-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G40eKlKJS8ifwDd09I9NZpWAB4dTkzrrsh0DoocN+yI5UNmFhBFjPN2EXEKmvxYX q7jMffN154iEspN5cOYnpQ== 0000887343-98-000010.txt : 19980817 0000887343-98-000010.hdr.sgml : 19980817 ACCESSION NUMBER: 0000887343-98-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLUMBIA BANKING SYSTEM INC CENTRAL INDEX KEY: 0000887343 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 911422237 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20288 FILM NUMBER: 98688880 BUSINESS ADDRESS: STREET 1: 1102 BROADWAY PLAZA CITY: TACOMA STATE: WA ZIP: 98402 BUSINESS PHONE: 2533051900 MAIL ADDRESS: STREET 1: 1102 BROADWAY PLAZA CITY: TACOMA STATE: WA ZIP: 98402 10-Q 1 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, 1998. / / 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 July 31, 1998 was 10,039,332. TABLE OF CONTENTS PART I -- FINANCIAL INFORMATION Page Item 1. Financial statements Consolidated Statements of Operations - three months and six months ended June 30, 1998 and 1997 2 Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 3 Consolidated Statements of Shareholders' Equity - twelve months ended December 31, 1997 and six months ended June 30, 1998 4 Consolidated Statements of Cash Flows - six months ended June 30, 1998 and 1997 5 Notes to consolidated financial statements 6 Item 2. Management Discussion and Analysis of Financial 8 Condition and Results of Operations Item 3. Interest Rate Sensitivity 17 PART II -- OTHER INFORMATION Item 4. Submission of matters to a vote of shareholders 18 Item 6. Exhibits and reports on Form 8-K 19 Signatures 19 1 CONSOLIDATED STATEMENTS OF OPERATIONS Columbia Banking System, Inc.
Three Months Ended Six Months Ended June 30, June 30, (in thousands except per share) 1998 1997 1998 1997 - ----------------------------------------------------------------------------- Interest Income Loans $16,522 $13,729 $32,375 $25,957 Securities available for sale 1,100 925 2,158 1,784 Securities held to maturity 110 196 246 364 Deposits with banks 153 333 513 806 - ----------------------------------------------------------------------------- Total interest income 17,885 15,183 35,292 28,911 Interest Expense Deposits 7,023 6,056 13,872 11,717 Federal Home Loan Bank advances 549 429 1,076 890 Other borrowings 20 41 - ----------------------------------------------------------------------------- Total interest expense 7,572 6,505 14,948 12,648 Net Interest Income 10,313 8,678 20,344 16,263 Provision for loan losses 450 1,259 1,000 1,708 - ----------------------------------------------------------------------------- Net interest income after provision for loan losses 9,863 7,419 19,344 14,555 Noninterest Income Service charges and other fees 1,416 1,059 2,701 1,927 Mortgage banking 412 191 810 295 Gains on sale of loans, net 1,035 1,035 Other fees 1,043 810 1,880 1,557 - ----------------------------------------------------------------------------- Total noninterest income 2,871 3,095 5,391 4,814 Noninterest Expense Compensation and employee benefits 3,889 3,175 7,660 6,302 Occupancy 1,206 1,164 2,329 2,260 Advertising and promotion 371 306 737 543 Data processing 453 350 860 694 Other 2,918 2,423 5,509 4,523 - ----------------------------------------------------------------------------- Total noninterest expense 8,837 7,418 17,095 14,322 Income before income taxes 3,897 3,096 7,640 5,047 Provision for income taxes 1,349 918 2,679 1,492 - ----------------------------------------------------------------------------- Net Income $ 2,548 $ 2,178 $ 4,961 $ 3,555 ============================================================================= Net income per common share: Basic $ 0.25 $ 0.22 $ 0.50 $ 0.36 Diluted 0.25 0.22 0.48 0.35 Average number of common shares outstanding 10,028 9,806 10,013 9,804 Average number of diluted common shares oustanding 10,387 10,066 10,353 10,060 See accompanying notes to consolidated financial statements.
2 CONSOLIDATED BALANCE SHEETS Columbia Banking System, Inc.
June 30, December 31, (in thousands) 1998 1997 - ----------------------------------------------------------------------------- Assets Cash and due from banks $ 57,626 $ 47,604 Interest-earning deposits with banks 26,313 28,108 Securities available for sale 61,497 56,279 Securities held to maturity 7,254 9,679 FHLB stock 5,343 5,144 Loans held for sale 9,043 4,377 Loans 752,968 685,889 Less: allowance for loan losses 8,877 8,440 - ----------------------------------------------------------------------------- Loans, net 744,091 677,449 Interest Receivable 5,649 5,023 Premises and equipment, net 32,583 27,246 Real estate owned 921 231 Other 3,402 3,415 - ----------------------------------------------------------------------------- Total Assets $953,722 $864,555 ============================================================================= Liabilities and Shareholders' Equity Deposits: Noninterest-bearing $169,304 $146,063 Interest-bearing 660,655 594,367 - ----------------------------------------------------------------------------- Total Deposits 829,959 740,430 Federal Home Loan Bank advances 34,000 39,000 Other liabilities 5,891 6,772 - ---------------------------------------------------------------------------- Total liabilities 869,940 786,202 Shareholders' equity: Preferred stock (no par value) Authorized, 2,000,000 shares; None outstanding June 30, December 31, Common stock (no par value) 1998 1997 --------- ---------- Authorized shares 45,000 16,500 Issued and outstanding 10,035 9,880 68,442 67,901 Retained Earnings 15,376 10,415 Unrealized gains (losses) on securities available for sale, net of tax (36) 37 - ----------------------------------------------------------------------------- Total shareholders' equity 83,782 78,353 - ----------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $953,722 $864,555 =============================================================================
See accompanying notes to consolidated financial statements. 3 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Columbia Banking System, Inc.
Common stock Unrealized Total Number of Retained Gains and Shareholders' (in thousands) Shares Amount Earnings (Losses) Equity - ----------------------------------------------------------------------------- Balance at December 31, 1996 9,332 $62,980 $5,282 ($38) $68,224 Net income 9,275 9,275 Issuance of shares of common stock, net 117 779 779 Issuance of shares of common stock - 5% stock dividend 391 4,142 (4,142) Change in unrealized gains (losses)on securities available for sale, net of tax 75 75 - ----------------------------------------------------------------------------- Balance at December 31, 1997 9,880 67,901 10,415 37 78,353 Net income 4,961 4,961 Issuance of shares of common stock, net 155 541 541 Change in unrealized gains (losses)on securities available for sale, net of tax (73) (73) - ----------------------------------------------------------------------------- Balance at June 30, 1998 10,035 $68,442 $15,376 ($36) $83,782 =============================================================================
See accompanying notes to consolidated financial statements. 4 CONSOLIDATED STATEMENTS OF CASH FLOWS Columbia Banking System, Inc.
Six Months Ended June 30, (in thousands) 1998 1997 - ----------------------------------------------------------------------------- Operating Activities Net income $ 4,961 $ 3,555 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 1,000 1,708 Losses on real estate owned (5) 85 Depreciation and amortization 900 1,426 Deferred income taxes 102 Net realized losses (gains) on sale of assets 2 (772) (Increase) decrease in loans held for sale (4,666) 8,062 Increase in interest receivable (626) (531) Increase in interest payable 91 250 Net changes in other assets and liabilities (876) (1,498) - ----------------------------------------------------------------------------- Net cash provided by operating activities 781 12,387 Investing Activities Proceeds from maturities of securities available for sale 20,849 4,041 Purchases of securities available for sale (31,423) (7,985) Proceeds from maturities of mortgage-backed securities available for sale 5,065 850 Proceeds from maturities of securities held to maturity 2,750 1,406 Purchases of securities held to maturity (325) (694) Loans originated and acquired, net of principal collected (68,148) (107,711) Proceeds from sales of loans 10,177 Purchases of premises and equipment (6,486) (6,187) Proceeds from disposal of premises and equipment 1 393 Proceeds from sale of real estate owned 46 63 Other, net 47 - ----------------------------------------------------------------------------- Net cash used by investing activities (77,624) (105,647) Financing Activities Net increase in deposits 89,529 59,446 Net increase in other borrowings (484) Proceeds from FHLB advances and other long-term debt 25,000 Repayment of FHLB advances and other long-term debt (5,000) (20,000) Repurchase of common stock (101) Proceeds from issuance of common stock 541 350 - ----------------------------------------------------------------------------- Net cash provided by financing activities 85,070 64,211 - ----------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 8,227 (29,049) Cash and cash equivalents at beginning of period 75,712 83,258 - ----------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 83,939 $ 54,209 ============================================================================= Supplemental information: Cash paid for interest $ 14,857 $ 15,692 Cash paid for income taxes 2,776 2,079 Loans foreclosed and transferred to real estate owned 731 409 See accompanying notes to consolidated financial statements.
5 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 commercial banking services to small and medium-sized businesses, professionals and other individuals through banking offices located in the Tacoma metropolitan area and contiguous parts of the Puget Sound region of Washington, as well as the Longview and Woodland communities in southwestern Washington. Substantially all of the Company's loans, loan commitments and core deposits are geographically concentrated in its service areas. 1. Basis of Presentation The interim unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments including normal recurring accruals necessary for a fair presentation of results of operations for the interim periods included herein have been made. The results of operations for the six months ended June 30, 1998, are not necessarily indicative of results to be anticipated for the year ending December 31, 1998. Certain amounts in the 1997 financial statements have been reclassified to conform with the 1998 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, 1997. 2. Subsequent Event - Stock Split On April 22, 1998, the Company announced a three shares for two stock split payable on May 20, 1998, to shareholders of record on May 6, 1998. Common shares authorized, issued and outstanding, average shares outstanding and net income per share for all periods presented have been retroactively adjusted to give effect to this transaction. 3. Comprehensive Income Beginning in 1998, the Company adopted the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 requires the reporting of comprehensive income in addition to net income from operations. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. The Company holds securities classified as available-for-sale, which had gross unrealized losses of $82,000 for the three months ended June 30, 1998 and gross unrealized gains of $345,000 for the three months ended June 30, 1997. For the six months ended June 30, 1998 and 1997, the Company had gross unrealized losses of $111,000 and $50,000, respectively. The before tax and after tax amounts for each of these categories, as well as the tax benefit of each period is summarized below.
Three Months Ended Six Months Ended June 30, June 30, (in thousands) 1998 1997 1998 1997 - ------------------------------------------------------------------------------ Unrealized gain (loss) on securities: Gain (loss) arising during the period $ (82) $ 345 $(111) $ (50) - ------------------------------------------------------------------------------ Other comprehensive income before tax (82) 345 (111) (50) - ------------------------------------------------------------------------------ Provision for income taxes 28 (117) 38 17 - ------------------------------------------------------------------------------ Other comprehensive income after tax $ (54) $ 228 $ (73) $ (33) ============================================================================= 6 CONSOLIDATED AVERAGE BALANCES--NET CHANGES Columbia Banking System, Inc.
Three Months Ended Increase Six Months Ended Increase June 30, (Decrease) June 30, (Decrease) (in thousands) 1998 1997 Amount 1998 1997 Amount - -------------------------------------------------------------------------------- ASSETS Loans $731,906 $596,242 $135,664 $716,119 $571,183 $144,936 Securities 78,753 72,093 6,660 76,960 69,836 7,124 Interest-earning deposits with banks 11,085 25,303 (14,218) 18,683 30,691 (12,008) - -------------------------------------------------------------------------------- Total interest-earning assets 821,744 693,638 128,106 811,762 671,710 140,052 Noninterest-earning assets 73,413 59,711 13,702 69,891 55,743 14,148 - -------------------------------------------------------------------------------- Total assets $895,157 $753,349 $141,808 $881,653 $727,453 $154,200 ================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits $624,253 $535,633 $ 88,620 $617,875 $517,385 $100,490 Federal Home Loan Bank advances 39,707 31,217 8,490 39,398 31,992 7,406 Other borrowings 1,537 (1,537) 1,668 (1,668) - -------------------------------------------------------------------------------- Total interest-bearing liabilities $663,960 568,387 95,573 657,273 551,045 106,228 Noninterest-bearing deposits 142,320 107,004 35,316 136,565 100,407 36,158 Other noninterest-bearing liabilities 5,506 5,905 (399) 5,718 5,393 325 Shareholders' Equity 83,371 72,053 11,318 82,097 70,608 11,489 - -------------------------------------------------------------------------------- Total liabilities and shareholders'equity $895,157 $753,349 $141,808 $881,653 $727,453 $154,200 ================================================================================
7 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Columbia Banking System, Inc. This discussion should be read in conjunction with the consolidated financial statements of Columbia Banking System, Inc. (the "Company") and notes thereto presented elsewhere in this report. In the following discussion, unless otherwise noted, references to increases or decreases in average balances in items of income and expense for a particular period and balances at a particular date refer to the comparison with corresponding amounts for the period or date one year earlier. This discussion contains certain forward-looking statements within the meaning of the federal securities laws. Actual results and the timing of certain events could differ materially from those projected in theforward- looking statements due to a number of factors. Specific factors include, among others, the effect of interest rate changes, risk associated with bank acquisitions or opening new branches, expense control and general economic conditions. Overview Columbia Banking System, Inc., a Washington corporation, is a registered bank holding company whose wholly owned subsidiary, Columbia State Bank ("Columbia Bank"), conducts a full-service commercial banking business. Headquartered in Tacoma, Washington, the Company serves small and medium-sized businesses, professionals and other individuals through 23 banking offices located in the Tacoma metropolitan area and contiguous parts of the Puget Sound region of Washington, as well as the Longview and Woodland communities in southwestern Washington. At June 30, 1998, the Company had total assets of $953.7 million. Management believes the ongoing consolidation among financial institutions in Washington has created significant gaps in the ability of large banks operating in Washington to serve certain customers, particularly the Company's target customer base of small and medium-sized businesses, professionals and other individuals. The Company's business strategy is to provide its customers with the financial sophistication and breadth of products of a regional bank while retaining the appeal and service level of a community bank. Management believes that as a result of the Company's strong commitment to highly personalized relationship-oriented customer service, its varied products, its strategic branch locations and the long-standing community presence of its managers, lending officers and branch personnel, it is well positioned to attract new customers and to increase its market share of loans and deposits. The Company's goal over the next several years is to create a well- capitalized, customer focused, Pacific Northwest commercial banking institution with a significant presence in selected markets. The Company intends to effect this growth strategy through a combination of growth at existing branch offices, new branch openings (usually following the hiring of an experienced branch manager and/or lending officer with strong community ties and banking relationships) and acquisitions. In particular, the Company anticipates continued expansion in Pierce County, north into King County (the location of Auburn and Bellevue), south into Thurston County (the location of the state capitol, Olympia) and northwest into Kitsap County (the location of Bremerton and Port Orchard). Expansion by acquisition into other markets will be considered as promising situations arise. In order to fund its commercial and consumer lending activities and to allow for increased contact with customers, the Company is establishing a branch system catering primarily to retail depositors, supplemented by business customer deposits and other borrowings. The Company believes this mix of funding sources will enable it to expand its commercial lending activities rapidly while attracting a stable core 8 deposit base. In order to support its strategy of growth, without compromising its personalized banking approach or its commitment to asset quality, the Company has made significant investments in experienced branch, lending and administrative personnel and has incurred significant costs related to its branch expansion. Although the Company's expense ratios have improved since 1993, management anticipates that the ratios will remain relatively high by industry standards for the foreseeable future due to the Company's aggressive growth strategy and emphasis on convenience and personal service. The Company completed its first bank acquisitions during the fourth quarter of 1997, merging Cascade Bancorp, Inc. ("Cascade") and Bank of Fife ("Fife") into Columbia Bank, thereby adding three branch office locations. Cascade operated three banking offices in the south King County market area. Two of the branches are located in Auburn (a market in which Columbia did not have a branch) and the third in downtown Kent. Columbia consolidated its Kent branch office into the Cascade branch location. Fife operated one banking office in downtown Fife, a commercial market in which Columbia did not have a branch. During the first quarter of 1998, Columbia Bank opened two new branches. The Westgate branch in north Tacoma opened in January, and the 176th and Meridian branch in eastern Pierce County opened in February. Both are newly constructed, full-service facilities. The Company plans to open several new branches before year-end 1998. Upcoming locations include a full-service facility in Port Orchard (Kitsap County) and a branch in the Triangle Mall Thriftway store of Longview (Cowlitz County). Additionally, management continues to pursue opportunities for branching in the Stadium district and near 84th and Pacific Avenue, both in Tacoma (Pierce County), and in Olympia (Thurston County) and Forest Villa (King County). New branches normally do not contribute to net income for many months after opening. At June 30 1998, the Company had 23 branches, 14 in Pierce County, 6 in King County, and 3 in Cowlitz County. Since beginning its major Pierce County expansion in August 1993, the Company has grown from four to twenty-three branches through a combination of internal and external growth by acquisition. In addition to the ongoing expansion of its branch network, the Company continuously reviews new products and services to give its customers more banking options. In addition, new technology and services are reviewed for business development and cost saving. The economy of the Company's principal market area, while primarily dependent upon aerospace, foreign trade and natural resources, including agriculture and timber, has become more diversified over the past decade as a result of the success of software companies such as Microsoft and the establishment of numerous research and biotechnology firms. The Washington economy and that of the Puget Sound region generally have experienced strong growth and stability in recent years. The Pierce County Economic Index, a regional publication providing economic forecasts and commentary reports, "The 1997 growth rate was almost twice the twenty-year average growth rate of the local economy. Continued expansion will take place in 1998, but not at the gallop- like pace of 1997. When 1998 comes to a close, economic activity in Pierce County's economy will have increased by 10% in just three 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 and income from mortgage banking and other operations. The Company's operating expenses consist primarily of compensation and employee benefit 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. 9 Net income for the second quarter of 1998 was $2.5 million, or $0.25 per share, compared to $2.2 million, or $0.22 per share, for the second quarter of 1997, an increase in net income of 17%. Net income for the six months ended June 30, 1998, was $5.0 million, or $0.50 per share, up 39% compared with $3.6 million, or $0.36 per share for the same period in 1997. The earnings increases for the quarter and six month periods reflect strong growth in loans coupled with continued increases in noninterest income. During the second quarter of 1997, an additional loan loss provision of $800,000 was recorded due to the rapid loan growth experienced in the second quarter, and a one-time gain of $1.0 million was realized from the sale of the Company's VISA (Trade Mark) credit card portfolio. With the completion of the Company's first acquisitions in December 1997, Cascade Community Bank and Bank of Fife were merged into Columbia Bank. The mergers were accounted for on a pooling of interests basis, and Company financial statements for all reported periods have been restated to reflect the mergers. Additionally, on April 22, 1998, the Company announced a three shares for two stock split payable on May 20, 1998, to shareholders of record on May 6, 1998. Common shares issued and outstanding, average shares outstanding and net income per share for all periods presented have been retroactively adjusted to give effect to this transaction. Net Interest Income Net interest income for the second quarter of 1998 increased 19% to $10.3 million, from $8.7 million in the second quarter of 1997. For the first six months of 1998, net interest income increased 25% to $20.3 million, from $16.3 million for the same period in 1997. 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 1998, average interest-earning assets increased $140.1 million, while average interest-bearing liabilities increased only $106.2 million, compared with the same period in 1997. Net interest margin (net interest income divided by average interest-earning assets) increased to 5.03% in the second quarter of 1998 from 5.02% in the second quarter of 1997. Average interest-earning assets grew to $821.7 million during the second quarter of 1998, compared with $693.6 million at June 30, 1997. The average yield on interest-earning assets decreased 0.05% to 8.73% during the second quarter of 1998 from 8.78% in the same period of 1997. In comparison, the average cost of interest- bearing liabilities decreased 0.02% to 4.57% during the second quarter of 1998 from 4.59% in the same period of 1997. For the first six months of 1998, net interest margin increased to 5.05% from 4.88% for the same period in 1997. Average interest-earning assets grew to $811.8 million during the first six months of 1998, compared with $671.7 million at June 30, 1997. The average yield on interest-earning assets increased 0.09% to 8.77% during the first six months of 1998 from 8.68% in the same period of 1997. In comparison, the average cost of interest-bearing liabilities decreased 0.04% to 4.59% during the first six months of 1998 from 4.63% in the same period of 1997. The increase in net interest margin was primarily due to a combination of higher yields obtained on loans and to decreasing deposit rates. The increase in loan yields was primarily caused by a change in loan mix whereby commercial business loans and multi-family and commercial real estate loans increased as a percentage of total loans. The decrease in deposit rates is primarily a result of decreasing rates in the markets in which the Company competes for funds. Interest rates, in general, exhibited a downward trend during the past year due to a variety of factors such as low inflation. 10 Noninterest Income Noninterest income, adjusted to reflect a nonrecurring gain of $1.0 million on sale of loans in the second quarter of 1997, increased $811,000, or 39%, in the second quarter of 1998, and $1.6 million, or 43%, for the first six months of 1998, compared with the same periods in 1997. Increases during the second quarter were primarily centered in account service charges and mortgage banking income. In general, increases in account service charges are due to the growth of the Company, and increases in mortgage banking income reflect lower long-term interest rates with corresponding greater volumes as compared with the first six months of 1997. During the second quarter of 1997, the Company sold its VISA (Trade Mark) credit card portfolio realizing a one-time gain of $1.0 million from the sale. Noninterest Expense Total noninterest expense increased $1.4 million, or 19%, in the second quarter of 1998, and $2.8 million, or 19%, for the first six months of 1998, compared with the same periods in 1997. The increase was primarily due to personnel costs associated with the Company's expansion as well as advertising, data processing and other expenses. The Company's efficiency ratio (noninterest expense, excluding unusual and nonrecurring items, divided by the sum of net interest income plus noninterest income, excluding unusual and nonrecurring items) was 67.0% and 66.4% for the second quarter and first six months of 1998, respectively, and 69.1% and 71.5% for the same periods in 1997, respectively. The portion of compensation expense related to loan originations is deferred and deducted from interest income over the life of the related loans. Other categories of expense are volume driven and reflect the Company's rapid growth. Total noninterest expense for the Company is expected to decline in relation to revenues as the Company's asset base grows. Income Taxes For the second quarter and first six months of 1998, the Company recorded income tax provisions of $1.3 million and $2.7 million, respectively. 11 Lending Activities The Company originates a wide variety of loans. Consistent with the trend beginning in 1993, the Company continues to increase commercial business loans as a percentage of its total loan portfolio. The Company also emphasizes Private Banking services to high income and high net worth individuals. Loan Portfolio The following table sets forth at the dates indicated the Company's loan portfolio composition by type of loan:
June 30, % of December 31 % of (in thousands) 1998 Total 1997 Total - ----------------------------------------------------------------------------- Commercial $322,358 42.8% $270,946 39.5% Real estate: One-to four-family residential 67,062 8.9 71,095 10.4 Five or more family residential and commercial properties 228,404 30.3 206,628 30.1 - ----------------------------------------------------------------------------- Total real estate 295,466 39.2 277,723 40.5 Real estate construction: One-to four-family residential 22,291 3.0 29,695 4.3 Five or more family residential and commercial properties 33,642 4.5 33,806 4.9 - ----------------------------------------------------------------------------- Total real estate construction 55,933 7.5 63,501 9.2 Consumer 80,144 10.6 74,710 10.9 - ----------------------------------------------------------------------------- Sub-total loans 753,901 100.1 686,880 100.1 Less: Deferred loan fees (933) (0.1) (991) (0.1) - ----------------------------------------------------------------------------- Total loans $752,968 100.0% $685,889 100.0% ============================================================================= Loans held for sale $ 9,043 $ 4,377 =============================================================================
Total loans increased $67.1 million, or 9.8%, to $753.0 million from year-end 1997. All categories contributed to the increase except for the one-to four family residential and real estate construction loans, which decreased during the first six months of 1998. Commercial and Private Banking Lending Commercial loans increased to $322.4 million at June 30, 1998, representing 42.8% of total loans, from $270.9 million at December 31, 1997. This increase reflects management's commitment to provide competitive commercial lending in the Company's primary market areas. The Company expects to continue to expand its commercial lending products and to emphasize in particular its relationship banking with businesses, business owners and professional individuals. Real Estate Lending One- to Four-Family Residential: Residential one- to four-family loans decreased $4.0 million to $67.1 million at June 30, 1998, representing 8.9% of total loans, compared with $71.1 million at December 31, 1997. The decrease is attributable to maturities and prepayments of the portfolio. These loans are used by the Company to collateralize advances from the FHLB. The Company's underwriting standards require that one- to four-family portfolio loans generally be owner-occupied and that loan amounts not exceed 80% (90% with private mortgage insurance) of the appraised value or cost, whichever is lower, of the underlying collateral at 12 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. Five or More Family Residential and Commercial Properties: The Company makes multi-family and commercial real estate loans in its primary market areas. Multi-family and commercial real estate lending increased to $228.4 million at June 30, 1998, representing 30.3% of total loans, from $206.6 million at December 31, 1997. The Company's underwriting standards generally require that the loan-to-value ratio for multi-family and commercial loans not exceed 75% of appraised value or cost, whichever is lower, and that commercial properties maintain debt coverage ratios (net operating income divided by annual debt servicing) of 1.2 or better. Underwriting standards can be influenced by competition. The Company endeavors to maintain the highest practical underwriting standards while balancing the need to remain competitive in its lending practices. Construction Loans The Company originates a variety of real estate construction loans. One- to four-family residential construction loans are originated for the construction of custom homes (where the home buyer is the borrower) and provides financing to builders for the construction of pre-sold homes and speculative residential construction. Construction loans on one- to four- family residences decreased to $22.3 million at June 30, 1998, representing 3.0% of total loans, from $29.7 million at December 31, 1997. Multi-family and commercial real estate construction loans decreased to $33.6 million at June 30, 1998, representing 4.5% of total loans, from $33.8 million at December 31, 1997. The decrease is a result of growing competition fueled in part by declining interest rates during the first six months of 1998 as well as management's intention to focus on commercial loans. The Company endeavors to limit its construction lending risk through adherence to strict underwriting procedures. Consumer Lending At June 30, 1998, the Company had $80.1 million of consumer loans outstanding, representing 10.6% of total loans, as compared with $74.7 million at December 31, 1997. Consumer loans made by the Company include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans and miscellaneous personal loans. 13 Nonperforming Assets Nonperforming assets consist of nonaccrual loans, restructured loans and 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) 1998 1997 - ----------------------------------------------------------------------------- Nonaccrual: One-to four-family residential $ 400 $ 661 Commercial business 1,490 728 Consumer 200 73 - ----------------------------------------------------------------------------- Total 2,090 $1,462 - ----------------------------------------------------------------------------- Restructured: One-to four-family residential 18 $ 20 - ----------------------------------------------------------------------------- Total 18 $ 20 - ----------------------------------------------------------------------------- Total nonperforming loans $2,108 $1,482 ============================================================================= Real estate owned: Five or more family residential and commercial properties $ 921 $ 231 - ----------------------------------------------------------------------------- Total real estate owned $ 921 $ 231 ============================================================================= Total nonperforming assets $3,029 $1,713 =============================================================================
The policy of the Company generally is to discontinue the accrual of interest on all loans past due 90 days or more and place them on nonaccrual status. The consolidated financial statements are prepared according to the accrual basis of accounting. This includes the recognition of interest income on the loan portfolio, unless a loan is placed on a nonaccrual basis, which occurs when there are serious doubts about the collectibility of principal or interest. Restructured loans are those for which concessions have been granted due to the borrower's weakened financial condition. This includes the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal. Interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur. Nonperforming loans increased to $2.1 million, or 0.28% of total loans (excluding loans held for sale), at June 30, 1998, from $1.5 million, or 0.22% of total loans at December 31, 1997 due to increases in the "commercial business" and "consumer" loans. Real estate owned ("REO") increased $690,000 to $921,000 at June 30, 1998, from $231,000 at December 31, 1997. During the first six months of 1998, the Company foreclosed on $731,000 of loans collateralized by real estate and transferred the real estate to REO. Also, the Company reduced REO by $41,000 through a sale and recorded a gain of $5,000. Total nonperforming assets increased to $3.0 million, or 0.32% of period-end assets at June 30, 1998, from $1.7 million, or 0.20% of period-end assets at December 31, 1997. 14 Provision and Allowance for Loan Losses The allowance for loan losses is maintained at a level considered by management to be adequate to provide for anticipated loan losses based on management's assessment of various factors affecting the loan portfolio. This includes a review of problem loans, business conditions and loss experience, and overall evaluation of the quality of the underlying collateral, holding and disposal costs, and costs of capital. The allowance is increased by provisions charged to operations, and is reduced by loans charged off, net of recoveries. While management believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance for loan losses, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in determining the allowance. The allowance for loan losses at June 30, 1998 increased $437,000 to $8.9 million from $8.4 million at December 31, 1997 (excluding loans held for sale at each date). The allowance for loan losses as a percentage of loans at June 30, 1998 decreased 0.05% to 1.18% form 1.23% of loans at December 31, 1997. The decrease in the allowance as a percentage of loans was due to net loan charge-offs of $560,000 during the second quarter of 1998 and to the $67.1 million increase in loans outstanding during the six months ended June 30, 1998. During the first six months of 1998, the Company set aside $1.0 million as a provision for loan losses as compared with $1.7 million during the first six months of 1997. During the second quarter of 1997, an additional loan loss provision of $800,000 was recorded due to the rapid loan growth experienced in the second quarter. Net loan charge-offs amounted to $563,000 for the first six months of 1998 compared with net loan charge-offs of $533,000 for the same period in 1997. The following table sets forth at the dates indicated the changes in the Company's allowance for loan losses:
Three Months Ended Six Months Ended June 30, June 30, (in thousands) 1998 1997 1998 1997 - ---------------------------------------------------------------------------- Beginning balance $8,987 $5,608 $8,440 $5,282 Charge offs: One-to-four family residential (1) (1) Commercial business (458) (425) (495) (430) Consumer (178) (30) (243) (167) - ---------------------------------------------------------------------------- Total charge-offs (636) (456) (738) (598) Recoveries: Commercial business 31 7 126 25 Consumer 45 39 49 40 - ---------------------------------------------------------------------------- Total recoveries 76 46 175 65 - ---------------------------------------------------------------------------- Net (charge-offs) recoveries (560) (410) (563) (533) Provision charged to expense 450 1,259 1,000 1,708 - ---------------------------------------------------------------------------- Ending balance $8,877 $6,457 $8,877 $6,457 ============================================================================
15 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 $89.5 million, or 12.1%, to $830.0 million at June 30, 1998, from $740.4 million at December 31, 1997. The Company is establishing a branch system catering primarily to retail depositors, supplemented by business banking customer deposits and other borrowings. While that stable core deposit base is being established, management's strategy for funding growth has been to make use of brokered and other wholesale deposits. Management anticipates continued use of such deposits, as needed, to fund increasing loan demand. Brokered and other wholesale deposits (excluding public deposits) increased $4.4 million to $7.9 million, or 0.96% of total deposits, at June 30, 1998. Borrowings The Company relies on advances from the FHLB to supplement its funding sources. FHLB advances decreased $5.0 million to $34.0 million during the first six months of 1998. FHLB advances are secured by one- to four-family real estate mortgages and certain other assets. Capital Shareholders' equity at June 30, 1998, was $83.8 million compared with $78.4 million at December 31, 1997. The increase is due to improved net income during the first six months of 1998. Shareholders' equity was 8.79% and 9.06% of total period-end assets at June 30, 1998, and December 31, 1997, respectively. Banking regulations require bank holding companies and banks to maintain a minimum "leverage" ratio of core capital to adjusted quarterly average total assets of at least 3%. At June 30, 1998, the Company's leverage ratio was 9.35%, compared with 9.33% at December 31, 1997. In addition, banking regulators have adopted risk-based capital guidelines, under which risk percentages are assigned to various categories of assets and off-balance sheet items to calculate a risk-adjusted capital ratio. Tier I capital generally consists of common shareholders' equity (which does not include unrealized gains and losses on securities), less goodwill and certain identifiable intangible assets, while Tier II capital includes the allowance for loan losses and subordinated debt, both subject to certain limitations. Regulatory minimum risk-based capital guidelines require Tier I capital of 4% of risk-adjusted assets and total capital (combined Tier I and Tier II) of 8%. The Company's Tier I and total capital ratios were 10.37% and 11.47%, respectively, at June 30, 1998, compared with 10.77% and 11.93%, respectively, at December 31, 1997. 16 The Federal Deposit Insurance Corporation (the "FDIC") established the qualifications necessary to be classified as a "well-capitalized" bank, primarily for assignment of FDIC insurance premium rates. To qualify as "well-capitalized," banks must have a Tier I risk-adjusted capital ratio of at least 6%, a total risk-adjusted capital ratio of at least 10%, and a leverage ratio of at least 5%. Columbia Bank qualified as "well-capitalized" at June 30, 1998. Federal laws generally bar institutions which are not well-capitalized from accepting brokered deposits. The FDIC has issued rules which prohibit under-capitalized institutions from soliciting or accepting such deposits. Adequately capitalized institutions are allowed to solicit such deposits, but only to accept them if a waiver is obtained from the FDIC. Applicable federal and Washington state regulations restrict capital distributions, including dividends by institutions such as Columbia Bank. Such restrictions are tied to the institution's capital levels after giving effect to distributions. The Company's ability to pay cash dividends is substantially dependent upon receipt of dividends from the Bank. The Company presently intends to retain earnings to support anticipated growth. Accordingly, the Company does not intend to pay cash dividends on its common stock in the foreseeable future. On April 22, 1998, the Company announced a three shares for two stock split payable on May 20, 1998, to shareholders of record on May 6, 1998. Common shares issued and outstanding, average shares outstanding and net income per share for all periods presented have been retroactively adjusted to give effect to this transaction. Interest Rate Sensitivity 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, changes in market conditions and management strategies, among other factors. At June 30, 1998, 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, 1997. For additional information, refer to the Company's annual report on Form 10-K for the year ended December 31, 1997. Impact of the Year 2000 Issue Many existing computer systems, including the systems used by the Company, use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. The Company currently is preparing its operations for the year 2000 and also has begun to identify which customers and their respective operations will not be in compliance with the Year 2000. The Company also has received assurances from its data processing service provider that it has dedicated substantial resources to assure its Year 200 compliance. The data processing service provider has completed the inventory and project scoping phases of their compliance program and testing of code renovation is scheduled for completion in the third quarter of 1998. Software installation and testing is scheduled for the fourth quarter of 1998 and the first quarter of 1999. The Company expects its data processing to be fully compliant by March 31, 1999. 17 PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS The Company held its annual shareholders meeting on April 22, 1998, for the purpose of electing a Board of Directors and to approve an amendment to Columbia's Articles of Incorporation. All fifteen persons nominated were elected to hold office for the ensuing year. Nominee Votes "For" Votes "Withheld" - ---------------------------------------------------------------------------- W. Barry Connoley 5,552,212 8,529 Richard S. DeVine 5,560,535 103 Jack Fabulich 5,560,620 121 Jonathan Fine 5,560,666 75 John P. Folsom 5,560,699 42 Margel S. Gallagher 5,560,640 92 W. Kelso Gillenwater 5,560,306 435 John A. Halleran 5,560,402 339 Thomas L. Matson 5,560,688 53 William W. Philip 5,560,662 79 John H. Powell 5,560,647 94 Robert E. Quoidbach 5,560,658 83 Donald Rodman 5,560,700 41 Frank H. Russell 5,560,257 484 Sidney R. Snyder 5,541,257 19,484 William T. Weyerhaeuser 5,560,707 34 James M. Will 5,560,724 17 A proposal to amend Columbia's Articles of Incorporation to increase the number of authorized common shares from 11,000,000 to 30,000,000 was approved by the following vote of the shareholders: Shares Shares Shares Voted Voted Shares Not "FOR" "AGAINST" "ABSTAINING" Voted 5,129,335 709,974 32,080 660,853 18 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See Exhibit 3(i) - Restated Articles of Incorporation of Columbia Banking System, Inc. See Exhibit 11 - Computation of Fully Diluted Earnings per Common Share See Exhibit 27 - Financial Data Schedule (b) On May 4, 1998, the Company filed Form 8-K, announcing a three shares for two shares stock split payable on May 20, 1998 to shareholders of record on May 6, 1998. Also, the Company announced the appointment of J. James Gallagher as Vice Chairman and a member of the Board. Mr. Gallagher will be responsible for strategic planning, mergers and acquisitions, and legal and regulatory compliance. 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 August 13, 1998 By /s/ W. W. Philip ----------------------------- -------------------------------- W. W. Philip Chairman and Chief Executive Officer Date August 13, 1998 By /s/ Gary R. Schminkey ----------------------------- --------------------------------- Gary R. Schminkey Senior Vice President and Chief Financial Officer 19 Exhibit 3(i) Restated Articles of Incorporation of Columbia Banking System, Inc. RESTATED ARTICLES OF INCORPORATION OF COLUMBIA BANKING SYSTEM, INC. The undersigned, being the Secretary of Columbia Banking System, Inc., executes in duplicate the following Restated Articles of Incorporation for the corporation. ARTICLE 1 Section 1.1 The name of the corporation shall be COLUMBIA BANKING SYSTEM, INC. ARTICLE 2 Section 2.1 The corporation's period of duration shall be perpetual. ARTICLE 3 Section 3.1 The purpose for which the corporation is organized is the transaction of any and all lawful business for which corporations may be incorporated under the Washington Business Corporation Act. ARTICLE 4 Section 4.1 The aggregate number of shares which the corporation shall have authority to issue is 45,000,000 common shares with no par value (hereinafter referred to as "the common stock") and 2,000,000 preferred shares with no par value (hereinafter referred to as "the preferred stock"). The preferred stock is senior to the common stock, and the common stock is subject to the rights and preferences of the preferred stock as provided in the following section. Section 4.2 The board of directors is hereby vested with authority to divide any or all of the preferred stock into one or more series and, within the limitations set forth in the Washington Business Corporation Act (as amended from time to time), to fix and determine or to amend the relative rights and preferences of the shares of any series so established. ARTICLE 5 Section 5.1 No shareholder shall have the preemptive right to acquire unissued shares of the corporation. ARTICLE 6 Section 6.1 Each shareholder entitled to vote at any election for directors shall have the right to vote, in person or by proxy, the number of shares owned by him for as many persons as there are directors to be elected and for whose election he has a right to vote, and no shareholder shall be entitled to cumulate his votes. ARTICLE 7 Section 7.1 The corporation reserves the right to amend, alter, change or repeal any provision of its Articles of Incorporation to the extent permitted by the laws of the State of Washington. All rights of shareholders are granted subject to this reservation. ARTICLE 8 Section 8.1 The address of the initial registered office of the corporation is 1301 Fifth Avenue, Suite 3400, Seattle, Washington 98101. The name of its initial registered agent at that address is J. James Gallagher. 1 ARTICLE 9 Section 9.1 The corporation may enter into a contract and otherwise transact business as vendor, purchaser, or otherwise, with its directors, officers and shareholders, and with corporations, associations, firms and entities in which they are or may become interested as directors, officers, shareholders, members or otherwise, as freely as though such adverse interest did not exist, even though the vote, action or presence of such director, officer or shareholder may be necessary to obligate the corporation upon such contract or transaction; and in the absence of fraud, no such contract or transaction shall be avoided and no such director, officer or shareholder shall be held liable to account to the corporation, by reason of such adverse interest or any fiduciary relationship to the corporation arising out of such office or stock ownership, for any profit or benefit realized by him through any such contract or transaction; provided that the nature of the interest of such director, officer or shareholder, though not necessarily the details or extent thereof, be disclosed or known to the board of directors or shareholders of the corporation, at the meeting thereof at which such contract or transaction is authorized or confirmed. A general notice that a director, officer or shareholder of the corporation is interested in any corporation, association, firm or entity shall be sufficient disclosure as to such director, officer or shareholder with respect to all contracts and transactions with that corporation, association, firm or entity. ARTICLE 10 Section 10.1 Nominations for election to the board of directors may be made by the board of directors or by any stockholder of any outstanding class of stock of the corporation entitled to vote for the election of directors. Nominations, other than those made by the board of directors, shall be made in writing and shall be delivered or mailed, U.S. mail, postage prepaid, to the Chairman of the corporation not less than fourteen (14) days nor more than fifty (50) days prior to any meeting of shareholders called for the election of directors; provided, however, that if less than twenty-one days' notice of the meeting is given to shareholders, such nomination shall be delivered or mailed, U.S. mail, postage prepaid, to the Chairman of the corporation not later than the close of business on the seventh day following the day on which the notice of meeting was mailed. Such notification shall contain the following information to the extent known to the notifying shareholder: (a) The name and address of each proposed nominee; (b) The principal occupation of each proposed nominee; (c) The total number of shares of stock of the corporation that will be voted for each proposed nominee; (d) The name and address of the notifying shareholder; and (e) The number of shares of common stock of the corporation owned by the notifying shareholder. Nominations not made in accordance herewith may, in his discretion, be disregarded by the Chairman of the meeting, and upon his instructions, the vote teller may disregard all votes cast for such nominee. ARTICLE 11 Section 11.1 In addition to the requirements of any applicable statute, and notwithstanding any other provisions of any other articles of these Articles of Incorporation, the affirmative vote of not less than 66 2/3% of the total shares attributable to persons other than a Control Person (as defined below), considered for the purposes of this Article 11 as one class, which are entitled to be voted in an election of directors shall be required for the approval of any Business Combination (as defined below) between the corporation and any Control Person. 2 Section 11.2 The approval requirements of Section 11.1 shall not apply if either: (a) The Business Combination is approved by at least a majority of Continuing Directors (as defined below) of the corporation; or (b) All the following conditions are satisfied: (i) The cash or fair market value of the property, securities or other consideration to be received per share in the Business Combination by holders of the common stock of the corporation is not less than the higher of: (A) the highest price per share (including brokerage commissions, soliciting dealers, fees and dealer-management compensation) paid by such Control Person in acquiring any of its holdings of the corporation's common stock; (B) the highest per share market price of the common stock during the three-month period immediately preceding the date of the proxy statement described in (iii) below; or (C) the per share value of the common stock at the end of the fiscal quarter immediately prior to the Business Combination, as determined by an appraisal prepared by persons, selected by the Continuing Directors, who are independent of the corporation and the Control Person, and who are experienced and expert in the area of corporate appraisal. (ii) After becoming a Control Person and prior to the consummation of such Business Combination (A) such Control Person shall not have acquired any newly issued shares of capital stock, directly or indirectly, from the corporation (except upon conversion of convertible securities acquired by it prior to becoming a Control Person or upon compliance with the provisions of this Article 11 or as a result of a pro rata stock dividend or stock split), and (B) such Control Person shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or tax credits provided by the corporation, or made any major changes in the corporation's business or equity capital structure; and (iii) A proxy statement responsive to the requirements of the Securities Exchange Act of 1934, whether or not the corporation is then subject to such requirements, shall be mailed to the public stockholders of the corporation for the purpose of soliciting stockholder approval of such Business Combination. Section 11.3 For the purpose of this Article 11 (a) The term "Business Combination" shall mean (i) any merger or consolidation of the corporation with or into a Control Person, (ii) any sale, lease, exchange, transfer or other disposition, including without limitation a mortgage or any other security device, of all or any Substantial Part (as defined below) of the assets of the corporation (including without limitation any voting securities of a subsidiary) or of a subsidiary, to a Control Person, (iii) any merger or consolidation of a Control Person with or into the corporation or a subsidiary of the corporation, (iv) any sale, lease, exchange, transfer or other disposition of all or any Substantial Part of the assets of a Control Person to the corporation or a subsidiary of the corporation, (v) the issuance of any securities of the corporation or a subsidiary of the corporation to a Control Person, (vi) the acquisition by the corporation or a subsidiary of the corporation of any securities of a Control Person, (vii) any reclassification of common stock of the corporation, or any recapitalization involving common stock of the corporation,consummated within five years after a Control Person becomes a Control Person, or (viii) any agreement, contract or other arrangement providing for any of the transactions described in this definition of Business Combination; (b) The term "Continuing Director" shall mean (i) a director who was a member of the board of directors of the corporation immediately prior to the time that a Control Person became the beneficial owner (as this term is defined in Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934 on the date on which this amendment becomes effective) of 10% or more of the outstanding shares of common stock of the corporation or (ii) a person so designated before initially becoming a director by a majority of the then Continuing Directors. (c) The term "Control Person" shall mean and include any individual, corporation, partnership or other person or entity which, together with their Affiliates and Associates (as those terms are defined on the date on which this amendment becomes effective in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934) is the beneficial owner in the aggregate of 20% or more of the outstanding shares of common stock of the corporation, and any Affiliate or Associate of any such individual, corporation, partnership or other person or entity; 3 (d) The term "Substantial Part" shall mean more than 10% of the total assets of the corporation in question, as of the end of its most recent fiscal year prior to the time the determination is being made; (e) Without limitation, any shares of common stock of the corporation which any Control Person has the right to acquire at any time pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise, shall be deemed outstanding and beneficially owned by such Control Person for purposes of this Article 11; and (f) For the purposes of Section 11.2(b)(i) of this Article 11, the phrase "other consideration to be received" shall include, without limitation, common stock of the corporation retained by its existing public stockholders in the event of a Business Combination with such Control Person in which the corporation is the surviving corporation. Section 11.4 For the purposes of this Article 11, a majority of the Continuing Directors shall have the power and duty to determine on the basis of information known to them (a) whether a proposed transaction is subject to the provisions of this Article 11, (b) the amount of shares of the corporation Beneficially Owned by any person, (c) whether a person is an Affiliate or Associate of another, and (d) such other matters as to which a determination may be required by the provisions of this Article 11. Section 11.5 The provisions set forth in this Article 11 may not be repealed or amended in any respect or in any manner including any merger or consolidation of the corporation with any other corporation unless the surviving corporation's Articles of Incorporation contain an article to the same effect as this Article 11, except by the affirmative vote of the holders of not less than 66 2/3% of the outstanding shares of common stock of the corporation, subject to the provisions of any series of preferred stock which may at the time be outstanding; provided, however, that if there is a Control Person such action must be approved by not less than 66 2/3% of the total shares entitled to be voted in an election of directors attributable to shares owned by person other than the Control Persons. ARTICLE 12 Section 12.1 The board of directors of the corporation, when evaluating any offer of another party to (a) make a tender or exchange offer for any equity security of the corporation, (b) merge or consolidate the corporation with another corporation, or (c) purchase or otherwise acquire all or substantially all of the properties and assets of the corporation, shall, in connection with the exercise of its judgment in determining what is in the best interests of the corporation and its stockholders, give due consideration to all relevant factors, including without limitation the social and economic effects on the employees, customers, suppliers and other constituents of the corporation and its subsidiaries and on the communities in which the corporation and its subsidiaries operate or are located. ARTICLE 13 Section 13.1 Defined Terms. As used in this Article 13: (a) "Egregious conduct" by a person shall mean acts or omissions that involve intentional misconduct or a knowing violation of law, conduct violating section 23B. of the Revised Code of Washington, or participation in any transaction from which the person will personally receive a benefit in money, property, or services to which the person is not legally entitled. (b) "Finally adjudged" shall mean stated in a judgment based upon clear and convincing evidence by a court having jurisdiction, from which there is no further right to appeal. (c) "Director" shall mean any person who is a director of the corporation and any person who, while a director of the corporation, is serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, or other enterprise, or is a fiduciary or party in interest in relation to any employee benefit plan covering any employee of the corporation or of any employer in which it has an ownership interest; and "conduct as a director" shall include conduct while a director is acting in any of such capacities. 4 (d) "Officer-director" shall mean any person who is simultaneously both an officer and director of the corporation and any person who, while simultaneously both an officer and director of the corporation, is serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, or other enterprise, or is a fiduciary or party in interest in relation to any employee benefit plan covering any employee of the corporation or of any employer in which it has an ownership interest; and "conduct as an officer-director" shall include conduct while an officer- director is acting as an officer of the corporation or in any of such other capacities. (e) "Subsidiary corporation" shall mean any corporation at least eighty percent of the voting stock of which is held beneficially by this corporation. Section 13.2 - Liability of Directors. No director, officer-director, former director or former officer-director of the corporation shall be personally liable to the corporation or its shareholders for monetary damages for conduct as a director or officer-director occurring after the effective date of this Article 13 unless the conduct is finally adjudged to have been egregious conduct, as defined herein. Section 13.3 - Liability of Subsidiary Directors. No director, officer- director, former director, or former officer-director of a subsidiary corporation shall be personally liable in any action brought directly by this corporation as a shareholder of the subsidiary corporation or derivatively on behalf of the subsidiary corporation (or by any shareholder of this corporation double-derivatively on behalf of this corporation and the subsidiary corporation) for monetary damages for conduct as a director or officer-director of such subsidiary corporation occurring after the effective date of this Article 13 unless the conduct is finally adjudged to have been egregious conduct, as defined herein. Section 13.4 - Indemnification of Directors. The corporation shall indemnify any person who is, or is threatened to be made, a party to any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, and whether by or in the right of the corporation or its shareholders or by any other party, by reason of the fact that the person is or was a director or officer-director of the corporation or of a subsidiary corporation against judgments, penalties or penalty taxes, fines, settlements (even if paid or payable to the corporation or its shareholders or to a subsidiary corporation) and reasonable expenses, including attorneys' fees, actually incurred in connection with such proceeding unless the liability and expenses were on account of conduct finally adjudged to be egregious conduct, as defined herein. The reasonable expenses, including attorneys' fees, of such person incurred in connection with such proceeding shall be paid or reimbursed by the corporation, upon request of such person, in advance of the final disposition of such proceeding upon receipt by the corporation of a written, unsecured promise by the person to repay such amount if it shall be finally adjudged that the person is not eligible for indemnification. All expenses incurred by such person in connection with such proceeding shall be considered reasonable unless finally adjudged to be unreasonable. Section 13.5 - Procedure. No action by the board of directors, the shareholders, independent counsel, or any other person or persons shall be necessary or appropriate to the determination of the corporation's indemnification obligation in any specific case, to the determination of the reasonableness of any expenses incurred by a person entitled to indemnification under this Article 13, nor to the authorization of indemnification in any specific case. Section 13.6 Internal Claims Expected. Notwithstanding section 13.4, the corporation shall not be obligated to indemnify any person for any expenses, including attorneys' fees, incurred to assert any claim against the corporation (except a claim based on section 13.7) or any person related to or associated with it, including any person who would be entitled hereby to indemnification in connection with the claim. Section 13.7 - Enforcement of Rights. The corporation shall indemnify any person granted indemnification rights under this Article 13 against any reasonable expenses incurred by the person to enforce such rights. Section 13.8 - Set-off of Claims. Any person granted indemnification rights herein may directly assert such rights in set-off of any claim raised against the person by or in the right of the corporation and shall be entitled to have the same tribunal which adjudicates the corporation's claim adjudicate the person's entitlement to indemnification by the corporation. Section 13.9 - Continuation of Rights. The indemnification rights provided in this Article 13 shall continue as to a person who has ceased to be a director or officer-director and shall inure to the benefit of the heirs, executors, and administrators of such person. 5 Section 13.10 - Effect of Amendment or Repeal. Any amendment or repeal of this Article 13 shall not adversely affect any right or protection of a director, officer-director, former director or former officer-director existing at the time of such amendment or repeal with respect to acts or omissions occurring prior to such amendment or repeal. Section 13.11 - Severability of Provisions. Each of the substantive provisions of this Article 13 is separate and independent of the others, so that if any provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions. ARTICLE 14 Section 14.1 The name and address of the incorporator is Mark C. Lewington, 1301 Fifth Avenue, Suite 3400, Seattle, WA 98101. These Restated Articles of Incorporation correctly set forth without change the corresponding provisions of the Articles of Incorporation as heretofore amended, and supersede the original Articles of Incorporation and all amendments thereto. Executed in duplicate this 28 day of May, 1998. COLUMBIA BANKING SYSTEM, INC. By: /s/ Jill L. Myers ------------------------- Jill L. Myers. Secretary 6 Exhibit 11 Statement re computation of per share net income Columbia Banking System, Inc.
Three Months Ended Six Months Ended June 30, June 30, (in thousands, except per share data) 1998 1997 1998 1997 - -------------------------------------------------------------------------------- Net income applicable to common stock $2,548 $2,178 $4,961 $3,555 - -------------------------------------------------------------------------------- Average number of basic common shares outstanding 10,028 9,806 10,013 9,804 Dilutive effect of stock options unexercised 387 200 340 238 - -------------------------------------------------------------------------------- Average number of diluted common shares outstanding 10,387 10,066 10,353 10,060 ================================================================================ Diluted net income per share $ 0.25 $ 0.22 $ 0.48 $ 0.35 ================================================================================
On April 22, 1998, the Company announced a three shares for two stock split payable on May 20, 1998, to shareholders of record on May 6, 1998. Common shares issued and outstanding, average shares outstanding and net income per share for all periods presented have been retroactively adjusted to give effect to this transaction. For additional information on earnings per share, please see the "Capital" section of the "Management Discussion and Analysis of Financial Condition and Results of Operations". EX-27 2
9 FINANCIAL DATA SCHEDULE Columbia Banking System, Inc. (in thousands except per share) 0000887343 COLUMBIA BANKING SYSTEM, INC. 1000 $ 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1 57626 26313 0 0 61497 7254 0 752968 8877 953722 829959 0 5981 34000 0 0 68442 15340 953722 32375 2404 513 35292 13872 14948 20344 1000 0 17095 7640 7640 0 0 4961 .50 .48 5.05 2090 0 18 0 8440 738 175 8877 8877 0 1542
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