-----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, IiFdjfrS/y5sToDPcC8nQu/mpS4Fo4gwEpf3x9FaxwnsK0aGeKzkpyRiDjqUnEQL sfkuDVEbQ+tPhRJbtRpJZw== 0000891020-97-000441.txt : 19970329 0000891020-97-000441.hdr.sgml : 19970329 ACCESSION NUMBER: 0000891020-97-000441 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20288 FILM NUMBER: 97567030 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 10-K 1 EDGAR FORM 10-K FOR COLUMBIA BANKING SYSTEMS, INC. 1 ============================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended DECEMBER 31, 1996 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] Commission File Number 0-20288 COLUMBIA BANKING SYSTEM, INC. (Exact name of registrant as specified in its charter) WASHINGTON 91-1422237 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1102 BROADWAY PLAZA TACOMA, WASHINGTON 98402 (Address of principal executive offices) (Zip code) Registrant's Telephone Number, Including Area Code: (206) 305-1900 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, No Par Value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 C.F.R. 229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of Common Stock held by non-affiliates of registrant at February 28, 1997 was $90,418,214. The number of shares of registrant's Common Stock outstanding at February 28, 1997 was 5,203,926 Documents incorporated by reference and parts of Form 10-K into which incorporated: Registrant's Annual Report to Shareholders Parts I and II for the year ended December 31, 1996 Registrant's definitive Proxy Statement Part III dated March 20, 1997 ============================================================================ 2 CROSS REFERENCE SHEET Location in Annual Report to Shareholders and Definitive Proxy Statement of Items required by Form 10-K
Annual Report to Shareholders and Form 10-K Definitive Proxy Statement - ----------------------------------------------- ---------------------------------------------------- Part and Page Item No. Caption Caption Number - ---------- ------------------------------- ---------------------------------------------------- PART I ANNUAL REPORT TO SHAREHOLDERS ----------------------------- Item 1 Business Consolidated Average Balance Consolidated Five-Year Summary of Sheet and Analysis of Net Average Balances and Net Interest Interest Income and Expense Revenue 62 Management Discussion and Analysis of Financial Condition and Results of Operations("Management Discussion") 20 Investments Note 4, Notes to Consolidated Financial Statements 46 Management Discussion - Securities 28 Lending Activities Management Discussion - Loan Portfolio 24 Management Discussion - Nonperforming Assets 26 Note 5, Notes to Consolidated Financial Statements 47 Summary of Loan Loss Experience Management Discussion - Provision and Allowance for Loan Losses 27 Supervision and Regulation Management Discussion - Capital 31 Item 2 Properties Note 7, Notes to Consolidated Financial Statements 49 Item 3 Legal Proceedings Note 12, Notes to Consolidated Financial Statements 53
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Annual Report to Shareholders and Form 10-K Definitive Proxy Statement - -------------------------------------------- ---------------------------------------------------- Part and Page Item No. Caption Caption Number - --------- ---------------------------- ----------------------------------------------------- PART II ANNUAL REPORT TO SHAREHOLDERS ----------------------------- Item 5 Market for the Registrant's Management Discussion - Quarterly Common Stock and Related Common Stock Prices & Dividend Stockholder Matters Payments 33 Item 6 Selected Financial Data Consolidated Highlights 15 Consolidated Five-Year Statements of Operations 60 Consolidated Five-Year Summary of Average Balances and Net Interest Revenue 62 Item 7 Management's Discussion and Management Discussion 20 Analysis of Financial Condition and Results of Operations Consolidated Five-Year Summary of Average Balances and Net Interest Revenue 62 Item 8 Financial Statements and Audited Financial Statements 36 Supplementary Data Summary of Quarterly Financial Information (Unaudited) 59 Item 9 Changes in and Disagreements With Recent Change in Accounting Firms 33 Accountants on Accounting and Financial Disclosure PART III DEFINITIVE PROXY STATEMENT -------------------------- Item 10 Directors and Executive Officers Election of Directors 2 of the Registrant Item 11 Executive Compensation Executive Compensation 6 Item 12 Security Ownership of Certain Election of Directors 2, 12 Beneficial Owners and Management Item 13 Certain Relationships and Related Interest of Management in Certain Transactions Transactions 13
4 COLUMBIA BANKING SYSTEM, INC. FORM 10-K December 31, 1996 TABLE OF CONTENTS
PART I Page ---- Item 1. Business General 1 Strategy 2 Market Area 3 Competition 4 Employees 4 Executive Officers of the Company 5 Effects of Governmental Monetary Policies 6 Consolidated Average Balance Sheet and Analysis of Net Interest Income and Expense 6 Consolidated Analysis of Changes in Interest Income and Expense 7 Investments 8 Lending Activities 10 Summary of Loan Loss Experience 12 Deposits 13 Significant Financial Ratios 14 Short-term Borrowings 14 Supervision and Regulation 14 Item 2. Properties 18 Item 3. Legal Proceedings 18 Item 4. Submission of Matters to a Vote of Security Holders 18 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 18 Item 6. Selected Financial Data 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 8. Financial Statements and Supplementary Data 19 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 19 PART III Item 10 Directors and Executive Officers of the Registrant 19 Item 11. Executive Compensation 19 Item 12. Security Ownership of Certain Beneficial Owners and Management 19 Item 13. Certain Relationships and Related Transactions 19 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 20
5 PART I ITEM 1. BUSINESS GENERAL Columbia Banking System, Inc. (the "Company"), a Washington corporation, 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 Arnold Espe, (Chairman and Chief Executive Officer of the Company) 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 ("Columbia 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 long-standing 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. In November and December 1996, the Company issued approximately 1.445 million shares of common stock in a public offering. The issuance raised approximately $20.7 million in new capital. The Company contributed approximately $10.0 million of these proceeds to Columbia Bank primarily to fund additional expansion in Pierce County, and, over the next several years, into south King and Thurston Counties. The remainder was used to repay a $3.0 million borrowing and for general corporate purposes. The Company's sole subsidiary, Columbia Bank, is a Washington state-chartered commercial bank, the deposits of which are insured by the Federal Deposit Insurance Corporation (the "FDIC"). Columbia Bank is subject to regulation by the FDIC and the Washington State Department of Financial Institutions, Division of Banks (the "Division"). Although Columbia Bank is not a member of the Federal Reserve System, the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") has certain supervisory authority over the Company which can also affect Columbia Bank. Columbia Bank provides a wide range of banking services to small- and medium-sized businesses and individuals. At December 31, 1996, the Company had total consolidated assets of $588.9 million, loans of $446.1 million and deposits of $493.2 million. 1 6 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 emphasis on relationship banking. * 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. 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 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 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 customer deposit and lending activities will produce significant benefits, including increased core deposits and greater loan portfolio diversification. 2 7 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 strong demand for a locally based banking institution. The Company also currently anticipates expansion into neighboring Thurston County (the location of Olympia, the capital of Washington) 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 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 semiconductor 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 two banking offices, 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. 3 8 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 / Pierce 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. COMPETITION The Company anticipates that the substantial consolidation among financial institutions in Washington that has occurred to date will continue, due in part to recent federal legislation concerning interstate banking. 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 currently does not have a significant market share of the deposit-taking or lending activities in the areas in which it conducts operations. The Company's strategy involves significant expansion throughout the Tacoma metropolitan area and contiguous parts of the Puget Sound region of Washington. 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. EMPLOYEES At December 31, 1996, the Company had 247 full-time equivalent employees. The Company has placed an increased emphasis and high priority on staff development. This development involves selective hiring and extensive training (including customer service training). New hires are selected on the basis of both technical skills and customer service capabilities. Emphasis has been placed upon hiring and retaining additional key officers in areas such as lending, administration and finance. 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. 4 9 EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth certain information about the executive officers of the Company.
Has Served as an Executive Officer of the Company Name Age Position Since - ----------------------------------------------------------------------------------------------------- A. G. Espe(1) 60 Director, Chairman and Chief Executive Officer 1990 W. W. Philip(2) 70 Director, President and Chief Operating Officer 1993 Donald A. Andersen(3) 51 Senior Vice President, Senior Credit 1996 Administrator - Columbia Bank Julie A. Healy(4) 41 Senior Vice President, Operations Manager 1994 H. R. Russell(5) 42 Senior Vice President, Senior Loan Production 1996 Officer - Columbia Bank Gary R. Schminkey(6) 39 Senior Vice President and Chief Financial 1993 Officer Evans Q. Whitney(7) 53 Senior Vice President, Human Resources Director 1994
(1) Mr. 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. (2) Mr. 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. (3) Mr. 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. (4) Ms. 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. (5) Mr. 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. 5 10 (6) Mr. 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. (7) Mr. 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. All officers are elected by the Board of Directors and serve at the pleasure of the Board for an unspecified term. EFFECTS OF GOVERNMENTAL MONETARY POLICIES Profitability in banking depends on interest rate differentials. In general, the difference between the interest earned on a bank's loans, securities and other interest-earning assets and the interest paid on a bank's deposits and other interest-bearing liabilities is the major source of a bank's earnings. Thus, the earnings and growth of the Company are affected not only by general economic conditions, but also by the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve. The Federal Reserve implements national monetary policy for such purposes as controlling inflation and recession by its open-market operations in United States government securities, control of the discount rate applicable to borrowings from the Federal Reserve and the establishment of reserve requirements against certain deposits. The actions of the Federal Reserve in these areas influence growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of future changes in monetary policies and their impact on the Company are not predictable. CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME AND EXPENSE For information concerning consolidated daily average balances, along with average yields for earning assets and average interest rates for interest-bearing liabilities, see "Consolidated Five-Year Summary of Average Balances and Net Interest Revenue" at page 62 of the Annual Report to Shareholders for the year ended December 31, 1996 ("Annual Report"), which is incorporated herein by reference. See also "Management Discussion and Analysis of Financial Condition and Results of Operations" ("Management Discussion") beginning at page 20 of the Annual Report for additional details on various asset and liability categories. 6 11 CONSOLIDATED ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE The following table sets forth the amounts of the changes in consolidated net interest income attributable to changes in volume and changes in interest rates for the Company. 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.
1996 Compared to 1995 1995 Compared to 1994 Increase (Decrease) Due to Increase (Decrease) Due to -------------------------- -------------------------- (in thousands) Volume Rate Total Volume Rate Total - --------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans: Commercial business $3,628 $ (832) $2,796 $2,728 $ 986 $3,714 One- to four-family residential (349) (304) (653) 1,693 885 2,578 Five or more family residential and commercial properties 3,291 (146) 3,145 3,002 85 3,087 Consumer 967 (245) 722 1,439 230 1,669 - ---------------------------------------------------------------------------------------------------------------- Total loans 7,537 (1,527) 6,010 8,862 2,186 11,048 Securities 492 18 510 (40) 76 36 Interest-earning deposits with banks 850 (28) 822 55 (75) (20) - ---------------------------------------------------------------------------------------------------------------- Total interest revenue $8,879 $(1,537) $7,342 $8,877 $2,187 $11,064 ================================================================================================================ INTEREST EXPENSE Certificates of deposit $1,176 $ (29) $1,147 $2,424 $1,546 $3,970 Savings accounts (81) 20 (61) (257) 31 (226) Interest-bearing demand 2,236 (238) 1,998 1,261 1,076 2,337 - ---------------------------------------------------------------------------------------------------------------- Total interest on deposits 3,331 (247) 3,084 3,428 2,653 6,081 Federal Home Loan Bank advances 459 (97) 362 200 143 343 Other borrowings (70) (17) (87) (324) (17) (341) - ---------------------------------------------------------------------------------------------------------------- Total interest expense $3,720 $ (361) $3,359 $3,304 $2,779 $6,083 ================================================================================================================
7 12 INVESTMENTS For additional information concerning securities (securities available for sale), see Note 4 of "Notes to Consolidated Financial Statements" at page 46 of the Annual Report and "Management Discussion - Securities" at page 28 of the Annual Report, all of which are incorporated herein by reference. 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 accretion 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. 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. At December 31, 1996, all of the Company's securities were classified in the "available for sale" portfolio. At December 31, 1996, there were no securities of any issuer that exceeded ten percent of shareholders' equity. 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 (in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------- December 31, 1996: U.S. Treasury & government agency $30,441 $40 $30,481 Mortgage-backed 10,874 ($114) 10,760 FHLB stock 4,248 4,248 - ----------------------------------------------------------------------------------------------------------- Total $45,563 $40 ($114) $45,489 =========================================================================================================== 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 ===========================================================================================================
8 13 At December 31, 1996 and 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:
Gross Gross Recorded Unrealized Unrealized Market - ----------------------------------------------------------------------------------------------------------- (in thousands) Value Gains Losses Value 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 ===========================================================================================================
The following table provides the carrying values, maturities and weighted average yields of the Company's "available for sale" portfolio at December 31, 1996.
Maturing ------------------------------------------------------------------ After 1 After 5 Within 1 But Within But Within After 10 (dollars in thousands) Year 5 Years 10 Years Years Total - -------------------------------------------------------------------------------------------------------------- U.S. Treasury Balance $15,040 $ 2,000 $ 17,040 Weighted Average Yield 5.74% 5.68% 5.73% U.S. government agency Balance 11,728 $1,713 13,441 Weighted Average Yield 6.56% 6.51% 6.55% Mortgage-backed (1) Balance 8,801 $1,959 10,760 Weighted Average Yield 5.32% 6.17% 5.47% FHLB stock and other (2) Balance 4,248 4,248 Weighted Average Yield 7.80% 7.80% - -------------------------------------------------------------------------------------------------------------- Total Balance $15,040 $22,529 $1,959 $5,961 $45,489 Weighted Average Yield 5.74% 6.00% 6.17% 7.43% 6.11% - --------------------------------------------------------------------------------------------------------------
(1) The maturities reported for mortgage-backed securities are based on contractual maturities and principal amortization. (2) The weighted average yield on FHLB stock is based upon the dividend yield and average balances for the 12 months ended December 31, 1996. 9 14 LENDING ACTIVITIES The following table sets forth the composition of the Company's loan portfolio by type of loan at the dates indicated.
(in thousands) December 31, 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------- Commercial business $169,318 $113,775 $ 72,829 $ 44,772 $ 16,511 Real estate: One-to four-family residential 67,709 67,991 76,260 55,804 53,161 Five or more family residential and commercial properties 128,803 97,103 68,531 45,193 30,681 - ----------------------------------------------------------------------------------------------------------- Total real estate 196,512 165,094 144,791 100,997 83,842 Real estate construction: One- to four-family residential 21,380 22,741 17,411 16,328 9,408 Five or more family residential and commercial properties 10,680 8,884 4,004 4,799 4,689 - ----------------------------------------------------------------------------------------------------------- Total real estate construction 32,060 31,625 21,415 21,127 14,097 Consumer 48,807 43,343 30,860 14,417 6,584 - ----------------------------------------------------------------------------------------------------------- Subtotal 446,697 353,837 269,895 181,313 121,034 Less deferred loan fees and other (602) (744) (899) (297) (237) - ----------------------------------------------------------------------------------------------------------- Total loans $446,095 $353,093 $268,996 $181,016 $120,797 =========================================================================================================== Loans held for sale $ 11,341 $ 1,367 $ 1,612 $ 1,777 $ 2,021 ===========================================================================================================
NOTE: During 1994, as part of its focus on loan quality, management developed more detailed statistical information on various types of lending. In this connection, the December 31, 1996, 1995 and 1994 loan balances in the table above reflect changes in classifications from prior periods. Due to the impracticality of developing similar information for prior period balances, prior period balances have not been restated and, as a result, are not comparable with December 31, 1996, 1995 and 1994. The following table presents at December 31, 1996, (i) the aggregate maturities of loans in each major category of the Company's loan portfolio and (ii) the aggregate amounts of variable and fixed rate loans that mature after one year.
Maturing ------------------------------------------------------------------ After 1 But After Five (in thousands) Within 1 Year Within 5 Years Years Total - ----------------------------------------------------------------------------------------------------------- Commercial business $146,357 $22,509 $452 $169,318 Real estate construction 31,852 55 153 32,060 - ----------------------------------------------------------------------------------------------------------- Total $178,209 $22,564 $605 $201,378 =========================================================================================================== Fixed rate loans $17,561 $605 $ 18,166 Variable rate loans 5,003 5,003 - ----------------------------------------------------------------------------------------------------------- Total $22,564 $605 $ 23,169 ===========================================================================================================
10 15 Risk Elements Risk elements consist of: (i) nonaccrual loans, which are loans placed on a nonaccrual basis generally when the loan becomes past due 90 days or when there are otherwise serious doubts about the collectibility of principal or interest; (ii) restructured loans, for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal, have been granted due to the borrower's weakened financial condition (interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur); (iii) accruing loans which are contractually past due ninety days or more as to interest or principal payments; and (iv) potential problem loans, which are currently performing and are not included in nonaccrual or restructured loans, 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. The following table sets forth, at the dates indicated, information with respect to nonaccrual loans, restructured loans, total nonperforming loans (nonaccrual loans plus restructured loans), real estate owned ("REO"), total nonperforming assets, accruing loans past-due 90 days or more and potential problem loans of the Company.
(in thousands) December 31, 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------- Nonaccrual $2,227 $ 435 $ 452 $1,631 $ 650 Restructured 25 29 44 94 109 - ----------------------------------------------------------------------------------------------------------- Total nonperforming loans 2,252 464 496 1,725 759 Real estate owned 40 3,304 3,227 3,305 2,959 - ----------------------------------------------------------------------------------------------------------- Total nonperforming assets $2,292 $3,768 $3,723 $5,030 $3,718 =========================================================================================================== Accruing loans past-due 90 days or $ 152 $ 82 more =========================================================================================================== Potential problem loans $ 213 ===========================================================================================================
For information pertaining to risk elements, see the appropriate sections in "Management Discussion - Loan Portfolio" beginning at page 24 of the Annual Report, "Management Discussion - Nonperforming Assets" beginning at page 26 of the Annual Report and Note 5 of "Notes to Consolidated Financial Statements" beginning at page 47 of the Annual Report, all of which are incorporated herein by reference. 11 16 SUMMARY OF LOAN LOSS EXPERIENCE The following table provides an analysis of net losses by loan type for the last five years.
(dollars in thousands) December 31, 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------- Total loans, net at end of period $446,095 $353,093 $268,996 $181,016 $120,797 Daily average loans 405,131 318,039 222,236 140,353 107,182 - ----------------------------------------------------------------------------------------------------------- Balance of allowance for loan losses at beginning of period $ 3,748 $ 2,711 $ 1,992 $ 1,539 $ 1,426 Charge-offs: Real estate: One- to four-family residential (31) Five or more family residential and commercial properties (18) Commercial business (514) (148) (258) (72) (45) Consumer (170) (115) (106) (38) (32) - ----------------------------------------------------------------------------------------------------------- Total charge-offs (684) (263) (364) (110) (126) Recoveries: Real estate: One-to four-family residential 1 Five or more family residential and commercial properties Commercial business 17 45 83 56 47 Consumer 3 5 5 16 - ----------------------------------------------------------------------------------------------------------- Total recoveries 20 50 83 61 64 - ----------------------------------------------------------------------------------------------------------- Net charge-offs (664) (213) (281) (49) (62) Provision charged to expense 1,420 1,250 1,000 502 170 Allowance acquired in purchase of branch 5 - ----------------------------------------------------------------------------------------------------------- Balance of allowance for loan losses at end of period $ 4,504 $ 3,748 $ 2,711 $ 1,992 $ 1,539 =========================================================================================================== Ratio of net charge-offs during period to average loans outstanding 0.16% 0.07% 0.13% 0.03% 0.06% ===========================================================================================================
In determining the adequacy of the allowance, management considered numerous factors including the level of nonperforming loans, loan loss experience, credit concentrations, a review of the quality of the loan portfolio, collateral values and uncertain economic conditions. For additional information, see "Management Discussion - Provision and Allowance for Loan Losses" at page 27 of the Annual Report, which is incorporated herein by reference. 12 17 The table below shows the allocation of the Allowance for Loan Losses for the last five years. 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.
(dollars in thousands) December 31, 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------- % of % of % of % of % of Balance at End of Total Total Total Total Total Period Applicable to: Amount Loans* Amount Loans* Amount Loans* Amount Loans* Amount Loans* - ------------------------------------------------------------------------------------------------------------------- Commercial business $3,103 37.9% $1,796 32.2% $1,369 27.0% $ 389 23.6% $ 348 13.2% Real estate and construction: One- to four-family 933 19.9 560 25.6 687 34.7 489 42.6 390 53.4 residential Five or more family residential 294 31.3 187 30.0 146 26.9 545 26.3 264 28.2 and commercial properties Consumer 402 10.9 284 12.2 216 11.4 138 7.5 88 5.2 Unallocated (228) 921 293 431 449 - ------------------------------------------------------------------------------------------------------------------- Total $4,504 100.0% $3,748 100.0% $2,711 100% $1,992 100% $1,539 100% ===================================================================================================================
*Represents the total of all outstanding loans in each category as a percent of total loans outstanding. DEPOSITS The following table presents the average balances outstanding and weighted average interest rate for each major category of deposits:
years ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average (dollars in thousands) Balance Rate Paid Balance Rate Paid Balance Rate Paid - ------------------------------------------------------------------------------------------------------------------- Interest-bearing demand and money market accounts $142,103 3.62% $ 79,706 3.95% $ 38,962 2.09% Savings accounts 21,673 2.80 24,547 2.73 33,938 2.64 Certificates of deposit 189,122 5.66 168,351 5.68 122,198 4.58 - ------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 352,898 4.67 272,604 4.91 195,098 3.74 Demand and other noninterest-bearing 60,691 42,167 26,238 - ------------------------------------------------------------------------------------------------------------------- Total deposits $413,589 $314,771 $221,336 ===================================================================================================================
The following table shows the amount and maturity of certificates of deposit that had balances of more than $100,000:
(in thousands) December 31, 1996 - ------------------------------------------------------------------------------------------------ Remaining maturity Three months or less $38,318 Over three through six months 16,408 Over six through twelve months 18,870 Over twelve months 7,626 - ------------------------------------------------------------------------------------------------ Total $81,222 ================================================================================================
13 18 SIGNIFICANT FINANCIAL RATIOS Ratios for the last three years, based on daily average balances, are as follows:
1996 1995 1994 - ------------------------------------------------------------------------------------------------------ Return on assets 0.73% 0.74% (0.22%) Return on equity 9.68 9.25 (2.12) Dividend payout ratio Equity to assets 7.55 7.95 10.38
SHORT-TERM BORROWINGS At December 31, 1996, 1995 and 1994, there were no short-term (original maturity of one year or less) borrowings that exceeded 30 percent of shareholders' equity at the end of the period. 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 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 Federal Reserve 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 of 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. 14 19 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 managing or controlling banks as to be a proper incident thereto. The Company must obtain the approval of the Federal Reserve 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 also 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 a 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 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 December 31, 1996, the Company's leverage ratio was 10.62% compared with 7.72% at December 31, 1995. The Company's Tier I and total capital ratios were 12.81% and 13.79%, respectively, at December 31, 1996, compared with 9.10% and 10.95% at December 31, 1995. 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 Division. Although Columbia Bank is not a member of the Federal Reserve System, the Federal Reserve Board's 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. 15 20 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 Bank Insurance Fund (the "BIF") and the Savings Association Insurance Fund (the "SAIF"). Prior to enactment of recent legislation and promulgation of regulations thereunder, the FDIC's annual assessment rate for deposits ranged from 0.0% to 0.27% of insured deposits for the BIF and 0.23% to 0.31% of insured deposits for the SAIF, depending on an institution's risk classification. The recent legislation was enacted to resolve the difference in rates between the two funds. Pursuant to this legislation, the FDIC adopted regulations lowering the SAIF assessment rates to a range of 0.04% to 0.31% and then through application of an adjustment factor further reducing SAIF assessment rates to an effective range of 0.0% to 0.27%. The FDIC has also proposed to maintain the BIF assessment rate within a range of 0.0% and 0.27% of covered deposits. These rates essentially became effective October 1, 1996 for certain institutions, such as Columbia Bank. The legislation also resulted in a one-time special assessment of $612,000 for the Company. The special assessment, which is tax deductible, was recognized during the third quarter of 1996. 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. This assessment is not tied to an institution's risk classification. 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. Management anticipates that its total assessment rate for deposits deemed to be SAIF-insured will be 0.064% for the year 1997. Management also anticipates that its total assessment rate for BIF-insured deposits will be 0.013% for the year 1997. At December 31, 1996, approximately $169.8 million, or 34.4%, of Columbia Bank's deposits were deemed to be SAIF-insured under the allocation formula. 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 pools within 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 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 premiums 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 comprised of directors who are independent of management. The Company had $588.9 million in assets at December 31, 1996, and thus became subject to the FDIC regulations on January 1, 1997. The Bank has an Audit Committee of independent directors which meets the audited financial statement requirements of applicable regulations. 16 21 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 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, 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 liabiltity 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. The foregoing is just a brief summary of certain important statutes and regulations. It is impossible to determine with any certainty the impact, both operationally and financially, that enacted and proposed statutes and regulations will have on the Company and its subsidiary. Implementation of the new regulations has resulted and will result in initial costs to financial institutions. In addition, many of the new regulations include additional reporting requirements which will result in increased and recurring personnel and other costs. 17 22 ITEM 2. PROPERTIES The Company's executive offices and the Main Office of Columbia Bank are located in approximately 37,500 square feet of leased space in downtown Tacoma. The lease of the downtown Tacoma office 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. The base rent is approximately $34,000 per month for the first five years, subject to certain increases for landlord operating expenses. Beginning in the sixth year of the lease and at each five-year renewal date, the base rent may be adjusted pursuant to a formula which limits the adjustments to an average of 3% of the base rent per year or 15% of the base rent over the five-year renewal term. The downtown lease also includes customer and employee parking spaces at rates at or below current market rates for downtown parking. As of December 31, 1996, Columbia Bank had 11 offices in Pierce County, including the Main Office ( 8 leased and 3 owned), two offices in Longview (both owned), one office in Bellevue (leased), one office in Federal Way (leased), and one office in Woodland (owned). Commerce Plaza, one of Columbia Bank's banking offices in Longview, houses a retail banking office and numerous retail and other tenants. For additional information pertaining to properties, see Note 7 of "Notes to Consolidated Financial Statements" at page 49 of the Annual Report, which is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS For information concerning legal proceedings, see Note 12 of "Notes to Consolidated Financial Statements" at page 53 of the Annual Report, which is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS For information concerning the Company's common stock and related security holder matters, see "Quarterly Common Stock Prices & Dividend Payments" at page 33 of the Annual Report, which is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA For selected financial data concerning the Company, see "Consolidated Highlights," "Consolidated Five-Year Statements of Operations" and "Consolidated Five-Year Summary of Average Balances and Net Interest Revenue" at pages 15, 60 and 62, respectively, of the Annual Report, which is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For management's discussion and analysis, see "Consolidated Analysis of Changes in Interest Income and Expense" in Part I of this report, "Management Discussion and Analysis of Financial Condition and Results of Operations" at pages 20 through 33 of the Annual Report and "Consolidated Five-Year Summary of Average Balances and Net Interest Revenue" at page 62 of the Annual Report, all of which are incorporated herein by reference. 18 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA For consolidated financial statements of the Company, see "Audited Financial Statements" beginning at page 36 of the Annual Report which is incorporated herein by reference. The "Summary of Quarterly Financial Information (Unaudited)" on page 59 of the Annual Report is also incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE For information concerning a change in the Company's independent accountant , see "Recent Change in Accounting Firms" on page 33 of the Annual Report, which is incorporated herein by reference. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning directors of the registrant is incorporated herein by reference to the section entitled "Information With Respect to Nominees" beginning at page 2 of the Company's definitive Proxy Statement dated March 20, 1997 (the "Proxy Statement") for the annual meeting of shareholders to be held April 23, 1997. The required information with respect to the executive officers of the Company is included under the caption "Executive Officers of the Company" in Part I of this report. Part I of this report is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION For information concerning executive compensation see "Executive Compensation" beginning at page 6 of the Proxy Statement, which is incorporated herein by reference. Neither the Report of the Personnel and Compensation Committee on Executive Compensation nor The Stock Performance Graph, both of which are contained in the Proxy Statement, are incorporated by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT For information concerning security ownership of certain beneficial owners and of management see "Information With Respect to Nominees" beginning at page 2 and 12 of the Proxy Statement, which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For information concerning certain relationships and related transactions, see "Interest of Management in Certain Transactions" beginning at page 13 of the Proxy Statement, which is incorporated herein by reference. 19 24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K List of Financial Statements and Financial Statement Schedules. (a) (1) Financial Statements: The following consolidated financial statements of the Company., included in the Annual Report of the registrant to its shareholders for the year ended December 31, 1996, are incorporated by reference in Item 8:
Page ---- Consolidated Statements of Operations--Years ended December 31, 1996, 1995 and 1994 36 Consolidated Balance Sheets--December 31, 1996 and 1995 38 Consolidated Statements of Shareholders' Equity--Years ended December 31, 1996, 1995 and 1994 40 Consolidated Statements of Cash Flows--Years ended December 31, 1996, 1995 and 1994 42 Notes to Consolidated Financial Statements 44 Report of Independent Accountants 35
(2) Exhibits: See "Index to Exhibits" at page 23 of this Form 10-K. (b) Reports on Form 8-K: None 20 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 24th day of March, 1997. Columbia Banking System, Inc. (Registrant) By /s/ A. G. Espe ------------------------------ A. G. Espe Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on the 24th day of March, 1997. Principal Executive Officer: /s/ A. G. Espe ------------------------------ A. G. Espe Chairman and Chief Executive Officer Principal Financial Officer: /s/ Gary R. Schminkey ------------------------------ Gary R. Schminkey Senior Vice President and Chief Financial Officer 21 26 A. G. Espe, pursuant to powers of attorney which are being filed with this Annual Report on Form 10-K, has signed this report on March 24, 1997 as attorney-in-fact for the following directors who constitute a majority of the board of directors. W. Barry Connoley Robert Quoidbach Richard S. DeVine Donald Rodman Jack Fabulich Frank Russell Jonathan Fine Sidney R. Snyder Margel Gallagher James M. Will, Jr. John A. Halleran /s/ A. G. Espe ------------------------------ A. G. Espe Attorney-in-fact March 24, 1997 22 27 INDEX TO EXHIBITS Exhibit No. - -------- 3 (a) Restated Articles of Incorporation of the Company. (1) (b) Restated Bylaws of the Company. (4) 4 Form of Indenture. (1) 10 (a) Lease dated May 7, 1993 between the Company and William B. Swensen Enterprises for Tacoma Main Office premises of Columbia Bank. (2) (b) Amended Employee Stock Option Plan dated July 19, 1993. (2) *(c) Amended Employment Agreement dated December 30, 1993 between the Company and A. G. Espe. (3) *(d) Amended Employment Agreement between the Company and A. G. Espe, dated as of September 25, 1996, effective January 1, 1997. (6) *(e) Amended Employment Agreement dated December 30, 1993 between the Company and W. W. Philip, as further amended effective December 29, 1995. (7) *(f) Amended Employment Agreement between the Company 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. (6) (g) 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 Company. The termination agreement also resulted in the termination of the Regulatory Capital Maintenance Agreement dated August 2, 1988 among the Company, Stanley B. Rose Company, Stanley B. Rose, Columbia Savings Bank and the Federal Savings and Loan Insurance Corporation. (4) (h) Amended Agreement Granting Options to NorCap, Ltd. to Purchase Shares of Common Stock of the Company dated September 26, 1990. (1) (i) Cash or Deferred Profit Sharing Plan effective as of July 1, 1992. (2) (j) Data processing servicing agreement dated May 3, 1993 between the Company and M&I Data Services. (3) 11 Statement re computation of per share earnings. 23 28 13 The Company's Annual Report to Shareholders for the fiscal year ended December 31, 1996. (5) 21 Subsidiaries of the Company are: (a) Columbia State Bank, Tacoma, Washington, a Washington state-chartered commercial bank. 24 Powers of Attorney dated February 26, 1997. (1) Incorporated by reference to the Form S-1 (Registration No. 33-47711) previously filed by the Company, declared effective on June 16, 1992. (2) Incorporated by reference to the Form SB-2 (Registration No. 33-66224) previously filed by the Company, declared effective on August 16, 1993. (3) Incorporated by reference to the Annual Report on Form 10-KSB for the year ended December 31, 1993 previously filed by the Company. (4) Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1994 previously filed by the Company. (5) Portions of the Annual Report to Shareholders have been specifically incorporated by reference elsewhere in this report. (6) Incorporated by reference to the Form S-2 (Registration No. 333-14465) previously filed by the Company, declared effective November 12, 1996. (7) Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1995 previously filed by the Company. * The listed documents are management contracts which contain compensatory arrangements. 24 EX-11 2 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 2 EXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS COLUMBIA BANKING SYSTEM, INC. (in thousands, except per share data) 1996 1995 1994 - -------------------------------------------------------------------------------------------------------- EARNINGS Net income (loss) applicable to common stock $3,577 $2,755 ($614) Interest on convertible subordinated notes, net of income tax effects--Note 1 - -------------------------------------------------------------------------------------------------------- Pro forma net income (loss) available to common stock $3,577 $2,755 ($614) ======================================================================================================== SHARES Weighted average number of common and common equivalent shares outstanding 3,866 3,496 3,481 Additional shares assuming conversion of convertible subordinated notes--Note 1 - -------------------------------------------------------------------------------------------------------- Pro forma shares 3,866 3,496 3,481 ======================================================================================================== Fully diluted earnings (loss) per share $0.92 $0.79 ($0.18) ========================================================================================================
Note 1. Earnings (loss) per share and fully diluted earnings (loss) per share are the same for the years ended December 31, 1995 and 1994. The inclusion of convertible subordinated notes would produce an antidilutive effect and therefore have not been included in the above presentation. Additional average shares, assuming the conversion of convertible subordinated notes which are not included, represent 243,011 and 246,619 shares for the years ended December 31, 1995 and 1994, respectively. The related interest expense on these notes (net of income tax effects) was $244,870 and $246,009 for the years ended December 31, 1995 and 1994, respectively. 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 on whole or in part, in multiples of $1,000 principal amount, at 100% of the principal amount of 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. For additional information on earnings per share, please see the "Capital" section of the "Management Discussion and Analysis of Financial Condition and Results of Operations" beginning at page 31 of the Annual Report, which is incorporated herein by reference. EX-13 3 ANNUAL REPORT 1 Exhibit 13 COLUMBIA BANKING SYSTEM 1996 ANNUAL REPORT [4 GRAPHICS] COLUMBIA BANKING SYSTEM 1996 ANNUAL REPORT [2 GRAPHICS] 2 PROFILE Columbia Banking System, Inc. is a Tacoma, Washington-based bank holding company which operates Columbia Bank, a state-chartered full-service commercial bank with 17 banking offices in Pierce, King and Cowlitz counties. The cornerstone of Columbia Bank's approach to banking is a return to friendly, old-fashioned banking, coupled with modern convenience and technology. Columbia Bank is a local bank, strongly committed to its customers and the communities it serves. Columbia Banking System trades on The Nasdaq Stock Market under the symbol COLB. Columbia Banking System achieved record results in 1996, thanks to a balanced combination of strategy, skill, and opportunity. With growing assets, a commitment to earn our customers' loyalty every day, and a market that continues to benefit from the vacuum created by industry consolidation, 1997 represents the opportunity for continued profitable growth. 3 CONTENTS 2 1996 16 letter to shareholders 19 financial review 64 corporate directory 65 shareholder information 66 branch locations 4 Page 2 [Graphic display of the total assets of Columbia Banking System, Inc. at December 31, 1996] $588,916,000 5 record growth A MAJOR MILESTONE.
MEASURES 38.9% average annual growth rate for total assets, 1992 - 1996 39.0% average annual growth rate for total loans, 1992-1996 43.4% average annual growth rate for total deposits, 1992-1996
Think of it as more than a measure of success. Think of it as a measure of just how much customers have come to value our personal approach to banking. In 1996 we crossed the one half-billion dollar mark in assets, increasing 38.5% from one year ago. And we believe that there is plenty of room to grow. 6 people and places BANKS AROUND BANKERS.
MEASURES 15 years average in-market experience for our loan officers 14 years average in-market experience for our branch managers 17 branches total, up from 13 in 1995
It's simple. Banks are best managed by bankers. We build our branch network by first finding the right banker for the market, and then building around their experience, skills and relationships with customers and the community. And it works. After all, wouldn't you rather do business with a banker you know? 7 Page 5 [Photograph of four bank employees symbolizing the narrative on the preceeding page #4] 8 Page 6 [Graphic display of the side profile of a human head symbolizing the narrative on page #7] 9 complete service CUSTOMERS FIRST. SERVICES - Columbia Financial Services - investing through a third party broker-dealer relationship - Pronto - delivers mortgage closings within 10 days or less in most cases - Save For America(TM) - government endorsed savings program for students Too often technology is being used to dehumanize banking and to keep contact with customers to a minimum. While we're just as technologically sophisticated as any other bank, we use technology to enhance our customer relationships, not to replace them. In other words, we give our customers the best of both worlds. 10 customer focus ALL TOGETHER NOW. FOCUS We are committed to our customers and our communities, offering a return to friendly, old-fashioned banking, in addition to providing our customers with all the modern conveniences and technology of banking today. At Columbia, banking is what banking was. People who listen and respond. Who work with our customers and see them as individuals instead of mere numbers. This approach may be the single biggest reason for our record-setting growth. Because, when you treat people as individuals, the word gets around. 11 Page 9 Photograph of two sets of hands working together raising an American flag up a flag pole symbolizing the narrative on the preceding page #8. 12 Page 10 Graphic display of the mathematical function of "6 times" symbolizing the narrative on page #11. 13 high performance WAY ABOVE AVERAGE.
MEASURES 31.3% Total asset growth vs. 4.6% industry average* 27.6% Total loan growth vs. 6.7% industry average* 33.4% Total deposit growth vs. 4.2% industry average* * Average based on all FDIC-insured institutions, 9-95 through 9-96
Not only compared to the county, or the state or the region. Compared to all the FDIC-insured institutions, everywhere in the country. Our balance sheet growth outpaced the industry average by an average of six times based on above measures, while non-performing loans reached an all time low of 0.39 percent. 14 continued growth THE TIME IS NOW.
MEASURES 29.8% increase in net income 26.3% increase in loans 36.3% increase in deposits
Combine our strategy, performance, skill and dedication to customers with a marketplace that is looking for a better way to bank in the aftermath of industry consolidation, and our window for growth is wide open. And that is where our focus remains: making the most of our business and our opportunity. 15 Page 13 Photograph of an eight-pane window with a view of blue sky and clouds symbolizing the narrative on the preceding page #12 16 Page 14 financial charts
December 31, (dollars in thousands) 1992 1993 1994 1995 1996 - ------------ ---- ---- ---- ---- ---- Assets 158,694 235,944 319,072 $425,206 $588,916 Loans 120,797 181,016 268,996 $353,093 $446,095 Deposits 118,014 165,339 268,692 $361,875 $493,222
17 consolidated highlights
- ------------------------------------------------------------------------------------------------- DOLLARS IN THOUSANDS PERCENT EXCEPT PER SHARE AMOUNTS 1996 1995 CHANGE - ------------------------------------------------------------------------------------------------- For the Year Net interest income $ 20,544 $ 16,561 24.1% Provision for loan losses 1,420 1,250 13.6 Net income 3,577 2,755 29.8 Net income excluding SAIF special assessment 4,189 52.1 Per Share: Net income 0.93 0.79 17.7 Net income excluding SAIF special assessment 1.09 38.0 Fully diluted net income 0.92 0.79 16.5 Fully diluted net income excluding SAIF special assessment 1.07 35.4 Book value 11.37 9.76 16.5 At Year-end Assets 588,916 425,206 38.5 Loans 446,095 353,093 26.3 Deposits 493,222 361,875 36.3 Shareholders' equity 58,960 31,967 84.4 Number of full-time equivalent employees 247 201 22.9 Number of banking offices 16 13 23.1 Financial Ratios Net interest margin 4.48% 4.78% Return on average assets 0.73 0.74 Return on average assets excluding SAIF special assessment 0.86 Return on average equity 9.68 9.25 Return on average equity excluding SAIF special assessment 11.34 Average equity to average assets 7.55 7.95 Risk-based capital ratios: Tier I capital 12.81 9.10 Total capital 13.79 10.95 Leverage ratio 10.62 7.72
COLUMBIA BANKING SYSTEM, INC. PAGE 15. 18 TO OUR SHAREHOLDERS Over the past several years, your Company has grown substantially while pursuing aggressive strategies. We have focused on the rapid expansion of Columbia Bank in order to establish a competitive presence in our markets. In the process, we have experienced growth rates well above-average for the banking industry, and have achieved strong earnings momentum. 19 In 1996, our achievements were the result of successful implementation of our business plan. Continuing to build your Company's solid foundation while increasing the value of your investment remains our top priority. We sought to keep pace with market demand in 1996 through ongoing development of our branch network, now numbering 17 branches in 3 counties. Accordingly, Columbia Banking System's asset size has tripled since opening the Tacoma Main Office in August 1993, entirely the result of internal growth. Surpassing one-half billion dollars in total assets during the third quarter of 1996 marked an important milestone. This measure of success was realized earlier than we had originally anticipated. As of December 31, 1996, your Company's assets totaled $588.9 million. Our capital position supports our plan for continued growth. Completion of a secondary equity offering of 1,445,000 shares of common stock during the fourth quarter resulted in net proceeds of approximately $21 million. Of this amount, $10 million was contributed to the capital of Columbia Bank to finance further expansion in Pierce County, and, over the next several years, north into King County and south into Thurston County. Additionally, $3 million was used to repay a borrowing, and $8 million will be used for general corporate purposes. As your Company grows in size, we are also pleased to report consistent growth in earnings, in spite of major investments in our expansion. Net income for 1996 was $3.6 million, a 30% increase from $2.8 million for 1995. On a per share basis, earnings were $0.93 for 1996 compared with $0.79 for 1995. In the third quarter, federal legislation designed to recapitalize the Savings Association Insurance Fund (SAIF) resulted in a one-time charge to earnings. If not for this SAIF special assessment, 1996 net income would have been $4.2 million, or $1.09 per share, up 52% from the prior year. Our approach to the business of banking is what sets us apart from our competitors. We believe that banking is a people business. This philosophy is what drives our organization, from back-room operations to front-line management, and it is what sets us apart from the mega-bank mentality. Our strategy is to provide our customers with the sophisticated systems and products of a regional bank while offering the superior service of a locally-managed community bank. Relationship banking and personal attention to detail make the difference. There are a number of factors influencing the successful implementation of our strategy. First of all, Columbia Bank's knowledgeable management team has considerable depth of experience: the average banking experience in market is 15 years for our loan officers and 14 years for our branch officers. Secondly, potential expansion opportunities are determined by our ability to hire the right banker to serve each community. We call it "building banks around bankers." The right people working together as a team is paramount to our rapid accumulation of loans and deposits and timely capture of market share. Additionally, we're benefiting from a market supportive of our banking style. Well-received in the areas in which we operate, we provide an alternative to the impersonal out-of-state financial institutions dominating western Washington's banking industry. We appeal to customers disillusioned by large-scale bank consolidations and the inconveniences associated with computer conversions, product changes and staff turnover. Our decentralized management system gives us the flexibility to provide prompt, local decision-making and to manage customer relationships with a superior quality of service. Although we have grown rapidly, we remain focused on maintaining sound asset quality while building a diversified loan portfolio. In 1996, we deemphasized commercial real estate lending activity in order to lessen our risk profile and to concentrate on meeting strong demand for lower-risk commercial business loans. We are also in the process of selling our VISA(R) credit card loans which will devote more resources to our commercial portfolio. Our future plans involve continued expansion in Pierce County and gradually north and south along the I-5 corridor in western Washington (see map on page 66). Having just opened a second Bellevue branch in February, and a new branch in Kent later this month, both in King County, we expect to open our Westgate office in north Tacoma later this year, and we have regulatory approval for branches in the Stadium and Lincoln districts of Tacoma. 20 With a strong, well-diversified economy, Washington ranks among the top ten states in the nation in terms of both population and job growth. In accordance with our growth objectives for Columbia Bank, the Puget Sound Region made up of Pierce, King and Thurston counties is projected to expand at nearly twice the national rate through the end of this century. An important factor to our competitive position is our commitment to technological advancement while keeping our primary focus on the personal aspects of banking. Our product and service mix matches that of most multi-state financial institutions. However, more and more we're seeing an industry trend toward automation which is replacing front-line people. Our customers like to work with people, but they also like to have the choice of up-to-date products, systems, services and conveniences. We'll continue to provide both because that's what customers want. We note with sadness the passing of Columbia Banking System Director Emeritus Stanley B. Rose in July 1996. As one of your Company's original Board members, Mr. Rose was a staunch supporter of this organization since its beginning. He will be greatly missed. In closing, it is our distinctive business style and our prospects for ongoing growth which reinforce the value of Columbia Banking System. 1996 was a great year, and we're meeting future challenges with the same enthusiasm and energy that has created strong performance so far. We thank our employees, shareholders and customers, all of whom have contributed to our success. [Photograph of Chairman and Chief Executive Officer, A. G. Espe sitting, and President and Chief Operating Officer, W. W. Phillip Standing] /s/ W. W. Philip /s/ A. G. Espe ------------------ --------------------- W. W. PHILIP A. G. ESPE President and Chairman and Chief Operating Officer Chief Executive Officer MARCH 1, 1997 Page 18. 21 financial review 20 management discussion and analysis of financial condition and results of operations 34 report of management 35 report of independent accountants audited financial statements 36 consolidated statements of operations 38 consolidated balance sheets 40 consolidated statements of shareholders' equity 42 consolidated statements of cash flows 44 notes to consolidated financial statements supplemental financial data (unaudited) 59 summary of quarterly financial information 60 consolidated five-year statements of operations 62 consolidated five-year summary of average balances and net interest revenue 22 management discussion and analysis of financial condition and results of operations This discussion should be read in conjunction with the consolidated financial statements of Columbia Banking System, Inc. (the "Company") and notes thereto presented elsewhere in this report. In the following discussion, unless otherwise noted, references to increases or decreases in average balances in items of income and expense for a particular period and balances at a particular date refer to the comparison with corresponding amounts for the period or date one year earlier. Overview Columbia Banking System, Inc., a Washington corporation, is a registered bank holding company whose wholly owned subsidiary, Columbia State Bank ("Columbia Bank"), conducts a full-service commercial banking business. Headquartered in Tacoma, Washington, the Company serves small and medium-sized businesses, professionals and other individuals through 16 banking offices located in the Tacoma metropolitan area and contiguous parts of the Puget Sound region of Washington, as well as the Longview and Woodland communities in southwestern Washington. At December 31, 1996, based on total assets of $588.9 million, the Company was the largest publicly traded bank holding company headquartered in Washington engaged primarily in commercial banking. In 1993, the Company reorganized in preparation for its aggressive expansion in Tacoma-Pierce County, and raised approximately $17.2 million in net proceeds in a public offering of common stock. Columbia Bank then began a rapid expansion in order to take advantage of 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 this industry consolidation 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 of loans and deposits. Since its reorganization, the Company has experienced rapid growth and has greatly expanded its commercial lending activities. The Company has grown from four banking offices at January 1, 1993 to its present sixteen banking offices, and currently has regulatory approval to open four additional banking offices. From January 1, 1993 to December 31, 1996, the Company increased its consolidated assets from $158.7 million to $588.9 million, its loans from $120.8 million to $446.1 million and its deposits from $118.0 million to $493.2 million. While experiencing this growth, the Company's asset quality, measured by total nonperforming assets as a percentage of total assets, has improved. At December 31, 1996, the Company's nonperforming assets constituted 0.39% 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 COLUMBIA BANKING SYSTEM, INC. page 20. 23 following its 1993 reorganization, the Company has been profitable in each of the last ten consecutive quarters beginning with the third quarter 1994. 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 (coupled with the hiring of an experienced branch manager and/or lending officer with strong community ties and banking relationships) and acquisitions. In particular, the Company anticipates continued expansion in Pierce County, north into King County (the location of Seattle and Bellevue) and south into Thurston County (the location of the state capital, 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 growth strategy, 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 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 and emphasis on convenience and personal service. 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 economies of Washington and 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. In November and December 1996, the Company issued 1.445 million shares of common stock in a public offering, raising approximately $20.7 million in new capital. The Company contributed approximately $10.0 million of these proceeds to Columbia Bank primarily to fund additional expansion in Pierce County, and, over the next several years, into south King and Thurston Counties. The remainder was used to repay a $3.0 million borrowing and for general corporate purposes. In November of 1996, the Gig Harbor branch moved into a new, permanent, full service facility. During the second quarter of 1996 a new branch in Spanaway opened in a temporary facility. Also, in September and December, two new branches were opened in Puyallup and Edgewood/Milton. Columbia Bank has opened 12 branch locations since beginning its major Pierce County expansion in August 1993, and the Company currently has regulatory approval to open three additional branches in Pierce County and one in King County. During 1997, the Company anticipates the establishment of new branches and the relocation of the Spanaway branch from a temporary to a permanent facility. New branches normally do not contribute to net income for many months after opening. In addition to the ongoing expansion of its branch network, the Company has added new products and services to give its customers more banking options and to keep current with industry trends and technology. During the second quarter of 1996, Columbia Bank introduced "Columbia Free Checking," with no monthly fee, no minimum balance, no per-check charges and free use of any ATM in Washington state (exclusive of surcharges assessed by other financial institutions). Columbia Bank also launched "Columbia Financial Services," an alternative investments department which makes available mutual funds, annuities, and other investment products through a contractual arrangement with PrimeVest Financial Services, Inc. COLUMBIA BANKING SYSTEM, INC. page 21. 24 Results of Operations The results of operations of the Company are dependent to a large degree on the Company's net interest income. The Company also generates noninterest income through service charges and fees and income from mortgage banking operations. The Company's operating expenses consist primarily of compensation and employee benefit expense and occupancy expense. Like most financial institutions, the Company's interest income and cost of funds are affected significantly by general economic conditions, particularly changes in market interest rates, and by government policies and actions of regulatory authorities. For 1996, the Company recorded net income of $3.6 million, compared with net income of $2.8 million in 1995 and a net loss of $614,000 in 1994. Net income per share amounted to $0.93 in 1996, compared with $0.79 per share in 1995 and a net loss per share of $0.18 in 1994. Excluding a one-time special assessment on SAIF-insured deposits of $612,000 recorded in the third quarter of 1996, (see Note 15 to consolidated financial statements), net income for 1996 would have been $4.2 million, or $1.09 per share. The increase in net income in 1996 was primarily due to increased revenue from continued loan and deposit growth. Additionally, the Company continued to benefit from utilization of its net operating loss carryforwards for federal income tax purposes and therefore, the Company had no federal income tax provision for the year ended December 31, 1996. Had earnings been fully taxable, net income would have been $2.4 million, or $0.61 per share. Net Interest Income Net interest income increased $4.0 million, or 24%, in 1996 compared with $5.0 million, or 43%, in 1995. The 1996 increase in net interest income was largely due to the overall growth of the Company. Net interest income was favorably affected by average interest-earning assets increasing more rapidly than average interest-bearing liabilities, with the difference funded by noninterest-bearing deposits and shareholders' equity. Average interest-earning assets increased $111.4 million and $91.8 million in 1996 and 1995, respectively, while average interest-bearing liabilities increased only $87.9 million and $77.7 million, respectively. Net interest margin (net interest income divided by average interest-earning assets) decreased to 4.48% for 1996, compared with 4.78% in 1995 and 4.54% in 1994. The decrease in net interest margin was primarily the result of reduced spreads on earning assets. While interest-earning assets grew during fiscal year 1996, the average yield on interest-earning assets decreased to 8.53%, from 9.15% in fiscal year 1995. In comparison, the average cost of interest-bearing liabilities decreased to 4.77% in 1996, from 5.05% 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 during the third quarter of 1996, amounting to approximately $100,000. Provision for Loan Losses For the years ended December 31, 1996, 1995 and 1994, net loan charge-offs amounted to $664,000, $213,000 and $281,000, respectively. The Company's provision for loan losses was $1.4 million for 1996, compared with $1.3 million for 1995 and $1.0 million for 1994. During 1996, the allowance for loan losses increased by $756,000 to 1.01% of loans (excluding loans held for sale) at December 31, 1996 as compared with 1.06% and 1.01% of loans at December 31, 1995 and 1994, respectively. COLUMBIA BANKING SYSTEM, INC. page 22. 25 Noninterest Income Total noninterest income increased $1.3 million, or 33.0% in 1996, and $995,000, or 33.2% in 1995. Increases in noninterest income during 1996 were made up of account service charges, bank card revenue, and mortgage banking income. Noninterest Expense Excluding the SAIF special assessment during the third quarter, total noninterest expense increased $3.7 million, or 22.3%, in 1996, and $2.5 million, or 17.9% 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 expenses. Total noninterest expense was 78.3% of adjusted revenue (the sum of net interest income plus noninterest income, less nonrecurring items) for 1996 compared with 80.5% and 96.3% for 1995 and 1994, respectively. The portion of compensation expense related to loan originations is deferred and deducted from interest income over the life of the related loans. Other categories of expense are volume driven and reflect the Company's rapid growth. Total noninterest expense for the Company is expected to decline in relation to revenues as the Company's asset base grows. Regulatory assessments increased $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 Note 15 to consolidated financial statements). 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 bank card business is not expected to have a material effect on results of operations in future periods. Set forth below is a schedule showing additional detail concerning increases and decreases in the Company's noninterest expense.
in thousands Increase/ Increase/ year ended December 31, 1996 (Decrease) 1995 (Decrease) 1994 -------- -------- -------- -------- -------- Compensation and employee benefits $ 10,737 $ 2,310 $ 8,427 $ 1,339 $ 7,088 Less: loan origination costs 2,300 1,212 1,088 219 869 Net compensation and employee benefits (as reported) 8,437 1,098 7,339 1,120 6,219 Occupancy 3,388 543 2,845 43 2,802 Professional services 574 138 436 9 427 Advertising and promotion 772 138 634 126 508 Printing and supplies 414 39 375 (22) 397 Regulatory assessments 323 (159) 482 7 475 Data processing 807 192 615 152 463 Gains on real estate owned 400 (400) (86) (314) Telephone and network 338 67 271 (49) 320 Postage and delivery 297 74 223 76 147 ATM network 176 125 51 (21) 72 Bank card 1,473 454 1,019 346 673 Taxes, licenses and fees 659 (52) 711 386 325 Other 2,585 639 1,946 424 1,522 SAIF special assessment 612 612 -------- -------- -------- -------- -------- Total noninterest expense $ 20,855 $ 4,308 $ 16,547 $ 2,511 $ 14,036 ======== ======== ======== ======== ========
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. COLUMBIA BANKING SYSTEM, INC. page 23 26 Lending Activities The Company originates a wide variety of loans. Consistent with the trend begun in 1993, the Company continues to increase commercial business loans as a percentage of its total loan portfolio. The Company also emphasizes its private banking services to high income and high net worth individuals. Loan Portfolio The following table sets forth at the dates indicated the Company's loan portfolio by type of loan:
in thousands % of % of December 31, 1996 Total 1995 Total --------- --------- --------- --------- Commercial business $ 169,318 38.0% $ 113,775 32.2% Real estate: One- to four-family residential 67,709 15.1 67,991 19.3 Five or more family residential and commercial properties 128,803 28.9 97,103 27.5 --------- --------- --------- --------- Total real estate 196,512 44.0 165,094 46.8 Real estate construction: One- to four-family residential 21,380 4.8 22,741 6.5 Five or more family residential and commercial properties 10,680 2.4 8,884 2.5 --------- --------- --------- --------- Total real estate construction 32,060 7.2 31,625 9.0 Consumer 48,807 10.9 43,343 12.2 --------- --------- --------- --------- Subtotal 446,697 100.1 353,837 100.2 Less deferred loan fees and other (602) (0.1) (744) (0.2) --------- --------- --------- --------- Total loans $ 446,095 100.0% $ 353,093 100.0% ========= ========= ========= ========= Loans held for sale $ 11,341 $ 1,367 ========= ========= ========= =========
Total loans at year end increased $93.0 million, or 26.3%, from year end 1995. All loan categories except for one-to four-family loans contributed significantly to the increase. Commercial and Private Banking Lending Commercial loans increased to $169.3 million at December 31, 1996, representing 38.0% of total loans, from $113.8 million at December 31, 1995. This increase reflects management's commitment to provide competitive commercial lending in the Company's primary market area. The Company expects to continue to expand COLUMBIA BANKING SYSTEM, INC. page 24 27 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 $67.7 million at December 31, 1996, representing 15.1% of total loans, compared with $68.0 million at December 31, 1995. These loans are used by the Company to collateralize advances from the Federal Home Loan Bank of Seattle (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 $128.8 million at December 31, 1996, representing 28.9% of total loans, from $97.1 million at December 31, 1995. The Company's underwriting standards generally require that the loan-to-value ratio for multi-family and commercial loans not exceed 75% of appraised value or cost, whichever is lower, and that commercial properties maintain debt coverage ratios (net operating income divided by annual debt servicing) of 1.2 or better. 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. Construction loans on one- to four-family residences decreased to $21.4 million at December 31, 1996, representing 4.8% of total loans, from $22.7 million at December 31, 1995. Consumer Lending At December 31, 1996, the Company had $48.8 million of consumer loans outstanding, representing 10.9% of total loans, as compared with $43.3 million at December 31, 1995. Consumer loans made by the Company include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans and miscellaneous personal loans. Excluded from the $48.8 million at December 31, 1996 are $7.3 million of bank card loans that have been transferred to "Loans Held For Sale," due to a pending transaction for the sale of all bank card loans. The corresponding balance of consumer loans at December 31, 1995, excluding bank card loans, would have been $37.3 million which translates into an $11.5 million, or 30.8% increase in consumer loans for 1996. COLUMBIA BANKING SYSTEM, INC. page 25 28 At December 31, 1996, the Company had no foreign loans or loans related to highly leveraged transactions. Management's growth strategy has concentrated on the Tacoma/Pierce County market. The results of that strategy are evident in the following summary of loans:
in thousands Increase December 31, 1996 1995 Amount Percent -------- -------- -------- -------- Pierce County $324,132 $238,763 $ 85,369 35.8% All other counties 121,963 114,330 7,633 6.7 -------- -------- -------- -------- Total $446,095 $353,093 $ 93,002 26.3% -------- -------- -------- --------
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:
in thousands December 31, 1996 1995 1994 ------ ------ ------ Nonaccrual: One-to four-family residential $1,645 $ 329 $ 299 Commercial business 385 86 143 Consumer 197 20 10 ------ ------ ------ Total 2,227 435 452 Restructured: One-to four-family residential 25 29 44 ------ ------ ------ Total nonperforming loans $2,252 $ 464 $ 496 ====== ====== ====== Real estate owned 40 3,304 3,227 ------ ------ ------ Total nonperforming assets $2,292 $3,768 $3,723 ====== ====== ====== Accruing loans past-due 90 days or more $ 152 $ 82 Potential problem loans $ 213 37 23 Allowance for loan losses 4,504 3,748 2,711 Nonperforming loans to loans 0.50% 0.13% 0.18% Allowance for loan losses to loans 1.01 1.06 1.01 Nonperforming assets to total assets 0.39 0.89 1.17 ------ ------ ------
The consolidated financial statements are prepared according to the accrual basis of accounting. This includes the recognition of interest income on the loan portfolio, unless a loan is placed on a nonaccrual basis, which occurs when there are serious doubts about the collectibility of principal or interest. Generally, the Company's policy is to place a loan on nonaccrual status when the loan is past due 90 days. Restructured loans are those for which concessions have been granted due to the borrower's weakened financial condition. This includes the reduction of interest rates below a rate otherwise available to that borrower, or the deferral of interest or principal. Interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur. 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. Therefore, these loans will likely be included later in nonaccrual, past due or restructured loans and are considered by management in assessing the adequacy of the allowance for loan losses. COLUMBIA BANKING SYSTEM, INC. page 26. 29 Nonperforming loans increased to $2.3 million at December 31, 1996 from $464,000 at December 31, 1995 due principally to the inclusion of loans which, though nonperforming, are secured by real estate. Management anticipates some charge-offs of those unsecured or undersecured nonperforming loans, although the amount of such charge-offs is not expected to be material. At December 31, 1996, nonperforming loans were 0.50% of period-end loans (excluding loans held for sale). In February 1996, the Company sold all of its "real estate owned" (which consisted of one property in the state of Washington), thus reducing total nonperforming assets to $2.3 million, or 0.39% of total assets at December 31, 1996, from $3.8 million, or 0.89% of total assets at year-end 1995. Provision and Allowance for Loan Losses The allowance for loan losses is maintained at a level considered by management to be adequate to provide for anticipated loan losses based on management's assessment of various factors affecting the loan portfolio. This includes a review of problem loans, business conditions and loss experience, and overall evaluation of the quality of the underlying collateral, holding and disposal costs and costs of capital. The allowance is increased by provisions charged to operations, and is reduced by loans charged off, net of recoveries. While management believes it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance for loan losses, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in determining the allowance. The allowance for loan losses at December 31, 1996 decreased to 1.01%, from 1.06% of loans at December 31, 1995 (excluding loans held for sale at each date). The decrease was due to a $421,000 increase in charge-offs compared with 1995, and a $93.0 million, or 26.3%, increase in loans since year-end 1995. For the years ended December 31, 1996, 1995 and 1994, net loan charge-offs amounted to $664,000, $213,000 and $281,000, respectively. The Company's provision for loan losses was $1.4 million for 1996, compared with $1.3 million for 1995 and $1.0 million for 1994. The following table summarizes the changes in the allowance for loan losses:
in thousands December 31, 1996 1995 1994 --------- --------- --------- Total loans, net at end of period(1) $ 446,095 $ 353,093 $ 268,996 Daily average loans 405,131 318,039 222,236 Beginning balance of allowance for loan losses 3,748 2,711 1,992 Charge-offs: Commercial business (514) (148) (258) Consumer (170) (115) (106) --------- --------- --------- Total charge-offs (684) (263) (364) Recoveries: Commercial business 17 45 83 Consumer 3 5 --------- --------- --------- Total recoveries 20 50 83 --------- --------- --------- Net charge-offs (664) (213) (281) Provision charged to expense 1,420 1,250 1,000 --------- --------- --------- Ending balance $ 4,504 $ 3,748 $ 2,711 ========= ========= ======== Ratio of net charge-offs during period to average loans outstanding 0.16% 0.07% 0.13% ========= ========= ========
(1) Excludes loans held for sale COLUMBIA BANKING SYSTEM, INC. page 27. 30 Securities The Company's securities (securities available for sale) increased by $22.8 million to $45.5 million from year end 1995 to year end 1996. The investment portfolio is comprised primarily of U.S. Treasury and government agency securities. The average maturity of the securities portfolio was 2 years, 6 months at December 31, 1996. In November 1995, the Financial Accounting Standards Board ("FASB") 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." For further information on investment securities, including gross unrealized gains and losses in the portfolio and gross realized gains and losses on sales of securities, see Note 4 to the consolidated financial statements. Premises and Equipment In 1996, fixed assets increased $1.5 million, or 11.0% from 1995. The net change includes purchases of $4.8 million, disposals of $1.5 million and depreciation expense of $1.8 million. The Company's capital expenditures in 1997 are anticipated to be approximately $5.3 million. Such expenditures are expected to include approximately $4.1 million for new buildings and for remodeling existing structures, and $1.2 million for new furniture and equipment. Liquidity and Sources of Funds The Company's primary sources of funds are customer deposits and advances from 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. Deposit Activities The Company experienced overall average deposit growth of 31.4% and 42.2% in 1996 and 1995, respectively. All categories of deposits increased during both years, except for savings accounts which decreased 11.7% and 27.7% in 1996 and 1995, respectively. Interest-bearing and noninterest-bearing demand deposits increased 78.3% and 43.9% in 1996, and 104.6% and 60.7% in 1995, respectively. Average deposits are summarized in the following table:
in thousands years ended December 31, 1996 1995 1994 -------- -------- -------- Demand and other noninterest-bearing $ 60,691 $ 42,167 $ 26,238 Interest-bearing demand 142,103 79,706 38,962 Savings 21,673 24,547 33,938 Certificates of deposit 189,122 168,351 122,198 -------- -------- -------- Total average deposits $413,589 $314,771 $221,336 ======== ======== ========
The Company is establishing a branch system catering primarily to retail depositors, supplemented by business banking customer deposits and other borrowings. While that stable core deposit base is being established, management's strategy for funding growth has been to make use of brokered and other wholesale deposits. The Company's use of brokered and other wholesale deposits decreased in 1996, though management anticipates continued 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. The deposit increase of $131.3 million during 1996 occurred entirely in "core deposits." Brokered and other wholesale deposits (excluding public deposits) decreased $18.0 million to $30.3 million, or 6.1% of total deposits at December 31, 1996, from $48.3 million, or 13.3% of total deposits at December 31, 1995. COLUMBIA BANKING SYSTEM, INC. page 28. 31 Brokered and other wholesale deposits are summarized below. The average interest rate for these deposits was 5.63% and 5.94% at December 31, 1996 and 1995, respectively.
in thousands December 31, 1996 1995 Percent Percent of Total of Total Amount Deposits Amount Deposits ------- ------- ------- ------- Maturing within one year $28,863 5.8% $41,546 11.5% Maturing after one year but within three years 1,387 0.3 5,633 1.5 Maturing after three years but within ten years 1,091 0.3 ------- ------- ------- ------- Total brokered and other wholesale deposits $30,250 6.1% $48,270 13.3% ------- ------- ------- -------
The increase in deposits is largely due to management's growth strategy emphasizing the Tacoma/Pierce County market area. Following is a summary of year-end deposits by county:
in thousands Increase December 31, 1996 1995 Amount Percent -------- -------- -------- -------- Pierce County $373,380 $264,848 $108,532 41.0% All other counties 119,842 97,027 22,815 23.5 -------- -------- -------- ---- Total $493,222 $361,875 $131,347 36.3% ======== ======== ======== ====
Borrowings The Company relies on FHLB advances to supplement its funding sources, and the FHLB serves as the Company's primary source of long-term borrowing. FHLB advances are secured by one- to four-family real estate mortgages and certain other assets. At December 31, 1996, the Company had total advances of $32 million at interest rates ranging from 5.20% to 6.14%. The weighted average interest rate on such advances was 5.63%. At December 31, 1996 the maximum borrowing line from the FHLB was $99.6 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. Interest Rate Sensitivity The mismatch between maturities and interest-rate sensitivities of balance sheet items results in interest rate risk. The Company maintains an asset/liability management policy that provides guidelines for controlling exposure to that risk. The guidelines direct management to assess the impact of changes in interest rates upon both earnings and capital. The guidelines further provide that in the event of an increase in interest rate risk beyond preestablished limits, management will consider steps intended to reduce interest rate risk to acceptable levels. 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 effect earnings performance, it should be used in conjunction with other methods of evaluating interest rate risk. COLUMBIA BANKING SYSTEM, INC. page 29. 32 The following table sets forth the estimated maturity or repricing, and the resulting interest rate gap of the Company's interest-earning assets and interest-bearing liabilities at December 31, 1996. The amounts in the table are derived from the Company's internal data and are based upon regulatory reporting formats. Therefore, they may not be consistent with financial information appearing elsewhere herein that has been prepared in accordance with generally accepted accounting principles. The amounts could be significantly affected by external factors such as changes in prepayment assumptions, early withdrawal of deposits and competition.
Estimated Maturity or Repricing in thousands 0-3 4-12 1-5 5-10 More than December 31, 1996 months months years years 10 years Total --------- --------- --------- --------- --------- --------- Interest-Earning Assets Interest-earning deposits $ 38,086 $ 38,086 Securities 1,863 $ 15,539 $ 22,763 $ 1,077 $ 4,247 45,489 Loans: Business and commercial real estate 188,667 5,201 31,018 1,842 1,822 228,550 One- to four-family 73,816 25,074 58,703 2,151 11,012 170,756 Consumer 5,079 26,847 21,593 1,859 525 55,903 ------------------------------------------------------------------------------------------- Total interest- earning assets $ 307,511 $ 72,661 $ 134,077 $ 6,929 $ 17,606 $ 538,784 =========================================================================================== Noninterest-earning assets 2,227 47,905 50,132 ------------------------------------------------------------------------------------------- Total assets $ 307,511 $ 74,888 $ 134,077 $ 6,929 $ 65,511 $ 588,916 =========================================================================================== Percent of total interest- earning assets 57.08% 13.48% 24.89% 1.29% 3.26% 100.00% =========================================================================================== Interest-Bearing Liabilities Deposits: Money market checking $ 125,428 $ 125,428 NOW accounts 8,922 $ 35,689 44,611 Savings accounts 7,456 $ 7,456 $ 7,456 22,368 Time certificates of deposit 66,470 $ 106,309 44,042 11 216,832 FHLB advances 12,000 20,000 32,000 ------------------------------------------------------------------------------------------- Total interest- bearing liabilities $ 220,276 $ 106,309 $ 99,731 $ 7,467 $ 7,456 $ 441,239 =========================================================================================== Noninterest-bearing liabilities and equity 67,218 16,771 63,688 147,677 ------------------------------------------------------------------------------------------- Total liabilities and equity $ 287,494 $ 106,309 $ 116,502 $ 7,467 $ 71,144 $ 588,916 =========================================================================================== Percent of total interest- earning assets 40.88% 19.73% 18.52% 1.39% 1.38% 81.90% =========================================================================================== Rate sensitivity gap $ 87,235 $ (33,648) $ 34,346 $ (538) $ 10,150 $ 97,545 Cumulative rate sensitivity gap 87,235 53,587 87,933 87,395 97,545 ------------------------------------------------------------------------------------------- Rate sensitivity gap as a percentage of interest-earning assets 16.20% (6.25)% 6.37% (0.10)% 1.88% 18.10% Cumulative rate sensitivity gap as a percentage of interest- earning assets 16.20% 9.95% 16.32% 16.22% 18.10% ===========================================================================================
COLUMBIA BANKING SYSTEM, INC. page 30 33 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 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. Income Tax 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 December 31, 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. 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 the Company will record a provision for income taxes during 1997. Capital Shareholders' equity increased to $59.0 million at December 31, 1996 from $32.0 million at December 31, 1995. The increase is due primarily to the issuance of 1.445 million shares of common stock with net proceeds of $20.7 million. Shareholders' equity was also enhanced by net income for the year of $3.6 million, conversion of convertible subordinated notes of $2.5 million, and a decrease in the reserve for unrealized gains and losses on securities available for sale. Shareholders' equity was 10.0% and 7.5% of total assets at December 31, 1996 and December 31, 1995, respectively. Banking regulations require bank holding companies to maintain a minimum "leverage" ratio of core capital to adjusted quarterly average total assets of at least 3%. At December 31, 1996, the Company's leverage ratio was 10.62%, compared with 7.72% at December 31, 1995. In addition, banking regulators have adopted risk-based capital guidelines, under which risk percentages are assigned to various categories of assets and off-balance sheet items to calculate a risk-adjusted capital ratio. Tier I capital generally consists of common shareholders' equity, less goodwill and certain identifiable intangible assets, while Tier II capital includes the allowance for loan losses and subordinated debt, both subject to certain limitations. Regulatory minimum risk-based capital guidelines require Tier I capital of 4% of risk-adjusted assets and total capital (combined Tier I and Tier II) of 8%. The Company's Tier I and total capital ratios were 12.81% and 13.79%, respectively, at December 31, 1996, compared with 9.10% and 10.95%, respectively, at December 31, 1995. During 1992, the Federal Deposit Insurance Corporation (the "FDIC") published the qualifications necessary to be classified as a "well capitalized" bank, primarily for assignment of FDIC insurance premium rates beginning in 1993. To qualify as "well capitalized," banks must have a Tier I risk-adjusted capital ratio of at least 6%, a total risk-adjusted capital ratio of at least 10%, and a leverage ratio of at least 5%. Columbia Bank qualified as "well-capitalized" at December 31, 1996. Failure to qualify as "well-capitalized" can negatively impact a bank's ability to expand and to engage in certain activities. COLUMBIA BANKING SYSTEM, INC. page 31 34 Applicable federal and Washington state regulations restrict capital distributions by institutions such as Columbia Bank, including dividends. Such restrictions are tied to the institution's capital levels after giving effect to distributions. The Company's ability to pay cash dividends is substantially dependent upon receipt of dividends from the Bank. On April 24, 1996, the Company announced a 5% stock dividend payable on May 22, 1996, to shareholders 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. 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 the Note (or portion thereof), at the conversion price per share of common stock of $10.56. As of August 1, 1996, all of the Notes were converted into 223,743 shares of common stock. In connection with the public offering of common stock in 1996, the Company contributed approximately $10 million of the net proceeds to Columbia Bank primarily to finance additional expansion in Pierce County, and, over the next several years, into south King and Thurston Counties. The remainder was used to repay a $3.0 million borrowing and for general corporate purposes. Impact of Inflation and Changing Prices The 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 effect 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. Recent 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 principle prescribed by Accounting Principles Board No. 25 "Accounting for Stock Issued to Employees" (APB 25). SFAS 123 requires among other things, 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 if the fair value method of accounting is not used. The adoption of SFAS 123 is required for the fiscal year ended December 31, 1996. The Company elected to continue to apply APB 25 for measurement of stock compensation and has provided disclosure required by SFAS 123 in footnote No. 10 accompanying the consolidated financials of the Company. 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. COLUMBIA BANKING SYSTEM, INC. page 32 35 Recent Change in Accounting Firms On February 26, 1997, the Company engaged Deloitte & Touche LLP as the Company's principal independent accountant. Prior to Deloitte & Touche's engagement, Price Waterhouse LLP, independent certified public accountants, had served as the principal independent accountant for the Company and rendered their report with respect to the Company's financial statements for the year ended December 31, 1996. The recommendation to change accountants was made by management of the Company and was approved by the Audit Committee and the Board of Directors. In the two most recent fiscal years preceding the Board's actions, there were no disagreements with Price Waterhouse LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to Price Waterhouse's satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with their report. Price Waterhouse's reports on the Company's financial statements for such fiscal years did not contain any adverse opinion or disclaimer of opinion, nor were such reports qualified in any respect. A representative of Price Waterhouse is expected to be present at the Annual Meeting to make a statement, if desired, and to be available to respond to appropriate questions. The Company does not anticipate that a representative of Deloitte & Touche will be present at the Meeting. Quarterly Common Stock Prices and Dividend Payments The Company's common stock trades on The Nasdaq Stock Market under the symbol COLB. Price information generally appears daily in the Nasdaq National Market Issues section of The Wall Street Journal and in most major Pacific Northwest metropolitan newspapers. On December 31, 1996, the last sale price for the Company's stock in the over-the-counter market was $16 1/4. The Company presently intends to retain earnings to support anticipated growth. Accordingly, the Company does not intend to pay cash dividends on its common stock in the foreseeable future. Please refer to the "Capital" section of the Management Discussion and Analysis of Financial Condition and Results of Operations, and Note 3 to the consolidated financial statements, contained elsewhere in this report, for regulatory capital requirements and restrictions on dividends to shareholders. The Company is aware that large blocks of its stock are held in street name by brokerage firms. At December 31, 1996, the number of shareholders of record was 872. The following are high and low sales prices as reported on the Nasdaq National Market according to information furnished by the National Association of Securities Dealers. Prices do not include retail mark-ups, mark-downs or commissions.
1996 High Low ------- ------- First quarter $14 3/4 $11 1/2 Second quarter 16 1/2 13 Third quarter 16 14 1/4 Fourth quarter 17 1/4 14 1/2 For the year 17 1/4 11 1/2 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 For the year 12 3/4 9 1/8
COLUMBIA BANKING SYSTEM, INC. page 33. 36 report of management The consolidated financial statements have been prepared by management in accordance with generally accepted accounting principles and include, where necessary, amounts based on the best estimates and judgments of management. The primary responsibility for the integrity of data in these financial statements is that of management. The other financial information in the Annual Report is consistent with that contained in the consolidated financial statements. The consolidated financial statements for 1996 have been audited by Price Waterhouse LLP, the Company's independent accountants. In planning and performing their audit, Price Waterhouse LLP considered the Company's internal control structure in order to determine their auditing procedures for the purpose of expressing their opinion on the financial statements and not to provide assurance on the internal control structure. Their consideration of the internal control structure would not necessarily disclose all matters in the internal control structure that might be material weaknesses under standards established by the American Institute of Certified Public Accountants. Management maintains an internal control structure which is deemed adequate to provide reasonable assurance as to the reliability of financial records and the protection of assets. In establishing the internal control structure, management weighs the cost of control procedures against the benefits that it believes can be derived. The Board of Directors monitors the internal control structure through its Audit Committee. The membership of the Committee is composed of directors who are not officers or employees of the Company. The independent and internal auditors have free access to the Audit Committee, and they meet with the Committee regularly, with and without management present, to discuss accounting, auditing, internal controls and financial reporting matters. In the opinion of management, the Company has a capable and aggressive internal audit department which serves as an integral part of the internal control structure. /s/ A. G. Espe /s/ W. W. Philip /s/ Gary R. Schminkey A. G. Espe W. W. Philip Gary R. Schminkey Chairman and President and Senior Vice President and Chief Executive Officer Chief Operating Officer Chief Financial Officer COLUMBIA BANKING SYSTEM, INC. page 34. 37 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, 1996 and 1995, 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, 1996, 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 each of the three years in the period ended December 31, 1996, 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 audits 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. /s/ Price Waterhouse LLP Seattle, Washington January 22, 1997 COLUMBIA BANKING SYSTEM, INC. page 35. 38 consolidated statements of operations
in thousands except per share years ended December 31, 1996 1995 1994 -------- -------- -------- Interest Income Loans $ 36,048 $ 30,038 $ 18,990 Investment securities 1,078 1,127 Securities available for sale 1,878 290 205 Deposits with banks 1,136 314 334 -------- -------- -------- Total interest income 39,062 31,720 20,656 Interest Expense Deposits 16,469 13,385 7,304 Federal Home Loan Bank advances 1,865 1,503 1,160 Other borrowings 184 271 612 -------- -------- -------- Total interest expense 18,518 15,159 9,076 -------- -------- -------- Net Interest Income 20,544 16,561 11,580 Provision for loan losses 1,420 1,250 1,000 Net interest income after provision for loan losses 19,124 15,311 10,580 Noninterest Income Service charges and other fees 2,381 1,895 1,242 Mortgage banking 636 394 782 Gains (losses) on sales of securities available for sale (8) Gains on sales of loans, net 39 Credit card fees and other fees 2,291 1,671 972 -------- -------- -------- Total noninterest income 5,308 3,991 2,996
COLUMBIA BANKING SYSTEM, INC. page 36. 39
in thousands except per share years ended December 31, 1996 1995 1994 -------- -------- -------- Noninterest Expense Compensation and employee benefits $ 8,437 $ 7,339 $ 6,219 Occupancy 3,388 2,845 2,802 Professional services 574 436 427 Advertising and promotion 772 634 508 Printing and supplies 414 375 397 Regulatory assessments 323 482 475 Data processing 807 615 463 Gains on, and net cost of, real estate owned (400) (314) Other 5,528 4,221 3,059 SAIF special assessment 612 -------- -------- -------- Total noninterest expense 20,855 16,547 14,036 Income (loss) from continuing operations before income tax 3,577 2,755 (460) -------- -------- -------- Provision for income tax Income (loss) from continuing operations before extraordinary item 3,577 2,755 (460) Extraordinary loss on extinguishment of debt, net (154) -------- -------- -------- Net Income (Loss) $ 3,577 $ 2,755 $ (614) ======== ======== ======== Per Share (On Average Shares Outstanding) Income (loss) from continuing operations $ 0.93 $ 0.79 $ (0.13) Extraordinary loss on extinguishment of debt, net (0.05) Net income (loss) 0.93 0.79 (0.18) Fully diluted net income (loss) 0.92 0.79 (0.18) Average number of common and common equivalent shares outstanding 3,866 3,496 3,481 Fully diluted average common and common equivalent shares outstanding 4,047 3,752 3,740
see accompanying notes to consolidated financial statements COLUMBIA BANKING SYSTEM, INC. page 37 40 consolidated balance sheets
in thousands December 31, 1996 1995 -------- -------- Assets Cash and due from banks $ 32,092 $ 18,244 Interest-earning deposits with banks 38,086 12,635 Securities available for sale: U.S. Treasury & government agencies 30,481 6,948 Mortgage-backed 10,760 12,446 FHLB stock 4,248 3,281 -------- -------- Total securities available for sale 45,489 22,675 Loans held for sale 11,341 1,367 Loans 446,095 353,093 Less: allowance for loan losses 4,504 3,748 -------- -------- Loans, net 441,591 349,345 Interest receivable 3,347 2,469 Premises and equipment, net 15,250 13,736 Real estate owned 40 3,304 Other 1,680 1,431 -------- -------- Total Assets $588,916 $425,206 ======== ========
COLUMBIA BANKING SYSTEM, INC. page 38 41
December 31, in thousands 1996 1995 -------- -------- Liabilities and Shareholders' Equity Deposits: Noninterest-bearing $ 83,983 $ 52,991 Interest-bearing 409,239 308,884 -------- -------- Total deposits 493,222 361,875 Federal Home Loan Bank advances 32,000 25,000 Other liabilities 4,734 3,669 Convertible subordinated notes 2,695 -------- -------- Total liabilities 529,956 393,239 Commitments and contingent liabilities (Note 12) Shareholders' equity: Preferred stock (no par value) Authorized, 2,000,000 shares; none outstanding
December 31, 1996 1995 --------- --------- Common stock (no par value) Authorized shares 10,000 10,000 Issued and outstanding 5,185 3,274 56,340 30,806 Retained earnings 2,694 1,274 Unrealized losses on securities available for sale (74) (113) Total shareholders' equity 58,960 31,967 --------- --------- Total Liabilities and Shareholders' Equity $ 588,916 $ 425,206 ========= =========
see accompanying notes to consolidated financial statements COLUMBIA BANKING SYSTEM, INC. page 39 42 consolidated statements of shareholders' equity
Common Stock Number in thousands of Shares Amount --------- -------- Balance at December 31, 1993 3,250 $ 30,668 Adjustment to beginning balance for change in accounting method, net Net loss Issuance of shares of common stock, net 8 35 ----- ------- Change in unrealized losses Balance at December 31, 1994 3,258 30,703 Net income Issuance of shares of common stock, net 16 103 ----- ------- Change in unrealized gains and (losses) Balance at December 31, 1995 3,274 30,806 Net income Issuance of shares of common stock, net 1,492 20,868 Issuance of shares of common stock 5% stock dividend 164 2,157 Conversion of Convertible Subordinated Notes 255 2,509 ----- -------- Change in unrealized gains and (losses) Balance at December 31, 1996 5,185 $ 56,340 ===== ========
see accompanying notes to consolidated financial statements COLUMBIA BANKING SYSTEM, INC. page 40 43
Unrealized Total Retained Gains and Shareholders' in thousands Earnings (Losses) Equity -------- ---------- ------------- Balance at December 31, 1993 $ (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 35 Change in unrealized losses (329) (329) -------- -------- -------- Balance at December 31, 1994 (1,481) (361) 28,861 Net income 2,755 2,755 Issuance of shares of common stock, net 103 Change in unrealized gains and (losses) 248 248 -------- -------- -------- Balance at December 31, 1995 1,274 (113) 31,967 Net income 3,577 3,577 Issuance of shares of common stock, net 20,868 Issuance of shares of common stock 5% stock dividend (2,157) Conversion of Convertible Subordinated Notes 2,509 Change in unrealized gains and (losses) 39 39 -------- -------- -------- Balance at December 31, 1996 $ 2,694 $ (74) $ 58,960 ======== ======== ========
COLUMBIA BANKING SYSTEM, INC. page 41 44 consolidated statements of cash flows
in thousands 1996 1995 1994 --------- --------- --------- Operating Activities Net income (loss) $ 3,577 $ 2,755 $ (614) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Provision for loan losses 1,420 1,250 1,000 Losses (gains) on real estate owned 41 29 (30) Depreciation and amortization 2,327 1,365 1,610 Net realized losses (gains) on sale of investments 185 (53) (12) (Increase) decrease in loans held for sale (9,974) 245 165 Increase in interest receivable (878) (735) (635) Increase in interest payable 368 388 538 Net changes in other assets and liabilities 184 1,317 (352) --------- -------- -------- Net cash provided (used) by operating activities (2,750) 6,561 1,670 Investing Activities Proceeds from maturities of securities available for sale 11,347 215 537 Proceeds from sales of securities available for sale 5,980 Purchase of securities available for sale (35,686) (6,000) Proceeds from maturities of mortgage-backed securities available for sale 1,682 Proceeds from maturities of investment securities 4,243 2,557 Purchases of investment securities (4,675) (266) Loans originated and acquired, net of principal collected (94,294) (88,579) (88,286) Proceeds from sales of loans 4,756 Purchases of premises and equipment (4,751) (6,660) (3,544) Proceeds from disposal of premises and equipment 1,273 240 412 Proceeds from sale of real estate owned 3,263 13 536 Other, net (119) --------- -------- -------- Net cash used by investing activities (117,166) (90,586) (88,054)
COLUMBIA BANKING SYSTEM, INC. page 42 45
in thousands 1996 1995 1994 --------- --------- --------- Financing Activities Net increase in deposits 131,347 93,183 103,353 Proceeds from FHLB advances and other long-term debt 30,800 17,000 17,000 Repayment of FHLB advances and other long-term debt (23,800) (9,000) (32,000) Repayment of other borrowings (4,600) Proceeds from issuance of common stock, net 20,868 63 35 --------- --------- --------- Net cash provided by financing activities 159,215 101,246 83,788 --------- --------- --------- Increase (decrease) in cash and cash equivalents 39,299 17,221 (2,596) Cash and cash equivalents at beginning of period 30,879 13,658 16,254 --------- --------- --------- Cash and cash equivalents at end of period $ 70,178 $ 30,879 $ 13,658 ========= ========= ========= Supplemental Information Cash paid for interest $ 18,149 $ 14,771 $ 8,538 Transfer from investment securities to securities available for sale 19,912 Loans foreclosed and transferred to real estate owned 40 428 Issuance of common stock from conversion of convertible subordinated notes 2,509 40
see accompanying notes to consolidated financial statements COLUMBIA BANKING SYSTEM, INC. page 43 46 notes to consolidated financial statements 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 16 banking offices located in the Tacoma metropolitan area and contiguous parts of the Puget Sound region of Washington, as well as the Longview and Woodland communities in southwestern Washington. Substantially all of the Company's loans, loan commitments and core deposits are geographically concentrated in its service areas. 1. summary of significant accounting policies The financial statements have been prepared in accordance with generally accepted accounting principles. Accordingly, they 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 all periods included herein have been made. The results of operations for the year ending December 31, 1996 are not necessarily indicative of results to be anticipated for future periods. 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 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 related loans. Costs related to 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. COLUMBIA BANKING SYSTEM, INC. page 44 47 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, 1996 and 1995, intangible assets amounted to $188,000 and $266,000, respectively, net of accumulated amortizations. 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 Earnings per share is computed using the weighted average number of shares of common and common equivalent shares outstanding during the period. Common equivalent shares result from the assumed exercise of outstanding stock options, if dilutive. Fully diluted earnings per share assumes conversion of convertible subordinated notes, if dilutive. 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 statements of cash flows have 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 1995 and 1994 consolidated financial statements have been reclassified to conform with the 1996 presentation. These reclassifications had no effect on net income (loss). COLUMBIA BANKING SYSTEM, INC. page 45 48 2. 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. 3. restrictions on subsidiary cash, loans and dividends Columbia Bank is required to maintain reserve balances with the Federal Reserve Bank. The average required reserves for the year ended December 31, 1996 were approximately $1.1 million. The required reserves are based on specified percentages of the Bank's total average deposits which 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% of its 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 the Columbia Bank's net profits then on hand, less any required transfers to additional paid-in capital. 4. 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 in thousands Cost Gains Losses Value --------- ---------- ---------- -------- December 31, 1996 U.S. Treasury and government agency $ 30,441 $ 40 $ 30,481 Mortgage-backed 10,874 $ (114) 10,760 FHLB stock 4,248 4,248 -------- -------- -------- -------- Total $ 45,563 $ 40 $ (114) $ 45,489 ======== ======== ======== ======== December 31, 1995 U.S. Treasury and 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 ======== ======== ======== ========
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 "investment securities" to "securities available for sale" resulting in additional net unrealized losses of $113,000. COLUMBIA BANKING SYSTEM, INC. page 46 49 At December 31, 1996 and 1995, securities available for sale with a fair value of $3.7 million and $3.0 million, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. The following table summarizes the amortized cost and market values of securities available for sale by contractual maturity groups:
in thousands Amortized Market December 31, 1996 Cost Value --------- --------- Amount maturing: Within one year $15,015 $15,040 Greater than one year and less than five years 22,613 22,529 Greater than five years and less than ten years 2,011 1,959 After ten years 5,924 5,961 ----------------------- Total $45,563 $45,489 =======================
5. loans The following is an analysis of the loan portfolio by major types of loans:
in thousands December 31, 1996 1995 --------- --------- Commercial business $ 169,318 $ 113,775 Real estate: One- to four-family residential 67,709 67,991 Five or more family residential and commercial properties 128,803 97,103 --------- --------- Total real estate 196,512 165,094 Real estate construction: One- to four-family residential 21,380 22,741 Five or more family residential and commercial properties 10,680 8,884 --------- --------- Total real estate construction 32,060 31,625 Consumer 48,807 43,343 --------- --------- Subtotal 446,697 353,837 Less deferred loan fees, net and other (602) (744) --------- --------- Total loans $ 446,095 $ 353,093 ========= ========= Loans held for sale $ 11,341 $ 1,367 ========= =========
At December 31, 1996 and 1995, residential real estate loans with recorded values of $38.4 million and $30.0 million, respectively, were pledged to secure Federal Home Loan Bank advances and for other purposes. COLUMBIA BANKING SYSTEM, INC. page 47 50 The following table summarizes certain information related to nonperforming loans:
in thousands December 31, 1996 1995 1994 ------ ------ ------ Loans accounted for on a nonaccrual basis $2,227 $ 435 $ 452 Restructured loans 25 29 44 ------------------------------ Total nonperforming loans $2,252 $ 464 $ 496 ============================== Originally contracted interest $ 219 $ 49 $ 50 Recorded interest 102 38 27 ------------------------------ Reduction in interest income $ 117 $ 11 $ 23 ==============================
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 collateral. In October 1994, the Board 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 December 31, 1996 and 1995, the recorded investment in impaired loans was $2.3 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 December 31, 1996 and 1995 was $1.4 million and $513,000 respectively. At December 31, 1996 and 1995, there were no commitments for additional funds for loans accounted for on a nonaccrual basis. At December 31, 1996 and 1995, the Company had no foreign loans or loans related to highly leveraged transactions. The Company's banking subsidiaries have 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 $4.4 million and $4.6 million at December 31, 1996 and 1995, respectively. During 1996, $2.9 million of new related party loans were made and repayments and transfers totaled $3.1 million. 6. allowance for loan losses Transactions in the allowance for loan losses are summarized as follows:
in thousands years ended December 31, 1996 1995 1994 ------- ------- ------- Balance at beginning of period $ 3,748 $ 2,711 $ 1,992 Loans charged off (684) (263) (364) Recoveries 20 50 83 ------- ------- ------- Net charge-offs (664) (213) (281) Provision charged to operating expense 1,420 1,250 1,000 ----------------------------------- Balance at end of period $ 4,504 $ 3,748 $ 2,711 ===================================
COLUMBIA BANKING SYSTEM, INC. page 48 51 7. premises and equipment Land, buildings, and furniture and equipment, less accumulated depreciation and amortization, were as follows:
in thousands December 31, 1996 1995 -------- -------- Land $ 2,914 $ 1,748 Buildings 9,419 8,589 Leasehold improvements 1,434 1,509 Furniture and equipment 6,339 5,533 Automobiles 102 101 Computer software 583 691 ----------------------- Total cost 20,791 18,171 Less accumulated depreciation and amortization (5,541) (4,435) ----------------------- Total $ 15,250 $ 13,736 =======================
Total depreciation and amortization expense on buildings and furniture and equipment was $1.8 million, $1.7 million and $1.6 million for the years ended December 31, 1996, 1995 and 1994, 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:
in thousands years ending December 31, 1997 $1,151 1998 1,055 1999 888 2000 634 2001 394 2002 and thereafter 2,757 ------ Total minimum payments $6,879 ======
Total rental expense on buildings and equipment was $983,000, $946,000 and $909,000 for the years ended December 31, 1996, 1995 and 1994, respectively. 8. federal home loan bank advances and long-term debt Federal Home Loan Bank ("FHLB") advances and long-term debt consisted of the following:
in thousands December 31, 1996 1995 ------- ------- Federal Home Loan Bank advances $32,000 $25,000 7.85% Convertible Subordinated Notes due June 30, 2002 2,695 -------------------- Total FHLB advances and other long-term debt $32,000 $27,695 ====================
COLUMBIA BANKING SYSTEM, INC. page 49 52 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 the Note (or portion thereof), at the conversion price per share of common stock of $10.56. As of August 1, 1996 all of the Notes were converted into 223,743 shares of common stock. FHLB advances are at the following interest rates:
in thousands December 31, 1996 1995 ------- ------- 6.90% $ 5,000 6.20 2,000 6.14 $10,000 6.09 8,000 5.79 2,000 5.45 10,000 5.32 5,000 5,000 5.20 5,000 5,000 ------------------------ Total $32,000 $25,000 ========================
Aggregate maturities of FHLB advances due in years ending after December 31, 1996, are as follows:
in thousands Amount ------- 1997 $10,000 1998 20,000 2000 2,000 ------- Total $32,000 =======
FHLB advances are collateralized by residential real estate loans with a recorded value of approximately $38.4 million at December 31, 1996, and $30.0 million at December 31, 1995 (see Note 5). Penalties are generally required for prepayments of certain long-term FHLB advances. 9. income tax The components of income tax expense are as follows:
in thousands years ended December 31, 1996 1995 1994 ---- ---- ---- Current Deferred ---- ---- ---- Total 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 financial reporting purposes and the amounts used for income tax purposes. COLUMBIA BANKING SYSTEM, INC. page 50 53 Significant components of the Company's deferred tax assets and liabilities at December 31, 1996 and 1995 are as follows:
in thousands December 31, 1996 1995 ------- ------- Deferred tax assets: Net operating loss carryforward $ 1,478 Allowance for loan losses $ 1,531 1,274 Contributions 164 97 ------- ------- Total deferred tax assets 1,695 2,849 Less: valuation allowance (768) (2,011) ------- ------- Subtotal 927 838 Deferred tax liabilities: FHLB stock dividends (657) (551) Depreciation (18) (35) ------- ------- Total deferred tax liabilities (675) (586) ------- ------- Net deferred tax assets $ 252 $ 252 ======= =======
A reconciliation of the Company's effective income tax rate with the federal statutory tax rate is as follows:
dollars in thousands 1996 1995 1994 ------------------ ------------------ ------------------ years ended December 31, Amount Percent Amount Percent Amount Percent ------- ------- ------- ------- ------- ------- Income tax based on statutory rate $(1,216) (34)% $ (937) (34)% $ 209 34% Increase (reduction) resulting from: Other nondeductible items (27) (1) (37) (1) (27) (4) Valuation allowance 1,243 35 974 35 (182) (30) ------- ------- ------- ------- ------- ------- Income tax $ 0 0% $ 0 0% $ 0 0% ======= ======= ======= ======= ======= =======
10. stock options and warrants At December 31, 1996 and 1995, the Company had stock options outstanding of 275,168 shares and 247,433 shares, respectively, for the purchase of common stock at option prices ranging from $2.38 to $21.25 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 then market value of the Company's common stock and the stated option price. At December 31, 1996 and 1995, the Company had options outstanding granted to a company controlled by a director for the purchase of 36,317 and 13,858 shares of common stock at exercise prices of approximately $6.45 and $8.81 per share, respectively. These options are generally exercisable in whole or in part at any time before September 26, 2000. At December 31, 1996 and 1995, the Company had stock warrants outstanding to purchase 18,716 shares of common stock at $10.14 per share, which expires in 1997. COLUMBIA BANKING SYSTEM, INC. page 51 54 The following table outlines the stock option activity for 1996 and 1995:
in thousands Balance Price Range ------- ------------- Balance at December 31, 1994 316,061 $ 2.38-$11.19 Issued 15,225 9.29- 10.71 Exercised (8,400) 2.38 Terminated (6,562) 9.29- 11.19 ------- ------------- Balance at December 31, 1995 316,324 2.38- 11.19 Issued 53,525 12.56- 21.25 Exercised (18,970) 2.38- 11.19 Terminated (6,820) 9.29- 11.19 ------- ------------- Balance at December 31, 1996 344,059 $ 3.81-$21.25 ======= ============= Total Vested at December 31, 1996 194,716 $ 3.81-$11.19 ======= =============
In August 1996, the Personnel and Compensation Committee of the Board of Directors of the Company approved the grant to Mr. A. G. Espe (Chairman of the Board and Chief Executive Officer) 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. W. W. Philip (Director, President and Senior Operating Officer) of a restricted stock award for 20,000 shares of Common Stock. The market value of the Common Stock at the date of grants to both Messrs. Espe and Philip was $15.25 per share. The option to Mr. Espe, which is subject to approval by the 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. Earlier vesting of the options may be approved at the sole discretion of the Board or the Compensation Committee of the Board and will occur in the event of termination of employment without cause (as defined) following a change in control (as defined) of the Company. 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 Mr. Philip's death or disability. Mr. Philip will have the right to vote shares and to receive any dividends or other distributions on the shares while they remain in escrow. The Company has an employee stock option plan ("the Plan") to provide additional incentives to key employees, thereby helping to attract and retain the best available personnel. The Company applies APB Opinion 25 and related interpretations in accounting for the Plan. Accordingly, no compensation cost has been recognized for the Plan. The Company estimates the fair value of its stock options using the Black-Scholes option-pricing model. Had compensation cost for the Company's Plan been determined based on the fair value at the grant dates consistent with the FASB's Statement of Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the impact on net income and earnings per share would not have been significant for the years ended December 31, 1996 and 1995. COLUMBIA BANKING SYSTEM, INC. page 52 55 11. 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 $153,000, $126,000 and $80,000 in matching funds to the plan during the years ended December 31, 1996, 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. In January 1997 and 1996, the Company announced discretionary contributions of approximately $348,000 and $290,000 for the years ended 1996 and 1995 respectively. The Company maintains 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, 7,955 shares were acquired by employees for $110,000 in 1996. There is no charge to income as a result of issuance of stock under this plan. The discount offered to employees approximates the cost of raising capital and does not have a material effect on net income and earnings per share. At December 31, 1996, 88,296 shares of common stock were reserved for issuance under this plan. 12. commitments and contingent liabilities The employment agreement with Mr. Espe originally provided for an annual salary of $150,000 in 1994 through 1996. As part of the agreement, the Company provides a Supplementary Employee Retirement Plan ("SERP") based on a contribution of 10% of total compensation per year and earnings at a stated rate on that amount. The agreement has recently been amended, effective January 1, 1997, to extend the term to December 31, 2001 and to establish the minimum salary at $160,000. Also, the employment agreement with Mr. Philip has recently been amended, effective January 1, 1997, to extend the term to December 31, 1998 and to establish his minimum annual salary at $175,000. In 1993, Messrs. Espe and Philip 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 payments at 6% and principal due in April and July 2000. The Company had Long Term Incentive Plan arrangements with Messrs. Espe and Philip. Under the arrangements, specific compensation and allowance payments were agreed to be made for work performed since 1993 if the Company achieved certain performance objectives by December 31, 1996. At December 31, 1996, the terms of the incentive plan were fulfilled, and in January 1997, $706,000 was paid under the terms of the plan. From 1993 through 1996, Mr. Philip received no salary or bonus payments. 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 December 31, 1996 and 1995, the Company's loan commitments amounted to $122.9 million and $72.8 million, respectively. Standby letters of credit were $1.6 million and $1.5 million at December 31, 1996 and 1995, respectively. In addition, commitments under commercial letters of credit used to facilitate customers' trade transactions amounted to $2.5 million at December 31, 1996 and 1995. 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. COLUMBIA BANKING SYSTEM, INC. page 53 56 13. 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. 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:
1996 1995 ---------------------- ---------------------- in thousands Assumptions Used in Carrying Fair Carrying Fair December 31, Estimating Fair Value Amount Value Amount Value --------------------- --------- --------- --------- --------- Assets Cash and due Approximately equal from banks to carrying value $ 32,092 $ 32,092 $ 18,244 $ 18,244 Interest-earning Approximately equal deposits with banks to carrying value 38,086 38,086 12,635 12,635 Securities available Quoted market prices for sale 45,489 45,489 22,675 22,675 Loans held for sale Approximately equal to carrying value 11,341 11,341 1,367 1,367 Loans Discounted expected future cash flows, net of allowance for loan losses 441,591 454,326 349,345 371,720 Liabilities Deposits Fixed-rate certificates of deposit: Discounted expected future cash flows All other deposits: Approximately equal to carrying value $493,222 $489,206 $361,875 $360,609 Federal Home Discounted Loan Bank expected future advances cash flows 32,000 31,362 25,000 24,585 Convertible Discounted subordinated expected future notes cash flows 2,695 2,695
COLUMBIA BANKING SYSTEM, INC. page 54 57 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, 1996 approximates the recorded amounts of the related fees. 14. 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 retro-actively adjusted to give effect to this transaction. 15. SAIF special assessment Columbia Bank's deposits are insured by the FDIC through the Bank Insurance Fund and through the Saving 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 enacted in 1996 for the purpose 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 of Oakar institutions, such as Columbia Bank, which meet certain tests. The one-time special assessment of $612,000, which is tax deductible, was recognized in third quarter 1996 earnings. COLUMBIA BANKING SYSTEM, INC. page 55 58 16. parent company financial information condensed balance sheets parent company only
in thousands December 31, 1996 1995 ------- ------- Assets Cash and due from banks: Subsidiary banks $ 6 $ 41 Unrelated banks 68 Interest-earning deposits with banks: Subsidiary banks Unrelated banks 4,021 Securities available for sale 4,007 Loans 720 905 Investments in bank subsidiaries 49,951 32,660 Premises and equipment, net 28 49 Real estate owned 3,304 Other assets 429 354 ------- ------- Total Assets $59,162 $37,381 ======= ======= Liabilities and Shareholders' Equity Other liabilities $ 202 $ 119 Borrowed funds 2,600 Convertible subordinated notes 2,695 ------- ------- Total liabilities 202 5,414 Shareholders' equity 58,960 31,967 ------- ------- Total Liabilities and Shareholders' Equity $59,162 $37,381 ======= =======
COLUMBIA BANKING SYSTEM, INC. page 56 59 condensed statements of operations parent company only
in thousands years ended December 31, 1996 1995 1994 ------- ------- ------- Income Interest on loans $ 48 $ 54 $ 54 Interest on securities available for sale 20 188 Gains (losses) on securities available for sale (1) (270) Interest-earning deposits: Subsidiary banks 6 9 Unrelated banks 53 16 31 Other 55 533 470 ------- ------- ------- Total income 176 609 482 Expense Compensation and employee benefits 346 341 234 Interest 204 377 246 Other 309 612 493 ------- ------- ------- Total expenses 859 1,330 973 ------- ------- ------- Loss before income tax benefit and equity in undistributed net income (loss) of subsidiaries (683) (721) (491) ------- ------- ------- Income tax benefit Loss before equity in undistributed net income (loss) of subsidiaries (683) (721) (491) Equity in undistributed net income (loss) of subsidiaries: 4,260 3,476 (123) ------- ------- ------- Net Income (Loss) $ 3,577 $ 2,755 $ (614) ======= ======= =======
(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. COLUMBIA BANKING SYSTEM, INC. page 57 60 condensed statements of cash flows parent company only
in thousands years ended December 31, 1996 1995 1994 -------- -------- -------- Operating Activities Net income (loss) $ 3,577 $ 2,755 $ (614) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Equity in undistributed (earnings) losses of subsidiaries (4,260) (3,476) 123 Loss on sale of real estate owned 41 Provision for depreciation and amortization 35 34 40 Loss on sale of security available for sale 270 Net changes in other assets and liabilities (140) 2,698 80 -------- -------- -------- Net cash provided (used) by operating activities (747) 2,011 (101) Investing Activities Proceeds from sales of securities available for sale 2,808 Purchase of securities available for sale (4,000) Proceeds from maturities of securities available for sale 209 Loans originated or acquired, net of principal collected 134 Contribution of capital - bank subsidiaries (16,800) (3,100) (2,813) Return of capital to parent 3,800 Proceeds from sale of real estate owned 3,263 Purchases of premises and equipment 34 -------- -------- -------- Net cash provided (used) by investing activities (13,603) (3,100) 238 Financing Activities Proceeds from other borrowings 7,000 Repayment of other borrowings (9,600) Proceeds from issuance of common stock 20,868 103 35 -------- -------- -------- Net cash provided by financing activities 18,268 103 35 -------- -------- -------- Increase (decrease) in cash and cash equivalents 3,918 (986) 172 Cash and cash equivalents at beginning of period 109 1,095 923 -------- -------- -------- Cash and cash equivalents at end of period $ 4,027 $ 109 $ 1,095 ======== ======== ======== Supplemental Information Cash paid for interest $ 204 $ 377 $ 246 Issuance of common stock from conversion of convertible subordinated notes 2,509 40
COLUMBIA BANKING SYSTEM, INC. page 58 61 summary of quarterly financial information (1) Quarterly financial information for the years ended December 31, 1996 and 1995 is summarized as follows:
in thousands First Second Third Fourth Year Ended except per share amounts Quarter Quarter Quarter Quarter December 31, ------- ------- ------- ------- ----------- 1996 Total interest income $ 8,786 $ 9,311 $10,041 $10,924 $39,062 Total interest expense 4,296 4,306 4,780 5,136 18,518 ------- ------- ------- ------- ------- Net interest income 4,490 5,005 5,261 5,788 20,544 Provision for loan losses 330 430 330 330 1,420 Noninterest income 1,165 1,308 1,390 1,445 5,308 Noninterest expense 4,517 4,851 5,226 5,649 20,243 SAIF special assessment 612 612 ------- ------- ------- ------- ------- Income before income tax 808 1,032 483 1,254 3,577 ------- ------- ------- ------- ------- Provision for income tax Net income $ 808 $ 1,032 $ 483 $ 1,254 $ 3,577 ------- ------- ------- ------- ------- Per share: Net income $ 0.23 $ 0.29 $ 0.13 $ 0.28 $ 0.93 ======= ======= ======= ======= ======= 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 $ 0.13 $ 0.17 $ 0.22 $ 0.27 $ 0.79 ======= ======= ======= ======= =======
(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 Annual Report. COLUMBIA BANKING SYSTEM, INC. page 59 62 consolidated five-year statements of operations(1)
dollars in thousands, except per share amounts years ended December 31, 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Interest Income Loans $ 36,048 $ 30,038 $ 18,990 $ 12,258 $ 10,649 Investment securities 1,078 1,127 1,108 59 Securities available for sale 1,878 290 205 227 639 Deposits with banks 1,136 314 334 362 236 -------- -------- -------- -------- -------- Total interest income 39,062 31,720 20,656 13,955 11,583 Interest Expense Deposits 16,469 13,385 7,304 4,867 4,860 Federal Home Loan Bank advances 1,865 1,503 1,160 1,788 1,328 Other borrowings 184 271 612 876 735 -------- -------- -------- -------- -------- Total interest expense 18,518 15,159 9,076 7,531 6,923 -------- -------- -------- -------- -------- Net Interest Income 20,544 16,561 11,580 6,424 4,660 Provision for loan losses 1,420 1,250 1,000 502 170 -------- -------- -------- -------- -------- Net interest income after provision for loan losses 19,124 15,311 10,580 5,922 4,490 Noninterest income 5,308 3,991 2,996 2,043 1,021 Noninterest expense 20,243 16,547 14,036 10,656 4,488 SAIF special assessment 612 -------- -------- -------- -------- -------- Noninterest expense 20,855 16,547 14,036 10,656 4,488 -------- -------- -------- -------- -------- Income (loss) from continuing operations before income tax 3,577 2,755 (460) (2,691) 1,023 Provision for income tax -------- -------- -------- -------- -------- Income (loss) from continuing operations 3,577 2,755 (460) (2,691) 1,023 Extraordinary loss on extinguishment of debt, net (154) Cumulative effect of accounting change 252 -------- -------- -------- -------- -------- Net Income (Loss) $ 3,577 $ 2,755 $ (614) $ (2,439) $ 1,023 ======== ======== ======== ======== ========
COLUMBIA BANKING SYSTEM, INC. page 60 63
dollars in thousands, except per share amounts years ended December 31, 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- Per share (on average shares outstanding): Income (loss) from continuing operations $ 0.93 $ 0.79 $ (0.13) $ (1.17) $ 0.89 Extraordinary loss on extinguishment of debt, net (0.05) Cumulative effect of accounting change 0.11 Net income (loss) 0.93 0.79 (0.18) (1.06) 0.89 Fully diluted net income (loss) 0.92 0.79 (0.18) (1.06) 0.76 Average number of common and common equivalent shares outstanding: Primary 3,866 3,496 3,481 2,301 1,155 Fully diluted 4,047 3,752 3,740 2,560 1,700 ----------- ----------- ----------- ----------- ----------- Total assets at end of period $588,916 $425,206 $319,072 $235,944 $158,694 Long-term obligations 32,000 27,695 19,735 39,081 27,975 Cash dividends ----------- ----------- ----------- ----------- -----------
(1) These unaudited schedules provide selected financial information concerning the Company which should be read in conjunction with the Management Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report. COLUMBIA BANKING SYSTEM, INC. page 61 64 consolidated five-year summary of average
1996 1995 Average Average Average Average dollars in thousands Balances(1) Interest Rate Balances(1) Interest Rate ----------- ----------- ----------- ----------- ----------- ----------- Interest-Earning Assets Loans: Commercial business $ 136,386 $ 11,782 8.64% $ 92,831 $ 8,986 9.68% Real estate (2): One- to four-family residential 93,471 8,420 9.01 97,280 9,073 9.33 Five or more family residential and commercial properties 126,061 11,556 9.17 90,135 8,411 9.33 Consumer 49,213 4,290 8.72 37,793 3,568 9.44 ----------- ----------- ----------- ----------- ----------- ----------- Total loans 405,131 36,048 8.90 318,039 30,038 9.44 Securities 31,527 1,878 5.96 23,266 1,368 5.89 Interest-earning deposit with banks 21,416 1,136 5.31 5,336 314 5.88 ----------- ----------- ----------- ----------- ----------- ----------- Total interest-earning assets 458,074 39,062 8.53 346,641 31,720 9.15 Noninterest-earning assets 31,177 28,007 ----------- ----------- Total assets $ 489,251 $ 374,648 ----------- ----------- Interest-Bearing Liabilities Certificates of deposit $ 189,122 $ 10,712 5.66% $ 168,351 $ 9,565 5.68% Savings accounts 21,673 608 2.80 24,547 669 2.73 Interest-bearing demand 142,103 5,149 3.62 79,706 3,151 3.95 ----------- ----------- ----------- ----------- ----------- ----------- Total interest-bearing deposits 352,898 16,469 4.67 272,604 13,385 4.91 Federal Home Loan Bank advances 33,287 1,865 5.60 24,915 1,503 6.03 Other borrowings 1,990 184 9.25 2,744 271 9.88 ----------- ----------- ----------- ----------- ----------- ----------- Total interest-bearing liabilities 388,175 18,518 4.77 300,263 15,159 5.05 Demand and other noninterest-bearing deposits 60,691 42,167 Other noninterest-bearing liabilities 3,439 2,444 Shareholders' equity 36,946 29,774 ----------- ----------- Total liabilities and shareholders' equity $ 489,251 $ 374,648 ----------- ----------- ----------- ----------- ----------- ----------- Net interest revenue $ 20,544 $ 16,561 ----------- ----------- ----------- ----------- ----------- ----------- Net interest spread 3.76% 4.10% ----------- ----------- ----------- ----------- ----------- ----------- Net interest margin 4.48% 4.78% ----------- ----------- ----------- ----------- ----------- ----------- Average interest-earning assets to average interest-bearing liabilities 118.01% 115.45% ----------- ----------- ----------- ----------- ----------- -----------
COLUMBIA BANKING SYSTEM, INC. page 62. 65 balances and net interest revenue
1994 1993 Average Average Average Average dollars in thousands Balances(1) Interest Rate Balances(1) Interest Rate ----------- ----------- ----------- ----------- ----------- ----------- Interest-Earning Assets Loans: Commercial business $ 63,541 $ 5,272 8.30% $ 23,894 $ 1,690 7.07% Real estate (2): One- to four-family residential 78,408 6,495 8.28 73,076 6,221 8.51 Five or more family residential and commercial properties 57,952 5,324 9.19 35,255 3,608 10.23 Consumer 22,335 1,899 8.50 8,128 739 9.09 ----------- ----------- ----------- ----------- ----------- ----------- Total loans 222,236 18,990 8.54 140,353 12,258 8.73 Securities 24,045 1,332 5.54 20,940 1,335 6.38 Interest-earning deposits with banks 8,597 334 3.89 12,800 362 2.83 ----------- ----------- ----------- ----------- ----------- ----------- Total interest-earning assets 254,878 20,656 8.10 174,093 13,955 8.02 Noninterest-earning assets 24,384 15,825 ----------- ----------- Total assets $ 279,262 $ 189,918 ----------- ----------- Interest-Bearing Liabilities Certificates of deposit $ 122,198 $ 5,595 4.58% $ 75,682 $ 3,459 4.57% Savings accounts 33,938 895 2.64 29,743 1,039 3.49 Interest-bearing demand 38,962 814 2.09 18,090 369 2.04 ----------- ----------- ----------- ----------- ----------- ----------- Total interest-bearing deposits 195,098 7,304 3.74 123,515 4,867 3.94 Federal Home Loan Bank advances 21,452 1,160 5.41 25,875 1,788 6.91 Other borrowings 6,017 612 10.17 9,868 876 8.88 ----------- ----------- ----------- ----------- ----------- ----------- Total interest-bearing liabilities 222,567 9,076 4.08 159,258 7,531 4.73 Demand and other noninterest-bearing deposits 26,238 10,621 Other noninterest-bearing liabilities 1,476 923 Shareholders' equity 28,981 19,116 ----------- ----------- Total liabilities and shareholders' equity $ 279,262 $ 189,918 ----------- ----------- ----------- ----------- ----------- ----------- Net interest revenue $ 11,580 $ 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% ----------- ----------- ----------- ----------- ----------- -----------
1992 Average Average dollars in thousands Balances(1) Interest Rate ----------- ----------- ----------- Interest-Earning Assets Loans: Commercial business $ 15,949 $ 1,501 9.41% Real estate (2): One- to four-family residential 61,461 6,120 9.96 Five or more family residential and commercial properties 24,086 2,463 10.23 Consumer 5,686 565 9.94 ----------- ----------- ----------- Total loans 107,182 10,649 9.94 Securities 9,382 698 7.44 Interest-earning deposits with banks 6,416 236 3.68 ----------- ----------- ----------- Total interest-earning assets 122,980 11,583 9.42 Noninterest-earning assets 14,295 ----------- Total assets $ 137,275 ----------- Interest-Bearing Liabilities Certificates of deposit $ 57,072 $ 3,331 5.84% Savings accounts 25,087 1,059 4.22 Interest-bearing demand 12,976 470 3.62 ----------- ----------- ----------- Total interest-bearing deposits 95,135 4,860 5.11 Federal Home Loan Bank advances 16,282 1,328 8.16 Other borrowings 7,730 735 9.51 ----------- ----------- ----------- Total interest-bearing liabilities 119,147 6,923 5.81 Demand and other noninterest-bearing deposits 3,416 Other noninterest-bearing liabilities 5,673 Shareholders' equity 9,039 ----------- Total liabilities and shareholders' equity $ 137,275 ----------- ----------- ----------- Net interest revenue $ 4,660 ----------- ----------- ----------- Net interest spread 3.61% ----------- ----------- ----------- Net interest margin 3.79% ----------- ----------- ----------- Average interest-earning assets to average interest-bearing liabilities 103.22% ----------- ----------- -----------
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. COLUMBIA BANKING SYSTEM, INC. page 63. 66 corporate directory Board of Directors W. Barry Connoley President and Chief Executive Officer, MultiCare Medical Center Richard S. DeVine President, Chinook Resources, Inc. Chairman, Raleigh, Schwarz & Powell, Inc. A. G. Espe Chairman and Chief Executive Officer, Columbia Banking System, Inc. Chairman, Columbia Bank Jack Fabulich Chairman, Parker Paint Manufacturing Co., Inc. President and Commissioner, Port of Tacoma Jonathan Fine Chief Operating Officer, American Red Cross, Seattle-King County Chapter Margel S. Gallagher President, Viva Imports, Ltd. John A. Halleran Private Investor W. W. Philip President and Chief Operating Officer, Columbia Banking System, Inc. President and Chief Executive Officer, Columbia Bank John H. Powell President and Co-owner, Sound Oil Company Robert E. Quoidbach Private Investor Donald Rodman Owner and Vice President, Rodman Realty, Inc. Frank H. Russell President, Professional Services Unified, Inc. and Quality Meal Expeditors Sidney R. Snyder Washington State Senator, Owner of Sid's Food Market and Midtown Market James M. Will President, Titus-Will Enterprises Executive Officers A. G. Espe Chairman and Chief Executive Officer W. W. Philip President and Chief Operating Officer Donald A. Andersen Senior Vice President, Loan Administration Julie A. Healy Senior Vice President, Operations Manager H. R. Russell Senior Vice President, Loan Production Gary R. Schminkey Senior Vice President, Chief Financial Officer Evans Q. Whitney Senior Vice President, Human Resources Director Senior Officers Stan Ausmus Senior Vice President, Puyallup Branch Manager Melanie J. Dressel Senior Vice President, Private Banking Manager Alan W. Fulp Senior Vice President, Bellevue Branch Manager Bret M. Gagliardi Senior Vice President, Commercial Loans, Kent Valley Gary Gahan Senior Vice President, Private Banking Kurt Graff Senior Vice President, Lakewood Branch Manager Eugene Horan Senior Vice President, Fircrest Branch Manager Trent Jonas Senior Vice President, Commercial Loans, Gig Harbor Gary Lindberg Senior Vice President, Commercial Loans Richard B. Martinez Senior Vice President, Private Banking, Bellevue Samuel R. Noel Executive Vice President, Southwest Region Ronald D. Staples Senior Vice President, Allenmore Branch Manager Loran W. Todd Senior Vice President, General Auditor Rick W. Tunnell Senior Vice President, Real Estate Brett R. Willis Senior Vice President, Commercial Loans Kenneth M. Yokoyama Senior Vice President, Commercial Loans, Bellevue COLUMBIA BANKING SYSTEM, INC. page 64. 67 shareholder information Corporate Headquarters Columbia Banking System, Inc. 1102 Broadway Plaza P.O. Box 2156 Tacoma, WA 98401-2156 (206) 305-1900* Independent Accountants Price Waterhouse LLP Transfer Agent and Registrar American Stock Transfer & Trust Company Market Makers Alex. Brown & Sons Inc. Dain Bosworth, Inc. Dean Witter Reynolds, Inc. Everen Securities, Inc. Herzog, Heine, Geduld, Inc. Keefe, Bruyette & Woods, Inc. Ragen MacKenzie Inc. Legal Counsel Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, PLLC Annual Meeting Sheraton Tacoma Hotel 1320 Broadway Plaza Tacoma, Washington Wednesday, April 23, 1997 1:00 p.m. Stock Listing The Company's common stock trades on the Nasdaq National Market tier of The Nasdaq Stock Market(sm) under the symbol: COLB. Form 10-K Report Upon request, Columbia Banking System provides to shareholders a copy of the 1996 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. There is no charge for this information. Quarterly Reporting In the interest of providing financial results in a timely and cost-effective manner, the Company does not publish a formal quarterly report. A copy of the quarterly earnings news release is available upon request. Immediate access to the Company's quarterly earnings news release via facsimile is provided by Company News On Call: (800) 758-5804, access #152519 For shareholder information, please contact: Kristen Kopay Marketing Officer Corporate Communications P.O. Box 2156, MS 8300 Tacoma, WA 98401-2156 tel (206) 305-1965* fax (206) 305-0317* E-mail: kkopay@columbiabank.com * area code will change to (253) effective April 25, 1997 COLUMBIA BANKING SYSTEM, INC. page 65 68 locations Pierce County Main Office 1102 Broadway Plaza Tacoma, WA 98402 (206) 305-1920* John Collins Allenmore 1959 South Union Tacoma, WA 98405 (206) 627-6909* Ron Staples Edgewood/Milton 900 Meridian E., Suite 17 Milton, WA 98354 (206) 952-6646* Michael Butcher [A map of Western Washington indicating the Company's market area with existing and approved branch locations marked by location.] Fircrest 2401 Mildred Street W. Fircrest, WA 98466 (206) 566-1172* Gene Horan Gig Harbor 5311 Point Fosdick Dr. N.W. Gig Harbor, WA 98335 (206) 858-5105* Marilyn Naylor Lakewood 6202 Mount Tacoma Dr. S.W. Lakewood, WA 98499 (206) 581-4232* Kurt Graff Old Town 2200 North 30th Street Tacoma, WA 98403 (206) 272-0412* Priscilla May Puyallup 4220 S. Meridian Puyallup, WA 98373 (206) 770-0770* Stan Ausmus South Hill Mall 3500 S. Meridian, Suite 503 Puyallup, WA 98373 (206) 770-8161* Robin Conrads Stacy Gibson Spanaway 220 South 175th Spanaway, WA 98387 (206) 539-3094* Joy Johnson Summit 10409 Canyon Road E. Puyallup, WA 98373 (206) 770-9323* Mike Williams King County Bellevue 777 108th Avenue N.E., Suite 100 Bellevue, WA 98004 (206) 646-9696+ Alan Fulp Bellevue Way (February 1997) 10350 N.E. 10th Street Bellevue, WA 98004 (206) 452-7323+ Stacy Sullivan Federal Way 33370 Pacific Highway S. Federal Way, WA 98003 (206) 925-9323 Chuck Folsom Kent (March 1997) 112 Washington Avenue N. Kent, WA 98032 (206) 852-0475* Patty Osthus Cowlitz County Commerce 1338 Commerce Avenue Longview, WA 98632 (360) 636-9200 Barbara Perret-Brusco 30th Avenue 2207 30th Avenue Longview, WA 98632 (360) 423-8760 Sheryl Vlach Woodland 782 Goerig Street Woodland, WA 98674 (360) 225-9421 Carol Rounds * area code will change to (253) effective April 25, 1997 + area code will change to (425) effective April 25, 1997 COLUMBIA BANKING SYSTEM, INC. page 66 69 [ COLUMBIA BANK LOGO ] 1102 BROADWAY PLAZA TACOMA, WASHINGTON 98402 www.columbiabank.com EX-24 4 POWERS OF ATTORNEY DATED FEBRUARY 26, 1997 1 Exhibit 24 2 POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints Arnold G. Espe, W. W. Philip and J. James Gallagher, or either of them, as his attorney to sign, in his name and behalf and in any and all capacities stated below, the Company's Form 10-K Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and all amendments and other documents relating thereto as shall be necessary, such person hereby granting to each such attorney power to act with or without the other and full power of substitution and revocation, and hereby ratifying all that any such attorney or his substitute may do by virtue hereof. This Power of Attorney has been signed by the following person in the capacity indicated, on the 26 day of February, 1997. Signature Title /s/ W. Barry Connoley Director - --------------------------------- W. Barry Connoley 3 POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints Arnold G. Espe, W. W. Philip and J. James Gallagher, or either of them, as his attorney to sign, in his name and behalf and in any and all capacities stated below, the Company's Form 10-K Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and all amendments and other documents relating thereto as shall be necessary, such person hereby granting to each such attorney power to act with or without the other and full power of substitution and revocation, and hereby ratifying all that any such attorney or his substitute may do by virtue hereof. This Power of Attorney has been signed by the following person in the capacity indicated, on the 26 day of February, 1997. Signature Title /s/ Richard S. DeVine Director - --------------------------------- Richard S. DeVine 4 POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints Arnold G. Espe, W. W. Philip and J. James Gallagher, or either of them, as his attorney to sign, in his name and behalf and in any and all capacities stated below, the Company's Form 10-K Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and all amendments and other documents relating thereto as shall be necessary, such person hereby granting to each such attorney power to act with or without the other and full power of substitution and revocation, and hereby ratifying all that any such attorney or his substitute may do by virtue hereof. This Power of Attorney has been signed by the following person in the capacity indicated, on the 26 day of February, 1997. Signature Title /s/ Jack Fabulich Director - --------------------------------- Jack Fabulich 5 POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints Arnold G. Espe, W. W. Philip and J. James Gallagher, or either of them, as his attorney to sign, in his name and behalf and in any and all capacities stated below, the Company's Form 10-K Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and all amendments and other documents relating thereto as shall be necessary, such person hereby granting to each such attorney power to act with or without the other and full power of substitution and revocation, and hereby ratifying all that any such attorney or his substitute may do by virtue hereof. This Power of Attorney has been signed by the following person in the capacity indicated, on the 26 day of February, 1997. Signature Title /s/ Jonathan Fine Director - --------------------------------- Jonathan Fine 6 POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints Arnold G. Espe, W. W. Philip and J. James Gallagher, or either of them, as his attorney to sign, in his name and behalf and in any and all capacities stated below, the Company's Form 10-K Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and all amendments and other documents relating thereto as shall be necessary, such person hereby granting to each such attorney power to act with or without the other and full power of substitution and revocation, and hereby ratifying all that any such attorney or his substitute may do by virtue hereof. This Power of Attorney has been signed by the following person in the capacity indicated, on the 26 day of February, 1997. Signature Title /s/ Margel Gallagher Director - --------------------------------- Margel Gallagher 7 POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints Arnold G. Espe, W. W. Philip and J. James Gallagher, or either of them, as his attorney to sign, in his name and behalf and in any and all capacities stated below, the Company's Form 10-K Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and all amendments and other documents relating thereto as shall be necessary, such person hereby granting to each such attorney power to act with or without the other and full power of substitution and revocation, and hereby ratifying all that any such attorney or his substitute may do by virtue hereof. This Power of Attorney has been signed by the following person in the capacity indicated, on the 26 day of February, 1997. Signature Title /s/ John A. Halleran Director - --------------------------------- John A. Halleran 8 POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints Arnold G. Espe, W. W. Philip and J. James Gallagher, or either of them, as his attorney to sign, in his name and behalf and in any and all capacities stated below, the Company's Form 10-K Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and all amendments and other documents relating thereto as shall be necessary, such person hereby granting to each such attorney power to act with or without the other and full power of substitution and revocation, and hereby ratifying all that any such attorney or his substitute may do by virtue hereof. This Power of Attorney has been signed by the following person in the capacity indicated, on the 26 day of February, 1997. Signature Title /s/ Robert Quoidbach Director - --------------------------------- Robert Quoidbach 9 POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints Arnold G. Espe, W. W. Philip and J. James Gallagher, or either of them, as his attorney to sign, in his name and behalf and in any and all capacities stated below, the Company's Form 10-K Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and all amendments and other documents relating thereto as shall be necessary, such person hereby granting to each such attorney power to act with or without the other and full power of substitution and revocation, and hereby ratifying all that any such attorney or his substitute may do by virtue hereof. This Power of Attorney has been signed by the following person in the capacity indicated, on the 26 day of February, 1997. Signature Title /s/ Donald Rodman Director - --------------------------------- Donald Rodman 10 POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints Arnold G. Espe, W. W. Philip and J. James Gallagher, or either of them, as his attorney to sign, in his name and behalf and in any and all capacities stated below, the Company's Form 10-K Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and all amendments and other documents relating thereto as shall be necessary, such person hereby granting to each such attorney power to act with or without the other and full power of substitution and revocation, and hereby ratifying all that any such attorney or his substitute may do by virtue hereof. This Power of Attorney has been signed by the following person in the capacity indicated, on the 26 day of February, 1997. Signature Title /s/ Frank Russell Director - --------------------------------- Frank Russell 11 POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints Arnold G. Espe, W. W. Philip and J. James Gallagher, or either of them, as his attorney to sign, in his name and behalf and in any and all capacities stated below, the Company's Form 10-K Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and all amendments and other documents relating thereto as shall be necessary, such person hereby granting to each such attorney power to act with or without the other and full power of substitution and revocation, and hereby ratifying all that any such attorney or his substitute may do by virtue hereof. This Power of Attorney has been signed by the following person in the capacity indicated, on the 26 day of February, 1997. Signature Title /s/ Sidney R. Snyder Director - --------------------------------- Sidney R. Snyder 12 POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints Arnold G. Espe, W. W. Philip and J. James Gallagher, or either of them, as his attorney to sign, in his name and behalf and in any and all capacities stated below, the Company's Form 10-K Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934, and likewise to sign any and all amendments and other documents relating thereto as shall be necessary, such person hereby granting to each such attorney power to act with or without the other and full power of substitution and revocation, and hereby ratifying all that any such attorney or his substitute may do by virtue hereof. This Power of Attorney has been signed by the following person in the capacity indicated, on the 26 day of February, 1997. Signature Title /s/ James M. Will, Jr. Director - --------------------------------- James M. Will, Jr. EX-27 5 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
9 0000887343 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 32,092 38,086 0 0 45,489 0 0 446,095 4,504 588,916 493,222 0 4,734 32,000 0 0 56,340 2,620 588,916 36,048 1,878 1,136 39,062 16,469 18,518 20,544 1,420 0 20,855 3,577 3,577 0 0 3,577 0.93 0.92 4.48 2,227 0 25 213 3,748 684 20 4,504 4,504 0 0
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