<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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
COLUMBIA BANKING SYSTEM, INC.
(Exact name of small business issuer as specified in its charter)
Washington 91-1422237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1102 Broadway Plaza
Tacoma, Washington 98402
(Address of principal executive offices) (Zip Code)
(253) 305-1900
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the issuer: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares of the issuer's Common Stock outstanding at
April 28, 2000 was 11,673,419.
<PAGE>
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Page
Item 1. Financial statements
Consolidated Statements of Operations - three months
ended March 31, 2000 and 1999 2
Consolidated Balance Sheets - March 31, 2000
and December 31, 1999 3
Consolidated Statements of Shareholders' Equity -
twelve months ended December 31, 1999 and
three months ended March 31, 2000 4
Consolidated Statements of Cash Flows -
three months ended March 31, 2000 and 1999 5
Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure about Market Risk 18
PART II -- OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 19
Signatures 19
1
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Columbia Banking System, Inc.
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(in thousands except per share) 2000 1999
- -----------------------------------------------------------------------------
<S> <C> <C>
Interest Income
Loans $23,343 $17,479
Securities available for sale 1,389 1,439
Securities held to maturity 64 81
Deposits with banks 17 352
- -----------------------------------------------------------------------------
Total interest income 24,813 19,351
Interest Expense
Deposits 10,009 7,717
Federal Home Loan Bank advances 891 340
Other borrowings 59
- -----------------------------------------------------------------------------
Total interest expense 10,959 8,057
Net Interest Income 13,854 11,294
Provision for loan losses 900 600
- -----------------------------------------------------------------------------
Net interest income after
provision for loan losses 12,954 10,694
Noninterest Income
Service charges and other fees 1,528 1,272
Mortgage banking 155 356
Merchant services fees 772 510
Other 138 125
- -----------------------------------------------------------------------------
Total noninterest income 2,593 2,263
Noninterest Expense
Compensation and employee benefits 5,574 4,839
Occupancy 1,591 1,647
Merchant processing 394 247
Advertising and promotion 441 440
Data processing 529 482
Taxes, licenses & fees 428 310
Other 1,866 1,831
- -----------------------------------------------------------------------------
Total noninterest expense 10,823 9,796
- -----------------------------------------------------------------------------
Income before income taxes 4,724 3,161
Provision for income taxes 1,628 1,073
- -----------------------------------------------------------------------------
Net Income $ 3,096 2,088
=============================================================================
Net income per common share:
Basic $ 0.27 $ 0.18
Diluted 0.26 0.17
Average number of common
shares outstanding 11,553 11,627
Average number of diluted common
shares oustanding 11,893 11,936
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
Columbia Banking System, Inc.
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
(in thousands) 2000 1999
- -----------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 61,045 $ 43,027
Interest-earning deposits with banks 1,114 170
- -----------------------------------------------------------------------------
Total cash and cash equivalents 62,159 43,197
Securities available for sale (fair value) 80,659 81,029
Securities held to maturity (fair value
of $7,003 and $7,040 respectively) 7,094 7,084
Federal Home Loan Bank stock 8,135 6,916
Loans held for sale 7,224 5,479
Loans, net of unearned income 1,102,020 1,048,006
Less: allowance for loan losses 10,897 9,967
- -----------------------------------------------------------------------------
Loans, net 1,091,123 1,038,039
Interest receivable 7,596 7,609
Premises and equipment, net 47,244 39,166
Real estate owned 1,263 1,263
Other 7,689 7,375
- -----------------------------------------------------------------------------
Total Assets $1,320,186 $1,237,157
=============================================================================
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing $207,169 $181,716
Interest-bearing 978,973 861,828
- -----------------------------------------------------------------------------
Total Deposits 1,186,142 1,043,544
Federal Home Loan Bank advances 14,400 83,700
Other borrowings 6,500 3,000
Other liabilities 10,814 7,699
- ----------------------------------------------------------------------------
Total liabilities 1,217,856 1,137,943
Shareholders' equity:
Preferred stock (no par value)
Authorized, 2 million shares;
none outstanding
March 31, December 31,
Common stock (no par value) 2000 1999
--------- ----------
<S> <C> <C>
Authorized shares 51,975 51,975
Issued and outstanding 10,611 10,603 78,457 78,285
Retained Earnings 27,012 23,916
Accumulated other comprehensive income (loss):
Unrealized losses on securities available
for sale, net of tax (3,139) (2,987)
- -----------------------------------------------------------------------------
Total shareholders' equity 102,330 99,214
- -----------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $1,320,186 $1,237,157
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Columbia Banking System, Inc.
(Unaudited)
<TABLE>
<CAPTION> Accumulated
Common stock Other Total
Number of Retained Comprehensive Shareholders'
(in thousands) Shares Amount Earnings Income (Loss) Equity
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1998 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 3,096
Change in unrealized gains and (losses)
on securities available for sale, net of tax (152)
Total comprehensive income 2,944
Issuance of stock under stock option
and other plans 8 172 172
- -----------------------------------------------------------------------------
Balance at
March 31, 2000 10,611 $78,457 $27,012 ($3,139) $102,330
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Columbia Banking System, Inc.
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(in thousands) 2000 1999
- -----------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 3,096 $ 2,088
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 900 600
Depreciation and amortization 480 498
Deferred income tax (benefit) expense (111) (344)
Net realized (gains) losses on sale of assets (1)
(Increase) decrease in loans held for sale (1,745) 4,696
Decrease in interest receivable 13 427
Increase in interest payable 2,248 95
Net changes in other assets and liabilities 739 (643)
- -----------------------------------------------------------------------------
Net cash provided by operating activities 5,619 7,417
Investing Activities
Proceeds from maturities of securities available for sale 11 7,497
Purchases of securities available for sale (8,256)
Proceeds from maturities of mortgage-backed
securities available for sale 130 72
Proceeds from maturities of securities held to maturity 280 250
Purchases of securities held to maturity (291) (400)
Purchases of Federal Home Loan Bank stock (1,219)
Loans originated and acquired, net of principal collected (53,675) (28,646)
Purchases of premises and equipment (8,869) (2,120)
Proceeds from disposal of premises and equipment 2
Other, net 4 (1)
- -----------------------------------------------------------------------------
Net cash used by investing activities (63,627) (31,604)
Financing Activities
Net increase in deposits 142,598 25,687
Net increase in long-term borrowings 3,500
Net decrease in Federal Home Loan Bank advances (69,300)
Proceeds from issuance of common stock, net 172 222
- -----------------------------------------------------------------------------
Net cash provided by financing activities 76,970 25,909
- -----------------------------------------------------------------------------
Increase in cash and cash equivalents 18,962 1,722
Cash and cash equivalents at beginning of period 43,197 76,418
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 62,159 $ 78,140
=============================================================================
Supplemental information:
Cash paid for interest $ 8,711 $ 7,962
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Columbia Banking System, Inc.
Columbia Banking System, Inc. (the "Company") is a registered bank holding
company whose wholly owned subsidiary, Columbia State Bank ("Columbia Bank"),
conducts a full-service commercial banking business. Headquartered in Tacoma,
Washington, the Company provides a full range of banking services to small
and medium-sized businesses, professionals and other individuals through
banking offices located in the Tacoma metropolitan area and contiguous parts
of the Puget Sound region of Washington, as well as the Longview and Woodland
communities in southwestern Washington. Substantially all of the Company's
loans, loan commitments and core deposits are geographically concentrated in
its service areas.
1. Basis of Presentation
The interim unaudited 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 three
months ended March 31, 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 only reconciling items affecting the calculation of earnings per share
for the Company is the inclusion for the three months ended March 31, 2000
and 1999, respectively, of 340,000 and 309,000 stock options and restricted
stock grants affecting the calculation of diluted earnings per share.
3. Subsequent Event - 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.
6
<PAGE>
Prior to 1999, the Company was managed as one segment, not by discrete
operating segments. Segment information for the three months ended March 31,
1999, has been restated to conform with presentation of the Company's
reportable segments at March 31, 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 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 March 31, 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 $ 2,479 $ 9,629 $ 1,559 $ (713) $ 12,954
Other income 155 1,016 157 1,265 2,593
Other expense (629) (3,489) (530) (6,175) (10,823)
- -------------------------------------------------------------------------------
Contribution to overhead
and profit $ 2,005 $ 7,156 $ 1,186 $ (5,623) $ 4,724
Income taxes (1,628)
- -------------------------------------------------------------------------------
Net income $ 3,096
===============================================================================
Total assets $352,463 $555,758 $278,835 $133,130 $1,320,186
===============================================================================
Three Months Ended March 31, 1999
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 $ 2,215 $ 6,628 $ 2,051 $ (200) $ 10,694
Other income 66 891 398 908 2,263
Other expense (603) (3,189) (522) (5,482) (9,796)
- -------------------------------------------------------------------------------
Contribution to overhead
and profit $ 1,678 $ 4,330 $ 1,927 $ (4,774) $ 3,161
Income taxes (1,073)
- -------------------------------------------------------------------------------
Net income $ 2,088
===============================================================================
Total assets $270,981 $423,444 $227,315 $165,777 $1,087,517
===============================================================================
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Columbia Banking System, Inc.
This discussion should be read in conjunction with the 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
March 31, 2000, the Company had total assets of $1.3 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(sm)
telephone banking, Columbia OnLine(sm) internet banking, development of
complimentary lines of business, and acquisitions. In particular, the
8
<PAGE>
Company anticipates continued expansion in Pierce County, north into King
County (the location of Auburn and Bellevue), south into Thurston County
(the location of the state 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 through a combination of internal and
external growth by acquisition.
In addition to the ongoing expansion of its branch network, the Company
continuously reviews new products and services to give its customers more
financial services options. Also, new technology and services are reviewed
for business development and cost saving purposes. The Company is now in
the testing phase of its new online banking module "Columbia On-Line", with
plans for full operation during the second 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 first quarter of 2000 was $3.1 million, or $0.26 per
diluted share, compared to $2.1 million, or $0.17 per diluted share, for the
first quarter of 1999, an increase in net income of 53%. The earnings
increase for the first quarter reflects significant growth in assets, loans
and deposits as compared to the quarter ended March 31, 1999, and to
continued increases in noninterest income.
9
<PAGE>
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 first quarter of 2000 increased 23% to $13.9
million, from $11.3 million in the first quarter of 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 three months of 2000, average interest-earning
assets increased $205.6 million, while average interest-bearing liabilities
increased only $182.7 million, compared with the same period in 1999.
Net interest margin (net interest income divided by average interest-earning
assets) increased to 4.75% in the first quarter of 2000 from 4.71% in the
first quarter of 1999. Average interest-earning assets grew to $1.2 billion
during the first quarter of 2000, compared with $972.6 million for the same
period in 1999. The average yield on interest-earning assets increased
0.41% to 8.49% during the first quarter of 2000 from 8.08% in the same
period of 1999. In comparison, the average cost of interest-bearing
liabilities increased 0.39% to 4.52% during the third quarter of 2000 from
4.13% in the same period of 1999.
For the first three months of 2000 compared to the same period in 1999, the
increase in net interest margin is primarily due to rising interest rates.
Competition and increasing interest rates have caused loan yields to rise
along with deposit and borrowing costs, causing the net interest margin to
increase slightly. Interest rates in general have exhibited an increasing
trend since the middle of 1999 and during the first quarter of 2000. During
the past twelve months, although loan yields have risen with increases of
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.
CONSOLIDATED AVERAGE BALANCES--NET CHANGES
Columbia Banking System, Inc.
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Increase
March 31, (Decrease)
(in thousands) 2000 1999 Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Loans $1,081,735 $839,450 $242,285
Securities 95,392 103,346 (7,954)
Interest-earning
deposits with banks 1,111 29,825 (28,714)
- --------------------------------------------------------------------------------
Total interest-earning
assets 1,178,238 972,621 205,617
Noninterest-earning
assets 98,724 86,336 12,388
- --------------------------------------------------------------------------------
Total assets $1,276,962 $1,058,957 $218,005
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing
deposits $ 912,310 $ 766,834 $145,476
Federal Home Loan Bank
advances 59,434 25,266 34,168
Other borrowings 3,077 3,077
- --------------------------------------------------------------------------------
Total interest-bearing
liabilities $ 974,821 792,100 182,721
Noninterest-bearing
deposits 191,959 169,261 22,698
Other noninterest-bearing
liabilities 8,832 6,133 2,699
Shareholders' Equity 101,350 91,463 9,887
- --------------------------------------------------------------------------------
Total liabilities and
shareholders'equity $1,276,962 $1,058,957 $218,005
================================================================================
</TABLE>
10
<PAGE>
Noninterest Income
Noninterest income increased $330,000, or 15%, in the first quarter of 2000,
compared with the same period in 1999, despite a decrease of $201,000 in
mortgage banking income during the same period. Increases during the first
quarter of 1999, 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 $1.0 million, or 10%, for the first
quarter of 2000, compared with the same period in 1999. The increase was
primarily due to personnel costs associated with the Company's expansion
as well as merchant processing 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 65.8% for the first quarter of 2000, compared
to 72.3% for the same period in 1999. There were no material unusual and
nonrecurring items for the three months ending March 31, 2000 and 1999.
The decrease in the efficiency ratio during the first three months of 2000
is primarily due to slower increases in expenses associated with branch and
infrastructure expansion than incurred in the first quarter of 1999. Early
in 1999, the Company reemphasized cost controls as shown by a decrease in
the efficiency ratio to 67.9%, 64.1%, and 62.6% during the second, third,
and fourth quarters of 1999, respectively.
Income Taxes
For the first quarter of 2000, the Company recorded an income tax provision
of $1.6 million, compared with $1.1 million for the same period 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 wouldassess
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,
11
<PAGE>
together with appropriate loan committees, has the responsibility for
administering the credit approval process. As another part of its control
process, the Company uses an independent internal credit review and
examination function to provide assurance that loans and commitments are
made and maintained as prescribed by 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>
March 31, % of December 31 % of
(in thousands) 2000 Total 1999 Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 469,954 42.6% $ 426,060 40.6%
Real estate:
One-to four-family residential 66,396 6.0 64,669 6.2
Five or more family residential and
commercial properties 389,020 35.3 377,708 36.0
- -----------------------------------------------------------------------------
Total real estate 455,416 41.3 442,377 42.2
Real estate construction:
One-to four-family residential 33,182 3.0 32,742 3.1
Five or more family residential and
commercial properties 47,998 4.4 45,886 4.4
- -----------------------------------------------------------------------------
Total real estate construction 81,180 7.4 78,628 7.5
Consumer 98,018 8.9 103,296 9.9
- -----------------------------------------------------------------------------
Sub-total loans 1,104,568 100.2 1,050,361 100.2
Less: Deferred loan fees (2,548) (0.2) (2,355) (0.2)
- -----------------------------------------------------------------------------
Total loans $1,102,020 100.0% $1,048,006 100.0%
=============================================================================
Loans held for sale $ 7,224 $ 5,479
=============================================================================
</TABLE>
Total loans increased $54.0 million, or 5.2%, to $1.1 billion from year-end
1999. Commercial loans and five or more family residential and commercial
real estate were the categories contributing a majority of the increase.
Commercial Loans: Commercial loans increased $43.9 million, or 10%, to
$470.0 million from year-end 1999, representing 42.6% of total loans.
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 increased
$1.7 million to $66.4 million at March 31, 2000, representing 6.0% of total
loans, compared with $64.7 million 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.
12
<PAGE>
The Company makes multi-family and commercial real estate loans in its
primary market areas. Multi-family and commercial real estate lending
increased $11.3 million, or 3%, to $389.0 million at March 31, 2000,
representing 35.3% of total loans, from $377.7 million 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 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 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 $440,000 to $33.2 million at March 31,
2000, representing 3.0% of total loans, from $32.7 million at December 31,
1999. Multi-family and commercial real estate construction loans increased
$2.1 million, or 5%, to $48.0 million at March 31, 2000, representing 4.4%
of total loans, from $45.9 million at December 31, 1999.
The Company endeavors to limit its construction lending risk through
adherence to strict underwriting procedures.
Consumer Lending: At March 31, 2000, the Company had $98.0 million of
consumer loans outstanding, representing 8.9% of total loans, as compared
with $103.3 million 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.
13
<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>
March 31, December 31,
(in thousands) 2000 1999
- -----------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual:
One-to four-family residential $ 23 $ 23
Commercial real estate 1,277 1,784
Commercial business 3,631 2,176
Consumer 290 377
- -----------------------------------------------------------------------------
Total 5,221 4,360
Restructured:
One-to four-family residential construction 122
Commercial business 5 65
Consumer 15
- -----------------------------------------------------------------------------
Total 20 187
- -----------------------------------------------------------------------------
Total nonperforming loans $ 5,241 $ 4,547
=============================================================================
Real estate owned $ 1,263 $ 1,263
=============================================================================
Total nonperforming assets $ 6,504 $ 5,810
=============================================================================
</TABLE>
Nonperforming loans were $5.2 million, or 0.48% of total loans (excluding
loans held for sale), at March 31, 2000, compared to $4.5 million, or 0.43%
of total loans, at December 31, 1999, due principally to increases in the
commercial business category.
Restructured loans totaled $20,000 at March 31, 2000.
Real estate owned, which is comprised of foreclosed real estate loans, was
unchanged at March 31, 2000, from its balance of $1.3 million at December 31,
1999. During the first three months of 2000, there were no REO transactions.
At March 31, 2000, REO consisted of two foreclosed properties.
Total nonperforming assets totaled $6.5 million, or 0.49% of period-end
assets, at March 31, 2000, compared to $5.8 million, or 0.47% 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.
14
<PAGE>
Provision and Allowance for Loan Losses
The Company maintains an allowance for loan losses to absorb losses inherent
in the loan portfolio. The size of the allowance is determined through
quarterly assessments of the probable estimated losses in the loan portfolio.
The Company's methodology for making such assessments and determining the
adequacy of the allowance includes the following key elements:
1. Formula based allowances calculated on minimum thresholds and historical
performance of the portfolio for 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 March 31, 2000, the Company's allowance for loan losses was $10.9 million,
or 0.99% of the total loan portfolio (excluding loans held for sale), and
207.9% 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 $900,000 in loan loss
provisions during the first quarter of 2000.
Net loan recoveries amounted to $30,000 for the first three months of 2000
compared with net loan charge-offs of $14,000 for the same period in 1999.
During the first three months of 2000, the Company set aside a $900,000
provision for loan losses as compared with $600,000 for the same period in
1999.
15
<PAGE>
The following table sets forth at the dates indicated the changes in the
Company's allowance for loan losses:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(in thousands) 2000 1999
- ----------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $ 9,967 $9,002
Charge offs:
One-to-four family residential
construction (1)
Commercial business (187) (48)
Consumer (59) (24)
- ----------------------------------------------------------------------------
Total charge-offs (246) (73)
Recoveries:
Commercial business 266 55
Consumer 10 4
- ----------------------------------------------------------------------------
Total recoveries 276 59
- ----------------------------------------------------------------------------
Net (charge-offs) recoveries 30 (14)
Provision charged to expense 900 600
- ----------------------------------------------------------------------------
Ending balance $10,897 $9,588
============================================================================
</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 $142.6 million, or 13.7%, to $1.2 billion at March 31, 2000 from
$1.0 billion at December 31, 1999.
The Company is establishing 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 March 31,
2000, brokered and other wholesale deposits (excluding public deposits)
totaled $58.7 million, or 4.9% 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 March 31, 2000, the Company had short-term advances
of $14,400 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.
16
<PAGE>
The Company maintains a borrowing relationship with another financial
institution to fund the liquidity needs of the Company and to provide for
the capital needs of Columbia Bank. At March 31, 2000, the Company had
$6.5 million in long-term borrowings.
Capital
Shareholders' equity at March 31, 2000, was $102.3 million compared with
$99.2 million at December 31, 1999. The increase is due primarily to net
income of $3.1 million during the first three months of 2000. Shareholders'
equity was 7.75% and 8.02% of total period-end assets at March 31, 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 March 31, 2000, the Company's leverage ratio was 8.25%,
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% to be considered "adequately capitalized". The Company's Tier I and
total capital ratios were 8.92% and 9.84%, respectively, at March 31, 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 March 31, 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.
17
<PAGE>
Impact of the Year 2000 Issue (Y2K)
Many existing computer systems, including the systems used by the Company,
originally used only two digits to identify a year in the date field. These
programs were designed and developed without taking into account the recent
change in the century. It was feared that the failure of any of these systems
to recognize the year 2000 could have a material effect on a Company's
business, results of operations, and/or financial condition. At the
century date change on January 1, 2000, the Company's operations and
electronic systems did not incur any breakdowns, stoppages, complications
or interruptions of any type. In addition, all outside service and utility
providers that the Company subscribes to experienced no service interruptions,
and to the best of the Company's knowledge, its customers experienced few,
if any, problems. The Company developed a comprehensive Year 2000
contingency plan. The Company's new state-of-the-art operations center has
a generator backup to run the entire facility. All branch offices have
special procedures in order to operate without the usual telecommunications
links so that, in the event of a telecommunications failure, the Company
is able to process its data through a remote site. Although the Company has
taken precautions to assure its technology is Y2K ready, should any
complications arise in the future, the Company is prepared to address such
potential problems or situations
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 uncertain and, as a result, the model cannot precisely estimate
net interest income or precisely predict the impact of higher or lower
interest rates on net interest income. Actual results will differ from
simulated results due to timing, magnitude and frequency of interest rate
changes and changes in market conditions and management strategies, among
other factors. At March 31, 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.
18
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) 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 May 12, 2000 By /s/ J. James Gallagher
----------------------------- --------------------------------
J. James Gallagher
Vice Chairman and
Chief Executive Officer
Date May 12, 2000 By /s/ Gary R. Schminkey
----------------------------- ---------------------------------
Gary R. Schminkey
Executive Vice President and
Chief Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
FINANCIAL DATA SCHEDULE
Columbia Banking System, Inc.
(in thousands except per share)
</LEGEND>
<CIK> 0000887343
<NAME> COLUMBIA BANKING SYSTEM, INC.
<MULTIPLIER> 1000
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 61045
<INT-BEARING-DEPOSITS> 1114
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 88794
<INVESTMENTS-CARRYING> 7094
<INVESTMENTS-MARKET> 0
<LOANS> 1109244
<ALLOWANCE> 10897
<TOTAL-ASSETS> 1320186
<DEPOSITS> 1186142
<SHORT-TERM> 14400
<LIABILITIES-OTHER> 10814
<LONG-TERM> 6500
0
0
<COMMON> 78457
<OTHER-SE> 23873
<TOTAL-LIABILITIES-AND-EQUITY> 1320186
<INTEREST-LOAN> 23343
<INTEREST-INVEST> 1453
<INTEREST-OTHER> 17
<INTEREST-TOTAL> 24813
<INTEREST-DEPOSIT> 10009
<INTEREST-EXPENSE> 10959
<INTEREST-INCOME-NET> 13854
<LOAN-LOSSES> 900
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10823
<INCOME-PRETAX> 4724
<INCOME-PRE-EXTRAORDINARY> 4724
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3096
<EPS-BASIC> .27
<EPS-DILUTED> .26
<YIELD-ACTUAL> 4.75
<LOANS-NON> 5221
<LOANS-PAST> 0
<LOANS-TROUBLED> 20
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9967
<CHARGE-OFFS> 246
<RECOVERIES> 276
<ALLOWANCE-CLOSE> 10897
<ALLOWANCE-DOMESTIC> 10897
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 682
</TABLE>
