<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission File Number 0-20288
COLUMBIA BANKING SYSTEM, INC.
(Exact name of small business issuer as specified in its charter)
Washington 91-1422237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1102 Broadway Plaza
Tacoma, Washington 98402
(Address of principal executive offices) (Zip Code)
(253) 305-1900
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the issuer: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares of the issuer's Common Stock outstanding at
April 30, 1999 was 10,070,086.
<PAGE>
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Page
Item 1. Financial statements
Consolidated Statements of Operations - three months
ended March 31, 1999 and 1998 2
Consolidated Balance Sheets - March 31, 1999
and December 31, 1998 3
Consolidated Statements of Shareholders' Equity -
twelve months ended December 31, 1997 and 1998, and
three months ended March 31, 1999 4
Consolidated Statements of Cash Flows -
three months ended March 31, 1999 and 1998 5
Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosure about Market Risk 19
PART II -- OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 20
Signatures 20
1
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(in thousands except per share) 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Interest Income
Loans $17,479 $15,853
Securities available for sale 1,439 1,058
Securities held to maturity 81 136
Deposits with banks 352 360
- -----------------------------------------------------------------------------
Total interest income 19,351 17,407
Interest Expense
Deposits 7,717 6,849
Federal Home Loan Bank advances 340 527
- -----------------------------------------------------------------------------
Total interest expense 8,057 7,376
Net Interest Income 11,294 10,031
Provision for loan losses 600 550
- -----------------------------------------------------------------------------
Net interest income after
provision for loan losses 10,694 9,481
Noninterest Income
Service charges and other fees 1,577 1,285
Mortgage banking 356 398
Other fees 1,411 837
- -----------------------------------------------------------------------------
Total noninterest income 3,344 2,520
Noninterest Expense
Compensation and employee benefits 4,839 3,771
Occupancy 1,647 1,123
Advertising and promotion 440 366
Data processing 482 407
Other 3,469 2,591
- -----------------------------------------------------------------------------
Total noninterest expense 10,877 8,258
- -----------------------------------------------------------------------------
Income before income taxes 3,161 3,743
Provision for income taxes 1,073 1,330
- -----------------------------------------------------------------------------
Net Income $ 2,088 $ 2,413
=============================================================================
Net income per common share:
Basic $ 0.20 $ 0.23
Diluted 0.19 0.22
Average number of common shares
outstanding 10,570 10,468
Average number of diluted common
shares oustanding 10,851 10,825
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
March 31, December 31,
(in thousands) 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 47,666 $ 53,602
Interest-earning deposits with banks 30,474 22,816
Securities available for sale 93,296 93,726
Securities held to maturity 6,507 6,358
FHLB stock 5,656 5,550
Loans held for sale 5,327 10,023
Loans 857,551 828,639
Less: allowance for loan losses 9,588 9,002
- -----------------------------------------------------------------------------
Loans, net 847,963 819,637
Interest receivable 5,993 6,420
Premises and equipment, net 38,429 37,077
Real estate owned 903 901
Other 5,303 3,809
- -----------------------------------------------------------------------------
Total Assets $1,087,517 $1,059,919
=============================================================================
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing $182,618 $180,445
Interest-bearing 781,414 757,900
- -----------------------------------------------------------------------------
Total Deposits 964,032 938,345
Federal Home Loan Bank advances 25,000 25,000
Other liabilities 6,812 7,008
- ----------------------------------------------------------------------------
Total liabilities 995,844 970,353
Shareholders' equity:
Preferred stock (no par value)
Authorized, 2,000,000 shares;
None outstanding
March 31, December 31,
Common stock (no par value) 1999 1998
--------- ----------
<S> <C> <C>
Authorized shares 45,000 45,000
Issued and outstanding 10,071 10,062 69,295 68,612
Retained Earnings 22,704 20,616
Accumulated other comprehensive income
Unrealized gains on securities available
for sale, net of tax (326) 338
- -----------------------------------------------------------------------------
Total shareholders' equity 91,673 89,566
- -----------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $1,087,517 $1,059,919
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Columbia Banking System, Inc.
<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, 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 stock under stock option
and other plans 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 stock under stock option
and other plans 182 711 711
- -----------------------------------------------------------------------------
Balance at
December 31, 1998 10,062 68,901 20,616 338 89,566
Comprehensive income:
Net income for 1999 2,088
Change in unrealized gains and (losses)
on securities available for sale, net of tax (664)
Total comprehensive income 1,424
Issuance of stock under stock option
and other plans (1) 9 683 683
- -----------------------------------------------------------------------------
Balance at
March 31, 1999 10,071 $69,295 $22,704 ($326) $91,673
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
(1) Includes the amortization of restricted stock grants of which 33,075
shares were issued and outstanding during 1996, and an additional 70,875
shares were issued and outstanding during 1998.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(in thousands) 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 2,088 $ 2,413
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 600 550
Depreciation and amortization 498 546
Deferred income tax expense (benefit) (344) 258
(Increase) decrease in loans held for sale 4,696 (2,610)
(Increase) decrease in interest receivable 427 (589)
Increase (decrease) in interest payable 95 157
Net changes in other assets and liabilities (643) (461)
- -----------------------------------------------------------------------------
Net cash provided by operating activities 7,417 264
Investing Activities
Proceeds from maturities of securities available for sale 7,497 11,284
Purchases of securities available for sale (8,256) (15,014)
Proceeds from maturities of mortgage-backed
securities available for sale 72 1,673
Proceeds from maturities of securities held to maturity 250 1,250
Purchases of securities held to maturity (400) (325)
Loans originated and acquired, net of principal collected (28,646) (30,951)
Purchases of premises and equipment (2,120) (2,276)
Other, net (1) 65
- -----------------------------------------------------------------------------
Net cash used by investing activities (31,604) (34,294)
Financing Activities
Net increase in deposits 25,687 32,773
Proceeds from issuance of common stock 222 320
- -----------------------------------------------------------------------------
Net cash provided by financing activities 25,909 33,093
- -----------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,722 (937)
Cash and cash equivalents at beginning of period 76,418 75,712
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 78,140 $ 74,775
=============================================================================
Supplemental information:
Cash paid for interest $ 7,962 $ 7,219
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Columbia Banking System, Inc.
Columbia Banking System, Inc. (the "Company") is a registered bank holding
company whose wholly owned subsidiary, Columbia State Bank ("Columbia Bank"),
conducts a full-service commercial banking business. Headquartered in Tacoma,
Washington, the Company provides a full range of banking services to small
and medium-sized businesses, professionals and other individuals through
banking offices located in the Tacoma metropolitan area and contiguous parts
of the Puget Sound region of Washington, as well as the Longview and Woodland
communities in southwestern Washington. Substantially all of the Company's
loans, loan commitments and core deposits are geographically concentrated in
its service areas.
1. Basis of Presentation
The interim unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments including normal recurring accruals necessary for
a fair presentation of results of operations for the interim periods included
herein have been made. The results of operations for the three months ended
March 31, 1999, are not necessarily indicative of results to be anticipated
for the year ending December 31, 1999. Certain amounts in the 1998 financial
statements have been reclassified to conform with the 1999 presentation. For
additional information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1998.
2. Subsequent Event - Stock Dividend
On April 28, 1999, the Company announced a 5% stock dividend payable on
May 26, 1999, to shareholders of record on May 12, 1999. Average shares
outstanding, net income per share and book value per share for all periods
presented have been retroactively adjusted to give effect to this transaction.
3. Prospective Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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.
6
<PAGE>
CONSOLIDATED AVERAGE BALANCES--NET CHANGES
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Three Months Ended Increase
March 31, (Decrease)
(in thousands) 1999 1998 Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Loans $ 839,450 $700,018 $139,432
Securities 103,346 75,186 28,160
Interest-earning
deposits with banks 29,825 26,456 3,369
- --------------------------------------------------------------------------------
Total interest-earning
assets 972,621 801,660 170,961
Noninterest-earning
assets 86,336 71,711 14,625
- --------------------------------------------------------------------------------
Total assets $1,058,957 $973,371 $185,586
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing
deposits $ 766,834 $611,511 $155,323
Federal Home Loan Bank
advances 25,266 39,000 (13,734)
- --------------------------------------------------------------------------------
Total interest-bearing
liabilities $ 792,100 650,511 141,589
Noninterest-bearing
deposits 169,261 130,715 38,546
Other noninterest-bearing
liabilities 6,133 11,332 (5,199)
Shareholders' Equity 91,463 80,813 10,650
- --------------------------------------------------------------------------------
Total liabilities and
shareholders'equity $1,058,957 $873,371 $185,586
================================================================================
</TABLE>
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Columbia Banking System, Inc.
This discussion should be read in conjunction with the consolidated financial
statements of Columbia Banking System, Inc. (the "Company") and notes thereto
presented elsewhere in this report. In the following discussion, unless
otherwise noted, references to increases or decreases in average balances in
items of income and expense for a particular period and balances at a
particular date refer to the comparison with corresponding amounts for the
period or date one year earlier.
This discussion contains certain forward-looking statements within the
meaning of the federal securities laws. Actual results and the timing of
certain events could differ materially from those discussed 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. Readers are cautioned not to
place undue reliance on the forward-looking statements since they reflect
management's analysis only as of the date of the statement.
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 27 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 March 31, 1999, the Company had total assets of $1.1 billion.
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 other markets
will be considered as promising situations 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
8
<PAGE>
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.
During the first quarter of 1999 Columbia Bank opened a newly constructed
branch in Port Orchard, its first office in Kitsap County. Additionally, a
new West Olympia branch opened in temporary quarters in April and is the
Company's first Thurston County location. Both branches are full service
facilities. The Company's future plans include new locations in Pierce, King,
Kitsap and Thurston counties of western Washington. 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.
At March 31, 1999, the Company had 27 branches, 15 in Pierce County, 6 in
King County, 4 in Cowlitz County, 1 in Kitsap County, and 1 in Thurston
County. Since beginning its major Pierce County expansion in August 1993,
the Company has grown from four to twenty-seven branches through a
combination of internal and external growth by acquisition.
In addition to the ongoing expansion of its branch network, the Company
continuously reviews new products and services to give its customers more
banking options. In addition, new technology and services are reviewed for
business development and cost saving purposes. During the first quarter of
1999, the Company opened an International Banking division located in
downtown Tacoma. The division serves local businesses and individuals
involved in international trade by providing letters of credit, wire
transfers, and foreign currency. During the first quarter of 1999, the
Company also made an equity investment in Manzanita Capital, Inc., a newly
formed holding company which owns all of the outstanding common stock of The
Trust Company of Washington, a non-depository trust and investment company,
and McAdams Wright Regan, a full service brokerage and advisory firm.
Management expects that the services provided by these companies will expand
and compliment the services provided by Columbia Bank in a cost-effective
manner and will assist in carrying out the Company's growth strategy.
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.
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.
9
<PAGE>
Net income for the first quarter of 1999 was $2.1 million, or $0.19 per share
(diluted), compared to $2.4 million, or $0.22 per share (diluted), for the
first quarter of 1998, a decrease in net income of 13%. The earnings decrease
for the quarter resulted from increased expenses associated with branch and
infrastructure expansion. Late in 1998, the Company occupied a new
operations center, designed to support long-term expansion and provide
much-needed space for essential functions. In addition, loan growth
occurred later in the first quarter than was anticipated and was slightly
less than expected. Management has established cost reduction as a high
priority and will continue taking steps to reduce costs.
On April 28, 1999, the Company announced a 5% stock dividend payable on
May 26, 1999, to shareholders of record on May 12, 1999. Average shares
outstanding, net income per share and book value per share for all periods
presented have been retroactively adjusted to give effect to this transaction.
Net Interest Income
Net interest income for the first quarter of 1999 increased 13% to $11.3
million, from $10.0 million in the first quarter of 1998. The increase in
net interest income was largely due to the overall growth of the Company.
Net interest income was favorably affected by average interest-earning
assets increasing more rapidly than average interest-bearing liabilities,
with the difference funded by noninterest-bearing deposits and shareholders'
equity. During the first three months of 1999, average interest-earning
assets increased $171.0 million, while average interest-bearing liabilities
increased only $141.6 million, compared with the same period in 1998.
Net interest margin (net interest income divided by average interest-earning
assets) decreased to 4.71% in the first quarter of 1999 from 5.07% in the
first quarter of 1998. Average interest-earning assets grew to $972.6
million during the first quarter of 1999, compared with $801.7 million at
March 31, 1998. The average yield on interest-earning assets decreased 0.73%
to 8.08% during the first quarter of 1999 from 8.81% in the same period of
1998. In comparison, the average cost of interest-bearing liabilities
decreased 0.47% to 4.13% during the first quarter of 1999 from 4.60% in the
same period of 1998. 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 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 exhibited a
downward trend during 1998 and were generally stable during the first quarter
of 1999.
Noninterest Income
Noninterest income increased $824,000, or 32%, in the first quarter of 1999
compared with the same periods in 1998. Increases during the first three
months were primarily centered in account service charges and merchant
services income. In general, increases in account service charges and
merchant services are due to the growth of the Company.
10
<PAGE>
Noninterest Expense
Total noninterest expense increased $2.6 million, or 32%, in the first
quarter of 1999, compared with the same period in 1998. The increase was
primarily due to personnel costs associated with the Company's expansion as
well as occupancy, merchant services and bank card, 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 74.3% for
the first quarter of 1999, compared with 65.8% for the same period in 1998.
The increase is primarily due to slower loan demand in the first quarter of
1999 and expenses associated with the new operations center. The portion
of compensation expense related to loan originations is deferred and deducted
from interest income over the life of the related loans. Slower loan
originations translate into slower interest income growth and lower deferrals
of compensation expense. Other categories of expense are volume driven and
reflect the Company's rapid growth. Total noninterest expense for the
Company is expected to decline in relation to revenues as the Company's
asset base grows.
Income Taxes
For the first quarter of 1999, the Company recorded an income tax provision of
$1.1 million.
Credit Risk Management
The extension of credit in the form of loans or other credit substitutes 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 or 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 non-accrual 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 chief 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
on-site examination to ensure continued performance and proper risk
assessment.
11
<PAGE>
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 composition by
type of loan for the dates indicated:
<TABLE>
<CAPTION>
March 31, % of December 31 % of
(in thousands) 1999 Total 1998 Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $346,539 40.5% $332,638 40.1%
Real estate:
One-to four-family residential 56,817 6.6 61,132 7.4
Five or more family residential and
commercial properties 331,180 38.6 291,868 35.2
- -----------------------------------------------------------------------------
Total real estate 387,997 45.2 353,000 42.6
Real estate construction:
One-to four-family residential 19,736 2.3 26,444 3.2
Five or more family residential and
commercial properties 21,407 2.5 23,213 2.8
- -----------------------------------------------------------------------------
Total real estate construction 41,143 4.8 49,657 6.0
Consumer 83,303 9.7 94,572 11.4
- -----------------------------------------------------------------------------
Sub-total loans 858,982 100.2 829,867 100.1
Less: Deferred loan fees (1,431) (0.2) (1,228) (0.1)
- -----------------------------------------------------------------------------
Total loans $857,551 100.0% $828,639 100.0%
=============================================================================
Loans held for sale $ 5,327 $ 10,023
=============================================================================
</TABLE>
Total loans increased $28.9 million, or 3.5%, to $857.6 million from year-end
1998. Commercial business and commercial real estate were the only
categories contributing to the increase.
Commercial and Private Banking Lending
Commercial loans increased to $346.5 million at March 31, 1999, representing
40.5% of total loans, from $332.6 million at December 31, 1998. Net growth in
commercial loans during the first quarter of 1999 was affected by substantial
reductions in existing debt and lower than normal use of committed lines of
credit due to increased liquidity of borrowing customers. Management is
committed to provide competitive commercial lending in the Company's primary
market areas. The Company expects to continue to expand its commercial
lending products and to emphasize in particular its relationship banking
with businesses, business owners and professional individuals.
Real Estate Lending
One- to Four-Family Residential. Residential one- to four-family loans
decreased $4.3 million to $56.8 million at March 31, 1999, representing
6.6% of total loans, compared with $61.1 million at December 31, 1998. 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,
12
<PAGE>
management's policy is to originate for sale to third parties residential
loans secured by properties located within the Company's primary market areas.
Five or More Family Residential and Commercial Properties. The Company makes
multi-family and commercial real estate loans in its primary market areas.
Multi-family and commercial real estate lending increased to $331.2 million
at March 31, 1999, representing 38.6% of total loans, from $291.9 million at
December 31, 1998. The increase in multi-family and commercial real estate
lending in the first quarter reflects a mix of owner occupied and income
property transactions. Generally, multi-family and commercial real estate
loans are made only to borrowers who have existing banking relationships with
the Company. Management believes that volumes in this category of loans will
increase at a slower rate during the balance of 1999. The Company's
underwriting standards generally require that the loan-to-value ratio for
multi-family and commercial loans not exceed 75% of appraised value or cost,
whichever is lower, and that commercial properties maintain debt coverage
ratios (net operating income divided by annual debt servicing) of 1.2 or
better. Underwriting standards can be influenced by competition. The
Company endeavors to maintain the highest practical underwriting standards
while balancing the need to remain competitive in its lending practices.
Construction Loans
The Company originates a variety of real estate construction loans. One- to
four-family residential construction loans are originated for the
construction of custom homes (where the home buyer is the borrower) and
provides financing to builders for the construction of pre-sold homes and
speculative residential construction. Construction loans on one- to four-
family residences decreased to $19.7 million at March 31, 1999, representing
2.3% of total loans, from $26.4 million at December 31, 1998. Multi-family
and commercial real estate construction loans decreased to $21.4 million at
March 31, 1999, representing 2.5% of total loans, from $23.2 million at
December 31, 1998. 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.
Consumer Lending
At March 31, 1999, the Company had $83.3 million of consumer loans
outstanding, representing 9.7% of total loans, as compared with $94.6 million
at December 31, 1998. The decrease is the result of payoffs of short-term
consumer loans made in December 1998 to a group of individuals in connection
with a singular transaction. Consumer loans made by the Company include
automobile loans, boat and recreational vehicle financing, home equity and
home improvement loans and miscellaneous personal loans.
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); (iii) accruing loans which are contractually
past due ninety days or more as to interest or principal payments.
13
<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, and total
nonperforming assets of the Company:
<TABLE>
<CAPTION>
March 31, December 31,
(in thousands) 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual:
One-to four-family residential $ 668 $ 722
Commercial real estate 1,553 1,542
Commercial business 998 1,214
Consumer 199 125
- -----------------------------------------------------------------------------
Total 3,418 3,603
- -----------------------------------------------------------------------------
Restructured:
One-to four-family residential 15
One-to four-family residential construction 1,783 1,768
Commercail business 74
- -----------------------------------------------------------------------------
Total 1,857 1,783
- -----------------------------------------------------------------------------
Total nonperforming loans $ 5,275 $ 5,386
=============================================================================
Real estate owned $ 903 $ 901
=============================================================================
Total nonperforming assets $ 6,178 $ 6,287
=============================================================================
</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.
Nonperforming loans decreased to $5.3 million, or 0.62% of total loans
(excluding loans held for sale), at March 31, 1999, from $5.4 million, or
0.65% of total loans at December 31, 1998 due principally to decreases in
the commercial business category.
Nonaccrual loans and other nonperforming assets are centered in a small
number of lending relationships which management considers to be adequately
reserved. All nonperforming loans are to Washington businesses. Columbia
Bank is not involved with loans to foreign companies and foreign countries.
Real estate owned ("REO") increased to $903,000 at March 31, 1999 from
$901,000 at December 31, 1998.
Total nonperforming assets decreased to $6.2 million, or 0.57% of period-end
assets at March 31, 1999, from $6.3 million, or 0.59% of period-end assets
at December 31, 1998.
14
<PAGE>
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 5 years
2. Specific allowances for identified problem loans and/or portfolio segments
3. Unallocated allowance
In addition, the allowance incorporates the results of measuring impaired
loans as provided in the Statement of Financial Accounting 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.
The allowance for loan losses at March 31, 1999 increased $586,000 to
$9.6 million from $9.0 million at December 31, 1998. The allowance for
loan losses as a percentage of loans (excluding loans held for sale at each
date) at March 31, 1999 increased to 1.12% from 1.09% of loans at December 31,
1998. The increase in the allowance as a percentage of loans was due to
loan loss provisions of $600,000 during the first three months of 1999.
Net loan charge-offs amounted to $14,000 for the first three months of 1999
compared with net loan charge-offs of $3,000 for the same period in 1998.
15
<PAGE>
The following table sets forth at the dates indicated the changes in the
Company's allowance for loan losses:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(in thousands) 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $ 9,002 $ 8,440
Charge offs:
One-to-four family residential (1)
Commercial business (48) (37)
Consumer (24) (65)
- ----------------------------------------------------------------------------
Total charge-offs (73) (102)
Recoveries:
One-to-four family residential 95
Commercial business 55
Consumer 4 4
- ----------------------------------------------------------------------------
Total recoveries 59 99
- ----------------------------------------------------------------------------
Net (charge-offs) recoveries (14) (3)
Provision charged to expense 600 550
- ----------------------------------------------------------------------------
Ending balance $ 9,588 $ 8,987
============================================================================
</TABLE>
The allowance for loan losses equaled 182% of nonperforming loans and 155%
of nonperforming assets at March 31, 1999.
Liquidity and Sources of Funds
The Company's primary sources of funds are customer deposits, advances from
the Federal Home Loan Bank of Seattle (the "FHLB") and brokered deposits.
These funds, together with loan repayments, loan sales, retained earnings,
equity and other borrowed funds, are used to make loans, to acquire
securities and other assets and to fund continuing operations.
Deposit Activities
The Company's deposit products include a wide variety of transaction accounts,
savings accounts and time deposit accounts. Total deposits increased
$25.7 million, or 3%, to $964.0 million at March 31, 1999, from $938.3
million at December 31, 1998.
The Company is establishing a branch system catering primarily to retail
depositors, supplemented by business banking customer deposits and other
borrowings. While that stable core deposit base is being established,
management's strategy for funding growth has been to make use of brokered
and other wholesale deposits. Management anticipates continued use of such
deposits, as needed, to fund increasing loan demand. Brokered and other
wholesale deposits (excluding public deposits) with a balance of $7.3 million,
or 0.76% of total deposits at March 31, 1999 were unchanged since December 31,
1998.
Borrowings
The Company relies on advances from the FHLB to supplement its funding
sources. FHLB advances at March 31, 1999 were unchanged from a balance of
$25.0 million at December 31, 1998. FHLB advances are secured by one- to
four-family real estate mortgages and certain other assets.
16
<PAGE>
Capital
Shareholders' equity at March 31, 1999, was $91.7 million compared with
$89.6 million at December 31, 1998. The increase is due primarily to net
income of $2.1 million during the first three months of 1999. Shareholders'
equity was 8.43% and 8.45% of total period-end assets at March 31, 1999,
and December 31, 1998, respectively.
Banking regulations require bank holding companies and banks to maintain a
minimum "leverage" ratio of core capital to adjusted quarterly average total
assets of at least 3%. At March 31, 1999, the Company's leverage ratio was
8.68%, compared with 8.72% at December 31, 1998. In addition, banking
regulators have adopted risk-based capital guidelines, under which risk
percentages are assigned to various categories of assets and off-balance
sheet items to calculate a risk-adjusted capital ratio. Tier I capital
generally consists of common shareholders' equity (which does not include
unrealized gains and losses on securities), less goodwill and certain
identifiable intangible assets, while Tier II capital includes the allowance
for loan losses and subordinated debt, both subject to certain limitations.
Regulatory minimum risk-based capital guidelines require Tier I capital of
4% of risk-adjusted assets and total capital (combined Tier I and Tier II)
of 8%. The Company's Tier I and total capital ratios were 9.85% and 10.88%,
respectively, at March 31, 1999, compared with 9.89% and 10.88%, respectively,
at December 31, 1998.
The Federal Deposit Insurance Corporation (the "FDIC") established the
qualifications necessary to be classified as a "well-capitalized" bank,
primarily for assignment of FDIC insurance premium rates. To qualify as
"well-capitalized," banks must have a Tier I risk-adjusted capital ratio of
at least 6%, a total risk-adjusted capital ratio of at least 10%, and a
leverage ratio of at least 5%. Columbia Bank qualified as "well-capitalized"
at March 31, 1999. Federal laws generally bar institutions which are not
well-capitalized from accepting brokered deposits. The FDIC has issued rules
which prohibit under-capitalized institutions from soliciting or accepting
such deposits. Adequately capitalized institutions are allowed to solicit
such deposits, but only to accept them if a waiver is obtained from the FDIC.
Applicable federal and Washington state regulations restrict capital
distributions, including dividends by institutions such as Columbia Bank.
Such restrictions are tied to the institution's capital levels after giving
effect to distributions. The Company's ability to pay cash dividends is
substantially dependent upon receipt of dividends from the Bank. The Company
presently intends to retain earnings to support anticipated growth.
Accordingly, the Company does not intend to pay cash dividends on its common
stock in the foreseeable future.
On April 28, 1999, the Company announced a 5% stock dividend payable on
May 26, 1999, to shareholders of record on May 12, 1999. Average shares
outstanding, net income per share and book value per share for all periods
presented have been retroactively adjusted to give effect to this transaction.
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.
17
<PAGE>
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.
Based on its assessment, the Company has essentially completed renovating
all systems and equipment needing Y2K upgrades. In early October 1998, the
Company's data processing provider advised the Company that it had
successfully converted its systems to Y2K compatibility. Testing has been
completed and the Company's data processing system is fully compliant at
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 its 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 $64,000 in staff time and travel expenses in addressing the
Y2K issue. Equipment upgrades are expected to cost approximately $562,000.
Much of the Company's equipment, such as PCs, has been upgraded 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 believes that expenses relating to meeting the Company's
Y2K challenges will not 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 that
its outside suppliers, vendors and customers are Y2K ready, their 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.
18
<PAGE>
The Company's Contingency Plans: The Company has developed a comprehensive
Year 2000 contingency plan. Although the Company has taken precaution 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 branch offices 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.
Qualitative and Quantitative Disclosure about Market Risk
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. At
March 31, 1999, based on the measures used to monitor and manage interest
rate risk, there has not been a material change in the Company's interest
rate risk since December 31, 1998. For additional information, refer to the
Company's annual report on Form 10-K for the year ended December 31, 1998.
19
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit 11 - Statement re computation of per share net income
See Exhibit 27 - Financial Data Schedule
(b) On March 25, 1999, the Company filed Form 8-K, announcing that first
quarter earnings per share will fall short of consensus estimates.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COLUMBIA BANKING SYSTEM, INC.
(Registrant)
Date May 14, 1999 By /s/ W. W. Philip
----------------------------- --------------------------------
W. W. Philip
Chairman and
Chief Executive Officer
Date May 14, 1999 By /s/ Gary R. Schminkey
----------------------------- ---------------------------------
Gary R. Schminkey
Executive Vice President and
Chief Financial Officer
20
<PAGE>
Exhibit 11
Statement re computation of per share net income
Columbia Banking System, Inc.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(in thousands, except per share data) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Net income applicable to common stock $2,088 $2,413
- --------------------------------------------------------------------------------
Average number of basic common shares
outstanding 10,570 10,468
Dilutive effect of stock options
unexercised 281 357
- --------------------------------------------------------------------------------
Average number of diluted common shares
outstanding 10,851 10,825
================================================================================
Diluted net income per share $ 0.19 $ 0.22
================================================================================
</TABLE>
On April 28, 1999, the Company announced a 5% stock dividend payable on
May 26, 1999, to shareholders of record on May 12, 1999. Average shares
outstanding, net income per share and book value per share for all periods
presented have been retroactively adjusted to give effect to this transaction.
For additional information on earnings per share, please see the "Capital"
section of the "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
FINANCIAL DATA SCHEDULE
Columbia Banking System, Inc.
(in thousands except per share)
</LEGEND>
<CIK> 0000887343
<NAME> COLUMBIA BANKING SYSTEM, INC.
<MULTIPLIER> 1000
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 47666
<INT-BEARING-DEPOSITS> 30474
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 93296
<INVESTMENTS-CARRYING> 6507
<INVESTMENTS-MARKET> 0
<LOANS> 857551
<ALLOWANCE> 9588
<TOTAL-ASSETS> 1087517
<DEPOSITS> 964032
<SHORT-TERM> 0
<LIABILITIES-OTHER> 6812
<LONG-TERM> 25000
0
0
<COMMON> 69295
<OTHER-SE> 22387
<TOTAL-LIABILITIES-AND-EQUITY> 1087517
<INTEREST-LOAN> 17479
<INTEREST-INVEST> 1520
<INTEREST-OTHER> 352
<INTEREST-TOTAL> 19351
<INTEREST-DEPOSIT> 7717
<INTEREST-EXPENSE> 8057
<INTEREST-INCOME-NET> 11294
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10877
<INCOME-PRETAX> 3161
<INCOME-PRE-EXTRAORDINARY> 2088
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2088
<EPS-PRIMARY> .20
<EPS-DILUTED> .19
<YIELD-ACTUAL> 4.71
<LOANS-NON> 3418
<LOANS-PAST> 0
<LOANS-TROUBLED> 1857
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9002
<CHARGE-OFFS> 73
<RECOVERIES> 59
<ALLOWANCE-CLOSE> 9588
<ALLOWANCE-DOMESTIC> 9588
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 645
</TABLE>
