-----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, Q+87b07LW02g3Ei5m8ZvrGT2UbEpAbzjtwMnQRxR2JzF6rw8Vt/IT4Rpfq5+iabI cE1kziBpdPaPscWoOkRGNg== 0001032210-98-000237.txt : 19980323 0001032210-98-000237.hdr.sgml : 19980323 ACCESSION NUMBER: 0001032210-98-000237 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980319 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLUMBIA BANKING SYSTEM INC CENTRAL INDEX KEY: 0000887343 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 911422237 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20288 FILM NUMBER: 98569291 BUSINESS ADDRESS: STREET 1: 1102 BROADWAY PLAZA CITY: TACOMA STATE: WA ZIP: 98402 BUSINESS PHONE: 2533051900 MAIL ADDRESS: STREET 1: 1102 BROADWAY PLAZA CITY: TACOMA STATE: WA ZIP: 98402 10-K 1 ANNUAL REPORT FOR THE FISCAL YEAR END 12-31-1997 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 For the fiscal year ended DECEMBER 31, 1997 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: (253) 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, 1998 was $204,949,093. The number of shares of registrant's Common Stock outstanding at February 28, 1998 was 6,532,242 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, 1997 Registrant's definitive Proxy Statement Part III dated March 18, 1998 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 Sheet Consolidated Five-Year Summary of and Analysis of Net Interest Income Average Balances and Net Interest Revenue 86 and Expense Management Discussion and Analysis of Financial Condition and Results of Operations ("Management Discussion") 26 Investments Note 4, Notes to Consolidated Financial Statements 63 Management Discussion - Securities 36 Lending Activities Management Discussion - Loan Portfolio 31 Management Discussion - Nonperforming Assets 34 Note 5, Notes to Consolidated Financial Statements 65 Summary of Loan Loss Experience Note 6, Allowance for Loan Losses 66 Management Discussion - Provision and Allowance for Loan Losses 35 Supervision and Regulation Management Discussion - Capital 43 Item 2 Properties Note 7, Notes to Consolidated Financial Statements 66 Item 3 Legal Proceedings Note 13, Notes to Consolidated Financial Statements 73
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 Common Management's Discussion - Quarterly Common Stock and Related Stockholder Matters Stock Prices and Dividend Payments 46 Item 6 Selected Financial Data Consolidated Highlights 16 Consolidated Five-Year Statements of Operations 84 Consolidated Five-Year Summary of Average Balances and Net Interest Revenue 86 Item 7 Management's Discussion and Analysis Management Discussion 26 of Financial Condition and Results of Operations Consolidated Five-Year Summary of Average Balances and Net Interest Revenue 86 Item 8 Financial Statements and Audited Financial Statements 50 Supplementary Data Note 18, Summary of Quarterly Financial Information (Unaudited) 80 Item 9 Changes in and Disagreements With Change in Accounting Firms 46 Accountants on Accounting and Financial Disclosure PART III DEFINITIVE PROXY STATEMENT Item 10 Directors and Executive Officers Election of Directors 4 of the Registrant Section 16(a) Beneficial Ownership Reporting Compliance 15 Item 11 Executive Compensation Executive Compensation 7 Item 12 Security Ownership of Certain Security Ownership of Management 2 Beneficial Owners and Management Item 13 Certain Relationships and Related Interest of Management in Certain Transactions Transactions 15
COLUMBIA BANKING SYSTEM, INC. FORM 10-K December 31, 1997 TABLE OF CONTENTS
PART I Page ---- Item 1. Business General.................................................................................... 1 Strategy................................................................................... 1 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................................................................................ 7 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
PART I ITEM 1. BUSINESS GENERAL Columbia Banking System, Inc. ("the Company"), 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 21 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, 1997, based on total assets of $864.6 million, the Company was the largest publicly traded bank holding company headquartered in Washington engaged primarily in commercial banking. The Company was reorganized and additional management was added in 1993 in order to take advantage of commercial banking business opportunities resulting from increased consolidation of banks in the Company's principal market area, primarily through acquisitions by out-of-state holding companies, and the resulting dislocation of customers. Since the reorganization, Columbia Bank has grown from four branch offices at January 1, 1993 to its present 21 branch offices and has regulatory approval to open four additional branch offices in its market area. Between January 1, 1993 and December 31, 1997, the Company increased its consolidated assets to $864.6 million from $198.2 million, its loans to $685.9 million from $146.2 million and its deposits to $740.4 million from $151.9 million. While accomplishing this expansion, the Company's asset quality has improved. At December 31, 1997, the Company's nonperforming assets constituted 0.20% of total assets, as compared with 0.39%, 0.73%, and 0.94% at December 31, 1996, 1995 and 1994, respectively. Although nonperforming assets are currently low, rapid growth could increase future losses. Accordingly, the Company increased the loan loss provision by $2.0 million in the fourth quarter of 1997, as well as adding $1.0 million in the second quarter of 1997, and increasing the monthly provision to $130,000 from $110,000 in April 1997. 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. STRATEGY Management believes the ongoing consolidation among financial institutions in Washington has created significant gaps in the ability of large banks operating in Washington to serve certain customers, particularly the Company's target customer base of small and medium-sized businesses, professionals and other individuals. The Company's business strategy is to provide its customers with the financial sophistication and breadth of products of a regional bank while retaining the appeal and service level of a community bank. Management believes that as a result of the Company's strong commitment to highly personalized relationship-oriented customer service, its varied products, its strategic branch locations and the long-standing community presence of its managers, lending officers and branch personnel, it is well positioned to attract new customers and to increase its market share of loans and deposits. 1 The Company's goal over the next several years is to create a well-capitalized, customer focused, Pacific Northwest commercial banking institution with a significant presence in selected markets. The Company intends to effect this growth strategy through a combination of growth at existing branch offices, new branch openings (usually following the hiring of an experienced branch manager and/or lending officer with strong community ties and banking relationships) and acquisitions. In order to fund its commercial and consumer lending activities and to allow for increased contact with customers, the Company is establishing a branch system catering primarily to retail depositors, supplemented by business banking customer deposits and other borrowings. The Company believes this mix of funding sources will enable it to expand its commercial lending activities rapidly while attracting a stable core deposit base. In order to support its strategy of growth, without compromising its personalized banking approach or its commitment to asset quality, the Company has made significant investments in experienced branch, lending and administrative personnel and has incurred significant costs related to its branch expansion. Although the Company's expense ratios have improved since 1993, management anticipates that the ratios will remain relatively high by industry standards for the foreseeable future due to the Company's aggressive growth strategy and emphasis on convenience and personal service. In November and December 1996, the Company issued approximately 1.445 million additional 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 neighboring south King, Thurston, and Kitsap Counties. The remainder was used to repay a $3.0 million borrowing and for general corporate purposes. During the first quarter of 1997, the Company opened a second Bellevue branch and a new branch in the south King County commercial market of downtown Kent. The Company completed its first bank acquisitions during the fourth quarter of 1997, merging Cascade Bancorp, Inc. ("Cascade") and Bank of Fife ("Fife") into Columbia Bank, thereby adding three branch office locations. Cascade operated three banking offices in the south King County market area. Two of the branches are located in Auburn (a market in which Columbia did not have a branch) and the third in downtown Kent. Columbia consolidated its Kent branch office into the Cascade branch location. Fife operated one banking office in downtown Fife, a commercial market in which Columbia did not have a branch. At the end of 1997, the Company had twenty-one branches, twelve in Pierce County, six in King County and three in Cowlitz County. Since beginning its major Pierce County expansion in August 1993, the Company has grown from four to twenty-one branches through a combination of internal and external growth by acquisition. Also, at the end of the year, construction was nearing completion on two more offices in Tacoma. The Company opened its twenty-second branch in mid-January 1998, located in the Westgate area of north Tacoma. The Westgate branch is the thirteenth location in Pierce County. The next Pierce County branch will open in February 1998, located at 176th and Meridian in Puyallup. The Company currently has regulatory approval to open one additional branch in Pierce County and one in King County. Management continues to pursue opportunities for expansion via a combination of internal and external growth by acquisition. 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 continuously reviews new products and services to give its customers more banking options. In addition, new technology and services are reviewed for business development and cost saving. 2 MARKET AREA The economy of the Company's principal market area, while primarily dependent upon aerospace, foreign trade and natural resources, including agriculture and timber, has become more diversified over the past decade as a result of the success of software companies such as Microsoft and the establishment of numerous research and biotechnology firms. The Washington economy and that of the Puget Sound region generally have experienced strong growth and stability in recent years. The Pierce County Economic Index, a regional publication providing economic forecasts and commentary, reports that "The 1997 growth rate was almost twice the twenty-year average growth rate of the local economy. Continued expansion will take place in 1998, but not at the gallop-like pace of 1997. When 1998 comes to a close, economic activity in Pierce County's economy will have increased by 10% in just three years." Pierce County, the area in which the Company's expansion is primarily focused, is located in the South Puget Sound region. With 12 branch offices in Pierce County at the end of 1997, and two new branch offices opening during the first quarter of 1998, the Company is positioning itself to increase its market share in this County of approximately 674,000 residents, the second largest populated county in Washington State. Over a year ago, Forbes magazine 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 King County 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. During 1997, the Company further expanded into neighboring south King County, an area of several residential communities whose employment base is supported by light industrial, aerospace, and forest products industries. In early 1997, the Company opened a branch office in Kent and with the merger of Cascade added two branches in Auburn, a market where Columbia had no branch offices, and merged its newly opened Kent branch into Cascade's Kent branch location. The merger brings the Company's branch office total in south King County to four, including the Federal Way office which opened during 1995. With its close proximity to Tacoma, the south King County 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 high residential and commercial growth markets and considered by management to be natural areas of expansion for the Company. The Company's market area also includes the Longview and Woodland communities in southwest Washington. The population of Cowlitz County, in which Longview and Woodland are located, is approximately 91,000. 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. The Company anticipates continued expansion in Pierce County, north into King County, south into Thurston County (the location of the state capitol, Olympia), and northwest into Kitsap County (the location of Bremerton and Port Orchard). 3 Olympia, with a population of approximately 39,000, and the neighboring community of Lacey, with a population of approximately 28,000, are the principal cities in Thurston County. The county has an approximate population of 198,000. 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 Washington State Almanac (an annual publication of demographic information of Washington State counties and cities), approximately 40% of the average employment was through federal, state, and local government agencies. The area also has a significant population of retired military personnel. Kitsap County, with a population of approximately 229,000 (sixth largest in the State), is home to the Bremerton Naval shipyard and the Trident Submarine Base. Directly west of Seattle across Puget Sound, commuters and visitors are able to travel by ferry in 30 to 60 minutes to jobs and entertainment in Seattle from residences in Kitsap County. According to the Washington State Almanac, approximately 39% of the average employment was government related. 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. Federal law (see "Supervision and Regulation -- Other Regulatory Developments") allows mergers or other combinations, relocations of a bank's main office and branching across state lines. 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, however, its share of commercial bank deposits in Pierce County has grown substantially over the last several years. The Company's strategy involves significant expansion throughout the Tacoma/Pierce County 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, 1997, the Company had 327 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 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 - --------------------------------------------------------------------------------------------------------------- W. W. Philip/1/ 71 Director, Chairman, President and Chief Executive 1993 Officer Melanie J. Dressel/2/ 45 Executive Vice President - Retail Banking 1997 H. R. Russell/3/ 43 Executive Vice President - Commercial Banking 1996 Donald A. Andersen/4/ 52 Senior Vice President, Senior Loan Production 1996 Officer - Columbia Bank Julie A. Healy/5/ 42 Senior Vice President, Operations Manager - 1994 Columbia Bank Gary R. Schminkey/6/ 40 Senior Vice President and Chief Financial Officer 1993 Evans Q. Whitney/7/ 54 Senior Vice President, Human Resources Director 1994
1 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. In November 1997, Mr. Philip was appointed Chairman, President and Chief Executive Officer of the Company and Columbia Bank. 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. 2 Ms. Dressel joined Columbia Bank as Senior Vice President -- Private Banking in June 1993. She was appointed Executive Vice President - Retail Banking for Columbia Bank in November 1997. Ms. Dressel served as Senior Vice President and directed the private banking division of Puget Sound National Bank for nearly five years and was employed by Bank of California for over 14 years. 3 Mr. Russell joined Columbia Bank as Senior Vice President -- Commercial Loans in October 1993. He was appointed Executive Vice President - Senior Credit Officer for Columbia Bank in November 1997. 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. 4 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. 5 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. 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. 5 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 86 of the Annual Report to Shareholders for the year ended December 31, 1997 ("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 26 of the Annual Report for additional details on various asset and liability categories. 6 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.
1997 Compared to 1996 1996 Compared to 1995 Increase (Decrease) Due to Increase (Decrease) Due to ----------------------------- ------------------------------- (in thousands) Volume Rate Total Volume Rate Total - --------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans: Commercial business $ 5,532 $ 487 $ 6,019 $ 4,170 $ (872) $3,298 One- to four-family residential (293) 761 468 (34) (359) (393) Five or more family residential and commercial properties 6,199 (945) 5,254 3,770 (239) 3,531 Consumer 916 279 1,195 1,059 (268) 791 - --------------------------------------------------------------------------------------------------------------- Total loans 12,354 582 12,936 8,965 (1,738) 7,227 Securities 1,284 103 1,387 773 112 885 Interest-earning deposits with banks (204) 77 (127) 988 (72) 916 - --------------------------------------------------------------------------------------------------------------- Total interest revenue $13,434 $ 762 $14,196 $10,726 $(1,698) $9,028 =============================================================================================================== INTEREST EXPENSE Deposits: Certificates of deposit $ 2,414 $(168) $ 2,246 $ 2,077 $ 14 $2,091 Savings accounts 158 (47) 111 (21) (7) (28) Interest-bearing demand 2,185 (137) 2,048 2,192 (254) 1,938 - --------------------------------------------------------------------------------------------------------------- Total interest on deposits 4,757 (352) 4,405 4,248 (247) 4,001 Federal Home Loan Bank advances 83 (26) 57 506 (95) 411 Other borrowings (106) (67) (173) 12 (57) (45) - --------------------------------------------------------------------------------------------------------------- Total interest expense $ 4,734 $(445) $ 4,289 $ 4,766 $ (399) $4,367 ===============================================================================================================
INVESTMENTS For additional information concerning securities (securities available for sale and held to maturity), see Note 4 of "Notes to Consolidated Financial Statements" at page 63 of the Annual Report and "Management Discussion - Securities" at page 36 of the Annual Report, all of which are incorporated herein by reference. 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 available for sale 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. Securities held to maturity 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. At December 31, 1997, there were no securities of any issuer that exceeded ten percent of shareholders' equity. 7 The following table summarizes the amortized cost, gross unrealized gains and losses and the resulting market value of Company's securities available for sale for the years ended December 31, 1997, 1996, and 1995.
SECURITIES AVAILABLE FOR SALE Gross Gross Amortized Unrealized Unrealized Market (in thousands) Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------- December 31, 1997: U.S. Treasury & government agency $48,178 $ 78 $48,256 Mortgage-backed 7,046 $ (27) 7,019 Other securities 990 14 1,004 - --------------------------------------------------------------------------------------------------------------- Total $56,214 $ 92 $ (27) $56,279 =============================================================================================================== December 31, 1996: U.S. Treasury & government agency $40,562 $104 $ (19) $40,647 Mortgage-backed 10,874 (114) 10,760 FHLMC preferred stock 250 8 258 Other securities 249 (3) 246 State and municipal securities 130 3 133 - --------------------------------------------------------------------------------------------------------------- Total $52,065 $115 $(136) $52,044 =============================================================================================================== December 31, 1995: U.S. Treasury & government agency $13,891 $ 38 $ (6) $13,923 Mortgage-backed 12,572 (126) 12,446 FHLMC preferred stock 250 8 258 Other securities State and municipal securities 130 4 134 - --------------------------------------------------------------------------------------------------------------- Total $26,843 $ 50 $(132) $26,761 ===============================================================================================================
The following table provides the carrying values, maturities and weighted average yields of the Company's securities available for sale at December 31, 1997.
SECURITIES AVAILABLE FOR SALE Maturing ------------------------------------------------------------------------------- After 5 But After 1 But Within 10 (dollars in thousands) Within 1 Year Within 5 Years Years After 10 Years Total ----------------------------------------------------------------------------------------------------------------------- U.S. Treasury Balance $15,967 $ 3,515 $19,482 Weighted Average Yield 5.76% 6.19% 5.83% U.S. government agency Balance 701 19,256 $6,938 $1,879 28,774 Weighted Average Yield 5.96% 6.49% 7.70% 7.39% 6.82% Mortgage-backed (1) Balance 5,037 1,982 7,019 Weighted Average Yield 5.37% 6.36% 5.65% Other Securities Balance 1,004 1,004 Weighted Average Yield 6.75% 6.75% - ----------------------------------------------------------------------------------------------------------------------- Total Balance $21,705 $23,775 $8,920 $1,879 $56,279 Weighted Average Yield 5.67% 6.45% 7.40% 7.39% 6.33% - -----------------------------------------------------------------------------------------------------------------------
(1) The maturities reported for mortgage-backed securities are based on contractual maturities and principal amortization. 8 The following table summarizes the recorded value, gross unrealized gains and losses and the resulting market value of securities held to maturity for the years ended December 31, 1997, 1996, and 1995.
SECURITIES HELD TO MATURITY Gross Gross Amortized Unrealized Unrealized Market (in thousands) Cost Gains Losses Value - -------------------------------------------------------------------------------------------------- December 31, 1997: U.S. Treasury & government agency $ 4,743 $ 8 $ 4,751 State and municipal securities 4,191 54 4,245 Other Securities 495 6 501 FHLMC preferred stock 250 7 257 - -------------------------------------------------------------------------------------------------- Total $ 9,679 $75 $ 9,754 ================================================================================================== December 31, 1996: U.S. Treasury & government agency $ 8,484 $15 $(56) $ 8,443 State and municipal securities 2,482 31 (2) 2,511 Other Securities 655 1 656 - -------------------------------------------------------------------------------------------------- Total $11,621 $47 $(58) $11,610 ================================================================================================== December 31, 1995: U.S. Treasury & government agency $ 6,731 $40 $(25) $ 6,746 State and municipal securities 2,275 20 (7) 2,288 Other Securities 1,063 4 (5) 1,062 - -------------------------------------------------------------------------------------------------- Total $10,069 $64 $(37) $10,096 ==================================================================================================
The following table provides the carrying values, maturities and weighted average yields of the Company's securities held to maturity at December 31, 1997.
SECURITIES HELD TO MATURITY Maturing ------------------------------------------------------------------------------- After 5 But After 1 But Within 10 (dollars in thousands) Within 1 Year Within 5 Years Years After 10 Years Total ----------------------------------------------------------------------------------------------------------------------- U.S. government agency Balance $ 998 $3,495 $ 250 $4,743 Weighted Average Yield 6.20% 6.41% 7.00% 6.40% State and municipal securities * Balance 441 1,972 1,778 4,191 Weighted Average Yield 7.34% 7.16% 7.02% 7.12% Other securities Balance 495 495 Weighted Average Yield 6.77% 6.77% FHLMC stock Balance 250 250 Weighted Average Yield 6.72% 6.72% ----------------------------------------------------------------------------------------------------------------------- Total Balance $1,689 $5,962 $2,028 $9,679 Weighted Average Yield 5.92% 5.88% 5.19% 5.75% -----------------------------------------------------------------------------------------------------------------------
* Yields on fully taxable equivalent basis, based on a marginal tax rate of 34%. 9 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, 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------ Commercial business $270,946 $194,843 $133,885 $ 89,546 $ 56,631 Real estate: One-to four-family residential 71,095 77,359 77,603 83,582 59,738 Five or more family residential and commercial properties 206,628 151,179 113,784 80,010 54,796 - ------------------------------------------------------------------------------------------------------------------- Total real estate 277,723 228,538 325,272 253,138 171,165 Real estate construction: One- to four-family residential 29,695 31,446 32,819 23,462 22,227 Five or more family residential and commercial properties 33,806 10,724 8,985 4,307 4,945 - ------------------------------------------------------------------------------------------------------------------- Total real estate construction 63,501 42,170 41,804 27,769 27,172 Consumer 74,710 58,249 51,788 38,120 20,436 - ------------------------------------------------------------------------------------------------------------------- Subtotal 686,880 523,800 418,864 319,027 218,773 Less deferred loan fees and other (991) (649) (807) (953) (328) - ------------------------------------------------------------------------------------------------------------------- Total loans $685,889 $523,151 $418,057 $318,074 $218,445 =================================================================================================================== Loans held for sale $ 4,377 $ 11,341 $ 1,367 $ 1,612 $ 1,777 ===================================================================================================================
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, 1994 through December 31, 1997 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 balances at December 31, 1994 through December 31, 1997. The following table presents at December 31, 1997, (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.
SECURITIES AVAILABLE FOR SALE Maturing ------------------------------------------------------------ After 1 But (in thousands) Within 1 Year Within 5 Years After 5 Years Total ----------------------------------------------------------------------------------------------------- Commercial business $169,382 $87,771 $13,793 $270,946 Real estate construction 59,299 1,866 2,335 63,501 - ------------------------------------------------------------------------------------------------------ Total $228,681 $89,637 $16,128 $334,447 ====================================================================================================== Fixed rate loans $38,722 $ 4,331 $ 43,053 Variable rate loans 50,915 11,797 62,712 - ------------------------------------------------------------------------------------------------------ Total $89,637 $16,128 $105,765 ======================================================================================================
10 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, 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------ Nonaccrual $1,462 $2,256 $ 449 $ 452 $1,631 Restructured 20 25 29 44 94 - ------------------------------------------------------------------------------------------------------------------ Total nonperforming loans $1,482 $2,281 $ 478 496 1,725 Real estate owned 231 484 3,304 3,227 3,305 - ------------------------------------------------------------------------------------------------------------------ Total nonperforming assets $1,713 $2,765 $3,782 $3,723 $5,030 ================================================================================================================== Accruing loans past-due 90 days or more $ 111 $ 154 $ 82 $ 2 ================================================================================================================== Potential problem loans $ 669 $ 346 $ 239 ==================================================================================================================
For information pertaining to risk elements, see the appropriate sections in "Management Discussion - Loan Portfolio" beginning at page 31 of the Annual Report, "Management Discussion - Nonperforming Assets" beginning at page 34 of the Annual Report and Note 5 of "Notes to Consolidated Financial Statements" beginning at page 65 of the Annual Report, all of which are incorporated herein by reference. 11 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, 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------- Total loans, net at end of period $685,889 $523,151 $418,057 $318,075 $218,448 Daily average loans 613,671 473,887 373,560 264,761 170,701 - ---------------------------------------------------------------------------------------------------------------------- Balance of allowance for loan losses at beginning of period $ 5,282 $ 4,340 $ 3,175 $ 2,354 $ 1,792 Charge-offs: One- to four-family residential (364) (7) Commercial business (1,025) (514) (148) (258) (87) Consumer (270) (199) (119) (111) (47) - ---------------------------------------------------------------------------------------------------------------------- Total charge-offs (1,659) (720) (267) (369) (134) Recoveries: One- to four-family residential 1 7 Commercial business 43 17 45 83 56 Consumer 47 3 5 5 - ---------------------------------------------------------------------------------------------------------------------- Total recoveries 91 27 50 83 61 - ---------------------------------------------------------------------------------------------------------------------- Net charge-offs (1,568) (693) (217) (286) (73) Provision charged to expense 4,726 1,635 1,382 1,107 635 - ---------------------------------------------------------------------------------------------------------------------- Balance of allowance for loan losses at end of period $ 8,440 $ 5,282 $ 4,340 $ 3,175 $ 2,354 ====================================================================================================================== Ratio of net charge-offs during period to average loans outstanding 0.26% 0.15% 0.06% 0.11% 0.04% ======================================================================================================================
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 35 of the Annual Report and Note 6 of "Notes to Consolidated Financial Statements" beginning at page 66 of the Annual Report, both of which are incorporated herein by reference. 12 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, 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ Balance at End of Period % of Total % of Total % of Total % of Total % of Total Applicable to: Amount Loans* Amount Loans* Amount Loans* Amount Loans* Amount Loans* - ------------------------------------------------------------------------------------------------------------------------------ Commercial business $4,109 39.4% $3,403 37.2% $2,006 32.0% $1,537 28.1% $ 421 25.9% Real estate and construction: One- to four-family residential 1,041 14.7 1,115 20.8 699 26.3 773 33.6 513 37.5 Five or more family residential and commercial properties 1,414 35.0 490 30.9 330 29.3 249 26.4 560 27.3 Consumer 334 10.9 499 11.1 386 12.4 295 11.9 144 9.3 Unallocated 1,542 (225) 919 321 716 - ------------------------------------------------------------------------------------------------------------------------------ Total $8,440 100.0% $5,282 100.0% $4,340 100.0% $3,175 100.0% $2,354 100.0% ==============================================================================================================================
*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, 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- 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 $223,514 3.45% $160,020 3.53% $ 97,326 3.82% Savings accounts 38,301 2.75 32,438 2.91 33,145 2.93 Certificates of deposit 282,899 5.66 240,214 5.73 203,978 5.73 - -------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 544,714 4.55 432,672 4.71 334,449 4.89 Demand and other noninterest-bearing 111,492 74,940 54,878 - -------------------------------------------------------------------------------------------------------------------- Total deposits $656,206 $507,612 $389,327 ====================================================================================================================
The following table shows the amount and maturity of certificates of deposit that had balances of more than $100,000:
(in thousands) December 31, 1997 - ----------------------------------------------------------- Remaining maturity Three months or less $ 42,432 Over three through six months 21,879 Over six through twelve months 28,288 Over twelve months 8,686 - ----------------------------------------------------------- Total $101,285 ===========================================================
13 SIGNIFICANT FINANCIAL RATIOS Ratios for the last three years, based on daily average balances, are as follows:
1997 1996 1995 - ------------------------------------------------------------------------ Return on assets 1.21% 0.78% 0.81% Return on equity 14.41 10.15 9.86 Dividend payout ratio Equity to assets 8.42 7.67 8.17
SHORT-TERM BORROWINGS At December 31, 1997, 1996 and 1995, 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 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, 1997, the Company's leverage ratio was 9.33% compared with 10.17% at December 31, 1996. The Company's Tier I and total capital ratios were 10.77% and 11.93%, respectively, at December 31, 1997, compared with 12.51% and 13.48%, respectively, at December 31, 1996. 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 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 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 0.062% for the year 1998. Management also anticipates that its total assessment rate for BIF- insured deposits will be 0.012% for the year 1998. At December 31, 1997, approximately $253.4 million, or 34.2%, 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, interest rate sensitivity, 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 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 took 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 took 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 offices 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 disclosure requirements of the two laws; (ii) eliminate civil liability for violations of the Truth in Savings Act after five years; and (iii) streamline the application process for a number of bank holding company and bank applications; (iv) establish a privilege from discovery in any civil or administrative proceeding or bank examination for any fair lending self-test results conducted by, or on behalf of, a financial institution in certain circumstances; (v) repeal the FDICIA requirement that independent public accountants attest to compliance with designated safety and soundness regulations; (vi) impose a continuous regulatory review of regulations to identify and eliminate outdated and unnecessary rules; and (vii) various other miscellaneous provisions to reduce bank regulatory burden. 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 ITEM 2. PROPERTIES The Company's executive offices and the Main Office of Columbia Bank are located in approximately 42,000 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 $38,000 per month for the first four 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, 1997, Columbia Bank had 12 offices in Pierce County, including the Main Office (7 leased and 5 owned), two offices in Longview (both owned), two offices in Bellevue (1 leased and 1 owned), two offices in Auburn (both owned), one office in Federal Way (owned), one office in Kent (owned) 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 66 of the Annual Report, which is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS For information concerning legal proceedings, see Note 13 of "Notes to Consolidated Financial Statements" at page 73 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 and Dividend Payments" at page 46 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 16, 84 and 86, respectively, of the Annual Report, which are 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 26 through 47 of the Annual Report and "Consolidated Five-Year Summary of Average Balances and Net Interest Revenue" at page 86 of the Annual Report, all of which are incorporated herein by reference. 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA For consolidated financial statements of the Company, see "Audited Financial Statements" beginning at page 50 of the Annual Report which is incorporated herein by reference. Note 18, the "Summary of Quarterly Financial Information (Unaudited)" on page 80 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 "Change in Accounting Firms" on page 46 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 "Election of Directors" beginning at page 4 of the Company's definitive Proxy Statement dated March 18, 1998 (the "Proxy Statement") for the annual meeting of shareholders to be held April 22, 1998. 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. The required information with respect to compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" beginning at page 15 of the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION For information concerning executive compensation see "Executive Compensation" beginning at page 7 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 "Security Ownership of Management" beginning at page 2 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 15 of the Proxy Statement, which is incorporated herein by reference. 19 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, 1997, are incorporated by reference in Item 8: Page ---- Consolidated Statements of Operations--Years ended December 31, 1997, 1996 and 1995 50 Consolidated Balance Sheets--December 31, 1997 and 1996 52 Consolidated Statements of Shareholders' Equity--Years ended December 31, 1997 and 1996 54 Consolidated Statements of Cash Flows--Years ended December 31, 1997, 1996 and 1995 56 Notes to Consolidated Financial Statements 58 Report of Independent Auditors 49 (2) Exhibits: See "Index to Exhibits" at page 23 of this Form 10-K. (b) Reports on Form 8-K: None 20 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 19th day of March, 1998. Columbia Banking System, Inc. (Registrant) By /s/ W. W. Philip -------------------------- W. W. Philip Chairman, President 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 19th day of March, 1998. Principal Executive Officer: /s/ W. W. Philip -------------------------- W. W. Philip Chairman, President and Chief Executive Officer Principal Financial Officer: /s/ Gary R. Schminkey -------------------------- Gary R. Schminkey Senior Vice President and Chief Financial Officer 21 W. W. Philip, pursuant to powers of attorney which are being filed with this Annual Report on Form 10-K, has signed this report on March 19, 1998, as attorney-in-fact for the following directors who constitute a majority of the board of directors. Richard S. DeVine John H. Powell Jack Fabulich Robert E. Quoidbach Jonathan Fine Donald Rodman John P. Folsom Frank H. Russell Margel S. Gallagher Sidney R. Snyder John A. Halleran James M. Will Thomas L. Matson /s/ W. W. Philip ---------------------- W. W. Philip Attorney-in-fact March 19, 1998 22 INDEX TO EXHIBITS Exhibit No. - -------- 3 (a) Restated Articles of Incorporation of the Company.(5) (b) Restated Bylaws of the Company.(3) 10 (a) Lease dated May 7, 1993 between the Company and William B. Swensen Enterprises for Tacoma Main Office premises of Columbia Bank.(1) (b) Stock Option Plan as amended and restated effective April 23, 1997.(4) *(c) Employment agreement between the Company and W. W. Philip effective January 1, 1998, except with respect to sections 4.3 and 4.4 (granting restricted stock awards) which are effective August 28, 1996 and January 28, 1998, respectively. (d) Data processing servicing agreement dated May 3, 1993 between the Company and M&I Data Services.(2) (e) Deferred Compensation Plan for directors and certain key employees effective April 1, 1995. 11 Statement re computation of per share earnings. 13 The Company's Annual Report to Shareholders for the fiscal year ended December 31, 1997.(6) 21 Subsidiaries of the Company 23 24 Powers of Attorney dated February 25, 1998. 27 Financial Data Schedule (1) Incorporated by reference to the Form SB-2 (Registration No. 33-66224) previously filed by the Company, declared effective on August 16, 1993. (2) Incorporated by reference to the Annual Report on Form 10-KSB for the year ended December 31, 1993 previously filed by the Company. (3) Incorporated by reference to the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997 previously filed by the Company. (4) Incorporated by reference to the definitive Proxy Statement dated March 20, 1997 for the Annual Meeting of Shareholders held April 23, 1997. (5) Incorporated by reference to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997 previously filed by the Company. (6) Portions of the Annual Report to Shareholders have been specifically incorporated by reference elsewhere in this report. * The listed documents are management contracts which contain compensatory arrangements. 24 EX-10.(C) 2 EMPLOYMENT AGREEMENT EXHIBIT 10(c) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into by and between Columbia State Bank, a Washington banking corporation ("Columbia Bank") together with Columbia Banking System, Inc., a Washington corporation ("CBSI") (collectively, the "Employer"), and W. W. PHILIP (the "Executive"). Except for the provisions of Section 4.3 and 4.4, this Agreement shall become effective as of January 1, 1998. RECITALS 1. The terms and conditions of an Employment Agreement effective January 1, 1997 provide for Executive's service as the President and Chief Executive Officer of Columbia Bank and the President and Chief Operating Officer of CBSI. The term of that Employment Agreement expires on December 31, 1998 (the "Original Agreement"). 2. On November 19, 1997, and following the passing of Mr. A. G. Espe, Mr. Philip was appointed by the Board of Directors to serve as the Chairman, President and Chief Executive Officer of Columbia Bank and CBSI. 3. Executive and the Board of Directors of CBSI and Columbia Bank have both indicated their desire to extend the term of Executive's service from December 31, 1998 to December 31, 1999, and to enter into this Agreement on the terms and conditions as set forth below, all of which shall supersede and replace the terms and conditions of the Original Agreement. In consideration of the mutual promises made in this Agreement, the parties agree as follows: AGREEMENT 1. EMPLOYMENT. Employer employs Executive and Executive accepts employment with Employer on the terms and conditions set forth in this Agreement. 2. TERM. The term of this Agreement will commence as of January 1, 1998 and will continue until December 31, 1999, unless extended or sooner terminated as provided in this Agreement; provided that the 1996 Restricted Stock Award described in Section 4.3 shall be granted effective August 28, 1996 and the 1998 Restricted Stock Award described in Section 4.4 shall be granted effective January 28, 1998. 3. DUTIES. (a) Executive will be Chairman, President and Chief Executive Officer of Columbia Bank and CBSI. In such capacities, and subject to the authority of the Board of Directors of Columbia Bank and CBSI, as appropriate, Executive will render the executive management and perform the tasks in connection with the affairs of Columbia Bank and CBSI that are normal and customary to the positions that he will hold. (b) Executive will perform such other duties as may be appropriate to his position and as may be prescribed from time to time by the Board, or that are provided in the Bylaws, of Columbia Bank or CBSI. He will be the person to whom all other officers of Columbia Bank and CBSI report. 1 (c) Executive will devote his best efforts and all necessary time, attention, and effort to the business and affairs of Employer and its affiliates, as such business and affairs now exist or hereafter may be changed or supplemented, in order to properly discharge his responsibilities under this Agreement. He may delegate such of his duties as he sees fit to the other officers of CBSI or its subsidiaries. 4. SALARY, BONUS, AND OTHER COMPENSATION. 4.1 SALARY. (a) During the term of this Agreement, Employer will pay Executive an annual base salary of not less than $225,000 per year beginning January 1, 1998. (b) CBSI will guarantee payment of any portion of Executive's compensation that may be allocated to a subsidiary of CBSI. (c) If this Agreement terminates prior to December 31, 1999, then Employer will pay Executive such greater or lesser amount of the agreed compensation as provided in Section 5. 4.2 BONUS. Executive will be eligible to participate in the bonus pools, if any, that the Board of Columbia Bank or CBSI may establish for senior executives, either under an executive incentive plan or otherwise. 4.3 1996 RESTRICTED STOCK AWARD. (a) Grant of Restricted Stock Award. In order to reward Executive for his outstanding prior service and to incent Executive to continue as a director following his employment as a senior executive officer, CBSI has granted to the Executive as a Restricted Stock Award a total of Twenty Thousand (20,000) shares of the no par value common stock of CBSI (the "1996 Shares"). The date of grant was August 28, 1996. (b) Consideration for Issuance of 1996 Shares. In consideration for the issuance of the 1996 Shares, the Executive agrees to remain as an active executive officer and/or Board member of CBSI and Columbia Bank from August 28, 1996 through the period the 1996 Shares are subject to the escrow, as provided herein. Should the Executive fail, without the express approval of the Board of Directors or the Personnel and Compensation Committee of the Board of Directors (the "Committee"), to remain in such capacity, the 1996 Shares will be redelivered by the Escrow Agent to CBSI and will be canceled. CBSI will have no other remedy for such a breach. (c) Escrow. The certificate(s) evidencing the 1996 Shares shall be deposited in escrow immediately upon issuance by CBSI. Columbia Bank shall act as Escrow Agent and, as such, shall hold the 1996 Shares subject to delivery to the Executive or redelivery to CBSI in its corporate capacity, all in accordance with the terms of this Agreement. The Executive hereby grants an irrevocable power of attorney to the Escrow Agent to transfer and deliver the 1996 Shares and the stock certificate(s) evidencing the same in accordance with the terms and provisions of this Agreement and the directions of the Board of Directors or the Committee. (d) Escrow Stock Not Transferable. No transfer, pledge or other disposition of the 1996 Shares may be made by the Executive so long as they are held under and remain subject to the escrow. (e) Term of Escrow. The 1996 Shares shall be subject to escrow until August 28, 2001 unless sooner terminated in accordance with the terms of this Employment Agreement. 2 (f) Dividends and Voting Rights. During the period while the 1996 Shares are held in escrow, all dividends payable with respect the such 1996 Shares shall be paid by the Escrow Agent directly to the Executive and the Executive shall be entitled to exercise all voting rights with respect to such 1996 Shares, all in the same manner and to the full extent as though such 1996 Shares were held by the Executive free of the escrow. (g) Release of Stock From Escrow. 1996 Shares held in escrow pursuant to this Agreement shall be released from such escrow by the delivery of the stock certificate(s) evidencing such 1996 Shares to the Executive (or, in the case of death or disability of the Executive, to the Executive's estate or legal guardian) at the earlier of: (i) August 28, 2001; (ii) The death or disability (as defined below) of the Executive; (iii) The determination by the Board of Directors or the Committee to authorize the release of such 1996 Shares to the Executive upon the occurrence of any event that the Board or Committee determines to warrant such release; or (iv) The occurrence of a change in control, as defined in Section 7.2 of this Agreement. (h) Termination of Service/Forfeiture of 1996 Shares. In the event of the termination of service as an active executive officer and/or Board member of CBSI or Columbia Bank during the period that the 1996 Shares are held in escrow (and the 1996 Shares are not then released pursuant to the provisions of Section 4.3(g) above), such 1996 Shares shall be forfeited to CBSI and all rights of the Executive with respect thereto terminated, unless, in the case of termination by act of Employer, the Board of Directors or the Committee, within thirty (30) days following such termination, authorizes the release of such 1996 Shares to Executive. Upon the expiration of such thirty (30) day period without action by the Board or Committee to release such 1996 Shares to the Executive, the 1996 Shares shall be deemed forfeited and the stock certificate(s) evidencing the same shall be redelivered to CBSI, whereupon they shall be canceled and retired. (i) Reliance by Escrow Agent. The Escrow Agent shall have no liability for action in reliance upon any instructions delivered to it and believed in good faith by it to be from the Board or the Committee. 4.4 1998 RESTRICTED STOCK AWARD. (a) Grant of Restricted Stock Award. In order to reward Executive for his service as Chairman, President and Chief Executive Officer for an extended term and to incent Executive to continue as a director following his employment as a senior executive officer, CBSI hereby grants and issues to and in the name of the Executive as a Restricted Stock Award a total of Twenty Thousand (20,000) shares of the no par value common stock of CBSI (the " 1998 Shares"). The date of grant is January 28, 1998. (b) Consideration for Issuance of 1998 Shares. In consideration for the issuance of the 1998 Shares, the Executive agrees to remain as an active executive officer and/or Board member of CBSI and Columbia Bank from January 28, 1998 through the period the 1998 Shares are subject to the escrow, as provided herein. Should the Executive fail, without the express approval of the Committee, to remain in such capacity, the 1998 Shares will be redelivered by the Escrow Agent to CBSI and will be canceled. CBSI will have no other remedy for such a breach. 3 (c) Escrow. The certificate(s) evidencing the 1998 Shares shall be deposited in escrow immediately upon issuance by CBSI. Columbia Bank shall act as Escrow Agent and, as such, shall hold the 1998 Shares subject to delivery to the Executive or redelivery to CBSI in its corporate capacity, all in accordance with the terms of this Agreement. The Executive hereby grants an irrevocable power of attorney to the Escrow Agent to transfer and deliver the 1998 Shares and the stock certificate(s) evidencing the same in accordance with the terms and provisions of this Agreement and the directions of the Board of Directors or the Committee. (d) Escrow Stock Not Transferable. No transfer, pledge or other disposition of the 1998 Shares may be made by the Executive so long as they are held under and remain subject to the escrow. (e) Term of Escrow. The 1998 Shares shall be subject to escrow until January 28, 2003 unless sooner terminated in accordance with the terms of this Employment Agreement. (f) Dividends and Voting Rights. During the period while the 1998 Shares are held in escrow, all dividends payable with respect the such 1998 Shares shall be paid by the Escrow Agent directly to the Executive and the Executive shall be entitled to exercise all voting rights with respect to such 1998 Shares, all in the same manner and to the full extent as though such 1998 Shares were held by the Executive free of the escrow. (g) Release of Stock From Escrow. 1998 Shares held in escrow pursuant to this Agreement shall be released from such escrow by the delivery of the stock certificate(s) evidencing such 1998 Shares to the Executive (or, in the case of death or disability of the Executive, to the Executive's estate or legal guardian) at the earlier of: (i) January 28, 2003; (ii) The mandatory retirement of Executive from service as a director, as provided in Section 2.3 of CBSI's Bylaws and Section 2.1 of Columbia Bank's Bylaws; (iii) The death or disability (as defined below) of the Executive; (iv) The determination by the Board of Directors or the Committee to authorize the release of such 1998 Shares to the Executive upon the occurrence of any event that the Board or Committee determines to warrant such release; or (iv) The occurrence of a change in control, as defined in Section 7.2 of this Agreement. (h) Termination of Service/Forfeiture of 1998 Shares. In the event of the termination of service as an active executive officer and/or Board member of CBSI or Columbia Bank during the period that the 1998 Shares are held in escrow (and the 1998 Shares are not then released pursuant to the provisions of Section 4.4(g) above), such 1998 Shares shall be forfeited to CBSI and all rights of the Executive with respect thereto terminated, unless, in the case of termination by act of Employer, the Board of Directors or the Committee, within thirty (30) days following such termination, authorizes the release of such 1998 Shares to Executive. Upon the expiration of such thirty (30) day period without action by the Board or Committee to release such 1998 Shares to the Executive, the 1998 Shares shall be deemed forfeited and the stock certificate(s) evidencing the same shall be redelivered to CBSI, whereupon they shall be canceled and retired. (i) Reliance by Escrow Agent. The Escrow Agent shall have no liability for action in reliance upon any instructions delivered to it and believed in good faith by it to be from the Board or the Committee. 4 4.5 BENEFITS. In addition to the base salary and bonus payable or potentially payable to Executive pursuant to this Section 4, Executive will be entitled to receive benefits similar to those offered to other senior executives of Employer. 5. TERMINATION OF AGREEMENT. 5.1 EARLY TERMINATION. (a) This Agreement may be terminated at any time by the Board of Employer or by Executive, and it shall terminate upon Executive's death or disability. Any termination by the Board of Employer other than termination for cause (as defined below) shall not prejudice Executive's right to compensation or other benefits under this Agreement. Except as provided in Section 7, if Executive voluntarily terminates his employment before December 31, 1999 he will be entitled to such payments as he would have the right to receive upon termination for cause under subsection 5.1 (b). (b) Except as provided in Section 7, if Employer terminates this Agreement without cause, Employer shall pay Executive upon the effective date of such termination all salary earned and all reimbursable expenses hereunder incurred through such termination date and, in addition, liquidated damages in an amount equal to the greater of two years' salary or salary for the then- remaining term of the Agreement (without regard to the term) payable hereunder; in such event, all forfeiture provisions regarding the Restricted Stock Award shall lapse. If Employer terminates this Agreement for cause, Employer shall pay Executive upon the effective date of such termination only such salary earned and expenses reimbursable hereunder incurred through such termination date. Executive shall have no right to receive compensation or other benefits for any period after termination for cause. (c) For purposes of this Agreement, the term "cause" shall mean willful misfeasance or gross negligence in the performance of his duties, conduct demonstrably and significantly harmful to Employer (including willful violation of any final cease and desist order applicable to Employer or a financial institution subsidiary), or conviction of a felony. For purposes of this Agreement, "disability" shall mean a medically reimbursable physical or mental impairment that may be expected to result in death, or to be of long, continued duration, and that renders Executive incapable of performing the duties required under this Agreement. The Board or the Committee, acting in good faith, shall make the final determination of whether Executive is suffering under any disability as herein defined and, for purposes of making such determination, may require Executive to submit himself to a physical examination by a physician mutually agreed upon by Executive and the Board or the Committee at Employer's expense. (d) In the event of termination of this Agreement by reason of Executive's death or disability, all forfeiture provisions regarding the Restricted Stock Award shall lapse. 5.2 OBLIGATIONS. Except as otherwise provided in Section 7 or in a particular option grant, Executive's rights, if any, to vested but unexercised stock options will continue for a period of one year after early termination, other than termination for cause. In the case of termination for cause, Executive's unvested stock options, if any, shall terminate immediately. 5 6. RESTRICTIVE COVENANT. 6.1 NONCOMPETITION. (a) Executive agrees that except as otherwise set forth in this Agreement, he will not, during the term of this Agreement and for a period of two years after the later of (i) expiration of the term of this Agreement, or (ii) completion of service as an active executive officer and/or Board member of CBSI or Columbia Bank pursuant to Section 4.3(b) of this Agreement, directly or indirectly, become interested in, as principal shareholder, director, or officer, any financial institution (other than an institution controlled by, controlling, or under common control with Employer and its affiliates) that competes within the State of Washington with Employer or any of its affiliates, with respect to activities of the type performed by such companies within such service area immediately prior to Executive's termination. (b) The restrictions concerning competition after termination as contained in this Section 6.1 shall apply only in the event that Executive voluntarily terminates his employment with Employer without good reason. For purposes of this Agreement, termination for "good reason" shall mean termination by Executive as a result of any material breach of this Agreement by Employer, or any diminution of duties of Executive by the Board of either Columbia Bank or CBSI. The provisions restricting competition by Executive may be waived by the Employer. 6.2 NONINTERFERENCE. During the noncompetition period described in Section 6.1, Executive shall not solicit or attempt to solicit any other employee of Employer or its affiliates to leave the employ of those companies, or in any way interfere with the relationship between Employer and any other employee of Employer or its affiliates. 6.3 INTERPRETATION. If a court or any other administrative body with jurisdiction over a dispute related to this Agreement should determine that the restrictive covenants set forth above is unreasonably broad, the parties authorize such court or administrative body to narrow the covenants so as to make it reasonable, given all relevant circumstances, and to enforce such revised covenants. The covenants in this paragraph shall survive termination of this Agreement. 7. CHANGE OF CONTROL. 7.1 BENEFITS. The parties recognize that a "change of control" of Employer (as defined in Section 7.2) could be detrimental to Executive's continued employment. Accordingly, in order to give further assurances to the Executive to enter into this Agreement, if: (a) There is a change of control of CBSI; and either (b) Within 730 days of such change in control, Executive terminates his employment with Employer; or (c) At any time from and after sixty days prior to the public announcement by Employer of a transaction that will result in the change of control, Employer (or its successor) terminates Executive's employment without cause, then Executive, as of the date of termination of his employment, subject to the remaining provisions of this Section 7.1, shall be paid or provided with: (i) continued payment of his base salary and all benefits provided for in this Agreement for a period of two years following termination; and (ii) vesting of all stock options and lapse of all restrictions with respect to the Restricted Stock Award shall occur. The provisions of this Section 7.1 shall survive expiration of the term of the Agreement. 6 7.2 DEFINITION. For purposes of this Agreement, the term "change of control" shall mean the occurrence of one or more of the following events: (a) One person or entity acquiring or otherwise becoming the owner of twenty-five percent or more of CBSI's outstanding common stock; (b) Replacement of a majority of the incumbent directors of CBSI or Columbia Bank by directors whose elections have not been supported by a majority of the Board of either company, as appropriate; or (c) Dissolution, or sale of fifty percent or more in value of the assets, of either CBSI or Columbia Bank. 7.3 REIMBURSEMENT. In the event the provisions of this Section 7.3 result in imposition of a tax on Executive under the provisions of Internal Revenue Code (S) 4999, Employer agrees to reimburse Executive for the same, exclusive of any tax imposed by reason of receipt of reimbursement under this Section 7.3. 8. DEFERRED COMPENSATION ARRANGEMENT. Executive will be entitled to defer the entire salary and bonus, if any, provided in Sections 4.1 and 4.2 of this Agreement, for the years 1997, 1998 and 1999, which amounts shall accrue interest at the rate paid on 2-year Treasury bills at January 1 of each year, until paid, plus 2% compounded annually, all in accordance with a nonqualified deferred compensation agreement to be entered into between the parties. 9. MISCELLANEOUS. 9.1 This Agreement contains the entire agreement between the parties with respect to Executive's employment with Employer and his covenant not to compete with Employer and its affiliates, and is subject to modification or amendment only upon amendment in writing signed by both parties. 9.2 This Agreement shall bind and inure to the benefit of the heirs, legal representatives, successors, and assigns of the parties, except that Employer's rights and obligations may not be assigned. The provisions of Section 6.1 of this Agreement are intended to confer upon CBSI and its subsidiaries and affiliates the benefits of Executive's covenant not to compete. 9.3 If any provision of this Agreement is invalid or otherwise unenforceable, all other provisions shall remain unaffected and shall be enforceable to the fullest extent permitted by law. 9.4 This Agreement is made with reference to and is intended to be construed in accordance with the laws of the State of Washington. Venue for any action arising out of or concerning this Agreement shall lie in Pierce County, Washington. In the event of a dispute under this Agreement not involving injunctive relief, the dispute shall be arbitrated pursuant to the Superior Court Mandatory Arbitration Rules ("MAR") adopted by the Washington State Supreme Court, irrespective of the amount in controversy. This Agreement shall be deemed as stipulation to that effect pursuant to MAR 1.2 and 8.1. The arbitrator, in his or her discretion, may award attorney's fees to the prevailing party or parties. 7 9.5 Any notice required to be given under this Agreement to either party shall be given by personal service or by depositing a copy thereof in the United States registered or certified mail, postage prepaid, addressed to the following address, or such other address as addressee shall designate in writing: Employer: 1102 Broadway Tacoma, WA 98402 Executive: 100 Shore Acres Road S.W. Tacoma, WA 98498 This Agreement is dated as of January 1, 1998. COLUMBIA STATE BANK By: /s/ Richard S. DeVine ---------------------------------- Richard S. DeVine, Chairman, Personnel & Compensation Committee COLUMBIA BANKING SYSTEM, INC. By: /s/ Richard S. DeVine /s/ W. W. Philip ---------------------------------- -------------------------------- Richard S. DeVine, Chairman, W. W. Philip Personnel & Compensation Committee Executive Compensation Committee 8 EX-10.(E) 3 DEFERRED COMPENSATION PLAN EXHIBIT 10(e) COLUMBIA BANKING SYSTEM, INC. [401 PLUS] DEFERRED COMPENSATION PLAN ARTICLE I PURPOSE; EFFECTIVE DATE The purpose of this Deferred Compensation Plan ("Plan") is to provide a means for Directors and certain key employees of Columbia Banking System, Inc. and its subsidiaries ("Company") to defer future compensation for retirement and to allow the Company to augment those deferrals. It is intended that the Plan will aid in retaining and attracting Directors and employees of exceptional ability by providing such individuals with these benefits. This Plan is effective April 1, 1995. ARTICLE II DEFINITIONS For the purposes of this Plan, the following words and phrases shall have the meanings indicated, unless the context clearly indicates otherwise: 2.1 ACCOUNTS the records maintained by the Company for each Participant in accordance with Article IV with respect to any deferral of Compensation and 401(k) Augmentation pursuant to this Plan. 2.2 BENEFICIARY means the person, persons or entity entitled under Article VI to receive any Plan Benefits payable after a Participant's death. 2.3 BOARD means the Board of Directors of the Columbia Banking System, Inc. 2.4 CHANGE IN CONTROL. A "Change In Control" shall occur: (a) upon the Company's knowledge that any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended ) is or becomes the "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the then outstanding securities; or (b) upon the first purchase of the common stock of the Company pursuant to a tender or exchange offer (other than a tender or exchange offer made by the Company); or (c) upon the approval by the stockholders of the Company of a merger or consolidation (other than a merger or consolidation in which the Company is the surviving corporation and which does not result in any reclassification or reorganization of the Company's then outstanding securities), a sale or disposition of all or substantially all of the Company's assets or a plan of liquidation or dissolution of the Company; or (d) if, during any period of two consecutive years, individuals who at the beginning of such period constitute the board of directors of the Company cease for any reason to constitute at least a majority thereof, unless the election or nomination for the election by the stockholders of the Company of each new director was approved by a vote of at least two- thirds of the directors then still in office who were directors at the beginning of the period. 1 2.5 CODE means the Internal Revenue Code of 1986, as amended. 2.6 COMMITTEE means the Compensation Committee appointed by the Board. 2.7 COMPANY means Columbia Banking System, Inc., a Washington corporation, its subsidiaries and also any other entity affiliated with the Company as may be designed by the Board. 2.8 COMPENSATION in the case of an Employee-Participant means the salary and bonuses paid to such Participant by the Company during the calendar year and considered to be "wages" for purposes of federal income tax withholding, calculated before reduction for any amounts deferred pursuant to this Plan or the 401(k) Plan. "Compensation" in the case of a Director-Participant means the retainer, meeting and committee fees paid to such Participant by the Company during the calendar year, with respect to duties performed as a member of the Board, before reduction for any amounts deferred pursuant to this Plan. Compensation does not include expense reimbursements, or any form of non-cash compensation or benefits. 2.9 DECLARED RATE means interest credited to an Account at the rate of 100% of the 120-month rolling average of the 10-year treasury note rate, credited as simple interest monthly from the date the Elective Deferred Compensation would have been paid, and compounded annually as of each December 31. The Declared Rate is established on each October 1 for the next calendar year. 2.10 DEFERRAL COMMITMENT means a written commitment made by a Participant and submitted to the Committee pursuant to Article III. 2.11 DEFERRAL PERIOD means the period during which a Participant has elected to defer a portion of his unearned Compensation. The Deferral Period shall be a calendar year, except for the initial Deferral Period which is April 1, 1995 through December 31, 1995. 2.12 DETERMINATION DATE means the last day of each calendar month. 2.13 DIRECTOR means a member of the Board, who is not also an employee of the Company. 2.14 DISABILITY means as defined under the Company's Long Term Disability Plan. The Committee will make a determination of disability based on that definition. 2.15 EARLY RETIREMENT DATE means the date on which a Participant terminates employment with the Company, if termination occurs on or after age 55 and completion of five years of Credited Service (whichever occurs last), but prior to his Normal Retirement Date. 2.16 ELECTIVE DEFERRED COMPENSATION. The amount of Compensation that a Participant elects to defer pursuant to a Deferral Commitment. 2.17 EMPLOYEE means an employee of the Company. 2.18 FINANCIAL HARDSHIP means an unforeseeable, immediate and heavy financial need of the Participant, determined by the Committee on the basis of information supplied by the Participant in accordance with the "safe-harbor" standards set forth in the applicable treasury regulations promulgated under Section 401(k) of the Code, or such other standards as are, from time to time, established by the Committee. 2 2.19 401 (k) PLAN means the Columbia Bank 401(k) Plan, a profit-sharing plan established by the Company and qualified under Section 401(a) of the Code, and containing a qualifying Code Section 401(k) arrangement. 2.20 401(k) AUGMENTATION CONTRIBUTION means the Company contribution credited to the Participant's Account under paragraph 4.4. 2.21 NORMAL RETIREMENT DATE means the date on which a Participant terminates employment with the Company, if such termination occurs on or after he attains age 65 and completes 10 years of Credited Service (whichever occurs last). 2.22 PARTICIPANT means any individual who is deferring (or has previously deferred) Compensation in this Plan, and who has not yet received his full Plan Benefit. 2.23 PAYMENT DATE means the first business day of a calendar month on which a Participant is eligible to commence and elects (or the Committee so elects per the Plan) to commence or receive full payment of his Plan Benefit, and which date is 30 days after the Valuation Date. 2.24 PLAN BENEFIT means the benefit payable to a Participant as calculated pursuant to Article V. 2.25 RETIREMENT means an Employee-Participant's termination from employment with the Company, on or following the Participant's Early Retirement Date or Normal Retirement Date, and, in the case of a Director-Participant termination, at any time, of service on the Board. 2.26 RETIREMENT RATE means interest credited to an Account at the rate of 115% of the Declared Rate. 2.27 VALUATION DATE means the Determination Date which precedes the Payment Date by 30 days. The Valuation Date must follow the Participant's Retirement or other termination of employment with the Company. 2.28 YEARS OF CREDITED SERVICE in the case of an Employee-Participant, means the Participant's number of completed calendar years (with more than 6 calendar months counting as 1 year) of employment with the Company. "Years of Credited Service" in the case of a Director-Participant, means the number of months during which the Participant served on the Board for at least 15 days, divided by 12, with any fractional amount in excess of one-half counting as 1 year. ARTICLE III PARTICIPATION AND DEFERRAL COMMITMENTS 3.1 ELIGIBILITY AND PARTICIPATION. (a) ELIGIBILITY. Eligibility to participate in the Plan is limited to Directors and those key Employees of the Company who are designated, from time to time, by the Committee, as Participants. Where a distinction is appropriate, employees participating are "Employee-Participants" and directors participating are "Director-Participants." (b) PARTICIPATION. A Participant may elect to defer unearned Compensation under the Plan with respect to any Deferral Period by submitting a Deferral Commitment to the Committee not later than December 15th of the calendar year immediately preceding the Deferral Period for which the Deferral Commitment is to become effective. The Deferral Commitment shall specify the Participant's Elective Deferred Compensation. No Deferral Commitment under this Plan may be submitted by a Participant or accepted by the Committee as to Compensation already earned at the time of submission. 3 (C) PART-YEAR PARTICIPATION. In the event that an Employee or Director first becomes eligible to participate during a Deferral Period and wishes to defer a portion of his Compensation for such Deferral Period, a Deferral Commitment must be submitted to the Committee no later than 30 days following notification to that individual by the Committee of his eligibility to participate. Any such Deferral Commitments shall be effective only with regard to Compensation earned following the submission thereof to the Committee, and, as to an Employee-Participant, must meet the minimum commitment amount specified in Section 3.2(a). 3.2 FORM OF DEFERRAL; MINIMUM AND MAXIMUM DEFERRAL. A Deferral Commitment may be made in whole dollar or percentage increments of Compensation and shall specify the pay periods to which the deferral (reduction in pay) will be applied; provided, that deferrals of salary by Employee-Participants must be made uniformly from each pay period for which the Deferral Commitment is in effect. A Deferral Commitment may apply to the following elements of Compensation: (a) SALARY DEFERRAL COMMITMENT. An Employee-Participant may elect to defer any portion of his salary; provided, (i) that the minimum deferral to the Plan must equal or exceed $20,000 (as further described below), and (ii) that not more than 50% of salary during a single Deferral Period may be deferred. In satisfying Section 3.2(a)(i) above, the Employee- Participant may make the minimum required $20,000 Deferral Commitment in a single Deferral Period or in consecutive Deferral Periods, not exceeding four, and at a minimum rate of $5,000 per Deferral Period. Once having made the initial Deferral Commitment(s) equaling or exceeding $20,000, the Employee-Participant may make additional Deferral Commitments without regard to the $5,000 minimum amount for a single Deferral Period. (b) BONUS DEFERRAL COMMITMENT. An Employee-Participant may elect to defer all or a portion of the bonus amounts to be paid by the Company in the Deferral Period following the calendar year in which the Deferral Commitment is submitted. (c) RETAINER FEE DEFERRAL COMMITMENT. A Director-Participant may elect to defer all or any portion of his Board retainer fees (including committee fees) for the Deferral Period following the calendar year in which the Deferral Commitment is submitted. (d) MEETING FEE DEFERRAL COMMITMENT. A Director-Participant may elect to defer all or any portion of his Board meeting fees for the Deferral Period following the calendar year in which the Deferral Commitment is submitted. 3.3 LIMITATION ON DEFERRAL. Notwithstanding Section 3.2, the Committee may increase the minimum deferral amount or impose a maximum deferral amount from time to time by giving written notice to all Participants, provided, however, that no such change may affect a Deferral Commitment made prior to the Committee's action. 3.4 DURATION, MODIFICATION OF DEFERRAL COMMITMENT. A Deferral Commitment shall be irrevocable for the Deferral Period(s) specified therein, or if no Deferral Period is specified, until timely modified by the Participant prospectively as to the next Deferral Period or such other Deferral Period(s) as specified by the Participant. A Deferral Commitment may not be modified as to the Deferral Period(s) for which it is in effect, except that the Committee may, in its sole discretion, permit a Participant to terminate or reduce the amount of Elective Deferred Compensation under a Deferral Commitment, prospectively as to Compensation not yet earned, upon a finding that the Participant has suffered a Financial Hardship during such Deferral Period. 4 ARTICLE IV DEFERRED COMPENSATION ACCOUNTS 4.1 PARTICIPANT'S ACCOUNT. The amount of the Elective Deferred Compensation and any 401(k) Augmentation shall be credited to the Participant's Account. 4.2 ELECTIVE DEFERRED COMPENSATION. A Participant's Elective Deferred Compensation shall be credited to the Participant's Account at the same time as the corresponding non-deferred portion of his Compensation becomes or would have become payable. Any withholding of taxes or other amounts with respect to Elective Deferred Compensation which is required by state, federal or local law shall be withheld from the Participant's non-deferred Compensation. 4.3 TYPES OF ACCOUNTS. For record-keeping purposes only, and not as an increase in the overall Account, a Retirement Account (with interest credited at the Retirement Rate) and a Termination Account (with interest credited at the Declared Rate) shall be maintained for each Employee-Participant. The Elective Deferred Compensation and 401(k) Augmentation of an Employee-Participant shall be credited to both the Retirement Account and the Termination Account. A Director-Participant shall have only a Retirement Account which shall be credited with the Director-Participant's Elective Deferred Compensation and interest at the Retirement Rate. 4.4 401(k) AUGMENTATION CONTRIBUTION. An Employee-Participant's Elective Deferred Compensation reduces "compensation" for purposes of the Participant's 401(k) contributions and the Company's match, which are both made to the 401(k) Plan. The Company will credit to the Participant's Account, during each Deferral Period, the dollar amount of the match to the 401(k) Plan which is foregone by the Participant, as a result of his participation in this Plan ("401(k) Augmentation Contribution"). 401(k) Augmentation Contributions shall be credited to the Participant's Account as of December 31 each year. Any withholding of taxes or other amounts with respect to 401(k) Augmentation Contributions which is required by state, federal or local law shall be withheld from the Participant's nondeferred Compensation. 4.5 DETERMINATION OF ACCOUNTS; INTEREST. Each Participant's Retirement Account and Termination Account (as to Employee-Participants) as of each Determination Date shall consist of the balance of the Participant's Account as of the immediately preceding Determination Date, plus the Participant's Elective Deferred Compensation credited, any 401(k) Augmentation Contributions credited and any interest earned, minus the amount of any distributions made since the immediately preceding Determination Date. Interest earned shall be calculated as of each Determination Date based upon the average daily balance of the Account since the preceding Determination Date and shall be credited to the Participants' Accounts at that time. Interest shall be simple interest monthly and compounded annually as of each December 31. 4.6 VESTING OF ACCOUNTS. An Employee-Participant shall at all times be completely vested in the amounts credited to his Account and the interest credited thereto either at the Retirement or Declared Rate, but not both, depending upon the event under which the Participant terminates employment with the Company. A Director-Participant shall at all times be completely vested in the amounts credited to his Account. 4.7 STATEMENT OF ACCOUNTS. The Committee shall submit to each Participant, at least once each calendar year, and at such other times as determined by the Committee, a statement setting forth the balance then credited to each Account maintained for the Participant. 5 ARTICLE V PLAN BENEFITS 5.1 RETIREMENT BENEFIT. The Company shall pay a Plan Benefit equal to the amount of the Participant's Retirement Account to each Participant who incurs Retirement. If the Participant elects an installment payout, interest at the Retirement Rate in effect on the Valuation Date, shall continue to be credited to and paid on the Account until the Participant's Plan Benefit is fully paid. 5.2 TERMINATION BENEFIT. The Company shall pay a Plan Benefit equal to the amount of the Employee-Participant's Termination Account to each Employee- Participant who terminates employment with the Company other than on account of Retirement, death, or Change In Control. If the Employee-Participant elects an installment payout, interest at the Declared Rate in effect on the Valuation Date, shall continue to be credited to and paid on the Account until the Participant's Plan Benefit is fully paid. 5.3 DEATH BENEFIT. Upon the death of a Participant, his Plan Benefit shall be distributed as follows: (a) If the Participant dies after commencement of payment of his Retirement or Termination Account, the Participant's remaining Account shall, be paid to his designated Beneficiary, in accordance with the payout method in effect at Participant's death. (b) If the Participant dies prior to commencement of payment of his Plan Benefit, the Participant's Retirement Account shall be paid to his designated Beneficiary, in accordance with the method previously elected by the Participant, but commencing on the first Payment Date following the Participant's death. 5.4 DISABILITY BENEFIT. The Company shall pay to each Employee- Participant who terminates employment with the Company by reason of Disability, his Retirement Account, in accordance with the timing (commencement) and method previously elected by the Participant. Such a Participant may request a hardship distribution under Section 5.6. 5.5 UNSCHEDULED WITHDRAWALS. Notwithstanding any other provisions of the Plan, a Participant or Beneficiary may elect at any time to receive an immediate lump sum payment of the balance of his Account, reduced by penalty, which shall be forfeited to the Company, equal to ten percent (10%) (or five percent (5%) within two years after a Change in Control) of the balance of such Account(s), in lieu of payments previously elected by the Participant. However, the penalty shall not apply if the Committee determines, based on advice of counsel or a final determination by the Internal Revenue Service or any court of competent jurisdiction, that by reason of the foregoing provision the Participant has recognized or will recognize gross income for federal income tax purposes under this Plan in advance of payment to him of Plan benefits. Whenever a Participant receives a lump sum payment under this Section 5.5, the Participant will be deemed to elect to discontinue all current Deferral Commitments under the Plan effective as of the date of the lump sum payment. The Participant will not be permitted to elect a new Deferral Commitment for a period of one year following receipt of the lump sum payment. 5.6 HARDSHIP DISTRIBUTIONS. Upon a finding by the Committee that a Participant has suffered a Financial Hardship, the Committee may, in its sole discretion, at any time, distribute to the Participant an amount of his Account which does not exceed the amount required to meet the immediate financial needs created by the Financial Hardship and not reasonably available from other sources of the Participant. 6 5.7 COMMENCEMENT AND METHOD OF PLAN BENEFIT. In accordance with paragraph 5.8, a Participant may elect the commencement and method of payment of his Plan Benefit from among the options provided herein: (a) COMMENCEMENT. A Participant's Plan Benefit shall commence or be paid following his Retirement or other termination of employment with the Company, on the first Payment Date elected by the Participant or as otherwise determined by the Plan. A Participant may elect to postpone commencement of his Plan Benefit for up to 10 years following Retirement or other termination of employment, but not beyond the Payment Date next following his 70th birthday. (b) DETERMINATION OF ACCOUNT. A Participant's Account, for purposes of distribution of his Plan Benefit, shall be determined as of the Valuation Date. Interest shall be thereafter credited, in the case of an installment payout, as provided herein. (c) METHOD OF PAYOUT. A Participant may elect to have the Company commence or pay his Plan Benefit in a lump sum, or in 60 or 120 substantially equal monthly installments. (d) NO ELECTION. If a Participant has not made a valid election as to the commencement of payout of his Plan Benefit, the Committee shall commence distribution on the first Payment Date which follows Retirement or other termination of employment. If no valid election is in effect as to the method of payout, distribution shall be made in 120 substantially equal monthly installments. 5.8 ELECTION BY PARTICIPANT. Commencing at the time of initial participation in the Plan, a Participant may provide the Committee with a written designation of his election as to the timing (commencement) and method of payment of his Plan Benefits. A Participant's election under this paragraph 5.8 becomes irrevocable (may be changed only by incurring a penalty) 12 months prior to Retirement (or other termination of employment in the case of an Employee-Participant). Any change made by a Participant within the above 12 months may be dishonored by the Committee and if honored, requires a 10% reduction (forfeiture) of the Plan Benefit applied to the Participant's Account on the applicable Determination Date) otherwise payable to the electing Participant. Once payment of a Participant's Plan Benefit commences, the Committee retains discretion to alter the method of payout on the written request of a Participant or Beneficiary, but may refuse a request in its sole discretion. In addition, the Committee may elect, notwithstanding any contrary Participant election, to pay in a lump sum, any Account (or to accelerate payment of the balance thereof) which is less than $5,000 as of any date it otherwise becomes payable in whole or in part. 5.9 WITHHOLDING; PAYROLL TAXES. The Company shall withhold from payments made hereunder any taxes or other amounts required to be withheld from such payments under federal, state or local law. ARTICLE VI BENEFICIARY DESIGNATION 6.1 BENEFICIARY DESIGNATION. Each participant shall have the right, at any time, to designate any person or persons (including trusts and other entities) as his Beneficiary or Beneficiaries (both primary as well as secondary) to whom benefits under this Plan shall be paid in the event of the Participant's death prior to complete distribution of his Plan Benefit. Each Beneficiary designation shall be in a written form prescribed by the Committee, and will be effective only when filed with the Committee during the Participant's lifetime. Any married Participant who designates someone other than his spouse as the sole primary Beneficiary of his Plan Benefit, must obtain written consent of the spouse. 7 6.2 AMENDMENTS. Any Beneficiary designation may be changed by a Participant (without spousal consent if required under paragraph 6.1), by the filing of a new Beneficiary designation with the Committee. The filing of a new Beneficiary designation form will cancel all Beneficiary designations previously filed. 6.3 NO BENEFICIARY DESIGNATION. In the absence of an effective Beneficiary designation or if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's Plan Benefit, then the Participant's designated Beneficiary shall be deemed to be the Participant's estate. 6.4 PAYMENT TO GUARDIAN. If a Plan Benefit is payable to a minor or a person legally declared incompetent, the Committee may direct payment of such Plan benefit to the guardian, legal representative or person having the care and custody of such minor or incompetent. The Committee may require proof of incompetency, minority, incapacity or guardianship as it may deem appropriate prior to distribution of the Plan Benefit. Such distribution shall completely discharge the Committee and the Company from all liability with respect to such benefit. 6.5 EFFECT OF PAYMENT. Payment to the proper Beneficiary as determined in this Article VI, shall completely discharge the Company's obligations under this Plan as to the affected Participant's Account. ARTICLE VII ADMINISTRATION 7.1 COMMITTEE; DUTIES. This Plan shall be administered by the Committee. Members of the Committee may be Participants under this Plan. The Committee shall have such powers and duties as may be necessary to discharge its responsibilities. These power shall include, but not be limited to, interpretation of the Plan provisions, determination of amounts due to any Participant, the rights of any Participant or Beneficiary under this Plan, the right to require any necessary information from any Participant, and any other activities the Committee deems necessary or helpful. 7.2 AGENTS. The Committee may, from time to time, employ other agents and delegate to them such administrative duties as it sees fit, and may from time to time consult with counsel who may be counsel to the Company. 7.3 BINDING EFFECT OF DECISIONS. The decision or action of the Committee related to the administration, interpretation and application of the Plan and any rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan. 7.4 INDEMNITY OF COMMITTEE. To the extent permitted by applicable law, the Company shall indemnify, hold harmless and defend the members of the Committee against any and all claims, loss, damage, expense or liability arising from any action or failure to act with respect to this Plan, except with respect to acts of gross negligence on the part of any Committee member. ARTICLE VIII CLAIMS PROCEDURE 8.1 CLAIM. Any person claiming a benefit, requesting an interpretation or ruling under the Plan, or requesting information under the Plan shall present the request in writing to the Committee which shall respond in writing as soon as practicable. 8 8.2 DENIAL OF CLAIM. If the claim or request is denied, the written notice of denial shall state: (a) The reasons for denial, with specific reference to the Plan provisions on which the denial is based; (b) A description of any additional material or information required and an explanation of why it is necessary; and (c) An explanation of the Plan's claim review procedure. 8.3 REVIEW OF CLAIM. Any person whose claim or request is denied or who has not received a response within 30 days may request review by notice given in writing to the Committee. The claim or request shall be reviewed by the Committee who may, but shall not be required to, grant the claimant a hearing. On review the claimant may have representation, examine pertinent documents and submit issues and comments in writing. 8.4 FINAL DECISION. The decision on review shall normally be made within 60 days. If an extension of time is required for a hearing or other special circumstances, the claimant shall be notified and the time limit shall be 120 days. The decision shall be in writing and shall state the reasons and the relevant plan provisions. All decisions on review shall be final and bind all parties concerned. ARTICLE IX AMENDMENT AND TERMINATION OF PLAN 9.1 AMENDMENT. The Board may at any time amend the Plan in whole or in part, provided, however that no amendment shall be effective to decrease or restrict the amount credited to any Account maintained under the Plan as of the date of Amendment. Changes in the rate or computation of interest shall be subject to the following restrictions: (a) NOTICE. A change shall not become effective before adoption by the Board and at least 30 days written notice of the amendment to the affected Participant, whichever occurs last. (b) CHANGE IN CONTROL. Any change in the definition of Interest after a Change In Control shall apply only to those amounts credited to a Participant's Account after the Change In Control. 9.2 COMPANY'S RIGHT TO TERMINATE. The Board may at any time partially or completely terminate the Plan if, in its judgment, the tax, accounting, or other effects of the continuance of the Plan, or potential payments thereunder, would not be in the best interests of the Company. (a) PARTIAL TERMINATION. The Board may partially terminate the Plan by instructing the Committee not to accept any additional Deferral commitments. In the event of such a partial termination, the Plan shall continue to operate and be effective with regard to Deferral Commitments entered into prior to the effective date of such partial termination. 9 (b) COMPLETE TERMINATION. The Board may completely terminate the Plan by instructing the Committee not to accept any additional Deferral Commitments, and terminate all ongoing Deferral Commitments. In the event of such a complete termination, the Plan shall cease to operate and the Committee shall payout to each Participant the balance in his Retirement Account in substantially equal monthly installments, including interest at the Retirement Date, amortized over the period listed below based on the Retirement Account balance on the Determination Date immediately preceding the effective date of such complete termination: Account Balance Payout Period ----------------------------- ------------- Less than $10,000 2 Years $10,000 but less than $50,000 5 Years $50,000 or more 10 Years Notwithstanding the foregoing, any properly elected Unscheduled Withdrawal, made prior to the Plan's termination date, shall be paid in accordance with Section 5.5. ARTICLE X MISCELLANEOUS 10.1 UNFUNDED PLAN. This Plan is intended to be an unfunded plan maintained primarily to provide deferred compensation benefits for a select group of "management or highly-compensated employees" within the meaning of Sections 201, 301 and 401 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and therefore to be exempt from the Provisions of Parts 2, 3 and 4 of Title I of ERISA. Accordingly, the Plan shall terminate and no further benefits shall accrue hereunder in the event it is determined by a court of competent jurisdiction or by an opinion of counsel that the Plan constitutes an employee pension benefit plan within the meaning of Section 3(2) of ERISA which is not so exempt. In the event of a termination under this Section 10.1, all ongoing Deferral Commitments shall terminate, no additional Deferral Commitments will be accepted by the Committee, and the amount of each Participant's Account shall be distributed to such participant at such time and in such manner as the Committee, in its sole discretion, determines. 10.2 UNSECURED GENERAL CREDITOR. Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interest or claims in any property or assets of Company, nor shall they be Beneficiaries of, or have any rights, claims or interests in any life insurance policies, annuity contracts or the proceeds therefrom owned or which may be acquired by Company. Such policies, annuity contracts or other assets of the Company shall not be held under any trust for the benefit of Participants, their Beneficiaries, heirs, successors or assigns, or held in any way as collateral security for the fulfilling of the obligations of the Company's assets and policies shall be, and remain, the general, unpledged, unrestricted assets of the Company. The Company's obligation under the Plan shall be that of an unfunded and unsecured promise to pay money in the future. 10.3 NONASSIGNABILITY. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt, the Participant's Account, which is expressly declared to be unassignable and non-transferable. No part of a Participant's Account shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency. 10 10.4 NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between the Company and the Participant, and the Participant (or his Beneficiary) shall have no rights against the Company except as may otherwise be specifically provided herein. Moreover, nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of the Company or to interfere with the right of the Company to discipline or discharge him at any time. 10.5 PROTECTIVE PROVISIONS. A Participant will cooperate with the Company by furnishing any and all information requested by the Company, in order to facilitate the payment of benefits hereunder, and by taking such physical examinations as the Company may deem necessary and taking such other action as may be requested by the Company. 10.6 GOVERNING LAW. The provisions of this Plan shall be construed and interpreted according to the laws of the State of Washington. 10.7 VALIDITY. In case any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision had never been inserted herein. 10.9 NOTICE. Any notice or filing required or permitted to be given to the Committee under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to any member of the Committee. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. 10.10 SUCCESSORS. The provisions of this Plan shall bind and inure to the benefit of the Company and its successors and assigns. The term successors as used herein shall include any corporate or other business entity which shall, whether by merger, consolidation, purchase or otherwise acquire all or substantially all of the business and assets of the Company, and successors of any such corporation or other business entity. COLUMBIA BANKING SYSTEM, INC. By: /s/ Evans Q. Whitney --------------------------------------- Evans Q. Whitney, Senior Vice President - Human Resources 11 EX-11 4 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 EXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS Columbia Banking System, Inc.
(in thousands, except per share data) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------- EARNINGS Net income (loss) applicable to common stock $9,275 $4,635 $3,691 Interest on convertible subordinated notes, net of income tax effects--Note 1 - ----------------------------------------------------------------------------------------------------------------------- Pro forma net income (loss) available to common stock $9,275 $4,635 $3,691 ======================================================================================================================= SHARES Average number of diluted common shares outstanding 6,777 4,931 4,385 Additional shares assuming conversion of convertible subordinated notes--Note 1 - ----------------------------------------------------------------------------------------------------------------------- Pro forma shares 6,777 4,931 4,385 ======================================================================================================================= Diluted earnings (loss) per share $ 1.37 $ 0.93 $ 0.84 =======================================================================================================================
Note 1. At December 31, 1995, the Company convertible subordinated notes of $2.7 million. 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 268,000 shares for the year ended December 31, 1995. The related interest expense on these notes (net of income tax effects) was $270,000 for the years ended December 31, 1995. 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 43 of the Annual Report, which is incorporated herein by reference. EX-13 5 THE COMPANY'S ANNUAL REPORT TO SHAREHOLDERS Columbia Banking System 1997 annual report the people the numbers [NASDAQ STOCK MARKET SYMBOL] COLB Columbia Banking System, Inc. is a Tacoma, Washington-based bank holding company which operates Columbia Bank, a state-chartered full-service commercial bank with 21 banking offices in Pierce, King and Cowlitz counties. The cornerstone of Columbia Bank's business approach 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. Loyalty The market demands that we have the right locations, the right products and the right services. It also demands something that has become rare in banking today: loyalty. For the fifth consecutive year, Columbia Banking System achieved record results, proof that our commitment to the communities and customers we serve may be one of the most distinguishing characteristics of our company. Proof that loyalty is rewarded. 1 [$865 million] 2 Assets With new branches and growing regional awareness of our business style, plus highly tailored product offerings, asset growth continued on pace - growing 22% for the year. 1995 1996 1997 ------------------------ dollars in millions $520 $706 $865 3 [PICTURE OF MAN] 4 Customer Focus [PICTURE OF MOTHER AND BABY] Now it's popular for banks to claim that they are customer-oriented, despite the trends to industry consolidation, more automation and fewer real bankers. Columbia's claim is unique. The whole reason we exist comes from a commitment to serve people as individuals. And even though we offer as much technology as any competitor, we'll never lose sight of what our business is really about: helping our customers in their businesses and in their personal lives. 5 [GRAPHIC: 21 BRANCHES] 6 21 Branches During 1997 we completed our first acquisitions: Cascade Community Bank and Bank of Fife. These banks were selected because each fit well with our culture and our style of business. And we've applied everything we know in maintaining the continuity and the relationships already established with existing customers. 16* 13* 1996 1995 * these numbers do not reflect the 1997 mergers which have been accounted for on a pooling of interests basis. 7 [PICTURE OF VIOLIN] 8 Community Spirit It's another measure of our loyalty to our customers: giving back for the greater good. Because being a member of our communities means more than providing outstanding service and personalized products. Our giving is focused on youth programs and education, health programs, community revitalization and the arts. And it's Columbia volunteers participating in programs as diverse as the people and businesses we serve. 9 Deposits A strong regional economy, growing awareness of our banking style, a larger branch system and customized product offerings - all delivered with highly personalized service - contributed to our growth in deposits: a 24% increase over last year. 1995 1996 1997 ------------------- dollars in millions $447 $597 $740 10 (GRAPHIC: $740 MILLION) 11 Effective Nothing beats experience. Experience and talent means decentralized decision making, enabling us to work much closer to our customers. Not to mention faster, with more flexibility and accuracy. And experience means more than efficiency: it translates into effectiveness. For our company and for our customers we've built our bank around our bankers: nothing beats real people, doing a job they love, for people they know. 12 [PICTURE OF THREE PEOPLE] 13 [GRAPHIC: $686 MILLION] 14 Loans Columbia Bank. A community bank with big bank resources. No canned responses. No hypothetical formulas. Decisions made in context, instead of in a vacuum. Treating customers as individuals. Making the extra effort to establish and maintain face-to-face relationships. Nothing beats the interest we show in our customers.
1997 1996 1995 ------------------------ millions $686 $523 $418
15 Consolidated Highlights/1/
1997 1996 percent change --------------------------------------------- dollars in thousands except per share amounts for the year Net interest income $ 35,231 $ 25,344 39.0% Provision for loan losses 4,726 1,635 189.1 Net income 9,275 4,635 100.1 Net income excluding unusual items/2/ 8,165 5,247 55.6 per share Net income (basic) $ 1.41 $ 0.97 45.4% Net income excluding unusual items2 (basic) 1.24 1.09 13.8 Book value 11.90 10.48 13.5 at year-end Assets $864,555 $706,448 22.4% Loans 685,889 523,151 31.1 Allowance for loan losses 8,440 5,282 59.8 Deposits 740,430 596,504 24.1 Shareholders' equity 78,353 68,224 14.8 Number of full-time equivalent employees 327 294 Number of banking offices 21 20 financial ratios Net interest margin 4.96% 4.58% Return on average assets 1.21 0.78 Return on average equity 14.41 10.15 Return on average assets excluding unusual items/2/ 1.07 0.88 Return on average equity excluding unusual items/2/ 12.68 11.49 Average equity to average assets 8.42 7.67 risk-based capital ratios Tier I capital 10.77% 12.51% Total capital 11.93 13.48 Leverage ratio 9.33 10.17
/1/ All numbers reflect the 1997 mergers which have been accounted for on a pooling of interests basis. /2/ Unusual items include: Key Man Life Insurance proceeds of $3.5 million (non-taxable), additional loan loss provision of $1.3 million (net of tax), and merger related expenses of $1.1 million (net of tax). 16 To Our Shareholders [INDIVIDUAL PICTURES/SIGNATURES OF W.W. PHILIP, MELANIE DRESSEL AND H. R. RUSSELL] At Columbia Bank, we are not solely in the business of money, checking accounts or business loans. We are in the business of people. Our people, and the way they relate to our customers, is what makes us successful. Our people are the foundation of your Company. With the strength of that foundation, our momentum did not slow in 1997. Rather, I am pleased to announce record earnings growth for the year. Comparing 1997 earnings with 1996, excluding certain nonrecurring items in both years, net income from operations increased 56 percent. Including these items, our profit for the year was $9.3 million, an increase of 100 percent over 1996, or $1.41 on a per share basis. We generated strong earnings while continuing substantial investments in expanding the franchise. Columbia Bank's network of 16 offices at the end of 1996 grew to 21 at the end of 1997, through a combination of internal branching and external growth. Three new offices were added with the completion of our first two bank acquisitions during the fourth quarter. Cascade Community Bank in Auburn and Bank of Fife were natural market extensions for Columbia Bank, and attractive opportunities given their similar management styles and philosophies of service. Since year-end, we have opened two more offices in Pierce County, and we plan to continue building our presence in selected markets at a similar pace. Specifically, we are now seeking opportunities in Thurston County (south of Pierce County) and northwest along the Kitsap Peninsula. 17 [PICTURE OF W.W. PHILIP, CHAIRMAN AND CHIEF EXECUTIVE OFFICER] Our expansion is timed to match the market demand for our approach to banking. So far, we have seized the opportunities available, serving customers who are disillusioned by industry consolidation and its effect on customer service. Our employees operate with the individual authority to make decisions and respond to customers with minimal delay. We offer the products and technology to compete with the big banks, but as far as our ability to know our customers and exceed their expectations, there really is no competition. So we continue to branch out in order to fill that need. The overall size of this organization, however, is not a top priority. We have not identified a specific target. Although aggressive growth is a part of our business plan, our growth is careful and well planned, as evidenced by our asset quality. While total assets reached $864.6 million at December 31, 1997, non- performing assets represent just 0.20 percent of that total, down from a low 0.39 percent last year. Our operating efficiency has also improved, down to 69.0 percent for 1997, from 76.7 percent for 1996. However, this too, is not a priority measure of our performance. Our challenge is to balance expense control while maximizing our expansion during this period of opportunity available due to the bank merger and acquisition trend. Also, we are recognizing certain economies of scale as our branches continue to grow, improving their efficiency. As we add branches, we add convenience and strengthen our competitive position. In May of 1997, your Company announced two particularly significant executive promotions. Melanie J. Dressel and H. R. "Hal" Russell were appointed Executive Vice Presidents, assuming responsi- 18 bility for all of the operational and lending functions of Columbia Bank. Melanie oversees the operations, investments, private banking and marketing/communications divisions of Columbia Bank, as well as the branch network. Hal directs credit production and administration, including all commercial, consumer and real estate lending functions, as well as the cash management, risk management, and compliance/CRA (Community Reinvestment Act) departments. These two appointments are important to the future of Columbia Bank. I believe these individuals solidly represent the culture and business philosophy that has brought this organization to where it is today. They are positioned to manage the direction of this Company guided by the same corporate vision that our recently deceased Chairman Arne Espe and I originally developed. This brings me to a sad chapter in our 1997 story. Arnold G. Espe passed away on November 9, following a year-long battle with cancer. Arne's immeasurable contributions to Columbia Banking System go without saying. Following his vision, this organization has achieved great success over the years. In 1990, he led a group of investors who acquired the predecessor to what is now Columbia Bank and Columbia Banking System. After recapitalizing and strengthening that organization, he moved its headquarters to Tacoma in 1993, and he and I joined forces to supervise the reorganization and expansion of Columbia Bank. Strategically, he saw a void in Pierce County left by massive industry consolidation, a gap where a new local, customer-focused, community-style bank should be. This began the rapid growth of your Company. Arne was a truly gifted entrepreneur, and a highly respected colleague. As we go forward, Columbia's progress will be an ongoing celebration of Arnold Espe's legacy. 19 In closing, I wish to express my appreciation to all of the employees of Columbia Bank for their talent and commitment to the success of this organization. They are an outstanding team, and they are responsible for Columbia's strong image, quality and performance. They are proud of what they have accomplished and proud of their association with Columbia Bank. Thank you, our shareholders, for your contributions to our progress and support of our goals. /s/ W.W. Philip W. W. Philip Chairman and Chief Executive Officer A Message from Melanie J. Dressel Columbia Bank's deposit generation continued at a healthy pace last year. Total deposits grew 24 percent to $740.4 million at year-end 1997. Importantly, all of this increase occurred in "core deposits," while brokered and other wholesale deposits decreased to just $3.5 million at year-end 1997, as compared with $30.3 million at year-end 1996. Our stable core deposit base is indicative of both the Bank's growing visibility and consumer acceptance of our banking style. Demand for our service translates into our growing share of the retail market. This strong demand supports the aggressive expansion of our branch system. With each new location, we add convenience for our existing customer base which strengthens our overall growth potential. We listen to specific location suggestions from our customers, identifying targets for profitable branch- 20 ing through market studies and research. Branch expansion, of course, is predicated on putting the right bankers in place to ensure our ongoing success. While management remains focused on expanding the branch system, we are equally focused on our responsibility to provide the highest quality products and services to our customers. We continuously review our existing product menu, while investigating new options and enhancements. Technology plays a major role in executing our growth strategy, for the purposes of both business development and cost savings. The Bank is committed to constructing a sound infrastructure to support electronic commerce. An example of this is our Cash Management division, operating with one of the most sophisticated systems available. Our diversified programs are tailored to the requirements of each organization to efficiently and effectively manage cash flows, and the system is highly responsive to the unique structure of each business account relationship. Columbia Bank's ability to remain competitive, efficient and effective requires us to be a technologically sound organization. This commitment is exemplified by information technology projects currently in motion. An example of this is a new check imaging method which is being developed as an alternative to returning checks with statements, whereby users can view a check image via CD-ROM. This should be particularly beneficial in our competition for commercial relationships. Another project deals with the Internet. The Bank's website is being comprehensively redesigned, and the new version will be live on the Internet in April of this year. With this new website, 21 we are researching web banking as a home banking option. Although we have reviewed and tested numerous PC software based applications for home banking, none have met the standard of quality we wish to make available to our customers. Accordingly, we are considering transactional banking on the Internet. Customers would be able to obtain account balances and transfer funds from their home or office by accessing our website at www.columbiabank.com. Columbia Bank has developed a project plan to address the Year 2000 issue. In addition to our internal preparations, our data processing service provider is allocating substantial investments and resources to address the issue of Year 2000 compliance. While we strive for excellence in each of these areas, we hold our civic obligation in high esteem. Columbia contributes significant resources back to the communities we serve. Through a combination of charitable donations, as well as volunteer and fund-raising efforts, we aim to make a recognizable impact on the vitality of our cities. With local roots, we take responsibility for helping to improve educational, health and youth services in the areas where we operate. That is what it means to be a community bank. In all that we do, we are committed to making a difference for our customers and our communities. This is the true measure of our success. /s/ Melanie J. Dressel Melanie J. Dressel Executive Vice President Retail Banking 22 A Message from H. R. Russell From the lending perspective, Columbia Bank's growth remains impressive. Looking at loan totals, our portfolio increased 31 percent to $685.9 million at year-end, after accounting for our 1997 acquisitions. This momentum shows no signs of subsiding, given our healthy Northwest regional economy and our strategic position in the marketplace. Perhaps our greatest strength relative to loan production is Columbia Bank's ability to take a proactive approach to making loans, which differentiates us from the larger out-of-state banks we compete with so closely. At the same time, with higher lending limits than the community banks in our markets, we are positioned to be more flexible to the needs of our customers. Whether it be our prompt response time, local management or breadth of experience, I believe our performance shows that we have a strong advantage over our competitors. Our commercial bankers work with the autonomy to tailor credit accommodations to each unique client profile. This is not a cookie-cutter process - our lenders possess the talent and authority to operate outside of such boundaries. Evidence is found in the quality of our earning assets, which continued to improve in 1997 despite the robust growth in our portfolio. Columbia's ratio of nonperforming loans to total loans (0.22 percent) is really a measure of the quality of our people and their knowledge of this business. Controlling credit risk is paramount to the Company's overall growth strategy. Therefore, management's selection of qualified bankers is our top priority. 23 We choose lenders who have a high degree of familiarity with their market areas. On average, our lenders and branch managers bring 15 years of in-market banking experience to their positions. With such knowledge of our markets and well- established relationships within those markets, Columbia Bank maintains the decision making process as close to the customer as possible. This style of doing business gives us the opportunity to attract successful commercial clientele. Focused on relationship banking to small and medium-sized businesses, our client mix is well diversified in terms of product and industry, also giving strength to the portfolio. Our net interest margin improved to 4.96 percent for 1997, compared with 4.58 percent for 1996. Loans are generating higher yields as we continue to increase the commercial business loan category within our portfolio, now at 39.5 percent of total loans. Emphasis is also being placed on production in our private banking division as well as the higher-earning consumer sector. We have begun to view consumer lending as a somewhat untapped resource for the Bank. Now that we have built a larger retail branch system, it makes sense to devote more attention to this area of lending while taking measures to reduce our exposure to risk on the consumer side. With expanded and competitive consumer lending activities, we are adding another attractive element to the complete banking relationship. With the above-mentioned strategies in place, I believe Columbia Bank is positioned to increase its lending market share. We will continue working hard to make the most of our business opportunities. /s/ H.R. Russell H. R. Russell Executive Vice President Commercial Banking March 2, 1998 24
Consolidated Report of Consolidated Consolidated Statements of Consolidated Report of Independent Statements of Balance Shareholders' Statements MD&A Management Auditors Operations Sheets Equity of Cash Flows Notes - ---- ---------- ----------- ------------- ------------ ------------- ------------- ----- 26 48 49 50 52 54 56 58 --------------------------------------------------------------------- | audited financial statements
Consolidated Consolidated Five-Year Five-Year Summary Statements of Average Balances Corporate Shareholder Branch of Operations and Net Interest Revenues Directory Information Locations - ------------- ------------------------- --------- ----------- --------- 84 86 88 89 90 - ---------------------------------------------- | Supplemental Financial Data (Unaudited)
25 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. This discussion contains certain forward-looking statements within the meaning of the federal securities laws. Actual results and the timing of certain events could differ materially from those projected in the forward-looking statements due to a number of factors. Specific factors include, among others, the effect of interest rate changes, risk associated with bank acquisitions or opening new branches, expense control and general economic conditions. Overview Columbia Banking System, Inc., a Washington corporation, is a registered bank holding company whose wholly owned subsidiary, Columbia State Bank ("Columbia Bank"), conducts a full-service commercial banking business. Headquartered in Tacoma, Washington, the Company serves small and medium-sized businesses, professionals and other individuals through 21 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 commu-nities in southwestern Washington. At December 31, 1997, based on total assets of $864.6 million, the Company was the largest publicly traded bank holding company headquartered in Washington engaged primarily in commercial banking. The Company was reorganized and additional management was added in 1993 in order to take advantage of commercial banking business opportunities resulting from increased consolidation of banks in the Company's principal market area, primarily through acquisitions by out-of-state holding companies, and the resulting dislocation of customers. Since the reorganization, Columbia Bank has grown from four branch offices at January 1, 1993 to its present twenty-one branch offices and currently has regulatory approval to open four additional branch offices in its market area. Between January 1, 1993 and December 31, 1997, the Company increased its consolidated assets to $864.6 million from $198.2 million, its loans to $685.9 million from $146.2 million and its deposits to $740.4 million from $151.9 million. While accomplishing this expansion, the Company's asset quality has improved. At December 31, 1997, the Company's nonperforming assets constituted 0.20% of total assets, as compared with 0.39%, 0.73% and 0.94% at December 31, 1996, 1995 and 1994, respectively. Although nonperforming assets are currently low, rapid growth could increase future losses. Accordingly, the Company increased the loan loss provision by $2.0 million in the fourth quarter of 1997, as well as adding $1.0 million in the second quarter of 1997, and increasing the monthly provision to $130,000 from $110,000 in April 1997. Management believes the ongoing consolidation among financial institutions in Washington has created significant gaps in the ability of large banks operating in Washington to serve certain customers, particularly the Company's target customer base of small and medium-sized businesses, professionals and other individuals. The Company's Columbia Banking System ...................................MD&A 26 business strategy is to provide its customers with the financial sophisti-cation and breadth of products of a regional bank while retaining the appeal and service level of a community bank. Management believes that as a result of the Company's strong commitment to highly personalized relationship-oriented customer service, its varied products, its strategic branch locations and the long-standing community presence of its managers, lending officers and branch personnel, it is well positioned to attract new customers and to increase its market share of loans and deposits. The Company's goal over the next several years is to create a well-capitalized, customer focused, Pacific Northwest commercial banking institution with a significant presence in selected markets. The Company intends to effect this growth strategy through a combination of growth at existing branch offices, new branch openings (usually following the hiring of an experienced branch manager and/or lending officer with strong community ties and banking relationships) and acquisitions. In particular, the Company anticipates continued expansion in Pierce County, north into King County (the location of Seattle and Bellevue), south into Thurston County (the location of the state capitol, Olympia), and northwest into Kitsap County (the location of Bremerton and Port Orchard). In order to fund its commercial and consumer lending activities and to allow for increased contact with customers, the Company is establishing a branch system catering primarily to retail depositors, supplemented by business banking customer deposits and other borrowings. The Company believes this mix of funding sources will enable it to expand its commercial lending activities rapidly while attracting a stable core deposit base. In order to support its strategy of growth without compromising its personalized banking approach or its commitment to asset quality, the Company has made significant investments in experienced branch, lending and administrative personnel and has incurred significant costs related to its branch expansion. Although the Company's expense ratios have improved since 1993, management anticipates that the ratios will remain relatively high by industry standards for the foreseeable future due to the Company's aggressive growth strategy and emphasis on convenience and personal service. During the first quarter of 1997, the Company opened a second Bellevue branch and a new branch in the south King County commercial market of downtown Kent. The Company completed its first bank acquisitions during the fourth quarter of 1997, merging Cascade Bancorp, Inc. ("Cascade") and Bank of Fife ("Fife") into Columbia Bank, thereby adding three branch office locations. Cascade operated three banking offices in the south King County market area. Two of the branches are located in Auburn (a market in which Columbia did not have a branch) and the third in downtown Kent. Columbia consolidated its Kent branch office into the Cascade branch location. Fife operated one banking office in downtown Fife, a commercial market in which Columbia did not have a branch. At the end of 1997, the Company had twenty-one branches, twelve in Pierce County, six in King County, and three in Cowlitz County. Since beginning its major Pierce County expansion in August 1993, the Company has grown from four to twenty-one branches through a combination of internal and external growth by acquisition. Also, at the end of the year, construction was nearing completion on two more offices in Tacoma. Columbia Banking System ...................................MD&A 27 The Company opened its twenty-second branch in mid-January 1998, located in the Westgate area of north Tacoma. The Westgate branch is the thirteenth location in Pierce County. The twenty-third branch (fourteenth in Pierce County) opened in February 1998, located at 176th and Meridian in Puyallup. Management continues to pursue opportunities for expansion via a combination of internal and external growth by acquisition. 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 continuously reviews new products and services to provide its customers with more banking options. In addition, new technology is reviewed continuously for business development and cost savings. The economy of the Company's principal market area, while primarily dependent upon aerospace, foreign trade and natural resources, including agriculture and timber, has become more diversified over the past decade as a result of the success of software companies such as Microsoft and the establishment of numerous research and biotechnology firms. The Washington economy and that of the Puget Sound region generally have experienced strong growth and stability in recent years. The Pierce County Economic Index, a regional publication providing economic forecasts and commentary reports, "The 1997 growth rate was almost twice the twenty-year average growth rate of the local economy. Continued expansion will take place in 1998, but not at the gallop-like pace of 1997. When 1998 comes to a close, economic activity in Pierce County's economy will have increased by 10% in just three years." Results of Operations The results of operations of the Company are dependent to a large degree on the Company's net interest income. The Company also generates noninterest income through service charges and fees and income from mortgage banking 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 1997, the Company recorded net income of $9.3 million, compared with net income of $4.6 million in 1996 and net income of $3.7 million in 1995. Net income per share amounted to $1.41 in 1997, compared with $0.97 per share in 1996 and $0.86 per share in 1995. Excluding certain unusual items which occurred in 1997 and 1996, net income from operations was $8.2 million compared with $5.2 million in 1996 and $3.7 million in 1995, increases of 56% and 41% for the years ended December 31, 1997 and 1996, respectively. On a per share basis, net income from operations excluding unusual items for 1997 was $1.24 per share compared with $1.09 per share and $0.86 per share in 1996 and 1995, respectively. Columbia Banking System ...................................MD&A 28 The 1997 unusual items consisted of proceeds from a Key Man Life Insurance policy upon the passing of Chairman A. G. Espe and expenses associated with two recently completed mergers. Also, excluded was an additional loan loss provision made in the fourth quarter to reflect the continued rapid growth of the loan portfolio during 1997. In third quarter 1996, federal legislation designed to recapitalize the Savings Association Insurance Fund ("SAIF") of the FDIC resulted in a one-time charge to earnings of $612,000. With the completion of the Company's first acquisitions during the fourth quarter, Cascade Community Bank and Bank of Fife were merged into Columbia Bank. The mergers were accounted for on a pooling of interests basis, and Company financial statements for all reported periods have been restated to reflect the mergers. Net Interest Income Net interest income increased $9.9 million, or 39%, in 1997 compared with $4.6 million, or 22%, in 1996. The 1997 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 $156.5 million and $132.0 million in 1997 and 1996, respectively, while average interest-bearing liabilities increased only $111.8 million and $107.5 million, respectively. Net interest margin (net interest income divided by average interest-earning assets) increased to 4.96% for 1997, compared with 4.58% in 1996 and 4.91% in 1995. While interest-earning assets grew during fiscal year 1997, the average yield on interest-earning assets increased to 8.73%, from 8.64% in fiscal year 1996. In comparison, the average cost of interest-bearing liabilities decreased to 4.61% in 1997 from 4.79% in 1996. The increase in net interest margin was primarily due to a combination of higher yields obtained on loans and decreasing deposit rates. The increase in loan yields was primarily caused by a change in the loan mix whereby multi-family and commercial real estate loans increased to 35% of total loans at December 31, 1997, from 31% at December 31, 1996. The decrease in deposit rates is primarily a result of decreasing rates in the markets in which the Company competes for funds. Interest rates, in general, have exhibited a downward trend for much of 1997 due to a variety of factors such as low inflation. Provision for Loan Losses For the years ended December 31, 1997, 1996 and 1995, net loan charge-offs amounted to $1.6 million, $693,000 and $217,000, respectively. The Company's provision for loan losses was $4.7 million for 1997, compared with $1.6 million for 1996 and $1.4 million for 1995. During 1997, the allowance for loan losses increased by $3.2 million to 1.23% Columbia Banking System ...................................MD&A 29 of loans (excluding loans held for sale) at December 31, 1997, as compared with 1.01% and 1.04% of loans at December 31, 1996 and 1995, respectively. At year- end 1997, the allowance for loan losses to nonperforming loans was 569.50% compared with 231.57% at December 31, 1996. The 1997 increase in the loan loss provision is a result of the Company's rapid loan growth. Although nonperforming loans are currently low, rapid growth could increase future losses. Accordingly, the Company increased the loan loss provision by $2.0 million in the fourth quarter of 1997. Noninterest Income Total noninterest income, excluding proceeds from a Key Man Life Insurance policy, increased $3.0 million, or 47% in 1997, and $1.5 million, or 32%, in 1996. Increases in noninterest income during 1997 were centered in account service charges, mortgage banking income, and gains on sales of loans. In general, increases in account service charges are due to the growth of the Company. Noninterest Expense Excluding non-recurring items (merger expenses in 1997 and SAIF assess-ment in 1996), total noninterest expense increased $5.7 million, or 23.5%, in 1997 and $4.3 million, or 21.6%, in 1996. The increase was primarily due to personnel costs associated with the Company's expansion as well as advertising, data processing and other expenses. The Company's efficiency ratio (the sum of net interest income plus noninterest income excluding unusual and nonrecurring items, divided by noninterest expense excluding unusual and nonrecurring items) was 69.0% for 1997 compared with 76.7% and 78.4% for 1996 and 1995, 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. Columbia Banking System ...................................MD&A 30 Set forth below is a schedule showing additional detail concerning increases and decreases in the Company's noninterest expense.
In Thousands Increase/ Increase/ Years Ended December 31, 1997 (Decrease) 1996 (Decrease) 1995 - ------------------------ --------- ---------- ---- ---------- ---- Compensation and employee benefits $15,256 $2,671 $12,585 $2,608 $ 9,977 Less: loan origination costs 1,927 (373) 2,300 1,212 1,088 - -------------------------------------------------------------------------------- Net compensation and employee benefits (as reported) 13,329 3,044 10,285 1,396 8,889 Occupancy 4,488 240 4,248 747 3,501 Professional services 598 (73) 671 164 507 Advertising and promotion 1,264 458 806 140 666 Printing and supplies 739 192 547 85 462 Regulatory assessments 245 (97) 342 (244) 586 Data processing 1,544 322 1,222 209 1,013 Losses (gains) on real estate owned 124 124 400 (400) Telephone and network 500 127 373 68 305 Postage and delivery 531 175 356 85 271 ATM network 221 12 209 125 84 Bank card 1,994 513 1,481 450 1,031 Taxes, licenses and fees 990 202 788 (33) 821 Other 3,433 468 2,965 722 2,243 SAIF special assessment (612) 612 612 Merger expenses 1,234 1,234 - -------------------------------------------------------------------------------- Total noninterest expense $31,234 $6,329 $24,905 $4,926 $19,979 - -------------------------------------------------------------------------------- ------- ------ ------- ------ -------
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. Columbia Banking System ...................................MD&A 31 Loan Portfolio The following table sets forth the Company's loan portfolio by type of loan for the dates indicated:
In Thousands % of % of December 31, 1997 Total 1996 Total - ------------ ---- ----- ---- ----- Commercial business $270,946 39.5% $194,843 37.2% Real estate: One- to four-family residential 71,095 10.4 77,359 14.8 Five or more family residential and commercial properties 206,628 30.1 151,179 28.9 -------- ---- -------- ---- Total real estate 277,723 40.5 228,538 43.7 Real estate construction: One- to four-family residential 29,695 4.3 31,446 6.0 Five or more family residential and commercial properties 33,806 4.9 10,724 2.1 -------- ---- -------- ---- Total real estate construction 63,501 9.2 42,170 8.1 Consumer 74,710 10.9 58,249 11.1 Subtotal 686,880 100.1 523,800 100.1 Less deferred loan fees and other (991) (0.1) (649) (0.1) -------- ----- -------- ----- Total loans $685,889 100.0% $523,151 100.0% ======== ===== ======== ===== Loans held for sale $ 4,377 $ 11,341 ======== ========
Total loans at year-end increased $162.7 million, or 31.1%, from year end 1996. All loan categories except for one- to four-family loans con-tributed significantly to the increase. Commercial and Private Banking Lending Commercial loans increased to $270.9 million at December 31, 1997, representing 39.5% of total loans, from $194.8 million at December 31, 1996. 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 its commercial lending products and to emphasize in particular its relationship banking with businesses, business owners and professional individuals. Columbia Banking System ...................................MD&A 32 Real Estate Lending One- to Four-Family Residential. Residential one- to four-family loans decreased $6.3 million to $71.1 million at December 31, 1997, representing 10.4% of total loans, compared with $77.4 million at December 31, 1996. The decrease is attributable to maturities and prepayments of the portfolio. These loans are used by the Company to collateralize advances from the Federal Home Loan Bank ("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. Five or More Family Residential and Commercial Properties. The Company makes multi-family and commercial real estate loans in its primary market areas. Multi-family and commercial real estate lending increased to $206.6 million at December 31, 1997, representing 30.1% of total loans, from $151.2 million at December 31, 1996. The Company's underwriting standards generally require that the loan-to-value ratio for multi-family and commercial loans not exceed 75% of the appraised value or cost, whichever is lower, and that commercial properties maintain debt coverage ratios (net operating income divided by annual debt servicing) of 1.2 or better. Underwriting standards can be influenced by competition. The Company endeavors to maintain the highest practical underwriting standards while balancing the need to remain competitive in its lending practices. Construction Loans The Company originates a variety of real estate construction loans. One- to four-family residential construction loans are originated for the construction of custom homes (where the home buyer is the borrower) and provide financing to builders for the construction of pre-sold homes and speculative residential construction. Construction loans on one- to four-family residences decreased to $29.7 million at December 31, 1997, representing 4.3% of total loans, from $31.4 million at December 31, 1996. Multi-family and commercial real estate construction loans increased to $33.8 million at December 31, 1997, representing 4.9% of total loans, from $10.8 million at December 31, 1996. The increase is a result of the growing commercial business economy in Pierce County and the Puget Sound region. The Company endeavors to limit its construction lending risk through adherence to strict underwriting procedures. Consumer Lending At December 31, 1997, the Company had $74.7 million of consumer loans outstanding, representing 10.9% of total loans, as compared with Columbia Banking System ...................................MD&A 33 $58.2 million at December 31, 1996. Consumer loans made by the Company include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans and miscellaneous personal loans. At December 31, 1997, the Company had no foreign loans. Management's growth strategy has concentrated on the Tacoma/Pierce County market. The results of that strategy are evident in the following summary of loan growth by market area:
In Thousands Increase December 31, 1997 1996 amount percent - ------------ ---- ---- ------------------- Pierce County $485,863 $346,353 $139,510 40.3% All other counties 200,026 176,798 23,228 13.1 -------- -------- -------- ---- Total $685,889 $523,151 $162,738 31.1% ======== ======== ======== ====
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, 1997 1996 1995 - ------------ ---- ---- ---- Nonaccrual: One- to four-family residential $ 661 $1,645 $ 329 Commercial business 728 385 86 Consumer 73 226 34 ------ ------ ----- Total 1,462 2,256 449 Restructured: One- to four-family residential 20 25 29 ------ ------ ------ Total nonperforming loans $1,482 $2,281 $ 478 ====== ====== ====== Real estate owned 231 484 3,304 ------ ------ ------ Total nonperforming assets $1,713 $2,765 $3,782 ====== ====== ====== Accruing loans past-due 90 days or more $ 111 $ 154 Impaired loans $ 728 385 86 Potential problem loans 669 346 239 Allowance for loan losses 8,440 5,282 4,340 Nonperforming loans to loans 0.22% 0.44% 0.11% Allowance for loan losses to loans 1.23 1.01 1.04 Allowance for loan losses to nonperforming loans 569.50 231.57 907.95 Nonperforming assets to total assets 0.20 0.39 0.73 ======= ====== ======
Columbia Banking System ...................................MD&A 34 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. Restruc-tured 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. Impaired loans, generally, refer to 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. 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. Nonperforming loans decreased to $1.5 million at December 31, 1997, from $2.3 million at December 31, 1996. At December 31, 1997, nonperforming loans were 0.22% of period-end loans (excluding loans held for sale) compared with 0.44% and 0.11% at December 31, 1996 and 1995, respectively. Total nonperforming assets decreased $1.1 million to $1.7 million, or 0.20% of total assets at December 31, 1997. In February 1996, the Company sold the majority of its "real estate owned" (which consisted of one property in the state of Washington), thus reducing total nonperforming assets to $2.8 million, or 0.39% of total assets at December 31, 1996, from $3.8 million, or 0.73% 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. Columbia Banking System ...................................MD&A 35 The allowance for loan losses at December 31, 1997 increased to 1.23%, from 1.01% of loans at December 31, 1996 (excluding loans held for sale at each date). The increase was due to a $3.1 million increase in loan loss provisions during 1997 compared to 1996. The 1997 increase in the loan loss provision is a result of the Company's rapid loan growth. Although nonperforming loans are currently low, rapid growth could increase future losses. Accordingly, the Company increased the loan loss provision by $2.0 million in the fourth quarter of 1997. For the years ended December 31, 1997, 1996 and 1995, net loan charge- offs amounted to $1.6 million, $693,000 and $217,000, respectively. The Company's provision for loan losses was $4.7 million for 1997, compared with $1.6 million for 1996 and $1.4 million for 1995. The following table summarizes the changes in the allowance for loan losses:
In Thousands December 31, 1997 1996 1995 - ------------ ---- ---- ---- Total loans, net at end of period/1/ $685,889 $523,151 $418,057 Daily average loans 613,671 473,887 373,560 Beginning balance of allowance for loan losses 5,282 4,340 3,175 Charge-offs: One- to four-family residential (364) (7) Commercial business (1,025) (514) (148) Private banking (11) (115) Consumer (259) (199) (4) -------- -------- -------- Total charge-offs (1,659) (720) (267) Recoveries: One- to four-family residential 1 7 Commercial business 43 17 45 Consumer 47 3 5 Total recoveries 91 27 50 Net charge-offs (1,568) (693) (217) Provision charged to expense 4,726 1,635 1,382 -------- -------- -------- Ending balance $ 8,440 $ 5,282 $ 4,340 ======== ======== ======== Ratio of net charge-offs during period to average loans outstanding 0.26% 0.15% 0.06% 1 Excludes loans held for sale.
Securities The Company's securities (securities available for sale and securities held to maturity) increased by $2.3 million to $66.0 million from year-end 1996 to year- end 1997. The Company had no sales of securities during 1997. Purchases during the year totaled $35.9 million while Columbia Banking System ...................................MD&A 36 maturities and prepayments totaled $33.6 million. U.S. Treasury and government agency securities comprised 80.4% of the investment portfolio, with mortgage- backed securities at 10.6% and state and municipal securities at 6.4%. The average maturity of the securities portfolio was 2 years, 6 months at December 31, 1997. Approximately 85.3% of the Company's securities are classified as available for sale and carried at market value. These securities are used by management as part of its asset/liability management strategy and may be sold in response to changes in interest rates and/or significant prepayment risk. 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 1997, fixed assets increased $8.5 million, or 45% from 1996. The net change includes purchases of $11.0 million, disposals of $500,000 and depreciation expense of $2.1 million. The Company's capital expenditures in 1998 are anticipated to be approximately $5.3 million. Such expenditures are expected to include approximately $2.1 million for new buildings and for remodeling existing structures, and $3.2 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 29.3% and 30.4% in 1997 and 1996, respectively. All categories of deposits increased during both years. Interest-bearing and noninterest-bearing demand deposits increased 39.7% and 48.8% in 1997, and 64.4% and 36.6% in 1996, respectively. Average deposits are summarized in the following table:
In Thousands years ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Demand and other noninterest-bearing $111,492 $ 74,940 $ 54,878 Interest-bearing demand 223,514 160,020 97,326 Savings 38,301 32,438 33,145 Certificates of deposit 282,899 240,214 203,978 -------- -------- -------- Total average deposits $656,206 $507,612 $389,327 ======== ======== ========
Columbia Banking System ...................................MD&A 37 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 1997, though management anticipates continued use of such deposits to fund increasing loan demand. The deposit increase of $143.9 million during 1997 occurred entirely in "core deposits." Brokered and other wholesale deposits (excluding public deposits) decreased $26.8 million to $3.5 million, or 0.47% of total deposits, at December 31, 1997, from $30.3 million, or 5.1% of total deposits, at December 31, 1996. Brokered and other wholesale deposits are summarized below. The average interest rate for these deposits was 5.77% and 5.63% at December 31, 1997 and 1996, respectively.
1997 1996 ---- ---- Percent Percent December 31, of Total of Total dollars in thousands amount deposits amount deposits - -------------------- ------ -------- ------ -------- Maturing within one year $1,486 0.20% $28,863 4.8% Maturing after one year but within three years 2,000 0.27 1,387 0.3 ------ ---- ------- --- Total brokered and other wholesale deposits $3,486 0.47% $30,250 5.1% ------ ---- ------- ---
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, 1997 1996 amount percent - ------------ ---- ---- ----------------- Pierce County $505,212 $402,938 $102,274 25.4% All other counties 235,218 193,566 41,652 21.5 -------- -------- -------- ---- Total $740,430 $596,504 $143,926 24.1% ======== ======== ======== ====
Borrowings The Company relies on FHLB advances to supplement its funding sources, and the FHLB serves as the Company's primary source of long-term borrowings. FHLB advances are secured by one- to four-family real estate mortgages and certain other assets. At December 31, 1997, the Company had total advances of $39.0 million at interest rates ranging from 5.20% to 6.14%. The weighted average interest rate on such advances was 5.43%. At December 31, 1997, the maximum borrowing line from the FHLB was $113.3 million. Management anticipates Columbia Banking System ...................................MD&A 38 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 Columbia Bank is exposed to interest rate risk, which is the risk that changes in prevailing interest rates will adversely affect assets, liabilities, capital income and expenses at different times or in different amounts. Generally, there are four sources of interest rate risk, as described below: Repricing Risk. Generally, repricing risk is the risk of adverse consequence from a change in interest rates that arise because of differences in the timing of when those interest rate changes affect an institution's assets and liabilities. Basis Risk. Basis risk is the risk of adverse consequence resulting from unequal changes in the spread between two or more rates for different instruments with the same maturity. Yield Curve Risk. Yield curve risk is the risk of adverse consequence resulting from unequal changes in the spread between two or more rates for different maturities for the same instrument. Option Risk. In banking, option risks are known as borrower options to prepay loans and depositor options to make deposits, withdrawals, and early redemptions. Option risk arises whenever bank products give customers the right, but not the obligation, to alter the quantity of the timing of cash flows. The Company maintains an asset/liability management policy that provides guidelines for controlling exposure to interest rate 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 to reduce interest rate risk to acceptable levels. The analysis of an institution's interest rate gap (the difference between the repricing of interest-earning assets and interest-bearing liabilities during a given period of time) is one standard tool for the measurement of the exposure to interest rate risk. The Company believes that because interest rate gap analysis does not address all factors that can affect earnings performance, it should be used in conjunction with other methods of evaluating interest rate risk. 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, 1997. 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 Columbia Banking System ...................................MD&A 39 changes in prepayment assumptions, early withdrawal of deposits and competition. 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 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.
Estimated Maturity or Repricing Dollars in Thousands 0-3 4-12 1-5 5-10 More Than December 31, 1997 months months years years 10 years Total - -------------------- ------ ------ ----- ----- -------- ----- Interest-earning assets Interest-earning deposits $ 28,108 $ 28,108 Securities 1,578 $ 21,394 $ 31,235 $16,092 $ 803 71,102 Loans: Business and commercial real estate 252,795 31,947 111,143 3,088 3,835 402,808 One- to four-family 70,780 60,761 62,883 3,150 10,724 208,298 Consumer 14,908 27,828 31,888 3,016 244 77,884 -------- -------- -------- ------ ------- -------- Total interest- earning assets $368,169 $141,930 $237,149 $25,346 $15,606 $788,200 ======== ======== ======== ======= ======= ======== Noninterest- earning assets 1,276 75,079 76,355 -------- -------- -------- ------- ------- -------- Total assets $368,169 $143,206 $237,149 $25,346 $90,685 $864,555 ======== ======== ======== ======= ======= ======== Percent of total interest-earning assets 46.71% 18.00% 30.09% 3.22% 1.98% 100.00%
Columbia Banking System ...................................MD&A 40
Estimated Maturity or Repricing Dollars in Thousands 0-3 4-12 1-5 5-10 More Than December 31, 1997 months months years years 10 years Total - -------------------- ------ ------ ----- ----- -------- ----- Interest-bearing liabilities Deposits: Money market checking $174,298 $174,298 NOW accounts 14,788 $ 59,154 73,942 Savings accounts 12,816 $ 12,815 $ 12,815 38,446 Time certificates of deposit 94,373 $169,652 44,636 308,661 FHLB advances 2,000 12,000 25,000 39,000 ------- -------- -------- -------- -------- -------- Total interest-bearing liabilities $298,275 $181,652 $128,790 $ 12,815 $ 12,815 $634,347 ======== ======== ======== ======== ======== ======== Noninterest-bearing liabilities and equity 116,450 29,112 84,646 230,208 ======== ======== ======== ======== ======== ======== Total liabilities and equity $414,725 $181,652 $157,902 $ 12,815 $ 97,461 $864,555 ======== ======== ======== ======== ======== ======== Percent of total interest-earning assets 37.84% 23.04% 16.34% 1.63% 1.63% 80.48% ======== ======== ======== ======== ======== ======== Rate sensitivity gap $ 69,894 $(39,722) $108,359 $ 12,531 $ 2,791 $153,853 Cumulative rate sensitivity gap 68,894 30,172 138,531 151,062 153,853 -------- -------- -------- -------- -------- -------- Rate sensitivity gap as a percentage of interest-earning assets 8.87% (5.04)% 13.75% 1.59% 0.35% 19.52% Cumulative rate sensitivity gap as a percentage of interest- earning assets 8.87% 3.83% 17.58% 19.17% 19.52% ======== ======== ======== ======== ========
Columbia Banking System ...................................MD&A 41 Interest Rate Sensitivity On Net Interest Income A number of measures are used to monitor and manage interest rate risk, including income simulations and interest sensitivity (gap) analyses. An income simulation model is the primary tool used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Key assumptions in the model include prepayment speeds on mortgage-related assets, cash flows and maturities of other investment securities, loan and deposit volumes and pricing. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. Based on the results of the simulation model as of December 31, 1997, the Company would expect an increase in net interest income of $332,000 and a decrease in net interest income of $333,000 if interest rates gradually decrease or increase, respectively, from current rates by 100 basis points over a twelve- month period. Income Tax Prior to December 31, 1996, for federal income tax purposes, the Company had net operating loss ("NOL") carryforwards. The carry-forwards were used, subject to certain restrictions and limitations, to offset taxable income and the tax liability of the Company. At December 31, 1996, all available NOL carryforwards had been utilized to offset taxable income and the Company is now fully taxable. For the years ending December 31, 1997 and 1996, the Company recorded income tax provisions of $2.8 million and $500,000, respectively. Columbia Banking System ...................................MD&A 42 Capital Shareholders' equity increased to $78.4 million at December 31, 1997,from $68.2 million at December 31, 1996. The increase is due primarily to net income for the year of $9.3 million. Shareholders' equity was 9.06% and 9.66% of total assets at December 31, 1997 and December 31, 1996, 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, 1997, the Company's leverage ratio was 9.33%, compared with 10.17% at December 31, 1996. 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 10.77% and 11.93%, respectively, at December 31, 1997, compared with 12.51% and 13.48%, respectively, at December 31, 1996. 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, 1997. Failure to qualify as "well capitalized" can negatively impact a bank's ability to expand and to engage in certain activities. Applicable federal and Washington state regulations restrict capital distributions by institutions such as Columbia Bank, including dividends. Such restrictions are tied to the institution's capital levels after giving effect to distributions. The Company's ability to pay cash dividends is substantially dependent upon receipt of dividends from the Bank. On April 23, 1997, the Company announced a 5% stock dividend payable on May 22, 1997, to shareholders of record on May 8, 1997. On May 22, 1997, 260,899 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. Columbia Banking System ...................................MD&A 43 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 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. 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. 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. Impact of The Year 2000 Issue Many existing computer systems, including the systems used by the Company, use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. The Company is currently preparing its operations for the Year 2000 and also has begun to identify which customers and their respective operations will not be in compliance with the Year 2000. The Company also has received assurances from its data processing service provider that it is aggressively addressing its capacity to achieve Year 2000 compliance. Columbia Banking System ...................................MD&A 44 Recent Accounting Pronouncements In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 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 No. 25). SFAS No. 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 No. 123 is required for the fiscal year ended December 31, 1997. The Company elected to continue to apply APB No. 25 for measurement of stock compensation and has provided disclosure required by SFAS No. 123 in Note 10 accompanying the consolidated financials of the Company. In June 1996, the FASB issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 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 No. 125 is not expected to have a significant impact on the Company. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). The statement is effective for years ending after December 15, 1997, for both interim and annual periods, and replaces the presentation of primary and fully diluted earnings per share with a presentation of basic and diluted earnings per share. The adoption of this statement is not expected to have a material impact on earnings per share reported by the Company. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). This statement provides standards for reporting comprehensive, or all inclusive, income. In the Company's case, based on current operations, it would include as an addition or deduction to reported net income, the change in the securities valuation reserve. This statement will not affect reported net income of the Company. SFAS No. 130 will be effective in the Company's 1998 financial statements and will require restatement of all prior periods shown on the financial statements. 45 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. For more information please refer to the Company's Form 8K/A filed with the Securities and Exchange Commission on March 17, 1997. 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. 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, 1997, the last sale price for the Company's stock in the over-the-counter market was $27. The Company presently intends to retain earnings to support antici-pated 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. Columbia Banking System ...................................MD&A 46 The Company is aware that large blocks of its stock are held in street name by brokerage firms. At December 31, 1997, the number of shareholders of record was 1,124. The following are high and low sales prices as reported in The Nasdaq National Market System according to information furnished by the National Association of Securities Dealers. Prices do not include retail mark-ups, mark-downs or commissions.
high low ---- --- 1997 First quarter $18 1/4 $15 1/2 Second quarter 20 5/8 14 3/4 Third quarter 25 3/4 19 3/4 Fourth quarter 28 1/4 22 1/2 For the year 28 1/4 15 1/2 1996 First quarter $14 3/4 $11 1/8 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 1/8
Columbia Banking System ...................................MD&A 47 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 1997 have been audited by Deloitte & Touche LLP, the Company's independent auditors. In planning and performing their audit, Deloitte & Touche 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. (signatures) /s/ W.W. Philip /s/ Gary R. Schminkey W. W. Philip Gary R. Schminkey Chairman, President and Senior Vice President and Chief Executive Officer Chief Financial Officer Columbia Banking System 48 Report of Independent Auditors To the Board of Directors and Shareholders of Columbia Banking System, Inc. We have audited the accompanying consolidated balance sheet of Columbia Banking System, Inc. and its subsidiaries (the Company) as of December 31, 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly in all material respects, the financial position of the Company at December 31, 1997, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements give retroactive effect to the mergers of the Company and Cascade Bancorp, Inc. and the Company and Bank of Fife, which have been accounted for as poolings of interests as described in Note 2 to the consolidated financial statements. The consolidated financial statements of the Company for the years ended December 31, 1996 and 1995, prior to their restatement for the 1997 poolings of interests were audited by other auditors whose report dated January 22, 1997, expressed an unqualified opinion on those statements. The contribution of the Company represented 81% and 80% of restated net interest income in 1996 and 1995 respectively, and 77% and 75% of restated net income in 1996 and 1995, respectively. Separate financial statements of the other companies included in the Company's restated consolidated financial statements for the years ended December 31, 1996 and 1995, were audited and reported on separately by other auditors. We have audited the combination of the accompanying consolidated balance sheet as of December 31, 1996, and the related statements of operations, shareholders' equity and cash flows for the years ended December 31, 1996 and 1995, after restatement for the 1997 poolings of interests; in our opinion, such consolidated statements have been properly combined on the basis described in Note 2 to the consolidated financial statements. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Seattle, Washington January 30, 1998 49 Consolidated Statements of Operations
In Thousands Except Per Share Amounts Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Interest income Loans $56,176 $43,240 $36,013 Securities available for sale 3,800 2,360 705 Securities held to maturity 628 702 1,491 Deposits with banks 1,457 1,583 667 ------- ------- ------- Total interest income 62,061 47,885 38,876 Interest expense Deposits 24,775 20,370 16,369 FHLB advances 1,971 1,938 1,503 Other borrowings 84 233 302 ------- ------- ------- Total interest expense 26,830 22,541 18,174 Net interest income 35,231 25,344 20,702 Provision for loan losses 4,726 1,635 1,382 ------- ------- ------- Net interest income after provision for loan losses 30,505 23,709 19,320 Noninterest income Service charges and other fees 4,234 2,837 2,331 Mortgage banking 1,032 701 462 Losses on sales of securities available for sale (8) Gains on sales of loans, net 1,035 39 Other fees 2,973 2,772 1,942 Key Man Life Insurance 3,518 ------- ------- ------- Total noninterest income 12,792 6,310 4,766
Columbia Banking System Financial Statements 50
In Thousands Except Per Share Amounts Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- noninterest expense Compensation and employee benefits $13,329 $10,285 $ 8,889 Occupancy 4,488 4,248 3,501 Advertising and promotion 1,264 806 666 Data processing 1,544 1,222 1,013 Other 9,375 7,732 5,910 SAIF special assessment 612 Merger expenses 1,234 ------- ------- ------- Total noninterest expense 31,234 24,905 19,979 ------- ------- ------- Income before income taxes 12,063 5,114 4,107 Provision for income taxes 2,788 479 416 ------- ------- ------- Net Income $ 9,275 $ 4,635 $ 3,691 ======= ======= ======= Net income per common share: Basic $1.41 $0.97 $0.86 Diluted 1.37 0.93 0.84 Average number of common shares outstanding 6,583 4,794 4,307 Average number of diluted common shares outstanding 6,777 4,931 4,385
See accompanying notes to consolidated financial statements Columbia Banking System Financial Statements 51 Consolidated Balance Sheets
In Thousands December 31, 1997 1996 - ------------ ---- ---- Assets Cash and due from banks $ 47,604 $ 38,286 Interest-earning deposits with banks 28,108 44,972 Securities available for sale 56,279 52,044 Securities held to maturity 9,679 11,621 FHLB stock 5,144 4,599 Loans held for sale 4,377 11,341 Loans 685,889 523,151 Less: allowance for loan losses 8,440 5,282 -------- -------- Loans, net 677,449 517,869 Interest receivable 5,023 4,120 Premises and equipment, net 27,246 18,751 Real estate owned 231 484 Other 3,415 2,361 -------- -------- Total Assets $864,555 $706,448 ======== ========
Columbia Banking System Financial Statements 52
In Thousands December 31, 1997 1996 - ------------ ---- ---- Liabilities and shareholders' equity Deposits: Noninterest-bearing $146,063 $101,401 Interest-bearing 594,367 495,103 -------- -------- Total deposits 740,430 596,504 Federal Home Loan Bank advances 39,000 34,000 Securities sold under agreements to repurchase 2,126 Other liabilities 6,772 5,594 -------- -------- Total liabilities 786,202 638,224 Commitments and contingent liabilities (Note 13) Shareholders' equity: Preferred stock (no par value) Authorized, 2,000,000 shares; none outstanding December 31, Common stock 1997 1996 (no par value) Authorized shares 11,000 10,000 Issued and outstanding 6,587 6,248 67,901 62,980 Retained earnings 10,415 5,282 Unrealized gains (losses) on securities available for sale, net of tax 37 (38) -------- -------- Total shareholders' equity 78,353 68,224 -------- -------- Total Liabilities and Shareholders' Equity $864,555 $706,448
See accompanying notes to consolidated financial statements Columbia Banking System Financial Statements 53 Consolidated Statements of Shareholders' Equity
Common Stock Number In Thousands of Shares Amount - ------------ --------- ------ Balance at December 31, 1995 4,337 $37,414 Net income 4,635 4,635 Issuance of shares of common stock, net 1,492 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 6,248 62,980 Net income 9,275 9,275 Issuance of shares of common stock, net 78 779 Issuance of shares of common stock 5% stock dividend 261 4,142 Change in unrealized gains and (losses) ----- ------ Balance at December 31, 1997 6,587 $67,901
Columbia Banking System Financial Statements 54
Unrealized Total Retained Gains and Shareholders' In Thousands earnings (losses) equity - ------------ -------- ---------- ------------- Balance at December 31, 1995 $ 2,804 $(98) $40,120 Net income Issuance of shares of common stock, net 4,635 4,635 Issuance of shares of common stock 20,900 5% stock dividend (2,157) Conversion of Convertible Subordinated Notes 2,509 Change in unrealized gains and (losses) 60 60 ------- ---- -------- Balance at December 31, 1996 5,282 (38) 68,224 Net income Issuance of shares of common stock, net 9,275 9,275 Issuance of shares of common stock 779 5% stock dividend (4,142) Change in unrealized gains and (losses) 75 75 ------- ---- ------- Balance at December 31, 1997 $10,415 $ 37 $78,353
See accompanying notes to consolidated financial statements Columbia Banking System Financial Statements 55 Consolidated Statements of Cash Flows
In Thousands 1997 1996 1995 - ------------ ---- ---- ---- Operating Activities Net income $9,275 $ 4,635 $3,691 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 4,726 1,635 1,382 Deferred income tax expense (benefit) 956 (12) 48 Losses on real estate owned 105 41 29 Depreciation and amortization 2,189 2,681 1,589 Net realized losses (gains) on sale of investments (971) 218 (53) (Increase) decrease in loans held for sale 6,964 (9,974) 245 Increase in interest receivable (903) (1,109) (881) Increase in interest payable 528 423 554 Net changes in other assets and liabilities (3,546) 208 1,344 -------- ------- ------ Net cash provided (used) by operating activities 19,323 (1,254) 7,948 Investing activities Proceeds from maturities of securities available for sale 25,337 17,885 2,120 Proceeds from sales of securities available for sale 5,980 Purchase of securities available for sale (34,831) (46,770) (8,408) Proceeds from maturities of mortgage-backed securities available for sale 3,814 1,682 Proceeds from maturities of securities held to maturity 4,414 1,471 8,828 Purchases of securities held to maturity (1,470) (3,014) (11,627) Loans originated and acquired, net of principal collected (173,877) (106,888) (104,477) Proceeds from sales of loans 10,177 4,756 Purchases of premises and equipment (11,043) (7,181) (7,000) Proceeds from disposal of premises and equipment 400 1,273 241 Proceeds from sale of real estate owned 588 3,307 13 Other, net (83) (495) (119) -------- -------- -------- Net cash used by investing activities (176,574) (138,730) (109,693)
Columbia Banking System Financial Statements 56
In Thousands 1997 1996 1995 - ------------ ---- ---- ---- Net increase in deposits $143,926 $149,605 $111,027 Proceeds from FHLB advances and other long-term debt 25,000 32,800 17,000 Repayment of FHLB advances and other long-term debt (20,000) (23,800) (9,000) Increase in securities sold under repurchase agreements 1,366 179 Proceeds from issuance of common stock, net 779 20,900 97 -------- -------- -------- Net cash provided by financing activities 149,705 180,871 119,303 -------- -------- -------- Increase (decrease) in cash and cash equivalents (7,546) 40,887 17,558 Cash and cash equivalents at beginning of period 83,258 42,371 24,813 -------- -------- -------- Cash and cash equivalents at end of period $ 75,712 $ 83,258 $ 42,371 ======== ======== ======== supplemental information Cash paid for interest $26,302 $ 22,117 $ 17,620 Cash paid for income taxes 3,380 460 189 Transfer from securities held to maturity to available for sale 23,162 Transfer from securities available for sale to held to maturity 996 Loans foreclosed and transferred to real estate owned 440 528 Issuance of common stock from conversion of convertible subordinated notes 2,509 40
See accompanying notes to consolidated financial statements Columbia Banking System Financial Statements 57 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 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. Note 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, 1997, 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. Accounting Treatment of Mergers All mergers during the reported periods qualify for "pooling of interests" accounting treatment. Under the pooling of interests method of accounting, the historical basis of the assets, liabilities, and equity are combined and carried forward at their previously recorded amounts. Income and other financial statements after the mergers are restated retroactively as if the mergers had taken place prior to the periods covered by such financial statements. No recognition of goodwill arising from the mergers is required under the pooling of interests accounting method. Securities Available For Sale 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 available for sale 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. Securities Held to Maturity Securities held to maturity 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 Columbia Banking System Notes 58 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. The Bank evaluates commercial real estate and commercial business loans for impairment on an individual basis. A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the terms of the loan agreement. Factors involved in determining impairment include, but are not limited to, the financial condition of the borrower, value of the underlying collateral, and current economic conditions. The valuation of impaired loans is based on either the present value of expected future cash flows discounted at the loan's effective interest rate or at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The amount by which the recorded investment in the loan exceeds either the present value of expected future cash flows or the value of the impaired loan's collateral when applicable, would be a specifically allocated reserve for loan losses. Any portion of an impaired loan classified as loss under regulatory guidelines is charged off. Premiums or discounts on loans purchased and sold are amortized, using the interest method, over periods which approximate the average life of the loans. Loan Fee Income Loan origination fees and certain direct loan origination costs are deferred and the net amount recognized as an adjustment to yield over the contractual life of the 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. 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. Columbia Banking System Notes 59 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. 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 In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). This statement established standards for computing and presenting earnings per share ("EPS"). The statement simplified the standards for computing EPS and made them comparable to international EPS standards. It replaced the presentation of primary EPS with a presentation of basic EPS. Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflected the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted EPS is computed similarly to previously reported fully diluted EPS. This statement required restatement of all prior period EPS data presented. The only reconciling item affecting the calculation of earnings per share is the inclusion of stock options affecting the shares outstanding in diluted earnings per share of 194,000, 137,000, and 78,000 in 1997,1996, and 1995 respectively. 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. Columbia Banking System Notes 60 Statement of Cash Flows The accompanying consolidated statements of cash flows has been prepared using the "indirect" method for presenting cash flows from operating activities. For purposes of this statement, cash and cash equivalents include cash and due from banks, interest-earning deposits with banks and federal funds sold. Reclassification Certain amounts in the 1996 and 1995 consolidated financial statements have been reclassified to conform with the 1997 presentation. These reclassifications had no effect on net income (loss). Prospective Accounting Pronouncement In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). This statement provides standards for reporting comprehensive, or all inclusive, income. In the Company's case, based on current operations, it would include as an addition or deduction to reported net income, the change in the securities valuation reserve. This statement will not affect reported net income of the Company. SFAS No. 130 will be effective in the Company's 1998 financial statements and will require restatement of all prior periods shown on the financial statements. Note 2. Business Combinations/Restructuring On December 1, 1997, the Company merged with Cascade Bancorp, Inc. ("Cascade") and Bank of Fife ("Fife"). At December 1, 1997, Cascade had assets of $90.3 million, deposits of $78.7 million and shareholders' equity of $6.8 million. At December 1, 1997, Fife had assets of $34.0 million, deposits of $30.2 million and shareholders' equity of $3.5 million. The Company issued 752,505 shares of common stock to complete the merger with Cascade and 310,184 shares to complete the merger with Fife. The mergers were treated as poolings of interests. The financial information presented in this document reflects the pooling of interests method of accounting for both mergers. Accordingly, under generally accepted accounting principles, the assets, liabilities and shareholders' equity of Cascade and Fife were recorded on the books of the resulting institution at their values as reported on the books of Cascade and Fife immediately prior to the consummation of the mergers. No goodwill was created in the mergers. This presentation required the restatement of prior periods as if the companies had been combined for all years presented. The following information represents the results of operations of the Company, Cascade and Fife for the nine months ended September 30, 1997. These results are included in the results of operations for the year ended December 31, 1997, presented in the accompanying consolidated statements of income.
In Thousands Nine Months Ended September 30, 1997 The Company Cascade Fife Restated - ------------------ ----------- ------- ------ -------- Net interest income and other income $27,521 $3,439 $1,525 $32,485 Net income 4,812 510 471 5,793
Columbia Banking System Notes 61 The following information represents a reconciliation of revenue and net income previously presented by the Company with the combined amounts presented in the accompanying consolidated statements of income for the years ended December 31, 1996 and 1995.
In Thousands Year Ended December 31, 1996 The Company Cascade Fife Restated - ---------------------------- ----------- ------- ------ -------- Net interest income and other income $25,852 $4,095 $1,707 $31,654 Net income 3,577 618 440 4,635 In Thousands Year Ended December 31, 1995 The Company Cascade Fife Restated - ---------------------------- ----------- ------- ------ -------- Net interest income and other income $20,552 $3,532 $1,384 $25,468 Net income 2,755 568 368 3,691
Note 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, 1997, were approximately $3.0 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. Columbia Banking System Notes 62 Note 4. Securities The following table summarizes the amortized cost, gross unrealized gains and losses and the resulting market value of securities available for sale. Securities Available For Sale
Gross Gross Amortized Unrealized Unrealized Market In Thousands Cost Gains Losses Value - ------------ --------- ---------- ---------- ------ December 31, 1997 U.S. Treasury and government agency $48,178 $ 78 $48,256 Mortgage-backed 7,046 $ (27) 7,019 Other securities 990 14 1,004 ------- ---- ------ ------- Total $56,214 $ 92 $ (27) $56,279 ======= ==== ====== ======= December 31, 1996 U.S. Treasury and government agency $40,562 $104 $ (19) $40,647 Mortgage-backed 10,874 (114) 10,760 FHLMC preferred stock 250 8 258 Other securities 249 (3) 246 State and municipal securities 130 3 133 ------- ---- ------ ------- Total $52,065 $115 $ (136) $52,044 ======= ==== ====== =======
There were no sales of securities available for sale during the year ended December 31, 1997. At December 31, 1997 and 1996, securities available for sale with a fair value of $4.3 million and $10.9 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, 1997 Cost Value - ----------------- --------- ------ Amount maturing: Within one year $27,017 $27,001 Greater than one year and less than five years 18,410 18,479 Greater than five years and less than ten years 8,890 8,920 After ten years 1,897 1,879 ------- ------- Total $56,214 $56,279 ======= =======
Columbia Banking System Notes 63 The following table summarizes the amortized cost, gross unrealized gains and losses and the resulting market value of securities held to maturity: Securities Held To Maturity
Gross Gross Amortized Unrealized Unrealized Market In Thousands Cost Gains Losses Value - ------------ --------- ---------- ---------- ------ December 31, 1997 U.S. Treasury and government agency $ 4,743 $ 8 $ 4,751 State and municipal securities 4,191 54 4,245 Other securities 495 6 501 FHLMC preferred stock 250 7 257 ------- ---- ------- Total $ 9,679 $ 75 $ 9,754 ======= ==== ======= =======
The following table summarizes the amortized cost and market values of securities held to maturity by contractual maturity groups:
December 31, 1996 U.S. Treasury and government agency $ 8,484 $ 15 $ (56) $ 8,443 State and municipal securities 2,482 31 (2) 2,511 Other securities 655 1 656 ------- ---- ----- ------- Total $11,621 $ 47 $ (58) $11,610 ======= ==== ===== =======
Amortized Market In Thousands Cost Value - ------------ --------- ------ December 31, 1997 Amount maturing: Within one year $ 1,706 $ 1,717 Greater than one year and less than five years 5,945 5,986 Greater than five years and less than ten years 2,028 2,051 After ten years ------- ------- Total $ 9,679 $ 9,754 ======= =======
There were no sales of securities held to maturity during the year ended December 31, 1997. Columbia Banking System Notes 64 Note 5. Loans The following is an analysis of the loan portfolio by major types of loans:
In Thousands December 31, 1997 1996 - ------------ ---- ---- Commercial business $270,946 $194,843 Real estate: One- to four-family residential 71,095 77,359 Five or more family residential and commercial properties 206,628 151,179 -------- -------- Total real estate 277,723 228,538 Real estate construction: One- to four-family residential 29,695 31,446 Five or more family residential and commercial properties 33,806 10,724 -------- -------- Total real estate construction 63,501 42,170 Consumer 74,710 58,249 -------- -------- Subtotal 686,880 523,800 Less deferred loan fees, net and other (991) (649) Total loans $685,889 $523,151 ======== ======== Loans held for sale $ 4,377 $ 11,341 ======== ========
At December 31, 1997 and 1996, residential real estate loans with recorded values of $46.8 million and $40.8 million, respectively, were pledged to secure Federal Home Loan Bank ("FHLB") advances and for other purposes. The following table summarizes certain information related to nonperforming loans:
In Thousands December 31, 1997 1996 1995 - ------------ ---- ---- ---- Loans accounted for on a nonaccrual basis $1,462 $2,256 $ 449 Restructured loans 20 25 29 Total nonperforming loans $1,482 $2,281 $ 478 ====== ====== ===== Originally contracted interest $ 68 $ 219 $ 49 Recorded interest 12 102 38 Reduction in interest income $ 56 $ 117 $ 11 ====== ====== =====
At December 31, 1997 and 1996, the recorded investment in impaired loans was $728,000 and $385,000, 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, 1997 and 1996 was $570,000 and $504,000, respectively. Columbia Banking System Notes 65 At December 31, 1997 and 1996, there were no commitments for additional funds for loans accounted for on a nonaccrual basis. At December 31, 1997 and 1996, the Company had no foreign loans. The Company's banking subsidiary has granted loans to officers and directors of the Company and their associates. These loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. The aggregate dollar amount of these loans was $5.9 million and $7.1 million at December 31, 1997 and 1996, respectively. During 1997, $2.6 million of new related party loans were made, and repayments and transfers totaled $3.8 million. Note 6. Allowance For Loan Losses Transactions in the allowance for loan losses are summarized as follows:
In Thousands Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Balance at beginning of period $ 5,282 $4,340 $3,175 Loans charged off (1,659) (720) (267) Recoveries 91 27 50 ------- ------ ------ Net charge-offs (1,568) (693) (217) Provision charged to operating expense 4,726 1,635 1,382 ------- ------ ------ Balance at end of period $ 8,440 $5,282 $4,340 ======= ====== ======
Note 7. Premises and Equipment Land, buildings, and furniture and equipment, less accumulated depreciation and amortization, were as follows:
In Thousands December 31, 1997 1996 - ------------ ---- ---- Land $ 5,452 $ 3,282 Buildings 17,762 10,731 Leasehold improvements 1,424 2,303 Furniture and equipment 9,303 8,087 Automobiles 118 140 Computer software 1,360 743 ------- ------- Total cost 35,419 25,286 Less accumulated depreciation and amortization (8,173) (6,535) ------- ------- Total $27,246 $18,751 ======= =======
Columbia Banking System Notes 66 Total depreciation and amortization expense on buildings and furniture and equipment was $2.1 million, $2.1 million, and $1.9 million for the years ended December 31, 1997, 1996 and 1995, 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, - ------------------------- 1998 $1,187 1999 1,024 2000 746 2001 483 2002 371 2003 and thereafter 2,627 ------ Total minimum payments $6,438 ======
Total rental expense on buildings and equipment was $1.2 million for each of the years ended December 31, 1997, 1996 and 1995, respectively. Note 8. Federal Home Loan Bank Advances and Long-Term Debt The Company had FHLB advances of $39.0 million and $34.0 million at December 31, 1997 and 1996, respectively. FHLB advances are at the following interest rates:
In Thousands December 31, 1997 1996 - ------------ ---- ---- 6.14% $ 2,000 $12,000 6.07 2,000 5.79 2,000 5.45 10,000 5.39 25,000 5.32 5,000 5,000 5.20 5,000 5,000 ------- ------- Total $39,000 $34,000 ======= =======
Columbia Banking System Notes 67 Aggregate maturities of FHLB advances due in years ending after December 31, 1997, are as follows:
In Thousands Amount - ------------ ------ 1998 $12,000 2000 2,000 2002 25,000 ------- Total $39,000 =======
FHLB advances are collateralized by residential real estate loans with a recorded value of approximately $46.8 million at December 31, 1997, and $40.8 million at December 31, 1996 (see Note 5). Penalties are generally required for prepayments of certain long-term FHLB advances. Note 9. Income Tax The components of income tax expense are as follows:
In Thousands Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Current $ 4,258 $ 491 $ 368 Deferred (benefit) (1,470) (12) 48 ------- ----- ----- Total $ 2,788 $ 479 $ 416 ======= ===== =====
Significant components of the Company's deferred tax assets and liabilities at December 31, 1997 and 1996 are as follows:
In Thousands December 31, 1997 1996 - ------------ ---- ---- Deferred tax assets: Allowance for loan losses $ 2,914 $1,724 Other 177 Total deferred tax assets 2,914 1,901 Less: valuation allowance (768) ------- ------ Subtotal 2,914 1,133 Deferred tax liabilities: FHLB stock dividends (775) (657) Depreciation (157) (111) Other (260) (261) ------- ------ Total deferred tax liabilities (1,192) 1,029 ------- ------ Net deferred tax assets $ 1,722 $ 104 ======= ======
Columbia Banking System Notes 68 A reconciliation of the Company's effective income tax rate with the federal statutory tax rate is as follows:
In Thousands 1997 1996 1995 years ended December 31, amount percent amount percent amount percent - ------------------------ ------ ------- ------ ------- ------ ------- Income tax based on statutory rate $ 4,101 34% $ 1,739 34% $1,396 34% Increase (reduction) resulting from: Tax-exempt income (1,252) (10) (40) (1) (30) (1) Other nondeductible items 707 5 23 24 1 Valuation allowance (768) (6) (1,243) (24) (974) (24) ------- --- ------- --- ------ --- Income tax $ 2,788 23% $ 479 9% $ 416 10% ======= === ======= === ====== ===
Note 10. Stock Options and Warrants 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 Accounting Principles Board ("APB") Opinion No. 25 and related interpretations in accounting for the Plan. Accordingly, no compensation cost has been recognized for the Plan. At December 31, 1997 and 1996, the Company had stock options outstanding of 348,149 shares and 336,385 shares, respectively, for the purchase of common stock at options prices ranging from $3.63 to $27.00 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, 1997, a maximum of 593,250 shares were authorized under the stock option plan. Additionally, at December 31, 1997 and 1996, the Company had options outstanding granted to a company controlled by a director (now controlled by the estate of that director) for the purchase of 38,133 and 14,551 shares of common stock at exercise prices of approximately $5.86 and $8.39 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 19,651 shares of common stock at $9.66 per share. These warrants were exercised on April 16, 1997, and at December 31, 1997, there were no stock warrants outstanding. Columbia Banking System Notes 69 The following table outlines the stock option activity for 1997, 1996 and 1995:
Weighted Number of Average Price of Option Shares Option Shares ------------- ---------------- Balance at December 31, 1994 349,874 $ 7.96 Issued 15,988 9.32 Exercised (8,000) 2.50 Terminated (6,250) 11.35 ------- ------ Balance at December 31, 1995 351,612 8.08 Issued 82,401 14.90 Exercised (18,530) 4.13 Terminated (6,763) 10.47 ------- ------ Balance at December 31, 1996 408,720 9.60 Issued 62,820 17.39 Exercised (70,182) 8.02 Terminated (525) 9.29 ------- ------ Balance at December 31, 1997 400,833 11.10 ======= ====== Total Vested at December 31, 1997 280,974 $9.48 ======= ======
Financial data pertaining to outstanding stock options were as follows:
December 31, 1997 Weighted Average Weighted Average Exercise Weighted Average Exercise Number of Price of Ranges of Number of Remaining Price of Exercisable Exercisable Exercise Prices Option Shares Contractual Life Option Shares Option Shares Option Shares --------------- ------------- ---------------- --------------- ------------- --------------- $2.50 - $ 3.63 23,098 0.6 years $ 3.63 23,098 $ 3.63 5.51 - 8.05 61,490 3.2 years 5.81 61,490 5.81 8.39 - 11.96 198,694 4.7 years 10.07 173,886 10.04 12.75 - 18.33 95,051 8.3 years 15.47 31,500 16.43 20.24 - 27.00 22,500 8.5 years 23.85 22,500 23.85 - --------------- ------- --------- ------ ------- ------ 400,833 5.3 years $11.10 312,474 $10.37 ======= ========= ====== ======= ======
Columbia Banking System Notes 70 In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based Compensation." The statement requires expanded disclosures of stock-based compensation arrangements with employees. Under SFAS No. 123, companies may continue to follow the rules, as outlined in APB Opinion No. 25, but are now required to disclose the pro forma amounts of net income and earnings per share that would have been reported had the company elected to follow the fair value provisions of SFAS No. 123. Had compensation cost for the Company's Plan been determined based on the fair value at the grant dates consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
In Thousands Except Per Share Year Ended December 31, 1997 1996 1995 - ----------------------------- ---- ---- ---- Net income attributable to common stock: As reported $9,275 $4,635 $3,691 Pro forma 9,163 4,601 3,683 Net income per common share: Basic: As reported $1.41 $0.97 $0.86 Pro forma 1.39 0.96 0.86 Diluted: As reported $1.37 $0.93 $0.84 Pro forma 1.35 0.93 0.84
The fair value of options granted under the Company's stock option plan is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997, 1996 and 1995; expected volatility of 36.95% in 1997, 40.11% in 1996 and 45.69% in 1995; risk-free rates of 5.56% for 1997, 6.00% for 1996 and 5.28% for 1995; no annual dividend yields; and expected lives of five years for all years. Note 11. Regulatory Capital Requirements The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory practices. The Company's capital amounts and classification are also subject to qualitative judgement by the regulators about components, risk weightings, and other factors. Columbia Banking System Notes 71 The FDIC has established minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. The regulations set forth the definitions of capital, risk-weighted and average assets. Management believes, as of December 31, 1997, that the Bank meets all capital adequacy requirements. The Bank's actual capital amounts and ratios are as follows:
Adequately Well Actual Capitalized Capitalized As of December 31, 1997 Amount Ratio Amount Ratio Amount Ratio - ----------------------- ------ ----- ------ ----- ------ ----- Total capital (to risk-weighted assets) $86,629 11.9% $58,073 8.0% $72,591 10.0% Tier 1 capital (to risk-weighted assets) 78,189 10.8 29,036 4.0 43,555 6.0 Tier 1 capital (to average assets) 78,189 9.3 33,504 4.0 41,880 5.0 As of December 31, 1996 Total capital (to risk-weighted assets) $73,410 13.5% $43,559 8.0% $54,448 10.0% Tier 1 capital (to risk-weighted assets) 68,128 12.5 21,779 4.0 32,669 6.0 Tier 1 capital (to average assets) 68,128 10.2 26,783 4.0 33,477 5.0
Note 12. 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 201/2 years of age and have completed six 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 $211,000, $153,000 and $126,000 in matching funds to the plan during the years ended December 31, 1997, 1996 and 1995, respectively. The Company's amended defined contribution plan provides for a nonmatching, discretionary contribution as determined annually by the Board of Directors of the Company. In January 1998 and 1997, the Company announced discretionary contributions of approximately $439,000 and $358,000 for the years ended 1997 and 1996, respectively. Columbia Banking System Notes 72 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, 8,411 shares were acquired by employees for $153,000 in 1997. 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, 1997, shares of common stock were reserved for issuance under this plan. Note 13. Commitments and Contingent Liabilities An employment agreement with A. G. Espe (Chairman and Chief Executive Officer until his death in November 1997) 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 was amended, effective January 1, 1997, to extend the term to December 31, 2001, and to establish the minimum salary at $160,000. Also, an employment agreement with Mr. W. W. Philip (Chairman, President and Chief Executive Officer) was amended, effective January 1, 1997, to extend the term to December 31, 1998, and to establish his minimum annual salary at $175,000, and was further amended after the death of Mr. Espe in November 1997, to extend the term to December 1, 1999, and to establish his minimum salary at $225,000. 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 payable at 6% and principal due in April and July 2000. The loan to Mr. Espe was paid in full by his estate in December 1997. Columbia Banking System Notes 73 The Company had Long Term Incentive Plan Awards 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. 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, 1997 and 1996, the Company's loan commitments amounted to $206.3 million and $138.9 million, respectively. Standby letters of credit were $6.1 million and $1.7 million at December 31, 1997 and 1996, respectively. In addition, commitments under commercial letters of credit used to facilitate customers' trade transactions amounted to $3.1 million and $2.5 million at December 31, 1997 and 1996, respectively. 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 Notes 74 Note 14. Fair Value of Financial Instruments The FASB's SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS No. 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 No. 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:
Assumptions Used 1997 1996 In Thousands In Estimating Carrying Fair Carrying Fair December 31, Fair Value Amount Value Amount Value - ------------ ---------------- -------- ------- --------- ------- Assets Cash and due Approximately from banks equal to carrying value $47,604 $ 47,604 $ 38,286 $ 38,286 Interest- earning Approximately deposits equal to with banks carrying value 28,108 28,108 44,972 44,972 Securities available Quoted for sale market prices 61,423 61,423 56,643 56,643 Securities held Quoted for sale market prices 9,679 9,754 11,621 11,610 Loans held Approximately for sale equal to carrying value 4,377 4,377 11,341 11,341 Loans Discounted expected future cash flows, net of allowance for loan losses 677,449 739,687 517,869 530,604 Liabilities Deposits Fixed-rate certificates of deposit: Discounted expected future cash flows All other deposits: Approximately equal to carrying value $740,430 $740,803 $596,504 $592,488 Federal Home Discounted Loan Bank expected future advances cash flows 39,000 39,032 34,000 33,362 Other borrowings 2,126 2,126
Columbia Banking System Notes 75 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, 1997, approximates the recorded amounts of the related fees. Note 15. Stock Dividend On April 23, 1997, the Company announced a 5% stock dividend payable on May 22, 1997, to shareholders of record on May 8, 1997. On May 22, 1997, 260,899 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 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. Note 16. SAIF Special Assessment Columbia Bank's deposits are insured by the FDIC through the Bank Insurance Fund and through the Savings Association Insurance Fund (the "SAIF"). SAIF-insured deposits of Columbia Bank are a result of a so-called Oakar transaction in which deposits were acquired from a savings bank. Legislation was 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 was tax deductible, was recognized in third quarter 1996 earnings. Columbia Banking System Notes 76 Note 17. Parent Company Financial Information Condensed Balance Sheets Parent Company Only
In Thousands December 31, 1997 1996 - ------------ ---- ---- Assets Cash and due from banks: Subsidiary banks $ 479 $ 6 Unrelated banks Interest-earning deposits with banks: Subsidiary banks Unrelated banks 1,878 4,021 Securities available for sale 6,794 4,007 Loans 360 720 Investments in bank subsidiaries 68,785 59,215 Premises and equipment, net 11 28 Real estate owned Other assets 256 429 ------- ------- Total assets $78,563 $68,426 ======= ======= Liabilities and shareholders' equity Other liabilities $ 210 $ 202 Borrowed funds Convertible subordinated notes ------- ------- Total liabilities 210 202 Shareholders' equity 78,353 68,224 ------- ------- Total liabilities and shareholders' equity $78,563 $68,426 ======= =======
Columbia Banking System Notes 77 Condensed Statements of Operations Parent Company Only
In Thousands Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Income Interest on loans $ 44 $ 48 $ 54 Interest on securities available for sale 322 20 Interest-earning deposits: Subsidiary banks 6 Unrelated banks 177 53 16 Other 3,518 55 533 ------ ------ ------ Total income 4,061 176 609 Expense Compensation and employee benefits 313 346 341 Interest 204 377 Other 330 309 612 ------ ------ ------ Total expenses 643 859 1,330 ====== ====== ====== Income (loss) before income tax benefit and equity in undistributed net income of subsidiaries 3,418 (683) (721) Income tax benefit 14 ------ ------ ------ Income (loss) before equity in undistributed net income of subsidiaries 3,432 (683) (721) Equity in undistributed net income of subsidiaries 5,843 5,318 4,412 ------ ------ ------ Net Income $9,275 $4,635 $3,691 ====== ====== ======
Columbia Banking System Notes 78 Condensed Statements of Cash Flows Parent Company Only
In Thousands Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Operating Activities Net income $ 9,275 $ 4,635 $ 3,691 Adjustments to reconcile net income to net cash provided (used) by operating activities: Equity in undistributed earnings of subsidiaries (5,843) (5,318) (4,412) Loss on sale of real estate owned 41 Provision for depreciation and amortization 31 35 34 Net changes in other assets and liabilities 181 (140) 2,698 ------- ------- ------ Net cash provided (used) by operating activities 3,644 (747) 2,011 Investing Activities Purchase of securities available for sale (9,792) (4,000) Proceeds from maturities of securities available for sale 7,000 Loans originated or acquired, net of principal collected 360 134 Contribution of capital - bank subsidiaries (3,500) (16,800) (3,100) Return of capital to parent 3,800 Proceeds from sale of real estate owned 3,263 Other, net (161) ------ ------- ------ Net cash provided (used) by investing activities (6,093) (13,603) (3,100) Financing Activities Proceeds from other borrowings 7,000 Repayment of other borrowings (9,600) Proceeds from issuance of common stock 779 20,868 103 ------ ------- ------ Net cash provided by financing activities 779 18,268 103 Increase (decrease) in cash and cash equivalents (1,670) 3,918 (986) Cash and cash equivalents at beginning of period 4,027 109 1,095 ------ ------- ------ Cash and cash equivalents at end of period $ 2,357 $ 4,027 $ 109 ======= ======== ======= Supplemental information: Cash paid for interest $ 204 $ 377 Issuance of common stock from conversion of convertible subordinated notes 2,509 40
Columbia Banking System Notes 79 Note 18. Summary of Quarterly Financial Information - Unaudited The results of operations on a quarterly basis have been restated to give effect to the business combinations with Cascade and Fife. Results of operations on a quarterly basis were as follows for the years 1997 and 1996.
Year Ended December 31, 1997 In Thousands, First Quarter Except Per Share Amounts The Company Cascade Fife Restated - ---------------------------- ----------- ------- ------ -------- 1997 Total interest income $11,353 $1,663 $ 712 $13,728 Total interest expense 5,079 759 305 6,143 ------- ------ ------ ------- Net interest income 6,274 904 407 7,585 Provision for loan losses 400 34 15 449 Noninterest income 1,490 179 50 1,719 Noninterest expense 5,885 791 228 6,904 ------- ------ ------ ------- Income before income tax 1,479 258 214 1,951 Provision for income tax 426 77 71 574 ------- ------ ------ ------- Net income $ 1,053 $ 181 $ 143 $ 1,377 ======= ====== ====== ======= Per share: Net income/1/ $ 0.20 $ 0.22 ======= ======= Year Ended December 31, 1997 In Thousands, Third Quarter Except Per Share Amounts The Company Cascade Fife Restated - ---------------------------- ----------- ------- ------ -------- 1997 Total interest income $13,701 $1,811 $ 810 $16,322 Total interest expense 5,843 793 331 6,967 ------- ------ ------ ------- Net Interest Income 7,858 1,018 479 9,355 Provision for loan losses 499 83 582 Noninterest income 1,814 175 64 2,053 Noninterest expense 6,339 913 355 7,607 ------- ------ ------ ------- Income before income tax 2,834 197 188 3,219 Provision for income tax 908 60 13 981 ------- ------ ------ ------- Net income $ 1,926 $ 137 $ 175 $ 2,238 ======= ====== ====== ======= Per share: Net income/1/ $ 0.35 $ 0.34 ======= =======
/1/ Net income per share has been restated to reflect the adoption of SFAS No. 128. Columbia Banking System Notes 80
Year Ended December 31, 1997 In Thousands, Second Quarter Except Per Share Amounts The Company Cascade Fife Restated - ---------------------------- ----------- ------- ------ -------- 1997 Total interest income $12,675 $ 1,715 $ 793 $15,183 Total interest expense 5,425 762 318 6,505 ------- ------- ----- ------- Net interest income 7,250 953 475 8,678 Provision for loan losses 1,206 36 17 1,259 Noninterest income 2,835 210 50 3,095 Noninterest expense 6,278 863 277 7,418 ------- ------- ----- ------- Income before income tax 2,601 264 231 3,096 Provision for income tax 768 72 78 918 ------- ------- ----- ------- Net income $ 1,833 $ 192 $ 153 $ 2,178 ======= ======= ===== ======= Per share: Net income/1/ $ 0.33 $ 0.33 ======= =======
year ended December 31, 1997 in thousands, third quarter fourth quarter except per share amounts the company cascade fife restated the company
Year Ended December 31, 1997 In Thousands, Fourth Quarter Except Per Share Amounts The Company - ---------------------------- ----------- 1997 Total interest income $16,828 Total interest expense 7,215 ------- Net interest income 9,613 Provision for loan losses 2,436 Noninterest income 5,925 Noninterest expense 9,305 ------- Income before income tax 3,797 Provision for income tax 315 ------- Net income $ 3,482 ======= Per share: Net income/1/ $ 0.53 =======
Columbia Banking System Notes 81
Year Ended December 31, 1996 In Thousands, First Quarter Except Per Share Amounts The Company Cascade Fife Restated - ---------------------------- ----------- ------- ------ -------- 1996 Total interest income $ 8,786 $ 1,454 $ 637 $10,877 Total interest expense 4,296 666 268 5,230 ------- ------- ------ ------- Net interest income 4,490 788 369 5,647 Provision for loan losses 330 30 10 370 Noninterest income 1,165 203 30 1,398 Noninterest expense 4,517 725 190 5,432 ------- ------- ------ ------- Income before income tax 808 236 199 1,243 Provision for income tax 74 68 142 ------- ------- ------ ------- Net income $ 808 $ 162 $ 131 $ 1,101 ======= ======= ====== ======= Per share: Net income/1/ $ 0.25 $ 0.25 ======= ======= Year Ended December 31, 1996 In Thousands, Third Quarter Except Per Share Amounts The Company Cascade Fife Restated - ---------------------------- ----------- ------- ------ -------- 1996 Total interest income $10,041 $ 1,547 $ 698 $12,286 Total interest expense 4,780 746 300 5,826 ------- ------- ------ ------- Net interest income 5,261 801 398 6,460 Provision for loan losses 330 31 20 381 Noninterest income 1,390 227 36 1,653 Noninterest expense 5,838 802 229 6,869 ------ ------- ------ ------- Income before income tax 483 195 185 863 Provision for income tax 58 59 117 ------ ------- ------ ------- Net income $ 483 $ 137 $ 126 $ 746 ====== ======= ====== ======= Per share: Net income/1/ $ 0.14 $ 0.16 ====== =======
/1/ Net income per share has been restated to reflect the adoption of SFAS No. 128. Columbia Banking System Notes 82
Year Ended December 31, 1996 In Thousands, Second Quarter Except Per Share Amounts The Company Cascade Fife Restated - ---------------------------- ----------- ------- ------ -------- 1996 Total interest income $ 9,311 $ 1,468 $ 631 $11,410 Total interest expense 4,306 689 266 5,261 ------- ------- ------ ------- Net interest income 5,005 779 365 6,149 Provision for loan losses 430 36 7 473 Noninterest income 1,308 209 31 1,548 Noninterest expense 4,851 805 200 5,856 ------- ------- ------ ------- Income before income tax 1,032 147 189 1,368 Provision for income tax 41 62 103 Net income $ 1,032 $106 $ 127 $ 1,265 ======= ======= ====== ======= Per share: Net income/1/ $ 0.30 $ 0.28 ======= ======= Year Ended December 31, 1996 In Thousands, Fourth Quarter Except Per Share Amounts The Company Cascade Fife Restated - ---------------------------- ----------- ------- ------ -------- Total interest income $10,924 $ 1,645 $ 743 $13,312 Total interest expense 5,136 768 320 6,224 ------- ------- ------ ------- Net interest income 5,788 877 423 7,088 Provision for loan losses 330 22 59 411 Noninterest income 1,445 211 55 1,711 Noninterest expense 5,649 759 340 6,748 ------- ------- ------ ------- Income before income tax 1,254 307 79 1,640 Provision for income tax 94 23 117 ------- ------- ------ ------- Net income $ 1,254 $ 213 $ 56 $ 1,523 ======= ======= ====== ======= Per share: Net income/1/ $ 0.28 $ 0.28 ======= =======
Columbia Banking System Notes 83 Consolidated Five-Year Statements of Operations/1/
Dollars In Thousands, Except Per Share Amounts Years Ended December 31, 1997 1996 1995 1994 1993 - ------------------------ ---- ---- ---- ---- ---- Interest Income Loans $56,176 $43,240 $36,013 $23,199 $15,299 Securities held to maturity 628 702 1,491 1,547 1,325 Securities available for sale 3,800 2,360 705 319 232 Deposits with banks 1,457 1,583 667 650 642 ------- ------- ------ ------- ------- Total interest income 62,061 47,885 38,876 25,715 17,498 Interest expense Deposits 24,775 20,370 16,369 9,121 6,205 Federal Home Loan Bank advances 1,971 1,938 1,503 1,160 1,788 Other borrowings 84 233 302 625 876 ------- ------- ------- ------- ------- Total interest expense 26,830 22,541 18,174 10,906 8,869 ======= ======= ======= ======= ======= Net interest income 35,231 25,344 20,702 14,809 8,629 Provision for loan losses 4,726 1,635 1,382 1,107 635 ------- ------- ------- ------- ------- Net interest income after provision for loan losses 30,505 23,709 19,320 13,702 7,994 Noninterest income 9,274 6,310 4,766 3,530 2,548 Key Man Life Insurance proceeds 3,518 Noninterest expense 30,000 24,293 19,979 17,061 12,878 SAIF special assessment 612 Merger expenses 1,234 ------- ------- ------- ------- ------- Noninterest expense 31,234 24,905 19,979 17,061 12,878 ======= ======= ======= ======= ======= Income (loss) from continuing operations before income tax 12,063 5,114 4,107 171 (2,336) Provision for income tax 2,788 479 416 156 98 ------- ------- ------- ------- ------- Income (loss) from continuing operations 9,275 4,635 3,691 15 (2,434) Extraordinary loss on extinguishment of debt, net (154) Cumulative effect of accounting change 252 ------- ------- ------- ------- ------- Net income (loss) $ 9,275 $ 4,635 $ 3,691 $ (139) $(2,182) ======= ======= ======= ======= =======
Columbia Banking System Notes 84
Dollars In Thousands, Except Per Share Amounts Years Ended December 31, 1997 1996 1995 1994 1993 - ------------------------ ---- ---- ---- ---- ---- Interest Income Net Income Per Common Share: Income (loss) from continuing operations $ 1.41 $ 0.97 $ 0.86 $ 0.00 $ (0.80) Extraordinary loss on extinguishment of debt, net (0.03) Cumulative effect of accounting change 0.08 Net Income (loss) Basic 1.41 0.97 0.86 (0.03) (0.72) Net Income (loss) Diluted 1.37 0.93 0.84 (0.03) (0.70) Average number of common shares outstanding (basic): 6,583 4,794 4,307 4,180 3,020 Average number of common shares outstanding (diluted): 6,777 4,931 4,385 4,252 3,107 -------- -------- -------- -------- -------- Total assets at end of period $864,555 $706,448 $520,059 $394,365 $293,830 Long-term obligations 39,000 34,000 27,695 19,735 39,081 Cash dividends ======== ======== ======== ======== ========
1 These unaudited schedules provide selected financial information concerning the Company which should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report. Columbia Banking System Notes 85 Consolidated Five-Year Summary of Average Balances and Net Interest Revenue
1997 1996 Average Average Average Average Dollars In Thousands Balances/1/ Interest Rate Balances/1/ Interest Rate - -------------------- ----------- -------- ------- ----------- -------- ------- Interest-earning assets Loans: Commercial business $218,560 $ 20,172 9.23% $158,460 $ 14,153 8.93% Real estate/2/: One- to four-family residential 109,659 10,936 9.97 112,986 10,468 9.26 Five or more family residential and commercial properties 217,412 18,727 8.61 144,340 13,473 9.33 Consumer 68,040 6,341 9.32 58,101 5,146 8.86 -------- -------- ------ -------- -------- ---- Total loans 613,671 56,176 9.15 473,887 43,240 9.12 Securities/3/ 71,424 4,513 6.32 51,056 3,126 6.12 Interest-earning deposits with banks 26,389 1,456 5.52 29,998 1,583 5.28 -------- -------- ------ -------- ------- ---- Total interest-earning assets 711,484 62,145 8.73 554,941 47,949 8.64 Noninterest-earning assets 53,244 40,311 -------- -------- ------ -------- ------- ---- Total assets $764,728 $595,252 ======== ======== Interest-bearing liabilities Certificates of deposit $282,899 $16,017 5.66% $240,214 $13,771 5.73% Savings accounts 38,301 1,054 2.75 32,438 943 2.91 Interest-bearing demand and money market accounts 223,514 7,704 3.45 160,020 5,656 3.53 -------- ------- ------ -------- ------- ------ Total interest-bearing deposits 544,714 24,775 4.55 432,672 20,370 4.71 Federal Home Loan Bank advances 35,597 1,971 5.54 34,096 1,914 5.61 Other borrowings 1,681 84 5.02 3,454 257 7.44 -------- ------- ------ -------- ------- ------ Total interest-bearing liabilities 581,992 26,830 4.61 470,222 22,541 4.79 Demand and other noninterest-bearing deposits 111,492 74,940 Other noninterest- bearing liabilities 6,860 4,421 Shareholders' equity 64,384 45,669 -------- -------- ------ -------- -------- ---- Total liabilities and shareholders' equity $764,728 $595,252 ======== ======== Net interest revenue $35,315 $25,408 ======= ======= Net interest spread 4.12% 3.85% ====== ====== Net interest margin 4.96% 4.58% ====== ====== Average interest-earning assets to average interest-bearing liabilities 122.25% 118.02% ====== ======
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. 3 Tax equivalent basis. Columbia Banking System Notes 86 Consolidated Five-Year Summary of Average Balances and Net Interest Revenue
1995 1994 1993 Average Average Average Average Average Average Dollars In Thousands Balances/1/ Interest Rate Balances/1/ Interest Rate Balances/1/ Interest Rate - -------------------- ----------- -------- ------- ----------- -------- ------- ----------- -------- ------- Interest-earning assets Loans: Commercial business $110,500 $ 10,855 9.82% $ 77,279 $ 6,561 8.49% $ 33,332 $ 2,550 7.65% Real estate/2/: One- to four-family residential 113,341 10,861 9.58 90,123 7,722 8.57 82,069 7,007 8.54 Five or more family residential and commercial properties 103,878 9,942 9.57 68,584 6,418 9.36 42,062 4,527 10.76 Consumer 45,841 4,355 9.50 28,775 2,498 8.68 13,238 1,215 9.18 -------- -------- ------ -------- -------- ------ -------- ------- ------ Total loans 373,560 36,013 9.64 264,761 23,199 8.76 170,701 15,299 8.96 Securities/3/ 38,353 2,241 5.84 35,316 1,891 5.36 25,784 1,570 6.09 Interest-earning deposits with banks 11,055 667 6.03 16,172 650 4.02 21,930 642 2.93 -------- -------- ------ -------- -------- ------ -------- ------- ------ Total interest-earning assets 422,968 38,921 9.20 316,249 25,740 8.14 218,415 17,511 8.02 Noninterest-earning assets 35,370 29,805 19,689 -------- -------- ------ -------- -------- ------ -------- ------- ------ Total assets $458,338 $346,054 $238,104 ======== ======== ======== interest-bearing liabilities Certificates of deposit $203,978 $ 11,680 5.73% $148,229 $ 6,795 4.58% $ 93,640 $ 4,331 4.63% Savings accounts 33,145 971 2.93 41,448 1,104 2.66 34,266 1,175 3.43 Interest-bearing demand and money market accounts 97,326 3,718 3.82 54,789 1,222 2.23 29,696 699 2.35 -------- -------- ------ -------- -------- ------ -------- ------- ------ Total interest-bearing deposits 334,449 16,369 4.89 244,466 9,121 3.73 157,602 6,205 3.94 Federal Home Loan Bank advances 24,915 1,503 6.03 21,452 1,160 5.41 25,875 1,788 6.91 Other borrowings 3,331 302 9.07 6,329 625 9.88 9,868 876 8.88 -------- -------- ------ -------- -------- ------ -------- ------- ------ Total interest-bearing liabilities 362,695 18,174 5.01 272,247 10,906 4.01 193,345 8,869 4.59 Demand and other noninterest-bearing deposits 54,878 36,819 18,760 Other noninterest- bearing liabilities 3,315 2,063 1,303 Shareholders' equity 37,450 34,925 24,696 -------- -------- ------ -------- -------- ------ -------- ------- ----- Total liabilities and shareholders' equity $458,338 $346,054 $238,104 ======== ======== ======== Net interest revenue $ 20,747 $ 14,834 $ 8,642 ======== ======== ======== Net interest spread 4.19% 4.13% 3.43% ====== ====== ====== Net interest margin 4.91% 4.69% 3.96% ====== ====== ====== Average interest-earning assets to average interest-bearing liabilities 116.62% 116.16% 112.97% ====== ====== ======
Columbia Banking System Notes 87 Corporate Directory Board of Directors W. Barry Connoley President and Chief Executive Officer, MultiCare Health System Richard S. DeVine President, Chinook Resources, Inc. Chairman, Raleigh, Schwartz & Powell, Inc. Jack Fabulich Chairman, Parker Paint Manufacturing Co., Inc. President and Commissioner, Port of Tacoma Jonathan Fine Chief Executive Officer, American Red Cross, Seattle-King County Chapter John P. Folsom President and Chief Executive Officer, Raleigh, Schwartz & Powell, Inc. Margel S. Gallagher President, Viva Imports, Ltd. John A. Halleran Private Investor Thomas L. Matson* Owner and President, Tom Matson Dodge, Inc. W. W. Philip Chairman, President and Chief Executive Officer, Columbia Banking System, Inc. and 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 Expediters Sidney R. Snyder Washington State Senator, Owner of Sid's Food Market and Midtown Market James M. Will President, Titus-Will Enterprises Executive Officers W. W. Philip Chairman, President and Chief Executive Officer Melanie J. Dressel Executive Vice President, Retail Banking H. R. Russell Executive Vice President, Commercial Banking Donald A. Andersen Senior Vice President, Loan Production Julie A. Healy Senior Vice President, Operations Gary R. Schminkey Senior Vice President, Chief Financial Officer Evans Q. Whitney Senior Vice President, Human Resources Senior Officers Stan Ausmus Senior Vice President, Puyallup Branch Manager Bret M. Gagliardi Senior Vice President, Commercial Loans, Kent Valley Gary Gahan Senior Vice President, Private Banking, Pierce County Kurt Graff Senior Vice President, Lakewood Branch Manager Janet D. Hildebrand Senior Vice President, Credit Administration Eugene Horan Senior Vice President, Fircrest Branch Manager Trent Jonas Senior Vice President, Commercial Loans, Gig Harbor Gary Lindberg Senior Vice President, Commercial Loans, Pierce County Donald W. Lisko Executive Vice President, Auburn / Puyallup Valley Richard B. Martinez Senior Vice President, Private Banking, Bellevue Linda S. McKeag Senior Vice President, Private Banking Manager Samuel R. Noel Executive Vice President, Southwest Region Richard Plummer Senior Vice President, Commercial Loans, Auburn Valley 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, Pierce County Kenneth M. Yokoyama Senior Vice President, Commercial Loans, Bellevue * Appointed in January 1998 Columbia Banking System Corporate Directory 88 Shareholder Information Corporate Headquarters Columbia Banking System, Inc. 1102 Broadway Plaza P.O. Box 2156 Tacoma, WA 98401-2156 (253) 305-1900 Independent Auditors Deloitte & Touche LLP Transfer Agent and Registrar American Stock Transfer & Trust Company Market Makers BT Alex. Brown Inc. Dain Bosworth, Inc. Everen Securities, Inc. Herzog, Heine, Geduld, Inc. Keefe, Bruyette & Woods, Inc. Ragen MacKenzie Inc. Ryan, Beck & Co., Inc. Legal Counsel Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, PLLC Annual Meeting Sheraton Tacoma Hotel 1320 Broadway Plaza Tacoma, Washington Wednesday, April 22, 1998 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 1997 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 Assistant Vice President, Marketing and Corporate Communications P.O. Box 2156, MS 8300 Tacoma, WA 98401-2156 tel (253) 305-1965 fax (253) 305-0317 E-mail: kkopay@columbiabank.com Columbia Banking System Shareholder Information 89 Branch Locations [GRAPHIC; MAP ART] PIERCE COUNTY 1 MAIN OFFICE 1102 Broadway Plaza Tacoma, WA 98402 (253) 305-1940 John Collins 2 ALLENMORE 1959 South Union Tacoma, WA 98405 (253) 627-6909 Ron Staples 3 EDGEWOOD/MILTON 900 Meridian E. Suite 17 Milton, WA 98354 (253) 952-6646 Michael Butcher 4 FIFE 5501 Pacific Hwy. E. Fife, WA 98424 (253) 922-7870 Ron Mason 5 FIRCREST 2401 Mildred St. w. Fircrest, WA 98466 (253) 566-1172 Gene Horan 6 GIG HARBOR 5303 Point Fosdick Dr. NW Gig Harbor, WA 98335 (253) 858-5105 Marilyn Naylor 7 LAKEWOOD 6202 Mount Tacoma Dr. SW Lakewood, WA 98499 (253) 581-4232 Kurt Graff 8 OLD TOWN 2200 North 30th St. Tacoma, WA 98403 (253) 272-0412 Priscilla May 9 176TH & MERIDIAN (February 1998) 17208 Meridian E. Puyallup, WA 98373 (253) 445-6748 Pat Horan 10 PUYALLUP 4220 S. Meridian Puyallup, WA 98373 (253) 770-0770 Stan Ausmus 11 SOUTH HILL MALL 3500 S. Meridian Suite 503 Puyallup, WA 98373 (253) 770-8161 Robin Conrads Stacy Gibson 12 SPANAWAY 17502 Pacific Ave. S. Spanaway, WA 98387 (253) 539-3094 Joy Johnson 13 SUMMIT 10409 Canyon Road E. Puyallup, WA 98373 (253) 770-9323 Mike Williams 14 WESTGATE (January 1998) 5727 N. 21st St. Tacoma, WA 98406 (253) 761-8170 Priscilla May KING COUNTY 15 AUBURN 25 16th St. NE Auburn, WA 98002 (253) 939-9600 Patty Osthus 16 BELLEVUE 777 108th Ave. NE Suite 100 Bellevue, WA 98004 (425) 646-9696 Stacy Sullivan 17 BELLWVUE WAY 10350 NE 10th St. Bellevue, WA 98004 (425) 452-7323 Stacy Sullivan 18 FEDERAL WAY 33370 Pacific Highway S. Federal Way, WA 98003 (253) 925-9323 Chuck Folsom 19 KENT 504 W. Meeker Kent, WA 98032 (253) 852-8400 Dolores Ehli 20 SOUTH AUBURN 4101 A St. SE Auburn, WA 98002 (253) 939-9800 Rod Clemmer COWLITZ COUTNY 21 COMMERCE 1338 Commerce Ave. Longview, WA 98632 (360) 636-9200 Faith Pacheco 22 30TH AVENUE 2207 30th Ave. Longview, WA 98632 (360) 423-8760 Sheryl Vlach 23 WOODLAND 782 Goerig St. Woodland, WA 98674 (360) 225-9421 Carol Rounds Columbia Banking System Locations 90 [LOGO OF COLUMBIA BANKING SYSTEM] Columbia Banking System, Inc. 1102 Broadway Plaza Tacoma, Washington 98402 www.columbiabank.com EX-21 6 SUBSIDIARIES OF THE COMPANY EXHIBIT 21 SUBSIDIARIES OF THE COMPANY Columbia State Bank, Tacoma, Washington, a Washington state-chartered commercial bank. EX-24 7 POWER OF ATTORNEY DATED FEBRUARY 25, 1998 EXHIBIT 24 POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints 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 25 day of February, 1998. Signature Title /s/ Richard S. DeVine Director - ----------------------------- Richard S. DeVine POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints 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 25 day of February, 1998. Signature Title /s/ Jack Fabulich Director - ----------------------------- Jack Fabulich POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints 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 25 day of February, 1998. Signature Title /s/ Jonathan Fine Director - ----------------------------- Jonathan Fine POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints 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 25 day of February, 1998. Signature Title /s/ John P. Folsom Director - ----------------------------- John P. Folsom POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints 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 25 day of February, 1998. Signature Title /s/ Margel S. Gallagher Director - ----------------------------- Margel S. Gallagher POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints 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 25 day of February, 1998. Signature Title /s/ John A. Halleran Director - ----------------------------- John A. Halleran POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints 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 25 day of February, 1998. Signature Title /s/ Thomas L. Matson Director - ----------------------------- Thomas L. Matson POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints 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 25 day of February, 1998. Signature Title /s/ John H. Powell Director - ----------------------------- John H. Powell POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints 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 25 day of February, 1998. Signature Title /s/ Robert E. Quoidbach Director - ----------------------------- Robert E. Quoidbach POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints 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 25 day of February, 1998. Signature Title /s/ Donald Rodman Director - ----------------------------- Donald Rodman POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints 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 25 day of February, 1998. Signature Title /s/ Frank H. Russell Director - ----------------------------- Frank H. Russell POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints 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 25 day of February, 1998. Signature Title /s/ Sidney R. Snyder Director - ----------------------------- Sidney R. Snyder POWER OF ATTORNEY The director of Columbia Banking System, Inc. (the "Company"), whose signature appears below, hereby appoints 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 25 day of February, 1998. Signature Title /s/ James M. Will Director - ----------------------------- James M. Will EX-27.1 8 FINANCIAL DATA SCHEDULE FISCAL YEAR END 12/31/97
9 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 47,604 28,108 0 0 56,279 9,679 0 685,889 8,440 864,555 740,430 0 6,772 39,000 0 0 67,901 10,452 864,555 56,176 4,428 1,457 62,061 24,775 26,830 35,231 4,726 0 31,234 12,063 9,275 0 0 9,275 1.41 1.37 4.96 1,462 0 20 669 5,282 1,659 91 8,440 8,440 0 1,542
EX-27.2 9 FINANCIAL DATA SCHEDULE FISCAL YEAR END 12/31/96
9 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 38,286 44,972 0 0 52,044 11,621 0 523,151 5,282 706,448 596,504 0 7,720 34,000 0 0 62,980 5,244 706,448 43,240 3,062 1,583 47,885 20,370 22,541 25,344 1,635 0 24,905 5,114 4,635 0 0 4,635 0.97 0.93 4.58 2,256 0 25 346 4,340 720 27 5,282 5,282 0 (225)
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