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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 June 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
July 27, 2000 was 11,705,588
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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 six months ended June 30, 2000 and 1999 2
Consolidated Condensed Balance Sheets - June 30, 2000
and December 31, 1999 3
Consolidated Condensed Statements of Shareholders'
Equity - twelve months ended December 31, 1999, and six
months ended June 30, 2000 4
Consolidated Condensed Statements of Cash Flows -
six months ended June 30, 2000 and 1999 5
Notes to consolidated 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 4. Submission of matters to a vote of security holders 21
Item 6. Exhibits and reports on Form 8-K 21
Signatures 22
1
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
COLUMBIA BANKING SYSTEM, INC.
(UNAUDITED)
<TABLE><CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(IN THOUSANDS EXCEPT PER SHARE) 2000 1999 2000 1999
---------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $25,516 $18,548 $48,859 $36,027
Securities available for sale 1,390 1,416 2,779 2,855
Securities held to maturity 67 73 131 154
Deposits with banks 37 136 54 488
---------------------------------------- ------- ------- ------- -------
Total interest income 27,010 20,173 51,823 39,524
INTEREST EXPENSE
Deposits 11,287 7,864 21,296 15,581
Federal Home Loan Bank advances 1,141 499 2,032 839
Other borrowings 133 192
---------------------------------------- ------- ------- ------- -------
Total interest expense 12,561 8,363 23,520 16,420
---------------------------------------- ------- ------- ------- -------
NET INTEREST INCOME 14,449 11,810 28,303 23,104
Provision for loan losses 900 600 1,800 1,200
---------------------------------------- ------- ------- ------- -------
Net interest income after provision
for loan losses 13,549 11,210 26,503 21,904
NONINTEREST INCOME
Service charges and other fees 1,488 1,479 3,016 2,751
Mortgage banking 245 297 400 653
Merchant services fees 910 647 1,682 1,157
Other 264 154 402 279
---------------------------------------- ------- ------- ------- -------
Total noninterest income 2,907 2,577 5,500 4,840
NONINTEREST EXPENSE
Compensation and employee benefits 5,736 4,829 11,310 9,668
Occupancy 1,542 1,631 3,133 3,278
Merchant processing 495 347 889 594
Advertising and promotion 371 474 812 914
Data processing 564 502 1,093 984
Taxes, licenses & fees 588 371 1,016 681
Other 1,988 1,610 3,854 3,441
---------------------------------------- ------- ------- ------- -------
Total noninterest expense 11,284 9,764 22,107 19,560
---------------------------------------- ------- ------- ------- -------
Income before income taxes 5,172 4,023 9,896 7,184
Provision for income taxes 1,781 1,361 3,409 2,434
---------------------------------------- ------- ------- ------- -------
NET INCOME $ 3,391 $ 2,662 $ 6,487 $ 4,750
======================================== ======= ======= ======= =======
Net income per common share:
Basic $ 0.29 $ 0.23 $ 0.56 $ 0.41
Diluted 0.28 0.22 0.54 0.40
Average number of common
shares outstanding 11,570 11,649 11,568 11,646
Average number of diluted common
shares outstanding 11,917 11,945 11,921 11,946
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE>
CONSOLIDATED CONDENSED BALANCE SHEETS
COLUMBIA BANKING SYSTEM, INC.
(UNAUDITED)
<TABLE><CAPTION>
June 30, December 31,
(IN THOUSANDS) 2000 1999
-------------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 57,369 $ 43,027
Interest-earning deposits with banks 3,430 170
-------------------------------------------------------------------------- ---------- ----------
Total cash and cash equivalents 60,799 43,197
Securities available for sale (fair value) 80,644 81,029
Securities held to maturity (fair value of $7,034 and $7,040 respectively) 7,094 7,084
Federal Home Loan Bank stock 8,267 6,916
Loans held for sale 13,641 5,479
Loans, net of unearned income 1,156,890 1,048,006
Less: allowance for loan losses 12,072 9,967
-------------------------------------------------------------------------- ---------- ----------
Loans, net 1,144,818 1,038,039
Interest receivable 9,282 7,609
Premises and equipment, net 47,949 39,166
Real estate owned 1,285 1,263
Other 7,736 7,375
-------------------------------------------------------------------------- ---------- ----------
Total Assets $1,381,515 $1,237,157
========================================================================== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 209,243 $ 181,716
Interest-bearing 969,739 861,828
-------------------------------------------------------------------------- ---------- ----------
Total deposits 1,178,982 1,043,544
Federal Home Loan Bank advances 79,000 83,700
Other borrowings 6,500 3,000
Other liabilities 10,654 7,699
-------------------------------------------------------------------------- ---------- ----------
Total liabilities 1,275,136 1,137,943
Shareholders' equity:
Preferred stock (no par value)
Authorized, 2 million shares; none outstanding
June 30, December 31,
2000 1999
---------- ----------
Common stock (no par value)
Authorized shares 51,975 51,975
Issued and outstanding 11,692 10,603 91,331 78,285
Retained earnings 18,066 23,916
Accumulated other comprehensive income (loss):
Unrealized losses on securities available for sale, net of tax (3,018) (2,987)
-------------------------------------------------------------------------- ---------- ----------
Total shareholders' equity 106,379 99,214
-------------------------------------------------------------------------- ---------- ----------
Total Liabilities and Shareholders' Equity $1,381,515 $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)
on securities available for sale, net of tax (3,325)
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 6,487
Change in unrealized gains and (losses) on
securities available for sale, net of tax (31)
Total comprehensive income 6,456
Issuance of stock under stock option
and other plans 28 331 331
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 JUNE 30, 2000 11,692 $ 91,331 $ 18,066 ($ 3,018) $106,379
=================================================== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
COLUMBIA BANKING SYSTEM, INC.
(UNAUDITED)
<TABLE><CAPTION>
Six Months Ended
June 30,
(IN THOUSANDS) 2000 1999
--------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,487 $ 4,750
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,800 1,200
Depreciation and amortization 1,048 1,389
Deferred income tax (benefit) expense (75) (1,066)
(Increase) decrease in loans held for sale (8,162) 3,380
(Increase) Decrease in interest receivable (1,673) (524)
Increase in interest payable 3,496 525
Net changes in other assets and liabilities (816) (1,769)
--------------------------------------------------------------------------- --------- ---------
Net cash provided by operating activities 2,105 7,885
INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 23 14,109
Purchases of securities available for sale (8,151)
Proceeds from maturities of mortgage-backed securities available for sale 324 204
Proceeds from maturities of securities held to maturity 280 860
Purchases of securities held to maturity (291) (1,980)
Purchases of Federal Home Loan Bank stock (1,351) (580)
Loans originated and acquired, net of principal collected (107,988) (105,854)
Purchases of premises and equipment (10,453) (2,728)
Other, net 6 (5)
--------------------------------------------------------------------------- --------- ---------
Net cash used by investing activities (119,450) (104,125)
FINANCING ACTIVITIES
Net increase in deposits 135,438 52,018
Net increase in long-term borrowings 3,500
Net increase (decrease) in Federal Home Loan Bank advances (4,700) 32,250
Proceeds from issuance of common stock, net 331 921
Tax benefits from prior year exercise of stock options 378
--------------------------------------------------------------------------- --------- ---------
Net cash provided by financing activities 134,947 85,189
--------------------------------------------------------------------------- --------- ---------
Increase (decrease) in cash and cash equivalents 17,602 (11,051)
Cash and cash equivalents at beginning of period 43,197 76,418
--------------------------------------------------------------------------- --------- ---------
Cash and cash equivalents at end of period $ 60,799 $ 65,367
=========================================================================== ========= =========
Supplemental information:
Cash paid for interest $ 20,024 $ 15,895
Cash paid for income taxes 4,025 2,670
Loans foreclosed and transferred to real estate owned 22 402
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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 consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for 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 six months ended June 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 347,000 and
296,000 for the three months ended June 30, 2000 and 1999, respectively, and
353,000 and 300,000 for the six months ended June 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 origination of
commercial business loans and private banking services. 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.
Prior to 1999, the Company was managed as one segment, not by discrete operating
segments. Segment information for the three months and six months ended June 30,
1999, has been restated to conform with presentation of the Company's reportable
segments at June 30, 2000.
6
<PAGE>
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 the Statement of Financial Accounting Standards 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 JUNE 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 $ 2,420 $ 10,764 $ 1,391 $ (1,026) $ 13,549
Other income 141 1,048 247 1,471 2,907
Other expense (415) (3,394) (511) (6,964) (11,284)
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
Contribution to overhead and profit $ 2,146 $ 8,418 $ 1,127 $ (6,519) 5,172
Income taxes (1,781)
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net income $ 3,391
============================================ =========== =========== =========== =========== ===========
Total assets $ 363,174 $ 587,697 $ 301,560 $ 129,084 $ 1,381,515
============================================ =========== =========== =========== =========== ===========
THREE MONTHS ENDED JUNE 30, 1999
Commercial Retail Real Estate
(IN THOUSANDS) Banking Banking Lending Other Total
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses $ 2,437 $ 7,187 $ 1,865 $ (279) $ 11,210
Other income 131 964 305 1,177 2,577
Other expense (575) (3,206) (465) (5,518) (9,764)
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
Contribution to overhead and profit $ 1,993 $ 4,945 $ 1,705 $ (4,620) 4,023
Income taxes (1,361)
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net income $ 2,662
============================================ =========== =========== =========== =========== ===========
Total assets $ 322,821 $ 446,222 $ 239,142 $ 138,753 $ 1,146,938
============================================ =========== =========== =========== =========== ===========
</TABLE>
7
<PAGE>
CONDENSED STATEMENTS OF OPERATIONS:
<TABLE><CAPTION>
SIX MONTHS ENDED JUNE 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 $ 4,899 $ 20,393 $ 2,950 $ (1,739) $ 26,503
Other income 296 2,064 404 2,736 5,500
Other expense (1,044) (6,883) (1,041) (13,139) (22,107)
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
Contribution to overhead and profit $ 4,151 $ 15,574 $ 2,313 $ (12,142) 9,896
Income taxes (3,409)
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net income $ 6,487
============================================ =========== =========== =========== =========== ===========
Total assets $ 363,174 $ 587,697 $ 301,560 $ 129,084 $ 1,381,515
============================================ =========== =========== =========== =========== ===========
SIX MONTHS ENDED JUNE 30, 1999
Commercial Retail Real Estate
(IN THOUSANDS) Banking Banking Lending Other Total
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses $ 4,652 $ 13,815 $ 3,916 $ (479) $ 21,904
Other income 197 1,855 703 2,085 4,840
Other expense (1,178) (6,395) (987) (11,000) (19,560)
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
Contribution to overhead and profit $ 3,671 $ 9,275 $ 3,632 $ (9,394) 7,184
Income taxes (2,434)
-------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net income $ 4,750
============================================ =========== =========== =========== =========== ===========
Total assets $ 322,821 $ 446,222 $ 239,142 $ 138,753 $ 1,146,938
============================================ =========== =========== =========== =========== ===========
</TABLE>
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.
THIS DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF THE FEDERAL SECURITIES LAWS. ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS
COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS
DUE TO A NUMBER OF FACTORS. SPECIFIC FACTORS INCLUDE, AMONG OTHERS, THE EFFECT
OF INTEREST RATE CHANGES, RISK ASSOCIATED WITH ACQUIRING OTHER BANKS, OR OPENING
AND ACQUIRING NEW BRANCHES, CONTROLLING EXPENSES, AND GENERAL ECONOMIC
CONDITIONS.
OVERVIEW
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 June 30, 2000, the Company had total assets of $1.4 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 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. 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 telephone banking,
Columbia OnLine internet banking, development of complimentary lines of
business, and acquisitions. In particular, the Company anticipates continued
expansion in Pierce County, north into King County (the location of
9
<PAGE>
Auburn and Bellevue), south into Thurston County (the location of the state
capital, Olympia) and northwest into Kitsap County (the location of Port
Orchard). Expansion by acquisition into other geographic and product line
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 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.
In April 2000, Columbia Bank opened its third branch in the Auburn area with its
newly constructed Forest Villa Branch. 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 growth and external growth by acquisition. New branches normally do not
contribute to net income for many months after opening.
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 addition to the ongoing expansion of its branch network, the Company
continuously reviews new products and services to give its customers more
financial services options. Also, new technology and services are reviewed for
business development and cost saving purposes. The Company is now completing the
testing phase of its new online banking module "Columbia On-Line", with plans
for full operation by the end of the third quarter of 2000. Customers will be
able to conduct a full range of services, including, balance inquiries,
transfers, bill paying, and loan information.
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 second quarter of 2000 was $3.4 million, or $0.28 per diluted
share, compared to $2.7 million, or $0.22 per diluted share, for the second
quarter of 1999, an increase in net income of 27%. Net income for the six months
ended June 30, 2000, was $6.5 million, or $0.54 per diluted share, an increase
of 37%, compared to $4.8 million, or $0.40 per diluted share for the same period
in 1999. The earnings increase for the second quarter and six month periods
reflect significant growth in total revenue (net interest income plus
noninterest income), which was up 21% from both the second quarter and the six
month periods ending
10
<PAGE>
June 30, 1999, and to slower increases in noninterest expense, which increased
16% compared with the second quarter of 1999 and 13% from the six month period
ending June 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 second quarter of 2000 increased 22% to $14.4
million, from $11.8 million in the second quarter of 1999. For the six months
ended June 30, 2000, net interest income increased 23% to $28.3 million from
$23.1 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 six
months of 2000, average interest-earning assets increased $221.7 million, while
average interest-bearing liabilities increased only $201.1 million, compared
with the same period in 1999. Net interest income is up 4% from the first
quarter to the second quarter of 2000.
Net interest margin (net interest income divided by average interest-earning
assets) decreased to 4.67% in the second quarter of 2000 from 4.70% in the
second quarter of 1999. Average interest-earning assets grew to $1.2 billion
during the second quarter of 2000, compared with $1.0 billion for the same
period in 1999. The average yield on interest-earning assets increased 0.70% to
8.71% during the second quarter of 2000 from 8.01% in the same period of 1999.
In comparison, the average cost of interest-bearing liabilities increased 0.77%
to 4.84% during the second quarter of 2000 from 4.07% in the same period of
1999.
For the first six months of 2000, net interest margin was unchanged at 4.71%
from the same period in 1999. Average interest-earning assets grew to $1.2
billion during the first six months of 2000, compared with $992.3 million for
the same period in 1999. The average yield on interest-earning assets increased
0.55% to 8.60% during the first six months of 2000 from 8.05% in the same period
of 1999. In comparison, the average cost of interest-bearing liabilities
increased 0.61% to 4.68% during the first nine months of 2000 from 4.07% in the
same period of 1999.
For the first six months of 2000, competition and increasing interest rates have
caused loan yields to rise along with deposit and borrowing costs, causing the
net interest margin to remain steady. Interest rates in general have exhibited
an increasing trend since the middle of 1999 and during the first six 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 six
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.
11
<PAGE>
CONSOLIDATED AVERAGE BALANCES--NET CHANGES
COLUMBIA BANKING SYSTEM, INC.
<TABLE><CAPTION>
Three Months Ended Increase Six Months Ended Increase
June 30, (Decrease) June 30, (Decrease)
(IN THOUSANDS) 2000 1999 Amount 2000 1999 Amount
-------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans $1,151,729 $ 899,818 $ 251,911 $1,116,732 $ 869,801 $ 246,931
Securities 95,566 100,441 (4,875) 95,479 101,885 (6,406)
Interest-earning deposits with banks 2,383 11,449 (9,066) 1,753 20,587 (18,834)
-------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets 1,249,678 1,011,708 237,970 1,213,964 992,273 221,691
Noninterest-earning assets 115,678 89,740 25,938 107,201 88,047 19,154
-------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Total assets $1,365,356 $1,101,448 $ 263,908 $1,321,165 $1,080,320 $ 240,845
====================================== ========== ========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits $ 968,198 $ 786,675 $ 181,523 $ 940,254 $ 776,809 $ 163,445
Federal Home Loan Bank advances 69,622 37,907 31,715 64,528 31,622 32,906
Other borrowings 6,500 6,500 4,788 4,788
-------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 1,044,320 824,582 219,738 1,009,570 808,431 201,139
Noninterest-bearing deposits 205,326 176,905 28,421 198,642 173,104 25,538
Other noninterest-bearing liabilities 10,705 6,596 4,109 9,776 6,439 3,337
Shareholders' equity 105,005 93,365 11,640 103,177 92,346 10,831
-------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and
shareholders' equity $1,365,356 $1,101,448 $ 263,908 $1,321,165 $1,080,320 240,845
====================================== ========== ========== ========== ========== ========== ==========
</TABLE>
NONINTEREST INCOME
Noninterest income increased $330,000, or 13%, in the second quarter of 2000,
and $660,000, or 14%, for the first six 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 second quarter and the first six 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 EXPENSE
Total noninterest expense increased $1.5 million, or 16%, for the second quarter
of 2000, and $2.5 million, or 13%, for the first six 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 65.0% and 65.4% for the second quarter and first six months of 2000,
respectively, compared to 67.9% and 70.0% for the same periods in 1999. There
were no material unusual and nonrecurring items for the three and six months
ending June 30, 2000 and 1999.
INCOME TAXES
For the second quarter and first six months of 2000, the Company recorded income
tax provisions of $1.8 million and $3.4 million, respectively, compared with
$1.4 million and $2.4 million for the same periods in 1999.
12
<PAGE>
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
would assess 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.
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.
13
<PAGE>
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>
June 30, % of December 31, % of
(IN THOUSANDS) 2000 Total 1999 Total
-------------------------------------------------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Commercial $ 492,894 42.6% $ 426,060 40.6%
Real estate:
One-to four-family residential 63,348 5.5 64,669 6.2
Five or more family residential
and commercial properties 408,738 35.3 377,708 36.0
-------------------------------------------------- ----------- -------- ----------- --------
Total real estate 472,086 40.8 442,377 42.2
Real estate construction:
One-to four-family residential 38,435 3.3 32,742 3.1
Five or more family residential
and commercial properties 51,213 4.4 45,886 4.4
-------------------------------------------------- ----------- -------- ----------- --------
Total real estate construction 89,648 7.7 78,628 7.5
Consumer 105,160 9.1 103,296 9.9
-------------------------------------------------- ----------- -------- ----------- --------
Sub-total loans 1,159,788 100.2 1,050,361 100.2
Less: Deferred loan fees (2,898) (0.2) (2,355) (0.2)
-------------------------------------------------- ----------- -------- ----------- --------
Total loans $ 1,156,890 100.0% $ 1,048,006 100.0%
================================================== =========== ======== =========== ========
Loans held for sale $ 13,641 $ 5,479
================================================== =========== ======== =========== ========
</TABLE>
Total loans at June 30, 2000, increased $108.9 million, or 10%, 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 $66.8 million, or 16%, to $492.9
million from year-end 1999, representing 42.6% 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.
REAL ESTATE LOANS: Residential one- to four-family loans decreased $1.3 million
to $63.3 million at June 30, 2000, representing 5.5% 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 $31.0
million, or 8%, to $408.7 million at June 30, 2000, representing 35.3% 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 three
months reflects a mix of owner occupied and income property transactions.
Generally, multi-family and commercial real estate loans are made
14
<PAGE>
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
$5.7 million to $38.4 million at June 30, 2000, representing 3.3% 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 $5.3
million, or 12%, to $51.2 million at June 30, 2000 from $45.9 million at
December 31, 1999, representing 4.4% of total loans for both ending periods.
The Company endeavors to limit its construction lending risk through adherence
to strict underwriting procedures.
CONSUMER LENDING: At June 30, 2000, the Company had $105.2 million of consumer
loans outstanding, representing 9.1% 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:
June 30, December 31,
(IN THOUSANDS) 2000 1999
---------------------------------------------------- ------ ------
Nonaccrual:
One-to four-family residential $ 4 $ 23
Commercial real estate 2,183 1,784
Commercial business 4,114 2,176
Consumer 396 377
---------------------------------------------------- ------ ------
Total 6,697 4,360
Restructured:
One-to four-family residential construction 122
Commercial business 4 65
Consumer 17
---------------------------------------------------- ------ ------
Total 21 187
---------------------------------------------------- ------ ------
Total nonperforming loans $6,718 $4,547
==================================================== ====== ======
Real estate owned $1,285 $1,263
---------------------------------------------------- ------ ------
Total nonperforming assets $8,003 $5,810
==================================================== ====== ======
Nonperforming loans increased $2.2 million to $6.7 million, or 0.58% of total
loans (excluding loans held for sale) at June 30, 2000, from $4.5 million, or
0.43% of total loans at December 31, 1999, due principally to increases in the
commercial business and commercial real estate categories.
Restructured loans totaled $21,000 at June 30, 2000.
Real estate owned, which is comprised of foreclosed real estate loans, increased
$22,000 at June 30, 2000, from its balance of $1.3 million at December 31, 1999.
During the second quarter of 2000, the Company foreclosed on a $34,000
residential land loan collateralized by real estate and transferred the real
estate to REO. At June 30, 2000, REO consisted of three foreclosed properties.
Total nonperforming assets totaled $8.0 million, or 58% of period-end assets, at
June 30,2000, compared to $5.8 million, or .47% of period-end assets, at
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 June 30, 2000, the Company's allowance for loan losses was $12.1 million, or
1.04% of the total loan portfolio (excluding loans held for sale), and 179.7% 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 primarily
to the $1.8 million in loan loss provisions during the first six months of 2000.
Net loan recoveries amounted to $305,000 for the first six months of 2000
compared with net loan charge-offs of $221,000 for the same period in 1999.
During the first six months of 2000, the Company set aside a $1.8 million
provision for loan losses as compared with $1.2 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 Six Months Ended
June 30, June 30,
(IN THOUSANDS) 2000 1999 2000 1999
------------------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Beginning balance $ 10,897 $ 9,588 $ 9,967 $ 9,002
Charge-offs:
One-to-four family residential construction (12) (12) (1)
Commercial business (86) (233) (273) (281)
Consumer (57) (8) (116) (32)
------------------------------------------------ -------- -------- -------- --------
Total charge-offs (155) (241) (401) (314)
Recoveries:
Commercial business 429 2 694 57
Consumer 1 32 12 36
------------------------------------------------ -------- -------- -------- --------
Total recoveries 430 34 706 93
------------------------------------------------ -------- -------- -------- --------
Net (charge-offs) recoveries 275 (207) 305 (221)
Provision charged to expense 900 600 1,800 1,200
------------------------------------------------ -------- -------- -------- --------
Ending balance $ 12,072 $ 9,981 $ 12,072 $ 9,981
================================================ ======== ======== ======== ========
</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 $135.4
million, or 13%, to $1.2 billion at June 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 June 30, 2000, brokered and other wholesale deposits
(excluding public deposits) totaled $53.6 million, or 5% of total deposits,
compared with $25.3 million, or 2.4% 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 June 30, 2000, the Company had short-term advances of
$79.0 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 June 30, 2000, the Company had $6.5 million
in long-term borrowings from that institution.
CAPITAL
Shareholders' equity at June 30, 2000, was $106.4 million compared with $99.2
million at December 31, 1999. The increase is due primarily to net income of
$6.5 million during the first six months of 2000. Shareholders' equity was 7.70%
and 8.02% of total period-end assets at June 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 June 30, 2000, the Company's leverage ratio was 8.01%, 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 8.71% and 9.67%, respectively, at June 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
June 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 June 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual shareholders meeting on April 25, 2000, for the
purpose of electing the Board of Directors.
All fifteen persons nominated were elected to hold office for the ensuing year.
Nominee Votes "For" Votes "Withheld"
---------------------------------------------------------------------------
Richard S. DeVine 8,953,618 181,868
Melanie J. Dressel 8,954,137 181,349
Jack Fabulich 8,952,484 183,002
Jonathan Fine 8,954,137 181,349
John P. Folsom 8,953,618 181,868
J. James Gallagher 8,954,144 181,342
John A. Halleran 8,954,137 181,349
Thomas M. Hulbert 8,954,144 181,342
Thomas L. Matson 8,954,144 181,342
William W. Philip 8,954,144 181,342
Robert E. Quoidbach 8,954,137 181,349
Donald Rodman 8,954,137 181,349
Sidney R. Snyder 8,954,137 181,349
William T. Weyerhaeuser 8,953,688 181,798
James M. Will 8,954,137 181,349
A proposal to amend and restate Columbia's Stock Option Plan was approved by the
following vote of the shareholders:
Shares Shares Shares
Voted Voted Shares Broker Not
"FOR" "AGAINST" "ABSTAINING" Non-Votes Voted
----- --------- ------------ --------- -----
5,028,910 1,003,210 136,711 2,966,655 1,467,578
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10
(a) Amended and Restated Stock Option Plan of Columbia Banking
System, Inc.
(b) Amended and Restated Articles of Incorporation of Columbia Banking
System, Inc.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
21
<PAGE>
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 July 28, 2000 By /s/ J. James Gallagher
----------------------- ------------------------------
J. James Gallagher
Vice Chairman and
Chief Executive Officer
Date July 28, 2000 By /s/ Gary R. Schminkey
----------------------- ------------------------------
Gary R. Schminkey
Executive Vice President and
Chief Financial Officer
22
