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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000.
/ / 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
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COLUMBIA BANKING SYSTEM, INC.
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(Exact name of issuer as specified in its charter)
Washington 91-1422237
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1102 Broadway Plaza
Tacoma, Washington 98402
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(Address of principal executive offices) (Zip Code)
(253) 305-1900
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(Issuer's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares of the issuer's Common Stock outstanding at
October 31, 2000 was 11,784,473
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<PAGE>
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Page
----
Item 1. Condensed unaudited Financial statements
Consolidated Condensed Statements of Operations - three months
and nine months ended September 30, 2000 and 1999 2
Consolidated Condensed Balance Sheets - September 30, 2000
and December 31, 1999 3
Consolidated Condensed Statements of Shareholders' Equity -
twelve months ended December 31, 1999, and
nine months ended September 30, 2000 4
Consolidated Condensed Statements of Cash Flows -
nine months ended September 30, 2000 and 1999 5
Notes to Consolidated Condensed Financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II -- OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 21
Signatures 21
1
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
COLUMBIA BANKING SYSTEM, INC.
(UNAUDITED)
<TABLE><CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(IN THOUSANDS EXCEPT PER SHARE) 2000 1999 2000 1999
------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $26,769 $20,219 $75,628 $56,246
Securities available for sale 1,392 1,387 4,171 4,242
Securities held to maturity 67 67 198 221
Deposits with banks 120 52 174 540
------------------------------------- ------- ------- ------- -------
Total interest income 28,348 21,725 80,171 61,249
INTEREST EXPENSE
Deposits 12,463 8,341 33,759 23,922
Federal Home Loan Bank advances 893 518 2,925 1,357
Other borrowings 139 331
------------------------------------- ------- ------- ------- -------
Total interest expense 13,495 8,859 37,015 25,279
------------------------------------- ------- ------- ------- -------
NET INTEREST INCOME 14,853 12,866 43,156 35,970
Provision for loan losses 900 600 2,700 1,800
------------------------------------- ------- ------- ------- -------
Net interest income after provision
for loan losses 13,953 12,266 40,456 34,170
NONINTEREST INCOME
Service charges and other fees 1,626 1,463 4,642 4,214
Mortgage banking 130 267 530 920
Merchant services fees 1,007 723 2,689 1,880
Other 255 155 657 434
------------------------------------- ------- ------- ------- -------
Total noninterest income 3,018 2,608 8,518 7,448
NONINTEREST EXPENSE
Compensation and employee benefits 5,886 5,105 17,196 14,773
Occupancy 1,442 1,615 4,575 4,893
Merchant processing 557 383 1,446 977
Advertising and promotion 350 407 1,162 1,321
Data processing 570 494 1,663 1,478
Taxes, licenses & fees 499 381 1,515 1,062
Other 2,001 1,534 5,855 4,975
------------------------------------- ------- ------- ------- -------
Total noninterest expense 11,305 9,919 33,412 29,479
------------------------------------- ------- ------- ------- -------
Income before income taxes 5,666 4,955 15,562 12,139
Provision for income taxes 1,947 1,666 5,356 4,100
------------------------------------- ------- ------- ------- -------
NET INCOME $ 3,719 $ 3,289 $10,206 $ 8,039
===================================== ======= ======= ======= =======
Net income per common share:
Basic $ 0.32 $ 0.28 $ 0.88 $ 0.69
Diluted 0.31 0.28 0.85 0.67
Average number of common
shares outstanding 11,657 11,658 11,650 11,652
Average number of diluted common
shares outstanding 11,975 11,927 11,952 11,942
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE>
CONSOLIDATED CONDENSED BALANCE SHEETS
COLUMBIA BANKING SYSTEM, INC.
(UNAUDITED)
<TABLE><CAPTION>
September 30, December 31,
(IN THOUSANDS) 2000 1999
-------------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 73,707 $ 43,027
Interest-earning deposits with banks 33,039 170
-------------------------------------------------------------------------- ---------- ----------
Total cash and cash equivalents 106,746 43,197
Securities available for sale (at fair value) 81,433 81,029
Securities held to maturity (fair value of $7,749 and $7,040 respectively) 7,750 7,084
Federal Home Loan Bank stock 8,402 6,916
Loans held for sale 13,541 5,479
Loans, net of unearned income 1,168,150 1,048,006
Less: allowance for loan losses 12,569 9,967
-------------------------------------------------------------------------- ---------- ----------
Loans, net 1,155,581 1,038,039
Interest receivable 8,969 7,609
Premises and equipment, net 47,581 39,166
Real estate owned 1,149 1,263
Other 8,346 7,375
-------------------------------------------------------------------------- ---------- ----------
Total Assets $1,439,498 $1,237,157
========================================================================== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 219,870 $ 181,716
Interest-bearing 1,051,568 861,828
-------------------------------------------------------------------------- ---------- ----------
Total deposits 1,271,438 1,043,544
Federal Home Loan Bank advances 40,000 83,700
Other borrowings 6,500 3,000
Other liabilities 10,382 7,699
-------------------------------------------------------------------------- ---------- ----------
Total liabilities 1,328,320 1,137,943
Shareholders' equity:
Preferred stock (no par value)
Authorized, 2 million shares; none outstanding
September 30, December 31,
Common stock (no par value) 2000 1999
---- ----
Authorized shares 51,975 51,975
Issued and outstanding 11,771 10,603 91,731 78,285
Retained earnings 21,785 23,916
Accumulated other comprehensive (loss):
Unrealized losses on securities available for sale, net of tax (2,338) (2,987)
-------------------------------------------------------------------------- ---------- ----------
Total shareholders' equity 111,178 99,214
-------------------------------------------------------------------------- ---------- ----------
Total Liabilities and Shareholders' Equity $1,439,498 $1,237,157
========================================================================== ========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
COLUMBIA BANKING SYSTEM, INC.
(UNAUDITED)
<TABLE><CAPTION>
Common stock Accumulated
--------------------- Other Total
Number of Retained Comprehensive Shareholders'
(IN THOUSANDS) Shares Amount Earnings Income (Loss) Equity
--------------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1999 10,050 $ 68,612 $ 20,616 $ 338 $ 89,566
Comprehensive income:
Net income for 1999 -- -- 11,670 -- --
Change in unrealized gains and
(losses) -- -- -- (3,325) --
On securities available for sale, net of tax
Total comprehensive income -- -- -- -- 8,345
Issuance of stock under stock option
And other plans 49 1,303 -- -- 1,303
Issuance of shares of common stock--
5% stock dividend 504 8,370 (8,370) -- --
--------------------------------------------------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1999 10,603 78,285 23,916 (2,987) 99,214
--------------------------------------------------- -------- -------- -------- -------- --------
Comprehensive income:
Net income for 2000 -- -- 10,206 -- --
Change in unrealized gains and (losses)
On securities available for sale, net of tax
Total comprehensive income -- -- -- 649 10,855
Issuance of stock under stock option
And other plans 107 731 -- -- 731
Tax benefits from prior year exercise of stock
options 378 -- -- 378
Issuance of shares of common stock--
10% stock dividend 1,061 12,337 (12,337) -- --
--------------------------------------------------- -------- -------- -------- -------- --------
BALANCE AT SEPTEMBER 30, 2000 11,771 $ 91,731 $ 21,785 ($ 2,338) $111,178
=================================================== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
COLUMBIA BANKING SYSTEM, INC.
(UNAUDITED)
<TABLE><CAPTION>
Nine Months Ended
September 30,
(IN THOUSANDS) 2000 1999
--------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 10,206 $ 8,039
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,700 1,800
Losses on real estate owned 194 4
Depreciation and amortization 1,484 1,727
Deferred income tax (benefit) expense (2,174) (1,385)
(Increase) decrease in loans held for sale (8,062) 723
(Increase) Decrease in interest receivable (1,360) (408)
Increase in interest payable 1,937 213
Net changes in other assets and liabilities 1,579 (2,015)
--------------------------------------------------------------------------- --------- ---------
Net cash provided by operating activities 6,504 8,698
INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 72 14,852
Purchases of securities available for sale (8,151)
Proceeds from maturities of mortgage-backed securities available for sale 538 460
Proceeds from maturities of securities held to maturity 618 940
Purchases of securities held to maturity (1,286) (1,980)
Purchases of Federal Home Loan Bank stock (1,486) (692)
Loans originated and acquired, net of principal collected (119,325) (147,314)
Purchases of premises and equipment (10,898) (4,081)
Proceeds from sale of real estate owned 562
Other, net 9 1
--------------------------------------------------------------------------- --------- ---------
Net cash used by investing activities (131,758) (145,403)
FINANCING ACTIVITIES
Net increase in deposits 227,894 134,567
Net increase in long-term borrowings 3,500
Net increase (decrease) in Federal Home Loan Bank advances (43,700) 16,300
Proceeds from issuance of common stock, net 731 1,084
Tax benefits from prior year exercise of stock options 378
--------------------------------------------------------------------------- --------- ---------
Net cash provided by financing activities 188,803 151,951
--------------------------------------------------------------------------- --------- ---------
Increase (decrease) in cash and cash equivalents 63,549 15,246
Cash and cash equivalents at beginning of period 43,197 76,418
--------------------------------------------------------------------------- --------- ---------
Cash and cash equivalents at end of period $ 106,746 $ 91,664
=========================================================================== ========= =========
Supplemental information:
Cash paid for interest $ 35,078 $ 25,066
Cash paid for income taxes 5,370 4,950
Loans foreclosed and transferred to real estate owned 80 921
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
NOTES TO CONSOLIDATED CONDENSED 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 consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for condensed interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. In the opinion of management, all adjustments consisting only of
normal recurring accruals necessary for a fair presentation of the financial
condition and the results of operations for the interim periods included herein
have been made. The results of operations for the nine months ended September
30, 2000, are not necessarily indicative of results to be anticipated for the
year ending December 31, 2000. Certain amounts in the 1999 financial statements
have been reclassified to conform with the 2000 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, 1999.
2. EARNINGS PER SHARE
Earnings per share ("EPS") 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 primary
reconciling items affecting the calculation of earnings per share is the
inclusion of stock options affecting diluted earnings per share of 318,000 and
269,000 for the three months ended September 30, 2000 and 1999, respectively,
and 302,000 and 290,000 for the nine months ended September 30, 2000 and 1999,
respectively.
3. STOCK DIVIDEND
On April 25, 2000, the Company announced a 10% stock dividend payable on May 24,
2000, to shareholders of record as of May 10, 2000. Average shares outstanding
and net income per share for all periods presented have been retroactively
adjusted to give effect to this transaction.
4. BUSINESS SEGMENT INFORMATION
The Company is managed along three major lines of business: commercial banking,
retail banking, and real estate lending. The treasury function of the Company,
although not considered a line of business, is responsible for the management of
investments and interest rate risk.
The principal activities conducted by commercial banking are the delivery of
commercial business and private banking services with the emphasis on commercial
business loans. Retail banking includes all deposit products, with their related
fee income, and all consumer loan products as well as commercial loan products
offered in the Bank's branch offices. Real estate lending includes single-family
residential, multi-family residential, and commercial real estate loans, and the
associated loan servicing activities.
6
<PAGE>
Prior to 1999, the Company was managed as one segment, not by discrete operating
segments. Segment information for the three months and nine months ended
September 30, 1999, has been restated to conform with the presentation of the
Company's reportable segments at September 30, 2000.
The financial results of each segment were derived from the Company's general
ledger system. Since the Company is not specifically organized around lines of
business, most reportable segments are comprised of more than one operating
segment. Expenses incurred directly by sales and back office support functions
are not allocated to the major lines of business.
Since Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information," requires no
segmentation or methodology standardization, the organizational structure of the
Company and its business line financial results are not necessarily comparable
across companies. As such, the Company's business line performance may not be
directly comparable with similar information from other financial institutions.
Financial highlights by lines of business:
CONDENSED STATEMENTS OF OPERATIONS:
<TABLE><CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2000
Commercial Retail Real Estate
(IN THOUSANDS) Banking Banking Lending Other Total
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net interest income after
provision for loan losses $ 2,398 $ 11,099 $ 1,418 $ (962) $ 13,953
Other income 176 1,117 132 1,593 3,018
Other expense (696) (4,209) (494) (5,906) (11,305)
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
Contribution to overhead and profit $ 1,878 $ 8,007 $ 1,056 $ (5,275) 5,666
Income taxes (1,947)
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net income $ 3,719
============================================ =========== =========== =========== =========== ===========
Total assets $ 364,614 $ 591,579 $ 314,291 $ 169,014 $ 1,439,498
============================================ =========== =========== =========== =========== ===========
THREE MONTHS ENDED SEPTEMBER 30, 1999
Commercial Retail Real Estate
(IN THOUSANDS) Banking Banking Lending Other Total
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses $ 2,657 $ 8,224 $ 1,730 $ (345) $ 12,266
Other income 145 985 268 1,210 2,608
Other expense (599) (3,304) (462) (5,554) (9,919)
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
Contribution to overhead and profit $ 2,203 $ 5,905 $ 1,536 $ (4,689) 4,955
Income taxes (1,666)
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net income $ 3,289
============================================ =========== =========== =========== =========== ===========
Total assets $ 348,141 $ 457,810 $ 244,076 $ 166,335 $ 1,216,362
============================================ =========== =========== =========== =========== ===========
</TABLE>
7
<PAGE>
CONDENSED STATEMENTS OF OPERATIONS:
<TABLE><CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000
Commercial Retail Real Estate
(IN THOUSANDS) Banking Banking Lending Other Total
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net interest income after
provision for loan losses $ 7,297 $ 31,492 $ 4,368 $ (2,701) $ 40,456
Other income 472 3,181 536 4,329 8,518
Other expense (1,740) (11,092) (1,535) (19,045) (33,412)
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
Contribution to overhead and profit $ 6,029 $ 23,581 $ 3,369 $ (17,417) 15,562
Income taxes (5,356)
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net income $ 10,206
============================================ =========== =========== =========== =========== ===========
Total assets $ 364,614 $ 591,579 $ 314,291 $ 169,014 $ 1,439,498
============================================ =========== =========== =========== =========== ===========
NINE MONTHS ENDED SEPTEMBER 30, 1999
Commercial Retail Real Estate
(IN THOUSANDS) Banking Banking Lending Other Total
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses $ 7,309 $ 22,039 $ 5,646 $ (824) $ 34,170
Other income 342 2,840 971 3,295 7,448
Other expense (1,777) (9,699) (1,449) (16,554) (29,479)
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
Contribution to overhead and profit $ 5,874 $ 15,180 $ 5,168 $ (14,083) 12,139
Income taxes (4,100)
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net income $ 8,039
============================================ =========== =========== =========== =========== ===========
Total assets $ 348,141 $ 457,810 $ 244,076 $ 166,335 $ 1,216,362
============================================ =========== =========== =========== =========== ===========
</TABLE>
5. PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". In June 2000,
the FASB issued SFAS No. 138, which amends certain provisions of SFAS 133 to
clarify specific areas causing difficulties in implementation. We have appointed
a team to implement SFAS 133 for the Company. This team has been addressing
various SFAS 133 related issues, including making an assessment of whether the
Company has any embedded derivatives that will need to be recorded in the
Company's financial statements when the Company adopts the standard. The Company
has not historically engaged in any hedging activities, and does not anticipate
that it will enter into any transaction that will qualify for hedge accounting
as defined by SFAS 133. We will adopt SFAS 133 and the corresponding amendments
under SFAS 138 on January 1, 2001. SFAS 133, as amended by SFAS 138, is not
expected to have a material impact on the Company's consolidated results of
operations, financial position or cash flows.
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. The Company must adopt the
guidance in SAB 101 no later than the fourth quarter of fiscal year 2000. SAB
101 is not expected to have a material impact on the Company's consolidated
results of operations, financial position or cash flows.
8
<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 unaudited 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.
THE FOLLOWING DISCUSSION INCLUDES "FORWARD-LOOKING STATEMENTS" AS THAT TERM IS
DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING
STATEMENTS ARE BASED ON MANAGEMENT'S BELIEFS AND ASSUMPTIONS BASED ON CURRENTLY
AVAILABLE INFORMATION, AND WE HAVE NOT UNDERTAKEN TO UPDATE THESE STATEMENTS
EXCEPT AS REQUIRED BY THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND THE
RULES PROMULGATED THEREUNDER. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL
FACT REGARDING OUR FINANCIAL POSITION, BUSINESS STRATEGY AND MANAGEMENT'S PLANS
AND OBJECTIVES FOR FUTURE OPERATIONS ARE FORWARD-LOOKING STATEMENTS. WHEN USED
IN THIS REPORT, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," AND
"INTEND" AND WORDS OR PHRASES OF SIMILAR MEANING, AS THEY RELATE TO COLUMBIA OR
MANAGEMENT, ARE INTENDED TO HELP IDENTIFY FORWARD-LOOKING STATEMENTS. ALTHOUGH
WE BELIEVE THAT MANAGEMENT'S EXPECTATIONS AS REFLECTED IN FORWARD-LOOKING
STATEMENTS ARE REASONABLE, WE CANNOT ASSURE READERS THAT THOSE EXPECTATIONS WILL
PROVE TO BE CORRECT. FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND
UNCERTAINTIES THAT MAY CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY AND
ADVERSELY FROM OUR EXPECTATIONS AS INDICATED IN THE FORWARD-LOOKING STATEMENTS.
THESE RISKS AND UNCERTAINTIES INCLUDE OUR ABILITY TO MAINTAIN OR EXPAND OUR
MARKET SHARE OR NET INTEREST MARGINS, AND TO IMPLEMENT OUR MARKETING AND GROWTH
STRATEGIES. FURTHER, ACTUAL RESULTS MAY BE AFFECTED BY OUR ABILITY TO COMPETE ON
PRICE AND OTHER FACTORS WITH OTHER FINANCIAL INSTITUTIONS; CUSTOMER ACCEPTANCE
OF NEW PRODUCTS AND SERVICES; THE REGULATORY ENVIRONMENT IN WHICH WE OPERATE;
AND GENERAL TRENDS IN THE LOCAL, REGIONAL AND NATIONAL BANKING INDUSTRY AS THOSE
FACTORS RELATE TO OUR COST OF FUNDS AND RETURN ON ASSETS. IN ADDITION, THERE ARE
RISKS INHERENT IN THE BANKING INDUSTRY RELATING TO COLLECTIBILITY OF LOANS AND
CHANGES IN INTEREST RATES. MANY OF THESE RISKS, AS WELL AS OTHER RISKS THAT MAY
HAVE A MATERIAL ADVERSE IMPACT ON OUR OPERATIONS AND BUSINESS, ARE IDENTIFIED IN
OUR OTHER FILINGS WITH THE SEC. HOWEVER, YOU SHOULD BE AWARE THAT THESE FACTORS
ARE NOT AN EXHAUSTIVE LIST, AND YOU SHOULD NOT ASSUME THESE ARE THE ONLY FACTORS
THAT MAY CAUSE OUR ACTUAL RESULTS TO DIFFER FROM OUR EXPECTATIONS.
OVERVIEW
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 28 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. Columbia Bank is
a Washington state-chartered commercial bank, the deposits of which are insured
by the Federal Deposit Insurance Corporation (the "FDIC"). The 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. At September 30, 2000, the Company had total assets of $1.4 billion.
9
<PAGE>
Management believes the ongoing consolidation among financial institutions in
the Northwest part of the U.S. has created significant gaps in the ability of
large banks operating in the states comprising that area 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 banking company 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, deposits, and other financial services in the markets it
now serves and in areas contiguous to those markets. The Company has closely
followed the recent changes to federal banking laws which allow financial
institutions to engage in a broader range of activities than previously
permitted. The new legislation also authorizes the creation of financial holding
companies to facilitate such expanded activity. As the Company pursues its
aggressive growth strategy, it is likely that the Company will utilize the new
financial holding company structure to accommodate an expansion of its products
and services.
The Company intends to effect its 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), Columbia On Call(TM) telephone
banking, Columbia OnLine(TM) internet banking, development of complimentary
lines of business, and acquisitions. In particular, the Company anticipates
continued expansion in Pierce County, north into King County, south into
Thurston County (the location of the state capital, Olympia) and northwest into
Kitsap County. Aggressive expansion within King County to the north (the
location of Auburn, Kent, Bellevue and Seattle) also is anticipated in the near
future. The Company considers that affluent and rapidly growing market a prime
growth opportunity and effective way to rapidly utilize the Company's
significant existing operating infrastructure. Expansion by acquisition into
other geographic areas of the Northwest and into other product line markets will
be actively pursued 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 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 expense 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 has
consistently emphasized control of noninterest expense. See the discussion of
noninterest expense for further detail.
The Company has 28 branches, 15 in Pierce County, 7 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 to 28 branches
from 4 primarily through internal and to a lesser degree, external growth by
acquisition. In April 2000, Columbia Bank opened its third branch in the Auburn
area with its newly constructed Forest Villa Branch. Within the next few weeks
the, the Bank will move its Edgewood-Milton branch into a larger, more
convenient new facility just south of its current location. Construction is also
underway for a permanent West Olympia facility, scheduled for completion in
January 2001. The Bank also, recently announced plans for Pierce County branches
at 11th and Martin Luther King Way, 84th & Pacific, and Bonney Lake, with target
opening dates during 2001. New branches normally do not contribute to net income
for many months after opening.
10
<PAGE>
In addition to the ongoing expansion of its branch network, the Company
continuously reviews new products and services to give its customers more
financial service options. Also, new technology and services are reviewed for
business development and cost saving purposes. During the third quarter, the
Company introduced its new online banking service "Columbia On-Line". Customers
are able to conduct a full range of services on a real time basis, including,
balance inquiries, transfers, bill paying, loan information, and check image
viewing.
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.
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, merchant services fees, and income from
mortgage banking operations. The Company's operating expenses consist primarily
of compensation and employee benefits expense, and occupancy expense. Like most
financial institutions, the Company's interest income and cost of funds are
affected significantly by general economic conditions, particularly changes in
market interest rates, and by government policies and actions of regulatory
authorities.
Net income for the third quarter of 2000 was $3.7 million, or $0.31 per diluted
share, compared to $3.3 million, or $0.28 per diluted share, for the third
quarter of 1999, an increase in net income of 13%. Net income for the nine
months ended September 30, 2000, was $10.2 million, or $0.85 per diluted share,
an increase of 27%, compared to $8.0 million, or $0.67 per diluted share for the
same period in 1999. The earnings increase for the third quarter and nine month
periods reflect significant growth in total revenue (net interest income plus
noninterest income), which was up 15% and 19% from the third quarter and the
nine month periods ending September 30, 1999, respectively, and to slower
increases in noninterest expense, which increased 14% compared with the third
quarter of 1999 and 13% from the nine month period ending September 30, 1999.
On April 25, 2000, the Company announced a 10% stock dividend payable on May 24,
2000, to shareholders of record as of May 12, 2000. Average shares outstanding
and net income per share for all periods presented have been retroactively
adjusted to give effect to this transaction.
NET INTEREST INCOME
Net interest income for the third quarter of 2000 increased 15% to $14.9
million, from $12.9 million in the third quarter of 1999. For the nine months
ended September 30, 2000, net interest income increased 20% to $43.2 million
from $36.0 million for the same period in 1999. 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 nine
months of 2000, average interest-earning assets increased $219.0 million, while
average interest-bearing liabilities increased only $198.7 million, compared
with the same period in 1999. Net interest income is up 3% from the second to
the third quarter of 2000.
11
<PAGE>
Net interest margin (net interest income divided by average interest-earning
assets) decreased to 4.65% in the third quarter of 2000 from 4.83% in the third
quarter of 1999. Average interest-earning assets grew to $1.3 billion during the
third quarter of 2000, compared with $1.1 billion for the same period in 1999.
The average yield on interest-earning assets increased 0.72% to 8.86% during the
third quarter of 2000 from 8.14% in the same period of 1999. In comparison, the
average cost of interest-bearing liabilities increased 1.01% to 5.10% during the
third quarter of 2000 from 4.09% in the same period of 1999.
For the first nine months of 2000, net interest margin decreased to 4.69% from
4.75% for the same period in 1999. Average interest-earning assets grew to $1.2
billion during the first nine months of 2000, compared with $1.0 million for the
same period in 1999. The average yield on interest-earning assets increased
0.61% to 8.69% during the first nine months of 2000 from 8.08% in the same
period of 1999. In comparison, the average cost of interest-bearing liabilities
increased 0.74% to 4.83% during the first nine months of 2000 from 4.09% in the
same period of 1999.
For the first nine months of 2000, competition and rising interest rates has
created downward pressure on the Company's net interest margin. Interest rates
in general have exhibited an increasing trend since the middle of 1999 and
during the first nine months of 2000. During the past twelve months, although
loan yields have risen with increases in the "prime rate", competition for
deposits to fund continued strong loan demand within the Company's market areas
has placed upward pressure on the cost of deposits and borrowings. To fund
strong loan demand during the first nine months of 2000, the Company has made
greater use of borrowings from the FHLB of Seattle and wholesale certificates of
deposit. The funding of new loan production at higher incremental rates, versus
the Company's historical mix of deposits, has caused the average cost of
interest-bearing liabilities to increase faster than the yield on
interest-earning assets.
CONSOLIDATED AVERAGE BALANCES--NET CHANGES
COLUMBIA BANKING SYSTEM, INC.
<TABLE><CAPTION>
Three Months Ended Increase Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
(IN THOUSANDS) 2000 1999 Amount 2000 1999 Amount
-------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans $1,171,773 $ 960,450 $ 211,323 $1,135,213 $ 900,349 $ 234,864
Securities 96,419 97,088 (669) 95,795 100,269 (4,474)
Interest-earning deposits with banks 7,329 3,964 3,365 3,625 14,985 (11,360)
-------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets 1,275,521 1,061,502 214,019 1,234,633 1,015,603 219,030
Noninterest-earning assets 112,080 94,667 17,413 108,839 90,277 18,562
-------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Total assets $1,387,601 $1,156,169 $ 231,432 $1,343,472 $1,105,880 $ 237,592
====================================== ========== ========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits $ 996,785 $ 822,150 $ 174,635 $ 959,235 $ 792,089 $ 167,146
Federal Home Loan Bank advances 50,408 37,467 12,941 59,787 33,591 26,196
Other borrowings 6,500 6,500 5,363 5,363
-------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 1,053,693 859,617 194,076 1,024,385 825,680 198,705
Noninterest-bearing deposits 214,225 193,911 20,314 203,875 180,116 23,759
Other noninterest-bearing liabilities 10,217 7,237 2,980 9,923 6,707 3,216
Shareholders' equity 109,466 95,404 14,062 105,289 93,377 11,912
-------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and shareholders'
equity $1,387,601 $1,156,169 $ 231,432 $1,343,472 $1,105,880 237,592
====================================== ========== ========== ========== ========== ========== ==========
</TABLE>
12
<PAGE>
NONINTEREST INCOME
Noninterest income increased $410,000, or 16%, in the third quarter of 2000, and
$1.1 million, or 14%, for the first nine months of 2000, compared with the same
periods in 1999, respectively, despite decreases in residential mortgage loan
originations due to the effect of higher long-term interest rates. Increases
during the third quarter and the first nine months of 2000, 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
overall growth of the Company. Noninterest income increased 4% from the second
quarter to the third quarter of 2000.
NONINTEREST EXPENSE
Total noninterest expense increased $1.4 million, or 14%, for the third quarter
of 2000, and $3.9 million, or 13%, for the first nine months of 2000, compared
with the same periods in 1999. The increase was primarily due to personnel costs
associated with the Company's expansion as well as merchant services, taxes and
licenses, 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 63.3% and 64.7% for the third quarter and first nine months of 2000,
respectively, compared to 64.1% and 67.9% for the same periods in 1999. There
were no material unusual and nonrecurring items for the three and nine months
ending September 30, 2000 and 1999. Noninterest expense remained essentially
flat from the second quarter to the third quarter of 2000.
INCOME TAXES
For the third quarter and first nine months of 2000, the Company recorded income
tax provisions of $1.9 million and $5.4 million, respectively, compared with
$1.7 million and $4.1 million for the same periods in 1999.
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 nonaccrual status even though the loan
may be current as to principal and interest payments. Additionally, the Company
assesses whether an impairment of a loan as provided in SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan", would warrant establishing a
specific reserve for the loan.
13
<PAGE>
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 committee, 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 the
Company's 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.
LENDING ACTIVITIES
The Company operates 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>
September 30, % of December 31, % of
(IN THOUSANDS) 2000 Total 1999 Total
-------------------------------------------------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Commercial $ 486,041 41.6% $ 426,060 40.6%
Real estate:
One-to four-family residential 59,034 5.1 64,669 6.2
Five or more family residential and
commercial properties 417,964 35.8 377,708 36.0
-------------------------------------------------- ----------- -------- ----------- --------
Total real estate 476,998 40.9 442,377 42.2
Real estate construction:
One-to four-family residential 36,461 3.1 32,742 3.1
Five or more family residential and
commercial properties 66,652 5.7 45,886 4.4
-------------------------------------------------- ----------- -------- ----------- --------
Total real estate construction 103,113 8.8 78,628 7.5
Consumer 105,104 9.0 103,296 9.9
-------------------------------------------------- ----------- -------- ----------- --------
Sub-total loans 1,171,256 100.3 1,050,361 100.2
Less: Deferred loan fees (3,106) (0.3) (2,355) (0.2)
-------------------------------------------------- ----------- -------- ----------- --------
Total loans $ 1,168,150 100.0% $ 1,048,006 100.0%
================================================== =========== ======== =========== ========
Loans held for sale $ 13,541 $ 5,479
================================================== =========== ======== =========== ========
</TABLE>
Total loans at September 30, 2000, increased $120.1 million, or 11%, to $1.2
billion from year-end 1999. Commercial loans and five or more family residential
and commercial properties were the categories contributing a majority of the
increase.
COMMERCIAL LOANS: Commercial loans increased $60.0 million, or 14%, to $486.0
million from year-end 1999, representing 41.6% of total loans compared with
40.6% of total loans at December 31, 1999. Management is committed to providing
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 affluent individuals.
14
<PAGE>
REAL ESTATE LOANS: Residential one- to four-family loans decreased $5.6 million
to $59.0 million at September 30, 2000, representing 5.1% of total loans,
compared with $64.7 million, or 6.2% of total loans at December 31, 1999. 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 $40.3
million, or 11%, to $418.0 million at September 30, 2000, representing 35.8% of
total loans, from $377.7 million, or 36.0% of total loans at December 31, 1999.
The increase in multi-family and commercial real estate lending in the first
nine months 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. The
Company's underwriting standards generally require that the loan-to-value ratio
for multi-family and commercial real estate 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.
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 increased
$3.7 million to $36.5 million at September 30, 2000, representing 3.1% of total
loans, from $32.7 million, or 3.1% of total loans at December 31, 1999.
Multi-family and commercial real estate construction loans increased $20.8
million to $66.7 million at September 30, 2000, representing 5.7% of total
loans, from $45.9 million at December 31, 1999, or 4.4% of total loans at
December 31, 1999.
The Company endeavors to limit its construction lending risk through adherence
to strict underwriting procedures.
CONSUMER LENDING: At September 30, 2000, the Company had $105.1 million of
consumer loans outstanding, representing 9.0% of total loans, as compared with
$103.3 million, or 9.9%, at December 31, 1999. The balance at December 31, 1999,
included approximately $6.0 million of short-term loans made to a group of
individuals in connection with a single transaction which matured in February
2000. Consumer loans made by the Company include automobile loans, boat and
recreational vehicle financing, home equity and home improvement loans and
miscellaneous personal loans.
Columbia Bank is not involved with loans to foreign companies and foreign
countries.
15
<PAGE>
NONPERFORMING ASSETS
Nonperforming assets consist of: (i) nonaccrual loans, which generally are loans
placed on a nonaccrual basis 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) real estate owned.
The following tables set forth, at the dates indicated, information with respect
to nonaccrual loans, restructured loans, total nonperforming loans (nonaccrual
loans plus restructured loans), real estate owned, and total nonperforming
assets of the Company:
<TABLE><CAPTION>
September 30, December 31,
(IN THOUSANDS) 2000 1999
------------------------------------------------------------ ------ ------
<S> <C> <C>
Nonaccrual:
One-to four-family residential $ 4 $ 23
Commercial real estate 729 1,784
Commercial business 3,472 2,176
Consumer 253 377
------------------------------------------------------------ ------ ------
Total 4,458 4,360
Restructured:
One-to four-family residential construction 1,146 122
Commercial business 2 65
------------------------------------------------------------ ------ ------
Total 1,148 187
------------------------------------------------------------ ------ ------
Total nonperforming loans $5,606 $4,547
============================================================ ====== ======
Real estate owned $1,149 $1,263
------------------------------------------------------------ ------ ------
Total nonperforming assets $6,755 $5,810
============================================================ ====== ======
</TABLE>
Nonperforming loans increased $1.1 million to $5.6 million, or 0.48% of total
loans (excluding loans held for sale) at September 30, 2000, from $4.5 million,
or 0.43% of total loans at December 31, 1999, due to increases in the commercial
business category.
Restructured loans increased to $1.1 million at September 30, 2000, from
$187,000 at December 31, 1999.
Real estate owned, which is comprised of foreclosed real estate loans, decreased
$114,000 at September 30, 2000, from its balance of $1.3 million at December 31,
1999. During the first nine months of 2000, the Company foreclosed and
transferred to REO $80,000 of loans collateralized by real estate, and incurred
write-downs of $194,000 on existing REO. At September 30, 2000, REO consisted of
four foreclosed properties.
Total nonperforming assets totaled $6.8 million at September 30, 2000 compared
to $5.8 million at December 31, 1999. As a percentage of period-end assets,
nonperforming assets were 0.47% at September 30, 2000, unchanged from December
31, 1999.
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.
16
<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 a minimum of 5 years
2. Specific allowances for identified problem loans in accordance with SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan."
3. Unallocated allowance that considers other potential losses inherent in the
loan portfolio that are not contemplated in the formula based allowances.
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 September 30, 2000, the Company's allowance for loan losses was $12.6
million, or 1.08% of the total loan portfolio (excluding loans held for sale),
and 224.2% of nonperforming loans. This compares with an allowance of $10.0
million, or 0.95% of the total loan portfolio, and 219.2% of nonperforming
loans, at December 31, 1999. The increase in the allowance as a percentage of
loans was due to the $2.7 million in loan loss provisions during the first nine
months of 2000.
Net loan charge-offs amounted to $98,000 for the first nine months of 2000
compared with net loan charge-offs of $993,000 for the same period in 1999.
During the first nine months of 2000, the Company set aside a $2.7 million
provision for loan losses as compared with $1.8 million for the same period in
1999.
17
<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 Nine Months Ended
September 30, September 30,
(IN THOUSANDS) 2000 1999 2000 1999
------------------------------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Beginning balance $ 12,072 $ 9,981 $ 9,967 $ 9,002
Charge-offs:
One-to-four family residential construction (8) (274) (20) (275)
Commercial business (239) (519) (512) (800)
Consumer (190) (62) (307) (94)
------------------------------------------------------------ -------- -------- -------- --------
Total charge-offs (437) (855) (839) (1,169)
Recoveries:
Commercial business 27 55 722 113
Consumer 7 28 19 63
------------------------------------------------------------ -------- -------- -------- --------
Total recoveries 34 83 741 176
------------------------------------------------------------ -------- -------- -------- --------
Net (charge-offs) recoveries (403) (772) (98) (993)
Provision charged to expense 900 600 2,700 1,800
------------------------------------------------------------ -------- -------- -------- --------
Ending balance $ 12,569 $ 9,809 $ 12,569 $ 9,809
============================================================ ======== ======== ======== ========
</TABLE>
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 $227.9
million, or 22%, to $1.3 billion at September 30, 2000 from $1.0 billion at
December 31, 1999.
The Company has established a branch system catering primarily to retail
depositors, supplemented by business customer deposits and other borrowings. The
branch system deposits are intended to provide a stable core funding base for
the Company. Together with that stable core deposit base, management's strategy
for funding growth is also to make use of brokered and other wholesale deposits.
The Company's use of brokered and other wholesale deposits increased in 1999 and
2000, and management anticipates continued use of such deposits to fund
increasing loan demand. At September 30, 2000, brokered and other wholesale
deposits (excluding public deposits) totaled $53.5 million, or 4% of total
deposits, compared with $25.3 million, or 2% of total deposits at December 31,
1999. The brokered deposits have varied maturities up to 5 years.
BORROWINGS
The Company relies on FHLB advances to supplement its funding sources, and the
FHLB serves as the Company's primary source of long-term borrowings. In
addition, the Company uses short-term borrowings from the FHLB when necessary.
FHLB advances are secured by one- to four-family real estate mortgages and
certain other assets. At September 30, 2000, the Company had short-term advances
of $40.0 million compared to a balance of $83.7 million at December 31, 1999.
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.
18
<PAGE>
The Company maintains a borrowing relationship with a third party financial
institution to fund the liquidity needs of the Company and to provide for the
capital needs of Columbia Bank. At September 30, 2000, the Company had $6.5
million in long-term borrowings from that institution.
CAPITAL
Shareholders' equity at September 30, 2000, was $111.2 million compared with
$99.2 million at December 31, 1999. The increase is due primarily to net income
of $10.2 million during the first nine months of 2000. Shareholders' equity was
7.72% and 8.02% of total period-end assets at September 30, 2000, and December
31, 1999, 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 September 30, 2000, the Company's leverage ratio was 8.18%,
compared with 8.46% at December 31, 1999. 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% of risk-adjusted assets to be
considered "adequately capitalized". The Company's Tier I and total capital
ratios were 8.84% and 9.82%, respectively, at September 30, 2000, compared with
9.12% and 10.01%, respectively, at December 31, 1999.
During 1992, the Federal Deposit Insurance Corporation (the "FDIC") published
the qualifications necessary to be classified as a "well capitalized" bank,
primarily for assignment of FDIC insurance premium rates beginning in 1993. To
qualify as "well capitalized," banks must have a Tier I risk-adjusted capital
ratio of at least 6%, a total risk-adjusted capital ratio of at least 10%, and a
leverage ratio of at least 5%. Columbia Bank qualified as "well-capitalized" at
September 30, 2000. Failure to qualify as "well capitalized" can negatively
impact a bank's ability to expand and to engage in certain activities.
Applicable federal and Washington state regulations restrict capital
distributions by institutions such as Columbia Bank, including dividends. Such
restrictions are tied to the institution's capital levels after giving effect to
distributions. The Company's ability to pay cash dividends is substantially
dependent upon receipt of dividends from the Bank.
On April 25, 2000, the Company announced a 10% stock dividend payable on May 24,
2000, to shareholders of record as of May 10, 2000. 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.
19
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 mortgage-related assets,
cash flows and maturities of other investment securities, loan and deposit
volumes and pricing. These assumptions are inherently subjective 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 September 30, 2000, 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, 1999. For
additional information, refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" referenced in the Company's
annual report on Form 10-K for the year ended December 31, 1999.
20
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COLUMBIA BANKING SYSTEM, INC.
(Registrant)
Date November 3, 2000 By /s/ J. James Gallagher
----------------------------------------- ------------------------
J. James Gallagher
Vice Chairman and
Chief Executive Officer
Date November 3, 2000 By /s/ Gary R. Schminkey
----------------------------------------- ------------------------
Gary R. Schminkey
Executive Vice President
and Chief Financial Officer
21
