following the hiring of an experienced branch manager and/or
lending officer with strong community ties and banking relationships) and
acquisitions. In particular, the Company anticipates continued expansion in
Pierce County, north into King County (the location of Auburn and Bellevue),
south into Thurston County (the location of the state capitol, Olympia) and
northwest into Kitsap County (the location of Bremerton and Port Orchard).
Expansion by acquisition into these and other markets will be considered as
promising opportunities arise. In order to fund its lending activities and to
allow for increased contact with customers, the Company is establishing a branch
system catering primarily to retail depositors, supplemented by business
customer deposits and other borrowings. The Company believes this mix of
funding sources will enable it to expand its lending activities rapidly while
attracting a stable core deposit base. In order to support its strategy
1
<PAGE>
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. Management is placing increased emphasis on control of
noninterest expense.
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 the town of Fife, a
commercial market in which Columbia did not have a branch.
During 1998, Columbia Bank opened four new branches. The Westgate branch in
north Tacoma opened in January, and the 176th and Meridian branch in eastern
Pierce County opened in February. Both are newly constructed, full-service
facilities. In November, its fifteenth Pierce County location opened in the
Stadium district of Tacoma. Also, in November the Bank opened its fourth Cowlitz
County branch inside the Triangle Mall Thriftway store in Longview. The Company
opened its twenty-sixth branch and first Kitsap County location in mid-February
1999 in Port Orchard. The Company's future plans include new locations in
Pierce, King, and Thurston counties of western Washington. The Company currently
has regulatory approval to open three additional branch offices in its market
area. 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 its ongoing expansion, 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 purposes. During the third quarter, the Company occupied a new state-of-
the-art Operations Center that will allow for substantial future growth.
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 "Five years after it started in
late 1992, the Pierce County economy continued its growth through the first half
of 1998. The local economy has grown at an average rate of just under 2.5%,
that's 0.5% above the long-term historical growth rate. The outlook is for some
cooling off and slower growth over the six quarters from the second half of 1998
through 1999."
In the third quarter of 1998 the Company was named in the Fortune magazine
annual ranking of America's 100 fastest growing companies as judged by earnings
growth. The Company was the only banking company on the list and was ranked
82nd.
Pierce County, the area in which the Company's expansion is primarily focused,
is located in the South Puget Sound region. With 15 branch offices in Pierce
County at the end of 1998, the Company is positioning itself to increase its
market share in this County of approximately 687,000 residents, the second most
populous county in Washington State.
2
<PAGE>
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
230,000 that includes several King County cities located east of Seattle. A
large portion of that economy is linked to the 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 area has experienced relatively rapid growth in population and employment,
and household incomes 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. The newly
opened Kent branch was then consolidated into Cascade's Kent branch location.
The merger brought 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 93,000. 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.
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 200,000.
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 in Thurston County 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 in Kitsap County was government
related.
3
<PAGE>
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 allows
mergers or other combinations, relocations of a bank's main office and branching
across state lines. Several other financial institutions, 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, other than in Pierce County where its
share of bank deposits has grown substantially over the last several years. In
June 1998, the Federal Deposit Insurance Corporation (FDIC) market share report
classified the Company with 13.4% of the deposit market share in Pierce County,
which placed the Company second in the County. 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, 1998, the Company had 439 full-time equivalent employees. The
Company has placed a 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.
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
Name Age Position the Company Since
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
W. W. Philip/1/ 72 Director, Chairman, and Chief Executive Officer 1993
J. James Gallagher/2/ 60 Director and Vice Chairman 1998
Melanie J. Dressel/3/ 46 Director, Executive Vice President - the Company; 1997
President and Chief Operating Officer - Columbia
Bank,
H. R. Russell/4/ 44 Executive Vice President - Senior Credit Officer 1996
Gary R. Schminkey/5/ 41 Executive Vice President and Chief Financial 1993
Officer
Evans Q. Whitney/6/ 55 Executive Vice President, Retail Banking 1994
Donald A. Andersen/7/ 53 Senior Vice President, Senior Loan Production 1996
Officer - Columbia Bank
Janet D. Hildebrand/8/ 50 Senior Vice President, Credit Administrator - 1998
Columbia Bank
</TABLE>
4
<PAGE>
/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/ Mr. Gallagher joined the Company as a Director and Vice Chairman in July
1998. From January 1994 until his appointment at Columbia, Mr. Gallagher was a
principal of Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C., a
law firm headquartered in Tacoma, Washington, where he served as outside legal
counsel for the Company. Mr. Gallagher, who is a former bank regulator, has over
30 years of experience as legal counsel to financial institutions throughout the
Northwest.
/3/ Ms. Dressel joined Columbia Bank as Senior Vice President -- Private
Banking in June 1993. In November 1997, she was appointed Executive Vice
President -Retail Banking for Columbia Bank and subsequently was appointed
President and Chief Operating Officer in July 1998. She became a Director of the
Company in 1998. 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.
/4/ 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.
/5/ Mr. Schminkey joined Columbia Bank as Vice President and Controller in
March 1993. In 1994, he was appointed Senior Vice President -- Chief Financial
Officer of Columbia Bank and the Company and subsequently was appointed
Executive Vice President -- Chief Financial Officer in December 1998. 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.
/6/ Mr. Whitney joined Columbia Bank as Senior Vice President -- Human
Resources in March 1993. In July 1998, Mr. Whitney was appointed Executive Vice
President -- Retail Banking for Columbia Bank and 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.
/7/ 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.
/8/ Ms. Hildebrand joined Columbia Bank as Senior Vice President Credit
Administrator in August 1997. Ms. Hildebrand was employed by First Interstate
Bank of Washington and its successor, Wells Fargo Bank, for 23 years, having
served as Senior Vice President and Regional Manager of Loan Review prior to
leaving that institution in 1997.
All officers are elected by the Board of Directors and serve at the pleasure of
the Board for an unspecified term.
5
<PAGE>
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 are 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 System
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 48 of the Annual Report to Shareholders for the
year ended December 31, 1998 ("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 13 of the
Annual Report for additional details on various asset and liability categories.
6
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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>
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------- --------------------------
(in thousands) Volume Rate Total Volume Rate Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans:
Commercial business $ 8,086 $ (219) $ 7,867 $ 5,532 $ 487 $ 6,019
One- to four-family residential (1,188) (1,236) (2,424) (293) 761 468
Five or more family residential and
commercial properties 4,081 200 4,281 6,199 (945) 5,254
Consumer 1,095 (137) 958 916 279 1,195
- ----------------------------------------------------------------------------------------------------------------------
Total loans 12,074 (1,392) 10,682 12,354 582 12,936
Securities 763 (54) 709 1,284 102 1,386
Interest-earning deposits with banks 242 (45) 197 (205) 79 (126)
- ----------------------------------------------------------------------------------------------------------------------
Total interest revenue $13,079 $(1,491) $11,588 $13,433 $ 763 $14,196
======================================================================================================================
Interest Expense
Deposits:
Certificates of deposit $ 3,061 $ (161) $ 2,900 $ 2,414 $(168) $ 2,246
Savings accounts 43 (100) (57) 158 (47) 111
Interest-bearing demand 2,178 (37) 2,141 2,185 (137) 2,048
- ----------------------------------------------------------------------------------------------------------------------
Total interest on deposits 5,282 (298) 4,984 4,757 (352) 4,405
Federal Home Loan Bank advances (59) (4) (63) 80 (47) 33
Other borrowings (42) (42) (84) (99) (50) (149)
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense $ 5,181 $ (344) $ 4,837 $ 4,738 $(449) $ 4,289
======================================================================================================================
</TABLE>
Investments
For additional information concerning securities (securities available for sale
and held to maturity), see Note 5 of "Notes to Consolidated Financial
Statements" at page 35 of the Annual Report and "Management Discussion -
Securities" at page 20 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, 1998, there were no securities of any issuer, other than the
U.S. Government and its agencies and corporations, 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, 1998, 1997, and 1996.
<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, 1998:
U.S. Treasury & government agency $81,549 $474 $82,023
Mortgage-backed 10,672 1 10,673
Other securities 992 38 1,030
- ------------------------------------------------------------------------------------------------------------------
Total $93,213 $513 $93,726
==================================================================================================================
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
==================================================================================================================
</TABLE>
The following table provides the carrying values, maturities and weighted
average yields of the Company's securities available for sale at December 31,
1998.
<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 $ 3,521 $ 3,521
Weighted Average Yield 6.19% 6.19%
U.S. government agency
Balance 6,489 $32,293 $39,405 $ 293 78,502
Weighted Average Yield 5.08% 5.75% 5.98% 7.06% 5.81%
Mortgage-backed (1)
Balance 1,978 8,695 10,673
Weighted Average Yield 6.36% 5.92% 6.00%
Other Securities
Balance 1,030 1,030
Weighted Average Yield 6.75% 6.75%
- -----------------------------------------------------------------------------------------------------------------------
Total
Balance $10,010 $35,301 $39,405 $9,010 $93,726
Weighted Average Yield 5.47% 5.81% 5.98% 5.96% 5.86%
- -----------------------------------------------------------------------------------------------------------------------
</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, 1998, 1997, and 1996.
<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, 1998:
U.S. government agency $ 497 $ 7 $ 504
State and municipal securities 5,115 121 5,236
Other Securities 496 18 515
FHLMC preferred stock 250 1 251
- ---------------------------------------------------------------------------------------------------------------
Total $ 6,358 $147 $ 6,505
===============================================================================================================
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
===============================================================================================================
</TABLE>
The following table provides the carrying values, maturities and weighted
average yields of the Company's securities held to maturity at December 31,
1998.
<TABLE>
<CAPTION>
Securities Held To Maturity Maturing
-------------------------------------------------------------------
After 1 But After 5 But
Within 1 Within 5 Within 10 After 10
(dollars in thousands) Year Years Years Years Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. government agency
Balance $ 497 $ 497
Weighted Average Yield 7.10% 7.10%
State and municipal securities *
Balance $ 732 2,670 $1,713 5,115
Weighted Average Yield 6.63% 6.46% 6.36% 6.45%
Other securities
Balance 496 496
Weighted Average Yield 6.77% 6.77%
FHLMC stock
Balance 250 250
Weighted Average Yield 6.72% 6.72%
- ------------------------------------------------------------------------------------------------------
Total
Balance $ 982 $3,663 $1,713 $6,358
Weighted Average Yield 6.65% 6.59% 6.36% 6.54%
- ------------------------------------------------------------------------------------------------------
</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, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial business $332,638 $270,946 $194,843 $133,885 $ 89,546
Real estate:
One-to four-family residential 61,132 71,095 77,359 77,603 83,582
Five or more family residential and
commercial properties 291,868 206,628 151,179 113,784 80,010
- ------------------------------------------------------------------------------------------------------------------------
Total real estate 353,000 277,723 228,538 325,272 253,138
Real estate construction:
One- to four-family residential 26,444 29,695 31,446 32,819 23,462
Five or more family residential and
commercial properties 23,213 33,806 10,724 8,985 4,307
- ------------------------------------------------------------------------------------------------------------------------
Total real estate construction 49,657 63,501 42,170 41,804 27,769
Consumer 94,572 74,710 58,249 51,788 38,120
- ------------------------------------------------------------------------------------------------------------------------
Subtotal 829,867 686,880 523,800 418,864 319,027
Less deferred loan fees and other (1,228) (991) (649) (807) (953)
- ------------------------------------------------------------------------------------------------------------------------
Total loans $828,639 $685,889 $523,151 $418,057 $318,074
========================================================================================================================
Loans held for sale $ 10,023 $ 4,377 $ 11,341 $ 1,367 $ 1,612
========================================================================================================================
</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,
1998 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, 1998.
The following table presents at December 31, 1998, (i) the aggregate maturities
of loans in each major reportable 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>
Maturing
-----------------------------------------------------------------
(in thousands) Within 1 Year After 1 But After Five
Within 5 Years Years Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial business $191,824 $128,428 $12,386 $332,638
Real estate construction 44,332 2,707 2,618 49,657
- ------------------------------------------------------------------------------------------------------
Total $236,156 $131,135 $15,004 $382,295
======================================================================================================
Fixed rate loans $ 55,285 $ 6,363 $ 61,648
Variable rate loans 75,850 8,641 84,491
- ------------------------------------------------------------------------------------------------------
Total $131,135 $15,004 $146,139
======================================================================================================
</TABLE>
10
<PAGE>
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, total nonperforming assets,
accruing loans past-due 90 days or more and potential problem loans of the
Company.
<TABLE>
<CAPTION>
(in thousands)
December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual $3,603 $1,462 $2,256 $ 449 $ 452
Restructured 1,783 20 25 29 44
- ------------------------------------------------------------------------------------------------------------------
Total nonperforming loans $5,386 $1,482 $2,281 $ 478 496
Real estate owned 901 231 484 3,304 3,227
- ------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $6,287 $1,713 $2,765 $3,782 $3,723
==================================================================================================================
Accruing loans past-due 90 days or more $ 40 $ 111 $ 154 $ 82
==================================================================================================================
Potential problem loans $1,862 $ 669 $ 346 $ 239
==================================================================================================================
</TABLE>
For information pertaining to risk elements, see the appropriate sections in
"Management Discussion - Credit Risk Management" beginning at page 16 of the
Annual Report, "Management Discussion - Nonperforming Assets" beginning at page
17 of the Annual Report, "Management Discussion Provision and Allowance for
Loan Losses" beginning at page 18 of the Annual Report, and Note 7 of "Notes to
Consolidated Financial Statements" beginning at page 37 of the Annual Report,
all of which are incorporated herein by reference.
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 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, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
Balance at End Amount Total Amount Total Amount Total Amount Total Amount Total
of Period Loans* Loans* Loans* Loans* Loans*
Applicable to:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial
business $5,540 40.0% $4,109 39.4% $3,178 37.2% $2,006 32.0% $1,537 28.1%
Real estate and
construction:
One- to four-family
residential 972 10.6 1,041 14.7 1,115 20.8 699 26.3 773 33.6
Five or more family
residential and
commercial properties 2,008 38.0 1,414 35.0 490 30.9 330 29.3 249 26.4
Consumer 482 11.4 334 10.9 499 11.1 386 12.4 295 11.9
Unallocated 1,542 919 321
- ------------------------------------------------------------------------------------------------------------------------------------
Total $9,002 100.0% $8,440 100.0% $5,282 100.0% $4,340 100.0% $3,175 100.0%
====================================================================================================================================
</TABLE>
*Represents the total of all outstanding loans in each category as a percent of
total loans outstanding.
11
<PAGE>
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, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
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 $287,007 3.43% $223,514 3.45% $160,020 3.53%
Savings accounts 39,768 2.51 38,301 2.75 32,438 2.91
Certificates of deposit 337,557 5.60 282,899 5.66 240,214 5.73
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 664,332 4.48 544,714 4.55 432,672 4.71
Demand and other noninterest-
bearing 149,353 111,492 74,940
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits $813,685 $656,206 $507,612
====================================================================================================================================
</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, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Remaining maturity
<S> <C>
Three months or less $ 52,673
Over three through six months 23,827
Over six through twelve months 28,596
Over twelve months 7,681
- ------------------------------------------------------------------------------------------------------------------------------------
Total $112,777
====================================================================================================================================
</TABLE>
Significant Financial Ratios
Ratios for the last three years, based on daily average balances, are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on assets 1.09% 1.21% 0.78%
Return on equity 12.05 14.41 10.15
Dividend payout ratio
Equity to assets 9.02 8.42 7.67
</TABLE>
Short-term Borrowings
At December 31, 1998, 1997 and 1996, 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 is a bank holding company within the meaning of the Bank Holding
Company Act of 1956 ("BHC Act") registered with and subject to examination by
the Federal Reserve Board ("FRB"). The Company's Bank subsidiary is a Washington
state chartered bank and is subject to examination, supervision, and regulation
by the Washington State Department of Financial Institutions - Division of Banks
("Division"). The FDIC insures Columbia Bank's deposits and in that capacity
also regulates the Bank.
12
<PAGE>
The Company's earnings and activities are affected by legislation, by actions of
the FRB, the Division, the FDIC and other regulators, and by local legislative
and administrative bodies and decisions of courts in Washington state. For
example, these include limitations on the ability of Columbia Bank to pay
dividends to the Company, numerous federal and state consumer protection laws
imposing requirements on the making, enforcement, and collection of consumer
loans, and restrictions by regulators on the sale of mutual funds and other
uninsured investment products to customers.
Legislation may be enacted or regulations imposed to further regulate banking
and financial services or to limit finance charges or other fees or charges
earned in such activities. There can be no assurance whether any such
legislation or regulation will place additional limitations on the Company's
operations or adversely affect its earnings.
Federal law imposes certain restrictions on transactions between the Company and
any nonbank subsidiaries, on the one hand, and Columbia Bank on the other. With
certain exceptions, federal law also imposes limitations on, and requires
collateral for, extensions of credit by insured depository institutions, such as
Columbia Bank, to their non-bank affiliates, such as the Company.
Subject to certain limitations and restrictions, a bank holding company, with
prior approval of the FRB, may acquire an out-of-state bank. Banks in states
that do not prohibit out-of-state mergers may merge with the approval of the
appropriate federal banking agency. A state bank may establish a de novo branch
out of state if such branching is expressly permitted by the other state.
The activities of bank holding companies are generally limited to managing or
controlling banks. Nonbank acquisitions are generally limited to 5% of voting
shares unless the FRB determines that the acquisition is so closely related to
banking as to be a proper incident to banking or managing or controlling banks.
Among other things, applicable federal and state statutes and regulations which
govern a bank's activities 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.
Under longstanding FRB policy, a bank holding company is expected to act as a
source of financial strength for its subsidiary banks and to commit resources to
support such banks. The Company could be required to commit resources to its
subsidiary banks in circumstances where it might not do so, absent such policy.
The Company and Columbia Bank are subject to risk-based capital and leverage
guidelines issued by federal banking agencies for banks and bank holding
companies. These agencies are required by law to take specific prompt corrective
actions with respect to institutions that do not meet minimum capital standards
and have defined five capital tiers, the highest of which is "well-capitalized.
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. 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.
In the liquidation or other resolution of a failed insured depository
institution, deposits in offices and certain claims for administrative expenses
and employee compensation are afforded a priority over other general unsecured
claims, including non-deposit claims, and claims of a parent company such as the
Company. Such priority creditors would include the FDIC, which succeeds to the
position of insured depositors.
The Company is also subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the Securities Exchange Act of
1934.
13
<PAGE>
The earnings of the Company are affected by general economic conditions and the
conduct of monetary policy by the U. S. government.
Item 2. Properties
The Company's executive offices and the Main Office of Columbia Bank are located
in approximately 51,000 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 $50,745 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,
1998, Columbia Bank had 15 offices in Pierce County, including the Main Office
(7 leased and 8 owned), three offices in Longview (two owned and one leased),
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 other tenants.
For additional information pertaining to properties, see Note 8 of "Notes to
Consolidated Financial Statements" at page 37 of the Annual Report, which is
incorporated herein by reference.
Item 3. Legal Proceedings
For information concerning legal proceedings, see Note 14 of "Notes to
Consolidated Financial Statements" at page 42 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 26 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 2, 47
and 48, respectively, of the Annual Report, which are incorporated herein by
reference.
14
<PAGE>
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 13
through 26 of the Annual Report and "Consolidated Five-Year Summary of Average
Balances and Net Interest Revenue" at page 48 of the Annual Report, all of which
are incorporated herein by reference.
Item 7a. Market Risk Disclosure
For market risk disclosure, see "Credit Risk Management" at page 16 of the
Annual Report which is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
For consolidated financial statements of the Company, see "Audited Financial
Statements" beginning at page 28 of the Annual Report which is incorporated
herein by reference. Note 17, the "Summary of Quarterly Financial Information
(Unaudited)" on page 46 of the Annual Report is also incorporated herein by
reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
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 26, 1999 (the "Proxy
Statement") for the annual meeting of shareholders to be held April 28, 1999.
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.
15
<PAGE>
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, 1998, are incorporated by reference in Item 8:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Statements of Operations--Years ended December 31, 1998, 1997 and 1996 28
Consolidated Balance Sheets--December 31, 1998 and 1997 29
Consolidated Statements of Shareholders' Equity--Years ended
December 31, 1998, 1997, and 1996 30
Consolidated Statements of Cash Flows--Years ended December 31, 1998, 1997 and 1996 31
Notes to Consolidated Financial Statements 32
Report of Independent Auditors 27
</TABLE>
(2) Exhibits:
See "Index to Exhibits" at page 19 of this Form 10-K.
(b) Reports on Form 8-K:
None
16
<PAGE>
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 26th day of March,
1999.
Columbia Banking System, Inc.
(Registrant)
By /s/ W. W. Philip
------------------
W. W. Philip
Chairman 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 26th day of March, 1999.
Principal Executive Officer:
/s/ W. W. Philip
------------------
W. W. Philip
Chairman and
Chief Executive Officer
Principal Financial Officer:
/s/ Gary R. Schminkey
---------------------
Gary R. Schminkey
Executive Vice President and
Chief Financial Officer
17
<PAGE>
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 26, 1999, as
attorney-in-fact for the following directors who constitute a majority of the
board of directors.
<TABLE>
<S> <C>
[Richard S. DeVine] [John Halleran]
[Melanie J. Dressel] [Thomas L. Matson]
[Jack Fabulich] [John Powell]
[Jonathan Fine] [Robert E. Quoidbach]
[John P. Folsom] [Donald Rodman]
[J. James Gallagher] [Sidney Snyder]
[Margel S. Gallagher] [William T. Weyerhaeuser]
[W. Kelso Gillenwater] [James M. Will]
</TABLE>
/s/ W. W. Philip
------------------
W. W. Philip
Attorney-in-fact
March 26, 1999
18
<PAGE>
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. (7)
*(d) Employment agreement between the Company and J. James Gallagher
effective July 1, 1998, except with respect to section 4.3
(granting restricted stock award) which is effective April 22,
1998.
(e) Data processing servicing agreement dated May 3, 1993 between the
Company and M&I Data Services. (2)
(f) Deferred Compensation Plan for directors and certain key
employees effective April 1, 1995. (7)
11 Statement re computation of per share earnings.
13 The Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1998. (6)
21 Subsidiaries of the Company are:
(a) Columbia State Bank, Tacoma, Washington, a Washington state-
chartered commercial bank.
19
<PAGE>
24 Powers of Attorney dated March 9, 10, and 12, 1999.
27 Financial Data Schedule
<TABLE>
<S> <C>
(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 June 30, 1998 previously filed by the Company.
(6) Portions of the Annual Report to Shareholders have been specifically
incorporated by reference elsewhere in this report.
(7) Incorporated by reference to the Annual Report on Form 10-K for the year
ended December 31, 1997 previously filed by the Company.
</TABLE>
* The listed documents are management contracts which contain compensatory
arrangements.
20
<PAGE>
Exhibit 10 *(d)
<PAGE>
Exhibit 10 *(d)
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 J. JAMES GALLAGHER (the "Executive"). This
Agreement shall become effective as of July 1, 1998.
RECITALS
Executive has served as outside legal counsel to Employer and has substantial
knowledge of Employer's affairs and of the business of financial institutions in
general. Employer has incurred substantial growth and is looking to continue
expansion of its operations, with the assistance of Executive. Executive is
willing to so assist the Employer and to discontinue his outside legal practice,
in return for consideration provided herein.
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 July 1, 1998 and will continue
until June 30, 2003, unless extended or sooner terminated as provided in this
Agreement.
3. Duties.
(a) Executive will be Vice-Chairman of Columbia Bank and CBSI. In such
capacities, and subject to the authority of the Chairman and the Board of
Directors of Columbia Bank and CBSI, as appropriate, Executive will be
responsible for strategic planning, merger and acquisition activity, legal
and regulatory compliance and will in addition 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 Chairman or the
Board, or that are provided in the Bylaws, of Columbia Bank or CBSI. He
will also report to the Chairman.
(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
(calendar year) base salary of not less than $175,000 per year (payable at
the rate of $14,583.33 per month) beginning July 1, 1998.
(b) Columbia Bank 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 June 30, 2003, 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 1998 Restricted Stock Award.
(a) Grant of Restricted Stock Award. In order to further incent Executive in
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
ten thousand (10,000) shares of the no par value common stock of CBSI (the
"1998 Shares"). The date of grant is April 22, 1998.
<PAGE>
(b) Consideration for Issuance of 1998 Shares. In consideration for the
issuance of the 1998 Shares, the Executive agrees to become Vice Chairman
effective July 1, 1998 and to remain as an active executive officer and/or
Board member of CBSI and Columbia Bank from July 1, 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.
(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 April 22,
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) April 22, 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 4.3(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.
<PAGE>
(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 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 June 30, 2003 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, benefits accrued and all reimbursable
expenses hereunder incurred through such termination date and, in addition,
liquidated damages in an amount equal to the greater of (i) two years'
salary, or (ii) salary for the then-remaining term of the Agreement 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, benefits accrued 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 (i) willful
misfeasance or gross negligence in the performance of his duties; (ii)
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 (iii) 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.
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
<PAGE>
Columbia Bank, 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 until two years following termination or
June 30, 2003, whichever is longer; 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.
7.2 Definitions. 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.
<PAGE>
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. Miscellaneous.
8.1 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.
8.2 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.
8.3 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.
8.4 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.
8.5 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: 23 Lagoon Lane North
Lakewood, WA 98498
This Agreement is dated as of May 27, 1998.
COLUMBIA STATE BANK
By: /s/ W.W. Philip
---------------
W.W. Philip
Its: Chairman, President and
Chief Executive Officer
COLUMBIA BANKING SYSTEM, INC.
<PAGE>
By: /s/ W.W. Philip
---------------
W.W. Philip
Its: Chairman, President and Chief Executive Officer
/s/ J. James Gallagher
----------------------
J. James Gallagher
<PAGE>
Exhibit 11
<PAGE>
Exhibit 11
Statement re computation of per share net income
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
(in thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $10,201 $ 9,275 $4,635
================================================================================================================================
Average number of basic common shares outstanding 10,046 9,875 7,192
Dilutive effect of stock options unexercised 313 291 205
- --------------------------------------------------------------------------------------------------------------------------------
Average number of diluted common shares outstanding 10,359 10,166 7,397
================================================================================================================================
Diluted net income per share $ 0.98 $ 0.91 $ 0.63
================================================================================================================================
</TABLE>
On April 22, 1998, the Company announced a three shares for two stock split
payable on May 20, 1998, to shareholders of record on May 6, 1998. Common
shares issued and outstanding, average shares outstanding and net income per
share for all periods presented have been retroactively adjusted to give effect
to this transaction.
For additional information on earnings per share, please see the "Capital"
section of the "Management Discussion and Analysis of Financial Condition and
Results of Operations" beginning at page 24 of the Annual Report, which is
incorporated herein by reference.
<PAGE>
EXHIBIT 13
COLUMBIA BANKING SYSTEM, INC.
1998 ANNUAL REPORT
<PAGE>
COLUMBIA BANKING SYSTEM, INC. is a Tacoma, Washington-based bank holding company
which operates Columbia Bank, a state-chartered full-service commercial bank
with 26 banking offices in Pierce, King, Cowlitz and Kitsap 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>
BANKING
IS WHAT
BANKING
WAS
(PHOTO)
1
<PAGE>
<TABLE>
<CAPTION>
consolidated
highlights
(dollars in thousands percent
except per share amounts) 1998 1997 change
<S> <C> <C> <C>
for the year
Net interest income $ 41,960 $ 35,231 19.1%
Provision for loan losses 1,900 4,726 (59.8)
Net income 10,201 9,275 10.0
Net income excluding unusual items * 10,201 8,165* 25.0
per share
Net income (basic) $ 1.02 $ 0.94 8.5%
Net income (diluted) 0.98 0.91 7.7
Net income excluding unusual items * (basic) 1.02 0.83* 22.9
Net income excluding unusual items * (diluted) 0.98 0.80* 22.5
Book value 8.90 7.93 12.2
at year-end
Assets $1,059,919 $864,555 22.6%
Loans 828,639 685,889 20.8
Allowance for loan losses 9,002 8,440 6.7
Deposits 938,345 740,430 26.7
Shareholders' equity 89,566 78,353 14.3
Number of full-time equivalent employees 439 327
Number of banking offices at year end 25 21
financial ratios
Net interest margin 4.87% 4.96%
Return on average assets 1.09 1.21
Return on average equity 12.05 14.41
Return on average assets excluding unusual items * 1.09 1.07*
Return on average equity excluding unusual items * 12.05 12.68*
Efficiency ratio 67.84 69.00
Average equity to average assets 9.02 8.42
risk-based capital ratios
Tier I capital 9.89% 10.77%
Total capital 10.88 11.93
Leverage ratio 8.72 9.33
</TABLE>
* 1997 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).
2
<PAGE>
to our shareholders
As Columbia prepares to move into the year 2000, we remain committed to the
values and service that helped us surpass our original goals. The heart and soul
of Columbia Bank is the trust we have in our people and in their connection with
the customers they serve. Our people and the values they embrace leave us well
positioned as we enter the new millennium. I am pleased to announce strong
earnings and loan growth for 1998. Comparing 1998 earnings with 1997 is a bit
confusing due to certain unusual, non-recurring items that occurred in 1997.
Excluding those items, net income in 1998 increased 25 percent. Our profit for
the year was $10.2 million, or $0.98 on a diluted per share basis. The Bank's
deposit generation continued to grow with ongoing branch expansion and demand
for our service. Deposits reached $938 million at year-end, up 27 percent from
one year ago, further increasing our growing share of the retail market. On
September 1, 1993 when we started Columbia Bank, we were last in market share in
Pierce County. We are proud to announce that we have now grown to number 2 in
deposits in Pierce County. Strong loan demand contributed to growth of 21
percent for the year, with loans totaling $828.6 million at December 31, 1998,
up from $685.9 million at year-end 1997.
Within five years of implementing our aggressive expansion strategy
targeting Pierce and South King counties, your Company reached one billion in
assets by the end of September 1998. At year-end 1998, Columbia Banking System's
assets were $1.1 billion, up 23 percent from $864.6 million at year-end 1997. Of
course, size alone is not the primary measure of our performance. Operating
efficiency continued to improve during a year of expansion, down to 67.8 percent
for 1998, from 69 percent in 1997. Loan growth remains balanced with careful
attention to asset quality. Nonperforming assets were 0.59 percent of total
assets, and nonaccrual loans were 0.43 percent of total loans at year-end.
During 1998, we expanded lending operations in several major areas. We
established a dealer banking program that helped diversify our loan portfolio.
We also created a Correspondent Banking Department, with the purpose of
providing banking services of all kinds to smaller commercial banks throughout
the northwest. This allows us to sell banking products and services these banks
don't currently offer to their customers. To offer additional support to these
small banks, we enhanced our Merchant Services Department in May of last year.
The department brings in bank card fees and more business deposits. Our consumer
loan portfolio expanded to $95 million in 1998 from $75 million in 1997, an
increase of 27 percent. As the number of retail branches increase, our ability
to provide consumer loans is also improved.
3
<PAGE>
In 1998 we made a commitment to hire management and staff for a full-
service International Department. Our search led to the hiring of well-seasoned,
experienced international bankers; the department was up and running by the end
of February, 1999.
On a personal note, I announced last year that I will be stepping aside as
an active officer later in 1999. I am very pleased that we have in place the
senior executive team that will guide the Bank's future growth and expansion.
During the third quarter of 1998 we announced the appointment of Melanie Dressel
as President and Chief Operating Officer of Columbia Bank, and Jim Gallagher as
Vice Chairman of the Bank and Columbia Banking System, Inc. Evans "Tex" Whitney
was also appointed as Executive Vice President with responsibility for the
bank's branch network. H.R. Russell, our Executive Vice President of commercial
banking, continues to maintain responsibility for all lending, production and
administration. Gary Schminkey, our Executive Vice President and Chief Financial
Officer, rounds out this group. This accomplished and experienced team will
guide the Company as we meet the opportunities and challenges that lie ahead.
I am very proud of this team and of what we've accomplished so far - and
we're just beginning. I also thank you, our shareholders, for your continued
support.
/s/ W. W. Philip
------------------------------------
W. W. PHILIP
Chairman and Chief Executive Officer
A MESSAGE FROM MELANIE J. DRESSEL
The financial services environment today continues to create opportunities
for your Bank due to the impact of industry consolidations. Your Company will
continue to focus on commitment to high quality customer service, while
aggressively pursuing growth through acquisition and branching in appropriate
markets.
Our philosophy and practice continues to be hiring the right banker
familiar with his or her own market - because it works. Our branch network is
built around the experience, skills and individualized relationships of these
bankers with their customers and their community.
Last year, Columbia Bank continued to expand the franchise in selected
markets as we opened four new branches, bringing the total number of banking
locations to twenty-five in Pierce, King and Cowlitz counties. The branches we
opened in Tacoma's Westgate and Stadium areas, and 176th and Meridian in
Puyallup are traditional, full-service branch facilities. We also added the
Triangle Mall branch in Longview's Thriftway store, offering customers 7-day-a-
week banking and extended hours.
4
<PAGE>
Our first Kitsap County branch opened mid-February, 1999 in Port Orchard. We
have identified a potential expansion opportunity in Olympia in Thurston County
and expect a small branch facility to open by the end of first quarter 1999.
While expansion and growth are important, we must also provide our
customers with the highest quality products and services, through the delivery
channels they demand. Columbia Bank offers choices - to do business face-to-
face, over the phone, by mail, and during 1999, over the Internet. Offering
these choices requires sound technology that's used to enhance, not diminish
customer relationships.
Through our website at www.columbiabank.com, we expect to offer home
banking during 1999. Customers will be able to check their transactions and
account balances, and transfer funds without the need to visit a branch office.
This will be coupled with a redesign of our home page to provide easier access
to products, services and information for our existing and potential customers.
Like all banks last year, we saw compressed net interest margins as a
result of lower interest rates and competitive pressure in our market. Loans are
always priced competitively with special attention paid to the overall
relationship and its benefit to both the customer and the Bank.
A substantial portion of Columbia Bank's readiness strategy for the Year
2000 date change has been completed to our satisfaction. We are continuing our
efforts to ensure our systems, and those provided to us by outside companies
will operate smoothly in the Year 2000. We are confident that our internal
systems will be in compliance well before January 1, 2000, and we expect all
equipment and software in our control will be Year 2000 compliant by this
spring.
All of us at Columbia are committed to growing your organization and
building long-term value for our shareholders. We know that the foundation of
our growth is the strength of the communities we serve, and in giving back for
the greater good. In that spirit, Columbia Bank and our volunteers give
generously of both their time and money to support a wide variety of programs
for health, education and youth programs, the arts, and community
revitalization.
Our progress and strong 1998 performance show that our strategies are
working well. We thank our employees, shareholders and customers, all of whom
have contributed to our success.
/s/ Melanie J. Dressel
--------------------------------------
MELANIE J. DRESSEL
Executive Vice President,
Columbia Banking System, Inc.
President and Chief Operating Officer,
Columbia Bank
5
<PAGE>
Come into any of our twenty-six branches. Look us up @ www.columbiabank.com. Or
just call on the phone. You'll be treated the way you expect to be treated: not
as a number or as a too small for our attention account, but as an individual.
With your own specific preferences, ideas, needs and goals. To make sure that
banking is what banking was, everything we do begins with the customer: after
all, without customers, what sort of business could we possibly have?
(PHOTO)
6
<PAGE>
WE MAKE A
POINT
OF GETTING
INVOLVED
(PHOTO)
7
<PAGE>
EXPERIENCE
TO MAKE
DECISIONS
ON THE SPOT
(PHOTO)
8
<PAGE>
No one likes to wait. No one likes to be viewed as just another customer with
just another loan. Which are just a few reasons for the way we've built our
business around experienced bankers: people who have the knowledge, insight and
authority to respond to a customer. On the spot. By working from the perspective
of customers, we've developed a culture that has a responsive, one-of-a-kind
mentality. Supported by all the tools and systems to be effective for customers
and for our Company. (PHOTO)
9
<PAGE>
It all comes back to loyalty. We find ways to show it to our employees, to our
vendors, to our customers, shareholders and communities every day. In how we
develop new business, and keep relationships strong with the people who have
stayed with us. And we feel loyalty is returned to us. You can measure that
loyalty through our record growth in assets and income, and you can measure it
in the trust customers show us. Not to mention the thanks that come our way for
a job well done. (PHOTO)
10
<PAGE>
WE BRING
LOYALTY
BACK TO
BANKING (PHOTO)
11
<PAGE>
MD&A.............................................................. 13
REPORT OF INDEPENDENT AUDITORS.................................... 27
AUDITED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS............................. 28
CONSOLIDATED BALANCE SHEETS....................................... 29
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY................... 30
CONSOLIDATED STATEMENTS OF CASH FLOWS............................. 31
NOTES............................................................. 32
SUPPLEMENTAL FINANCIAL DATA (UNAUDITED)
CONSOLIDATED FIVE-YEAR STATEMENTS OF OPERATIONS................... 47
CONSOLIDATED FIVE-YEAR SUMMARY OF AVERAGE BALANCES AND
NET INTEREST REVENUE............................................ 48
CORPORATE DIRECTORY............................................... 50
SHAREHOLDER INFORMATION........................................... 51
BRANCH LOCATIONS.................................................. N/A
12
<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 acquiring other banks, or opening
and acquiring new branches, controlling expenses, 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 25 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, 1998, the Company had total assets of $1.1 billion.
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 25 branch
offices and has regulatory approval to open three additional branch offices in
its market area. Between January 1, 1993 and December 31, 1998, the Company
increased its consolidated assets to $1.1 billion from $198.2 million, its loans
to $828.6 million from $146.2 million and its deposits to $938.3 million from
$151.9 million. Net interest income per year increased to $42.0 million from
$14.8 million and net income per year increased to $10.2 million from a loss of
$139,000 during the 5 year period ending December 31, 1998.
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.
Management believes the ongoing consolidation among financial institutions in
Washington has created significant gaps in the ability of large banks operating
in Washington to serve certain customers, particularly the Company's target
customer base of small and medium-sized businesses, professionals and other
individuals. The Company's business strategy is to provide its customers with
the financial sophistication and breadth of products of a regional bank while
retaining the appeal and service level of a community bank. Management believes
that as a result of the Company's strong commitment to highly personalized
relationship-oriented customer service, its varied products, its strategic
branch locations and the long-standing community presence of its managers,
lending officers and branch personnel, it is well positioned to attract new
customers and to increase its market share of loans and deposits.
The Company's goal over the next several years is to create a well-
capitalized, customer focused, Pacific Northwest banking institution with a
significant presence in selected markets. The Company intends to effect this
growth strategy through a combination of growth at existing branch offices, new
branch openings (usually following the hiring of an experienced branch manager
and/or lending officer with strong community ties and banking relationships) and
acquisitions. In particular, the Company anticipates continued expansion in
Pierce County, north into King County (the location of Auburn and Bellevue),
south into Thurston County (the location of the state capitol, Olympia) and
northwest into Kitsap County (the location of Bremerton and Port Orchard).
Expansion by acquisition into these and other markets will be considered as
promising opportunities arise. In order to fund its lending activities and to
allow for increased contact with customers, the Company is establishing a branch
system catering primarily to retail depositors, supplemented by business
customer deposits and other borrowings. The Company believes this mix of funding
sources will enable it to expand 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. Management is
placing increased emphasis on control of noninterest expense.
13
<PAGE>
During 1998, Columbia Bank opened four new branches. The Westgate branch in
north Tacoma opened in January and the 176th and Meridian branch in eastern
Pierce County opened in February. Both are newly constructed, full-service
facilities. In November, its fifteenth Pierce County location opened in the
Stadium district of Tacoma. Also, in November the Bank opened its fourth Cowlitz
County branch inside the Triangle Mall Thriftway store in Longview. The
Company's future plans include new locations in Pierce, King, Kitsap and
Thurston counties of western Washington. The Company currently has regulatory
approval to open three additional branches in its market area. 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.
The Company opened its twenty-sixth branch and first Kitsap County location in
mid-February 1999 in Port Orchard. Located just south of the port city of
Bremerton, Port Orchard is a fast growing residential community that provides
easy access for employees of the Bremerton Naval shipyard and the Trident
Submarine Base.
In addition to its ongoing expansion, 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 purposes. During the third quarter, the Company occupied a new state-of-
the-art Operations Center that will allow for substantial future growth.
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 "Five years after it started in
late 1992, the Pierce County economy continued its growth through the first half
of 1998. The local economy has grown at an average rate of just under 2.5%,
that's 0.5% above the long-term historical growth rate. The outlook is for some
cooling off and slower growth over the six quarters from the second half of 1998
through 1999." In the third quarter of 1998 the Company was named in the Fortune
magazine annual ranking of America's 100 fastest growing companies as judged by
earnings growth. The Company was the only banking company on the list and was
ranked 82/nd/.
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, occupancy expense, and merchant services and bank card
expenses. 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 1998, the Company recorded net income of $10.2 million, compared with net
income of $9.3 million in 1997 and net income of $4.6 million in 1996. On a
diluted per share basis, net income for 1998 was $0.98 per share, compared with
$0.91 per share in 1997, and $0.63 per share in 1996.
Excluding certain unusual items which occurred in 1997 and 1996, net income
was $10.2 million in 1998, compared with net income of $8.2 million in 1997, and
$5.2 million in 1996, increases of 25% and 58% for the years ended December 31,
1998 and 1997, respectively. On a diluted per share basis, 1998 net income was
$0.98 per share compared with net income excluding unusual items of $0.80 per
share in 1997, and $0.71 per share in 1996.
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
completed mergers. Also, excluded was an additional loan loss provision made in
the fourth quarter to reflect increased credit risk and portfolio growth during
1997. In the 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.
The Company completed its first bank acquisitions during the fourth quarter of
1997, merging Cascade Community Bank and Bank of Fife into Columbia Bank. The
mergers were accounted for on a pooling-of-interest basis, and Company financial
statements for all reported periods have been restated to reflect the mergers.
NET INTEREST INCOME Net interest income increased $6.7 million, or 19%, in 1998
compared with $9.9 million, or 39%, in 1997. The 1998 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 $151.7 million and $156.5 million in 1998 and 1997,
respectively, while average interest-bearing liabilities increased only
$116.9 million and $111.8 million, respectively.
Net interest margin (net interest income divided by average interest-earning
assets) decreased to 4.87% for 1998, compared with 4.96% in 1997 and 4.58% in
1996. While interest-earning assets grew during 1998, the average yield on
interest-earning assets decreased to 8.54%, from 8.73% in 1997. In comparison,
the average cost of interest-bearing liabilities decreased to 4.53% in 1998 from
4.61% in 1997. The decrease in net interest margin is primarily due to
decreasing interest rates and to deposit growth exceeding loan growth with
consequent investments in lower
14
<PAGE>
yielding assets. Competition and declining interest rates have caused loan
yields to decline to a greater degree than corresponding decreases in deposit
and borrowing costs, causing the net interest margin to decrease. Interest rates
in general have exhibited a downward trend during 1998 due to a variety of
economic factors, including slowing of economic growth and low inflation.
PROVISION FOR LOAN LOSSES For the years ended December 31, 1998, 1997 and 1996,
net loan charge-offs amounted to $1.3 million, $1.6 million and $693,000,
respectively. The Company's provision for loan losses was $1.9 million for 1998,
compared with $4.7 million for 1997 and $1.6 million for 1996. During 1998, the
allowance for loan losses increased $562,000 to $9.0 million as compared with
$8.4 million and $5.3 million at the end of 1997 and 1996, respectively. The
allowance for loan losses as a percentage of loans (excluding loans held for
sale at each date) decreased to 1.09% at December 31, 1998 as compared to 1.23%
and 1.01% of loans at December 31, 1997 and 1996, respectively. At year-end
1998, the allowance for loan losses to nonperforming loans was 167.14% compared
to 569.50% and 231.57% at December 31, 1997 and 1996, respectively.
NONINTEREST INCOME Total noninterest income, excluding proceeds from a Key Man
Life Insurance policy, increased $2.7 million, or 29%, in 1998, and $3.0
million, or 47%, in 1997. Increases in noninterest income during 1998 were
centered in account service charges, merchant services and mortgage banking
income. In general, increases in account service charges and merchant services
are due to the growth of the Company, and increases in mortgage banking income
reflect a greater volume of residential real estate loan originations due to
lower long term interest rates, as compared with the year ended December 31,
1997.
NONINTEREST EXPENSE Excluding nonrecurring items (merger expense in 1997 and
SAIF assessment in 1996), total noninterest expense increased $6.6 million, or
22.0%, in 1998 and $5.7 million, or 23.5%, in 1997. The increase was primarily
due to personnel costs associated with the Company's expansion as well as
occupancy, merchant services and bank card, advertising, and other expenses. The
Company's efficiency ratio (noninterest expense, excluding unusual and
nonrecurring items, divided by the sum of net interest income plus noninterest
income, excluding unusual and nonrecurring items) was 67.8% for 1998 compared
with 69.0% and 76.7% for 1997 and 1996, respectively. A 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.
Set forth below is a schedule showing additional detail concerning increases
and decreases in the Company's noninterest expense.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, INCREASE/ INCREASE/
(IN THOUSANDS) 1998 (DECREASE) 1997 (DECREASE) 1996
<S> <C> <C> <C> <C> <C>
Compensation and employee benefits $17,925 $ 2,669 $15,256 $2,671 $12,585
Less: loan origination costs 2,109 182 1,927 (373) 2,300
- ------------------------------------------------------------------------------------------
Net compensation and
employee benefits (as reported) 15,816 2,487 13,329 3,044 10,285
Occupancy 5,215 727 4,488 240 4,248
Professional services 951 353 598 (73) 671
Advertising and promotion 1,848 584 1,264 458 806
Printing and supplies 688 (51) 739 192 547
Regulatory assessments 198 (47) 245 (97) 342
Data processing 1,731 187 1,544 322 1,222
Losses on real estate owned 62 (62) 124 124
Telephone and network 465 (35) 500 127 373
Postage & delivery 473 (58) 531 175 356
ATM network 281 60 221 12 209
Merchant services and bank card 3,308 1,314 1,994 513 1,481
Taxes, licenses and fees 1,320 330 990 202 788
Other 4,247 814 3,433 468 2,965
SAIF special assessment (612) 612
Merger expenses (1,234) 1,234 1,234
- ------------------------------------------------------------------------------------------
Total noninterest expense $36,603 $ 5,369 $31,234 $6,329 $24,905
==========================================================================================
</TABLE>
15
<PAGE>
CREDIT RISK MANAGEMENT
The extension of credit in the form of loans to individuals and businesses is a
major portion of the Company's principal business activity. Company policies and
applicable laws and regulations require risk analysis as well as ongoing
portfolio and credit management. The Company manages its credit risk through
lending limit constraints, credit review, approval policies and extensive,
ongoing internal monitoring. The Company also manages credit risk through
diversification of the loan portfolio by type of loan, type of industry,
aggregation of debt limits to a single borrower and the type of borrower.
In analyzing its existing portfolio, the Company reviews its consumer and
residential loan portfolios by risk rating each loan and analyzing their
performance as a pool of loans since no single loan is individually significant,
judged by its risk rating size or potential risk of loss. In contrast, the
monitoring process for the commercial business, real estate construction, and
commercial real estate portfolios includes periodic reviews of individual loans
with risk ratings assigned to each loan and performance judged on a loan by loan
basis. The Company reviews these loans to assess the ability of the borrower to
service all of its interest and principal obligations and as a result the risk
rating may be adjusted accordingly. In the event that full collection of
principal and interest is not reasonably assured, the loan is appropriately
downgraded and, if warranted, placed on nonaccrual status even though the loan
may be current as to principal and interest payments.
Loan policies, credit quality criteria, portfolio guidelines and other
controls are established under the guidance of the Company's Senior Credit
Officer and approved, as appropriate, by the Board. Credit Administration,
together with appropriate loan committees, has the responsibility for
administering the credit approval process. As another part of its control
process, the Company uses an independent internal credit review and examination
function to provide assurance that loans and commitments are made and maintained
as prescribed by its credit policies. This includes a review of documentation
when the loan is initially extended and subsequent examination to ensure
continued performance and proper risk assessment.
LENDING ACTIVITIES
The Company is a full service commercial bank, which originates a wide variety
of loans. Consistent with the trend begun in 1993, the Company continues to have
success originating commercial business and commercial real estate loans.
The following table sets forth the Company's loan portfolio by type of loan for
the dates indicated:
<TABLE>
<CAPTION>
(IN THOUSANDS) % OF % OF % OF
DECEMBER 31, 1998 TOTAL 1997 TOTAL 1996 TOTAL
<S> <C> <C> <C> <C> <C> <C>
Commercial business $332,638 40.1% $270,946 39.5% $194,843 37.2%
Real estate:
One- to four-family residential 61,132 7.4 71,095 10.4 77,359 14.8
Five or more family residential
and commercial properties 291,868 35.2 206,628 30.1 151,179 28.9
- -------------------------------------------------------------------------------------------
Total real estate 353,000 42.6 277,723 40.5 228,538 43.7
Real estate construction:
One- to four-family residential 26,444 3.2 29,695 4.3 31,446 6.0
Five or more family residential
and commercial properties 23,213 2.8 33,806 4.9 10,724 2.1
- -------------------------------------------------------------------------------------------
Total real estate construction 49,657 6.0 63,501 9.2 42,170 8.1
Consumer 94,572 11.4 74,710 10.9 58,249 11.1
- -------------------------------------------------------------------------------------------
Subtotal 829,867 100.1 686,880 100.1 523,800 100.1
Less deferred loan fees and other (1,228) (0.1) (991) (0.1) (649) (0.1)
- -------------------------------------------------------------------------------------------
Total loans $828,639 100.0% $685,889 100.0% $523,151 100.0%
===========================================================================================
Loans held for sale $ 10,023 $ 4,377 $ 11,341
===================================================================================
</TABLE>
Total loans at year-end increased $142.8 million, or 20.8%, from year-end
1997. All loan categories except for one- to four-family residential and real
estate construction loans contributed significantly to the increase.
Commercial loans increased to $332.6 million at December 31, 1998,
representing 40.1% of total loans, from
16
<PAGE>
$270.9 million, or 39.5% of total loans, at December 31, 1997. This increase
reflects management's ongoing commitment to provide competitive commercial
lending in the Company's primary market areas. The Company expects to continue
to expand its commercial lending products and to emphasize in particular its
relationship banking with businesses, business owners and professional
individuals.
Residential one- to four-family loans decreased $10.0 million to $61.1 million
at December 31, 1998, representing 7.4% of total loans, compared with $71.1
million, or 10.4% of total loans, at December 31, 1997. The decrease is
attributable to maturities and prepayments of the portfolio. These loans are
used by the Company to collateralize advances from the FHLB. The Company's
underwriting standards require that one- to four-family portfolio loans
generally be owner-occupied and that loan amounts not exceed 80% (90% with
private mortgage insurance) of the appraised value or cost, whichever is lower,
of the underlying collateral at 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.
The Company makes multi-family and commercial real estate loans in its primary
market areas. Multi-family and commercial real estate lending increased to
$291.9 million at December 31, 1998, representing 35.2% of total loans, from
$206.6 million, or 30.1% of total loans, at December 31, 1997. The Company's
underwriting standards generally require that the loan-to-value ratio for multi-
family and commercial loans not exceed 75% of appraised value or cost, whichever
is lower, and that commercial properties maintain debt coverage ratios (net
operating income divided by annual debt servicing) which management considers
adequate. 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.
The Company originates a variety of real estate construction loans. One- to
four-family residential construction loans are originated for the construction
of custom homes (where the home buyer is the borrower) and provides financing to
builders for the construction of pre-sold homes and speculative residential
construction. Construction loans on one- to four-family residences decreased to
$26.4 million at December 31, 1998, representing 3.2% of total loans, from $29.7
million, or 4.3% of total loans at December 31, 1997. Multi-family and
commercial real estate construction loans decreased to $23.2 million at December
31, 1998, representing 2.8% of total loans, from $33.8 million, or 4.9% of total
loans, at December 31, 1997. The decrease is a result of growing competition
fueled in part by declining interest rates during 1998 as well as management's
intention to focus on commercial loans.
The Company endeavors to limit its construction lending risk through adherence
to strict underwriting procedures.
At December 31, 1998, the Company had $94.6 million of consumer loans
outstanding, representing 11.4% of total loans, as compared with $74.7 million,
or 10.9% of total loans, at December 31, 1997. Consumer loans made by the
Company include automobile loans, boat and recreational vehicle financing, home
equity and home improvement loans and miscellaneous personal loans.
At December 31, 1998, the Company had no loans to foreign domiciled businesses
or foreign countries, or loans related to highly leveraged transactions.
Management's growth strategy to date 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. Management has recently turned its attention to
growth in Thurston County, south King County and the Bellevue/Eastside areas.
<TABLE>
<CAPTION>
(IN THOUSANDS) INCREASE
DECEMBER 31, 1998 1997 AMOUNT PERCENT
<S> <C> <C> <C> <C>
Pierce County $619,688 $485,863 $133,825 27.5%
All other counties 208,951 200,026 8,925 4.5
- ----------------------------------------------------------------------------------------
Total $828,639 $685,889 $142,750 20.8%
========================================================================================
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets 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); and (iii) accruing loans which are contractually past due ninety
days or more as to interest or principal payments. Potential problem loans are
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 which may later be
included in nonaccrual, past due or restructured loans.
17
<PAGE>
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, total
nonperforming assets, accruing loans past-due 90 days or more and potential
problem loans of the Company:
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31, 1998 1997 1996
<S> <C> <C> <C>
Nonaccrual:
One- to four-family residential $ 722 $ 661 $1,645
Commercial real estate 1,542
Commercial business 1,214 728 385
Consumer 125 73 226
- -------------------------------------------------------------------------
Total 3,603 1,462 2,256
Restructured:
One- to-four-family residential 15 20 25
One- to-four-family residential construction 1,768
- -------------------------------------------------------------------------
Total 1,783 20 25
Total nonperforming loans $5,386 $1,482 $2,281
=========================================================================
Real estate owned 901 231 484
- -------------------------------------------------------------------------
Total nonperforming assets $6,287 $1,713 $2,765
=========================================================================
Accruing loans past due 90 days or more $ 40 $ 111
Impaired loans 2,756 $ 728 385
Potential problem loans 1,862 669 346
Allowance for loan losses 9,002 8,440 5,282
Nonperforming loans to loans 0.65% 0.22% 0.44%
Nonperforming assets to total assets 0.59 0.20 0.39
=========================================================================
</TABLE>
The consolidated financial statements are prepared according to the accrual
basis of accounting. This includes the recognition of interest income on the
loan portfolio, unless a loan is placed on a nonaccrual basis, which occurs when
there are serious doubts about the collectibility of principal or interest. The
policy of the Company generally is to discontinue the accrual of interest on all
loans past due 90 days or more and place them on nonaccrual status.
Impaired loans, generally, refer to non-homogeneous 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.
Nonperforming loans increased to $5.4 million, or 0.65% of total loans
(excluding loans held for sale), at December 31, 1998, from $1.5 million, or
0.22% of total loans at December 31, 1997 due principally to increases in the
commercial business, commercial real estate, and residential construction loan
categories.
The increase in nonaccrual loans and other nonperforming assets is centered in
a small number of lending relationships which management considers to be
adequately reserved. All nonperforming loans are to Washington businesses.
Real estate owned, which is comprised of foreclosed real estate loans ("REO"),
increased to $901,000 at December 31, 1998, from $231,000 at December 31, 1997.
During 1998, the Company foreclosed on $1.0 million of loans collateralized by
real estate and transferred the real estate to REO. Also, the Company reduced
REO by $343,000, with proceeds of $308,000 from sales and net losses on sales of
$35,000. At year-end 1998, REO consisted of two foreclosed properties.
Total nonperforming assets increased to $6.3 million, or 0.59% of period-end
assets at December 31, 1998, from $1.7 million, or 0.20% of period-end assets at
December 31, 1997.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for loan losses to absorb losses inherent in
the loan portfolio. The size of the allowance is determined through quarterly
assessments of the probable estimated losses in the loan portfolio. The
Company's methodology for making such assessments and determining the adequacy
of the allowance includes the following key elements:
1. Formula based allowances calculated on minimum thresholds and historical
performance of the portfolio for the past five years
2. Specific allowances for identified problem loans and/or portfolio segments
3. Unallocated allowance
18
<PAGE>
In addition, the allowance incorporates the results of measuring impaired
loans as provided in the Statement of Financial Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan", and SFAS No. 118, which
amended SFAS No. 114. These accounting standards prescribe the measurement
methods, income recognition and disclosures concerning impaired loans.
On a quarterly basis (semi-annual in the case of economic and business
conditions reviews) the senior credit officers of the Company review with
Executive Management and the Board of Directors the various additional factors
that management considers when determining the adequacy of the allowance. These
factors include the following as of the applicable balance sheet date:
1. Existing general economic and business conditions affecting the Company's
market place
2. Credit quality trends, including trends in nonperforming loans
3. Collateral values
4. Seasoning of the loan portfolio
5. Bank regulatory examination results
6. Findings of internal credit examiners
7. Duration of current business cycle
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, and
net income could be significantly affected, if circumstances differ
substantially from the assumptions used in determining the allowance.
At December 31, 1998, the Company's allowance for loan losses was $9.0
million, or 1.09% of the total loan portfolio, and 167% of nonperforming loans.
This compares with an allowance of $8.4 million, or 1.23% of the total loan
portfolio, and 570% of nonperforming loans, at December 31, 1997. During the
year ended December 31, 1998, the Company set aside $1.9 million as a provision
for loan losses as compared with $4.7 million during 1997. For the years ended
December 31, 1998, 1997 and 1996, net loan charge-offs amounted to $1.3 million,
$1.6 million, and $693,000, respectively.
During 1998, there were no changes in estimation methods or assumptions that
affected the Company's methodology for assessing the appropriateness of the
allowance, except that certain changes in assumptions regarding the effect of
portfolio maturity and of economic and business conditions on borrowers affected
the assessment of the appropriate provision for the year 1998. In 1997
management concluded that loss potential had increased in the loan portfolio as
a result of average annual growth in the portfolio of approximately 31% since
1993 combined with indications of a business downturn resulting from the effect
of global economic conditions from the Asian financial crisis and, in
particular, potential adverse effects on the aerospace, foreign trade and timber
industries. This judgement was made despite the absence of a manifested
increase in nonaccrual loans or nonperforming assets but after considering the
additional factors management considers when determining the adequacy of the
allowance, as discussed above. Thus management substantially increased the
provision in 1997 to reserve for such loss potential.
During 1998, nonperforming loan levels did rise significantly but the reasons
for the increase were determined by management to be a reflection of the
maturing of the portfolio rather than problems in the aerospace, foreign trade
and timber industries. Those borrowers who were downgraded to nonperforming
status received close supervision by the Bank with the objective of seeing
substantial improvement in performance or elimination from the portfolio by
refinancing outside the Bank or other means. Progress in improving their
condition was made by several borrowers during 1998. Also, the stability of
other borrowers despite the downturn convinced management that a similarly large
provision in 1998 was not required. Thus the 1998 provision was reduced to an
amount which did not anticipate further significant deterioration in the quality
of the loan portfolio. Further, management has determined that, absent an
unanticipated decline in credit quality, the provision in 1999 will be
maintained at an amount which holds the allowance in a range of 1.00% to 1.20%
of average outstanding loans, in line with industry norms.
19
<PAGE>
The following table provides an analysis of net losses by loan type for the
last five years.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
December 31, 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Total loans, net at end of period /(1)/ $828,639 $685,889 $523,151 $418,057 $318,075
Daily average loans 748,587 613,671 473,887 373,560 264,761
- --------------------------------------------------------------------------------------------------------
Balance of allowance for loan
losses at beginning of period $ 8,440 $ 5,282 $ 4,340 $ 3,175 $ 2,354
Charge-offs:
One- to four-family residential (57) (364) (7)
Commercial business (1,195) (1,025) (514) (148) (258)
Consumer (333) (270) (199) (119) (111)
- ---------------------------------------------------------------------------------------------------------
Total charge-offs (1,585) (1,659) (720) (267) (369)
Recoveries:
One- to four-family residential 1 7
Commercial business 175 43 17 45 83
Consumer 72 47 3 5
- ---------------------------------------------------------------------------------------------------------
Total recoveries 247 91 27 50 83
Net charge-offs (1,338) (1,568) (693) (217) (286)
Provision charged to expense 1,900 4,726 1,635 1,382 1,107
- ---------------------------------------------------------------------------------------------------------
Balance of allowance for loan losses
at end of period $ 9,002 $ 8,440 $ 5,282 $ 4,340 $ 3,175
=========================================================================================================
Net charge-off to average loans outstanding 0.18% 0.26% 0.15% 0.06% 0.11%
Allowance for loan losses to loans 1.09 1.23 1.01 1.04 1.01
Allowance for loan losses to nonperforming loans 167.14 569.50 231.57 907.95 640.12
=========================================================================================================
/(1)/ Excludes loans held for sale
</TABLE>
SECURITIES
The Company's securities (securities available for sale and securities held to
maturity) increased by $34.1 million to $100.1 million from year-end 1997 to
year-end 1998. The Company had no sales of securities during 1998. Purchases
during the year totaled $92.9 million while maturities and prepayments totaled
$59.0 million. U.S. Treasury and government agency securities comprise 82.5% of
the investment portfolio, with mortgage-backed securities at 10.7% and state and
municipal securities at 5.1%. The average maturity of the securities portfolio
was 5 years, 10 months at December 31, 1998.
Approximately 93.6% 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 5 to the consolidated financial statements.
PREMISES AND EQUIPMENT
In 1998, fixed assets increased $9.8 million, or 36% from 1997. The net change
includes purchases of $12.5 million, disposals of $54,000 and depreciation
expense of $2.6 million. The Company's capital expenditures in 1999 are
anticipated to be approximately $2.1 million. Such expenditures are expected to
include approximately $1.6 million for new buildings and for remodeling existing
structures, and $500,000 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.
20
<PAGE>
DEPOSIT ACTIVITIES
The Company experienced overall average deposit growth of 24.0% and 29.3% in
1998 and 1997, respectively. All categories of deposits increased during both
years. The average interest-bearing and noninterest-bearing demand deposits
increased 28.4% and 34.0% in 1998, and 39.7% and 48.8% in 1997, respectively.
Average deposits are summarized in the following table:
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1998 1997 1996
<S> <C> <C> <C>
Demand and other noninterest-bearing $149,353 $111,492 $ 74,940
Interest-bearing demand 287,007 223,514 160,020
Savings 39,768 38,301 32,438
Certificates of deposit 337,557 282,899 240,214
Total average deposits $813,685 $656,206 $507,612
====================================================================
</TABLE>
The Company is establishing a branch system catering primarily to retail
depositors, supplemented by business 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. During 1998, total deposits increased $197.9 million to $938.3 million
at December 31, 1998. The increase occurred primarily in "core deposits".
Brokered and other wholesale deposits (excluding public deposits) increased $3.8
million to $7.3 million, or 0.78% of total deposits, at December 31, 1998, from
$3.5 million, or 0.47% of total deposits, at December 31, 1997.
Brokered and other wholesale deposits are summarized below. The average
interest rate for these deposits was 5.59% and 5.77% at December 31, 1998 and
1997, respectively.
<TABLE>
<CAPTION>
December 31, 1998 1997
(dollars in thousands) PERCENT PERCENT
OF TOTAL OF TOTAL
AMOUNT DEPOSITS AMOUNT DEPOSITS
<S> <C> <C> <C> <C>
Maturing within one year $2,000 0.21% $1,486 0.20%
Maturing after one year but within three years 5,327 0.57 2,000 0.27
- ----------------------------------------------------------------------------------------
Total brokered and other wholesale deposits $7,327 0.78% $3,486 0.47%
========================================================================================
</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, 1998 1997 AMOUNT PERCENT
<S> <C> <C> <C> <C>
Pierce County $678,019 $505,212 $172,807 34.2%
All other counties 260,326 235,218 25,108 10.7
- ------------------------------------------------------------
Total $938,345 $740,430 $197,915 26.7%
============================================================
</TABLE>
BORROWINGS
The Company relies on FHLB advances to supplement its funding sources, and the
FHLB serves as the Company's primary source of long-term borrowing. FHLB
advances are secured by one- to four-family real estate mortgages and certain
other assets. At December 31, 1998, the Company had one advance of $25.0
million at an interest rate of 5.39%. At December 31, 1998 the maximum
borrowing line from the FHLB was $123.1 million. Management anticipates that
the Company will continue to rely on the same sources of funds in the future,
and will use those funds primarily to make loans and purchase securities.
21
<PAGE>
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 consequences
from a change in interest rates that arises 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 or 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, 1998. The amounts in the table are
derived from the Company's internal data and are based upon regulatory reporting
formats. Therefore, they may not be consistent with financial information
appearing elsewhere herein that has been prepared in accordance with generally
accepted accounting principles. The amounts could be significantly affected by
external factors such as changes in prepayment assumptions, early withdrawal of
deposits and competition. 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.
22
<PAGE>
<TABLE>
<CAPTION>
ESTIMATED MATURITY OR REPRICING
-------------------------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS) 0-3 4-12 1-5 5-10 MORE THAN
DECEMBER 31, 1998 MONTHS MONTHS YEARS YEARS 10 YEARS TOTAL
INTEREST-EARNING ASSETS
Interest-earning deposits $ 22,816 $ 22,816
Securities 8,191 $ 3,653 $ 38,966 $ 45,814 $ 9,010 105,634
Loans:
Business and commercial
real estate 284,040 23,665 172,913 24,245 2,233 507,096
One- to four-family and owner-
occupied residential real estate 76,512 56,027 75,463 8,931 10,021 226,954
Consumer 32,634 31,533 30,290 6,264 683 101,404
- -----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $424,193 $114,878 $317,632 $ 85,254 $ 21,947 $ 963,904
=======================================================================================================================
Noninterest-earning assets 3,207 92,808 96,015
- -----------------------------------------------------------------------------------------------------------------------
Total assets $424,193 $118,085 $317,632 $ 85,254 $114,755 $1,059,919
=======================================================================================================================
Percent of total interest-
earning assets 44.01% 11.92% 32.95% 8.84% 2.28% 100.00%
=======================================================================================================================
INTEREST-BEARING LIABILITIES
Deposits:
Money market checking $267,372 $ 267,372
NOW accounts 18,286 $ 73,144 91,430
Savings accounts 14,447 $ 14,447 $ 14,447 43,341
Time certificates of deposit 130,007 $183,668 43,489 357,164
FHLB advances 25,000 25,000
- -----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $430,112 $183,668 $141,633 $ 14,447 $ 14,447 $ 784,307
=======================================================================================================================
Noninterest-bearing liabilities
and equity 143,230 35,808 96,574 275,612
=======================================================================================================================
Total liabilities and equity $573,342 $183,668 $177,441 $ 14,447 $111,021 $1,059,919
=======================================================================================================================
Percent of total interest-
earning assets 44.62% 19.06% 14.69% 1.50% 1.50% 81.37%
=======================================================================================================================
Rate sensitivity gap $ (5,919) $(68,790) $175,999 $ 70,807 $ 7,500 $ 179,597
Cumulative rate sensitivity gap (5,919) (74,709) 101,290 172,097 179,597
- -----------------------------------------------------------------------------------------------------------------------
Rate sensitivity gap as a percentage
of interest-earning assets (0.61)% (7.14)% 18.26% 7.34% 0.78% 18.63%
Cumulative rate sensitivity gap
as a percentage of interest-
earning assets (0.61)% (7.75)% 10.51% 17.85% 18.63%
=======================================================================================================================
</TABLE>
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 certain 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, 1998, the
Company would expect an increase in net interest income of $470,000 and a
decrease in net interest income of $461,000 if interest rates gradually decrease
or increase, respectively, from current rates by 100 basis points over a twelve-
month period. Similarly, 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 the then current rates by 100
basis points over a twelve-month period.
23
<PAGE>
INCOME TAX
Prior to December 31, 1996, for federal income tax purposes, the Company had net
operating loss ("NOL") carryforwards. The carryforwards were used, subject to
certain restrictions and limitations, to offset taxable income and the tax
liability of the Company. At December 31, 1996, all available NOL carryforwards
had been utilized to offset taxable income and the Company is now fully taxable.
For the years ending December 31, 1998 and 1997, the Company recorded income
tax provisions of $5.2 million and $2.8 million, respectively.
CAPITAL
Shareholders' equity increased to $89.6 million at December 31, 1998, from $78.4
million at December 31, 1997. The increase is due primarily to net income for
the year of $10.2 million. Shareholders' equity was 8.45% and 9.06% of total
assets at December 31, 1998 and December 31, 1997, 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, 1998, the Company's leverage ratio was 8.72%,
compared with 9.33% at December 31, 1997. In addition, banking regulators have
adopted risk-based capital guidelines, under which risk percentages are assigned
to various categories of assets and off-balance sheet items to calculate a risk-
adjusted capital ratio. Tier I capital generally consists of common
shareholders' equity, 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 9.89% and 10.88%, respectively, at December 31, 1998,
compared with 10.77% and 11.93%, respectively, at December 31, 1997.
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 22, 1998, the Company announced a three shares for two stock split
payable on May 20, 1998, to shareholders of record on May 6, 1998. Common shares
issued and outstanding, average shares outstanding and net income per share for
all periods presented have been retroactively adjusted to give effect to this
transaction.
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 (Y2K)
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. Financial institutions, such as
Columbia, are dependent on many types of automated computer systems for their
day to day operations. The failure of any of theses systems to recognize the
Year 2000, could have a material effect on the Company's business, results of
operations, and/or financial condition.
THE COMPANY'S STATE OF READINESS The Company currently is preparing its
operations for the Year 2000 and has established a project team, which has
developed a project plan intended to insure that the Company will be Y2K
compatible well before December 31, 1999. The project plan incorporates five
phases: awareness, assessment, renovation, validation, and implementation.
The awareness phase is ongoing and incorporates monthly updates to the Board
of Directors, management, and staff. In addition, shareholders and customers are
informed through mailings and financial reports. The Y2K project team meets
regularly. Loan officers have been trained in interviewing and surveying credit
customers on the state of readiness of their businesses and have begun those
activities.
The Company has completed its assessment of all of its computer systems,
hardware, software, networks, telecommunications, ATM, property, and equipment
that could potentially be either directly or indirectly affected by Y2K. The
Company has identified all vendors that supply services and/or products that
could be considered critical to day-to-day operations to determine if they are
Y2K compatible. The Company is identifying all customers who have a total
borrowing relationship of $250,000 or more or otherwise have the potential to
adversely affect the Company's asset quality or profitability if they do not
become Y2K compatible.
24
<PAGE>
Based on its assessment, the Company has essentially completed renovating all
systems and equipment that have been identified needing Y2K up-grades. In early
October, the Company's data processing provider advised the Company that it had
successfully converted its systems to Y2K compatibility. Testing is scheduled to
be completed and the Company's data processing system is expected to be fully
compliant by March 31, 1999. All other systems and equipment have been upgraded
or are in process of being upgraded. The Company is monitoring vendors that are
in the process of upgrading or have not begun upgrading their businesses.
The validation process involves testing all systems and equipment for Y2K
compatibility. Bank hardware has been tested and the Company is in the process
of replacing obsolete equipment as part of our normal business operations.
The implementation phase is ongoing and incorporates the development of
contingency plans for the century date change. The Company has developed a
credit risk mitigation plan, a liquidity contingency plan, and ongoing
disclosures and inquiries to customers and vendors.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES The Company has expended
approximately $53,000 in staff time and travel expenses in addressing the Y2K
issue. Equipment upgrades are expected to cost approximately $543,000. Much of
the Company's equipment, such as PCs, was upgraded in 1998 as part of normal
business operations. The Company is relatively new and the majority of its
hardware and software are recent purchases or are being upgraded to meet growth
demands. The Company moved into a new state-of-the-art operations center in
August 1998. The center included the installation of new item processing
hardware and software, a new voice response unit, a new wire transfer system,
and a new optical storage system, all of which are Y2K compatible. Future
expenses cannot be predicted with certainty at this time, however, management
does not believe that expenses relating to meeting the Company's Y2K challenges
will have a material effect on its operations or financial performance.
THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES Although the Company can and will
prepare its operations for the century change, there can be no assurance that
forces beyond its control will not impact its operations. The Company purchases
systems, equipment, and data processing services from vendors and suppliers. It
also depends on many other vendors for various services needed for day-to-day
operations. The Company's customers could also be impacted adversely by the
century change and thereby impact the financial performance of the Company. In
spite of the Company's diligent efforts in assuring its outside suppliers,
vendors and customers are Y2K compliant, there can be no assurance that when the
century changes, certain systems, technology and equipment of Columbia, its
vendors and its customers will not be impacted and consequently impact the
operations of the Company.
THE COMPANY'S CONTINGENCY PLANS The Company has developed a comprehensive Year
2000 contingency plan. Although the Company has taken precautions to assure its
technology is Y2K ready, it will continue to address possible emergency
scenarios.
The Company's new state-of-the-art operations center has a generator backup to
run the entire facility. All branches have special procedures in order to
operate without the usual telecommunications links so that, in the event of a
telecommunications failure, the Company is able to process its data through a
remote site.
25
<PAGE>
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, 1998, the last sale price for the
Company's stock in the over-the-counter market was $18/1/2/.
The Company presently intends to retain earnings to support anticipated
growth. Accordingly, the Company does not intend to pay cash dividends on its
common stock in the foreseeable future. Please refer to the "Capital" section of
the "Management Discussion and Analysis of Financial Condition and Results of
Operations" and Note 4 to the consolidated financial statements, contained
elsewhere in this report, for regulatory capital requirements and restrictions
on dividends to shareholders.
The Company is aware that large blocks of its stock are held in street name by
brokerage firms. At December 31, 1998, the number of shareholders of record was
1,349.
The following are high and low sales prices as reported in Nasdaq according to
information furnished by the National Association of Securities Dealers. Prices
do not include retail mark-ups, mark-downs or commissions.
1998 1997
HIGH LOW HIGH LOW
First quarter $ 21/1/4/ $ 17/7/8/ $ 11/9/16/ $9/27/32/
Second quarter 27/5/32/ 19/7/8/ 13/3/4/ 9/3/8/
Third quarter 23/1/2/ 14/3/8/ 17/5/32/ 13/5/32/
Fourth quarter 22/1/2/ 15/7/16/ 18/27/32/ 15
For the year 27/5/32/ 14/3/8/ 18/27/32/ 9/3/8/
26
<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, 1998 and
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for the years 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 audits.
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 audits provide 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, 1998
and 1997, and the results of its operations and its cash flows for the two years
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 3 to the consolidated financial statements.
The consolidated financial statements of the Company for the year ended
December 31, 1996, 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 77% of restated net income in 1996. Separate financial
statements of the other companies included in the Company's restated
consolidated financial statements for the year ended December 31, 1996 were
audited and reported on separately by other auditors. We have audited the
statements of operations, shareholders' equity, and cash flows for the year
ended December 31, 1996, after restatement for the 1997 poolings of interests;
in our opinion, such consolidated statements have been properly combined on the
basis as described in Note 3 of the notes to the consolidated financial
statements.
/s/ Deloitte & Touche LLP
_____________________________
Deloitte & Touche LLP
Seattle, Washington
January 29, 1999
27
<PAGE>
CONSOLIDATED STATEMENTS OF
OPERATIONS
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE) YEARS ENDED DECEMBER 31, 1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 66,858 $ 56,176 $ 43,240
Securities available for sale 4,696 3,800 2,360
Securities held to maturity 419 628 702
Deposits with banks 1,654 1,457 1,583
- --------------------------------------------------------------------------------------------------------------------------------
Total interest income 73,627 62,061 47,885
INTEREST EXPENSE
Deposits 29,759 24,775 20,370
Federal Home Loan Bank advances 1,908 1,971 1,938
Other borrowings 84 233
- --------------------------------------------------------------------------------------------------------------------------------
Total interest expense 31,667 26,830 22,541
- --------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 41,960 35,231 25,344
Provision for loan losses 1,900 4,726 1,635
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 40,060 30,505 23,709
NONINTEREST INCOME
Service charges and other fees 5,679 4,234 2,837
Mortgage banking 1,677 1,032 701
Gains on sales of loans, net 1,035
Other 4,635 2,973 2,772
Key Man Life Insurance 3,518
- --------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 11,991 12,792 6,310
NONINTEREST EXPENSE
Compensation and employee benefits 15,816 13,329 10,285
Occupancy 5,215 4,488 4,248
Advertising and promotion 1,848 1,264 806
Data processing 1,731 1,544 1,222
Other 11,993 9,375 7,732
SAIF special assessment 612
Merger expenses 1,234
- --------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 36,603 31,234 24,905
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 15,448 12,063 5,114
Provision for income taxes 5,247 2,788 479
- --------------------------------------------------------------------------------------------------------------------------------
Net Income $ 10,201 $ 9,275 $ 4,635
================================================================================================================================
NET INCOME PER COMMON SHARE:
Basic $1.02 $0.94 $0.64
Diluted 0.98 0.91 0.63
Average number of common shares outstanding 10,046 9,875 7,192
Average number of diluted common shares outstanding 10,359 10,166 7,397
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
CONSOLIDATED
BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 53,602 $ 47,604
Interest-earning deposits with banks 22,816 28,108
Securities available for sale 93,726 56,279
Securities held to maturity 6,358 9,679
FHLB stock 5,550 5,144
Loans held for sale 10,023 4,377
Loans 828,639 685,889
Less: allowance for loan losses 9,002 8,440
- --------------------------------------------------------------------------------------------------------------------------------
Loans, net 819,637 677,449
Interest receivable 6,420 5,023
Premises and equipment, net 37,077 27,246
Real estate owned 901 231
Other 3,809 3,415
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets $1,059,919 $ 864,555
================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 180,445 $ 146,063
Interest-bearing 757,900 594,367
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits 938,345 740,430
Federal Home Loan Bank advances 25,000 39,000
Other liabilities 7,008 6,772
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 970,353 786,202
Commitments and contingent liabilities (Note 14)
Shareholders' equity:'
Preferred stock (no par value)
Authorized, 2 million shares; none outstanding
DECEMBER 31,
Common stock (no par value) 1998 1997
Authorized shares 45,000 16,500
Issued and outstanding 10,062 9,880 68,612 67,901
Retained earnings 20,616 10,415
Accumulated other comprehensive income
Unrealized gains on securities available for sale, net of tax 338 37
- --------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 89,566 78,353
Total Liabilities and Shareholders' Equity $1,059,919 $864,555
================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER TOTAL
NUMBER OF RETAINED COMPREHENSIVE SHAREHOLDERS'
(IN THOUSANDS) SHARES AMOUNT EARNINGS INCOME (LOSS) EQUITY
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 6,505 $37,414 $ 2,804 $ (98) $ 40,120
Comprehensive income:
Net income for 1996 4,635
Change in unrealized gains and (losses)
on securities available for sale, net of tax 60
Total comprehensive income 4,695
Issuance of shares of common stock, net 2,238 20,900 20,900
Issuance of shares of common stock -
5% stock dividend 246 2,157 (2,157)
Conversion of Convertible Subordinated Notes 383 2,509 2,509
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 9,372 62,980 5,282 (38) 68,224
Comprehensive income:
Net income for 1997 9,275
Change in unrealized gains and (losses)
on securities available for sale, net of tax 75
Total comprehensive income 9,350
Issuance of shares of common stock, net 117 779 779
Issuance of shares of common stock --
5% stock dividend 391 4,142 (4,142)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 9,880 67,901 10,415 37 78,353
Comprehensive income:
Net income for 1998 10,201
Change in unrealized gains and (losses)
on securities available for sale, net of tax 301
Total comprehensive income 10,502
Issuance of shares of common stock, net 182 711 711
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 10,062 $68,612 $ 20,616 $ 338 $ 89,566
================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
CONSOLIDATED STATEMENTS OF
CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 10,201 $ 9,275 $ 4,635
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Provision for loan losses 1,900 4,726 1,635
Deferred income tax expense (benefit) 30 956 (12)
Losses on real estate owned 35 105 41
Depreciation and amortization 2,304 2,189 2,681
Net realized losses (gains) on sale of assets (55) (971) 218
(Increase) decrease in loans held for sale (5,646) 6,964 (9,974)
Increase in interest receivable (1,397) (903) (1,109)
Increase in interest payable 660 528 423
Net changes in other assets and liabilities (883) (3,546) 208
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 7,149 19,323 (1,254)
INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 49,250 25,337 17,885
Purchase of securities available for sale (83,186) (34,831) (46,770)
Proceeds from maturities of mortgage-backed securities available for
sale 5,075 3,814 1,682
Purchase of mortgage-backed securities available for sale (8,710)
Proceeds from maturities of securities held to maturity 4,698 4,414 1,471
Purchases of securities held to maturity (1,380) (1,470) (3,014)
Loans originated and acquired, net of principal collected (144,585) (173,877) (106,888)
Proceeds from sales of loans 10,177
Purchases of premises and equipment (12,546) (11,043) (7,181)
Proceeds from disposal of premises and equipment 20 400 1,273
Proceeds from sale of real estate owned 308 588 3,307
Other, net (13) (83) (495)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (191,069) (176,574) (138,730)
FINANCING ACTIVITIES
Net increase in deposits 197,915 143,926 149,605
Proceeds from FHLB advances and other long-term debt 25,000 32,800
Repayment of FHLB advances and other long-term debt (14,000) (20,000) (23,800)
Increase in securities sold under repurchase agreements 1,366
Proceeds from issuance of common stock, net 711 779 20,900
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 184,626 149,705 180,871
- ----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 706 (7,546) 40,887
Cash and cash equivalents at beginning of period 75,712 83,258 42,371
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 76,418 $ 75,712 $ 83,258
==================================================================================================================================
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 31,007 $ 26,302 $ 22,117
Cash paid for income taxes 5,547 3,380 460
Transfer from securities available for sale to held to
maturity 996
Loans foreclosed and transferred to real estate owned 1,000 440 528
Issuance of common stock from conversion of convertible subordinated notes 2,509
See accompanying notes to consolidated financial statements.
</TABLE>
31
<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 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, 1998 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 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 are amortized, using the interest
method, over periods which approximate the average life of the loans.
32
<PAGE>
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.
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 Earnings per share is computed using the weighted average
number of common and diluted common shares outstanding during the period. 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 reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
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 313,000, 291,000, and 205,000 in 1998, 1997, and 1996 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.
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 1997 and 1996 consolidated financial
statements have been reclassified to conform with the 1998 presentation. These
reclassifications had no effect on net income.
PROSPECTIVE ACCOUNTING PRONOUNCEMENT In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" ("SFAS 130"). The 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 is effective in the Company's 1998 financial statements and all
prior periods shown on the financial statements have been restated.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". The statement provides standards for
reporting of information about operating segments in annual financial statements
that public business enterprises report and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. SFAS No.131 is effective for financial
statements for periods beginning after December 15, 1997. The Company, after
reviewing SFAS No. 131, has determined that its current business and operations
are not divided and reported on in segments. All of the Company's operations
are interrelated and to breakout any of its operations into segments would not
be meaningful or consistent with its current management and reporting practices
and therefore could possibly be misleading to the reader and/or investor.
33
<PAGE>
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." The Statement revises employers'
disclosures about pension and other postretirement benefit plans to facilitate
financial analysis, and to eliminate disclosures that are no longer useful. SFAS
No. 132 is effective for fiscal years beginning after December 15, 1997.
Adoption of SFAS No. 132 has no material effect on the Company's financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet measured at its fair value. This Statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999. The Company currently has no
activity in derivative instruments and hedging activities, and does not expect
adopting of SFAS No. 133 to have a material effect on the financial statements.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." The Statement establishes accounting and
reporting standards requiring that after the securitization of mortgage loans
held for sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interests based on its
ability and intent to sell or hold those investments. SFAS No. 134 is effective
for the first fiscal quarter beginning after December 15, 1998. The Company
currently has no activity in securitizing mortgage loans held for sale, and does
not expect adopting of SFAS No. 134 to have a material effect on the financial
statements.
NOTE 2. STOCK SPLIT
On April 22, 1998, the Company announced a three shares for two stock split
payable on May 20, 1998, to shareholders of record on May 6, 1998. Common
shares authorized, issued and outstanding, average shares outstanding and net
income per share for all periods presented have been retroactively adjusted to
give effect to this transaction.
NOTE 3. BUSINESS COMBINATIONS/RESTRUCTURING
On December 1,1997, the Company merged with Cascade Bancorp ("Cascade") and Bank
of Fife ("Fife"). At December 1, 1997, Cascade Bancorp had assets of $90.3
million, deposits of $78.7 million and shareholder's equity of $6.8 million. At
December 1, 1997, Bank of Fife had assets of $34.0 million, deposits of $30.2
million and stockholder's equity of $3.5 million. The Company issued 1,128,758
shares of common stock to complete the merger with Cascade Bancorp and 465,276
shares to complete the merger with Bank of Fife (adjusted for 1998 stock split,
see Note 2). The mergers were treated as a pooling 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 stockholders' equity of
Cascade Bancorp and Bank of Fife were recorded on the books of the resulting
institution at their values as reported on the books of Cascade Bancorp and Bank
of 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.
NOTE 4. 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, 1998
were approximately $4.4 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.
34
<PAGE>
NOTE 5. SECURITIES
The following table summarizes the amortized cost, gross unrealized gains and
losses and the resulting market value of securities available for sale.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
December 31, 1998:
U.S. Treasury & government agency $81,549 $474 $82,023
Mortgage-backed 10,672 1 10,673
Other securities 992 38 1,030
- ----------------------------------------------------------------------------------
Total $93,213 $513 $93,726
==================================================================================
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
==================================================================================
</TABLE>
There were no sales of securities available for sale during the years ended
December 31, 1998 and 1997.
At December 31, 1998 and 1997, securities available for sale with a fair value
of $4.8 million and $4.3 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>
AMORTIZED MARKET
(IN THOUSANDS) DECEMBER 31, 1998 COST VALUE
<S> <C> <C>
Amount maturing:
Within one year $ 9,988 $10,010
Greater than one year and less than five years 35,127 35,301
Greater than five years and less than ten years 39,088 39,405
After ten years 9,010 9,010
- ----------------------------------------------------------------------------------------------
Total $93,213 $93,726
==============================================================================================
</TABLE>
<TABLE>
SECURITIES HELD TO MATURITY GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
<S> <C> <C> <C>
December 31, 1998:
U.S. Treasury & government agency $ 497 $ 7 $ 504
State and municipal securities 5,115 121 5,236
Other Securities 496 18 514
FHLMC preferred stock 250 1 251
- ----------------------------------------------------------------------------------------------
Total $6,358 $147 $ 6,505
==============================================================================================
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
==============================================================================================
</TABLE>
35
<PAGE>
<TABLE>
AMORTIZED MARKET
(IN THOUSANDS) DECEMBER 31, 1998 COST VALUE
<S> <C> <C>
Amount maturing:
Within one year $ 982 $ 990
Greater than one year and less than five years 3,663 3,751
Greater than five years and less than ten years 1,713 1,764
- ----------------------------------------------------------------------------------------------
Total $ 6,358 $ 6,505
==============================================================================================
</TABLE>
There were no sales of securities held to maturity during the years ended
December 31, 1998 and 1997.
NOTE 6. LOANS
The following is an analysis of the loan portfolio by major types of loans:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1998 1997
<S> <C> <C>
Commercial business $332,638 $270,946
Real estate:
One- to four-family residential 61,132 71,095
Five or more family residential and commercial properties 291,868 206,628
- ---------------------------------------------------------------------------------
Total real estate 353,000 277,723
Real estate construction:
One- to four-family residential 26,444 29,695
Five or more family residential and commercial properties 23,213 33,806
- ---------------------------------------------------------------------------------
Total real estate construction 49,657 63,501
Consumer 94,572 74,710
- ---------------------------------------------------------------------------------
Subtotal 829,867 686,880
Less deferred loan fees, net and other (1,228) (991)
- ---------------------------------------------------------------------------------
Total loans $828,639 $685,889
=================================================================================
Loans held for sale $ 10,023 $ 4,377
=================================================================================
</TABLE>
At December 31, 1998 and 1997, residential real estate loans with recorded
values of $30.0 million and $46.8 million, respectively, were pledged to secure
Federal Home Loan Bank advances and for other purposes.
The following table summarizes certain information related to nonperforming
loans:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1998 1997 1996
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis $3,603 $1,462 $2,256
Restructured loans 1,783 20 25
- -------------------------------------------------------------------
Total nonperforming loans $5,386 $1,482 $2,281
===================================================================
Originally contracted interest $ 408 $ 68 $ 219
Recorded interest 221 12 102
- -------------------------------------------------------------------
Reduction in interest income $ 187 $ 56 $ 117
===================================================================
</TABLE>
At December 31, 1998 and 1997, the recorded investment in impaired loans was
$1.2 million and $728,000, respectively. No specific allocated allowance for
loan losses has been made for impaired loans. The average recorded investment in
impaired loans for the period ended December 31, 1998 and 1997 was $1.5 million
and $570,000, respectively.
At December 31, 1998 and 1997, there were no commitments for additional funds
for loans accounted for on a nonaccrual basis.
At December 31, 1998 and 1997, the Company had no loans to foreign domiciled
businesses or foreign countries, or loans related to highly leveraged
transactions.
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 $27.6 million and $5.9 million at December 31, 1998 and 1997,
respectively. During 1998, $21.8 million of new related party loans were made,
and repayments and transfers totaled $100,000.
36
<PAGE>
NOTE 7. ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of period $ 8,440 $ 5,282 $4,340
Loans charged off (1,585) (1,659) (720)
Recoveries 247 91 27
- ---------------------------------------------------------------------
Net charge-offs (1,338) (1,568) (693)
Provision charged to operating expense 1,900 4,726 1,635
- ---------------------------------------------------------------------
Balance at end of period $ 9,002 $ 8,440 $5,282
=====================================================================
</TABLE>
NOTE 8. PREMISES AND EQUIPMENT
Land, buildings, and furniture and equipment, less accumulated depreciation and
amortization, were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1998 1997
<S> <C> <C>
Land $ 8,667 $ 5,452
Buildings 21,337 17,762
Leasehold improvements 1,583 1,424
Furniture and equipment 13,180 9,303
Vehicles 181 118
Computer software 2,610 1,360
- --------------------------------------------------------------------
Total cost 47,558 35,419
Less accumulated depreciation and amortization (10,481) (8,173)
- --------------------------------------------------------------------
Total $ 37,077 $27,246
====================================================================
</TABLE>
Total depreciation and amortization expense on buildings and furniture and
equipment was $2.6 million, $2.1 million, and $2.1 million for the years ended
December 31, 1998, 1997 and 1996, 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) YEAR ENDING DECEMBER 31,
<S> <C>
1999 $1,270
2000 1,000
2001 610
2002 478
2003 404
2004 and thereafter 2,827
- -------------------------------------------------------------
Total minimum payments $6,589
=============================================================
</TABLE>
Total rental expense on buildings and equipment was $1.2 million for each of
the years ended December 31, 1998, 1997 and 1996, respectively.
37
<PAGE>
NOTE 9. FEDERAL HOME LOAN BANK ADVANCES AND LONG-TERM DEBT
The Company had Federal Home Loan Bank ("FHLB") advances of $25.0 million and
$39.0 million at December 31, 1998 and 1997, respectively.
FHLB advances are at the following interest rates:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1998 1997
<S> <C> <C>
6.14% $ 2,000
6.07 2,000
5.39 $25,000 25,000
5.32 5,000
5.20 5,000
- ----------------------------------------------------------------------------------------
Total $25,000 $39,000
========================================================================================
</TABLE>
Aggregate maturities of FHLB advances due in years ending after December 31,
1998, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) AMOUNT
<S> <C>
2002 $25,000
========================================================================================
</TABLE>
FHLB advances are collateralized by residential real estate loans with a
recorded value of approximately $30.0 million at December 31, 1998, and $46.8
million at December 31, 1997 (see Note 6). Penalties are generally required for
prepayments of certain long-term FHLB advances.
38
<PAGE>
NOTE 10. INCOME TAX
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1998 1997 1996
<S> <C> <C> <C>
Current $5,217 $ 4,258 $ 491
Deferred (benefit) 30 (1,470) (12)
- ------------------------------------------------------------------
Total $5,247 $ 2,788 $ 479
==================================================================
</TABLE>
Significant components of the Company's deferred tax assets and liabilities at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1998 1997
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 3,099 $ 2,914
- -------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 3,099 2,914
Deferred tax liabilities:
FHLB stock dividends (938) (775)
Unrealized gain on investment securities available for sale (174) (22)
Depreciation (100) (157)
Other (195) (238)
- -------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (1,407) (1,192)
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 1,692 $ 1,722
===================================================================================================================
</TABLE>
A reconciliation of the Company's effective income tax rate with the federal
statutory tax rate is as follows:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C> <C> <C>
Income tax based on statutory rate $5,252 34% $ 4,101 34% $ 1,739 34%
Increase (reduction) resulting from:
Tax-exempt income (32) (1) (1,252) (10) (40) (1)
Other nondeductible items 27 1 707 5 23
Valuation allowance (768) (6) (1,243) (24)
- ------------------------------------------------------------------------------------------------------------
Income tax $5,247 34% $ 2,788 23% $ 479 9%
============================================================================================================
</TABLE>
39
<PAGE>
NOTE 11. STOCK OPTIONS
The Company has an employee stock option plan ("the Plan") to provide additional
incentives to key employees, thereby helping to attract and retain the best
available personnel. The Company applies APB Opinion 25 and related
interpretations in accounting for the Plan. Accordingly, no compensation cost
has been recognized for the Plan.
At December 31, 1998 and 1997, the Company had stock options outstanding of
549,953 shares and 522,224 shares, respectively, for the purchase of common
stock at options prices ranging from $3.67 to $26.00 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, 1998, a maximum of
797,823 shares were authorized under the stock option plan.
Additionally, at December 31, 1998, 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 43,228 and 16,497 shares of common stock at
exercise prices of approximately $3.91 and $5.59 per share, respectively. These
options are generally exercisable in whole or in part at any time before
September 26, 2000.
The following table outlines the stock option activity for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS) WEIGHTED
NUMBER OF AVERAGE PRICE
OPTION OF OPTION
SHARES SHARES
<S> <C> <C>
Balance at December 31, 1995 527,418 $ 5.39
Issued 123,602 9.93
Exercised (27,795) 2.75
Terminated (10,145) 6.98
- --------------------------------------------------------------
Balance at December 31, 1996 613,080 6.40
Issued 94,230 11.59
Exercised (105,273) 5.34
Terminated (787) 6.19
- --------------------------------------------------------------
Balance at December 31, 1997 601,250 7.40
Issued 92,427 24.44
Exercised (100,121) 4.99
Terminated (375) 18.50
Balance at December 31, 1998 593,181 $10.37
==============================================================
Total vested at December 31, 1998 392,614 $ 7.36
==============================================================
</TABLE>
Financial data pertaining to outstanding stock options were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 WEIGHTED
WEIGHTED WEIGHTED AVERAGE
RANGES OF AVERAGE AVERAGE NUMBER OF EXERCISE PRICE
EXERCISE NUMBER OF REMAINING EXERCISE PRICE OF EXERCISABLE OF EXERCISABLE
PRICES OPTION SHARES CONTRACTUAL LIFE OPTION SHARES OPTION SHARES OPTION SHARES
<S> <C> <C> <C> <C> <C>
$3.67 - $5.37 75,220 2.2 Years $ 3.85 75,220 $ 3.85
5.59 - 7.97 251,125 3.3 6.69 237,894 6.62
9.53 - 13.49 158,336 7.2 10.63 63,000 11.59
18.00 - 26.00 108,500 6.8 23.02 16,500 18.00
- ------------------------------------------------------------------------------------------------------------
593,181 4.8 Years $10.37 392,614 $ 7.37
============================================================================================================
</TABLE>
40
<PAGE>
Had compensation cost for the Company's Plan been determined based on the fair
value at the option grant dates, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS EXCEPT PER SHARE) 1998 1997 1996
<S> <C> <C> <C>
Net income attributable to common stock:
As reported $10,201 $9,275 $4,635
Pro forma 9,947 9,163 4,601
Net income per common share:
Basic:
As reported $ 1.02 $ 0.94 $ 0.64
Pro forma 0.99 0.93 0.64
Diluted:
As reported $ 0.98 $ 0.91 $ 0.63
Pro forma 0.96 0.90 0.62
</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 1998, 1997 and
1996; expected volatility of 57.0% in 1998, 37.0% in 1997 and 40.1% in 1996;
risk-free rates of 4.5% for 1998, 5.6% for 1997 and 6.0% for 1996; no annual
dividend yields; and expected lives of five years for all years.
NOTE 12. 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 judgment by the regulators about components, risk
weightings, and other factors.
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, 1998, that the Bank meets all
capital adequacy requirements, but is slightly below the criteria necessary to
be "well capitalized" as defined by regulations.
As of September 30, 1997, the most recent notification from the FDIC
categorized the Bank as adequately capitalized under the regulatory framework
for prompt corrective action. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
FOR CAPITAL TO BE WELL CAPITALIZED
ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
AS OF DECEMBER 31, 1998
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk-weighted assets) $87,693 9.8% $71,863 8.0% $89,829 10.0%
Tier 1 Capital
(to risk-weighted assets) 78,691 8.8% 35,931 4.0% 53,897 6.0%
Tier 1 Capital
(to average assets) 78,691 7.8% 40,515 4.0% 50,644 5.0%
AS OF DECEMBER 31, 1997
Total Capital
(to risk-weighted assets) $77,164 10.7% $57,711 8.0% $72,139 10.0%
Tier 1 Capital
(to risk-weighted assets) 68,724 9.5% 28,856 4.0% 43,284 6.0%
Tier 1 Capital
(to average assets) 68,724 8.3% 32,966 4.0% 41,207 5.0%
</TABLE>
41
<PAGE>
NOTE 13. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution plan which allows employees to
contribute up to 15% of their compensation to the plan. Employees who are at
least 20 1/2 years of age and have completed 6 months of service are eligible
to participate in the plan. The Company is required to match 50% of employee
contributions up to 3% of each employee's total compensation. The Company
contributed approximately $273,000, $211,000 and $153,000 in matching funds to
the plan during the years ended December 31, 1998, 1997 and 1996, 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 1999 and 1998, the Company announced discretionary
contributions of approximately $581,000 and $439,000 for the years ended 1998
and 1997, respectively.
The Company maintains an "Employee Stock Purchase Plan" ("ESPP").
Substantially all employees of the Company who have been continuously employed
for six months are eligible to participate in the ESPP under which Common Stock
is issued at quarterly intervals for cash at a price of 90% of the fair market
value of the stock. Under the ESPP, 13,238 shares were acquired by employees
for approximately $258,000 in 1998. There is no charge to income as a result of
issuance of stock under this plan. At December 31, 1998, 105,270 shares of
common stock were reserved for issuance under this plan.
NOTE 14. COMMITMENTS AND CONTINGENT LIABILITIES
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, 1998 and 1997, the Company's
loan commitments amounted to $267.5 million and $206.3 million, respectively.
Standby letters of credit were $8.8 million and $6.1 million at December 31,
1998 and 1997, respectively. In addition, commitments under commercial letters
of credit used to facilitate customers' trade transactions amounted to $591,000
and $3.1 million at December 31, 1998 and 1997, 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.
42
<PAGE>
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
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>
(IN THOUSANDS) DECEMBER 31, 1998 1997
ASSUMPTIONS USED IN CARRYING FAIR CARRYING FAIR
ESTIMATING FAIR VALUE AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks Approximately equal to
carrying value $53,602 $53,602 $47,604 $47,604
Interest-earning deposits Approximately equal to
with banks carrying value 22,816 22,816 28,108 28,108
Securities available for sale Quoted market prices 99,276 99,276 61,423 61,423
Securities held for sale Quoted market prices 6,358 6,505 9,679 9,754
Loans held for sale Approximately equal to
carrying value 10,023 10,023 4,377 4,377
Loans Discounted expected future
cash flows, net of allowance
for loan losses 819,637 882,836 677,449 739,687
LIABILITIES
Deposits Fixed-rate certificates of
deposit: Discounted
expected future cash flows
All other deposits:
Approximately equal to
carrying value $938,345 $948,718 $740,430 $740,803
Federal Home Loan Bank
advances Discounted expected future
cash flows 25,000 24,994 39,000 39,032
Other borrowings
</TABLE>
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, 1998 and 1997 approximates the recorded
amounts of the related fees.
43
<PAGE>
NOTE 16. PARENT COMPANY FINANCIAL INFORMATION
CONDENSED
BALANCE SHEETS
PARENT COMPANY ONLY
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1998 1997
<S> <C> <C>
ASSETS
Cash and due from subsidiary banks $ 479
Interest-earning deposits with unrelated banks $ 4,020 1,878
Securities available for sale 5,998 6,794
Loans 360 360
Investments in bank subsidiaries 79,032 68,785
Premises and equipment, net 11
Other assets 304 256
- -------------------------------------------------------------------------------------------------------
Total assets $89,714 $ 78,563
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 148 $ 210
- -------------------------------------------------------------------------------------------------------
Total liabilities 148 210
Shareholders' equity 89,566 78,353
- -------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $89,714 $ 78,563
=======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF
OPERATIONS
PARENT COMPANY ONLY
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1998 1997 1996
INCOME
<S> <C> <C> <C>
Interest on loans $ 20 $ 44 $ 48
Interest on securities available for sale 376 322 20
Interest-earning deposits with unrelated banks 154 177 53
Other 67 3,518 55
- -------------------------------------------------------------------------------------------------------
Total income 550 4,061 176
EXPENSE
Compensation and employee benefits (16) 313 346
Interest 204
Other 278 330 309
- -------------------------------------------------------------------------------------------------------
Total expenses 262 643 859
- -------------------------------------------------------------------------------------------------------
Income (loss) before income tax benefit and equity in
undistributed net income of subsidiaries 355 3,418 (683)
Income tax expense (benefit) 100 (14)
- -------------------------------------------------------------------------------------------------------
Income (loss) before equity in undistributed net income of subsidiaries 255 3,432 (683)
Equity in undistributed net income of subsidiaries: 9,946 5,843 5,318
- -------------------------------------------------------------------------------------------------------
Net income $10,201 $ 9,275 $ 4,635
=======================================================================================================
</TABLE>
44
<PAGE>
CONDENSED STATEMENTS OF
CASH FLOWS
PARENT COMPANY ONLY
<TABLE>
<CAPTION>
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $10,201 $ 9,275 $ 4,635
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Equity in undistributed earnings of subsidiaries (9,946) (5,843) (5,318)
Loss on sale of real estate owned 41
Provision for depreciation and amortization 14 31 35
Net changes in other assets and liabilities (124) 181 (140)
- ------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 145 3,644 (747)
INVESTING ACTIVITIES
Purchase of securities available for sale (5,995) (9,792) (4,000)
Proceeds from maturities of securities available for sale 6,800 7,000
Loans originated or acquired, net of principal collected 360 134
Contribution of capital - bank subsidiaries (3,500) (16,800)
Return of capital to parent 3,800
Proceeds from sale of real estate owned 3,263
Other, net 2 (162)
- ------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 807 (6,094) (13,603)
FINANCING ACTIVITIES
Proceeds from other borrowings 7,000
Repayment of other borrowings (9,600)
Proceeds from issuance of common stock 711 779 20,868
- ------------------------------------------------------------------------------------------
Net cash provided by financing activities 711 779 18,268
- ------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,663 (1,670) 3,918
Cash and cash equivalents at beginning of period 2,357 4,027 109
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 4,020 $ 2,357 $ 4,027
==========================================================================================
Supplemental information:
Cash paid for interest $ 204
Issuance of common stock from conversion
of convertible subordinated notes 2,509
</TABLE>
45
<PAGE>
NOTE 17. SUMMARY OF QUARTERLY FINANCIAL INFORMATION - UNAUDITED
Quarterly financial information for the years ended December 31, 1998 and 1997
is summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FIRST SECOND THIRD FOURTH YEAR ENDED
quarter QUARTER QUARTER QUARTER DECEMBER 31,
<S> <C> <C> <C> <C> <C>
1998
Total interest income $17,407 $17,885 $19,009 $19,326 $73,627
Total interest expense 7,376 7,572 8,281 8,438 31,667
- --------------------------------------------------------------------------------------------
Net interest income 10,031 10,313 10,728 10,888 41,960
Provision for loan losses 550 450 450 450 1,900
Noninterest income 2,520 2,871 3,134 3,466 11,991
Noninterest expense 8,258 8,837 9,456 10,052 36,603
- --------------------------------------------------------------------------------------------
Income before income tax 3,743 3,897 3,956 3,852 15,448
Provision for income tax 1,330 1,349 1,362 1,206 5,247
- --------------------------------------------------------------------------------------------
Net income $ 2,413 $ 2,548 $ 2,594 $ 2,646 $10,201
============================================================================================
Net income per common share:
Basic $0.24 $0.25 $0.26 $0.26 $1.02
Diluted 0.23 0.25 0.25 0.26 0.98
1997
Total interest income $13,728 $15,183 $16,322 $16,828 $62,061
Total interest expense 6,143 6,505 6,967 7,215 26,830
- --------------------------------------------------------------------------------------------
Net interest income 7,585 8,678 9,355 9,613 35,231
Provision for loan losses 449 1,259 582 2,436 4,726
Noninterest income 1,719 3,095 2,053 5,925 12,792
Noninterest expense 6,904 7,418 7,607 9,305 31,234
- --------------------------------------------------------------------------------------------
Income before income tax 1,951 3,096 3,219 3,797 12,063
Provision for income tax 574 918 981 315 2,788
- --------------------------------------------------------------------------------------------
Net income $ 1,377 $ 2,178 $ 2,238 $ 3,482 $ 9,275
============================================================================================
Net income per common share:
Basic $0.15 $0.22 $0.23 $0.35 $0.94
Diluted 0.14 0.22 0.22 0.34 0.91
</TABLE>
46
<PAGE>
CONSOLIDATED FIVE-YEAR STATEMENTS OF
OPERATIONS/(1)/
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $66,858 $56,176 $43,240 $36,013 $23,199
Securities held to maturity 4,696 628 702 1,491 1,547
Securities available for sale 419 3,800 2,360 705 319
Deposits with banks 1,654 1,457 1,583 667 650
- ------------------------------------------------------------------------------------------------
Total interest income 73,627 62,061 47,885 38,876 25,715
INTEREST EXPENSE:
Deposits 29,759 24,775 20,370 16,369 9,121
Federal Home Loan Bank advances 1,908 1,971 1,938 1,503 1,160
Other borrowings 84 233 302 625
- ------------------------------------------------------------------------------------------------
Total interest expense 31,667 26,830 22,541 18,174 10,906
- ------------------------------------------------------------------------------------------------
Net Interest Income 41,960 35,231 25,344 20,702 14,809
Provision for loan losses 1,900 4,726 1,635 1,382 1,107
- ------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 40,060 30,505 23,709 19,320 13,702
Noninterest income 11,991 9,274 6,310 4,766 3,530
Key Man Life Insurance proceeds 3,518
Noninterest expense 36,603 30,000 24,293 19,979 17,061
SAIF special assessment 612
Merger expenses 1,234
- ------------------------------------------------------------------------------------------------
Noninterest expense 36,603 31,234 24,905 19,979 17,061
Income (loss) from continuing
operations before income tax 15,448 12,063 5,114 4,107 171
Provision for income tax 5,247 2,788 479 416 156
- ------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 10,201 9,275 4,635 3,691 15
Extraordinary loss on extinguishment of debt, net (154)
- -------------------------------------------------------------------------------------------------
Net income (loss) $10,201 $ 9,275 $ 4,635 $ 3,691 $ (139)
=================================================================================================
NET INCOME PER COMMON SHARE:
Income (loss) from continuing operations $1.02 $0.94 $0.64 $0.57 $0.00
Extraordinary loss on extinguishment of debt, net (0.02)
Net Income (loss) Basic 1.02 0.94 0.64 0.57 (0.02)
Net Income (loss) Diluted 0.98 0.91 0.63 0.56 (0.02)
Average number of common
shares outstanding (basic) 10,046 9,875 7,192 6,461 6,270
Average number of common
shares outstanding (diluted) 10,359 10,166 7,397 6,578 6,378
=================================================================================================
Total assets at end of period $1,059,919 $864,555 $706,448 $520,059 $394,365
Long-term obligations 25,000 39,000 34,000 27,695 19,735
Cash dividends
=================================================================================================
</TABLE>
/(1)/ These unaudited schedules provide selected financial information
concerning the Company which should be read in conjunction with the
Management Discussion and Analysis of Financial Condition and Results of
Operations in this Annual Report.
47
<PAGE>
CONSOLIDATED FIVE-YEAR SUMMARY OF
AVERAGE BALANCES AND NET INTEREST REVENUE
<TABLE>
<CAPTION>
1998
AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) BALANCES/(1)/ INTEREST RATE
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans:
Commercial business $307,174 $28,039 9.13%
Real estate/(2)/:
One- to four-family
residential 96,999 8,512 8.78
Five or more family
residential
and commercial
properties 264,314 23,008 8.70
Consumer 80,100 7,299 9.11
- --------------------------- -------- ------- ------
Total loans 748,587 66,858 8.93
Securities/(3)/ 83,657 5,221 6.24
Interest-earning deposits 30,949 1,654 5.35
with banks -------- ------- ------
Total interest-earning
assets 863,193 73,733 8.54
Noninterest-earning assets 76,081
- --------------------------- --------
Total assets $939,274
=========================== ========
INTEREST-BEARING LIABILITIES
Certificates of deposit $337,557 $18,917 5.60%
Savings accounts 39,768 997 2.51
Interest-bearing demand and
money market accounts 287,007 9,845 3.43
- --------------------------- -------- ------- ------
Total interest-bearing
deposits 664,332 29,759 4.48
Federal Home Loan Bank
advances 34,538 1,908 5.52
Other borrowings
- ---------------------------
Total interest-bearing
liabilities 698,870 31,667 4.53
Demand and other
noninterest-bearing
deposits 149,353
Other noninterest-bearing
liabilities 6,371
Shareholders' equity 84,680
- --------------------------- --------
Total liabilities and
shareholders' equity $939,274
=========================== ========
Net interest revenue $42,066
=========================== =======
Net interest spread 4.01%
=========================== ======
Net interest margin 4.87%
=========================== ======
Average interest-earning
assets to
average interest-bearing
liabilities 123.51%
=========================== ======
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
1997
AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) BALANCES/(1)/ INTEREST RATE
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans:
Commercial business $218,560 $20,172 9.23%
Real estate/(2)/:
One- to four-family
residential 109,659 10,936 9.97
Five or more family
residential
and commercial
properties 217,412 18,727 8.61
Consumer 68,040 6,341 9.32
- --------------------------- -------- ------- ------
Total loans 613,671 56,176 9.15
Securities/(3)/ 71,424 4,512 6.32
Interest-earning deposits 26,389 1,457 5.52
with banks -------- ------- ------
Total interest-earning
assets 711,484 62,145 8.73
Noninterest-earning assets 53,244
- --------------------------- --------
Total assets $764,728
=========================== ========
INTEREST-BEARING LIABILITIES
Certificates of deposit $282,899 $16,017 5.66%
Savings accounts 38,301 1,054 2.75
Interest-bearing demand and
money market accounts 223,514 7,704 3.45
- --------------------------- -------- ------- ------
Total interest-bearing
deposits 544,714 24,775 4.55
Federal Home Loan Bank
advances 35,597 1,971 5.54
Other borrowings 1,681 84 5.02
- --------------------------- -------- ------- ------
Total interest-bearing
liabilities 581,992 26,830 4.61
Demand and other
noninterest-bearing
deposits 111,492
Other noninterest-bearing
liabilities 6,860
Shareholders' equity 64,384
- --------------------------- --------
Total liabilities and
shareholders' equity $764,728
=========================== ========
Net interest revenue $35,315
=========================== =======
Net interest spread 4.12%
=========================== ======
Net interest margin 4.96%
=========================== ======
Average interest-earning
assets to
average interest-bearing
liabilities 122.25%
=========================== ======
1996
AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) BALANCES/(1)/ INTEREST RATE
INTEREST-EARNING ASSETS
Loans:
Commercial business $158,460 $14,153 8.93%
Real estate/(2)/:
One- to four-family
residential 112,986 10,468 9.26
Five or more family
residential
and commercial
properties 144,340 13,473 9.33
Consumer 58,101 5,146 8.86
- --------------------------- -------- ------- ------
Total loans 473,887 43,240 9.12
Securities/(3)/ 51,056 3,126 6.12
Interest-earning deposits 29,998 1,583 5.28
with banks -------- ------- ------
Total interest-earning
assets 554,941 47,949 8.64
Noninterest-earning assets 40,311
- --------------------------- --------
Total assets $595,252
=========================== ========
INTEREST-BEARING LIABILITIES
Certificates of deposit $240,214 $13,771 5.73%
Savings accounts 32,438 943 2.91
Interest-bearing demand and
money market accounts 160,020 5,656 3.53
- --------------------------- -------- ------- ------
Total interest-bearing
deposits 432,672 20,370 4.71
Federal Home Loan Bank
advances 34,096 1,914 5.61
Other borrowings 3,454 257 7.44
- --------------------------- -------- ------- ------
Total interest-bearing
liabilities 470,222 22,541 4.79
Demand and other
noninterest-bearing
deposits 74,940
Other noninterest-bearing
liabilities 4,421
Shareholders' equity 45,669
- --------------------------- --------
Total liabilities and
shareholders' equity $595,252
=========================== ========
Net interest revenue $25,408
=========================== =======
Net interest spread 3.85%
=========================== ======
Net interest margin 4.58%
=========================== ======
Average interest-earning
assets to
average interest-bearing
liabilities 118.02%
=========================== ======
1995
AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) BALANCES/(1)/ INTEREST RATE
INTEREST-EARNING ASSETS
Loans:
Commercial business $110,500 $10,855 9.82%
Real estate/(2)/:
One- to four-family
residential 113,341 10,861 9.58
Five or more family
residential
and commercial
properties 103,878 9,942 9.57
Consumer 45,841 4,355 9.50
- --------------------------- -------- ------- ------
Total loans 373,560 36,013 9.64
Securities/(3)/ 38,353 2,241 5.84
Interest-earning deposits 11,055 667 6.03
with banks -------- ------- ------
Total interest-earning
assets 422,968 38,921 9.20
Noninterest-earning assets 35,370
- --------------------------- --------
Total assets $458,338
=========================== ========
INTEREST-BEARING LIABILITIES
Certificates of deposit $203,978 $11,680 5.73%
Savings accounts 33,145 971 2.93
Interest-bearing demand and
money market accounts 97,326 3,718 3.82
- --------------------------- -------- ------- ------
Total interest-bearing
deposits 334,449 16,369 4.89
Federal Home Loan Bank
advances 24,915 1,503 6.03
Other borrowings 3,331 302 9.07
- --------------------------- -------- ------- ------
Total interest-bearing
liabilities 362,695 18,174 5.01
Demand and other
noninterest-bearing
deposits 54,878
Other noninterest-bearing
liabilities 3,315
Shareholders' equity 37,450
- --------------------------- --------
Total liabilities and
shareholders' equity $458,338
=========================== ========
Net interest revenue $20,747
=========================== =======
Net interest spread 4.19%
=========================== ====
Net interest margin 4.91%
=========================== ====
Average interest-earning
assets to
average interest-bearing
liabilities 116.62%
=========================== ======
1994
AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) BALANCES/(1)/ INTEREST RATE
INTEREST-EARNING ASSETS
Loans:
Commercial business $ 77,279 $ 6,561 8.49%
Real estate/(2)/:
One- to four-family
residential 90,123 7,722 8.57
Five or more family
residential
and commercial
properties 68,584 6,418 9.36
Consumer 28,775 2,498 8.68
- --------------------------- -------- ------- ------
Total loans 264,761 23,199 8.76
Securities/(3)/ 35,316 1,891 5.36
Interest-earning deposits 16,172 650 4.02
with banks -------- ------- ------
Total interest-earning
assets 316,249 25,740 8.14
Noninterest-earning assets 29,805
- --------------------------- --------
Total assets $346,054
=========================== ========
INTEREST-BEARING LIABILITIES
Certificates of deposit $148,229 $ 6,795 4.58%
Savings accounts 41,448 1,104 2.66
Interest-bearing demand and
money market accounts 54,789 1,222 2.23
- --------------------------- -------- ------- ------
Total interest-bearing
deposits 244,466 9,121 3.73
Federal Home Loan Bank
advances 21,452 1,160 5.41
Other borrowings 6,329 625 9.88
- --------------------------- -------- ------- ------
Total interest-bearing
liabilities 272,247 10,906 4.01
Demand and other
noninterest-bearing
deposits 36,819
Other noninterest-bearing
liabilities 2,063
Shareholders' equity 34,925
- --------------------------- --------
Total liabilities and
shareholders' equity $346,054
=========================== ========
Net interest revenue $14,834
=========================== =======
Net interest spread 4.13%
=========================== ====
Net interest margin 4.69%
=========================== ====
Average interest-earning
assets to
average interest-bearing
liabilities 116.16%
=========================== ======
</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.
49
<PAGE>
BOARD OF DIRECTORS, EXECUTIVE OFFICERS AND SHAREHOLDER INFORMATION
BOARD OF DIRECTORS
Richard S. DeVine
President, Chinook Resources, Inc.
Chairman, Raleigh, Schwartz & Powell, Inc.
Melanie J. Dressel
Executive Vice President,
Columbia Banking System, Inc.
President and Chief Operating Officer, Columbia Bank
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.
J. James Gallagher
Vice Chairman, Columbia Banking System, Inc. and Columbia Bank
Margel S. Gallagher
President, Viva Imports, Ltd.
W. Kelso Gillenwater
Private Investor
John A. Halleran
Private Investor
Thomas L. Matson
Owner and President, Tom Matson Dodge, Inc.
W. W. Philip
Chairman, 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.
Sidney R. Snyder
Washington State Senator,
Owner of Sid's Food Market and Midtown Market
William T. Weyerhaeuser
Clinical Psychologist
Chairman, Comerco, Inc. (local telephone holding company)
James M. Will
President, Titus-Will Enterprises
EXECUTIVE OFFICERS
W. W. Philip
Chairman and Chief Executive Officer
J. James Gallagher
Vice Chairman
Melanie J. Dressel
Executive Vice President, Columbia Banking System, Inc.
President and Chief Operating Officer, Columbia Bank
H. R. Russell
Executive Vice President, Senior Credit Officer
Gary R. Schminkey
Executive Vice President, Chief Financial Officer
Evans Q. Whitney
Executive Vice President, Retail Banking
Donald A. Andersen
Senior Vice President, Senior Loan Production Officer
Janet D. Hildebrand
Senior Vice President, Credit Administrator
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
Eugene Horan
Senior Vice President, Fircrest Branch Manager
Avery Johnson
Senior Vice President, Consumer Services
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
Racardo McLaughlin
Senior Vice President, Residential Lending
Samuel R. Noel
Executive Vice President, Southwest Region
Richard Plummer
Senior Vice President, Commercial Loans, Auburn Valley
Ernie Smith
Senior Vice President, Commercial Loans, Bellevue
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 Division Manager
Brett R. Willis
Senior Vice President, Commercial Loans, Pierce County
Kenneth M. Yokoyama
Senior Vice President, Commercial Loans, Bellevue
50
<PAGE>
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.
Everen Securities, Inc.
Herzog, Heine, Geduld, Inc.
Keefe, Bruyette & Woods, Inc.
Mayer & Schweitzer Inc.
Pacific Crest Securities
Ragen MacKenzie Inc.
Troster Singer Corp.
LEGAL COUNSEL
Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, PLLC
ANNUAL MEETING
Sheraton Tacoma Hotel
1320 Broadway Plaza
Tacoma, Washington
Wednesday, April 28, 1999
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
1998 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:
Jo Anne Coy
Vice President,
Marketing Director
P.O. Box 2156, MS 8300
Tacoma, WA
98401-2156
tel (253) 305-1965
fax (253) 305-0317
E-mail: [email protected]
51
<PAGE>
Exhibit 24
<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 10 day of March , 1999.
---- --------------
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Richard S. Devine Director
- -----------------------
Richard S. Devine
</TABLE>
<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 10 day of March , 1999.
----- --------------
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Melanie J. Dressel Director
- ----------------------------
Melanie J. Dressel
</TABLE>
<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 10 day of March , 1999.
----- --------------
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Jack Fabulich Director
- ---------------------------
Jack Fabulich
</TABLE>
<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 10 day of March , 1999.
----- --------------
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Jonathan Fine Director
- --------------------------
Jonathan Fine
</TABLE>
<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 10 day of March , 1999.
---- --------------
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ John P. Folsom Director
- ----------------------------
John P. Folsom
</TABLE>
<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 9 day of March , 1999.
----- --------------
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ J. James Gallagher Director
- ------------------------
J. James Gallagher
</TABLE>
<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 10 day of March , 1999.
---- --------------
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Margel S. Gallagher Director
- ---------------------------
Margel S. Gallagher
</TABLE>
<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 10 day of March , 1999.
----- --------------
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ W. Kelso Gillenwater Director
- -------------------------
W. Kelso Gillenwater
</TABLE>
<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 10 day of March , 1999.
----- --------------
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ John Halleran Director
- --------------------------
John Halleran
</TABLE>
<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 10 day of March , 1999.
----- --------------
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Thomas L. Matson Director
- ---------------------
Thomas L. Matson
</TABLE>
<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 10 day of March , 1999.
------ --------------
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ John Powell Director
- ---------------------------
John Powell
</TABLE>
<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 10 day of March , 1999.
---- --------------
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Robert E. Quoidbach Director
- ------------------------
Robert E. Quoidbach
</TABLE>
<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 9 day of March , 1999.
----- --------------
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Donald Rodman Director
- --------------------------
Donald Rodman
</TABLE>
<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 10 day of March , 1999.
------ --------------
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Sidney Snyder Director
- -------------------------
Sidney Snyder
</TABLE>
<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 10 day of March , 1999.
----- --------------
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ William T. Weyerhaeuser Director
- ---------------------------
William T. Weyerhaeuser
</TABLE>
<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 12 day of March , 1999.
------ --------------
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ James M. Will Director
- -------------------------
James M. Will
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 53,602 47,604
<INT-BEARING-DEPOSITS> 22,816 28,108
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 93,726 56,279
<INVESTMENTS-CARRYING> 6,358 9,679
<INVESTMENTS-MARKET> 0 0
<LOANS> 828,639 685,889
<ALLOWANCE> 9,002 8,440
<TOTAL-ASSETS> 1,059,919 864,555
<DEPOSITS> 938,345 740,430
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 7,008 6,772
<LONG-TERM> 25,000 39,000
0 0
0 0
<COMMON> 68,612 67,901
<OTHER-SE> 20,954 10,452
<TOTAL-LIABILITIES-AND-EQUITY> 1,059,919 864,555
<INTEREST-LOAN> 66,858 56,176
<INTEREST-INVEST> 5,115 4,428
<INTEREST-OTHER> 1,654 1,457
<INTEREST-TOTAL> 73,627 62,061
<INTEREST-DEPOSIT> 29,759 24,775
<INTEREST-EXPENSE> 31,667 26,830
<INTEREST-INCOME-NET> 41,960 35,231
<LOAN-LOSSES> 1,900 4,726
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 36,603 31,234
<INCOME-PRETAX> 15,448 12,063
<INCOME-PRE-EXTRAORDINARY> 10,201 9,275
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,201 9,275
<EPS-PRIMARY> 1.02 0.94
<EPS-DILUTED> 0.98 0.91
<YIELD-ACTUAL> 4.87 4.96
<LOANS-NON> 3,603 1,462
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 1,783 20
<LOANS-PROBLEM> 1,862 669
<ALLOWANCE-OPEN> 8,440 5,282
<CHARGE-OFFS> 1,585 1,659
<RECOVERIES> 247 91
<ALLOWANCE-CLOSE> 9,002 8,440
<ALLOWANCE-DOMESTIC> 9,002 8,440
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 1,542
</TABLE>
