-----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, U1+Oy8cN6qtx8DSxBKpxYzK80etvP39ffcCTviJOiJQhAR2Uea6VBH67msaJY08O lvy950LCwQq/NizsaZ+2aw== 0000891020-96-001262.txt : 19961029 0000891020-96-001262.hdr.sgml : 19961029 ACCESSION NUMBER: 0000891020-96-001262 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19961028 SROS: NONE 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: S-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-14465 FILM NUMBER: 96648305 BUSINESS ADDRESS: STREET 1: 1102 BROADWAY PLAZA CITY: TACOMA STATE: WA ZIP: 98402 BUSINESS PHONE: 2063051900 MAIL ADDRESS: STREET 1: 1102 BROADWAY PLAZA CITY: TACOMA STATE: WA ZIP: 98402 S-2/A 1 AMENDMENT NO. 1 TO FORM S-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1996 REGISTRATION NO. 333-14465 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO.1 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ COLUMBIA BANKING SYSTEM, INC. (Exact name of registrant as specified in its charter) WASHINGTON 91-142237 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number)
1102 BROADWAY PLAZA, TACOMA, WASHINGTON 98402 (206) 305-1900 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ARNOLD G. ESPE CHAIRMAN AND CHIEF EXECUTIVE OFFICER COLUMBIA BANKING SYSTEM, INC. 1102 BROADWAY PLAZA TACOMA, WA 98402 (206) 305-1900 (Name, address, including zip code, and telephone number, including area code, of agent for service) COPIES OF COMMUNICATIONS TO: J. JAMES GALLAGHER, ESQ. TODD H. BAKER, ESQ. AND SANDRA L. GALLAGHER, ESQ. Gibson, Dunn & Crutcher LLP Gordon, Thomas, Honeywell, Malanca One Montgomery Street, Suite 3100 Peterson & Daheim, P.L.L.C. San Francisco, California 94104 1201 Pacific Avenue, Suite 2200 (415) 393-8200 Tacoma, Washington 98402 (206) 572-5050
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the Prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 COLUMBIA BANKING SYSTEM, INC. ------------------------ CROSS-REFERENCE SHEET
FORM S-2 ITEM NO. AND CAPTION LOCATION OR HEADING IN THE PROSPECTUS --------------------------------------------- ------------------------------------------ 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus..... Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus................................. Insider Front Cover Page; Outside Back Cover Page 3. Summary Information and Risk Factors......... Prospectus Summary; Risk Factors 4. Use of Proceeds.............................. Prospectus Summary; Use of Proceeds 5. Determination of Offering Price.............. Not Applicable 6. Dilution..................................... Not Applicable 7. Selling Security Holders..................... Not Applicable 8. Plan of Distribution......................... Outside Front Cover Page; Underwriting 9. Description of Securities to be Registered... Outside Front Cover Page; Description of Capital Stock 10. Interests of Named Experts and Counsel....... Legal Matters; Experts 11. Information with Respect to the Registrant... Outside Front Cover Page; Prospectus Summary; Recent Developments; Price Range of Common Stock; Dividends; Capitalization; Selected Consolidated Financial Information; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Security Ownership of Certain Beneficial Owners and Management; Certain Transactions; Description of Capital Stock; Shares Eligible for Future Sale; Consolidated Financial Statements 12. Incorporation of Certain Documents by Reference.................................. Incorporation of Certain Documents by Reference 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities................................ Underwriting
3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION OCTOBER 28, 1996 1,100,000 SHARES LOGO COLUMBIA BANKING SYSTEM, INC. COMMON STOCK ------------------ All of the shares of Common Stock, no par value per share (the "Common Stock"), offered hereby are being sold by Columbia Banking System, Inc. (the "Company"). The Common Stock is quoted on the Nasdaq National Market under the symbol COLB. On October 25, 1996, the last reported sale price for the Common Stock on the Nasdaq National Market was $15.00 per share. See "Price Range of Common Stock." ------------------ THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 9. ------------------ THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PRICE UNDERWRITING PROCEEDS TO DISCOUNTS AND TO PUBLIC COMMISSIONS(1) COMPANY(2) - ----------------------------------------------------------------------------------------------- Per Share................................ $ $ $ - ----------------------------------------------------------------------------------------------- Total(3)................................. $ $ $ - ----------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------
(1) See "Underwriting" for information relating to indemnification of the Underwriters. (2) Before deducting expenses of the offering estimated at $275,000. (3) The Company has granted the Underwriters a 30-day option to purchase up to 165,000 additional shares of Common Stock solely to cover over-allotments, if any. To the extent the option is exercised, the Underwriters will offer the additional shares at the Price to Public shown above. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to the Company will be $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them and subject to the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of the shares of Common Stock will be made at the offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about , 1996. ALEX. BROWN & SONS RAGEN MACKENZIE INCORPORATED INCORPORATED THE DATE OF THIS PROSPECTUS IS , 1996. 4 [INSERT MAP] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." 2 5 AVAILABLE INFORMATION The Company is subject to the reporting and other informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Copies of such reports, proxy statements and other information can be obtained, upon payment of prescribed fees, from the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, such reports, proxy statements and other information can be inspected at the Commission's facilities referred to above and at the Commission's Regional Offices at 7 World Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661. The Common Stock is included for quotation on the Nasdaq National Market, and such reports, proxy statements and other information concerning the Company are available for inspection and copying at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. The Company has filed with the Commission a Registration Statement on Form S-2 (together with any amendments thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act") with respect to the shares of Common Stock to be offered pursuant to this Prospectus. This Prospectus does not contain all the information set forth in the Registration Statement. The Commission also maintains a site accessible to the public by computer on the World Wide Web at http://www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the Commission, including the Company. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents, filed with the Commission by the Company under the Exchange Act, are incorporated in and made a part of this Prospectus by reference: (i) the Company's Annual Report on Form 10-K for the year ended December 31, 1995; (ii) the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30, 1996; and (iii) the Company's Current Report on Form 8-K dated October 14, 1996. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be modified or superseded for the purposes of this Prospectus to the extent that a statement contained herein modifies or supersedes such statement. Any such statement so modified or superseded shall not, except as so modified or superseded, constitute a part of this Prospectus. The Company will provide without charge to each person to whom a copy of this Prospectus has been delivered, on the written or oral request of any such person, a copy of any or all of the documents referred to above which have been or may be incorporated in this Prospectus by reference, other than exhibits to such documents, unless such exhibits are specifically incorporated by reference into such documents. Requests for such copies should be directed to: Kristen Kopay, Marketing Officer, Columbia Banking System, Inc., 1102 Broadway Plaza, Tacoma, Washington 98402, (206) 305-1900. 3 6 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. Unless the context otherwise requires, references in this Prospectus to the Company include its banking subsidiary, Columbia Bank. This Prospectus 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, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY 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 15 branch 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, 1996, based on total assets of $481.6 million, the Company was the largest publicly traded bank holding company headquartered in Washington. The Company was reorganized and additional management was added in 1993 in order to take advantage of commercial banking business opportunities resulting from increased consolidation of banks in the Company's principal market area, primarily through acquisitions by out-of-state holding companies, and the resulting dislocation of customers. 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 business strategy of the Company 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 in lending and deposits. Since the reorganization, the Company has experienced rapid growth and has greatly expanded its commercial lending activities. The Company has grown from four branch offices at January 1, 1993 to its present 15 branch offices and has regulatory approval to open four additional branch offices in its market area. Between January 1, 1993 and June 30, 1996, the Company increased its consolidated assets from $158.6 million to $481.6 million, its loans from $120.8 million to $401.6 million and its deposits from $118.0 million to $402.9 million. While accomplishing this expansion, the Company's asset quality has improved. At June 30, 1996, the Company's nonperforming assets constituted 0.15% of total assets, as compared to 0.89%, 1.17%, and 2.13% at December 31, 1995, 1994 and 1993, respectively. Although the Company incurred anticipated losses in the four quarters following its 1993 reorganization, the Company has been profitable in each of the last eight quarters ending June 30, 1996. The Company's goal is to create, over the next several years, a well-capitalized, customer focused, Pacific Northwest commercial banking institution with a significant presence in selected markets and total assets in excess of $1.0 billion. 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 and expansion into additional parts of neighboring King County and Thurston 4 7 County (the location of the state capitol, Olympia). 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 banking 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 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 utilizes the extensive banking experience of the senior executives and other key personnel of the Company to pursue its personal service-oriented approach to banking. The Company's principal executives are A.G. Espe, its Chairman, and W.W. Philip, its President. Both executives have extensive experience in managing larger and medium-sized commercial banking organizations in the Northwest and were instrumental in executing internal and acquisition-based growth strategies for Alaska Pacific Bancorporation, Inc. and Key Pacific Bancorp (in the case of Mr. Espe) and Puget Sound Bancorp (in the case of Mr. Philip). Mr. Espe has over 30 years of experience in the commercial banking business. During his tenure at Key Pacific Bancorp, Mr. Espe was responsible for numerous mergers and acquisitions in several western states, including Washington, totaling more than $4 billion in total assets. Prior to 1985, Mr. Espe founded and managed Alaska Pacific Bancorporation, Inc., a bank holding company with total assets in excess of $600 million at the time it was acquired by KeyCorp. Under the leadership of Mr. Philip, Puget Sound Bancorp had the largest deposit market share of any financial institution in Pierce County prior to its acquisition in 1993. Mr. Philip has over 40 years of experience in the commercial banking business and managed the growth of Puget Sound Bancorp from approximately $200 million in 1971 when he became President to approximately $4.9 billion prior to its acquisition in January 1993. In addition, all of the Company's senior lending officers and branch managers had significant experience with other Washington banking organizations prior to joining the Company. 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 moderate growth and stability in recent years. Pierce County is projected to have the strongest economic performance in the Puget Sound region through 1999 according to the Puget Sound Economic Forecaster, a regional publication providing economic forecasts and commentary. According to the same publication, the greater Puget Sound economy is projected to expand at nearly twice the national rate for the years 1997 through 1999. The Company's principal executive offices are located at 1102 Broadway Plaza, Tacoma, Washington, 98402. Its telephone number is (206) 305-1900. 5 8 THE OFFERING Common Stock offered hereby............... 1,100,000 shares(1) Common Stock to be outstanding after the offering................................ 4,810,077 shares(1)(2) Use of proceeds........................... Approximately $10.0 million of the net proceeds will be contributed to Columbia Bank, primarily to fund additional loan growth. The remainder will be used to repay $3.0 million borrowed under a line of credit and for general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol............. COLB
- --------------- (1) An additional 165,000 shares may be sold pursuant to an over-allotment option granted by the Company to the Underwriters. See "Underwriting." (2) Excludes 293,393 shares of Common Stock (333,393 shares of Common Stock, assuming shareholder approval of additional shares to be available pursuant to the Company's Employee Stock Option Plan and certain other amendments to that plan) issuable upon exercise of outstanding options as of September 30, 1996. See "Management -- Option Grants/Awards." 6 9 SUMMARY CONSOLIDATED FINANCIAL INFORMATION
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, -------------------- -------------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATIONS DATA: Net interest income.............. $9,495 $7,925 $16,561 $11,580 $ 6,424 $4,660 $3,138 Provision for loan losses........ 760 600 1,250 1,000 502 170 80 Noninterest income............... 2,473 1,833 3,991 2,996 2,043 1,021 1,131 Noninterest expense.............. 9,368 8,111 16,547 14,036 10,656 4,488 3,810 Provision for income taxes(1).... -- -- -- -- -- -- 14 Net income (loss)(1)............. 1,840 1,047 2,755 (614) (2,439) 1,023 365 Net income (loss) per share(1)(2).................... $ 0.52 $ 0.30 $ 0.79 $ (0.18) $ (1.06) $ 0.89 $ 0.44 PERFORMANCE RATIOS: Net interest margin(3)(4)........ 4.55% 4.96% 4.78% 4.54% 3.69% 3.79% 3.25% Efficiency ratio(5).............. 78.30 83.10 80.50 96.30 125.90 79.00 89.20 Return on average assets(4)...... 0.82 0.61 0.74 (0.22) (1.28) 0.74 0.36 Return on average equity(4)...... 11.36 7.29 9.25 (2.12) (12.76) 11.16 6.48
JUNE 30, DECEMBER 31, -------------------- -------------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: Total assets..................... $481,612 $383,305 $425,206 $319,072 $235,944 $158,694 $120,800 Loans, net of unearned fees(6)... 401,554 323,447 353,093 268,996 181,016 120,797 92,383 Deposits......................... 402,914 313,708 361,875 268,692 165,339 118,014 94,379 Federal Home Loan Bank advances....................... 37,000 34,000 25,000 17,000 32,000 18,000 15,000 Shareholders' equity............. 33,783 30,214 31,967 28,861 29,801 11,641 6,001 Book value per share(2).......... $ 9.70 $ 8.82 $ 9.30 $ 8.44 $ 8.73 $ 8.22 $ 7.73 Equity to assets ratio........... 7.01% 7.88% 7.52% 9.05% 12.63% 7.34% 4.97% ASSET QUALITY RATIOS: Nonperforming loans to loans..... 0.19% 0.17% 0.13% 0.18% 0.95% 0.62% 0.91% Allowance for loan losses to loans.......................... 1.10 0.98 1.06 1.01 1.10 1.25 1.54 Allowance for loan losses to nonperforming loans............ 592.08 592.34 807.76 546.57 115.48 202.77 168.96 Nonperforming assets to total assets......................... 0.15 1.00 0.89 1.17 2.13 2.34 2.79 OTHER DATA: Number of banking offices........ 14 10 13 9 8 4 4 Number of full-time equivalent employees...................... 218 181 201 161 169 109 n/a
- --------------- (1) The Company continues to benefit from the utilization of its net operating loss carryforwards for federal income tax purposes. Therefore, the Company had no federal income tax provision for the periods presented except for fiscal year 1991. Had earnings been taxable for the six months ended June 30, 1996, net income would have been $1.2 million or $0.34 per share. Management anticipates that the Company will record a provision for income taxes during 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations," "Taxation" and Notes to Consolidated Financial Statements. (2) On April 24, 1996, the Company announced a 5% stock dividend to shareholders of record on May 8, 1996, which was paid on May 22, 1996 through the issuance of 164,051 common shares to shareholders. Per share data have been adjusted retroactively for all periods presented. 7 10 (3) Net interest margin is net interest income divided by average interest-earning assets. (4) Six-month data presented on an annualized basis. (5) The efficiency ratio is recurring noninterest expense divided by the sum of net interest income and noninterest income excluding nonrecurring items. (6) Excludes loans held for sale. Except as otherwise specified, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." All information with respect to the Common Stock and per share amounts contained in this Prospectus have been adjusted, unless otherwise specified, to give effect to a 5% stock dividend paid on May 22, 1996. 8 11 RISK FACTORS In addition to other information in this Prospectus, the following factors should be considered carefully in evaluating an investment in the shares of Common Stock offered by this Prospectus. Aggressive Growth Strategy. The Company intends to continue pursuing the aggressive growth strategy which it began in 1993, both through expanding its existing operations and through acquisitions. Its growth strategy is significantly dependent upon the continued expansion of banking offices throughout the Company's market area and the Company's ability to generate an increasing volume of loans and deposits at acceptable risk levels and upon acceptable terms. Since 1993, the Company has expanded, and continues to expand, its loan portfolio at a rapid pace, with a heavy emphasis on commercial lending. The loan-to-deposit ratio at June 30, 1996 was approximately 99.7%. Although the Company has not incurred significant credit losses in recent periods, there can be no assurance that the Company will not incur significant credit losses in the future. Moreover, there can be no assurance that the Company will be successful in expanding its asset base to a targeted size, managing the costs and implementation risks associated with its growth strategy, identifying and acquiring attractive potential acquisition candidates on terms favorable to the Company, integrating any acquired institutions or branches or preventing deposit erosion at acquired institutions or branches. Acquisitions and branching by the Company will also be subject to regulatory approvals and there can be no assurance that the Company will succeed in securing such approvals. The Company's ability to pursue its growth strategy also may be adversely affected by general economic conditions. See "Business -- General" and "-- Competition." Dependence on Key Personnel. The Company is dependent on the services of A.G. Espe, its current Chairman of the Board and Chief Executive Officer, and W.W. Philip, its President and Chief Operating Officer and President and Chief Executive Officer of Columbia Bank. The loss of the services of either Mr. Espe or Mr. Philip, or of certain other key branch and lending personnel, could adversely affect the Company. The Company recently amended its employment agreement with Mr. Espe to extend its term to December 31, 2001. While the Company also recently amended its employment agreement with Mr. Philip to extend its term to December 31, 1998, Mr. Philip has indicated his intention to retire at that time. See "Management -- Employment and Change of Control Agreements." Changing Nature of Banking Business. The banking industry generally has seen a trend toward automation of delivery of banking services, a reduction in the number of full-service branch offices and a de-emphasis on personal service. This trend appears to be the result of efforts by banks to reduce costs and increase efficiency. While the Company seeks to keep pace with industry trends and technological innovations, its strategy is based on the belief that customer demand for personal contact and strategically placed branch offices will continue for the foreseeable future. Thus, Columbia Bank is continuing to expand its branch network and the availability to customers of well-trained and highly motivated personnel at a time when many banks are consolidating their branch networks and automating customer responses. There can be no assurance that this strategy will be successful or that technological advances by its competitors will not result in the loss of customer relationships. As a result of this strategy, Columbia Bank's cost for providing banking services may generally be higher than that of many of its competitors for the foreseeable future. Overhead Expense. Competition in the banking industry has led many commercial banking companies to focus on expense reduction as a method of increasing shareholder returns. Due to the Company's aggressive growth strategy and emphasis on personal service, the Company's expense ratios are higher than those of most similarly sized commercial banks. At June 30, 1996, the Company's efficiency ratio was 78.3%. While the Company anticipates that its efficiency ratio will improve gradually as overhead expenses are allocated over a larger asset base, there can be no assurance that it will reach the levels of certain of the Company's more efficient commercial banking competitors, many of whom are following strategies different from those of the Company. See 9 12 "-- Changing Nature of Banking Business." Failure by the Company to improve its efficiency ratio over time could adversely affect the value of the Common Stock. Allowance for Loan Losses. The Company's allowance for loan losses is maintained at a level considered adequate by management to provide for anticipated loan losses. The amount of future losses is subject to changes in economic, operating and other conditions that may be beyond the Company's control and such losses may exceed current estimates. At June 30, 1996, the Company had total nonperforming loans of $745,000 which constituted 0.19% of total loans at that date. At that same date, the Company's allowance for loan losses was $4.4 million, or 1.10% of total loans and 592.08% of total nonperforming loans. There can be no assurance, however, that such allowance will be adequate to cover actual losses. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." Competition. The Company's strategy involves the significant expansion of Columbia Bank throughout the Tacoma metropolitan area and contiguous parts of the Puget Sound region of Washington. During the past several years, substantial consolidation among financial institutions in Washington has occurred. Due in part to recent federal legislation concerning interstate banking, the Company anticipates a continuation of the consolidation trend in Washington. Legislation has recently been passed by the Washington legislature (effective June 1996) that allows, subject to certain conditions, mergers or other combinations, relocations of a bank's main office and branching across state lines in advance of the June 1, 1997 date established by federal law (see "Supervision and Regulation -- Other Regulatory Developments"). Many other financial institutions, most of which have greater resources than the Company, compete with the Company for banking business in the Company's market area. Among the advantages of some of these institutions are their ability to make larger loans, finance extensive advertising campaigns, access international money markets and allocate their investment assets to regions of highest yield and demand. The Company does not have a significant market share of the deposit-taking or lending activities in the areas in which it conducts operations. Although the Company has been able to compete effectively in its market areas to date, there can be no assurance that it will be able to continue to do so in the future. See "Business -- Competition." Impact of Interest Rates. The results of operations for commercial banks, including Columbia Bank, may be materially and adversely affected by changes in prevailing economic conditions, including changes in interest rates and the monetary and fiscal policies of the federal government. Although the current interest rate environment is favorable for many financial institutions, including the Company, such an environment is unlikely to continue indefinitely. The Company's profitability, like that of many financial institutions, is dependent to a large extent upon net interest income, which is the difference between interest income on interest-earning assets, such as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and borrowings. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Conversely, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset/ Liability Management." Geographic Concentration. Substantially all of the Company's lending activities are to customers in the Puget Sound region of Washington. Consequently, the Company's growth and profitability are dependent upon economic conditions in the region. Unfavorable changes in economic conditions affecting the region, such as in the aerospace, natural resources or software industries, or a significant decline in foreign trade or in the large military base presence in the area may have an adverse impact on operations of the Company. Conflicts of Interest. In addition to his position with the Company, Mr. Espe is the Chairman of the Board of Northrim Bank, a publicly traded bank based in Anchorage, Alaska, with total assets of 10 13 $202.4 million at September 30, 1996. At September 30, 1996, Mr. Espe beneficially owned 10.5% of Northrim Bank's common stock. While Mr. Espe currently devotes, and intends to continue to devote, a majority of his time to the Company's matters, there can be no assurance that this will continue to be the case. Mr. Espe's employment agreement with the Company prohibits him from competing with the Company in Washington and Oregon for a period of two years following his voluntary termination of the agreement without "good reason" (as defined in the agreement). See "Management -- Employment and Change of Control Agreements." Shares Eligible for Future Sale. The future sale of a substantial number of shares of Common Stock by existing shareholders, or the sale of shares of Common Stock by shareholders purchasing shares of Common Stock in this offering, could have a material adverse effect on the market price of the Common Stock. The Company, its executive officers and directors and any affiliates thereof have agreed that for a period of 120 days after the date of this Prospectus they will not sell or otherwise dispose of any shares of Common Stock without the prior written consent of the Underwriters. See "Underwriting" and "Shares Eligible for Future Sale." Government Regulation and Recent Legislation. The Company is subject to extensive federal and Washington state legislation, regulation and supervision. These laws and regulations are primarily intended to protect depositors and the deposit insurance fund, not shareholders of the Company. The Company is subject to regulation by the Board of Governors of the Federal Reserve System. Columbia Bank, as a state-chartered bank, is subject to supervision by the Federal Deposit Insurance Corporation (the "FDIC") and the Washington Department of Financial Institutions, Division of Banks. Recently enacted, proposed and future legislation and regulations have had, will continue to have, or may have a material effect on the business, operations and prospects of the Company. Some of the legislative and regulatory changes may increase the Company's cost of doing business and assist competitors of the Company. The Company is unable to predict the nature or extent of the effects on its business and earnings that any fiscal or monetary policies, or new federal or state legislation or regulations, may have in the future. See "Recent Developments" and "Supervision and Regulation." Anti-Takeover Provisions. Certain provisions contained in the Company's Articles of Incorporation (the "Articles") may deter potential acquirers from attempting a takeover of the Company. The Articles require that any Business Combination (as defined in the Articles) be approved by the affirmative vote of not less than 66 2/3% of the total shares attributable to persons other than a Control Person (as defined in the Articles). This "supermajority" approval is not required if the Company's Board of Directors has approved the transaction or if certain other conditions concerning nondiscrimination among shareholders and receipt of fair value are satisfied. The Articles also include a provision that requires the Company's Board of Directors to consider certain non-monetary factors in evaluating any acquisition bid. Finally, the Articles provide, among other things, that the Company may issue up to 2,000,000 shares of preferred stock, none of which shares are currently issued and outstanding, without prior shareholder approval, in one or more series, with such relative rights and preferences as the Board of Directors may determine. The issuance of preferred stock under certain circumstances could have the effect of delaying or preventing a change in control of the Company. These provisions, and certain provisions contained in Chapter 19 of the Washington Business Corporation Act, Revised Code of Washington Title 23B.19, which prohibit certain significant business transactions if not accomplished in accordance with the statute, collectively and individually, may discourage transactions such as mergers or tender offers on terms which certain of the Company's shareholders may consider beneficial. As a result, holders of the Common Stock may potentially be deprived of an opportunity to sell their shares at a premium over market price. 11 14 RECENT DEVELOPMENTS EFFECT OF RECENT LEGISLATION Columbia Bank's deposits are insured by the FDIC through the Bank Insurance Fund (the "BIF") and through the Savings Association Insurance Fund (the "SAIF"). Approximately 39% of the Company's deposits are deemed to be SAIF-insured under an allocation formula that applies because certain deposits were previously acquired from a savings bank in a so-called "Oakar" transaction. See "Business -- General." The FDIC's current annual assessment rate for deposits ranges from 0.0% to 0.27% of insured deposits for the BIF and 0.23% to 0.31% of insured deposits for the SAIF. Legislation was recently enacted to resolve the difference in rates between the two funds. Pursuant to this legislation, the FDIC has proposed to lower SAIF assessment rates from their current rates to a range of 0.04% to 0.31% and then through application of an adjustment factor to further reduce SAIF assessment rates to an effective range of 0.0% to 0.27%. The FDIC has also proposed to maintain an assessment rate of between 0.0% and 0.27% of covered deposits for BIF members. These rates would become effective January 1, 1997. Further, the FDIC has proposed that such rate schedule be effective for certain institutions, such as Columbia Bank, for the period of October 1, 1996 until December 31, 1996. Any overpayment of fourth quarter assessments, estimated at 0.0575% for certain banks, such as Columbia Bank, will be refunded or credited with interest. The legislation also requires a special assessment on SAIF-insured deposits held by the institution at March 31, 1995, with a discount of 20% on the special assessment and subsequent assessments for Oakar institutions, such as Columbia Bank, which meet certain tests. The FDIC has estimated that the special assessment rate will be approximately 0.657% of covered deposits. Moreover, the legislation requires assessments on both SAIF and BIF members in order to service bonds issued in connection with the government resolution of the savings and loan crisis. The FDIC also has estimated that for the next three years beginning on January 1, 1997 through December 31, 1999, an annual assessment of approximately 0.064% of covered deposits and 0.013% of covered deposits will be assessed upon SAIF- and BIF-insured deposits, respectively, and from January 1, 2000 through December 31, 2017, the assessment rate will be 0.024% of covered deposits for all insured institutions. If the deposit insurance funds are merged on January 1, 1999 pursuant to the legislation, then the uniform assessment rate to service the bonds will apply from that date forward. Based on the FDIC estimates as to assessment rates in future periods, management anticipates that its assessment rate for deposits deemed to be SAIF-insured will be 0.0% during the fourth quarter of 1996 and 0.064% beginning in 1997. Management also anticipates that its assessment rate for BIF-insured deposits will be 0.0% during the fourth quarter of 1996 and 0.013% beginning in 1997. The discount of 20% on the one-time special assessment and subsequent SAIF assessments is applicable to certain commercial banking institutions, such as Columbia Bank, that had SAIF deposits of less than 50% of total domestic deposits as of June 30, 1995. At March 31, 1995, the date upon which the SAIF deposit base is calculated for the purpose of the special assessment, Columbia Bank was deemed to have SAIF deposits of $116.5 million. Management has calculated the effect of the one-time special assessment to be $612,000. That amount was charged to earnings during the third quarter of 1996, substantially reducing third quarter earnings. The current charge to earnings is expected to be recovered within approximately three years through reduced assessment rates. At September 30, 1996, approximately $156.0 million of Columbia Bank's deposits were deemed to be SAIF-insured under the allocation formula. The actual deposits at that date remaining from the Oakar transaction were approximately $23.0 million. THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 The following table sets forth unaudited summary financial information for the Company for the three and nine months ended September 30, 1996 and 1995 and reflects the effect of the one-time special assessment by the FDIC. This information should be read in conjunction with the consoli- 12 15 dated financial statements of the Company and notes thereto appearing elsewhere in this Prospectus and with Management's Discussion and Analysis of Financial Condition and Results of Operations.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- --------------------- 1996 1995 1996 1995 ------ ------ ------- ------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATIONS DATA: Net interest income............................................... $5,261 $4,281 $14,756 $12,206 Provision for loan losses......................................... 330 320 1,090 920 Noninterest income................................................ 1,390 1,078 3,863 2,911 Noninterest expense............................................... 5,226 4,267 14,594 12,378 SAIF special assessment........................................... 612 -- 612 -- Provision for income taxes(1)..................................... -- -- -- -- Net income(1)..................................................... 483 772 2,323 1,819 Net income (excluding SAIF special assessment)(1)................. 1,095 772 2,935 1,819 Net income per share(1)(2)........................................ $ 0.13 $ 0.22 $ 0.64 $ 0.52 Net income per share (excluding SAIF special assessment)(1)(2).... $ 0.30 $ 0.22 $ 0.81 $ 0.52 PERFORMANCE RATIOS: Net interest margin(3)(4)......................................... 4.40% 4.71% 4.49% 4.87% Efficiency ratio(5)............................................... 78.57 80.21 78.38 82.09 Return on average assets(4)....................................... 0.38 0.78 0.66 0.67 Return on average assets (excluding SAIF special assessment)(4)... 0.86 0.78 0.84 0.67 Return on average equity(4)....................................... 5.39 10.17 9.24 8.29 Return on average equity (excluding SAIF special assessment)(4)... 12.22 10.17 11.67 8.29
SEPTEMBER 30, 1996 DECEMBER 31, 1995 ------------------ ----------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: Total assets.................................................. $530,854 $ 425,206 Loans, net of unearned fees(6)................................ 431,772 353,093 Deposits...................................................... 454,500 361,875 Federal Home Loan Bank advances............................... 32,000 25,000 Shareholders' equity.......................................... 36,876 31,967 Book value per share(2)....................................... $ 9.94 $ 9.30 Equity to assets ratio........................................ 6.95% 7.52% ASSET QUALITY RATIOS: Nonperforming loans to loans.................................. 0.35% 0.13% Allowance for loan losses to loans............................ 1.01 1.06 Allowance for loan losses to nonperforming loans.............. 284.00 807.76 Nonperforming assets to total assets.......................... 0.29 0.89 OTHER DATA: Number of banking offices..................................... 15 13 Number of full-time equivalent employees...................... 238 201
- --------------- (1) The Company continues to benefit from the utilization of its net operating loss carryforwards for federal income tax purposes. Therefore, the Company had no federal income tax provision for the periods presented except for fiscal year 1991. Had earnings been taxable for the nine months ended September 30, 1996, net income would have been $1.5 million or $0.42 per share. Management anticipates that the Company will record a provision for income taxes during 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations," "Taxation" and Notes to Consolidated Financial Statements. (2) On April 24, 1996, the Company announced a 5% stock dividend to shareholders of record on May 8, 1996, which was paid on May 22, 1996 through the issuance of 164,051 common shares to shareholders. Per share data have been adjusted retroactively for all periods presented. (3) Net interest margin is net interest income divided by average interest-earning assets. (4) Three-month and nine-month data presented on an annualized basis. (5) The efficiency ratio is recurring noninterest expense divided by the sum of net interest income and noninterest income excluding nonrecurring items. (6) Excludes loans held for sale. 13 16 Net Income. Net income for the three months ended September 30, 1996 was $483,000, or $0.13 per share, compared to $772,000, or $0.22 per share, for the same period in 1995, a decrease of 37.4% and 40.9% in net income and earnings per share, respectively. The decrease was attributable to the $612,000 special assessment on SAIF-insured deposits. Net income for the nine months ended September 30, 1996 was $2.3 million, or $0.64 per share, compared to $1.8 million, or $0.52 per share, for the same period in 1995. Excluding the special SAIF assessment, net income for the three months ended September 30, 1996 increased 41.8% to $1.1 million, or $0.30 per share, compared to $772,000, or $0.22 per share, for the same period in the prior year. Net income for the nine months ended September 30, 1996, excluding the special SAIF assessment, increased 61.4% to $2.9 million, or $0.81 per share, from $1.8 million, or $0.52 per share, for the same period in 1995. The increase in net income was primarily due to increased revenue resulting from continued loan and deposit growth. Net Interest Income. Net interest income for the nine months ended September 30, 1996 increased 20.9% to $14.8 million from $12.2 million for the same period in 1995. The increase in net interest income for the first nine months of 1996 was due to the overall growth of the Company. Total assets increased 24.8% to $530.9 million at September 30, 1996 from $425.2 million at December 31, 1995. Net interest margin (net interest income divided by average interest-earning assets) for the nine months ended September 30, 1996 decreased to 4.49% from 4.87% for the same period in 1995. The decrease in net interest margin was primarily due to lower yields obtained on loans as a result of a planned change in loan mix from higher yielding commercial real estate loans to high quality, but lower yielding, commercial loans and to increased competition in the Company's market area. Also affecting net interest margin was a one-time adjustment to the amortization of deferred loan origination fees in the three months ended September 30, 1996, amounting to approximately $100,000. Noninterest Income. Total noninterest income for the nine months ended September 30, 1996 increased 32.7% to $3.9 million, compared to $2.9 million for the same period in 1995. Noninterest Expense. Excluding the special SAIF assessment, total noninterest expense for the nine months ended September 30, 1996 increased 17.9% to $14.6 million, compared to $12.4 million for the same period in 1995. Nonperforming Assets. Nonperforming loans increased to $1.5 million at September 30, 1996 from $464,000 at December 31, 1995 due principally to the inclusion of loans which, though nonperforming, are secured by real estate. In the fourth quarter of 1996, management anticipates charge-offs of those nonperforming loans which are unsecured or undersecured, although the amount of such charge-offs is not expected to be material. The balance of such loans are expected to be paid or to return to performing status in the near future. The allowance for loan losses at September 30, 1996 decreased to 1.01% from 1.06% of loans at December 31, 1995 (excluding loans held for sale at each date) due to a $273,000 increase in charge-offs compared with the first nine months of 1995 and a $78.7 million, or 22.3%, increase in loans compared to year-end 1995. At September 30, 1996, nonperforming loans were 0.35% of period-end loans and nonperforming assets were 0.29% of period-end assets. 14 17 USE OF PROCEEDS The net proceeds (after deducting underwriting discounts, commissions and estimated offering expenses) to the Company from the sale of the Common Stock offered hereby are estimated to be $15,193,750 ($17,514,063 if the Underwriters' over-allotment option is exercised in full) based on an assumed offering price of $15.00 per share. The Company plans to contribute approximately $10.0 million of the net proceeds to Columbia Bank primarily to fund additional loan growth. The remainder will be used to repay $3.0 million borrowed under a line of credit and for general corporate purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Resources." PRICE RANGE OF COMMON STOCK The Common Stock is quoted on the Nasdaq National Market under the symbol COLB. The following table sets forth for the periods indicated the high and low sale prices for the Common Stock as reported on the Nasdaq National Market:
HIGH LOW ---- ---- 1994 First quarter................................................... $ 12 $ 10 Second quarter.................................................. 11 1/2 10 1/4 Third quarter................................................... 11 10 Fourth quarter.................................................. 11 9 1995 First quarter................................................... $ 12 $9 1/8 Second quarter.................................................. 12 1/2 9 7/8 Third quarter................................................... 12 3/8 11 1/8 Fourth quarter.................................................. 12 3/4 11 1/4 1996 First quarter................................................... $14 3/4 $11 1/2 Second quarter.................................................. 16 1/2 13 Third quarter................................................... 14 14 1/4 Fourth quarter (through October 25, 1996)....................... 16 1/2 14 7/8
On October 25, 1996, the last trading day prior to the date of this Prospectus, the last reported sale price for the Common Stock on the Nasdaq National Market was $15.00 per share. At September 30, 1996, there were 852 holders of record of the Common Stock. DIVIDENDS The Company does not currently pay cash dividends on its Common Stock and does not intend to do so for the foreseeable future. It is not presently anticipated that the Company will conduct significant operations independent of Columbia Bank and therefore the Company does not expect to have any significant source of income other than earnings on the net proceeds of the offering retained by the Company and dividends from Columbia Bank, if any. Consequently, the ability of the Company to pay dividends to its shareholders will be dependent upon such retained proceeds and the earnings thereon, and upon the ability of Columbia Bank to pay dividends to the Company. 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 such distributions. For the foreseeable future, it is the Company's intent to retain earnings to support the growth of its business. See "Supervision and Regulation -- The Company." 15 18 CAPITALIZATION The following table sets forth the capitalization of the Company at June 30, 1996, and as adjusted to reflect the receipt of net proceeds from the sale of 1,100,000 shares of Common Stock pursuant to this offering at an assumed offering price of $15.00 per share:
JUNE 30, 1996 ----------------------------- ACTUAL AS ADJUSTED -------- -------------- (IN THOUSANDS) Deposits................................................... $402,914 $402,914 Borrowings: Federal Home Loan Bank advances.......................... 37,000 37,000 Other borrowings......................................... 2,300 2,300 Convertible subordinated notes(1)........................ 2,363 -- -------- ------------- Total deposits and borrowings......................... $444,577 $442,214 -------- ------------- -------- ------------- Shareholders' equity: Preferred stock (no par value); 2,000,000 shares authorized; none outstanding.......................... -- -- Common stock (no par value); 10,000,000 shares authorized; 3,482,268 shares issued and outstanding; 4,806,011 shares as adjusted(1)(2).................... $ 33,354 $ 52,217 Retained earnings........................................ 957 957 Unrealized losses on securities available for sale....... (528) (528) -------- ------------- Total shareholders' equity............................ $ 33,783 $ 52,646 -------- ------------- -------- -------------
- --------------- (1) On June 3, 1996, the Company gave notice of its intent to redeem all of its issued and outstanding 7.85% Convertible Subordinated Notes on August 1, 1996. Prior to August 1, 1996, all of the Notes were converted into 223,743 shares of Common Stock. The issuance of such additional shares is reflected in the as adjusted "Shareholders' Equity." (2) Does not include 293,393 shares issuable at prices ranging from $3.81 to $15.25 per share upon exercise of outstanding stock options. Also does not include a warrant outstanding to Dain Bosworth Incorporated, lead underwriter of a prior issue of securities by the Company, to purchase 18,716 shares at $10.14 per share. Between June 30, 1996 and September 30, 1996, 4,066 shares were issued pursuant to the exercise of stock options. 16 19 SELECTED CONSOLIDATED FINANCIAL INFORMATION The following selected consolidated financial information for the five years ended December 31, 1995 has been derived in part from the audited consolidated financial statements of the Company. Consolidated balance sheets at December 31, 1995 and 1994 and the related consolidated statements of operations and of cash flows for the three years ended December 31, 1995 and notes thereto appearing elsewhere in this Prospectus have been audited by Price Waterhouse, LLP, independent accountants. The summary financial data for the six months ended June 30, 1996 and 1995 is derived from unaudited consolidated financial statements and includes, in the opinion of management, all adjustments including normal recurring accruals necessary to present fairly the data for such periods. Operating results for the six months ended June 30, 1996 are not necessarily indicative of the results that may be expected for any other interim period or the entire year ending December 31, 1996.
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ------------------ --------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATIONS DATA: Total interest income..................... $18,097 $14,717 $31,720 $20,656 $13,955 $11,583 $ 9,772 Total interest expense.................... 8,602 6,792 15,159 9,076 7,531 6,923 6,634 ------- ------- ------- ------- ------- ------- ------- Net interest income..................... 9,495 7,925 16,561 11,580 6,424 4,660 3,138 Provision for loan losses................. 760 600 1,250 1,000 502 170 80 ------- ------- ------- ------- ------- ------- ------- Net interest income after provision for loan losses........................... 8,735 7,325 15,311 10,580 5,922 4,490 3,058 Service charges and other fees............ 1,148 905 1,895 1,242 556 417 432 Other noninterest income.................. 1,325 928 2,096 1,754 1,487 604 699 ------- ------- ------- ------- ------- ------- ------- Total noninterest income................ 2,473 1,833 3,991 2,996 2,043 1,021 1,131 Total noninterest expense............... 9,368 8,111 16,547 14,036 10,656 4,488 3,810 ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes......... 1,840 1,047 2,755 (460) (2,691) 1,023 379 Provision for income taxes(1)............. -- -- -- -- -- -- 14 ------- ------- ------- ------- ------- ------- ------- Income (loss) before extraordinary item... 1,840 1,047 2,755 (460) (2,691) 1,023 365 Extraordinary loss on extinguishment of debt, net............................... -- -- -- (154) -- -- -- Cumulative effect of accounting change.... -- -- -- -- 252 -- -- ------- ------- ------- ------- ------- ------- ------- Net income (loss)(1)...................... $ 1,840 $ 1,047 $ 2,755 $ (614) $(2,439) $ 1,023 $ 365 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss) per share(1)(2)......... $ 0.52 $ 0.30 $ 0.79 $ (0.18) $ (1.06) $ 0.89 $ 0.44 Average common and common equivalent shares outstanding (in thousands)(2).... 3,566 3,484 3,496 3,481 2,301 1,155 824 PERFORMANCE RATIOS: Net interest margin(3)(4)................. 4.55% 4.96% 4.78% 4.54% 3.69% 3.79% 3.25% Efficiency ratio(5)....................... 78.30 83.10 80.50 96.30 125.90 79.00 89.20 Return on average assets(4)............... 0.82 0.61 0.74 (0.22) (1.28) 0.74 0.36 Return on average equity(4)............... 11.36 7.29 9.25 (2.12) (12.76) 11.16 6.48
17 20
JUNE 30, DECEMBER 31, ------------------- ---------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: Total assets............................ $481,612 $383,305 $425,206 $319,072 $235,944 $158,694 $120,800 Loans, net of unearned fees(6).......... 401,554 323,447 353,093 268,996 181,016 120,797 92,383 Real estate owned....................... -- 3,296 3,304 3,227 3,305 2,959 2,523 Deposits................................ 402,914 313,708 361,875 268,692 165,339 118,014 94,379 Federal Home Loan Bank advances......... 37,000 34,000 25,000 17,000 32,000 18,000 15,000 Shareholders' equity.................... 33,783 30,214 31,967 28,861 29,801 11,641 6,001 Book value per share(2)................. $ 9.70 $ 8.82 $ 9.30 $ 8.44 $ 8.73 $ 8.22 $ 7.73 Equity to assets ratio.................. 7.01% 7.88% 7.52% 9.05% 12.63% 7.34% 4.97% ASSET QUALITY RATIOS: Nonperforming loans to loans............ 0.19% 0.17% 0.13% 0.18% 0.95% 0.62% 0.91% Allowance for loan losses to loans...... 1.10 0.98 1.06 1.01 1.10 1.25 1.54 Allowance for loan losses to nonperforming loans................... 592.08 592.34 807.76 546.57 115.48 202.77 168.96 Nonperforming assets to total assets.... 0.15 1.00 0.89 1.17 2.13 2.34 2.79 CAPITAL RATIOS(7): Tier 1 risk-based capital............... 8.58% 9.57% 9.10% 11.34% 17.98% 10.18% n/a Total risk-based capital................ 10.30 11.45 10.95 13.48 22.77 16.08 n/a Leverage ratio.......................... 7.30 8.25 7.72 9.35 13.27 8.18 n/a OTHER DATA: Number of banking offices............... 14 10 13 9 8 4 4 Number of full-time equivalent employees............................. 218 181 201 161 169 109 n/a
- --------------- (1) The Company continues to benefit from the utilization of its net operating loss carryforwards for federal income tax purposes. Therefore, the Company had no federal income tax provision for the periods presented except for fiscal year 1991. Had earnings been taxable for the six months ended June 30, 1996, net income would have been $1.2 million, or $0.34 per share. Management anticipates that the Company will record a provision for income taxes during 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations," "Taxation" and Notes to Consolidated Financial Statements. (2) On April 24, 1996, the Company announced a 5% stock dividend to shareholders of record on May 8, 1996, which was paid on May 22, 1996 through the issuance of 164,051 common shares to shareholders. Share data have been adjusted retroactively for all periods presented. (3) Net interest margin is net interest income divided by average interest-earning assets. (4) Six-month data presented on an annualized basis. (5) The efficiency ratio is recurring noninterest expense divided by the sum of net interest income and noninterest income excluding nonrecurring items. (6) Excludes loans held for sale. (7) Capital ratios are for the Company. At June 30, 1996, Columbia Bank exceeded regulatory capital requirements and qualified as "well-capitalized." See "Supervision and Regulation -- Banking Subsidiary." Capital ratios in effect as of December 31, 1991 are not comparable to the ratios as calculated in this table. However, at December 31, 1991, the Company was in compliance with applicable regulatory capital requirements. 18 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements of the Company and the notes thereto appearing elsewhere in this Prospectus. The data presented for the six-month periods ended June 30, 1996 and June 30, 1995 are derived from unaudited consolidated interim financial statements of the Company and include, in the opinion of management, all adjustments necessary to present fairly the data for such periods. OVERVIEW The Company was substantially reorganized and raised approximately $17.2 million in net proceeds from a public offering of Common Stock in 1993 in order to take advantage of perceived opportunities resulting from the consolidation of banks operating in the Puget Sound region. Since that time, the Company has experienced rapid asset growth, with assets increasing from $158.6 million at January 1, 1993 to $481.6 million at June 30, 1996. In connection with its 1993 reorganization and subsequent rapid expansion, the Company incurred anticipated net losses of $2.4 million in 1993 and $614,000 in 1994. However, the Company achieved a small profit for the quarter ended September 30, 1994 and has been profitable each quarter thereafter through June 30, 1996. Set forth below is certain unaudited quarterly financial data for the Company for the eight quarters ended June 30, 1996. Quarterly performance for the quarter ending September 30, 1996 was significantly affected by a one-time FDIC special assessment of $612,000 on Columbia Bank, which has certain deposits insured by the SAIF. See "Recent Developments."
1996 QUARTER 1994 QUARTER ENDED ENDED 1995 QUARTER ENDED ---------------- ------------------------------------- ------------------- JUN 30 MAR 31 DEC 31 SEP 30 JUN 30 MAR 31 DEC 31(1) SEP 30 ------ ------ ------ ------ ------ ------- --------- ------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Total interest income........... $9,311 $8,786 $8,630 $8,373 $7,775 $6,942 $ 6,152 $5,497 Total interest expense.......... 4,306 4,296 4,275 4,092 3,699 3,093 2,619 2,405 ----- ----- ----- ----- ----- ------- ------- ----- Net interest income........... 5,005 4,490 4,355 4,281 4,076 3,849 3,533 3,092 Provision for loan losses....... 430 330 330 320 300 300 260 240 Noninterest income.............. 1,308 1,165 1,080 1,078 950 883 856 853 Noninterest expense............. 4,851 4,517 4,169 4,267 4,124 3,987 3,621 3,488 ----- ----- ----- ----- ----- ------- ------- ----- Income before income tax...... 1,032 808 936 772 602 445 508 217 Provision for income tax........ -- -- -- -- -- -- -- -- Income (loss) from continuing operations before extraordinary item.......... 1,032 808 936 772 602 445 508 217 Extraordinary loss on extinguishment of debt, net... -- -- -- -- -- -- -- (154 ) ----- ----- ----- ----- ----- ------- ------- ----- Net income.................... $1,032 $ 808 $ 936 $ 772 $ 602 $ 445 $ 508 $ 63 ----- ----- ----- ----- ----- ------- ------- ----- ----- ----- ----- ----- ----- ------- ------- ----- Net income per share........ $0.29 $0.23 $0.27 $0.22 $0.17 $ 0.13 $ 0.14 $0.02 ----- ----- ----- ----- ----- ------- ------- ----- ----- ----- ----- ----- ----- ------- ------- -----
- --------------- (1) The Company recorded a net loss of $614,000 for the year ended December 31, 1994. The results of operations of the Company are dependent to a large degree on the Company's net interest income. The Company also generates noninterest income through service charges and fees and income from mortgage banking operations. The Company's operating expenses consist primarily of compensation and employee benefit expense 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 the actions of regulatory authorities. See "Risk Factors -- Impact of Interest Rates." 19 22 NET INTEREST INCOME Net interest income is the difference between interest income, principally from loans and securities, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, net interest spread and net interest margin. Volume refers to the average dollar amounts of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. During the six months ended June 30, 1996 and the years ended December 31, 1995 and 1994, average interest-earning assets were $419.0 million, $346.6 million and $254.9 million, respectively. During these same periods, average interest-bearing liabilities were $359.2 million, $300.3 million and $222.6 million, respectively, and net interest margins were 4.55%, 4.78% and 4.54%, respectively. The following table sets forth for the periods indicated information for the Company with respect to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant yields or costs, net interest income, net interest spread, net interest margin and the ratio of average interest-earning assets to average interest-bearing liabilities. Nonaccrual loans have been included in the tables as loans carrying a zero yield. 20 23
YEAR ENDED DECEMBER 31, ------------------------------------------------------- SIX MONTHS ENDED JUNE 30, 1996 1995 1994 ------------------------------- ------------------------------- --------------------- INTEREST INTEREST INTEREST AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ BALANCE(1) PAID RATE(2) BALANCE(1) PAID RATE BALANCE(1) PAID ---------- -------- ------- ---------- -------- ------- ---------- -------- (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: Loans: Commercial...................... $121,526 $ 5,300 8.75 % $ 92,831 $ 8,986 9.68 % $ 63,541 $ 5,272 Real estate(3): One- to four-family residential................. 92,829 4,209 9.09 97,280 9,073 9.33 78,408 6,495 Five or more family residential and commercial properties.................. 118,414 5,443 9.22 90,135 8,411 9.33 57,952 5,324 Consumer........................ 45,512 1,991 8.77 37,793 3,568 9.44 22,335 1,899 -------- ------- ------ -------- ------- ------ -------- ------- Total loans................... 378,281 16,943 8.98 318,039 30,038 9.44 222,236 18,990 Securities....................... 28,329 826 5.85 23,266 1,368 5.88 24,045 1,332 Interest-earning deposits with banks........................... 12,352 328 5.32 5,336 314 5.88 8,597 334 -------- ------- ------ -------- ------- ------ -------- ------- Total interest-earning assets...................... 418,962 18,097 8.66 346,641 31,720 9.15 254,878 20,656 Noninterest-earning assets....... 29,271 28,007 24,384 -------- -------- -------- Total assets.................. $448,233 $374,648 $279,262 -------- -------- -------- -------- -------- -------- INTEREST-BEARING LIABILITIES: Certificates of deposit.......... $171,410 $ 4,879 5.71 % $168,351 $ 9,565 5.68 % $122,198 $ 5,595 Savings accounts................. 21,554 301 2.80 24,547 669 2.73 33,938 895 Interest-bearing demand deposits........................ 131,362 2,413 3.68 79,706 3,151 3.95 38,962 814 -------- ------- ------ -------- ------- ------ -------- ------- Total interest-bearing deposits.................... 324,326 7,593 4.70 272,604 13,385 4.91 195,098 7,304 Federal Home Loan Bank advances........................ 32,170 884 5.51 24,915 1,503 6.03 21,452 1,160 Other borrowings................. 2,736 125 9.15 2,744 271 9.88 6,017 612 -------- ------- ------ -------- ------- ------ -------- ------- Total interest-bearing liabilities................. 359,232 8,602 4.80 300,263 15,159 5.05 222,567 9,076 Demand and other noninterest- bearing deposits................ 53,673 42,167 26,238 Other noninterest-bearing liabilities..................... 2,854 2,444 1,476 Shareholders' equity............. 32,474 29,774 28,981 -------- -------- -------- Total liabilities and shareholders' equity........ $448,233 $374,648 $279,262 -------- -------- -------- -------- -------- -------- Net interest income.............. $ 9,495 $16,561 $11,580 ------- ------- ------- ------- ------- ------- Net interest spread.............. 3.86 % 4.10 % ------ ------ ------ ------ Net interest margin.............. 4.55 % 4.78 % ------ ------ ------ ------ Average interest-earning assets to average interest-bearing liabilities..................... 116.63 % 115.45 % ------ ------ ------ ------ 1993 ------------------------------- INTEREST AVERAGE AVERAGE EARNED/ AVERAGE RATE BALANCE(1) PAID RATE ------- ---------- -------- ------- INTEREST-EARNING ASSETS: Loans: Commercial...................... 8.30 % $ 23,894 $ 1,690 7.07 % Real estate(3): One- to four-family residential................. 8.28 73,076 6,221 8.51 Five or more family residential and commercial properties.................. 9.19 35,255 3,608 10.23 Consumer........................ 8.50 8,128 739 9.09 ------- -------- ------- ------ Total loans................... 8.54 140,353 12,258 8.73 Securities....................... 5.54 20,940 1,335 6.38 Interest-earning deposits with banks........................... 3.89 12,800 362 2.83 ------- -------- ------- ------ Total interest-earning assets...................... 8.10 174,093 13,955 8.02 Noninterest-earning assets....... 15,825 -------- Total assets.................. $189,918 -------- -------- INTEREST-BEARING LIABILITIES: Certificates of deposit.......... 4.58 % $ 75,682 $ 3,459 4.57 % Savings accounts................. 2.64 29,743 1,039 3.49 Interest-bearing demand deposits........................ 2.09 18,090 369 2.04 ------- -------- ------- ------ Total interest-bearing deposits.................... 3.74 123,515 4,867 3.94 Federal Home Loan Bank advances........................ 5.41 25,875 1,788 6.91 Other borrowings................. 10.17 9,868 876 8.88 ------- -------- ------- ------ Total interest-bearing liabilities................. 4.08 159,258 7,531 4.73 Demand and other noninterest- bearing deposits................ 10,621 Other noninterest-bearing liabilities..................... 923 Shareholders' equity............. 19,116 -------- Total liabilities and shareholders' equity........ $189,918 -------- -------- Net interest income.............. $ 6,424 ------- ------- Net interest spread.............. 4.02 % 3.29 % ------ ------ ------ ------ Net interest margin.............. 4.54 % 3.69 % ------ ------ ------ ------ Average interest-earning assets to average interest-bearing liabilities..................... 114.52 % 109.32 % ------ ------ ------ ------
- --------------- (1) Loans on a nonaccrual status have been included in the computation of average balances. (2) Six-month yields are presented on an annualized basis. (3) Real estate average balances include real estate construction loans. 21 24 The following table sets forth the amounts of the changes in the Company's consolidated net interest income attributable to changes in volume and changes in interest rates. Changes attributable to the combined effect of volume and interest rates have been allocated proportionately to the changes due to volume and the changes due to interest rates.
SIX MONTHS ENDED JUNE 30, 1996 VS. SIX MONTHS ENDED JUNE 30, 1995 INCREASE (DECREASE) DUE TO ------------------------------- VOLUME RATE TOTAL ------ ----- ------ (IN THOUSANDS) Interest Income: Loans: Commercial............................................. $1,632 $(330) $1,302 Real estate(1): One- to four-family residential...................... (234) (33) (267) Five or more family residential and commercial properties......................... 1,732 (148) 1,584 Consumer............................................... 443 (97) 346 ------ ----- ------ Total loans....................................... 3,573 (608) 2,965 Securities................................................ 149 7 156 Interest-earning deposits with banks...................... 267 (8) 259 ------ ----- ------ Total interest revenue............................ $3,989 ($609) $3,380 ------ ----- ------ ------ ----- ------ Interest Expense: Certificates of deposit................................... $ 179 $ 218 $ 397 Savings accounts.......................................... (73) 19 (54) Interest-bearing demand deposits.......................... 1,263 (3) 1,260 ------ ----- ------ Total interest on deposits........................ 1,369 234 1,603 Federal Home Loan Bank advances........................... 268 (48) 220 Other borrowings.......................................... (2) (11) (13) ------ ----- ------ Total interest expense............................ $1,635 $ 175 $1,810 ------ ----- ------ ------ ----- ------
22 25
1995 COMPARED TO 1994 1994 COMPARED TO 1993 INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO ----------------------------- --------------------------- VOLUME RATE TOTAL VOLUME RATE TOTAL ------ ------ ------- ------ ----- ------ (IN THOUSANDS) Interest Income: Loans: Commercial......................... $2,728 $ 986 $ 3,714 $3,244 $ 338 $3,582 Real estate(1): One- to four-family residential................... 1,693 885 2,578 435 (161) 274 Five or more family residential and commercial properties..... 3,002 85 3,087 2,040 (324) 1,716 Consumer........................... 1,439 230 1,669 1,205 (45) 1,160 ----- ------ ------- ----- ----- ------ Total loans................... 8,862 2,186 11,048 6,924 (192) 6,732 Securities........................... (41 ) 76 35 (26 ) 23 (3) Interest-earning deposits with banks.............................. 56 (75) (19) 203 (231) (28) ----- ------ ------- ----- ----- ------ Total interest revenue........ $8,877 $2,187 $11,064 $7,101 ($400) $6,701 ----- ------ ------- ----- ----- ------ ----- ------ ------- ----- ----- ------ Interest Expense: Certificates of deposit.............. $2,424 $1,546 $ 3,970 $2,130 $ 6 $2,136 Savings accounts..................... (257 ) 31 (226) 195 (339) (144) Interest-bearing demand deposits..... 1,261 1,076 2,337 436 9 445 ----- ------ ------- ----- ----- ------ Total interest on deposits.... 3,428 2,653 6,081 2,761 (324) 2,437 Federal Home Loan Bank advances...... 200 143 343 (276 ) (352) (628) Other borrowings..................... (324 ) (17) (341) (421 ) 157 (264) ----- ------ ------- ----- ----- ------ Total interest expense........ $3,304 $2,779 $ 6,083 $2,064 ($519) $1,545 ----- ------ ------- ----- ----- ------ ----- ------ ------- ----- ----- ------
- --------------- (1) Real estate includes real estate construction loans. RESULTS OF OPERATIONS Six Months Ended June 30, 1996 and 1995 Net Income. Net income for the six months ended June 30, 1996 was $1.8 million, or $0.52 per share, compared to $1.0 million, or $0.30 per share, for the same period in 1995. This represented an increase of 75.7% and 73.3% in net income and earnings per share, respectively. Net income for the first half of 1996 was positively affected by an increase in net interest income. The Company continued to benefit from the utilization of its net operating loss carryforwards for federal income tax purposes. Therefore, the Company had no federal income tax provision for the six months ended June 30, 1996. Had the earnings been fully taxable, net income would have been $1.2 million. See "Income Taxes." The Company opened four new branch offices during 1995, three in Pierce County and one in South King County. Construction began in the first quarter of 1996 on a permanent facility for the Gig Harbor branch. During the second quarter a new Spanaway branch opened in a temporary facility. The Spanaway branch office is the tenth branch to open since Columbia Bank's major Pierce County expansion began in August 1993, and the Puyallup branch, which opened in September 1996, is the eleventh branch to open since that time, bringing Columbia Bank's total number of branches to 15. The Company also intends to build a branch at Northwest Landing in Dupont, near the site of Intel Corporation's new manufacturing facility. Additional expansion opportunities in the near future include another Puyallup location, the Edgewood/Milton area, the Tacoma Westside, Stadium and Lincoln business districts and a second Bellevue branch. Establishment of new branch offices and relocation of existing temporary branch offices can be expected to require significant capital investment in 1996 and beyond. New branch offices are often not profitable for the first year after opening. 23 26 Net Interest Income. Net interest income for the six months ended June 30, 1996 increased by $1.6 million, or 19.8%, as compared to the first six months of 1995. The increase in net interest income for the first six months of 1996 was largely due to the overall growth of the Company. Net interest income in the first half of 1996 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. Average interest-earning assets for the first six months of 1996 increased by $96.6 million, compared with the same period in 1995, while average interest-bearing liabilities increased by only $80.0 million. For the first six months of 1996, net interest margin (net interest income divided by average interest-earning assets) decreased to 4.55% in 1996 from 4.96% in 1995. The decrease in net interest margin was primarily the result of reduced spreads on earning assets. While interest-earning assets grew during the first six months of 1996, the average yield on interest-earning assets decreased to 8.66%, from 9.21% in the same period of 1995. In comparison, the average cost of interest-bearing liabilities decreased to 4.80% during the first six months of 1996 from 4.90% in the same period in 1995. The decrease in net interest margin and spread was primarily due to lower yields obtained on loans as a result of a planned change in loan mix from higher yielding commercial real estate loans to high quality, but lower yielding commercial loans and to increased competition in the Company's market area. Provision for Loan Losses. Net loan charge-offs amounted to $97,000 for the first six months of 1996, compared with net loan charge-offs of $142,000 for the same period of 1995. The Company's provision for loan losses during the first six months of 1996 increased to $760,000, compared with $600,000 for the first six months of 1995. The allowance for loan losses increased by $663,000 to 1.10% of loans (excluding loans held for sale) at June 30, 1996, as compared to 0.98% of loans (excluding loans held for sale) at June 30, 1995. Management considers the allowance for loan losses at June 30, 1996 to be adequate to cover anticipated loan losses based on management's assessment of various factors affecting the loan portfolio, including the level of problem loans, business conditions, estimated collateral values, loss experience and credit concentrations. Noninterest Income. Total noninterest income increased $640,000, or 34.9%, for the first six months of 1996, compared with the same period in 1995. Increases in noninterest income in the first half of 1996 were centered in account service charges, bank card revenue, and mortgage banking income. Noninterest Expense. Total noninterest expense increased $1.3 million, or 15.5%, in the first six months of 1996 compared with the same period in 1995. The increase was primarily due to personnel and occupancy costs associated with the Company's expansion as well as bank card, data processing and other expense. Total noninterest expense was 78.3% of adjusted revenue (the sum of net interest income plus noninterest income, less nonrecurring items) for the first six months of 1996 as compared to 83.1% for the same period in 1995. The portion of compensation expense related to loan originations is deferred and deducted from interest income over the life of the related loans. In the third quarter of 1995, the Company modified its estimates of loan origination costs to be deferred, which resulted in increased deferral of compensation expense. The 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. Regulatory assessments increased by approximately $612,000 in the third quarter of 1996 due to a one-time special assessment, required by recently enacted legislation, to recapitalize the SAIF fund of the FDIC. See "Recent Developments -- Effect of Recent Legislation." Management is currently evaluating a proposed sale of Columbia Bank's credit card portfolio which, if consummated, will result in a one-time gain. The sale of the business is not expected to have a material effect on results of operations in future periods. 24 27 Set forth below is a schedule showing additional detail concerning increases and decreases in the Company's noninterest expense during the first six months of 1996 compared with 1995.
SIX MONTHS ENDED JUNE 30, -------------------------------- INCREASE/ 1996 (DECREASE) 1995 ------ ---------- ------ (IN THOUSANDS) Compensation and employee benefits.......................... $4,989 $ 968 $4,021 Less: loan origination costs.............................. 1,362 1,078 284 ------ ---------- ------ Net compensation and employee benefits (as reported)........ 3,627 (110) 3,737 Occupancy................................................... 1,616 272 1,344 Professional services....................................... 278 58 220 Advertising and promotion................................... 374 36 338 Printing and supplies....................................... 192 -- 192 Regulatory assessments...................................... 184 (136) 320 Data processing............................................. 363 68 295 Gains on real estate owned.................................. -- 264 (264) Telephone & network......................................... 166 40 126 Postage & delivery.......................................... 173 36 137 ATM network................................................. 87 59 28 Bank card................................................... 651 200 451 Taxes, licenses and fees.................................... 321 50 271 Other....................................................... 1,336 420 916 ------ ---------- ------ Total noninterest expense......................... $9,368 $1,257 $8,111 ------ ---------- ------ ------ ---------- ------
In February 1996, the Company recorded a loss of $41,000 on the sale of its only "real estate owned" property. Also, in March 1996, the Company recorded a loss of $38,000 on a branch real estate transaction. In June 1996, the Company wrote off $135,000 due to the abandonment of a potential branch site. Income Taxes. Effective January 1, 1993, the Company adopted the FASB's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which requires the use of the "asset and liability" method of accounting for income taxes. Deferred income tax represents the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Upon adoption of SFAS 109, the Company recorded a deferred tax asset with an equal valuation allowance due to uncertainties regarding the ability to ultimately recognize the tax benefits from the net operating losses and certain tax credits. The Company did not record an income tax expense from that date through June 30, 1996 since the expected income tax expense, calculated by applying statutory tax rates to income before income taxes, was offset by a reduction in the valuation allowance established when the Company adopted SFAS 109. At June 30, 1996, the deferred tax asset was $3.0 million and was partially offset by the valuation allowance of $2.1 million. The deferred tax asset is measured by applying tax rates to the difference between the carrying value and the tax basis of assets and liabilities. Management anticipates that expected income tax expense for 1996 will be substantially offset by a reduction in the valuation allowance established when the Company adopted SFAS 109. Management anticipates that the Company will record a provision for income taxes during 1997. 25 28 Significant components of the Company's deferred tax assets and liabilities at June 30, 1996 and December 31, 1995 and 1994 are as follows:
DECEMBER 31, JUNE 30, --------------------- 1996 1995 1994 -------- ------- ------- (IN THOUSANDS) Deferred tax assets: NOL carryforward.................................... $ 733 $ 1,478 $ 2,799 Tax credit carryover................................ 673 595 595 Allowance for loan losses........................... 1,499 1,274 922 Contributions....................................... 129 97 56 -------- ------- ------- Total deferred tax assets........................ 3,034 3,444 4,372 Less: valuation allowance........................... (2,051) (2,606) (3,580) -------- ------- ------- Subtotal......................................... 983 838 792 Deferred tax liabilities: FHLB stock dividends................................ (601) (551) (487) SAIF special assessment............................. (104) -- -- Depreciation........................................ (26) (35) (53) -------- ------- ------- Total deferred tax liabilities................... (731) (586) (540) -------- ------- ------- Net deferred tax assets........................ $ 252 $ 252 $ 252 -------- ------- ------- -------- ------- -------
For federal income tax purposes at June 30, 1996, the Company has available net operating loss carryforwards to reduce future taxable income approximately as follows:
EXPIRATION DATE JUNE 30, DECEMBER 31, DECEMBER 31, 1996 1995 ---------------------------------------------------------------- -------- ------------ (IN THOUSANDS) 2002............................................................ $ -- $ 715 2003............................................................ -- 648 2004............................................................ 41 876 2005............................................................ 75 75 2006............................................................ 223 223 2008............................................................ 1,740 1,740 2009............................................................ 76 76 ------- ----------- Total net operating loss carryforwards................ $2,155 $4,353 ------- ----------- ------- -----------
Additionally, at June 30, 1996, the Company had alternative minimum tax, investment and rehabilitation tax credit carryforwards of approximately $673,000, of which $581,000 expires in 1997, $14,000 expires in 1999, and the remainder in 2010. However, because of annual limitations on the utilization of net operating loss carryforwards and because the Internal Revenue Code of 1986, as amended, (the "Code") requires that net operating loss carryforwards be utilized before tax credit carryforwards, the Company may not receive an income tax benefit from the tax credit carryforwards, which may expire unused. 26 29 A reconciliation of the Company's effective income tax rate with the federal statutory tax rate is as follows:
YEAR ENDED DECEMBER 31, SIX MONTHS ------------------------------------------------------ ENDED JUNE 30, 1996 1995 1994 1993 ---------------- ---------------- ---------------- ---------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- ------ ------- (DOLLARS IN THOUSANDS) Income (tax) benefit based on statutory rate................... $(625 ) (34)% $(937 ) (34)% $ 209 34% $ 918 34% Increase (reduction) resulting from other nondeductible items........ 70 4 (37 ) (1) (27 ) (4) -- -- Valuation allowance................ 555 30 974 35 (182 ) (30) (918 ) (34) ----- ------- ----- ------- ----- ------- ----- ------- Income tax......................... $ -- --% $ -- --% $ -- --% $ -- --% ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- -------
Years Ended December 31, 1995, 1994 and 1993 Net Income. For 1995, the Company reported net income of $2.8 million, compared with a net loss of $614,000 in 1994 and a net loss of $2.4 million in 1993. Net income per share amounted to $0.79 in 1995, compared with a net loss per share of $0.18 in 1994 and a net loss per share of $1.06 in 1993. The loss in 1993 was primarily due to the opening of Columbia Bank in Tacoma in August 1993 and the planned expansion and aggressive growth strategy of Columbia Bank that began in that year, while 1994 earnings moved closer to break-even as increased revenues related to the expansion began to be realized. Net income for 1995 was positively affected by increases in net interest margin and service charges and fees. Net Interest Income. Net interest income increased $5.0 million, or 43.0%, in 1995 and $5.2 million, or 80.3%, in 1994. Net interest margin increased to 4.78% for 1995, compared with 4.54% in 1994 and 3.69% in 1993. Net interest spread increased to 4.10% in 1995, compared with 4.02% in 1994 and 3.29% in 1993. The increase in net interest margin reflected a more favorable mix of funding sources supporting earning assets. This change in mix was the result of lower-cost deposits growing at a faster rate than higher-cost deposits and borrowings. The increase in net interest income in each year was largely due to the overall growth of the Company. Net interest income in each year was also 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. Average interest-earning assets increased $91.8 million and $80.8 million in 1995 and 1994, respectively, while average interest-bearing liabilities increased only $77.7 million and $63.3 million, respectively, during the same periods. Provision for Loan Losses. For the years ended December 31, 1995, 1994 and 1993, net loan charge-offs amounted to $213,000, $281,000 and $49,000, respectively. The Company's provision for loan losses was $1.3 million for 1995, compared with $1.0 million for 1994 and $502,000 for 1993. During 1995, the allowance for loan losses increased by $1.0 million to 1.06% of loans (excluding loans held for sale) at December 31, 1995, from 1.01% of loans (excluding loans held for sale) at December 31, 1994. Noninterest Income. Total noninterest income increased $995,000, or 33.2%, in 1995 and $953,000, or 46.6%, in 1994. Included in total noninterest income in 1995 and 1993 were $39,000 and $913,000 of nonrecurring gains on sales of securities and loans. Excluding these gains, which can fluctuate significantly from period to period, noninterest income increased $964,000, or 32.2%, in 1995 and $1.9 million, or 165.1%, in 1994. Mortgage banking revenue decreased $388,000 in 1995 after increasing $270,000 and $452,000 in 1994 and 1993, respectively. The decrease in 1995 is attributable to less emphasis on mortgage banking after discontinuance of the separate mortgage subsidiary and a softer market for residential mortgage loans, while increases in 1994 and 1993 were due primarily to an increase in loan originations and sales of mortgage loans. Income from bank 27 30 cards and other income increased $699,000, or 71.9%, in 1995 and $910,000 in 1994 as a result of marketing efforts in 1995 and 1994. Noninterest Expense. Total noninterest expense increased $2.5 million, or 17.9%, in 1995 and $3.4 million, or 31.7%, in 1994. Increases in noninterest expense were primarily related to compensation and employee benefits, Washington Business and Occupation taxes, bank card expense, data processing expenses and advertising and promotion. These increases were due to the continuing expansion of the Company. Included in noninterest expense for 1993 were pre-opening expenses related to Columbia Bank's opening in Tacoma of approximately $1.0 million, consisting primarily of salaries, advertising, premises, furniture, equipment and software expense. Also impacting noninterest expense were expenses relating to the Company's merger with Columbia National Bankshares, Inc. which was accounted for in a manner similar to a pooling-of-interests due to common ownership, a writedown of data processing equipment and software at the Company's former savings bank subsidiary and expenses related to the merger of this subsidiary into Columbia Bank in 1994. Set forth below is a schedule showing additional detail concerning increases and decreases in the Company's noninterest expense for 1995 as compared with 1994:
YEAR ENDED DECEMBER 31, ---------------------------------- INCREASE/ 1995 (DECREASE) 1994 ------- ---------- ------- (IN THOUSANDS) Compensation and employee benefits.................... $ 8,427 $1,339 $ 7,088 Less: loan origination costs........................ 1,088 219 869 ------- ---------- ------- Net compensation and employee benefits (as reported)........................................... 7,339 1,120 6,219 Occupancy............................................. 2,845 43 2,802 Professional services................................. 436 9 427 Advertising and promotion............................. 634 126 508 Printing and supplies................................. 375 (22) 397 Regulatory assessments................................ 482 7 475 Data processing....................................... 615 152 463 Gains on real estate owned............................ (400) (86) (314) Telephone & network................................... 271 (49) 320 Postage & delivery.................................... 223 76 147 ATM network........................................... 51 (21) 72 Bank card............................................. 1,019 346 673 Taxes, licenses and fees.............................. 711 386 325 Other................................................. 1,946 424 1,522 ------- ---------- ------- Total noninterest expense................... $16,547 $2,511 $14,036 ------- ---------- ------- ------- ---------- -------
Excluding nonrecurring expenses such as gains and costs related to real estate owned, which can vary significantly from period to period, noninterest expense increased approximately $2.5 million, or 17.5%, and $5.4 million, or 59.5%, in 1995 and 1994, respectively. Total noninterest expense was 80.5%, 96.3% and 125.9% of adjusted revenues (the sum of net interest income and noninterest income less non-recurring gains) for 1995, 1994 and 1993, respectively. Income Taxes. The Company did not record income tax expense from January 1, 1993 through December 31, 1995 since the expected income tax expense, calculated by applying statutory tax rates to income before income taxes, was offset by a reduction in the valuation allowance established when the Company adopted SFAS 109. For additional information concerning deferred tax assets and liabilities, operating loss carryforwards and reconciliation of the Company's effective income tax rate, see "-- Results of Operations -- Six Months Ended June 30, 1996 and 1995 -- Income Taxes" and the Notes to Consolidated Financial Statements. 28 31 LIQUIDITY AND SOURCES OF FUNDS The Company's primary sources of funds are customer deposits, brokered deposits and advances from the Federal Home Loan Bank of Seattle (the "FHLB"). 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. Total deposits increased 11.3% to $402.9 million at June 30, 1996 from $361.9 million at December 31, 1995, and 34.7% at December 31, 1995 from $268.7 million at December 31, 1994. FHLB advances increased $12.0 million during the first six months of 1996 to $37.0 million. Advances outstanding from the FHLB totaled $25.0 million at December 31, 1995 and $17.0 million at December 31, 1994. FHLB advances are secured by one- to four-family real estate mortgages and certain other assets. See "Business -- Source of Funds -- Borrowings." At June 30, 1996 the maximum borrowing line from the FHLB was $97.0 million. 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. To fund the growth of the Company, management's strategy has been to make use of brokered and other wholesale deposits, as well as FHLB advances, while working to build core deposits as rapidly as possible through the Company's development of commercial banking relationships and its branch office network. Brokered and wholesale deposits can be more expensive and more volatile in comparison with core deposits obtained in the Company's market area. The deposit increase of $41.0 million during the first six months of 1996 occurred entirely in "core deposits". Brokered and other wholesale deposits (excluding public deposits) decreased $13.2 million to $35.1 million, or 8.7% of total deposits at June 30, 1996, from $48.3 million, or 13.3% of total deposits at December 31, 1995, though management anticipates continued, and perhaps increasing, use of such deposits to fund increasing loan demand. However, management anticipates use of brokered deposits will decrease over time as a percent of total deposits. Brokered and other wholesale deposits (excluding public deposits) amounted to $48.3 million and $60.8 million at December 31, 1995 and 1994, respectively. Brokered and other wholesale deposits are summarized below. Such deposits had an average interest rate of 5.63%, 5.94%, 5.21% and 4.53% at June 30, 1996, December 31, 1995, 1994 and 1993, respectively.
DECEMBER 31, ------------------------------------------------------------ JUNE 30, 1996 1995 1994 1993 ------------------ ------------------ ------------------ ------------------ PERCENT PERCENT PERCENT PERCENT OF TOTAL OF TOTAL OF TOTAL OF TOTAL AMOUNT DEPOSITS AMOUNT DEPOSITS AMOUNT DEPOSITS AMOUNT DEPOSITS ------- -------- ------- -------- ------- -------- ------- -------- (DOLLARS IN THOUSANDS) Maturing within one year........ $31,691 7.9% $41,546 11.5% $37,642 14.0% $6,947 4.2% Maturing after one year, but within three years............ 3,371 0.8 6,724 1.8 22,542 8.4 19,118 11.6 Maturing after three years, but within ten years.............. -- -- -- -- 596 0.2 1,291 0.7 ------- --- ------- ---- ------- ---- ------- ---- Total brokered and other wholesale deposits.... $35,062 8.7% $48,270 13.3% $60,780 22.6% $27,356 16.5% ======= === ======= ==== ======= ==== ======= ====
ASSET/LIABILITY MANAGEMENT The mismatch between maturities and interest-rate sensitivities of balance sheet items results in interest rate risk. The Company maintains asset/liability management policies that provide guidelines for controlling exposure to interest rate risk. Although analysis of an institution's interest rate gap (the difference between the repricing of interest-earning assets and interest-bearing liabilities during a given period of time) is one standard tool for the measurement of the exposure to interest rate risk, the Company believes that, because interest rate gap analysis does not address all factors that can affect earnings performance, such as early withdrawal of time deposits and prepayment of loans, it should not be used as the primary 29 32 indicator of exposure to interest rate risk and the related volatility of net interest income in a changing interest rate environment. The following tables set forth the estimated maturity or repricing and the resulting interest rate gap of the Company's interest-earning assets and interest-bearing liabilities at June 30, 1996. The amounts in the table are derived from the Company's internal data, and because certain assumptions have been utilized in presenting this data, the amounts may not be consistent with financial information appearing elsewhere in this Prospectus that has been prepared in accordance with generally accepted accounting principles. The amounts in the tables also could be significantly affected by external factors, such as changes in prepayment assumptions, early withdrawal of deposits and competition. 30 33
ESTIMATED MATURITY OR REPRICING WITHIN --------------------------------------------------------------- 0-3 4-12 1-5 5-10 MORE THAN MONTHS MONTHS YEARS YEARS 10 YEARS TOTAL -------- -------- -------- ------- --------- -------- (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: Interest-earning deposits... $ 10,415 $ -- $ -- $ -- $ -- $ 10,415 Securities.................. 2,180 6,143 18,230 1,448 4,082 32,083 Loans: Business and commercial real estate............ 143,976 7,344 27,940 5,401 1,806 186,467 One- to four-family...... 75,360 24,910 52,749 3,539 11,293 167,851 Consumer................. 5,384 21,748 19,464 813 1,052 48,461 -------- -------- -------- ------- -------- -------- Total interest-earning assets............ $237,315 $ 60,145 $118,383 $11,201 $18,233 $445,277 -------- -------- -------- ------- -------- -------- -------- -------- -------- ------- -------- -------- Noninterest-earning assets................... -- 726 -- -- 35,609 36,335 -------- -------- -------- ------- -------- -------- Total assets........ $237,315 $ 60,871 $118,383 $11,201 $53,842 $481,612 -------- -------- -------- ------- -------- -------- -------- -------- -------- ------- -------- -------- Percent of total interest- earning assets........... 53.29% 13.51% 26.59% 2.52% 4.09% 100.00% -------- -------- -------- ------- -------- -------- -------- -------- -------- ------- -------- -------- INTEREST-BEARING LIABILITIES: Deposits: Money market checking....... $107,245 $ -- $ -- $ -- $ -- $107,245 NOW accounts................ 6,773 -- 27,090 -- -- 33,863 Savings accounts............ 7,104 -- 7,104 7,104 21,312 Time certificates of deposit.................. 61,605 81,932 34,381 11 -- 177,929 FHLB advances............... 27,000 -- 10,000 -- -- 37,000 Convertible subordinated notes.................... -- -- -- 2,363 -- 2,363 -------- -------- -------- ------- -------- -------- Total interest-bearing liabilities....... $209,727 $ 81,932 $ 71,471 $ 9,478 $ 7,104 $379,712 -------- -------- -------- ------- -------- -------- -------- -------- -------- ------- -------- -------- Noninterest-bearing liabilities and equity... 50,068 -- 12,517 -- 39,315 101,900 -------- -------- -------- ------- -------- -------- Total liabilities and equity........ $259,795 $ 81,932 $ 83,988 $ 9,478 $46,419 $481,612 -------- -------- -------- ------- -------- -------- -------- -------- -------- ------- -------- -------- Percent of total interest- earning assets........... 47.10% 18.40% 16.05% 2.13% 1.60% 85.28% -------- -------- -------- ------- -------- -------- -------- -------- -------- ------- -------- -------- Rate sensitivity gap.......... $ 27,588 ($21,787) $ 46,912 $ 1,723 $11,129 $ 65,565 Cumulative rate sensitivity gap............. $ 27,588 $ 5,801 $ 52,713 $54,436 $65,565 Rate sensitivity gap as a percentage of interest-earning assets..... 6.19% (4.89)% 10.54% 0.39% 2.49% 14.72% Cumulative rate sensitivity gap as a percentage of interest-earning assets..... 6.19% 1.30% 11.84% 12.23% 14.72% -------- -------- -------- ------- -------- -------- -------- -------- ------- --------
As stated above, certain shortcomings are inherent in the method of analysis presented in the foregoing tables. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates. Additionally, certain assets, such as adjustable-rate mortgages, have features which restrict changes 31 34 in the interest rates of such assets both on a short-term basis and over the lives of such assets. Further, in the event of a change in market interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of a substantial increase in market interest rates. CAPITAL RESOURCES Shareholders' equity at June 30, 1996 was $33.8 million compared with $32.0 million at December 31, 1995. The increase was primarily due to net income during the first six months of 1996, partially offset by an increase in the reserve for unrealized losses on securities available for sale. Shareholders' equity was 7.0% and 7.5% of total period-end assets at June 30, 1996 and December 31, 1995, respectively. Shareholders' equity at December 31, 1995, was $32.0 million compared with $28.9 million at December 31, 1994. The increase was due to net income for the year of $2.8 million and a decrease in the reserve for unrealized losses on securities available for sale. Shareholders' equity was 7.5% and 9.0% of total assets at December 31, 1995 and December 31, 1994, respectively. The Company plans to contribute approximately $10.0 million of the net proceeds of the offering to Columbia Bank, primarily to fund additional loan growth. The remainder of the net proceeds will be used to repay $3.0 million borrowed under a line of credit, which is secured by the outstanding shares of common stock of Columbia Bank, and for general corporate purposes. Management presently intends to retain earnings, if any, to support anticipated growth. Accordingly, the Company does not intend to pay cash dividends on the Common Stock in the foreseeable future. See "Dividends." Columbia Bank is subject to minimum capital requirements. See "Supervision and Regulation -- Banking Subsidiary." The Company has established a line of credit with a commercial bank, secured by Columbia Bank stock, which can be used to augment the capital of Columbia Bank. At September 30, 1996, $3.0 million was outstanding. A portion of the proceeds will be used to pay off that loan. See "Use of Proceeds." As the following table indicates, at June 30, 1996, and as adjusted to reflect the issuance and sale of the Common Stock, and the application of the net proceeds therefrom, Columbia Bank exceeded regulatory capital requirements:
JUNE 30, 1996 --------------------------------------------------------- MINIMUM WELL-CAPITALIZED ACTUAL AS ADJUSTED REQUIREMENT REQUIREMENT RATIO RATIO ----------- ---------------- ------ ----------- Tier 1 risk-based capital................. 4.00% 6.00% 9.56 % 11.82% Total risk-based capital.................. 8.00% 10.00% 10.68 % 12.91% Leverage ratio............................ 3.00% 5.00% 8.12 % 10.08%
Management expects that the net proceeds of the offering, together with internally generated funds, will allow Columbia Bank to remain "well-capitalized" for regulatory purposes, although there can be no assurance that additional capital will not be required in the near future due to greater-than-expected growth, net losses or a combination thereof. IMPACT OF INFLATION AND CHANGING PRICES The primary impact of inflation on the Company's operations is increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. 32 35 RECENT FINANCIAL ACCOUNTING PRONOUNCEMENTS In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires the Company to elect to account for stock-based compensation on a fair value basis or an intrinsic value basis. The intrinsic value basis is currently used by the Company and is the accounting principal prescribed by Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). SFAS 123 requires disclosure in the footnotes of the pro forma impact on net income and earnings per share of the difference between compensation expense using the intrinsic value method and the fair value method. The adoption of SFAS 123 is required for the fiscal year ended December 31, 1996. The Company expects to continue to apply APB 25 for measurement of stock compensation and will provide disclosure required by SFAS 123 beginning in fiscal year 1996. In June 1996, the FASB issued Statement of Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). SFAS 125 requires the Company to recognize all financial assets and servicing that it controls and liabilities that it has incurred after a transfer of financial assets. The Company must also "derecognize" financial assets when control has been surrendered and must derecognize liabilities when extinguished. SFAS 125 is not expected to have a significant impact on the Company. 33 36 BUSINESS GENERAL The Company was originally organized in 1988 under the name "First Federal Corporation" in connection with the acquisition by an investor group, which included recently deceased director emeritus Stanley Rose and current director Sidney Snyder, of a savings association, which was later named Columbia Savings Bank, a Federal Savings Bank (the "Savings Bank"). In 1990, an investor group headed by Mr. Espe and financed in part by NorCap, LLC acquired from Mr. Rose a controlling interest in the Company, a second corporation, Columbia National Bankshares, Inc. ("CNBI"), and CNBI's sole subsidiary, Columbia National Bank, located in Longview, Washington. See "Security Ownership of Certain Beneficial Owners and Management" and "Certain Transactions -- NorCap Options". In connection with the 1993 reorganization of the Company, CNBI was merged into the Company, Columbia National Bank was merged into the newly chartered Columbia State Bank and additional management was added. In 1994, the Savings Bank was merged into Columbia Bank. The 1993 reorganization was undertaken in order to take advantage of commercial banking business opportunities resulting from increased consolidation of banks in the Company's principal market area, primarily through acquisitions by out-of-state holding companies, and the resulting dislocation of customers. In August 1993, the Company completed a public offering of common stock with net proceeds of approximately $17.2 million, of which the Company contributed approximately $16.3 million to the capital of Columbia Bank. In connection with the reorganization, the Company moved its headquarters to Tacoma, Washington, with the intent of focusing on growth opportunities in the Tacoma metropolitan area and contiguous parts of the Puget Sound region. 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 business strategy of the Company 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. As a result of the Company's strong commitment to highly personalized customer service, its varied products, and the longstanding community presence of its managers, lending officers and branch personnel, the Company believes it is well positioned to attract new customers and to increase its market share in lending and deposits. STRATEGY The Company's goal is to create, over the next several years, a well-capitalized, customer-focused Pacific Northwest commercial banking institution with a significant presence in selected markets and total assets in excess of $1.0 billion. Management believes that the ongoing consolidation in its principal market area affords an opportunity for aggressive growth in loans and deposits. The Company's growth strategy consists of the following elements: - Focus on relationship lending to small and medium-sized businesses, professionals and other individuals whom the Company believes are underserved by larger banks in its market area and are attracted by the Company's "customer first" philosophy. - Fund loan growth through the creation of a branch system catering primarily to retail depositors, supplemented by business banking customer deposits and other borrowings. - Continue growth in the Tacoma metropolitan area and selectively expand into neighboring King and Thurston Counties. - Control credit risk through established loan underwriting and monitoring procedures, loan concentration limits, product and industry diversification, and the hiring of experienced lending personnel with a high degree of familiarity with their market area. 34 37 Focus on Relationship Lending. The Company focuses on lending to small and medium-sized businesses, professionals and other individuals who value high levels of customer service from a locally based institution. The Company believes that there are significant commercial banking business opportunities arising from the ongoing consolidation of banks in its principal market area, primarily through acquisitions by out-of-state holding companies, and the resulting dislocation of customers. Management believes that many business customers of previously acquired banks are dissatisfied with low levels of service and the lack of personal contact, flexibility and local decision-making authority at these institutions, and thus are willing to transfer their primary banking relationship to a customer-service oriented institution like the Company which can be more responsive to their specific needs. As part of its effort to provide responsive service to its target customers, the Company markets a varied menu of relationship banking products, including private banking and cash management services. Management continually strives to develop a business culture in which customers are accorded the highest priority in all aspects of the Company's operations. This "customer first" philosophy is combined with the Company's emphasis on personalized, local decision-making in each of the markets it serves. Create a Branch-Based Deposit Franchise. In order to fund its lending activities, the Company is establishing a branch system catering primarily to retail depositors, supplemented by business banking customer deposits and other borrowings. The Company believes this mix of funding sources will enable it to expand its commercial lending activities rapidly while establishing a stable core deposit base. Additionally, the Company's strategically placed branch offices allow for increased contact with customers. While the Company's primary lending focus will continue to be on business lending, management believes that its consumer deposit and lending activities will produce significant benefits, including increased core deposits and greater loan portfolio diversification. Geographic Expansion. The Company currently has regulatory approval to open four additional branches in Pierce County, and anticipates opening several more branches in the next few years to strengthen its local market position and capitalize on expansion opportunities resulting from the strong demand for a locally based banking institution. The Company also currently anticipates expansion into neighboring Thurston County (the location of Olympia, Washington's state capitol) and parts of neighboring King County, such as Bellevue and surrounding areas and the Auburn and Kent Valley areas. The Company plans to effect its growth strategy through a combination of growth at existing branch facilities, new branch openings and acquisitions. Typically, expansion into new markets will be in connection with the hiring of an experienced branch manager and/or lending officers with strong community ties and banking relationships. Control Credit Risk. Management considers the maintenance of high asset quality, with corresponding low levels of nonperforming assets and charge-offs, to be of utmost importance as it pursues its growth strategy. The Company has implemented loan underwriting and monitoring procedures and loan concentration limits which management believes permit continued portfolio expansion without materially increasing credit risk. The Company will also seek to control credit risk as it grows through increased product and industry diversification, by expanding its loan product offerings and related services, and through the hiring of experienced lending personnel with a high degree of familiarity with their market area. MARKET AREA The Company's principal market area is the Tacoma metropolitan area and contiguous parts of the Puget Sound region of Washington state. The economy of that 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 Microsoft and the establishment of numerous research and biotechnology firms. The Washington economy and that of the Puget Sound region generally have experienced moderate growth and stability in recent years. According to the Puget Sound Economic Forecaster, a regional publication providing economic forecasts and 35 38 commentary, the greater Puget Sound economy is projected to expand at nearly twice the national rate for the years 1997 through 1999. The region is projected to add 220,000 new jobs and 290,000 new residents during this time. Boeing, the region's largest employer, has announced increased production after recent years of declining orders for aircraft and related reductions in its work force. Microsoft and other major employers in the area east of Seattle also anticipate continued growth. Pierce County, the area in which the Company's expansion is primarily focused, is located in the South Puget Sound region. The economy of this area is well-diversified, with the principal industries being aerospace, shipping, military-related government employment, agriculture and forest products. Pierce County's economy is expected to benefit over the next few years because of Intel's decision to build a computer chip facility in DuPont and the expansion of the Matsushita semi-conductor plant in Puyallup, east of Tacoma. The Puget Sound Economic Forecaster predicts that Pierce County will likely have the strongest economic performance in the Puget Sound region through 1999. Forbes magazine recently published its prediction that the Tacoma area would be among the top twenty-five cities in the United States in terms of job growth, especially in the area of computers and semiconductors. Bellevue, where the Company has one office and may seek to open or acquire a second, is located in an area known as the "Eastside", a metropolitan area with a population of approximately 215,000 that includes several cities located east of Seattle. A large portion of the Eastside economy is linked to aerospace, construction, computer software and biotechnology industries. Microsoft is headquartered just north of Bellevue and several biotech firms are located on the Eastside. In recent years, the Eastside has experienced relatively rapid growth in population and employment, and household incomes in the Eastside are among the highest in Washington. The Company anticipates further expanding into neighboring south King County, which contains several residential communities whose employment base is supported by light industrial, aerospace and forest products industries. With its close proximity to Tacoma, this market area is considered an important natural extension of the Company's Pierce County market area. The Weyerhaeuser Corporation maintains its world headquarters in Federal Way, which is located in south King County adjacent to the King/Piece County line. The Auburn and Kent Valley areas to the east of Federal Way are also considered by management to be natural areas of expansion for the Company. Expansion south of Tacoma into Thurston County is also considered by management to be an extension of the Company's Pierce County market area. Olympia, with a population of approximately 38,000, and the neighboring community of Lacey, with a population of approximately 26,000, are the principal cities in Thurston County. As of April 1996, the county had an approximate population of 193,000. The area enjoys a stable economic climate due largely to state government employment and the proximity of the Fort Lewis army base and McChord Air Force Base. According to the Thurston County Regional Planning Council, out of a total civilian work force of 88,000, approximately 33% were employed by federal, state and local government. The area also has a significant population of retired military personnel. The Company's market area also includes the Longview and Woodland communities in southwestern Washington. The population of Cowlitz County, in which Longview and Woodland are located, is approximately 85,000. Cowlitz County's economy has become more diversified in recent years, but remains materially dependent on the forest products industry and, as a result, is relatively vulnerable to the cyclical downturns of that industry as well as environmental disputes. LENDING ACTIVITIES General The Company originates a wide variety of loans. Since its 1993 reorganization, the Company has significantly increased commercial business loans and consumer loans as a percentage of its total 36 39 loan portfolio. During the same period the percentage of loans consisting of multi-family and commercial real estate loans has also increased while single-family and real estate construction loan percentages have declined. The Company also emphasizes its private banking services to high income and high net worth individuals. The following table sets forth at the dates indicated the Company's loan portfolio composition by type of loan:
DECEMBER 31, -------------------------------------------------------------------------------------------- JUNE 30, 1996 1995 1994 1993 1992 1991 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- % OF % OF % OF % OF % OF % OF BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- (DOLLARS IN THOUSANDS) Commercial...... $132,251 32.9% $113,775 32.2% $ 72,829 27.1% $ 44,772 24.7% $ 16,511 13.7% $ 12,707 13.7% Real estate: One- to four-family residential... 69,364 17.3 67,991 19.3 76,260 28.3 55,804 30.8 53,161 44.0 53,084 57.5 Five or more family residential and commercial properties... 117,486 29.2 97,103 27.5 -- 25.5 45,193 25.0 30,681 25.4 22,776 24.6 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total real estate... 186,850 46.5 165,094 46.8 144,791 53.8 100,997 55.8 83,842 69.4 75,860 82.1 Real estate construction: One- to four-family residential... 23,870 6.0 22,741 6.5 17,411 6.5 16,328 9.0 9,408 7.8 -- -- Five or more family residential and commercial properties... 10,466 2.6 8,884 2.5 4,004 1.5 4,799 2.7 4,689 3.9 -- -- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total real estate construction... 34,336 8.6 31,625 9.0 21,415 8.0 21,127 11.7 14,097 11.7 -- -- Consumer........ 48,547 12.1 43,343 12.2 30,860 11.4 14,417 8.0 6,584 5.4 3,937 4.3 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Subtotal... 401,984 100.1 353,837 100.2 269,895 100.3 181,313 100.2 121,034 100.2 92,504 100.1 Less deferred loan fees and other......... (430) (0.1) (744) (0.2) (899) (0.3) (297) (0.2) (237) (0.2) (121) (0.1) -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total loans... $401,554 100.0% $353,093 100.0% $268,996 100.0% $181,016 100.0% $120,797 100.0% $ 92,383 100.0% -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Loans held for sale.......... $ 1,950 $ 1,367 $ 1,612 $ 1,777 $ 2,021 $ -- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
The following table presents at June 30, 1996, (i) the aggregate maturities of loans in the named categories of the Company's loan portfolio and (ii) the aggregate amounts of variable and fixed rate loans that mature after one year:
MATURING ------------------------------------------------------------- AFTER 5 WITHIN 1 YEAR 1-5 YEARS YEARS TOTAL ------------- -------------- ---------- --------- (DOLLARS IN THOUSANDS) Commercial............................ $ 113,285 $ 15,790 $3,176 $ 132,251 Real estate construction.............. 34,107 74 155 34,336 ------------ ------------ ---------- --------- Total....................... $ 147,392 $ 15,864 $3,331 $ 166,587 ------------ ------------ ---------- --------- ------------ ------------ ---------- --------- Fixed-rate loans...................... $ 13,459 $3,331 $ 16,790 Variable-rate loans................... 2,405 -- 2,405 ------------ ---------- --------- Total....................... $ 15,864 $3,331 $ 19,195 ------------ ---------- ---------
Commercial and Private Banking Lending Commercial loans increased to $132.3 million at June 30, 1996, representing 32.9% of its total loans, from $113.8 million at December 31, 1995 and $72.8 million at December 31, 1994. These increases at actual and annualized rates exceeding 30% per year reflect management's commitment to provide competitive commercial lending in the Company's primary market area. Commercial loans constitute a wide variety of lending products, including term loans, lines of credit and equipment financing. A broad range of short-to medium-term commercial loans, both collateralized and uncollateralized, is made available to businesses for working capital (including inventory and 37 40 receivable loans), business expansion (including acquisitions and improvement of real estate), and the purchase of equipment and machinery. In addition, in order to develop and maintain long-term multiple account banking relationships with its business customers, the Company's private banking department offers a wide range of lending and other products to owners or key employees of such businesses. Generally, commercial and private banking loans are underwritten on the basis of the borrower's ability to service the debt from cash flow generated from business or investments and, in the case of private banking, also from employment income. The Company generally collateralizes such loans with real estate, equipment, securities or other assets. The value of assets collateralizing commercial loans is often not subject to readily available appraisals and usually varies substantially depending upon the success of the business. Commercial and private banking loans are typically tied to a floating interest rate. The Company expects to continue to expand its commercial lending products and emphasize in particular its relationship banking with businesses, business owners and professional individuals. Real Estate Lending One- to Four-Family Residential Real Estate Lending. Residential one- to four-family loans amounted to $69.4 million at June 30, 1996, representing 17.3% of total loans, compared to $68.0 million and $76.3 million at December 31, 1995 and 1994, respectively. The majority of these loans were originated by the Savings Bank and 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. Multi-family and Commercial Real Estate Lending. The Company makes multi-family and commercial real estate loans in its primary market areas. Multi-family and commercial real estate lending increased to $117.5 million at June 30, 1996, representing 29.2% of total loans, from $97.1 million and $68.5 million at December 31, 1995 and 1994, respectively. At June 30, 1996, 36.0% of the $128.0 million multi-family and commercial real estate loan portfolio, including commercial real estate construction loans, consisted of loans to acquire, expand or improve owner-occupied income-producing real estate such as manufacturing plants, distribution centers and office facilities. At that same date, 17.6% of the $128.0 million multi-family and commercial real estate loan portfolio consisted of loans to acquire, expand or improve multi-family residential units and 46.4% consisted of loans to acquire, expand or improve non-owner-occupied commercial real estate. The Company has recently determined to reduce new loan originations of non-owner-occupied commercial real estate. 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 1.20 or better. Construction Loans. The Company originates one- to four-family residential construction loans 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. The Company endeavors to limit its construction lending risk through adherence to strict underwriting procedures. Also, the Company generally requires prompt and thorough documentation of all draw requests and utilizes third party inspectors to inspect the project prior to paying any draw requests from the builder. Construction loans on one- to four-family residences increased to $23.9 million at June 30, 1996, representing 6.0% of total loans, from $22.7 million and $17.4 million for fiscal years 1995 and 1994, respectively. 38 41 The Company is also active in multi-family and commercial real estate construction lending. Such loans amounted to $10.5 million at June 30, 1996, representing 2.6% of total loans, compared with $8.9 million and $4.0 million at December 31, 1995 and 1994, respectively. The Company's policy is generally to require personal guarantees of the principals of the companies that are developing multi-family or commercial real estate projects. Management's policy is to make commitments for such loans only on projects located within the Company's primary market areas. Consumer Lending At June 30, 1996, the Company had $48.5 million of consumer loans outstanding, representing 12.1% of total loans, as compared with $43.3 million at December 31, 1995 and $30.9 million at December 31, 1994. Consumer loans made by the Company include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans and miscellaneous personal loans. The terms of these loans typically range from 12 to 60 months and vary based upon the nature of collateral and size of loan. Since 1993, the Company has originated and underwritten its own credit card receivables. Management is currently considering the sale of the Company's credit card loan portfolio. Consumer loans are attractive to the Company because they typically have a short term and carry higher interest rates than those charged on other types of loans. Installment loans do, however, pose additional risks of collectibility when compared to other traditional types of loans granted by commercial banks, such as commercial and residential mortgage loans. In many instances, the Company is required to rely on the borrower's ability to repay since the collateral may be of reduced value at the time of collection. Accordingly, the initial determination of the borrower's ability to repay is of primary importance in the underwriting of consumer loans. Loan Approvals The Company's loan policies establish the basic policies and procedures governing its lending operations. Generally, the policies address the types of loans that the Company seeks, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations and compliance with laws and regulations. All loans or credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrower's total outstanding indebtedness to the Company, including the indebtedness of any guarantor. The policies are reviewed and approved annually by the Board of Directors of Columbia Bank. The Company supplements its own supervision of the loan underwriting and approval process with periodic loan audits by experienced internal loan examiners who examine quality, loan documentation and compliance with laws and regulations. Loan reviews by outside professionals who are experienced in loan review work may also be utilized as management or the Board of Directors deems appropriate. The Loan Committee consists of Columbia Bank's Senior Vice President and Senior Credit Administrator, who is chairman of the Loan Committee, and four additional senior Bank officers. The Committee has a loan authority limit of $3.0 million. Amounts over that amount are reviewed by the Executive Loan Committee, consisting of the Chairman and Chief Executive Officer, the President, the Senior Credit Administrator and the Loan Production Administrator, or the Board of Directors of Columbia Bank. In addition, reports on all loans over $100,000 which are past due but not criticized, all new and renewed loans over $250,000 and all non-accrual and problem loans are reviewed by the Board of Directors of Columbia Bank on a regular basis. Loans to one borrower are generally subject to a statutory limit of 20% of unimpaired capital and surplus. The Company's legal lending limit was $7.4 million at June 30, 1996. As a matter of policy, the Company seldom makes loans approaching its legal lending limit. 39 42 Delinquencies and 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:
DECEMBER 31, JUNE 30, ---------------------------------------------- 1996 1995 1994 1993 1992 1991 -------- ------ ------ ------ ------ ------ (DOLLARS IN THOUSANDS) Nonaccrual loans..................... $ 676 $ 435 $ 452 $1,631 $ 650 $ 728 Restructured loans................... 69 29 44 94 109 116 ------- ------ ------ ------ ------ ------ Total nonperforming loans.................... 745 464 496 1,725 759 844 Real estate owned.................... -- 3,304 3,227 3,305 2,959 2,523 ------- ------ ------ ------ ------ ------ Total nonperforming assets................... $ 745 $3,768 $3,723 $5,030 $3,718 $3,367 ------- ------ ------ ------ ------ ------ ------- ------ ------ ------ ------ ------ Accruing loans past-due 90 days or more............................... $ 260 $ 152 $ 82 $ -- $ -- $ -- Potential problem loans.............. 465 37 23 1,508 (1) (1) Allowance for loan losses............ 4,411 3,748 2,711 1,992 1,539 1,426 Nonperforming loans to loans......... 0.19% 0.13% 0.18% 0.95% 0.62% 0.91% Allowance for loan losses to loans... 1.10 1.06 1.01 1.10 1.25 1.54 Allowance for loan losses to nonperforming loans................ 592.08 807.76 546.57 115.48 202.77 168.96 Nonperforming assets to total assets............................. 0.15 0.89 1.17 2.13 2.34 2.79
- --------------- (1) Information not available for 1992 and 1991. The consolidated financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on its loan portfolio, unless a loan is placed on a nonaccrual basis. Loans are placed on a nonaccrual basis when there are serious doubts about the collectibility of principal or interest. Generally, the Company's policy is to place a loan on nonaccrual status when the loan becomes past due 90 days. Restructured loans are those 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. Potential problem loans are loans which are currently performing and are not included in nonaccrual or restructured loans above, but about which there are serious doubts as to the borrower's ability to comply with present repayment terms and, therefore, will likely be included later in nonaccrual, past due or restructured loans. These loans are considered by management in assessing the adequacy of the allowance for loan losses. At June 30, 1996 and at December 31, 1995 and 1994, the Company had nonaccrual loans of $676,000, $435,000 and $452,000, respectively. At each date, nonaccrual loans constituted less than 0.20% of loans outstanding. In February 1996, the Company sold all its "real estate owned" (which consisted of one property in the State of Washington), thus reducing total nonperforming assets to $745,000, or 0.19%, of total loans (excluding loans held for sale) at June 30, 1996, from $3.8 million, or 1.1%, of total loans at year end 1995. ANALYSIS OF ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level considered adequate by management to provide for anticipated loan losses based on management's assessment of various factors affecting the loan portfolio, including a review of problem loans, business conditions and loss experience and an overall evaluation of the quality of the underlying collateral, holding and disposal costs and costs 40 43 of capital. The allowance is increased by provisions charged to operations and 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 following tables show the allocation of the allowance for loan losses at June 30, 1996 and at the last five year ends. The allocation is based on an evaluation of defined loan problems, historical ratios of loan losses and other factors which may affect future loan losses in the categories of loans shown.
DECEMBER 31, -------------------------------------- JUNE 30, 1996 1995 1994 ----------------- ----------------- ----------------- % OF % OF % OF TOTAL TOTAL TOTAL BALANCE APPLICABLE TO: AMOUNT LOANS(2) AMOUNT LOANS(2) AMOUNT LOANS(2) - ------------------------------------ ------ -------- ------ -------- ------ -------- (DOLLARS IN THOUSANDS) Commercial.......................... $2,393 32.8% $1,796 32.2% $1,369 27.0% Real estate(1): One- to four-family residential... 660 23.2 560 25.6 687 34.7 Five or more family residential and commercial properties...... 273 31.9 187 30.0 146 26.9 Consumer............................ 319 12.1 284 12.2 216 11.4 Unallocated......................... 766 921 293 ----- ------- ----- ------- ----- ------- Total..................... $4,411 100.0% $3,748 100.0% $2,711 100.0% ===== ======= ===== ======= ===== =======
DECEMBER 31, ----------------------------------------------------------- 1993 1992 1991 ----------------- ----------------- ----------------- % OF % OF % OF TOTAL TOTAL TOTAL BALANCE APPLICABLE TO: AMOUNT LOANS(2) AMOUNT LOANS(2) AMOUNT LOANS(2) - ------------------------------------ ------ -------- ------ -------- ------ -------- (DOLLARS IN THOUSANDS) Commercial.......................... $ 389 23.6% $ 348 13.2% $ 287 13.4% Real estate(1): One- to four-family residential... 489 42.6 390 53.4 381 58.4 Five or more family residential and commercial properties...... 545 26.3 264 28.2 334 24.0 Consumer............................ 138 7.5 88 5.2 50 4.2 Unallocated......................... 431 449 374 ----- ------- ----- ------- ----- ------- Total............................. $1,992 100.0% $1,539 100.0% $1,426 100.0% ===== ======= ===== ======= ===== =======
- --------------- (1) Real estate includes real estate construction loans. (2) Represents the total of all outstanding loans in each category as a percent of total loans outstanding. 41 44 The following table sets forth for the periods indicated information regarding changes in the Company's allowance for loan losses:
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------- 1996 1995 1994 1993 1992 1991 ---------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Total loans, net at end of period(1).................. $401,554 $353,093 $268,996 $181,016 $120,797 $ 92,383 Daily average loans.......... 378,281 318,039 222,236 140,353 107,182 82,828 Balance of allowance for loan losses at beginning of period..................... 3,748 2,711 1,992 1,539 1,426 1,704 Charge-offs: Commercial................. (44) (148) (258) (72) (45) (316) Real estate(2)............. (49) (233) Consumer................... (67) (115) (106) (38) (32) (56) --------- -------- -------- -------- -------- -------- Total charge-offs...... (111) (263) (364) (110) (126) (605) Recoveries: Commercial................. 14 45 83 56 47 230 Real estate(2)............. 1 16 Consumer................... -- 5 -- 5 16 1 --------- -------- -------- -------- -------- -------- Total recoveries... 14 50 83 61 64 247 Net charge-offs.... (97) (213) (281) (49) (62) (358) Loan loss provision.......... 760 1,250 1,000 502 170 80 Allowance acquired in purchase of branch......... 5 Balance of allowance for loan losses at end of period.... $ 4,411 $ 3,748 $ 2,711 $ 1,992 $ 1,539 $ 1,426 --------- -------- -------- -------- -------- -------- --------- -------- -------- -------- -------- -------- Ratio of net charge-offs during period to average loans outstanding.......... 0.03% 0.07% 0.13% 0.03% 0.06% 0.43% --------- -------- -------- -------- -------- -------- --------- -------- -------- -------- -------- --------
- --------------- (1) Excludes loans held for sale. (2) Real estate includes real estate construction loans. INVESTMENT ACTIVITIES The Company's securities (investment securities and securities available for sale) increased by $9.4 million from year end 1995 to June 30, 1996 and by $416,000 from December 31, 1994 to 1995. The investment portfolio consists primarily of U.S. Treasury and government agency securities and mortgage-backed securities. The average maturity of the securities portfolio was 3 years, 1 month at June 30, 1996. Investment securities are those securities which the Company has the ability and the intent to hold to maturity. Events which may be reasonably anticipated are considered when determining the Company's intent to hold investment securities for the foreseeable future. Investment securities are carried at cost, adjusted for amortization of premiums and accretions of discounts. Securities to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and carried at fair value with any unrealized gains or losses reflected as an adjustment to shareholders' equity. Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates and/or significant prepayment risks. In November 1995, FASB 42 45 issued a Special Report permitting a one time opportunity for institutions to reassess the appropriateness of the designations of all securities. Accordingly, in December 1995 the Company reclassified all "investment securities" as "securities available for sale." At June 30, 1996 and December 31, 1995, all of the Company's securities were classified as available for sale. The following table summarizes the amortized cost, gross unrealized gains and losses and the resulting market value of securities available for sale:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- ------- (IN THOUSANDS) June 30, 1996: U.S. Treasury & government agency........ $16,773 $ -- $ (39) $16,734 Mortgage-backed.......................... 11,757 -- (489) 11,268 FHLB stock............................... 4,082 -- -- 4,082 -------- --------- --------- ------- Total............................ $32,612 $ -- $ (528) $32,084 -------- --------- --------- ------- -------- --------- --------- ------- December 31, 1995: U.S. Treasury & government agency........ $ 6,935 $ 13 $ -- $ 6,948 Mortgage-backed.......................... 12,572 -- (126) 12,446 FHLB stock............................... 3,281 -- -- 3,281 -------- --------- --------- ------- Total............................ $22,788 $ 13 $ (126) $22,675 -------- --------- --------- ------- -------- --------- --------- ------- December 31, 1994: Mortgage-backed.......................... $ 3,079 $ -- $ (361) $ 2,718 -------- --------- --------- ------- -------- --------- --------- ------- December 31, 1993: Mortgage-backed.......................... $ 3,621 $ -- $ (32) $ 3,589 -------- --------- --------- ------- -------- --------- --------- -------
At June 30, 1996 and December 31, 1995, the Company had no securities held for investment purposes. The following table summarizes the recorded value, gross unrealized gains and losses and the resulting market value of investment securities as of December 31, 1994 and December 31, 1993:
GROSS GROSS RECORDED UNREALIZED UNREALIZED MARKET VALUE GAINS LOSSES VALUE -------- ---------- ---------- ------- (IN THOUSANDS) December 31, 1994: U.S. Treasury............................. $ 1,003 $ -- $ (17) $ 986 Mortgage-backed........................... 16,389 -- (863) 15,526 FHLB stock and other...................... 2,149 -- -- 2,149 ------- --------- --------- ------- Total............................. $19,541 $ -- $ (880) $18,661 ------- --------- --------- ------- ------- --------- --------- ------- December 31, 1993: U.S. Treasury............................. $ 1,009 $ -- $ -- $ 1,009 Mortgage-backed........................... 19,038 70 (12) 19,096 FHLB stock and other...................... 1,883 -- -- 1,883 ------- --------- --------- ------- Total............................. $21,930 $ 70 $ (12) $21,988 ------- --------- --------- ------- ------- --------- --------- -------
43 46 The following table summarizes the recorded and market values of securities available for sale at June 30, 1996 by contractual maturity groups:
JUNE 30, 1996 ----------------------- RECORDED MARKET VALUE VALUE -------- -------- (IN THOUSANDS) Amount maturing: Within one year............................................... $ 1,962 $ 1,960 Greater than one year and less than five years................ 22,765 22,321 Greater than five years and less than ten years............... 2,024 1,931 After ten years............................................... 5,861 5,872 ------ -------- Total................................................. $32,612 $ 32,084 ------ -------- ------ --------
The following table provides the market values, maturities and weighted average yields of the Company's "available for sale" portfolio at June 30, 1996:
MATURING --------------------------------------------------------- WITHIN 1 1-5 5-10 AFTER 10 YEAR YEARS YEARS YEARS TOTAL -------- ----------- ----------- -------- ------- (DOLLARS IN THOUSANDS) U.S. Treasury Balance............................. $1,960 $12,984 -- -- $14,944 Weighted average yield.............. 5.27% 5.86% -- -- 5.78% U.S. government agency Balance............................. -- -- -- $1,790 1,790 Weighted average yield.............. -- -- -- 6.55% 6.55% Mortgage-backed(1) Balance............................. -- 9,337 $ 1,931 -- 11,268 Weighted average yield.............. -- 5.34% 6.27% -- 5.50% FHLB stock and other(2) Balance............................. -- -- -- 4,082 4,082 Weighted average yield.............. -- -- -- 7.61% 7.61% Total Balance............................. $1,960 $22,321 $ 1,931 $5,872 $32,084 Weighted average yield.............. 5.27% 5.64% 6.27% 7.29% 5.96%
- --------------- (1) The maturities reported for mortgage-backed securities are based on contractual maturities and therefore do not reflect principal amortization or assumed prepayments. (2) The weighted average yield on FHLB stock is based upon the dividend yield and average balances for the six months ended June 30, 1996. The Company does not engage in, nor does it presently intend to engage in, securities trading activities and therefore does not maintain a trading account. At June 30, 1996 and December 31, 1995 there were no securities of any issuer (other than governmental agencies) that exceeded 10% of the Company's shareholders' equity. SOURCES OF FUNDS Deposit Activities The Company's products include a wide variety of transaction accounts, savings accounts and certificates of deposit. The Company is continuing to expand the deposit products that it offers. The Company introduced "Columbia Free Checking," which includes no monthly fees, no minimum balance, no per check charges, free use of any ATM in Washington, and, upon approval, a 44 47 personalized no fee Visa(R) debit card. To fund the growth of the Company, management's strategy has been to make use of brokered and other wholesale deposits while working to build core deposits as rapidly as possible through the Company's development of commercial banking relationships and its branch office network. The Company's use of brokered and other wholesale deposits has decreased since year end 1993, though management anticipates continued, and perhaps increasing, use of such deposits to fund increasing loan demand. However, management anticipates use of brokered deposits will decrease over time as a percent of total deposits. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Sources of Funds." The following table sets forth for the periods indicated the average balances outstanding and weighted average interest rates for each major category of deposits:
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, --------------------------------------- --------------------------------------- 1996 1995 1995 1994 ------------------ ------------------ ------------------ ------------------ AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE RATE AVERAGE RATE AVERAGE RATE AVERAGE RATE BALANCE PAID(2) BALANCE PAID(2) BALANCE PAID BALANCE PAID -------- ------- -------- ------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Interest-bearing demand and money market accounts.................... $131,362 3.68% $ 62,587 3.72% $ 79,706 3.95% $ 38,962 2.09% Savings accounts.................... 21,554 2.80 26,726 2.68 24,547 2.73 33,938 2.64 Certificates of deposit............. 171,410 5.71 164,970 5.48 168,351 5.68 122,198 4.58 -------- ----- -------- ----- -------- ----- -------- ----- Total interest-bearing deposits...................... 324,326 4.70% 254,283 4.75% 272,604 4.91% 195,098 3.74% ----- ----- ----- ----- ----- ----- ----- ----- Demand and other noninterest-bearing deposits.......................... 53,673 37,687 42,167 26,238 -------- -------- -------- -------- -------- -------- -------- -------- Total deposits.............. $377,999 $291,970 $314,771 $221,336 -------- -------- -------- -------- -------- -------- -------- --------
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------ 1993 1992 1991 ---------------------- ---------------------- ---------------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE(1) RATE PAID BALANCE(1) RATE PAID BALANCE(1) RATE PAID ---------- --------- ---------- --------- ---------- --------- (DOLLARS IN THOUSANDS) Interest-bearing demand and money market accounts.............................. $ 18,090 2.04% $ 12,976 3.62% $ 9,806 4.82% Savings accounts........................ 29,743 3.49 25,087 4.22 16,518 4.90 Certificates of deposit................. 75,682 4.57 57,072 5.84 51,346 7.44 --------- ------ --------- ------ --------- ------ Total interest-bearing deposits..... 123,515 3.94% 95,135 5.11% 77,670 6.57% ------ ------ ------ ------ ------ ------ Demand and other noninterest-bearing deposits.............................. 10,621 3,416 328 --------- -------- -------- Total deposits.................. $134,136 $ 98,551 $ 77,998 --------- -------- -------- --------- -------- --------
- --------------- (1) Average balances were calculated as the average of month-end balances. (2) Six-month data presented on an annualized basis. The following table shows the amount and maturity of certificates of deposit that had balances of more than $100,000 on the specified dates:
JUNE 30, DECEMBER 31, ------------------- ------------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS) Remaining maturity: Three months or less................ $29,341 $21,319 $24,555 $14,040 $ 5,965 $ 6,245 $ 4,826 Over three through six months....... 13,456 9,690 14,281 9,043 2,799 912 724 Over six through twelve months...... 12,750 18,900 14,742 16,787 3,488 2,216 1,809 Over twelve months.................. 7,834 6,814 5,428 4,706 5,194 1,057 200 ------- ------- ------- ------- ------- ------- ------- Total......................... $63,381 $56,723 $59,006 $44,576 $17,446 $10,430 $ 7,559 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
45 48 Borrowings The Company relies on advances from the FHLB to supplement its funding sources. The FHLB has served as the Company's primary source of long-term borrowings. The Company is authorized to apply for advances on the security of its FHLB stock and certain of its loans and other assets (principally one- to four-family residential loans and securities that are obligations of, or guaranteed by, the U.S. Government). FHLB advances are made pursuant to several different credit programs. Each credit program has its own interest rates and range of maturities. Depending on the particular program limitations, the amounts of the advances are generally based on the FHLB's assessment of the institution's creditworthiness. At June 30, 1996, the Company had total advances of $37.0 million at interest rates ranging from 4.74% to 6.90%. The weighted average interest rate on such advances was 5.42%. On June 3, 1996, the Company gave notice of its intent to redeem all of its issued and outstanding 7.85% Convertible Subordinated Notes on August 1, 1996. Prior to August 1, 1996, all of the Notes were converted into 223,743 shares of Common Stock. COMPETITION The Company's strategy involves the significant expansion of Columbia Bank throughout the Tacoma metropolitan area and contiguous parts of the Puget Sound region of Washington. During the past several years, substantial consolidation among financial institutions in Washington has occurred. Due in part to recent federal legislation concerning interstate banking, the Company anticipates a continuation of the consolidation trend in Washington. Legislation has recently been passed by the Washington legislature (effective June 1996) that allows, subject to certain conditions, mergers or other combinations, relocations of a bank's main office and branching across state lines in advance of the June 1, 1997 date established by federal law (see "Supervision and Regulation -- Other Regulatory Developments"). Many other financial institutions, most of which have greater resources than the Company, compete with the Company for banking business in the Company's market area. Among the advantages of some of these institutions are their ability to make larger loans, finance extensive advertising campaigns, access international money markets and allocate their investment assets to regions of highest yield and demand. The Company does not have a significant market share of the deposit-taking or lending activities in the areas in which it conducts operations. Although the Company has been able to compete effectively in its market areas to date, there can be no assurance that it will be able to continue to do so in the future. PROPERTIES The Company's executive offices and the main office of Columbia Bank are located in approximately 37,500 square feet of newly renovated lease space in downtown Tacoma. The lease has an initial lease term of seven years, with an expiration of August 2000. The lease agreement provides for one renewal option for three years and two additional renewal options for five years each. As of September 30, 1996, Columbia Bank had 10 offices in Pierce County, including the main office, of which six are leased and four owned (with one owned office building being situated on leased land). Columbia Bank also has two offices in Longview (both owned), one office in Bellevue (leased), one office in Federal Way (leased) and one office in Woodland (owned). LEGAL PROCEEDINGS In the ordinary course of business, various claims and lawsuits are brought against the Company, such as claims to enforce liens, condemnation proceedings on properties in which the Company holds security interests, claims involving the making and servicing of real property loans and other issues incident to Columbia's business. In the opinion of the Company's management and outside legal counsel, the ultimate liability, if any, resulting from such claims or lawsuits will not be material to the Company. 46 49 EMPLOYEES At June 30, 1996, the Company had 218 full-time equivalent employees. None of the Company's employees are covered by a collective bargaining agreement with the Company and management believes that its relationship with its employees is satisfactory. SUPERVISION AND REGULATION The Company and Columbia Bank are subject to extensive federal and Washington state legislation, regulation and supervision. These laws and regulations are primarily intended to protect depositors and the FDIC rather than shareholders of the Company. The laws and regulations affecting banks and bank holding companies have changed significantly over recent years, and there is reason to expect that similar changes will continue in the future. Any change in applicable laws, regulations or regulatory policies may have a material effect on the business, operations and prospects of the Company. The Company is unable to predict the nature or the extent of the effects on its business and earnings that any fiscal or monetary policies or new federal or state legislation may have in the future. The following information is qualified in its entirety by reference to the particular statutory and regulatory provisions described herein. THE COMPANY The Company is subject to regulation as a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the "BHCA"), as amended. As such, the Company is supervised by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board" or the "Board"). The Federal Reserve Board has the authority to order bank holding companies to cease and desist from unsound practices and violations of conditions imposed by the Board. The Federal Reserve Board is also empowered to assess civil money penalties against companies and individuals who violate the BHCA or orders or regulations thereunder in amounts up to $1.0 million per day or order termination of non-banking activities of non-banking subsidiaries of bank holding companies, and to order termination of ownership and control of a non-banking subsidiary by a bank holding company. Certain violations may also result in criminal penalties. The FDIC is authorized to exercise comparable authority under the Federal Deposit Insurance Act and other statutes with respect to state nonmember banks such as Columbia Bank. The Federal Reserve Board takes the position that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Board's position that in serving as a source of strength to its subsidiary banks, bank holding companies should be prepared to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Board to be an unsafe and unsound banking practice or a violation of the Board's regulations or both. The Federal Deposit Insurance Act requires an undercapitalized institution to submit to the Federal Reserve Board a capital restoration plan with a guarantee by each company having control of the bank's compliance with the plan. The BHCA prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of any company which is not a bank or from engaging in any activities other than those of banking, managing or controlling banks and certain other subsidiaries, or furnishing services to or performing services for its subsidiaries. One principal exception to these prohibitions allows a bank holding company to acquire an interest in companies whose activities are found by the Federal Reserve Board, by order or by regulation, to be so closely related to banking or 47 50 managing or controlling banks as to be a proper incident thereto. The Company must obtain the approval of the Federal Reserve Board before it acquires all, or substantially all, of any bank, or ownership or control of more than 5 percent of the voting shares of a bank. The Company is required under the BHCA to file an annual report and periodic reports with the Federal Reserve Board and such additional information as the Federal Reserve Board may require pursuant to the BHCA. The Board may examine a bank holding company and any of its subsidiaries and charge the company for the cost of such an examination. The Company and any subsidiaries which it may control are deemed "affiliates" within the meaning of the Federal Reserve Act, and transactions between bank subsidiaries of the Company and its affiliates are subject to certain restrictions. With certain exceptions, the Company and its subsidiaries are prohibited from tying the provision of certain services, such as extensions of credit, to other services offered by the Company or its affiliates. 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%. 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 risk-based capital guidelines require Tier I capital of 4% of risk-adjusted assets and minimum total capital ratio (combined Tier I and Tier II) of 8%. At June 30, 1996, the Company's leverage ratio was 7.30% compared with 7.72% at December 31, 1995. The Company's Tier I and total capital ratios were 8.58% and 10.30%, respectively, at June 30, 1996, compared with 9.10% and 10.95%, respectively, at December 31, 1995. For a discussion of Columbia Bank's capital ratios, see "-- Banking Subsidiary." BANKING SUBSIDIARY Columbia Bank is a Washington state-chartered commercial bank, the deposits of which are insured by the FDIC. It is subject to regulation by the FDIC and the Washington Department of Financial Institutions, Division of Banks (the "Division"). Although Columbia Bank is not a member of the Federal Reserve System, the Federal Reserve Board supervisory authority over the Company can also affect Columbia Bank. Among other things, applicable federal and state statutes and regulations which govern a bank's operations relate to minimum capital requirements, required reserves against deposits, investments, loans, legal lending limits, mergers and consolidations, borrowings, issuance of securities, payment of dividends, establishment of branches and other aspects of its operations. The Division and the FDIC also have authority to prohibit banks under their supervision from engaging in what they consider to be unsafe and unsound practices. Columbia Bank is required to file periodic reports with the FDIC and the Division and is subject to periodic examinations and evaluations by those regulatory authorities. Based upon such an evaluation, the regulators may revalue the assets of an institution and require that it establish specific reserves to compensate for the differences between the regulator-determined value and the book value of such assets. These examinations must be conducted every 12 months, except that certain well-capitalized banks may be examined every 18 months. The FDIC and the Division may each accept the results of an examination by the other in lieu of conducting an independent examination. As a subsidiary of a bank holding company, Columbia Bank is subject to certain restrictions in its dealings with the Company and with other companies that may become affiliated with the Company. Columbia Bank's deposits are insured by the FDIC through the BIF and SAIF. Approximately 39% of the Company's deposits are deemed to be SAIF-insured under an allocation formula that 48 51 applies because certain deposits were previously acquired from a savings bank in a so-called Oakar transaction. See "Business -- General." The FDIC's current annual assessment rate for deposits range from 0.0% to 0.27% of insured deposits for the BIF and 0.23% to 0.31% of insured deposits for the SAIF. Legislation was recently enacted to resolve the difference in rates between the two funds. Pursuant to this legislation, the FDIC has proposed to lower SAIF assessment rates from their current rates to a range of 0.04% to 0.31% and then through application of an adjustment factor to further reduce SAIF assessment rates to an effective range of 0.0% to 0.27%. The FDIC has also proposed to maintain an assessment rate of between 0.0% and 0.27% of covered deposits for BIF members. These rates would become effective January 1, 1997. Further, the FDIC has proposed that such rate schedule be effective for certain institutions, such as Columbia Bank, for the period of October 1, 1996 until December 31, 1996. Any overpayment of fourth quarter assessments, estimated at 0.0575% for certain banks, such as Columbia Bank, will be refunded or credited with interest. The legislation also requires a special assessment on SAIF-insured deposits held by the institution at March 31, 1995, with a discount of 20% on the special assessment and subsequent assessments for Oakar institutions, such as Columbia Bank, which meet certain tests. The FDIC has estimated that the special assessment rate will be approximately 0.657% of covered deposits. Moreover, the legislation requires assessments on both SAIF and BIF members in order to service bonds issued in connection with the government resolution of the savings and loan crisis. The FDIC has estimated that for the next three years beginning on January 1, 1997 through December 31, 1999, an annual assessment of approximately 0.064% of covered deposits and 0.013% of covered deposits will be assessed upon SAIF- and BIF-insured deposits, respectively, and from January 1, 2000 through December 31, 2017, the assessment rate will be 0.024% of covered deposits for all insured institutions. If the deposit insurance funds are merged on January 1, 1999 pursuant to the legislation, then the uniform assessment rate to service the bonds will apply from that date forward. At September 30, 1996, approximately $156.0 million of Columbia Bank's deposits were deemed to be SAIF-insured under the allocation formula. The actual deposits at that date remaining from the Oakar transaction were approximately $23.0 million. Dividends paid by Columbia Bank will provide substantially all of the Company's cash flow. 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 such distributions. At June 30, 1996, Columbia Bank's leverage ratio was 8.12% compared with 7.99% at December 31, 1995. Tier I and total capital ratios for Columbia Bank at June 30, 1996 were 9.56% and 10.68%, respectively, compared with 9.54% and 10.63%, respectively, at December 31, 1995. The FDIC has established the qualifications necessary to be classified as a "well-capitalized" bank, primarily for assignment of FDIC risk-based insurance assessment 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 at "well-capitalized" at June 30, 1996. 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. OTHER REGULATORY DEVELOPMENTS Congress has enacted significant federal banking legislation in recent years. Included in this legislation have been the Financial Institution Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). FIRREA, among other things, (i) created two deposit insurance funds administered by the FDIC; (ii) permitted commercial banks that meet certain housing-related asset requirements to secure advances and other financial services from local Federal Home Loan Banks; (iii) restructured the 49 52 federal regulatory agencies for savings associations; and (iv) greatly enhanced the regulators' enforcement powers over financial institutions and their affiliates. FDICIA went substantially farther than FIRREA in establishing a more rigorous regulatory environment. Under FDICIA, regulatory authorities are required to enact a number of new regulations, substantially all of which are now effective. These regulations include, among other things, (i) a new method for calculating deposit insurance assessments based on risk, (ii) restrictions on acceptance of brokered deposits except by well-capitalized institutions, (iii) additional limitations on loans to executive officers and directors of banks, (iv) the employment of interest rate risk in the calculation of risk-based capital, (v) safety and soundness standards that take into consideration, among other things, management, operations, asset quality, earnings and compensation, (vi) a five-tiered rating system from well-capitalized to critically undercapitalized, along with the prompt corrective action the agencies may take depending on the category, and (vii) new disclosure and advertising requirements with respect to interest paid on savings accounts. FDICIA and regulations adopted by the FDIC impose additional requirements for annual independent audits and reporting when a bank begins a fiscal year with assets of $500 million or more. Such banks, or their holding companies, are also required to establish audit committees consisting of directors who are independent of management. The Company had less than $500 million in assets at January 1, 1996, but it currently has an Audit Committee of independent directors and it meets the audited financial statement requirements of applicable regulations. Columbia Bank will become subject to additional reporting requirements and will incur additional compliance expense when it becomes subject to the FDIC regulation. Also, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act") provides banks with greater opportunities to merge with other institutions and to open branches nationwide. The Interstate Banking Act also allows a bank holding company whose principal operations are in one state to apply to the Federal Reserve for approval to acquire a bank that is headquartered in a different state. States cannot "opt out" but may impose minimum time periods, not to exceed five years, for the target bank's existence. The Interstate Banking Act also allows bank subsidiaries of bank holding companies to establish "agency" relationships with their depository institution affiliates. In an agency relationship, a bank can accept deposits, renew time deposits, close and service loans, and receive payments for a depository institution affiliate. States cannot "opt out." In addition, the Interstate Banking Act allows banks whose principal operations are located in different states to apply to federal regulators to merge. This provision takes effect June 1, 1997, unless states enact laws to either (i) authorize such transactions at an earlier date or (ii) prohibit such transactions entirely. The Interstate Banking Act also allows banks to apply to establish de novo branches in states in which they do not already have a branch office. This provision takes effect June 1, 1997, but (i) states must enact laws to permit such branching and (ii) a bank's primary federal regulator must approve any such branch establishment. The Washington legislature passed legislation that allows, subject to certain conditions, mergers or other combinations, relocations of banks' main office and branching across state lines in advance of the June 1, 1997 date established by federal law. Further effects on the Company may result from the Riegle Community Development and Regulatory Improvement Act of 1994 (the "Community Development Act"). The Community Development Act (i) establishes and funds institutions that are focused on investing in economically distressed areas and (ii) streamlines the procedures for certain transactions by financial institutions with federal banking agencies. Among other things, the Community Development Act requires the federal banking agencies to (i) consider the burdens that are imposed on financial institutions when new regulations are issued or new compliance burdens are created and (ii) coordinate their examinations of financial 50 53 institutions when more than one agency is involved. The Community Development Act also streamlines the procedures for forming certain one-bank holding companies and engaging in authorized non-banking activities. In addition to the changes to the BIF and SAIF assessment rates implemented by the legislation which was recently passed as part of the 1996 Omnibus spending bill (see "Recent Developments"), various regulatory relief provisions were enacted. The new legislation includes, among other things, changes to (i) the Truth in Lending Act and the Real Estate Settlement Procedures Act to coordinate and simplify the two laws' disclosure requirements; (ii) eliminate civil liability for violations of the Truth in Savings Act after five years; and (iii) streamline the application process for a number of bank holding company and bank applications; (iv) establish a privilege from discovery in any civil or administrative proceeding or bank examination for any fair lending self-test results conducted by, or on behalf of, a financial institution in certain circumstances; (v) repeal the FDICIA requirement that independent public accountants attest to compliance with designated safety and soundness regulations; (vi) impose a continuous regulatory review of regulations to identify and eliminate outdated and unnecessary rules; and (vii) various other miscellaneous provisions to reduce bank regulatory burden. TAXATION NET OPERATING LOSS AND TAX CREDIT CARRYFORWARDS At June 30, 1996 and December 31, 1995, for federal income tax purposes, the Company had net operating loss ("NOL") carryforwards of $2.2 million and $4.4 million, respectively. The carryforwards may be used, subject to certain restrictions and limitations, to offset taxable income and the tax liability of the Company. If there is no taxable income or tax liability, the carryforwards will not be utilized. In addition, the carryforwards will expire if they are not utilized within a specified period. Certain provisions of the Code, impose limitations on the amount of the carryforwards which may be utilized annually after an "ownership change," as defined in the Code. Where the annual limitations apply, their effect on the carryforwards is dependent upon, among other factors, the "value" (for purposes of these limitations) of a corporation at the time of the ownership change. The 1990 Acquisition, the sale of Common Stock in June 1992 and the sale of Common Stock in August 1993 each constituted an "ownership change" within the meaning of the Code and resulted in the application of an annual limitation on utilization of the Company's carryforwards. The Company does not believe that the reduction of the annual limitation as a result of the above named events would be material for financial statement purposes. At June 30, 1996, the Company had alternative minimum tax, investment and rehabilitation tax credit carryforwards of approximately $673,000, of which $581,000 expires in 1997, $14,000 expires in 1999, and the remainder in 2010. However, because of annual limitations on the utilization of net operating loss carryforwards and because the Code requires that net operating loss carryforwards be utilized before tax credit carryforwards, the Company may not receive an income tax benefit from the tax credit carryforwards, which may expire unused. The applicable provisions of the law regarding these limitations are complex, and definitive interpretations of all aspects of the law and its application to all factual situations do not exist. There can be no assurance that the Internal Revenue Service (the "IRS") will not challenge the Company s treatment of the carryforwards, or that such treatment, if challenged, will be upheld. If successful, such challenge could result in a reduction in the limitation. However, the Company does not anticipate that a challenge by the IRS would result in a material reduction for financial statement purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes to Consolidated Financial Statements. 51 54 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information with respect to the directors and executive officers of the Company. All directors hold office until the next annual meeting of shareholders of the Company or until their successors are elected and qualified. Executive officers are elected generally to serve at the discretion of the Company's Board of Directors.
NAME AGE POSITION - ---------------------------- --- -------------------------------------------------------- A.G. Espe................... 59 Director, Chairman of the Board and Chief Executive Officer of the Company; Chairman of the Board of Columbia Bank W.W. Philip................. 69 Director, President and Chief Operating Officer of the Company; President and Chief Executive Officer of Columbia Bank Donald A. Andersen.......... 51 Senior Vice President, Senior Credit Administrator of Columbia Bank Julie A. Healy.............. 41 Senior Vice President, Operations Manager of Columbia Bank H.R. Russell................ 42 Senior Vice President, Senior Loan Production Officer of Columbia Bank Gary R. Schminkey........... 39 Senior Vice President, Chief Financial Officer of the Company and Columbia Bank Evans Q. Whitney............ 53 Senior Vice President, Human Resources Director of the Company and Columbia Bank W. Barry Connoley........... 54 Director(1) Richard S. DeVine........... 69 Director(2) Jack Fabulich............... 68 Director(1) Jonathan Fine............... 42 Director(1) Margel S. Gallagher......... 48 Director(2) John A. Halleran............ 67 Director(2) John H. Powell.............. 72 Director(2) Robert E. Quoidbach......... 71 Director(1) Donald Rodman............... 58 Director(1) Frank H. Russell............ 66 Director(2) Sidney R. Snyder............ 70 Director(1) James M. Will, Jr........... 49 Director(1)
- --------------- (1) Serves as a member of the Audit Committee. (2) Serves as a member of the Personnel and Compensation Committee. From January 1995 through June 1996, directors of the Company received an annual retainer of $1,600 in addition to fees of $100 for each Board and Committee meeting attended. Commencing July 1996, director compensation was amended to provide for an annual retainer of $1,600 and fees of $200 for each Board meeting attended and $150 for each Committee meeting attended. The business experience of each of the directors and executive officers during the last five years is set forth below. The following also sets forth the term of service of each executive officer at, and the year each director first became a director of, (i) the Company; (ii) its predecessor corporation; 52 55 (iii) its former subsidiary, Savings Bank (which was merged into Columbia Bank in 1994); or (iv) its current subsidiary, Columbia Bank. A.G. Espe has been Chairman of the Board of the Company since September 1990 and Chief Executive Officer of the Company since March 1993. Mr. Espe, who is also Chairman of the Board of Columbia Bank and of Northrim Bank, has extensive banking and business experience. From 1985 to 1989, Mr. Espe served as Chairman of the Board, President and Chief Executive Officer of Key Pacific Bancorp. See "Prospectus Summary." W.W. Philip has been a director of the Company since July 1993. He became President and Chief Operating Officer of the Company and President and Chief Executive Officer of Columbia Bank in August 1993 when the Company's reorganization was completed and the Company began operations in Tacoma. Until his retirement in December 1992, Mr. Philip was Chairman of the Board and Chief Executive Officer of Puget Sound Bancorp ("PSB") since its inception in 1981 and was Chairman of the Board and Chief Executive Officer of Puget Sound National Bank prior to and after the inception of PSB, having served with that institution for more than 40 years. See "Prospectus Summary -- The Company." Donald A. Andersen joined Columbia Bank as Senior Vice President -- Commercial Loans in January 1995. Mr. Andersen was employed by Puget Sound National Bank and its successor institution for nearly 25 years, having served as Vice President -- Commercial Loan Officer from 1991 to 1995. Julie A. Healy joined Columbia Bank as Senior Vice President -- Operations in June 1993. Ms. Healy was employed by Puget Sound National Bank for nearly 12 years, having served as Vice President -- Operations from 1991 to 1993. H.R. Russell joined Columbia Bank as Senior Vice President -- Commercial Loans in October 1993. Mr. Russell was employed by Puget Sound National Bank and its successor institution for nearly 14 years, having served as Vice President -- Commercial Loan Officer from 1991 to 1993. Gary R. Schminkey joined Columbia Bank as Vice President and Controller in March 1993. He was appointed Senior Vice President -- Chief Financial Officer of Columbia Bank and the Company in 1994. Mr. Schminkey was employed by PSB, Puget Sound National Bank and its successor institution for nearly 10 years, having served from 1991 to 1993 as Assistant Vice President -- Assistant Controller for PSB and during that same period as Vice President -- Accounting and Finance for Puget Sound National Bank and its successor institution. Evans Q. Whitney joined Columbia Bank as Senior Vice President -- Human Resources in March 1993. Mr. Whitney is also the Senior Vice President -- Human Resources of the Company. Mr. Whitney was employed by PSB and Puget Sound National Bank for nearly 27 years, having served as Senior Vice President -- Human Resources for PSB and Puget Sound National Bank from 1991 to 1993. W. Barry Connoley has been a director since 1993. Since 1986, Mr. Connoley has been President and Chief Executive Officer of MultiCare Medical Center, Tacoma, Washington. Richard S. DeVine has been a director since 1993. Since 1992, Mr. DeVine has served as President of Chinook Resources, Inc. (timber acquisition and sales). Mr. DeVine currently serves as Chairman of Raleigh Schwarz & Powell, Inc. (insurance brokers), Tacoma, Washington, having served as President of that company from 1976 to 1990. Jack Fabulich has served as a director since 1993. He currently is Chairman of Parker Paint Manufacturing Co., Inc., Tacoma, Washington, having served as President from 1982 to 1993. Since 1976, he has also served as Commissioner of the Port of Tacoma. Jonathan Fine has been a director since 1993. From 1986 until December 1992, Mr. Fine served as Senior Vice President and Treasurer of PSB. From January 1993 until April 1996 Mr. Fine was a 53 56 private investor. Mr. Fine is currently the Chief Operating Officer of the American Red Cross, Seattle -- King County Chapter. Margel S. Gallagher has served as a director since 1993. Since 1982 she has served as President of Viva Imports, Ltd., (retail women's clothing), Tacoma and Seattle, Washington. John A. Halleran has served as a director since 1992. During the past five years, Mr. Halleran, who is retired, has been a private investor. Prior to that time he was a general contractor with headquarters in Bellevue, Washington. John H. Powell has been a director since 1991. Since 1950, Mr. Powell has been the co-owner of Sound Oil Company, a heating oil dealer in Bellevue, Washington. He is also a director of NorCap, L.L.C. Mr. Powell was Chairman of the Board of Bank of Seattle, Seattle, Washington, from 1976 to 1983. Robert E. Quoidbach has served as a director since 1988. Since 1990 Mr. Quoidbach, who is retired, has been a private investor and tree farmer. Prior to that time he was an industrial contractor in Longview, Washington. Donald Rodman has served as a director since 1991. Since 1961, he has been the owner and an executive officer of Rodman Realty, Inc., Longview, Washington. Frank H. Russell has served as a director since 1993. Since 1985, he has been President of Professional Services Unified, Inc., a full-facility service, including food service, janitorial and electronic access systems in Tacoma, Washington. Mr. Russell is also the President of Quality Meal Expeditors (food catering) headquartered in Tacoma, Washington. Sidney R. Snyder has been a director since 1988. He also served as a director of the Savings Bank from 1988 until April 1994. Mr. Snyder has been the owner of Sid's Food Market in Seaview, Washington since 1953 and of Midtown Market in Long Beach, Washington since 1982. Mr. Snyder is the Chairman of the Board and a principal shareholder of Bank of the Pacific in Long Beach, Washington. Mr. Snyder has been a member of the Washington State Senate since 1990, currently serving as Senate Majority Leader. James M. Will, Jr. has served as a director since 1993. Since 1969, he has served as President of TAM Manufacturing Co., Tacoma, Washington. EXECUTIVE COMPENSATION The following table sets forth the aggregate compensation for services rendered to the Company or its subsidiaries in all capacities paid or accrued for the fiscal years ended December 31, 1995, December 31, 1994 and December 31, 1993, to each person serving as an executive officer of the Company whose aggregate cash and cash equivalent forms of compensation exceeded $100,000 (the "Named Executive Officers"). 54 57
LONG-TERM ANNUAL COMPENSATION COMPENSATION ---------------------------------------------- --------------- OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION(2) - ---------------------------- ---- -------- ------- ------------ --------------- A.G. Espe, Chairman and Chief Executive Officer... 1995 $168,623(1) $50,000 $ -- $25,995 1994 165,000 -- -- 18,715 1993 137,500 15,625 18,700 20,673 W.W. Philip, President and Chief Executive Officer... --(3) --(3) -- --
- --------------- (1) Represents total cash compensation earned, including amounts deferred under a Supplemental Executive Retirement Plan. (2) Includes $11,900 in contributions to 401(k) savings plan and a 3% match of Mr. Espe's 1995 deferral under the plan; also includes $14,095 paid in 1995 as premium for life insurance payable to Mr. Espe's estate and $11,845 paid in 1994 and 1993 as premiums for such life insurance. (3) Payment of salary and bonus compensation to Mr. Philip is subject to attainment of certain performance criteria, except, as provided by contract, in the event of early termination. See "Long-Term Incentive Plan Awards" and "Employment and Change of Control Agreements." OPTION GRANTS/AWARDS The Company's Employee Stock Option Plan (the "Plan") authorizes the grant of options to purchase up to 315,000 shares of Common Stock in aggregate to eligible employees. At June 30, 1996, options to purchase 293,393 shares at prices ranging from $3.81 to $15.25 per share were outstanding. No grant of options under the Plan was made to the Named Executive Officers during the period from the Company's reorganization in 1993 until August 1996. In lieu of the grant of stock options to either Mr. Espe or Mr. Philip in September 1993, when options were granted to numerous new senior personnel, the Personnel and Compensation Committee determined to give each of them the right to acquire 30,000 shares of Common Stock by purchase at the then fair market value of $12.00 per share, with the assistance of a fixed-rate loan in the full principal amount of the purchase. The loan is due on or before March 1, 2000. Both Mr. Espe and Mr. Philip elected to make such purchases, thus becoming owners of the stock, rather than becoming holders of option interests, and are personally liable for repayment of the sums represented by the loan. In August 1996, the Personnel and Compensation Committee of the Board of Directors of the Company approved the grant to Mr. Espe of an option to purchase 40,000 shares of Common Stock at prices ranging from $15.25 to $21.25. The Board also approved the grant to Mr. Philip of a restricted stock award for 20,000 shares of Common Stock. The market value of the Common Stock at the date of grant to Mr. Philip was $15.25 per share. The option to Mr. Espe, which is subject to approval by shareholders of additional shares to be available pursuant to the Plan and certain other amendments to the Plan, provides for 10,000 shares to vest (become exercisable) in August 1997 at an option price of $15.25, and 10,000 additional shares to vest each year beginning in August 1998 and continuing through August 2000 at option prices of $17.25, $19.25 and $21.25 respectively. Vested options will remain exercisable for ten years from the date of vesting in the event of Mr. Espe's retirement (as approved by the Board), death or disability, or a change in control of the Company or Columbia Bank (as the term is defined in Mr. Espe's Employment Agreement). The restricted stock award to Mr. Philip provides for the immediate issuance of 20,000 shares of the Company's Common Stock to Mr. Philip in escrow. The shares are to remain in escrow until Mr. Philip has served as an active officer or Board member of the Company and/or Columbia Bank for a period of five years from the date of the grant, unless that term is reduced (i) by action of the Board or the Personnel and Compensation Committee, (ii) by reason of a change of control of the Company or Columbia Bank (as defined in Mr. Philip's employment agreement), or (iii) by 55 58 Mr. Philip's death or disability. Mr. Philip will have the right to vote the shares and to receive any dividends or other distributions on the shares while they remain in escrow. LONG-TERM INCENTIVE PLAN AWARDS The following table refers to long-term incentive arrangements that were entered into with Mr. Espe and Mr. Philip in 1993 and amended, as to Mr. Philip only, in 1995. Under the arrangements, specific compensation and allowance payments were agreed to be made in 1996 and 1997 if the Company achieves certain performance objectives in 1995 and 1996. These objectives are: (1) Growth -- by June 30, 1995, the Company must have assets, loans and deposits of at least $325 million, $200 million and $230 million, respectively (achieved); (2) Asset Quality -- at December 31, 1995 and 1996, problem assets of the Company (excluding those existing at September 1, 1993) must not exceed 1.5% of the Company's total assets at those dates; and (3) Profitability -- the Company must achieve net income of at least 50 basis points on average assets for calendar year 1995, and must achieve net income of at least 75 basis points on average assets for calendar year 1996. Performance criteria may be waived by the Board of Directors of the Company in its discretion and amounts may be deemed earned and payments accelerated in the event of early termination of the executive's employment agreement or in the event of the executive's death or disability. The Company has accrued the anticipated expense. See "Employment and Change of Control Agreements."
PERIOD UNTIL ESTIMATED FUTURE PAYOUT DOLLAR VALUE MATURATION BASED UPON ACHIEVEMENT NAME AWARD OF PAYOUT OF PERFORMANCE CRITERIA(1) - ------------------------------- ------------ ------------------- -------------------------- A.G. Espe...................... $ 59,400 December 31, 1996 $ 67,413 W.W. Philip.................... 383,000 December 31, 1996 440,824 167,000 Twelve monthly 197,292 payments beginning January 1, 1997
- --------------- (1) If earned, the amounts will bear interest from the date deemed to be earned (as provided by Agreement) at the two year U.S. Treasury Bill rate at January 1 each year plus 3%. OTHER EMPLOYEE BENEFITS The Company also maintains a defined contribution plan, in the form of a 401(k) plan, that allows employees, including executive officers, to contribute up to 15% of their compensation each year. The Company currently makes matching contributions to the extent of 50% of employees' contributions up to 3% of each employee's total compensation and is authorized to make a discretionary contribution as determined by the Personnel and Compensation Committee of the Board of Directors each year. The Company contributed approximately $126,000 in matching funds to the 401(k) Plan during 1995, and made a discretionary contribution of approximately $290,000 for the year 1995. The Company also maintains an Employee Stock Purchase Plan (the "ESPP") that was adopted in 1995. The ESPP allows eligible employees to purchase shares of Common Stock at 90% of the then current market price by means of payroll deductions. Beginning in 1994, the Company established a discretionary incentive bonus plan for the benefit of employees. Contributions by the Company are based upon year-end results of operations for the Company and attainment of goals by individuals. In 1995 the Company contributed $341,000 to the plan. The Company also provides a group health insurance plan along with standard vacation and sick pay benefits. 56 59 EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS Mr. Espe entered into an employment agreement with the Company effective December 30, 1993. The agreement has a term expiring December 31, 1997. Mr. Espe's annual salary is $150,000 in 1996, with annual increases thereafter, as the Board of Directors shall determine. In addition, the Company has agreed to provide Mr. Espe with a Supplemental Employee Retirement Plan, which will provide Mr. Espe with a benefit payable after retirement calculated on the basis of ten percent of his salary being contributed each year, the amount contributed increasing in value based on an assumed interest rate. At the time of entering into the agreement, Mr. Espe was offered and purchased 30,000 shares of Common Stock at $12.00 per share (the then fair market value). In connection with that transaction, the Company loaned Mr. Espe $360,000 to purchase the shares, with interest payable annually at six percent per annum and the full principal amount due on or before March 1, 2000. The principal payment may be accelerated under certain circumstances. Mr. Espe also receives life and disability benefits, will be reimbursed for certain reasonable expenses incurred in carrying out his duties, and may participate in the Company's health and welfare plans available to the Company's employees generally. Mr. Espe may also receive certain allowances in the amount of $59,400 plus interest, if certain performance targets, including growth, asset quality, and profitability, as more fully discussed under "-- Long-Term Incentive Plan Awards," are met. In the event the Company terminates the agreement without cause (as defined therein), Mr. Espe would be entitled to the greater of two years' salary or salary payable for the remainder of the term of the agreement. The agreement has recently been amended, effective January 1, 1997, to extend the term of Mr. Espe's employment to December 31, 2001 and to establish his minimum annual salary at $160,000. Other terms were changed consistent with the new term of the amended agreement. Both the agreement and the amended agreement contain a covenant by Mr. Espe not to compete with the Company in its market area for two years after voluntarily terminating employment without "good cause" (as defined). The Company is the beneficiary under a key-person life insurance policy on the life of Mr. Espe in the amount of $3.5 million. Mr. Philip also entered into an employment agreement with the Company effective December 31, 1993, as further amended effective December 29, 1995. The term of the agreement expires on December 31, 1996. Mr. Philip's salary for the term of the agreement is $550,000, but payment of this salary is subject to the attainment of performance targets, including growth, asset quality, and profitability as more fully discussed under "-- Long-Term Incentive Plan Awards." If these targets are met, Mr. Philip will receive a lump sum payment of $383,000, plus interest, on December 31, 1996, and an additional $167,000, plus interest, during the calendar year 1997. Other provisions of the Agreement with Mr. Philip are on substantially the same terms as that of Mr. Espe's, described above. In connection with his employment, Mr. Philip also was offered and purchased 30,000 shares of Common Stock at $12.00 per share (the then fair market value). In connection with that transaction, the Company loaned Mr. Philip $360,000 to purchase the shares, on terms and conditions similar to those for the loan to Mr. Espe, described above. Mr. Philip's agreement recently has been amended, effective January 1, 1997 ("amended agreement"), to extend the term to December 31, 1998 and to establish his minimum annual salary at $175,000. Other terms were changed consistent with the new term of the amended agreement. Both the agreement and the amended agreement contain a covenant by Mr. Philip not to compete with the Company in its market area for two years after voluntarily terminating employment without "good cause" (as defined therein). The Company is the beneficiary under a key-person life insurance policy on the life of Mr. Philip in the amount of $2.0 million. The employment agreements for both Messrs. Espe and Philip, as now in effect and as amended effective January 1, 1997, contain provisions that require payments in the event of a change in control (as defined therein) and termination of employment without cause (as defined therein) following by up to two years, and in certain cases preceding, that event. Generally in such circumstances, all contingent payments payable to each of Messrs. Espe and Philip are deemed earned. In addition, under the agreements in effect until January 1, 1997, Mr. Espe is entitled to 57 60 receive his base salary until three years following such termination, and Mr. Philip is entitled to receive the sum of $100,000 reduced by certain pro-rated amounts. Under the terms of their amended agreements, Messrs. Espe and Philip are entitled to receive their base salary for three and two years, respectively, following such termination or until the term of their amended agreements, whichever is longer. In such circumstances, each is also entitled to all benefits provided for in his amended agreement, to be fully vested as to any nonvested options, and to have restrictions lapse with regard to any restricted stock or other restricted securities. In the event either executive receives an amount under these provisions which result in imposition of a tax on the executive under the provisions of Internal Revenue Code Section 4999 (relating to Golden Parachute payments), the Company is obligated to reimburse the executive for that amount, exclusive of any tax imposed by reason of receipt of reimbursement under the employment agreement. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of the Common Stock at September 30, 1996 by (i) each director and Named Executive Officer, (ii) all directors and executive officers as a group, and (iii) each person known by the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock:
SHARES BENEFICIALLY PERCENT OF CLASS OWNED BEFORE BEFORE THE NAME AND ADDRESS(1) THE OFFERING(2) OFFERING(2) ------------------------------------------------------ --------------- ---------------- A.G. Espe............................................. 164,525(3) 4.4% W.W. Philip........................................... 120,435(4) 3.2% W. Barry Connoley..................................... 1,050 * Richard S. DeVine..................................... 22,242 * Jack Fabulich......................................... 4,375 * Jonathan Fine......................................... 14,045(5) * Margel S. Gallagher................................... 61,562(6) 1.8% John A. Halleran...................................... 9,235 * John H. Powell........................................ 11,688 * Robert E. Quoidbach................................... 3,579(7) * Donald Rodman......................................... 4,853(8) * Frank H. Russell...................................... 1,512 * Sidney R. Snyder...................................... 21,000 * James M. Will, Jr..................................... 1,924 * All directors and executive officers as a group (19 persons)............................................ 469,640(2) 12.4%
- --------------- * Less than one percent. (1) Unless otherwise noted, the address for all of the named persons is 1102 Broadway Plaza, Tacoma, Washington 98402. (2) Unless otherwise indicated, represents shares over which each individual exercises sole voting or investment power. Includes 22,050 shares issuable to executive officers under options exercisable within 60 days. (3) Includes 62,753 shares beneficially owned by NorCap, L.L.C. ("NorCap"), a corporation controlled by Mr. Espe. Also includes 50,175 shares issuable upon exercise of options granted to NorCap, L.L.C., which options became exercisable on September 25, 1993 (and until September 26, 2000) at $6.15 per share as to 36,317 shares and $8.81 per share as to 13,858 shares. (4) Includes 51,184 shares held by Kelcin, a limited partnership in which Mr. Philip is a general partner. Also includes 20,000 shares issued to Mr. Philip as a restricted stock award and held in escrow until certain conditions are met. See "Management -- Options Grants/Awards." 58 61 (5) Includes 3,908 shares owned by a family trust for which Mr. Fine is co-trustee and shares voting and investment power. (6) Includes 3,641 shares held by C&G Partnership, a Washington general partnership in which Ms. Gallagher's spouse, J. James Gallagher, is a general partner. Also includes 10,424 shares held by J. James Gallagher & Company Profit Sharing Trust, for which Ms. Gallagher's spouse, J. James Gallagher, is the trustee. (7) All shares are owned by a living trust for which Mr. Quoidbach is the trustee with sole voting and investment power. (8) All shares are owned by a living trust for which Mr. Rodman and his spouse are co-trustees and share voting and investment power. CERTAIN TRANSACTIONS TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS Employment Agreements With Messrs. Espe and Philip. Pursuant to their respective employment agreements, Columbia agreed to sell to each of Mr. Espe and Mr. Philip 30,000 shares of Common Stock at $12.00 per share, the fair market value of the Common Stock on the dates the parties agreed on the terms of their respective employment agreements. Pursuant to their respective employment agreements, the Company loaned to each of Mr. Espe and Mr. Philip $360,000 to purchase such shares. See "Management -- Employment and Change of Control Agreements." Loans to Directors and Executive Officers. Certain of the Company's directors and executive officers and their immediate families are also customers and depositors of the Company and it is anticipated that such individuals will continue to be customers of the Company in the future. All transactions between the Company and the Company's directors, executive officers and their immediate families were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and in the opinion of management did not involve more than the normal risk of collectibility or present other unfavorable features. At December 31, 1995, loans to directors and executive officers represented 14.4% of the Company's shareholders' equity. NORCAP OPTIONS As compensation for the costs and risks associated with its efforts in facilitating the 1990 acquisition of the Company by a group of investors that included Mr. Espe, NorCap was granted an option to purchase 36,317 shares of Common Stock at a price of $6.15 per share. As part of that same transaction, NorCap was also granted an option to purchase shares of common stock of CNBI. The option to purchase CNBI shares was converted into an option to purchase 13,859 shares of Common Stock at a price of $8.81 per share, as part of the merger of CNBI with and into the Company that was completed in August 1993. The NorCap options are exercisable at any time between September 25, 1993 and September 26, 2000. NorCap is controlled by Mr. Espe, who owns 60% of NorCap's common units, subject to conversion and limited voting rights of holders of its convertible Series A units. Mr. Powell, a current director of the Company, is a director of NorCap. DESCRIPTION OF CAPITAL STOCK COMMON STOCK General. The Company currently is authorized to issue up to 10,000,000 shares of Common Stock. At September 30, 1996, there were 3,710,077 shares of Common Stock outstanding, held of record by 852 shareholders. 59 62 Voting. Each share of Common Stock is entitled to one vote on all matters presented for shareholder vote, including the election of directors. Shareholders do not have cumulative voting rights. Under Washington law, directors are elected by a plurality of votes, where the nominees who receive the greatest number of votes cast by the holders of shares entitled to vote will be elected directors. Unless a corporation's articles of incorporation provide otherwise, Washington law requires that certain fundamental corporate transactions (such as mergers, asset sales and "going private" transactions) be approved by the holders of at least two-thirds of the outstanding voting shares, and that material amendments to a public corporation's articles of incorporation be approved by the holders of at least a majority of the outstanding voting shares. The Company's Articles do not provide otherwise except that any Business Combination (as defined in the Articles) between the Company and any Control Person (as defined in the Articles) must be approved by the holders of at least 66 2/3% of the total shares attributable to persons other than a Control Person in certain circumstances. The Company's Articles further provide that such provision may not be amended except by the affirmative vote of the holders of at least 66 2/3% of the outstanding shares of the Company's Common Stock (subject to the provisions of any preferred stock that may be issued by the Company). Preemptive Rights. The holders of Common Stock do not have preemptive rights to subscribe to any additional securities that the Company may issue. Liquidation. In the event of the Company's liquidation, the holders of Common Stock are entitled to share, pro rata, the assets of the Company remaining after provision for liabilities. Dividends, Distributions and Redemptions. Subject to such preferences as may be applicable to any shares of preferred stock that may be authorized and issued by the Company in the future, dividends may be paid on the Common Stock as and when declared by the Board of Directors out of funds legally available therefor. On May 22, 1996, the Company paid a 5% stock dividend. 164,051 common shares were issued to shareholders. Management presently intends to retain future earnings to support the development and growth of the Company. Accordingly, the Company does not expect to pay cash dividends for the foreseeable future. In addition, regulatory requirements also limit dividends, distributions and redemptions with respect to the Common Stock. Registration Rights. Dain Bosworth Incorporated, a lead underwriter of a prior issue of securities by the Company, has warrants to purchase 18,716 shares of the Company's Common Stock issuable at $10.14 per share. They are entitled to certain rights with respect to registration under the Securities Act of shares issuable upon exercise of such warrants. Under the terms of the warrants, if the Company proposes to register any of its securities under the Securities Act, the warrant holder is entitled to include such shares therein. Dain Bosworth Incorporated has waived its right to include its shares in the offering. In addition, Dain Bosworth Incorporated may require the Company on not more than one occasion to register such shares at the Company's expense, and the Company is required to use commercially reasonable efforts to effect such registration. Transfer Agent and Registrar. The transfer agent and registrar for the Common Stock is American Stock Transfer and Trust Company. PREFERRED STOCK The Company currently is authorized to issue up to 2,000,000 shares of preferred stock. At June 30, 1996, no shares of preferred stock were issued and outstanding. There is no existing or pending plan or agreement for the Company to issue any preferred stock. The Company's Board of Directors has the authority to issue preferred stock in one or more series and, subject to applicable law, to fix and determine or to amend the relative rights and preferences of the shares of any series so established, without any further vote or action of the shareholders. By such applicable law, the Company's Board of Directors also has the authority to determine the liquidation and dividend rights of any preferred stock that may be issued, including priority over the liquidation and dividend rights of holders of Common Stock. 60 63 ANTI-TAKEOVER PROVISIONS Certain provisions contained in the Company's Articles of Incorporation (the "Articles") may deter potential acquirers from attempting a takeover of the Company. The Articles require that any Business Combination (as defined in the Articles) be approved by the affirmative vote of not less than 66 2/3% of the total shares attributable to persons other than a Control Person (as defined in the Articles). This "supermajority" approval is not required if the Company's Board of Directors has approved the transaction or if certain other conditions concerning nondiscrimination among shareholders and receipt of fair value are satisfied. The Articles also include a provision that requires the Company's Board of Directors to consider certain non-monetary factors in evaluating any acquisition bid. Finally, the Articles provide, among other things, that the Company may issue up to 2,000,000 shares of preferred stock, none of which shares are currently issued and outstanding, without prior shareholder approval, in one or more series, with such relative rights and preferences as the Board of Directors may determine. The issuance of preferred stock under certain circumstances could have the effect of delaying or preventing a change in control of the Company. These provisions, and certain provisions contained in Chapter 19 of the Washington Business Corporation Act, Revised Code of Washington Title 23B.19, which prohibit certain significant business transactions if not accomplished in accordance with the statute, collectively and individually, may discourage transactions such as mergers or tender offers on terms which certain of the Company's shareholders may consider beneficial. As a result, holders of the Common Stock may potentially be deprived of an opportunity to sell their shares at a premium over market price. INDEMNIFICATION The Articles provide, among other things, for the indemnification of directors, and authorize the Board of Directors to pay reasonable expenses incurred by, or to satisfy a judgment or fine against, a current or former director in connection with any personal legal liability incurred by the individual while acting for the Company within the scope of his or her employment and which were not the result of conduct finally adjudged to be "egregious" conduct. "Egregious" conduct is defined as intentional misconduct, a knowing violation of law or participation in any transaction from which the person will personally receive a benefit in money, property or services to which that person is not legally entitled. The Articles also include a provision that limits the liability of directors from any personal liability to the Company or its shareholders for conduct not found to have been egregious. SHARES ELIGIBLE FOR FUTURE SALE After completion of this offering, the Company will have outstanding 4,810,077 shares of Common Stock (assuming no exercise of the Underwriters over-allotment option and no exercise of outstanding stock options). Of these shares, the 1,100,000 shares of Common Stock offered hereby will be freely tradeable without restriction or limitation under the Securities Act except to the extent such shares become subject to the agreement with the Underwriters described below or are held by "affiliates" of the Company as such term is defined under Rule 144 under the Securities Act. In addition, an aggregate of 3,223,041 shares of Common Stock presently outstanding are not restricted and, under certain conditions, may be freely tradeable without restriction or limitation under the Securities Act. Shares owned by affiliates may only be sold if they are registered under the Securities Act or if an exemption from registration, such as that provided by Rule 144, is available. The Company, its executive officers and directors and any affiliates thereof, holding in the aggregate 469,640 shares of Common Stock on an as converted or as exercised basis, have agreed not to directly or indirectly offer, sell, pledge, contract to sell, grant any option to purchase or otherwise dispose of any shares of Common Stock of the Company (except pursuant to its stock plan or other employee benefit plans) for a period of 120 days after the date of this Prospectus, without the prior written consent of Alex. Brown & Sons Incorporated. See "Underwriting." 61 64 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, Alex. Brown & Sons Incorporated and Ragen MacKenzie Incorporated (the "Underwriters") have severally agreed to purchase from the Company the following respective numbers of shares of Common Stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus:
NUMBER OF UNDERWRITER SHARES - --------------------------------------------------------------------------------- --------- Alex. Brown & Sons Incorporated.................................................. Ragen MacKenzie Incorporated..................................................... --------- Total............................................................................ 1,100,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all shares of Common Stock offered hereby if any of such shares are purchased. The Company has been advised by the Underwriters that the Underwriters propose to offer the shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the public offering, the offering price and other selling terms may be changed by the Underwriters. The Company has granted to the Underwriters an option, exercisable not later than 30 days after the date of the final Prospectus, to purchase up to 165,000 additional shares of Common stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus. To the extent the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by it shown on the above table bears to 1,100,000, and the Company will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of Common Stock offered hereby. If purchased, the Underwriters will offer such additional shares on the same terms as those on which the 1,100,000 shares are being offered. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. The Company, its executive officers and directors and any affiliates thereof, holding in the aggregate 469,640 shares of Common Stock on an as converted or exercised basis, have agreed not to directly or indirectly offer, sell, pledge, contract to sell, grant any option to purchase or otherwise dispose of any shares of Common Stock of the Company (except pursuant to its stock plan or other employee benefit plans) for a period of 120 days after the date of this Prospectus, without the prior written consent of Alex. Brown & Sons Incorporated. In 1993, Ragen MacKenzie Incorporated, one of the Underwriters, acted as a representative of the underwriters in connection with an offering of 1,580,000 shares of Common Stock. In connection with this offering, certain Underwriters and selling group members (if any) who are qualifying registered market makers on Nasdaq may engage in passive market making transactions in the Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange Act during the two business day period before commencement of sales in this offering. The passive market making transactions must comply with applicable price and volume limits and be identified as such. In general, a passive market maker may display its bid at a price not in excess of the highest independent bid for the security; if all independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. Net purchases by a passive market maker on each day are generally limited to a specified percentage of the passive market maker's average daily trading volume in the Common 62 65 Stock during a prior period and must be discontinued when such limit is reached. Passive market making may stabilize the market price of the Common Stock at a level above that which might otherwise prevail, and if commenced, may be discontinued at any time. LEGAL MATTERS The validity of the Common Stock offered by this Prospectus will be passed upon for the Company by Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C., Tacoma, Washington. Members of Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, beneficially owned 76,384 shares of the Company Common Stock at September 30, 1996. Certain legal matters will be passed upon for the Underwriters by Gibson, Dunn & Crutcher LLP, San Francisco, California. EXPERTS The consolidated financial statements of the Company as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. 63 66 COLUMBIA BANKING SYSTEM, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants..................................................... F-2 Consolidated Balance Sheets at June 30, 1996 (unaudited) and December 31, 1995 and 1994................................................................................ F-3 Consolidated Statements of Operations for the six months ended June 30, 1996 and 1995 (unaudited) and the years ended December 31, 1995, 1994 and 1993.................... F-4 Consolidated Statements of Shareholders' Equity for the six months ended June 30, 1996 (unaudited) and the years ended December 31, 1995, 1994 and 1993.................... F-5 Consolidated Statements of Cash Flows for the six months ended June 30, 1996 and 1995 (unaudited) and the years ended December 31, 1995, 1994 and 1993.................... F-6 Notes to Consolidated Financial Statements............................................ F-7
F-1 67 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Columbia Banking System, Inc. In our opinion, the accompanying consolidated balance sheets as of December 31, 1995 and 1994, and the related consolidated statements of operations, of shareholders' equity and of cash flows for each of the three years in the period ended December 31, 1995, present fairly, in all material respects, the financial position of Columbia Banking System, Inc. and its subsidiaries, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Seattle, Washington January 24, 1996 except as to Note 17, which is as of May 22, 1996 F-2 68 COLUMBIA BANKING SYSTEM, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------- 1995 1994 -------- -------- JUNE 30, 1996 ----------- (UNAUDITED) (IN THOUSANDS) A S S E T S Cash and due from banks.................................... $ 22,326 $ 18,244 $ 11,357 Interest-earning deposits with banks....................... 10,415 12,635 2,301 Securities available for sale: U.S. Treasury and government agencies.................... 16,734 6,948 Mortgage-backed.......................................... 11,268 12,446 2,718 FHLB stock............................................... 4,082 3,281 ----------- -------- -------- Total securities available for sale................... 32,084 22,675 2,718 Investment securities: U.S. Treasury............................................ 1,003 Mortgage-backed.......................................... 16,389 FHLB stock and other..................................... 2,149 ----------- -------- -------- Total investment securities (market value: 12/31/94 -- $18,661)................................ 19,541 Loans held for sale........................................ 1,950 1,367 1,612 Loans...................................................... 401,554 353,093 268,996 Less: allowance for loan losses.......................... 4,411 3,748 2,711 ----------- -------- -------- Loans, net............................................ 397,143 349,345 266,285 Interest receivable........................................ 2,893 2,469 1,734 Premises and equipment, net................................ 13,532 13,736 8,972 Real estate owned.......................................... 3,304 3,227 Other...................................................... 1,269 1,431 1,325 ----------- -------- -------- Total Assets..................................... $ 481,612 $425,206 $319,072 =========== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing...................................... $ 63,208 $ 52,991 $ 37,251 Interest-bearing......................................... 339,706 308,884 231,441 ----------- -------- -------- Total deposits........................................ 402,914 361,875 268,692 Federal Home Loan Bank advances............................ 37,000 25,000 17,000 Other borrowings........................................... 2,300 Other liabilities.......................................... 3,252 3,669 1,784 Convertible subordinated notes............................. 2,363 2,695 2,735 ----------- -------- -------- Total liabilities..................................... 447,829 393,239 290,211 Commitments and contingent liabilities (Note 14) Shareholders' equity: Preferred stock (no par value) Authorized, 2,000,000 shares; None outstanding
JUNE DECEMBER 31, 30, ---------------- Common stock (no par value) 1996 1995 1994 ------- ------- ------- Authorized shares............ 10,000 10,000 10,000 Issued and outstanding....... 3,482 3,274 3,258 33,354 30,806 30,703 Retained earnings........................................ 957 1,274 (1,481) Unrealized losses on securities available for sale....... (528) (113) (361) ----------- -------- -------- Total shareholders' equity............................ 33,783 31,967 28,861 ----------- -------- -------- Total Liabilities and Shareholders' Equity....... $ 481,612 $425,206 $319,072 ========== ======== ========
The accompanying notes are an integral part of these financial statements. F-3 69 COLUMBIA BANKING SYSTEM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ------------------- --------------------------- 1996 1995 1995 1994 1993 ------- ------- ------- ------- ------- (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE) INTEREST INCOME Loans.............................................................. $16,943 $13,978 $30,038 $18,990 $12,258 Investment securities.............................................. 571 1,078 1,127 1,108 Securities available for sale...................................... 826 99 290 205 227 Deposits with banks................................................ 328 69 314 334 362 ------- ------- ------- ------- ------- Total interest income....................................... 18,097 14,717 31,720 20,656 13,955 INTEREST EXPENSE Deposits........................................................... 7,593 5,990 13,385 7,304 4,867 Federal Home Loan Bank advances.................................... 884 664 1,503 1,160 1,788 Other borrowings................................................... 125 138 271 612 876 ------- ------- ------- ------- ------- Total interest expense...................................... 8,602 6,792 15,159 9,076 7,531 ------- ------- ------- ------- ------- NET INTEREST INCOME.................................................. 9,495 7,925 16,561 11,580 6,424 Provision for loan losses.......................................... 760 600 1,250 1,000 502 ------- ------- ------- ------- ------- Net interest income after provision for loan losses......... 8,735 7,325 15,311 10,580 5,922 NONINTEREST INCOME Service charges and other fees..................................... 1,148 905 1,895 1,242 556 Mortgage banking................................................... 308 191 394 782 512 Gains (losses) on sales of securities available for sale........... (8) 842 Gains on sales of loans, net....................................... 39 71 Credit card fees and other fees.................................... 1,017 737 1,671 972 62 ------- ------- ------- ------- ------- Total noninterest income.................................... 2,473 1,833 3,991 2,996 2,043 NONINTEREST EXPENSE Compensation and employee benefits................................. 3,627 3,737 7,339 6,219 4,134 Occupancy.......................................................... 1,616 1,344 2,845 2,802 2,380 Professional services.............................................. 278 220 436 427 867 Advertising and promotion.......................................... 374 338 634 508 735 Printing and supplies.............................................. 192 192 375 397 710 Regulatory assessments............................................. 184 320 482 475 296 Data processing.................................................... 363 295 615 463 160 Gains on, and net cost of, real estate owned....................... (264) (400) (314) (253) Other.............................................................. 2,734 1,929 4,221 3,059 1,627 ------- ------- ------- ------- ------- Total noninterest expense................................... 9,368 8,111 16,547 14,036 10,656 ------- ------- ------- ------- ------- Income (loss) from continuing operations before income tax....................................................... 1,840 1,047 2,755 (460) (2,691) ------- ------- ------- ------- ------- Provision for income tax Income (loss) from continuing operations before extraordinary item and cumulative effect of accounting change.................................................... 1,840 1,047 2,755 (460) (2,691) Extraordinary loss on extinguishment of debt, net.................. (154) Cumulative effect of accounting change............................. 252 ------- ------- ------- ------- ------- NET INCOME (LOSS).................................................... $ 1,840 $ 1,047 $ 2,755 ($ 614) ($2,439) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Per share (on average shares outstanding): Income (loss) from continuing operations........................... $ 0.52 $ 0.30 $ 0.79 ($ 0.13) ($ 1.17) Extraordinary loss on extinguishment of debt, net.................. (0.05) Cumulative effect of accounting change............................. 0.11 Net income (loss).................................................. 0.52 0.30 0.79 (0.18) (1.06) Fully diluted net income (loss).................................... 0.52 0.30 0.79 (0.18) (1.06) Average number of common and common equivalent shares outstanding.... 3,566 3,484 3,496 3,481 2,301 Fully diluted average common and common equivalent shares outstanding........................................................ 3,790 3,742 3,752 3,740 2,560
The accompanying notes are an integral part of these financial statements. F-4 70 COLUMBIA BANKING SYSTEM, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK --------------------- UNREALIZED TOTAL NUMBER OF RETAINED GAINS AND SHAREHOLDERS' SHARES AMOUNT EARNINGS (LOSSES) EQUITY --------- ------- -------- ---------- ------------ (IN THOUSANDS) BALANCE AT DECEMBER 31, 1992... 1,336 $10,069 $ 1,572 $ 11,641 Net loss..................... (2,439) (2,439) Issuance of shares of common stock, net................ 1,914 20,599 20,599 ------- ------- -------- --------- ----------- BALANCE AT DECEMBER 31, 1993... 3,250 30,668 (867) 29,801 Adjustment to beginning balance for change in accounting method, net.... ($ 32) (32) Net loss..................... (614) (614) Issuance of shares of common stock, net................ 8 35 35 Change in unrealized losses.................... (329) (329) ------- ------- -------- --------- ----------- BALANCE AT DECEMBER 31, 1994... 3,258 30,703 (1,481) (361) 28,861 Net income................... 2,755 2,755 Issuance of shares of common stock, net................ 16 103 103 Change in unrealized gains and (losses).............. 248 248 ------- ------- -------- --------- ----------- BALANCE AT DECEMBER 31, 1995... 3,274 30,806 1,274 (113) 31,967 Net income (unaudited)....... 1,840 1,840 Issuance of shares of common stock, net................ 44 391 391 Issuance of shares of common stock -- 5% stock dividend.................. 164 2,157 (2,157) Change in unrealized gains and (losses).............. (415) (415) ------- ------- -------- --------- ----------- BALANCE AT JUNE 30, 1996 (UNAUDITED).................. 3,482 $33,354 $ 957 ($ 528) $ 33,783 ======= ======= ======== ========= ===========
The accompanying notes are an integral part of these financial statements. F-5 71 COLUMBIA BANKING SYSTEM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ------------------- ------------------------------ 1996 1995 1995 1994 1993 -------- -------- -------- -------- -------- (UNAUDITED) (IN THOUSANDS) OPERATING ACTIVITIES Net income (loss)......................................... $ 1,840 $ 1,047 $ 2,755 $ (614) $ (2,439) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Provision for loan losses............................... 760 600 1,250 1,000 502 Losses (gains) on real estate owned..................... 41 (11) 29 (30) (26) Depreciation and amortization........................... 1,057 588 1,365 1,610 1,162 Deferred income tax (benefit)........................... (252) Net realized losses (gains) on sales of investments..... 196 (22) (53) (12) (62) (Increase) decrease in loans held for sale.............. (583) (716) 245 165 244 Increase in interest receivable......................... (424) (444) (735) (635) (325) (Decrease) increase in interest payable................. (12) 438 388 538 104 Net changes in other assets and liabilities............. (282) 249 1,317 (352) 673 -------- -------- -------- -------- -------- Net cash provided (used) by operating activities... 2,593 1,729 6,561 1,670 (419) INVESTING ACTIVITIES Proceeds from maturities of securities available for sale.................................................... 9,428 215 537 Proceeds from maturities of mortgage-backed securities available for sale...................................... 807 Proceeds from maturities of investment securities......... 4,243 2,557 1,047 Proceeds from maturities of mortgage-backed securities.... 1,220 Proceeds from sales of securities available for sale...... 5,980 Proceeds from sales of investment securities.............. 507 Proceeds from sales of loans.............................. 4,756 3,570 Purchase of securities available for sale................. (19,937) (6,000) Purchases of investment securities........................ (3,546) (4,675) (266) (17,197) Loans originated and acquired, net of principal collected............................................... (48,785) (54,319) (88,579) (88,286) (63,491) Purchases of premises and equipment....................... (1,045) (4,434) (6,660) (3,544) (3,681) Proceeds from disposal of premises and equipment.......... 140 240 412 2 Proceeds from sale of real estate owned................... 3,263 13 13 536 110 Other, net................................................ (71) (119) 273 -------- -------- -------- -------- -------- Net cash used by investing activities.............. (56,129) (61,137) (90,586) (88,054) (78,860) FINANCING ACTIVITIES Net increase in deposits.................................. 41,039 45,016 93,183 103,353 47,325 Net increase in other borrowings.......................... 2,300 Proceeds from FHLB advances and other long-term debt...... 20,800 17,000 17,000 17,000 41,000 Repayment of FHLB advances and other long-term debt....... (8,800) (9,000) (32,000) (27,000) Repayment of other borrowings............................. (4,600) Proceeds from issuance of common stock.................... 59 16 63 35 17,901 -------- -------- -------- -------- -------- Net cash provided by financing activities.......... 55,398 62,032 101,246 83,788 79,226 -------- -------- -------- -------- -------- Increase (decrease) in cash and cash equivalents... 1,862 2,624 17,221 (2,596) (53) Cash and cash equivalents at beginning of period... 30,879 13,658 13,658 16,254 16,307 -------- -------- -------- -------- -------- Cash and cash equivalents at end of period................ $ 32,741 $ 16,282 $ 30,879 $ 13,658 $ 16,254 ======== ======== ======== ======== ======== Supplemental information: Cash paid for interest.................................... $ 8,614 $ 6,354 $ 14,771 $ 8,538 $ 7,427 Transfer from investment securities to securities available for sale...................................... 19,912 4,162 Loans foreclosed and transferred to real estate owned..... 428 236 Issuance of common stock from conversion of convertible subordinated notes...................................... 332 15 40 2,698
The accompanying notes are an integral part of these financial statements. F-6 72 COLUMBIA BANKING SYSTEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The interim unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. 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, 1996 are not necessarily indicative of results to be anticipated for the year ending December 31, 1996. Certain amounts in the 1995 financial statements have been reclassified to conform with the 1996 interim presentation. Consolidation The consolidated financial statements of the Company include the accounts of the corporation and its wholly owned subsidiaries after the elimination of all material intercompany transactions and accounts. Securities Securities to be held for indefinite periods of time and not intended to be held to maturity or on a long-term basis are classified as available for sale and carried at market value. Unrealized gains and losses are recorded directly to a component of shareholders equity. Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates and/or significant prepayment risk. Investment securities are those securities which the Company has the ability and intent to hold to maturity. Events which may be reasonably anticipated are considered when determining the Company's intent to hold investment securities until maturity. Investment securities are carried at cost, adjusted for amortization of premiums and accretion of discounts using a method that approximates the interest method. Gains and losses on the sale of all securities are determined using the specific identification method. Loans Loans are stated at their principal amount outstanding, less any unamortized discounts and deferred net loan fees. Loans held for sale are carried at the lower of cost or market value. The amount by which cost exceeds market for loans held for sale is accounted for as a valuation allowance and changes in the allowance are included in the determination of net income in the period in which the change occurs. The current 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. Premiums or discounts on loans purchased and sold are amortized, using the interest method, over periods which approximate the average life of the loans. Loan Fee Income Loan origination fees and certain direct loan origination costs are deferred and the net amount recognized as an adjustment to yield over the contractual life of the loans. Costs related to F-7 73 COLUMBIA BANKING SYSTEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) origination of credit cards are expensed as incurred. Fees related to lending activity other than the origination or purchase of loans are recognized as noninterest income during the period the related services are performed. Allowance for Loan Losses The allowance for loan losses is maintained at a level believed to be sufficient to absorb potential losses in the portfolio. Management's determination of the adequacy of the allowance is based on a number of factors, including the level of nonperforming loans, loan loss experience, credit concentrations, a review of the quality of the loan portfolio, collateral values and uncertainties in economic conditions. Premises and Equipment Premises and equipment are recorded at cost and depreciated over the estimated useful lives of the assets. Depreciation and amortization are computed using the straight-line method. Gains or losses on dispositions are reflected in operations. Expenditures for improvements and major renewals are capitalized, and ordinary maintenance, repairs and small purchases are charged to operations as incurred. Real Estate Owned All real estate acquired in satisfaction of a loan is considered held for sale and reported as "real estate owned." Real estate owned is carried at the lower of cost or fair value less estimated cost of disposal. Cost at the time of foreclosure is defined as the fair value of the asset less estimated disposal costs. Intangible Assets Intangible assets represent assets purchased by the Company in mergers and acquisitions. The recorded cost of each asset is amortized using the straight-line method over its estimated useful life (up to 15 years for core deposit intangible assets and 25 years for goodwill). At December 31, 1995 and 1994, intangible assets amounted to $266,000 and $339,000, respectively, net of accumulated amortization. Income Tax The provision for income tax generally is based on income and expense reported for financial statement purposes, using the "asset and liability method" for accounting for deferred income tax. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded against any deferred tax assets for which it is more likely than not that the deferred tax asset will not be realized. Earnings Per Share Primary and fully diluted earnings per share are computed using the weighted average number of shares of common and common equivalent shares outstanding. Common equivalent shares result F-8 74 COLUMBIA BANKING SYSTEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) from the assumed exercise of outstanding stock options, if dilutive. Fully diluted earnings per share assumes conversion of convertible subordinated notes, if dilutive. (See Note 17). Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are used in determining the level of the allowance for loan losses, valuation allowance on deferred tax assets, depreciation of premises and equipment and others. Statement of Cash Flows The accompanying consolidated statement of cash flows has been prepared using the "indirect" method for presenting cash flows from operating activities. For purposes of this statement, cash and cash equivalents include cash and due from banks, interest-earning deposits with banks and federal funds sold. Reclassification Certain amounts in the 1994 and 1993 consolidated financial statements have been reclassified to conform with the 1995 presentation. These reclassifications had no effect on net income (loss). 2. MERGERS In August 1993 the Company merged with Columbia National Bankshares, Inc. ("CNBI"), and its sole subsidiary Columbia National Bank, located in Longview, Washington (now Columbia State Bank, Tacoma, Washington, a state-chartered, FDIC-insured commercial bank). The transaction called for the exchange of .1622 shares of the Company's common stock for each share of CNBI stock. Shareholders of Columbia National Bank ("Columbia Bank"), except CNBI, also received .1622 shares of the Company's common stock for each share of Columbia National Bank common stock. The merger was accounted for in a manner similar to a pooling of interests due to common control, and, accordingly, pre-merger historical financial information has been restated to include the accounts of CNBI. In March and October 1994, respectively, the Company merged its wholly owned subsidiaries Columbia Savings Bank, A Federal Savings Bank ("the Savings Bank") and Columbia First Service, Inc. into Columbia Bank. As a result of the mergers, Columbia Bank remains as the Company's sole subsidiary, and its operations include all activities related to mortgage banking and servicing. 3. TERMINATION OF ASSISTANCE AGREEMENT AND EXTINGUISHMENT OF DEBT In connection with the acquisition of the Savings Bank in 1988, the Savings Bank and the Company entered into an agreement (the "Assistance Agreement"), pursuant to which the Federal Savings and Loan Insurance Corporation ("the FSLIC") provided various forms of financial and other assistance to the Savings Bank, including the purchase of a $5 million subordinated debenture due August 2, 1998. On September 30, 1994, Columbia Bank entered into an agreement with the FDIC, as successor to the FSLIC, to terminate the Assistance Agreement and to settle the obligations under the subordinated debenture for $4.6 million, resulting in an extraordinary nonrecurring loss of approximately $154,000. F-9 75 COLUMBIA BANKING SYSTEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. RESTRICTIONS ON SUBSIDIARY CASH, LOANS AND DIVIDENDS Columbia Bank is required to maintain reserve balances with the Federal Reserve Bank. The average required reserves at December 31, 1995 were approximately $200,000. The required reserves are based on specified percentages of Columbia Bank's total average deposits. The percentages of deposits required to be maintained are established by the Federal Reserve Board. Under Federal Reserve regulations, Columbia Bank, generally, is limited as to the amount it may loan to the Company, to 10 percent of its combined capital stock and additional paid-in capital. Such loans must be collateralized by specified obligations. Under Washington state banking regulations, Columbia Bank is limited as to the ability to declare or pay dividends to the Company up to the amount of Columbia Bank's net profits then on hand, less any required transfers to additional paid-in capital. 5. SECURITIES AVAILABLE FOR SALE Effective January 1, 1994, the Company adopted the FASB's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 generally requires that investments in equity and debt securities be classified as either investment securities, trading securities or securities available for sale. Securities that are bought with the positive intent and ability to hold to maturity ("investment securities") are reported at amortized cost. Securities that are bought principally for the purpose of selling them in the near term ("trading securities") are reported at fair value, with unrealized gains and losses included in net income. Securities to be held for indefinite periods of time and not intended to be held to maturity ("securities available for sale") are reported at fair value, with unrealized gains and losses excluded from net income and reported in a separate component of shareholders equity. At December 31, 1995 and 1994, the Company had no trading securities. The following table summarizes the amortized cost, gross unrealized gains and losses and the resulting market value of securities available for sale.
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- ------- (IN THOUSANDS) December 31, 1995: U.S. Treasury & government agency.......... $ 6,935 $ 13 $ 6,948 Mortgage-backed............................ 12,572 $ (126) 12,446 FHLB stock................................. 3,281 3,281 -------- -------- --------- ------- Total.............................. $22,788 $ 13 $ (126) $22,675 ======== ======== ========= ======= December 31, 1994: Mortgage-backed............................ $ 3,079 $ (361) $ 2,718 ======== ======== ========= ======= December 31, 1993: Mortgage-backed............................ $ 3,621 $ (32) $ 3,589 ======== ======== ========= =======
In November 1995, the FASB issued a Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." In addition to the report, the FASB permitted a one-time opportunity for institutions to reassess the appropriateness of the designations of all securities. Accordingly, in December 1995, the Company reclassified all "invest- F-10 76 COLUMBIA BANKING SYSTEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ment securities" as "securities available for sale" resulting in additional net unrealized losses of $113,000. In December 1995 the Company sold mortgage-backed-securities available for sale with a market value of $5.9 million for a net loss of $8,000. Proceeds from sales of securities available for sale during 1993 were $5.7 million, resulting in gross gains of $842,000 and no gross losses. At December 31, 1995, securities available for sale with a fair value of $3.0 million were pledged to secure public deposits and for other purposes as required or permitted by law. No securities available for sale were pledged at December 31, 1994 and 1993. The following table summarizes the recorded and market values of securities available for sale by contractual maturity groups:
DECEMBER 31, 1995 ----------------------- AMORTIZED MARKET COST VALUE --------- ------- (IN THOUSANDS) Amount maturing: Within one year................................................... $ 1,911 $ 1,909 Greater than one year and less than five years.................... 13,537 13,413 Greater than five years and less than ten years................... 2,034 2,034 After ten years................................................... 5,306 5,318 -------- ------- Total..................................................... $22,788 $22,675 ======== =======
6. INVESTMENT SECURITIES At December 31, 1995, the Company had no securities held for investment purposes. The following table summarizes the recorded value, gross unrealized gains and losses and the resulting market value of investment securities at December 31, 1994 and 1993:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- ------- (IN THOUSANDS) December 31, 1994: U.S. Treasury.............................. $ 1,003 $ (17) $ 986 Mortgage-backed............................ 16,389 (863) 15,526 FHLB stock and other....................... 2,149 2,149 -------- -------- --------- ------- Total.............................. $19,541 $ (880) $18,661 ======== ======== ========= ======= December 31, 1993: U.S. Treasury.............................. $ 1,009 $ 1,009 Mortgage-backed............................ 19,038 $ 70 $ (12) 19,096 FHLB stock and other....................... 1,883 1,883 -------- -------- --------- ------- Total.............................. $21,930 $ 70 $ (12) $21,988 ======== ======== ========= =======
No investment securities were sold during 1995 and 1994. Proceeds from sales of investment securities during 1993 were $507,000, resulting in gross gains of $37,500 and no gross losses. In computing gains and losses, cost is determined using the specific identification method. F-11 77 COLUMBIA BANKING SYSTEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1994 and 1993, investment securities with face values of $2.3 million and $1.0 million, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. 7. LOANS The following is an analysis of the loan portfolio by major types of loans:
DECEMBER 31, ----------------------- 1995 1994 JUNE 30, -------- -------- 1996 ----------- (UNAUDITED) (IN THOUSANDS) Real estate: One- to four-family residential.................. $ 69,364 $ 67,991 $ 76,260 Five or more family residential and commercial properties.................................... 117,486 97,103 68,531 ----------- -------- -------- Total real estate............................. 186,850 165,094 144,791 Real estate construction: One- to four-family residential.................. 23,870 22,741 17,411 Five or more family residential and commercial properties.................................... 10,466 8,884 4,004 ----------- -------- -------- Total real estate construction................ 34,336 31,625 21,415 Commercial business................................ 132,251 113,775 72,829 Consumer........................................... 48,547 43,343 30,860 ----------- -------- -------- Subtotal......................................... 401,984 353,837 269,895 Less deferred loan fees, net and other............. (430) (744) (899) ----------- -------- -------- Total loans...................................... $ 401,554 $353,093 $268,996 ========== ======== ======== Loans held for sale................................ $ 1,950 $ 1,367 $ 1,612 ========== ======== ========
At June 30, 1996, December 31, 1995 and 1994, residential real estate loans with recorded values of $44.4 million, $30.0 million and $20.4 million, respectively, were pledged to secure Federal Home Loan Bank advances and for other purposes. The following table summarizes certain information related to nonperforming loans:
DECEMBER 31, ---------------------------- 1995 1994 1993 JUNE 30, ---- ---- ------ 1996 ----------- (UNAUDITED) (IN THOUSANDS) Loans accounted for on a nonaccrual basis...... $ 676 $435 $452 $1,631 Restructured loans............................. 69 29 44 94 --------- ---- ---- ------ Total nonperforming loans.................... $ 745 $464 $496 $1,725 ======== ==== ==== ====== Originally contracted interest................. $ 26 $ 49 $ 50 $ 153 Recorded interest.............................. 4 38 27 103 --------- ---- ---- ------ Reduction in interest income................. $ 22 $ 11 $ 23 $ 50 ======== ==== ==== ======
In May 1993, the FASB issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114), which requires that impaired loans (as defined) be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the bank's collateral. In October 1994, the Board F-12 78 COLUMBIA BANKING SYSTEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) issued Statement No. 118 ("SFAS 118"), amending SFAS 114 with regard to income recognition and disclosure related to impaired loans. Impaired loans, generally refer to all loans that are restructured in a troubled debt restructuring involving a modification of terms, nonaccrual loans and loans past due 90 days and still accruing. The Company adopted the new standard in 1995. At June 30, 1996 and December 31, 1995, the recorded investment in impaired loans was $1.0 million and $616,000, respectively. No specific allocated allowance for loan losses has been made for impaired loans. The average recorded investment in impaired loans for the periods ended June 30, 1996 and December 31, 1995 was $1.0 million and $513,000, respectively. In September 1995, the Company sold approximately $4.8 million in lower yielding one to four-family adjustable rate real estate loans realizing a gain on the sale of $39,000. At June 30, 1996, December 31, 1995 and 1994, there were no commitments to loan additional funds on loans accounted for on a nonaccrual basis. At December 31, 1995 and 1994, the Company had no foreign loans or loans related to highly leveraged transactions. The Company's banking subsidiary has granted loans to officers and directors of the Company and their associates. These loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. The aggregate dollar amount of these loans were $3.2 million, $4.6 million and $4.5 million at June 30, 1996, December 31, 1995 and 1994, respectively. During 1995, $1.2 million of new related party loans were made and repayments and transfers totaled $1.1 million. 8. ALLOWANCE FOR LOAN LOSSES Transactions in the allowance for loan losses are summarized as follows:
YEAR ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 JUNE 30, ------ ------ ------ 1996 ----------- (UNAUDITED) (IN THOUSANDS) Balance at beginning of period................... $ 3,748 $2,711 $1,992 $1,539 Loans charged off................................ (111) (263) (364) (110) Recoveries....................................... 14 50 83 61 ---------- ------ ------ ------ Net charge-offs................................ (97) (213) (281) (49) Provision charged to operating expense........... 760 1,250 1,000 502 ---------- ------ ------ ------ Balance at end of period............... $ 4,411 $3,748 $2,711 $1,992 ========== ====== ====== ======
F-13 79 COLUMBIA BANKING SYSTEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. PREMISES AND EQUIPMENT Land, buildings, and furniture and equipment, less accumulated depreciation and amortization, were as follows:
DECEMBER 31, ------------------- 1995 1994 ------- ------- (IN THOUSANDS) Land................................................... $ 1,748 $ 500 Buildings.............................................. 8,589 5,204 Leasehold improvements................................. 1,509 1,132 Furniture and equipment................................ 5,533 4,362 Automobiles............................................ 101 62 Computer software...................................... 691 638 ------- ------- Total cost................................... 18,171 11,898 Less accumulated depreciation and amortization......... (4,435) (2,926) ------- ------- Total........................................ $13,736 $ 8,972 ======= =======
Total depreciation and amortization expense on buildings and furniture and equipment was $1,678,000, $1,610,000 and $1,300,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The Company is obligated under various noncancellable lease agreements for property and equipment (primarily for land and buildings) which require future minimum rental payments, exclusive of taxes and other charges, as follows:
YEAR ENDING DECEMBER 31, (IN THOUSANDS) ------------------------------------------------------------- -------------- 1996......................................................... $ 883 1997......................................................... 744 1998......................................................... 701 1999......................................................... 608 2000......................................................... 389 2001 and thereafter.......................................... 2,158 ---------- Total minimum payments............................. $5,483 ==========
Total rental expense on buildings and equipment was $946,000, $909,000 and $474,000 for the years ended December 31, 1995, 1994 and 1993, respectively. 10. FEDERAL HOME LOAN BANK ADVANCES AND LONG-TERM DEBT Federal Home Loan Bank of Seattle (FHLB) advances and long-term debt consisted of the following:
DECEMBER 31, ------------------- 1995 1994 ------- ------- (IN THOUSANDS) FHLB........................................................... $25,000 $17,000 7.85% Convertible subordinated notes due June 30, 2002......... 2,695 2,735 ------- ------- Total FHLB advances and other long-term debt......... $27,695 $19,735 ======= =======
F-14 80 COLUMBIA BANKING SYSTEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Convertible Notes are redeemable in whole or in part at any time at the option of the Company. At the option of the holder, the Convertible Notes are convertible into shares of Common Stock at any time prior to maturity at a conversion price of $10.56 per share subject to adjustment under certain circumstances. FHLB advances are at the following interest rates:
DECEMBER 31, ---------------------- 1995 1994 --------- --------- (DOLLARS IN THOUSANDS) 7.10........................................ $ 2,000 6.90........................................ $ 5,000 5,000 6.20........................................ 2,000 6.09........................................ 8,000 5.32........................................ 5,000 5,000 5.20........................................ 5,000 5,000 --------- --------- Total............................. $ 25,000 $ 17,000 ========= =========
Aggregate maturities of FHLB advances due in years ending December 31, 1995, are as follows:
AMOUNT -------------- (IN THOUSANDS) 1996................................................. $ 13,000 1998................................................. 10,000 2000................................................. 2,000 ------------ Total...................................... $ 25,000 ============
FHLB advances are collateralized by residential real estate loans with a recorded value of approximately $30.0 million at December 31, 1995, and $20.4 million at December 31, 1994 (see Note 7). Penalties are generally required for prepayments of certain long-term FHLB advances. At December 31, 1995, the Company had an unused $5 million line of credit with a commercial bank bearing interest at prime plus 0.25% expiring October 1, 1996 at which time the balance on the line of credit becomes payable in quarterly installments over 18 months. The line of credit is secured by common stock of Columbia Bank. 11. INCOME TAX The components of income tax expense are as follows:
YEAR ENDED DECEMBER 31, ---------------------- 1995 1994 1993 SIX MONTHS ---- ---- ---- ENDED JUNE 30, 1996 ------------- (UNAUDITED) (IN THOUSANDS) Current..................................... Deferred.................................... ---------- ---- ---- ---- Total............................. None None None None ========== ==== ==== ====
Effective January 1, 1993, the Company adopted the FASB's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). This Statement requires the use of the "asset and liability" method of accounting for income taxes. Deferred income tax represents the net tax effects of temporary differences between the carrying amounts of assets and liabilities for F-15 81 COLUMBIA BANKING SYSTEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) financial reporting purposes and the amounts used for income tax purposes. As permitted under SFAS 109, financial statements for years prior to 1993 have not been restated. However, the cumulative effect on prior years of adopting SFAS 109 -- an income increase of $252,000 -- is included in 1993 income. Significant components of the Company's deferred tax assets and liabilities at June 30, 1996, December 31, 1995 and 1994 are as follows:
DECEMBER 31, ------------------- 1995 1994 JUNE 30, ------- ------- 1996 ----------- (UNAUDITED) (IN THOUSANDS) Deferred tax assets: Net operating loss carryforward........................ 733 $ 1,478 $ 2,799 Tax credit carryover................................... 673 595 595 Allowance for loan losses.............................. 1,499 1,274 92 Contributions.......................................... 129 97 56 ----------- ------- ------- Total deferred tax assets...................... 3,034 3,444 4,372 Less: valuation allowance.............................. (2,051) (2,606) (3,580) ----------- ------- ------- Subtotal....................................... 983 838 792 Deferred tax liabilities: FHLB stock dividends................................... (601) (551) (487) "SAIF" special assessment.............................. (104) Depreciation........................................... (26) (35) (53) ----------- ------- ------- Total deferred tax liabilities................. (731) (586) (540) ----------- ------- ------- Net deferred tax assets........................ $ 252 $ 252 $ 252 =========== ======= =======
For federal income tax purposes the Company has available net operating loss carryforwards to reduce future taxable income approximately as follows:
DECEMBER 31, EXPIRATION DATE DECEMBER 31, 1995 ------------------------------------------------- JUNE 30, ------------ 1996 ----------- (UNAUDITED) (IN THOUSANDS) 2002............................................. -- $ 715 2003............................................. -- 648 2004............................................. 41 876 2005............................................. 75 75 2006............................................. 223 223 2008............................................. 1,740 1,740 2009............................................. 76 76 ---------- ----------- Total net operating loss carryforwards........................ $ 2,155 $4,353 ========== ===========
Additionally, at June 30, 1996, the Company had alternative minimum tax, investment and rehabilitation tax credit carryforwards of approximately $673,000, of which $581,000 expires in 1997, $14,000 expires in 1999 and the remainder in 2010. However, because of annual limitations on the utilization of net operating loss carryforwards due to changes in control, and because the Internal Revenue Code of 1986 requires that net operating loss carryforwards be utilized before tax credit carryforwards, the Company may not receive an income tax benefit from the tax credit carryforwards. F-16 82 COLUMBIA BANKING SYSTEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of the Company's effective income tax rate with the federal statutory tax rate is as follows:
JUNE 30, YEAR ENDED DECEMBER 31, ---------------- ------------------------------------------------------ 1996 1995 1994 1993 ---------------- ---------------- ---------------- ---------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- ------ ------- (UNAUDITED) (DOLLARS IN THOUSANDS) Income tax based on statutory rate............................. $(625 ) (34)% $(937 ) (34)% $ 209 34% $ 918 34% Increase (reduction) resulting from: Other nondeductible items........ 70 4 (37 ) (1) (27 ) (4) Valuation allowance.............. 555 30 974 35 (182 ) (30) (918 ) (34) ----- ------ ------ ------- ----- ------ ------ ------ Total securities available for sale......................... 32,084 22,675 2,718 Investment securities: U.S. Treasury.................... 1,003 Mortgage-backed.................. 16,389 FHLB stock and other............. 2,149 Income tax................. $ 0 0% $ 0 0% $ 0 0% $ 0 0% ===== ====== ====== ======= ===== ====== ====== ======
12. STOCK OPTIONS AND WARRANTS At December 31, 1995 and 1994, the Company had stock options outstanding of 247,433 shares and 247,170 shares, respectively, for the purchase of common stock at option prices ranging from $2.38 to $11.19 per share. The Company's policy is to recognize compensation expense at the date the options were granted due to the difference, if any, between the estimated market value of the underlying common stock in excess of the stated option price. At December 31, 1995 and 1994, the Company had a stock warrant outstanding to purchase 18,716 shares of common stock at $10.14 per share, which expire in 1997. At December 31, 1995 and 1994, the Company had stock options outstanding granted to a company controlled by a director for the purchase of 36,317 and 13,858 shares of common stock at an exercise price of approximately $6.15 and $8.81 per share, respectively. These options are generally exercisable in whole or in part at any time before September 26, 2000. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The statement requires the Company to elect to account for stock-based compensation on a fair value basis or an intrinsic value basis. The intrinsic value basis is currently used by the Company and is the accounting principle prescribed by Accounting Principles Board No. 25 "Accounting for Stock Issued to Employees" (APB 25). SFAS 123 requires disclosure in the footnotes of the pro forma impact on net income and earnings per share of the difference between compensation expense using the intrinsic value method and the fair value method. The adoption of SFAS 123 is required for the fiscal year ended December 31, 1996. The Company expects to apply APB 25 for measurement of stock compensation and will provide disclosure required by SFAS 123 beginning in fiscal year 1996. 13. EMPLOYEE BENEFIT PLAN The Company maintains a defined contribution plan which allows employees to contribute up to 15% of their compensation to the plan. Employees who are at least 20 1/2 years of age and have completed 6 months of service are eligible to participate in the plan. The Company is required to match 50% of employee contributions up to 3% of each employee's total compensation. The Company contributed approximately $126,000 and $80,000 in matching funds to the plan during the years ended December 31, 1995 and 1994, respectively. The Company amended the defined contribution plan effective April 1, 1990 to add a nonmatching, discretionary contribution as determined by the Board of Directors of the Company. F-17 83 COLUMBIA BANKING SYSTEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In January 1996, the Company announced a discretionary contribution of approximately $290,000 which will be paid out of a reserve established during 1995. In April 1995, the Company established an "Employee Stock Purchase Plan" ("ESPP"). Substantially all employees of the Company who have been continuously employed for six months are eligible to participate in the ESPP under which Common Stock is issued at quarterly intervals for cash at a price of 90% of the fair market value of the stock. Under the ESPP, 3,749 shares were acquired by employees for $41,000 in 1995. There is no charge to income as a result of issuance of stock under this plan. At December 31, 1995, 96,251 shares of unissued common stock were reserved for issuance under this plan. 14. COMMITMENTS AND CONTINGENT LIABILITIES An employment agreement with one officer calls for an annual salary of $150,000 in 1994 through 1996. As part of the employment agreement, the Company will provide a Supplementary Employee Retirement Plan (SERP) based on a contribution of 10% of total compensation. In addition, in 1993, two officers each purchased 30,000 shares of the Company's common stock at the fair value of $12.00 per share at the date of purchase. The purchase of stock was financed by the Company with annual interest-only payable at 6% and principal due in April and July 2000. The Company has Long Term Incentive Plan Awards with two officers. Under the arrangements, specific compensation and allowance payments were agreed to be made in 1996 and 1997 if the company achieves certain performance objectives. The estimated future payout is $706,000, of which $495,000 has been accrued as of June 30, 1996. In the normal course of business, the Company makes loan commitments (unfunded loans and unused lines of credit) and issues standby letters of credit to accommodate the financial needs of its customers. Standby letters of credit commit the Company to make payments on behalf of customers under specified conditions. Historically, no significant losses have been incurred by the Company under standby letters of credit. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Company's normal credit policies, including the obtaining of collateral, where appropriate. At June 30, 1996, December 31, 1995 and 1994, the Company's loan commitments amounted to $105.6 million, $72.8 million and $72.4 million, respectively. Standby letters of credit were $1.3 million, $1.5 million and $655,000 at June 30, 1996, December 31, 1995 and 1994, respectively. In addition, commitments under commercial letters of credit used to facilitate customers trade transactions amounted to $2.5 million at December 31, 1995 and 1994. The Company and its subsidiaries are from time to time defendants in and are threatened with various legal proceedings arising from their regular business activities. Management, after consulting with legal counsel, is of the opinion that the ultimate liability, if any, resulting from these and other pending or threatened actions and proceedings will not have a material effect on the financial position or results of operations of the Company and its subsidiaries. 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The FASB's Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS 107"), requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. "Fair Value" is defined in SFAS 107 as the amount at which an instrument could be exchanged in a current transaction between willing parties, other than a forced or liquidation sale. F-18 84 COLUMBIA BANKING SYSTEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes carrying amounts and estimated fair values of selected financial instruments as well as assumptions used by the Company in estimating fair value:
DECEMBER 31, ----------------------------------------- 1995 1994 ------------------- ------------------- ASSUMPTIONS USED IN CARRYING FAIR CARRYING FAIR ESTIMATING FAIR VALUE AMOUNT VALUE AMOUNT VALUE --------------------- -------- -------- -------- -------- (IN THOUSANDS) ASSETS Cash and due from banks................ Approximately equal to carrying value $ 18,244 $ 18,244 $ 11,357 $ 11,357 Interest-earning deposits with banks................ Approximately equal to carrying value 12,635 12,635 2,301 2,301 Securities available for sale................. Quoted market prices 22,675 22,675 2,718 2,718 Investment securities... Quoted market prices 19,541 18,661 Loans held for sale..... Approximately equal to carrying value 1,367 1,367 1,612 1,612 Loans................... Discounted expected future cash flows, net of allowance for loan losses 349,345 371,720 266,285 269,210 LIABILITIES Deposits................ Fixed-rate certificates of deposit: Discounted expected future cash flows All other deposits: Approximately equal to carrying value $361,875 $360,609 $268,692 $259,975 Federal Home Loan Bank advances............. Discounted expected future cash flows 25,000 24,585 17,000 16,106 Convertible subordinated notes................ Discounted expected future cash flows 2,695 2,695 2,735 2,591
Off-Balance Sheet Financial Instruments The fair value of commitments is estimated based upon fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate commitments, the fair value estimation takes into consideration an interest rate risk factor. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements. The fair value of these off-balance sheet items at December 31, 1995 approximates the recorded amounts of the related fees. Concentration of Credit Risk Substantially all of the Company's loans, loan commitments and core deposits are geographically concentrated in Washington state. F-19 85 COLUMBIA BANKING SYSTEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. PARENT COMPANY FINANCIAL INFORMATION CONDENSED BALANCE SHEET -- PARENT COMPANY ONLY
DECEMBER 31, ------------------- 1995 1994 ------- ------- (IN THOUSANDS) ASSETS Cash and due from banks: Subsidiary banks..................................................... $ 41 $ 9 Unrelated banks...................................................... 68 68 Interest-earning deposits with banks: Subsidiary banks..................................................... 368 Unrelated banks...................................................... 651 Loans.................................................................. 905 905 Investments in bank subsidiaries....................................... 32,660 25,835 Premises and equipment, net............................................ 49 69 Real estate owned...................................................... 3,304 3,227 Other assets........................................................... 354 520 ------- ------- Total Assets................................................. $37,381 $31,652 LIABILITIES AND SHAREHOLDERS' EQUITY Other liabilities...................................................... $ 119 $ 56 Borrowed funds from subsidiary bank.................................... 2,600 Convertible subordinated notes......................................... 2,695 2,735 ------- ------- Total liabilities............................................ 5,414 2,791 Shareholders' equity................................................... 31,967 28,861 ------- ------- Total Liabilities and Shareholders' Equity................... $37,381 $31,652 ======= =======
F-20 86 COLUMBIA BANKING SYSTEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED STATEMENT OF OPERATIONS -- PARENT COMPANY ONLY
YEAR ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 ------ ----- ------- (IN THOUSANDS) INCOME Interest on loans.............................................. $ 54 $ 54 $ 50 Interest on securities available for sale...................... 188 221 Losses on securities available for sale(1)..................... (270) Interest-earning deposits: Subsidiary banks............................................. 6 9 62 Unrelated banks.............................................. 16 31 17 Other.......................................................... 533 470 10 ------ ----- ------- Total Income......................................... 609 482 360 EXPENSE Compensation and employee benefits............................. 341 234 200 Interest....................................................... 377 246 367 Other.......................................................... 612 493 613 ------ ----- ------- Total Expenses....................................... 1,330 973 1,180 ------ ----- ------- Loss before income tax benefit and equity in undistributed net income (loss) of subsidiaries................................ (721) (491) (820) Income tax benefit............................................. (87) ------ ----- ------- Loss before equity in undistributed net income (loss) of subsidiaries................................................. (721) (491) (733) Equity in undistributed net income (loss) of subsidiaries...... 3,476 (123) (1,706) ------ ----- ------- Net Income (Loss).............................................. $2,755 $(614) $(2,439) ------ ----- ------- ------ ----- -------
- --------------- (1) In November 1994, the Parent Company sold a mortgage-backed security to Columbia Bank. A loss was recognized by the Parent Company while the security was recorded at fair value by Columbia Bank. The proceeds from the sale were subsequently contributed to the capital of Columbia Bank. On a consolidated basis the loss recorded by the Parent Company is eliminated as if no transaction had occurred. F-21 87 COLUMBIA BANKING SYSTEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED STATEMENT OF CASH FLOWS -- PARENT COMPANY ONLY
YEAR ENDED DECEMBER 31, -------------------------------- 1995 1994 1993 ------- ------- -------- (IN THOUSANDS) OPERATING ACTIVITIES Net income (loss)........................................ $ 2,755 $ (614) $ (2,439) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Equity in undistributed earnings of subsidiaries...... (3,476) 123 1,706 Depreciation and Amortization......................... 34 40 16 Loss on sale of security available for sale........... 270 Decrease in loans held for sale....................... 2,021 Net changes in other assets and liabilities........... 2,698 80 (46) ------- ------- -------- Net cash provided (used) by operating activities..................................... 2,011 (101) 1,258 INVESTING ACTIVITIES Proceeds from sales of securities available for sale..... 2,808 599 Proceeds from maturities of securities available for sale.................................................. 209 Loans originated or acquired, net of principal collected............................................. (905) Contribution of capital -- bank subsidiaries............. (3,100) (2,813) (16,279) Purchase of real estate owned from bank subsidiary....... (3,100) Purchases of premises and equipment...................... 34 (135) Other, net............................................... (19) ------- ------- -------- Net cash provided (used) by investing activities..................................... (3,100) 238 (19,389) FINANCING ACTIVITIES Proceeds from issuance of common stock................... 103 35 17,901 ------- ------- -------- Net cash provided by financing activities............. 103 35 17,901 ------- ------- -------- Increase (decrease) in cash and cash equivalents.... (986) 172 (680) Cash and cash equivalents at beginning of period........... 1,095 923 1,603 ------- ------- -------- Cash and cash equivalents at end of period............... $ 109 $ 1,095 $ 923 ------- ------- -------- ------- ------- -------- Supplemental information: Cash paid for interest................................... $ 377 $ 246 $ 367 Issuance of common stock from conversion of convertible subordinated notes.................................... 40 2,698
17. STOCK DIVIDEND On April 24, 1996, the Company announced a 5% stock dividend payable on May 22, 1996, to holders of record on May 8, 1996. On May 22, 1996, 164,051 common shares were issued to shareholders. 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. 18. SUBSEQUENT EVENTS (UNAUDITED) On June 3, 1996, the Company gave notice that it would redeem all of its issued and outstanding 7.85% Convertible Subordinated Notes (the "Notes") on August 1, 1996. The Notes were convertible in whole or in part, in multiples of $1,000 principal amount, at 100% of the principal amount of F-22 88 COLUMBIA BANKING SYSTEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the Note (or portion thereof), at the conversion price per share of Common Stock of $10.56. Prior to August 1, 1996 all of the Notes were converted into 223,743 shares of Common Stock. Columbia Bank's deposits are insured by the FDIC through the Bank Insurance Fund and through the Savings Association Insurance Fund (the "SAIF"). SAIF-insured deposits of Columbia Bank are a result of a so-called Oakar transaction in which deposits were acquired from a savings bank. Legislation was recently enacted with the intent of recapitalizing the SAIF fund. The legislation required a special assessment on SAIF-insured deposits of approximately 65.7 cents per $100 of insured deposits at March 31, 1995 (SAIF deposits then $116.5 million) with a discount of 20% on the special assessment for Oakar institutions, such as Columbia Bank, which meet certain tests. The one-time special assessment, which is tax deductible, is estimated to be $612,000 and will be reflected in third quarter 1996 earnings. The special assessment is payable before November 29, 1996. F-23 89 COLUMBIA BANKING SYSTEM, INC. SUMMARY OF QUARTERLY FINANCIAL INFORMATION(1) Quarterly financial information for the years ended December 31, 1995 and 1994 is summarized as follows:
FIRST SECOND THIRD FOURTH YEAR ENDED QUARTER QUARTER QUARTER QUARTER DECEMBER 31, ------- ------- ------- ------- ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1995 Total interest income................. $6,942 $7,775 $8,373 $8,630 $ 31,720 Total interest expense................ 3,093 3,699 4,092 4,275 15,159 ------ ------ ------ ------ ----------- Net interest income................. 3,849 4,076 4,281 4,355 16,561 Provision for loan losses............. 300 300 320 330 1,250 Noninterest income.................... 883 950 1,078 1,080 3,991 Noninterest expense................... 3,987 4,124 4,267 4,169 16,547 ------ ------ ------ ------ ----------- Income before income tax............ 445 602 772 936 2,755 Provision for income tax.............. ------ ------ ------ ------ ----------- Net income............................ $ 445 $ 602 $ 772 $ 936 $ 2,755 ------ ------ ------ ------ ----------- ------ ------ ------ ------ ----------- Per share: Net income (loss)................... $ 0.13 $ 0.17 $ 0.22 $ 0.27 $ 0.79 ------ ------ ------ ------ ----------- ------ ------ ------ ------ ----------- 1994 Total interest income................. $4,202 $4,805 $5,497 $6,152 $ 20,656 Total interest expense................ 1,972 2,080 2,405 2,619 9,076 ------ ------ ------ ------ ----------- Net interest income................. 2,230 2,725 3,092 3,533 11,580 Provision for loan losses............. 240 260 240 260 1,000 Noninterest income.................... 541 746 853 856 2,996 Noninterest expense................... 3,330 3,597 3,488 3,621 14,036 ------ ------ ------ ------ ----------- Income (loss) before income tax..... (799 ) (386 ) 217 508 (460) Provision for income tax.............. ------ ------ ------ ------ ----------- Income (loss) from continuing operations before extraordinary item............................. (799 ) (386 ) 217 508 (460) Extraordinary loss on extinguishment of debt, net........................ (154 ) (154) ------ ------ ------ ------ ----------- Net income (loss)..................... $ (799 ) $ (386 ) $ 63 $ 508 $ (614) ====== ====== ====== ====== ========== Per share: Income (loss) from continuing operations before extraordinary item............................. ($0.23 ) ($0.11 ) $ 0.07 $ 0.14 ($ 0.13) Extraordinary loss on extinguishment of debt, net..................... (0.05 ) (0.05) ------ ------ ------ ------ ----------- Net income (loss)................... $(0.23 ) $(0.11 ) $ 0.02 $ 0.14 $ (0.18) ====== ====== ====== ====== ==========
- --------------- (1) These unaudited schedules provide selected financial information concerning the Company which should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations in this Prospectus. F-24 90 COLUMBIA BANKING SYSTEM, INC. CONSOLIDATED FIVE-YEAR STATEMENT OF OPERATIONS(1)
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INTEREST INCOME: Loans.............................. $ 30,038 $ 18,990 $ 12,258 $ 10,649 $ 8,701 Investment securities.............. 1,078 1,127 1,108 59 671 Securities available for sale...... 290 205 227 639 Deposits with banks................ 314 334 362 236 400 -------- -------- -------- -------- -------- Total interest income............ 31,720 20,656 13,955 11,583 9,772 INTEREST EXPENSE: Deposits........................... 13,385 7,304 4,867 4,860 5,104 Federal Home Loan Bank advances.... 1,503 1,160 1,788 1,328 1,147 Other borrowings................... 271 612 876 735 383 -------- -------- -------- -------- -------- Total interest expense........... 15,159 9,076 7,531 6,923 6,634 -------- -------- -------- -------- -------- NET INTEREST INCOME................ 16,561 11,580 6,424 4,660 3,138 Provision for loan losses.......... 1,250 1,000 502 170 80 -------- -------- -------- -------- -------- Net interest income after provision for loan losses...... 15,311 10,580 5,922 4,490 3,058 Noninterest income................. 3,991 2,996 2,043 1,021 1,131 Noninterest expense................ 16,547 14,036 10,656 4,488 3,810 -------- -------- -------- -------- -------- Income (loss) from continuing operations before income tax... 2,755 (460) (2,691) 1,023 379 Provision for income tax........... 14 -------- -------- -------- -------- -------- Income (loss) from continuing operations..................... 2,755 (460) (2,691) 1,023 365 Extraordinary loss on extinguishment of debt, net...... (154) Cumulative effect of accounting change........................... 252 -------- -------- -------- -------- -------- NET INCOME (LOSS).................. $ 2,755 ($ 614) ($ 2,439) $ 1,023 $ 365 ======== ======== ======== ======== ======== Per share (on average shares outstanding): Income (loss) from continuing operations..................... $ 0.79 ($ 0.13) ($ 1.17) $ 0.89 $ 0.44 Extraordinary loss on extinguishment of debt, net.... 0.79 (0.05) Cumulative effect of accounting change......................... 0.11 Net income (loss)................ 0.79 (0.18) (1.06) 0.89 0.44 Fully diluted net income (loss)......................... 0.79 (0.18) (1.06) 0.76 0.44 Average number of common and common equivalent shares outstanding: Primary.......................... 3,496 3,481 2,301 1,155 824 Fully diluted.................... 3,752 3,740 2,560 1,700 824 ======== ======== ======== ======== ======== Total assets at end of period...... $425,206 $319,072 $235,944 $158,694 $120,800 Long-term obligations.............. 27,695 19,735 39,081 27,975 19,117 Cash dividends..................... ======== ======== ======== ======== ========
- --------------- (1) These unaudited schedules provide selected financial information concerning the Company which should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations in this Prospectus. F-25 91 COLUMBIA BANKING SYSTEM, INC. CONSOLIDATED THREE-YEAR SUMMARY OF AVERAGE BALANCES AND NET INTEREST REVENUE
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------------------------- 1995 1994 1993 ------------------------------- ------------------------------- ------------------------------- INTEREST INTEREST INTEREST AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE BALANCE(1) PAID RATE BALANCE(1) PAID RATE BALANCE(1) PAID RATE ---------- -------- ------- ---------- -------- ------- ---------- -------- ------- (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: Loans: Commercial.............. $ 92,831 $ 8,986 9.68 % $ 63,541 $ 5,272 8.30 % $ 23,894 $ 1,690 7.07 % Real estate(2): One-to four-family residential......... 97,280 9,073 9.33 78,408 6,495 8.28 73,076 6,221 8.51 Five or more family residential and commercial properties.......... 90,135 8,411 9.33 57,952 5,324 9.19 35,255 3,608 10.23 Consumer................ 37,793 3,568 9.44 22,335 1,899 8.50 8,128 739 9.09 --------- -------- ------ --------- -------- ------ --------- -------- ------ Total loans........... 318,039 30,038 9.44 222,236 18,990 8.54 140,353 12,258 8.73 Securities................ 23,266 1,368 5.88 24,045 1,332 5.54 20,940 1,335 6.38 Interest-earning deposits with banks.............. 5,336 314 5.88 8,597 334 3.89 12,800 362 2.83 --------- -------- ------ --------- -------- ------ --------- -------- ------ Total interest-earning assets.............. 346,641 31,720 9.15 254,878 20,656 8.10 174,093 13,955 8.02 Noninterest-earning assets.................. 28,007 24,384 15,825 --------- --------- --------- Total assets.......... $374,648 $279,262 $189,918 --------- --------- --------- --------- --------- --------- INTEREST-BEARING LIABILITIES: Certificates of deposit... $168,351 $ 9,565 5.68 % $122,198 $ 5,595 4.58 % $ 75,682 $ 3,459 4.57 % Savings accounts.......... 24,547 669 2.73 33,938 895 2.64 29,743 1,039 3.49 Interest-bearing demand deposits................ 79,706 3,151 3.95 38,962 814 2.09 18,090 369 2.04 --------- -------- ------ --------- -------- ------ --------- -------- ------ Total interest-bearing deposits............ 272,604 13,385 4.91 195,098 7,304 3.74 123,515 4,867 3.94 Federal Home Loan Bank advances................ 24,915 1,503 6.03 21,452 1,160 5.41 25,875 1,788 6.91 Other borrowings.......... 2,744 271 9.88 6,017 612 10.17 9,868 876 8.88 --------- -------- ------ --------- -------- ------ --------- -------- ------ Total interest-bearing liabilities......... 300,263 15,159 5.05 222,567 9,076 4.08 159,258 7,531 4.73 Demand and other noninterest-bearing deposits................ 42,167 26,238 10,621 Other noninterest-bearing liabilities............. 2,444 1,476 923 Shareholders' equity...... 29,774 28,981 19,116 --------- -------- ------ --------- -------- ------ --------- -------- ------ Total liabilities and shareholders' equity.............. $374,648 $279,262 $189,918 --------- --------- --------- Net interest income....... $16,561 $11,580 $ 6,424 -------- -------- -------- -------- -------- -------- Net interest spread....... 4.10 % 4.02 % 3.29 % ------- ------- ------- ------- ------- ------- Net interest margin....... 4.78 % 4.54 % 3.69 % ------- ------- ------- ------- ------- ------- Average interest-earning assets to average interest-bearing liabilities............. 115.45 % 114.52 % 109.32 % ------- ------- ------- ------- ------- -------
- --------------- (1) Loans on a nonaccrual status have been included in the computation of average balances. (2) Real estate average balances include real estate construction loans. F-26 92 - ------------------------------------------------------ - ------------------------------------------------------ NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE ---- Available Information................. 3 Incorporation of Certain Documents by Reference........................... 3 Prospectus Summary.................... 4 Risk Factors.......................... 9 Recent Developments................... 12 Use of Proceeds....................... 15 Price Range of Common Stock........... 15 Dividends............................. 15 Capitalization........................ 16 Selected Consolidated Financial Information......................... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 19 Business.............................. 34 Supervision and Regulation............ 47 Taxation.............................. 51 Management............................ 52 Security Ownership of Certain Beneficial Owners and Management.......................... 58 Certain Transactions.................. 59 Description of Capital Stock.......... 59 Shares Eligible for Future Sale....... 61 Underwriting.......................... 62 Legal Matters......................... 63 Experts............................... 63 Index to Consolidated Financial Statements.......................... F-1
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 1,100,000 SHARES LOGO COLUMBIA BANKING SYSTEM, INC. COMMON STOCK ------------------- PROSPECTUS ------------------- ALEX . BROWN & SONS INCORPORATED RAGEN MACKENZIE INCORPORATED , 1996 - ------------------------------------------------------ - ------------------------------------------------------ 93 PART II ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered, other than underwriting discounts and commissions. All of the amounts shown are estimated except the Securities and Exchange Commission registration fee and the NASD filing fee.
ITEM AMOUNT ---------------------------------------------------------------- ---------- Commission registration fee..................................... $ 6,038 NASD filing fee................................................. 2,492 Blue sky fees and expenses...................................... 10,000 Printing and engraving expenses................................. 70,000 Legal fees and expenses......................................... 125,000 Accounting fees and expenses.................................... 50,000 Transfer agent and registrar fees............................... 500 Miscellaneous................................................... 10,970 ---------- Total................................................. $ 275,000 ---------- ----------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Articles of Incorporation provide, among other things, for the indemnification of directors, and authorize the Board to pay reasonable expenses incurred by, or to satisfy a judgment or fine against, a current or former director in connection with any personal legal liability incurred by the individual while acting for the Company within the scope of his or her employment, and which was not the result of conduct finally adjudged to be "egregious" conduct. "Egregious" conduct is defined as intentional misconduct, a knowing violation of law, or participation in any transaction from which the person will personally receive a benefit in money, property, or services to which that person is not legally entitled. The Articles of Incorporation also include a provision that limits the liability of directors of the Company from any personal liability to the Company or its shareholders for conduct not found to have been egregious. ITEM 16. EXHIBITS
EXHIBIT NO. - --------- 1.1 Form of Underwriting Agreement.*
4.1 Restated Articles of Incorporation of the Registrant. Filed as an exhibit to the Registrant's Registration Statement on Form S-1 ("Registration No. 33-47711) declared effective on June 16, 1992 and incorporated herein by reference. 4.2 Restated Bylaws of the Registrant. Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 5.1 Opinion of Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C. regarding legality of the Common Stock. Filed as an exhibit to the Registrants' Registration on Form S-2 (Registration No. 333-14465) and incorporated herein by reference. 10.1(a) Lease dated May 7, 1993 between the Registrant and William B. Swenson Enterprises for Tacoma main office premises of Columbia Bank. Filed as an exhibit to the Registrant's Registration Statement on Form SB-2 (Registration No. 33-66224) declared effective on August 16, 1993 and incorporated herein by reference.
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EXHIBIT NO. - --------- 10.2 Amended Employee Stock Option Plan dated July 19, 1993. Filed as an exhibit to the Registrant's Registration Statement on Form SB-2 (Registration No. 33-66224) declared effective on August 16, 1993 and incorporated herein by reference. 10.3(a) Amended Employment Agreement dated December 30, 1993 between the Registrant and A.G. Espe. Filed as an exhibit to the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1993 and incorporated herein by reference. 10.3(b) Amended Employment Agreement between the Registrant and A.G. Espe dated as of September 25, 1996, effective as of January 1, 1997. Filed as an exhibit to the Registrants' Registration Statement on Form S-2 (Registration No. 333-14465) and incorporated herein by reference. 10.4(a) Amended Employment Agreement between the Registrant and W.W. Philip dated December 31, 1993, as further amended effective December 29, 1995. Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. 10.4(b) Amended Employment Agreement between the Registrant and W.W. Philip dated as of September 25, 1996, effective January 1, 1997, except with respect to Section 4.3 (granting restricted stock award) which is immediately effective. Filed as an exhibit to the Registrants' Registration Statement on Form S-2 (Registration No. 333-14465) and incorporated herein by reference. 10.5 Agreement of September 30, 1994 with the Federal Deposit Insurance Corporation regarding termination of the Assistance Agreement dated August 2, 1988 among the Federal Savings and Loan Insurance Corporation, Columbia Savings Bank and the Registrant. The Termination Agreement also resulted in the termination of the Regulatory Capital Maintenance Agreement dated August 2, 1988 among the Registrant, Stanley B. Rose Company, Stanley B. Rose, Columbia Savings Bank and the Federal Savings and Loan Insurance Corporation. Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 10.6 Amended Agreement granting options to NorCap, Ltd. to Purchase Shares of Common Stock of the Registrant dated September 26, 1990. Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (Registration No. 33-47711) declared effective on June 16, 1992 and incorporated herein by reference. 10.7 Cash or Deferred Profit Sharing Plan effective as of July 1, 1992. Filed as an exhibit to the Registrant's Registration Statement on Form SB-2 (Registration No. 33-66224) declared effective on August 16, 1993 and incorporated herein by reference. 10.8 Data processing servicing agreement dated May 3, 1993 between the Registrant and M&I Data Services. Filed as an exhibit to the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1993 and incorporated herein by reference. 11.1 Statement regarding computation of per share earnings. Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference. 23.1 Consent of Price Waterhouse LLP.* 23.2 Consent of Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C. (included in the opinion filed as Exhibit 5.1). 24.1 Power of Attorney. Filed as an exhibit to the Registrants' Registration Statement on Form S-2 (Registration No. 333-14465) and incorporated herein by reference.
- --------------- * Filed herewith. II-2 95 ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 96 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Company certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Tacoma, State of Washington, on October 24, 1996. COLUMBIA BANKING SYSTEM, INC. By: /s/ A.G. ESPE ------------------------------------ A.G. Espe Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the Registration Statement has been signed by the following persons on October 24, 1996 in the capacities indicated.
SIGNATURE TITLE - --------------------------------------------- -------------------------------------------- PRINCIPAL EXECUTIVE OFFICER: /s/ A.G. ESPE Chairman of the Board and - --------------------------------------------- Chief Executive Officer A.G. Espe PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER: /s/ GARY R. SCHMINKEY Chief Financial Officer - --------------------------------------------- Gary R. Schminkey A MAJORITY OF THE BOARD OF DIRECTORS: /s/ W. BARRY CONNOLEY* Director - --------------------------------------------- W. Barry Connoley /s/ RICHARD S. DEVINE* Director - --------------------------------------------- Richard S. DeVine /s/ ARNOLD G. ESPE* Director - --------------------------------------------- Arnold G. Espe /s/ JACK FABULICH* Director - --------------------------------------------- Jack Fabulich
II-4 97
SIGNATURE TITLE - --------------------------------------------- -------------------------------------------- /s/ JONATHAN FINE* Director - --------------------------------------------- Jonathan Fine /s/ MARGEL S. GALLAGHER* Director - --------------------------------------------- Margel S. Gallagher /s/ JOHN A. HALLERAN* Director - --------------------------------------------- John A. Halleran /s/ W.W. PHILIP* Director - --------------------------------------------- W.W. Philip /s/ JOHN H. POWELL* Director - --------------------------------------------- John H. Powell /s/ ROBERT QUOIDBACH* Director - --------------------------------------------- Robert Quoidbach /s/ DONALD RODMAN* Director - --------------------------------------------- Donald Rodman /s/ FRANK RUSSELL* Director - --------------------------------------------- Frank Russell /s/ SIDNEY R. SNYDER* Director - --------------------------------------------- Sidney R. Snyder /s/ JAMES M. WILL, JR.* Director - --------------------------------------------- James M. Will, Jr. *By: /s/ J. JAMES GALLAGHER - --------------------------------------------- J. James Gallagher Attorney-in-Fact
II-5 98 INDEX TO EXHIBITS
EXHIBIT NO. - --------- 1.1 Form of Underwriting Agreement.* 4.1 Restated Articles of Incorporation of the Registrant. Filed as an exhibit to the Registrant's Registration Statement on Form S-1 ("Registration No. 33-47711) declared effective on June 16, 1992 and incorporated herein by reference. 4.2 Restated Bylaws of the Registrant. Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 5.1 Opinion of Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C. regarding legality of the Common Stock. Filed as an exhibit to Registrant's Registration on Form S-2 (Registration No. 333-14465) and incorporated herein by reference. 10.1(a) Lease dated May 7, 1993 between the Registrant and William B. Swenson Enterprises for Tacoma main office premises of Columbia Bank. Filed as an exhibit to the Registrant's Registration Statement on Form SB-2 (Registration No. 33-66224) declared effective on August 16, 1993 and incorporated herein by reference. 10.2 Amended Employee Stock Option Plan dated July 19, 1993. Filed as an exhibit to the Registrant's Registration Statement on Form SB-2 (Registration No. 33-66224) declared effective on August 16, 1993 and incorporated herein by reference. 10.3(a) Amended Employment Agreement dated December 30, 1993 between the Registrant and A.G. Espe. Filed as an exhibit to the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1993 and incorporated herein by reference. 10.3(b) Amended Employment Agreement between the Registrant and A.G. Espe dated as of September 25, 1996, effective as of January 1, 1997. Filed as an exhibit to Registrant's Registration on Form S-2 (Registration No. 333-14465) and incorporated herein by reference. 10.4(a) Amended Employment Agreement between the Registrant and W.W. Philip dated December 31, 1993, as further amended effective December 29, 1995. Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. 10.4(b) Amended Employment Agreement between the Registrant and W.W. Philip dated as of September 25, 1996, effective January 1, 1997, except with respect to Section 4.3 (granting restricted stock award) which is immediately effective. Filed as an exhibit to Registrant's Registration on Form S-2 (Registration No. 333-14465) and incorporated herein by reference. 10.5 Agreement of September 30, 1994 with the Federal Deposit Insurance Corporation regarding termination of the Assistance Agreement dated August 2, 1988 among the Federal Savings and Loan Insurance Corporation, Columbia Savings Bank and the Registrant. The Termination Agreement also resulted in the termination of the Regulatory Capital Maintenance Agreement dated August 2, 1988 among the Registrant, Stanley B. Rose Company, Stanley B. Rose, Columbia Savings Bank and the Federal Savings and Loan Insurance Corporation. Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 10.6 Amended Agreement granting options to NorCap, Ltd. to Purchase Shares of Common Stock of the Registrant dated September 26, 1990. Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (Registration No. 33-47711) declared effective on June 16, 1992 and incorporated herein by reference.
99
EXHIBIT NO. - --------- 10.7 Cash or Deferred Profit Sharing Plan effective as of July 1, 1992. Filed as an exhibit to the Registrant's Registration Statement on Form SB-2 (Registration No. 33-66224) declared effective on August 16, 1993 and incorporated herein by reference. 10.8 Data processing servicing agreement dated May 3, 1993 between the Registrant and M&I Data Services. Filed as an exhibit to the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1993 and incorporated herein by reference. 11.1 Statement regarding computation of per share earnings. Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference. 23.1 Consent of Price Waterhouse LLP.* 23.2 Consent of Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C. (included in the opinion filed as Exhibit 5.1). 24.1 Power of Attorney. Filed as an exhibit to Registrant's Registration on Form S-2 (Registration No. 333-14465) and incorporated herein by reference.
- --------------- * Filed herewith. EX-1.1 2 UNDERWRITING AGREEMENT 1 Exhibit 1.1 1,100,000 Shares COLUMBIA BANKING SYSTEM, INC. Common Stock (No Par Value) UNDERWRITING AGREEMENT November ___, 19___ Alex. Brown & Sons Incorporated Ragen MacKenzie Incorporated c/o Alex. Brown & Sons Incorporated 135 East Baltimore Street Baltimore, Maryland 21202 Gentlemen: Columbia Banking System Inc., a Washington corporation (the "Company"), proposes to sell to you (the "Underwriters") an aggregate of 1,100,000 shares of the Company's Common Stock, no par value per share (the "Firm Shares"). The respective amounts of the Firm Shares to be so purchased by the Underwriters are set forth opposite their names in Schedule I hereto. The Company also proposes to sell at the Underwriters' option an aggregate of up to 165,000 additional shares of the Company's Common Stock (the "Option Shares") as set forth below. As the Underwriters, you have advised the Company (a) that you are authorized to enter into this Agreement, and (b) that you are willing, acting severally and not jointly, to purchase the numbers of Firm Shares set forth opposite your respective names in Schedule I, plus your pro rata portion of the Option Shares if you elect to exercise the over-allotment option in whole or in part. The Firm Shares and the Option Shares (to the extent the aforementioned option is exercised) are herein collectively called the "Shares." In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each of the Underwriters as follows: (a) A registration statement on Form S-2 (File No. 333-14465) with respect to the Shares has been carefully prepared by the Company in conformity with the 2 requirements of the Securities Act of 1933, as amended (the "Act"), and the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission. The Company has complied with the conditions for the use of Form S-2. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of the Rules and Regulations) contained therein (each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus") and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to you. Such registration statement, together with any registration statement filed by the Company pursuant to Rule 462(b) of the Act, herein referred to as the "Registration Statement," which shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, has become effective under the Act and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. "Prospectus" means (a) the form of prospectus first filed with the Commission pursuant to Rule 424(b) or (b) the last Preliminary Prospectus included in the Registration Statement filed prior to the time it becomes effective or filed pursuant to Rule 424(a) under the Act that is delivered by the Company to the Underwriters for delivery to purchasers of the Shares, together with the term sheet or abbreviated term sheet filed with the Commission pursuant to Rule 424(b)(7) under the Act. Any reference herein to the Registration Statement, any Preliminary Prospectus or to the Prospectus shall be deemed to refer to and include any documents incorporated by reference therein, and, in the case of any reference herein to any Prospectus, also shall be deemed to include any documents incorporated by reference therein, and any supplements or amendments thereto, filed with the Commission after the date of filing of the Prospectus under Rules 424(b) or 430A, and prior to the termination of the offering of the Shares by the Underwriters. (b) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Washington, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. Each of the subsidiaries of the Company as listed in Exhibit A hereto (collectively, the "Subsidiaries") has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. The Subsidiaries are the only subsidiaries, direct or indirect, of the Company. The Company and each of the Subsidiaries are duly qualified to transact business in all jurisdictions in which the conduct of their business requires such qualification. The outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable (except to the extent such shares are assessable under the Revised Code of Washington Section 30.44.020) and to the extent shown in Exhibit A hereto are owned by the Company or another Subsidiary free and clear of all liens, encumbrances and equities and claims (except to the extent such shares are subject to the lien in favor of U.S. Bank under that certain Pledge Agreement dated December 1, 1995 by and between the Company and U.S. Bank); and no options, warrants or other rights to purchase, agreements or other obligations to issue or other 2 3 rights to convert any obligations into shares of capital stock or ownership interests in the Subsidiaries are outstanding. (c) The outstanding shares of Common Stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; the Shares to be issued and sold by the Company have been duly authorized and when issued and paid for as contemplated herein will be validly issued, fully paid and non-assessable; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue and sale thereof. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock. (d) The information set forth under the caption "Capitalization" in the Prospectus is true and correct. All of the Shares conform to the description thereof contained in the Registration Statement. The form of certificates for the Shares conforms to the requirements of Washington corporate law. (e) The Commission has not issued an order preventing or suspending the use of any Prospectus relating to the proposed offering of the Shares nor instituted proceedings for that purpose. The Registration Statement contains, and the Prospectus and any amendments or supplements thereto will contain, all statements which are required to be stated therein by, and will conform to, the requirements of the Act and the Rules and Regulations. The documents incorporated by reference in the Prospectus, at the time filed with the Commission, conformed in all respects to the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as applicable, and the rules and regulations of the Commission thereunder. The Registration Statement and any amendment thereto do not contain, and will not contain, any untrue statement of a material fact and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus and any amendments and supplements thereto do not contain, and will not contain, any untrue statement of material fact; and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of either Underwriter, specifically for use in the preparation thereof. (f) The consolidated financial statements of the Company and the Subsidiaries, together with related notes and schedules as set forth or incorporated by reference in the Registration Statement, present fairly the financial position and the results of operations and cash flows of the Company and the consolidated Subsidiaries, at the indicated dates and for the indicated periods. Such financial statements and related schedules have been prepared in accordance with generally accepted principles of accounting, consistently 3 4 applied throughout the periods involved, except as disclosed herein, and all adjustments necessary for a fair presentation of results for such periods have been made. Such financial statements and related schedules comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations. The summary financial and statistical data included or incorporated by reference in the Registration Statement presents fairly the information shown therein and such data has been compiled on a basis consistent with the financial statements presented therein and the books and records of the company. (g) Price Waterhouse LLP, who have certified certain of the financial statements filed with the Commission as part of, or incorporated by reference in, the Registration Statement, are independent public accountants as required by the Act and the Rules and Regulations. (h) There is no action, suit, claim or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of the Subsidiaries before any court or administrative agency or otherwise which if determined adversely to the Company or any of its Subsidiaries might result in any material adverse change in the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and of the Subsidiaries taken as a whole or to prevent the consummation of the transactions contemplated hereby, except as set forth in the Registration Statement. (i) The Company and the Subsidiaries have good and marketable title to all of the properties and assets reflected in the financial statements (or as described in the Registration Statement) hereinabove described, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements (or as described in the Registration Statement) or which are not material in amount. The Company and the Subsidiaries occupy their leased properties under valid and binding leases conforming in all material respects to the description thereof set forth in the Registration Statement. (j) The Company and the Subsidiaries have filed all Federal, State, local and foreign income tax returns which have been required to be filed and have paid all taxes indicated by said returns and all assessments received by them or any of them to the extent that such taxes have become due and are not being contested in good faith. All tax liabilities have been adequately provided for in the financial statements of the Company. (k) Since the respective dates as of which information is given in the Registration Statement, as it may be amended or supplemented, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise), or prospects of the Company and its Subsidiaries taken as a whole, whether or not occurring in the ordinary course of business, and there has not been any material transaction entered into or any material transaction that is probable of being entered into by the Company or the Subsidiaries, other than transactions in the ordinary course of business and changes and transactions described in the Registration Statement, 4 5 as it may be amended or supplemented. The Company and the Subsidiaries have no material contingent obligations which are not disclosed in the Company's financial statements which are included in the Registration Statement. (l) Neither the Company nor any of the Subsidiaries is or with the giving of notice or lapse of time or both, will be, in violation of or in default under its charter or by-laws or under any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it, or any of its properties, is bound and which default is of material significance in respect of the condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole or the business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Subsidiaries taken as a whole. The execution and delivery of this Agreement and the consummation of the transactions herein contemplated and the fulfillment of the terms hereof will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any Subsidiary is a party, or of the charter or by-laws of the Company or any order, rule or regulation applicable to the Company or any Subsidiary of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (m) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the Commission, the National Association of Securities Dealers, Inc. (the "NASD") or such additional steps as may be necessary to qualify the Shares for public offering by the Underwriters under state securities or Blue Sky laws) has been obtained or made and is in full force and effect. (n) The Company and each of the Subsidiaries holds all material licenses, certificates and permits from governmental authorities which are necessary to the conduct of their businesses; and neither the Company nor any of the Subsidiaries has infringed any patents, patent rights, trade names, trademarks or copyrights, which infringement is material to the business of the Company and the Subsidiaries taken as a whole. The Company knows of no material infringement by others of patents, patent rights, trade names, trademarks or copyrights owned by or licensed to the Company. (o) Neither the Company, nor to the Company's best knowledge, any of its affiliates, has taken or may take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares. The Company acknowledges that the Underwriters may engage in passive market making transactions in the Shares on the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange Act. 5 6 (p) Neither the Company nor any Subsidiary is an "investment company" within the meaning of such term under the Investment Company Act of 1940 and the rules and regulations of the Commission thereunder. (q) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (r) The Company and each of its Subsidiaries carry, or are covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar industries. (s) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (t) The Company confirms as of the date hereof that it is in compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198, An Act Relating to Disclosure of doing Business with Cuba, and the Company further agrees that if it commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba after the date the Registration Statement becomes or has become effective with the Commission or with the Florida Department of Banking and Finance (the "Department"), whichever date is later, or if the information reported or incorporated by reference in the Prospectus, if any, concerning the Company's business with Cuba or with any person or affiliate located in Cuba changes in any material way, the Company will provide the Department notice of such business or change, as appropriate, in a form acceptable to the Department. (u) The Company has complied with all registration, filing and reporting requirements of the Exchange Act, which have from time to time been applicable to the Company. 6 7 (v) Columbia State Bank (the "Bank") is duly chartered as a commercial bank under the laws of the State of Washington and is in good standing under the laws of the State of Washington. The Bank is a member in good standing of the Federal Home Loan Bank of Seattle (the "FHLB"). The deposit accounts and investment certificates of the Bank are duly insured by the Federal Deposit Insurance Corporation (the "FDIC") to the fullest extent permitted by law. No charge, investigation or proceeding for the termination or revocation of such charter, FHLB membership, good standing or FDIC insurance are pending, or, to the knowledge of the Company, threatened. (w) Neither the Company nor any of the Subsidiaries are subject to any order of the Federal Reserve Board (the "FRB"), the FDIC, or the Washington State Department of Financial Institutions, nor are the Company or any Subsidiary subject to any agreement or consent with, or board resolution adopted at the instigation of, any such regulatory authorities. The Company and its subsidiaries have conducted and are conducting their businesses so as to comply in all material respects with all applicable federal and state laws, rules, regulations, decisions, directives and orders (including without limitation the rules, regulations, decisions, directives and orders of the FRB, the FDIC and the Washington State Department of Financial Institutions). No charge, investigation or proceeding with respect to the Company or its subsidiaries before or by any regulatory, administrative or governmental agency, body or authority is pending or, to the best of the Company's knowledge, threatened. (x) The Company and the Subsidiaries are in compliance with all applicable capital requirements, the Bank is "well capitalized" as defined in FDIC regulations, and will be "well capitalized" after the payment of any special assessment levied by the FDIC, and neither the Company nor any Subsidiary is, to the Company's knowledge, threatened with or being considered for receivership or any special supervision by the FRB, the FDIC or the Washington State Department of Financial Institutions. The Company is a "bank holding company" within the meaning of the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"). (y) There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company or the Bank to or for the benefit of any of the officers or directors of the Company or the Bank or any of the members of the families of any of them, except for loans, advances or guarantees disclosed in the Prospectus or not required to be disclosed in the Prospectus which meet the standards set forth in Instruction 3 to paragraph (c) of Item 404 of Regulation S-K. (z) The Company and each of its Subsidiaries have obtained all permits, licenses and other authorizations that are required under the environmental laws of any applicable jurisdiction relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, surface water, ground water or land), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, 7 8 contaminants, chemicals or industrial, toxic or hazardous substances or wastes or under any regulation, code, plan, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder (collectively, the "Environmental Laws"), except to the extent that the failure to have any such permit, license or authorization, individually or in the aggregate would not have material adverse effect on the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and of the Subsidiaries taken as a whole. To the knowledge of the Company, each of the Company and the Subsidiaries is in compliance with all terms and conditions of any required permits, licenses and authorizations that are required under any Environmental Laws, and is also in compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in the Environmental Laws, except to the extent that the failure to comply would not have a material adverse effect on the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and of the Subsidiaries taken as a whole. To the knowledge of the Company, there are no past or present events, conditions, circumstances, activities, facts, practices, incidents, actions or plans relating to the real property owned by, or securing loans made by, the Company or the Subsidiaries that interfere with or prevent material compliance or continued material compliance with the Environmental Laws, or which would be reasonably likely to give rise to any legal liability (whether statutory or common law) or otherwise would be reasonably likely to form the basis of any claim, action, demand, suit, proceeding, hearing, notice of violation, study, investigation, remediation or cleanup based on or related to the generation, manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling, or the emission, discharge, release into the workplace, the community or the environment of any pollutant, contaminant, chemical or industrial, toxic or hazardous substance or waste, except for any liabilities or any claims, demands or other actions specified above that would not individually or in the aggregate have a material adverse effect on the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and of the Subsidiaries taken as a whole. (aa) The Company has not taken, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result, under the Exchange Act or otherwise, in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. 2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES. (a) On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Company agrees to sell to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase, at a price of $_____ per share, the number of Firm Shares set forth opposite the name of each Underwriter in Schedule I hereof, subject to adjustments in accordance with Section 9 hereof. 8 9 (b) Payment for the Firm Shares to be sold hereunder is to be made by wire transfer of immediately available funds to the order of the Company against delivery of certificates therefor to the Underwriters for their respective accounts. Such payment and delivery are to be made at the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland, at 10:00 a.m., Baltimore time, on the third (or, if the Firm Shares are priced as contemplated by rule 15c6-1(c) of the Exchange Act, after 4:30 p.m. Washington D.C. Time, the fourth) business day after the date of this Agreement, such time and date being herein referred to as the "Closing Date." (As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and are not permitted by law or executive order to be closed.) The certificates for the Firm Shares will be delivered in such denominations and in such registrations as the Underwriters request in writing not later than the second full business day prior to the Closing Date, and will be made available for inspection by the Underwriters at least one business day prior to the Closing Date. (c) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriters to purchase the Option Shares at the price per share as set forth in the first paragraph of this Section 2. The option granted hereby may be exercised in whole or in part by giving written notice (i) at any time before the Closing Date and (ii) only once thereafter within 30 days after the date of this Agreement by you to the Company setting forth the number of Option Shares as to which the Underwriters are exercising the option, the names and denominations in which the Option Shares are to be registered and the time and date at which such certificates are to be delivered. The time and date at which certificates for Option Shares are to be delivered shall be determined by the Underwriters but shall not be earlier than three nor later than 10 full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the "Option Closing Date"). If the date of exercise of the option is three or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. The number of Option Shares to be purchased by each Underwriter shall be in the same proportion to the total number of Option Shares being purchased as the number of Firm Shares being purchased by such Underwriter bears to the total number of Firm Shares being purchased, adjusted by you in such manner as to avoid fractional shares. The option with respect to the Option Shares granted hereunder may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters. You may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Company. To the extent, if any, that the option is exercised, payment for the Option Shares shall be made on the Option Closing Date in New York Clearing House funds by certified or bank cashier's check drawn to the order of the Company against delivery of certificates therefor at the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland. 9 10 3. OFFERING BY THE UNDERWRITERS. It is understood that the Underwriters are to make a public offering of the Firm Shares as soon as the Underwriters deem it advisable to do so. The Firm Shares are to be initially offered to the public at the initial public offering price set forth in the Prospectus. The Underwriters may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters will offer them to the public on the foregoing terms. It is further understood that you will act as the Underwriters in the offering and sale of the Shares in accordance with a Master Agreement Among Underwriters entered into by each of you. 4. COVENANTS OF THE COMPANY. The Company covenants and agrees with the Underwriters that: (a) The Company will (i) use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Rules and Regulations is followed, to prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the Underwriters containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations, (ii) not file any amendment to the Registration Statement or supplement to the Prospectus or document incorporated by reference therein of which the Underwriters shall not previously have been advised and furnished with a copy or to which the Underwriters shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations and (iii) file on a timely basis all reports and any definitive proxy or information statements required to be filed by the Company with the Commission subsequent to the date of the Prospectus and prior to the termination of the offering of the Shares by the Underwriters. (b) The Company will advise the Underwriters promptly (i) when the Registration Statement or any post-effective amendment thereto shall have become effective, (ii) of receipt of any comments from the Commission, (iii) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (c) The Company will cooperate with the Underwriters in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as the Underwriters may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or 10 11 required to file such a consent. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Underwriters may reasonably request for distribution of the Shares. (d) The Company will deliver to, or upon the order of, the Underwriters, from time to time, as many copies of any Preliminary Prospectus as the Underwriters may reasonably request. The Company will deliver to, or upon the order of, the Underwriters during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Underwriters may reasonably request. The Company will deliver to the Underwriters at or before the Closing Date, three signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Underwriters such number of copies of the Registration Statement (including such number of copies of the exhibits filed therewith that may reasonably be requested), including documents incorporated by reference therein, and of all amendments thereto, as the Underwriters may reasonably request. (e) The Company will comply with the Act and the Rules and Regulations, and the Exchange Act, and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will either (i) prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus or (ii) prepare and file with the Commission an appropriate filing under the Exchange Act which shall be incorporated by reference in the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. (f) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earning statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earning statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you in writing when such statement has been so made available. (g) The Company will, for a period of five years from the Closing Date, deliver to the Underwriters copies of annual reports and copies of all other documents, reports and information furnished by the Company to its stockholders or filed with any securities 11 12 exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Securities Exchange Act of 1934, as amended. The Company will deliver to the Underwriters similar reports with respect to significant subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's financial statements. (h) No offering, sale, short sale or other disposition of any shares of Common Stock of the Company, or other capital stock of the Company or other securities convertible into or exchangeable or exercisable for shares of Common Stock or derivative of Common Stock (or agreement for such) will be made for a period of 120 days after the date of this Agreement, directly or indirectly, by the Company otherwise than hereunder, or pursuant to the Company's stock plan or other employee benefit plan, except with the prior written consent of Alex. Brown & Sons Incorporated. (i) The Company will use its best efforts to list, subject to notice of issuance, the Shares on the Nasdaq National Market. (j) The Company has caused each officer and director of the Company, and any affiliate thereof, to furnish to you, on or prior to the date of this agreement, a letter or letters, in form and substance satisfactory to the Underwriters, pursuant to which each such person shall agree not to offer, sell, sell short or otherwise dispose of any shares of Common Stock of the Company, or other capital stock of the Company, or any other securities convertible into or exchangeable or exercisable for shares of Common Stock or derivative of Common Stock owned by such person (or as to which such person has the right to direct the disposition of), or request the registration for the offer or sale of any of the foregoing, for a period of 120 days after the date of this Agreement, directly or indirectly, except with the prior written consent of Alex. Brown & Sons Incorporated ("Lockup Agreements"). (k) The Company shall apply the net proceeds of its sale of the Shares as set forth in the Prospectus. (l) The Company shall not invest, or otherwise use the proceeds received by the Company from its sale of the Shares in such a manner as would require the Company or any of the Subsidiaries to register as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). (m) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Common Stock. (n) The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. 12 13 5. COSTS AND EXPENSES. The Company will pay all costs, expenses and fees incident to the performance of the obligations of the Company under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Company; the fees and disbursements of counsel for the Company; the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the Underwriters' invitation letter, the Nasdaq National Market listing application, the Blue Sky memorandum and any supplements or amendments thereto; the filing fees of the Commission; the filing fees and expenses (including reasonable legal fees and disbursements of counsel to the underwriters) incident to securing any required review by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Shares; the listing fee of the Nasdaq National Market; and the expenses, including the reasonable fees and disbursements of counsel for the Underwriters, incurred in connection with the qualification of the Shares under State securities or Blue Sky laws. The Company agrees to pay all costs and expenses of the Underwriters, including the reasonable fees and disbursements of counsel for the Underwriters, incident to the offer and sale of directed shares of the Common Stock by the Underwriters to employees and persons having business relationships with the Company and its Subsidiaries. The Company shall not, however, be required to pay for any of the Underwriters' other expenses (other than those related to qualification under NASD regulation and State securities or Blue Sky laws) except that, if this Agreement shall not be consummated because the conditions in Section 6 hereof are not satisfied, or because this Agreement is terminated by the Underwriters pursuant to Section 11 hereof, or by reason of any failure, refusal or inability on the part of the Company to perform any undertaking or satisfy any condition of this Agreement or to comply with any of the terms hereof on its part to be performed, unless such failure to satisfy said condition or to comply with said terms be due to the default or omission of either Underwriter, then the Company shall reimburse the Underwriters for reasonable out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Shares or in contemplation of performing their obligations hereunder; but the Company shall not in any event be liable to any of the Underwriters for damages on account of loss of anticipated profits from the sale by them of the Shares. 6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS. The several obligations of the Underwriters to purchase the Firm Shares on the Closing Date and the Option Shares, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company contained herein, and to the performance by the Company of its covenants and obligations hereunder and to the following additional conditions: (a) The Registration Statement and all post-effective amendments thereto shall have become effective and any and all filings required by Rule 424 and Rule 430A of the 13 14 Rules and Regulations shall have been made, and any request of the Commission for additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Underwriters and complied with to their reasonable satisfaction. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company , shall be contemplated by the Commission and no injunction, restraining order, or order of any nature by a Federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance of the Shares. (b) The Underwriters shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C., counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) to the effect that: (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Washington with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; each of the Subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; the Company and each of the Subsidiaries are duly qualified to transact business in all jurisdictions in which the conduct of their business requires such qualification, or in which the failure to qualify would have a materially adverse effect upon the business of the Company and the Subsidiaries taken as a whole; and the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable (except to the extent such shares are assessable under the Revised Code of Washington Section 30.44.020) and are owned by the Company or a Subsidiary; and, to the best of such counsel's knowledge, the outstanding shares of capital stock of each of the Subsidiaries is owned free and clear of all liens, encumbrances and equities and claims (except to the extent such shares are subject to the lien in favor of U.S. Bank under that certain Pledge Agreement dated as of December 1, 1995 by and between the Company and U.S. Bank), and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into any shares of capital stock or of ownership interests in the Subsidiaries are outstanding. (ii) The Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the authorized shares of the Company's Common Stock have been duly authorized; the outstanding shares of the Company's Common Stock have been duly authorized and validly issued and are fully paid and non-assessable; all of the Shares conform to the description thereof contained in the Prospectus; the certificates for the Shares, assuming they 14 15 are in the form filed with the Commission, are in due and proper form; the shares of Common Stock, including the Option Shares, if any, to be sold by the Company pursuant to this Agreement have been duly authorized and will be validly issued, fully paid and non-assessable when issued and paid for as contemplated by this Agreement; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue or sale thereof. (iii) Except as described in or contemplated by the Prospectus, to the knowledge of such counsel, there are no outstanding securities of the Company convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or rights of any character obligating the Company to issue any shares of its capital stock or any securities convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of such stock; and except as described in the Prospectus, to the knowledge of such counsel, no holder of any securities of the Company or any other person has the right, contractual or otherwise, which has not been satisfied or effectively waived, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Shares or the right to have any Common Stock or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Act of any shares of Common Stock or other securities of the Company. (iv) The Registration Statement has become effective under the Act and, to the best of the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act. (v) The Registration Statement, the Prospectus and each amendment or supplement thereto and document incorporated by reference therein comply as to form in all material respects with the requirements of the Act or the Exchange Act, as applicable and the applicable rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements and related schedules or incorporated by reference therein). The conditions for the use of Form S-2, set forth in the General Instructions thereto, have been satisfied. (vi) The statements under the captions "Risk Factors -- Government Regulation and Recent Legislation," "Risk Factors -- Anti-Takeover Provisions," "Recent Developments -- Effect of Recent Legislation," "Management -- Employment and Change of Control Agreements," "Supervision and Regulation," "Taxation," "Description of Capital Stock" and "Shares Eligible for Future Sale" in the Prospectus, insofar as such statements constitute a summary of documents referred to therein or matters of law, fairly summarize in all material respects the information called for with respect to such documents and matters. (vii) Such counsel does not know of any contracts or documents required to be filed as exhibits to or incorporated by reference in the Registration Statement or described in the Registration Statement or the Prospectus which are no so filed, 15 16 incorporated by reference or described as required, and such contracts and documents as are summarized in the Registration Statement or the Prospectus are fairly summarized in all material respects. (viii) Such counsel knows of no material legal or governmental proceedings pending or threatened against the Company or any of the Subsidiaries except as set forth in the Prospectus. (ix) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the Charter or by-laws of the Company, or any agreement or instrument known to such counsel to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries may be bound. (x) This Agreement has been duly authorized, executed and delivered by the Company. (xi) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the NASD or as required by State securities and Blue Sky laws as to which such counsel need express no opinion) except such as have been obtained or made, specifying the same. (xii) The Company is not, and will not become, as a result of the consummation of the transactions contemplated by this Agreement, and application of the net proceeds therefrom as described in the Prospectus, required to register as an investment company under the 1940 Act. (xiii) The Bank is duly chartered as a commercial bank under the laws of the State of Washington and is in good standing under the laws of the State of Washington. The Bank is a member in good standing of the FHLB. The deposit accounts of the Bank are duly insured by the FDIC to the fullest extent permitted by law. (xiv) To the best of such counsel's knowledge, no charge, investigation or proceeding for the termination or revocation of such charter, FHLB membership, good standing or FDIC insurance are pending or threatened. (xv) To the best of such counsel's knowledge, neither the Company nor any of the Subsidiaries are subject to any order of the FRB, the FDIC or the Washington State Department of Financial Institutions, nor are the Company or any Subsidiary subject to any agreement or consent with, or board resolution adopted at the instigation of, any such regulatory authorities. Such counsel is not aware of any violation by the Company or the Subsidiaries of any applicable 16 17 federal or state laws, rules, regulations, decisions, directives and orders (including without limitation the rules, regulations, decisions, directives and orders of the FRB, the FDIC and the Washington State Department of Financial Institutions). (xvi) The Company is a "bank holding company" within the meaning of the Bank Holding Company Act. In rendering such opinion Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim P.L.L.C. may rely as to matters governed by the laws of states other than Washington or Federal laws on local counsel in such jurisdictions , provided that in each case Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim P.L.L.C. shall state that they believe that they and the Underwriters are justified in relying on such other counsel. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement, at the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information included or incorporated by reference in the Registration Statement or Prospectus). With respect to such statement, Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim P.L.L.C. may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (c) The Underwriters shall have received from Gibson, Dunn & Crutcher LLP, counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, substantially to the effect specified in the penultimate clause in subparagraph (ii), subparagraph (iv), the first sentence of subparagraph (v), and subparagraph (x) of Paragraph (b) of this Section 6, and that the Company is a duly organized and validly existing corporation under the laws of the State of Washington. In rendering such opinion Gibson, Dunn & Crutcher LLP may rely as to all matters governed other than by the laws of the State of California or Federal laws on the opinion of counsel referred to in Paragraph (b) of this Section 6. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement, or any amendment thereto, as of the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the 17 18 Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact, necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (d) The Underwriters shall have received at or prior to the Closing Date from Gibson, Dunn & Crutcher LLP a memorandum or summary, in form and substance satisfactory to the Underwriters, with respect to the qualification for offering and sale by the Underwriters of the Shares under the State securities or Blue Sky laws of such jurisdictions as the Underwriters may reasonably have designated to the Company. (e) You shall have received, on each of the dates hereof, the Closing Date and the Option Closing Date, as the case may be, a letter dated the date hereof, the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to you, of Price Waterhouse, LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating that in their opinion the financial statements and schedules examined by them and included in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; and containing such other statements and information as is ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial and statistical information contained in the Registration Statement and Prospectus. (f) The Underwriters shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Chief Financial Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows: (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for such purpose have been taken or are, to his knowledge, contemplated by the Commission; (ii) The representations and warranties of the Company contained in Section l hereof are true and correct as of the Closing Date or the Option Closing Date, as the case may be; (iii) All filings required to have been made pursuant to Rules 424 or 430A under the Act have been made; 18 19 (iv) He or she has carefully examined the Registration Statement and the Prospectus and, in his or her opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement were true and correct, and such Registration Statement and Prospectus did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, and since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment; and (v) Since the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Subsidiaries taken as a whole, whether or not arising in the ordinary course of business. (g) The Company shall have furnished to the Underwriters such further certificates and documents confirming the representations and warranties, covenants and conditions contained herein and related matters as the Underwriters may reasonably have requested. (h) The Firm Shares and Option Shares, if any, have been approved for designation upon notice of issuance on the Nasdaq National Market. (i) The Lockup Agreements described in Section 4 (j) are in full force and effect. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects satisfactory to the Underwriters and to Gibson, Dunn & Crutcher LLP, counsel for the Underwriters. If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Underwriters by noticing the Company of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). 7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY. The obligations of the Company to sell and deliver the portion of the Shares required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no 19 20 stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. INDEMNIFICATION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls either Underwriter within the meaning of the Act, against any losses, claims, damages or liabilities to which such Underwriter or any such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse each Underwriter and each such controlling person upon demand for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage or liability, action or proceeding or in responding to a subpoena or governmental inquiry related to the offering of the Shares, whether or not such Underwriter or controlling person is a party to any action or proceeding; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Underwriters specifically for use in the preparation thereof; and provided further, that, as to any Preliminary Prospectus, the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon the sale of Shares to any person by such Underwriter if the Underwriter failed to send or give a copy of the Prospectus or any amendment or supplement thereto to such person within the time required by the Act and the untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact in the Preliminary Prospectus was corrected in the Prospectus or any amendment or supplement thereto, unless such failure resulted from noncompliance by the Company with Sections 4(d) and (e) hereof. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter severally and not jointly will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer, or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission 20 21 or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, or controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Underwriters specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a) or (b) shall be available to any party who shall fail to give notice as provided in this Section 8(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was materially prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a) or (b). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred (or within 30 days of presentation) the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them or (iii) the indemnifying party shall have failed to assume the defense and employ counsel acceptable to the indemnified party within a reasonable period of time after notice of commencement of the action. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm representing the indemnified parties who are parties to such proceeding or proceedings. Such firm shall be designated in writing by you in the case of parties indemnified pursuant to Section 8(a) and by the Company in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if 21 22 settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. In addition, the indemnifying party will not, without the prior written consent of the indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding of which indemnification may be sought hereunder (whether or not any indemnified party is an actual or potential party to such claim, action or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action or proceeding. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such 22 23 Underwriter and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 8(d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. (f) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 8 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 8 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of either Underwriter or any person controlling either Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to either Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 8. 9. DEFAULT BY UNDERWRITERS. If on the Closing Date or the Option Closing Date, as the case may be, either Underwriter shall fail to purchase and pay for the portion of the Shares which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company), the Underwriters shall use their reasonable efforts to procure within 36 hours the other Underwriter, or any other Underwriter Underwriter to purchase from the Company such amounts as may be agreed upon and upon the terms set forth herein, the Firm Shares or Option Shares, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 36 hours the Underwriters shall not have procured such other Underwriter, or any other Underwriter, to purchase the Firm Shares or Option Shares, as the case may be, agreed to be purchased by the defaulting Underwriter, then (a) if the aggregate number of shares with respect to which such default shall occur does not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the non-defaulting Underwriter shall be obligated to purchase the Firm Shares or Option Shares, as the case may be, which such defaulting Underwriter failed to purchase, or (b) if the aggregate number of shares of 23 24 Firm Shares or Option Shares, as the case may be, with respect to which such default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the Company or the non-defaulting Underwriter will have the right, by written notice given within the next 36-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the non-defaulting Underwriter or the Company except to the extent provided in Section 8 hereof. In the event of a default by either Underwriter, as set forth in this Section 9, the Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as the Underwriters may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. NOTICES. All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered, telecopied or telegraphed and confirmed as follows: if to the Underwriters, to Alex. Brown & Sons Incorporated, 101 California Street, 46th Floor, San Francisco, California 94111, Attention: Jean-Luc Servat, with a copy to Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202. Attention: General Counsel; if to the Company, to Columbia Banking System, Inc. 1102 Broadway Plaza Tacoma, WA 98402 Attention: Chief Executive Officer 11. TERMINATION. This Agreement may be terminated by you by notice to the Company as follows: (a) at any time prior to the earlier of (i) the time the Shares are released by you for sale, or (ii) 11:30 a.m. on the first business day following the date of this Agreement; (b) at any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and its Subsidiaries taken as a whole, whether or not arising in the ordinary course of business, (ii) any outbreak or escalation of hostilities or declaration of war or national emergency or other national or international calamity or crisis or change in 24 25 economic or political conditions if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States would, in your reasonable judgment, make it impracticable to market the Shares or to enforce contracts for the sale of the Shares, or (iii) suspension of trading in securities generally on the New York Stock Exchange or the American Stock Exchange or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on either such Exchange, (iv) the enactment, publication, decree or other promulgation of any statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects or may materially and adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by United States or New York State authorities, (vi) any downgrading in the rating of the Company's debt securities by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Exchange Act); (vii) the suspension of trading of the Company's common stock by the Commission on the Nasdaq National Market or (viii) the taking of any action by any governmental body or agency in respect of its monetary or fiscal affairs which in your reasonable opinion has a material adverse effect on the securities markets in the United States; or (c) as provided in Sections 6 and 9 of this Agreement. 12. SUCCESSORS. This Agreement has been and is made solely for the benefit of the Underwriters and the Company and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. No purchaser of any of the Shares from either Underwriter shall be deemed a successor or assign merely because of such purchase. 13. INFORMATION PROVIDED BY UNDERWRITERS. The Company and the Underwriters acknowledge and agree that the only information furnished or to be furnished by either Underwriter to the Company for inclusion in any Prospectus or the Registration Statement consists of the information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), legends required by Item 502(d) of Regulation S-K under the Act and the information under the caption "Underwriting" in the Prospectus. 14. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of either Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Shares under this Agreement. 25 26 This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland. If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the Underwriters in accordance with its terms. Very truly yours, COLUMBIA BANKING SYSTEM, INC. By______________________________________ A.G. Espe Chief Executive Officer The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. ALEX. BROWN & SONS INCORPORATED RAGEN MACKENZIE INCORPORATED By: Alex. Brown & Sons Incorporated By:_________________________________ 26 27 SCHEDULE I SCHEDULE OF UNDERWRITERS
Number of Firm Shares Underwriters to be Purchased Alex. Brown & Sons Incorporated Ragen MacKenzie Incorporated
Total ___________ 27 EX-23.1 3 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-2 of our report dated January 24, 1996 except as to the stock dividend described in Note 17, which is as of May 22, 1996, relating to the financial statements of Columbia Banking System, Inc., which appears in such Prospectus. We also consent to the application of such report to the Financial Statement Schedules for the three years ended December 31, 1995 listed under Item 14(a) of Columbia Banking System, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995 when such schedules are read in conjunction with the financial statements referred to in our report. The audits referred to in such report also included these Financial Statement Schedules. We also consent to the references to us under the headings "Experts" and "Selected Consolidated Financial Information" in such Prospectus. However, it should be noted that Price Waterhouse LLP has not prepared or certified such "Selected Consolidated Financial Information." /s/ PRICE WATERHOUSE LLP - ------------------------ Seattle, Washington October 23, 1996 -----END PRIVACY-ENHANCED MESSAGE-----