-----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, HDhc6UjYXvyYzNlmdKMIolAoyTnraw51J2AXd1S3qkX51mo0g4Vc/CuOEehR4lcf 39MQsPXMdmwWGHy/iqpASA== 0001032210-99-000424.txt : 19990331 0001032210-99-000424.hdr.sgml : 19990331 ACCESSION NUMBER: 0001032210-99-000424 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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: 99577171 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 FORM 10K ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended December 31, 1998 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 26, 1999 was $172,462,210. The number of shares of registrant's Common Stock outstanding at February 26, 1999 was 10,070,786 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, 1998 Registrant's definitive Proxy Statement Part III Dated March 26, 1999 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 and Expense Revenue 48 Management Discussion and Analysis of Financial Condition and Results of Operations ("Management Discussion") 13 Investments Note 5, Notes to Consolidated Financial Statements 35 Management Discussion - Securities 20 Lending Activities Management Discussion - Loan Portfolio 16 Management Discussion - Nonperforming Assets 17 Note 6, Notes to Consolidated Financial Statements 36 Summary of Loan Loss Experience Note 7, Allowance for Loan Losses 37 Management Discussion - Provision and Allowance for Loan Losses 18 Supervision and Regulation Management Discussion - Capital 24 Item 2 Properties Note 8, Notes to Consolidated Financial Statements 37 Item 3 Legal Proceedings Note 14, Notes to Consolidated Financial Statements 42 Part II Annual Report to Shareholders Item 5 Market for the Registrant's Common Management Discussion - Quarterly Common Stock and Related Stockholder Stock Prices and Dividend Matters Payments 26
Annual Report to Shareholders and Form 10-K Definitive Proxy Statement - ----------------------------------------------------------- --------------------------------------------------------- Part and Page Item No. Caption Caption Number - ----------- -------------------------------------- ------------------------------------------ ------------- Item 6 Selected Financial Data Consolidated Highlights 2 Consolidated Five-Year Statements of Operations 47 Consolidated Five-Year Summary of Average Balances and Net Interest Revenue 48 Item 7 Management's Discussion and Management Discussion 13 Analysis of Financial Condition and Results of Operations Consolidated Five-Year Summary of Average Balances and Net Interest Revenue 48 Item 7a Market Risk Disclosure Management Discussion- 16 Credit Risk Management Item 8 Financial Statements and Audited Financial Statements 28 Supplementary Data Note 17, Summary of Quarterly Financial Information (Unaudited) 46 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 16
COLUMBIA BANKING SYSTEM, INC. FORM 10-K December 31, 1998 TABLE OF CONTENTS
PART I Page ---------- Item 1. Business General 1 Strategy 1 Market Area 2 Competition 4 Employees 4 Executive Officers of the Company 4 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 11 Deposits 12 Significant Financial Ratios 12 Short-term Borrowings 12 Supervision and Regulation 12 Item 2. Properties 14 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 14 Item 6. Selected Financial Data 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 7a. Market Risk Disclosure 15 Item 8. Financial Statements and Supplementary Data 15 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 15 PART III Item 10. Directors and Executive Officers of the Registrant 15 Item 11. Executive Compensation 15 Item 12. Security Ownership of Certain Beneficial Owners and Management 15 Item 13. Certain Relationships and Related Transactions 16 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 16
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 25 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, 1998, the Company had total assets of $1.1 billion. 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 25 branch offices and has regulatory approval to open three additional branch offices in its market area. Between January 1, 1993 and December 31, 1998, the Company increased its consolidated assets to $1.1 billion from $198.2 million, its loans to $828.6 million from $146.2 million and its deposits to $938.3 million from $151.9 million. Net interest income per year increased to $42.0 million from $14.8 million and net income per year increased to $10.2 million from a loss of $139,000 during the 5 year period ending December 31, 1998. 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. Although Columbia Bank is not a member of the Federal Reserve System, the Board of Governors of the Federal Reserve System has certain supervisory authority over the Company, which can also affect Columbia Bank. 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. The Company's goal over the next several years is to create a well-capitalized, customer focused, Pacific Northwest banking institution with a significant presence in selected markets. The Company intends to effect this growth strategy through a combination of growth at existing branch offices, new branch openings (usually following the hiring of an experienced branch manager and/or lending officer with strong community ties and banking relationships) and acquisitions. In particular, the Company anticipates continued expansion in Pierce County, north into King County (the location of Auburn and Bellevue), south into Thurston County (the location of the state capitol, Olympia) and northwest into Kitsap County (the location of Bremerton and Port Orchard). Expansion by acquisition into these and other markets will be considered as promising opportunities arise. In order to fund its lending activities and to allow for increased contact with customers, the Company is establishing a branch system catering primarily to retail depositors, supplemented by business customer deposits and other borrowings. The Company believes this mix of funding sources will enable it to expand its lending activities rapidly while attracting a stable core deposit base. In order to support its strategy 1 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. Management is placing increased emphasis on control of noninterest expense. 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 the town of Fife, a commercial market in which Columbia did not have a branch. During 1998, Columbia Bank opened four new branches. The Westgate branch in north Tacoma opened in January, and the 176th and Meridian branch in eastern Pierce County opened in February. Both are newly constructed, full-service facilities. In November, its fifteenth Pierce County location opened in the Stadium district of Tacoma. Also, in November the Bank opened its fourth Cowlitz County branch inside the Triangle Mall Thriftway store in Longview. The Company opened its twenty-sixth branch and first Kitsap County location in mid-February 1999 in Port Orchard. The Company's future plans include new locations in Pierce, King, and Thurston counties of western Washington. The Company currently has regulatory approval to open three additional branch offices in its market area. 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 its ongoing expansion, 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 purposes. During the third quarter, the Company occupied a new state-of- the-art Operations Center that will allow for substantial future growth. 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 "Five years after it started in late 1992, the Pierce County economy continued its growth through the first half of 1998. The local economy has grown at an average rate of just under 2.5%, that's 0.5% above the long-term historical growth rate. The outlook is for some cooling off and slower growth over the six quarters from the second half of 1998 through 1999." In the third quarter of 1998 the Company was named in the Fortune magazine annual ranking of America's 100 fastest growing companies as judged by earnings growth. The Company was the only banking company on the list and was ranked 82nd. Pierce County, the area in which the Company's expansion is primarily focused, is located in the South Puget Sound region. With 15 branch offices in Pierce County at the end of 1998, the Company is positioning itself to increase its market share in this County of approximately 687,000 residents, the second most populous county in Washington State. 2 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 230,000 that includes several King County cities located east of Seattle. A large portion of that economy is linked to the 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 area has experienced relatively rapid growth in population and employment, and household incomes 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. The newly opened Kent branch was then consolidated into Cascade's Kent branch location. The merger brought 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 93,000. 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. 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 200,000. 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 in Thurston County 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 in Kitsap County was government related. 3 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 allows mergers or other combinations, relocations of a bank's main office and branching across state lines. Several other financial institutions, 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, other than in Pierce County where its share of bank deposits has grown substantially over the last several years. In June 1998, the Federal Deposit Insurance Corporation (FDIC) market share report classified the Company with 13.4% of the deposit market share in Pierce County, which placed the Company second in the County. 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, 1998, the Company had 439 full-time equivalent employees. The Company has placed a 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. 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 Name Age Position the Company Since - --------------------------------------------------------------------------------------------------------------- W. W. Philip/1/ 72 Director, Chairman, and Chief Executive Officer 1993 J. James Gallagher/2/ 60 Director and Vice Chairman 1998 Melanie J. Dressel/3/ 46 Director, Executive Vice President - the Company; 1997 President and Chief Operating Officer - Columbia Bank, H. R. Russell/4/ 44 Executive Vice President - Senior Credit Officer 1996 Gary R. Schminkey/5/ 41 Executive Vice President and Chief Financial 1993 Officer Evans Q. Whitney/6/ 55 Executive Vice President, Retail Banking 1994 Donald A. Andersen/7/ 53 Senior Vice President, Senior Loan Production 1996 Officer - Columbia Bank Janet D. Hildebrand/8/ 50 Senior Vice President, Credit Administrator - 1998 Columbia Bank
4 /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/ Mr. Gallagher joined the Company as a Director and Vice Chairman in July 1998. From January 1994 until his appointment at Columbia, Mr. Gallagher was a principal of Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C., a law firm headquartered in Tacoma, Washington, where he served as outside legal counsel for the Company. Mr. Gallagher, who is a former bank regulator, has over 30 years of experience as legal counsel to financial institutions throughout the Northwest. /3/ Ms. Dressel joined Columbia Bank as Senior Vice President -- Private Banking in June 1993. In November 1997, she was appointed Executive Vice President -Retail Banking for Columbia Bank and subsequently was appointed President and Chief Operating Officer in July 1998. She became a Director of the Company in 1998. 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. /4/ 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. /5/ Mr. Schminkey joined Columbia Bank as Vice President and Controller in March 1993. In 1994, he was appointed Senior Vice President -- Chief Financial Officer of Columbia Bank and the Company and subsequently was appointed Executive Vice President -- Chief Financial Officer in December 1998. 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. /6/ Mr. Whitney joined Columbia Bank as Senior Vice President -- Human Resources in March 1993. In July 1998, Mr. Whitney was appointed Executive Vice President -- Retail Banking for Columbia Bank and 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. /7/ 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. /8/ Ms. Hildebrand joined Columbia Bank as Senior Vice President Credit Administrator in August 1997. Ms. Hildebrand was employed by First Interstate Bank of Washington and its successor, Wells Fargo Bank, for 23 years, having served as Senior Vice President and Regional Manager of Loan Review prior to leaving that institution in 1997. All officers are elected by the Board of Directors and serve at the pleasure of the Board for an unspecified term. 5 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 are 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 System 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 48 of the Annual Report to Shareholders for the year ended December 31, 1998 ("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 13 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.
1998 Compared to 1997 1997 Compared to 1996 Increase (Decrease) Due to Increase (Decrease) Due to ------------------------------- -------------------------- (in thousands) Volume Rate Total Volume Rate Total - ---------------------------------------------------------------------------------------------------------------------- Interest Income Loans: Commercial business $ 8,086 $ (219) $ 7,867 $ 5,532 $ 487 $ 6,019 One- to four-family residential (1,188) (1,236) (2,424) (293) 761 468 Five or more family residential and commercial properties 4,081 200 4,281 6,199 (945) 5,254 Consumer 1,095 (137) 958 916 279 1,195 - ---------------------------------------------------------------------------------------------------------------------- Total loans 12,074 (1,392) 10,682 12,354 582 12,936 Securities 763 (54) 709 1,284 102 1,386 Interest-earning deposits with banks 242 (45) 197 (205) 79 (126) - ---------------------------------------------------------------------------------------------------------------------- Total interest revenue $13,079 $(1,491) $11,588 $13,433 $ 763 $14,196 ====================================================================================================================== Interest Expense Deposits: Certificates of deposit $ 3,061 $ (161) $ 2,900 $ 2,414 $(168) $ 2,246 Savings accounts 43 (100) (57) 158 (47) 111 Interest-bearing demand 2,178 (37) 2,141 2,185 (137) 2,048 - ---------------------------------------------------------------------------------------------------------------------- Total interest on deposits 5,282 (298) 4,984 4,757 (352) 4,405 Federal Home Loan Bank advances (59) (4) (63) 80 (47) 33 Other borrowings (42) (42) (84) (99) (50) (149) - ---------------------------------------------------------------------------------------------------------------------- Total interest expense $ 5,181 $ (344) $ 4,837 $ 4,738 $(449) $ 4,289 ======================================================================================================================
Investments For additional information concerning securities (securities available for sale and held to maturity), see Note 5 of "Notes to Consolidated Financial Statements" at page 35 of the Annual Report and "Management Discussion - Securities" at page 20 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, 1998, there were no securities of any issuer, other than the U.S. Government and its agencies and corporations, 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, 1998, 1997, and 1996.
Securities Available For Sale Gross Gross Amortized Unrealized Unrealized Market (in thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------ December 31, 1998: U.S. Treasury & government agency $81,549 $474 $82,023 Mortgage-backed 10,672 1 10,673 Other securities 992 38 1,030 - ------------------------------------------------------------------------------------------------------------------ Total $93,213 $513 $93,726 ================================================================================================================== 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 ==================================================================================================================
The following table provides the carrying values, maturities and weighted average yields of the Company's securities available for sale at December 31, 1998.
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 $ 3,521 $ 3,521 Weighted Average Yield 6.19% 6.19% U.S. government agency Balance 6,489 $32,293 $39,405 $ 293 78,502 Weighted Average Yield 5.08% 5.75% 5.98% 7.06% 5.81% Mortgage-backed (1) Balance 1,978 8,695 10,673 Weighted Average Yield 6.36% 5.92% 6.00% Other Securities Balance 1,030 1,030 Weighted Average Yield 6.75% 6.75% - ----------------------------------------------------------------------------------------------------------------------- Total Balance $10,010 $35,301 $39,405 $9,010 $93,726 Weighted Average Yield 5.47% 5.81% 5.98% 5.96% 5.86% - -----------------------------------------------------------------------------------------------------------------------
(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, 1998, 1997, and 1996.
Securities Held To Maturity Gross Gross Amortized Unrealized Unrealized Market (in thousands) Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------- December 31, 1998: U.S. government agency $ 497 $ 7 $ 504 State and municipal securities 5,115 121 5,236 Other Securities 496 18 515 FHLMC preferred stock 250 1 251 - --------------------------------------------------------------------------------------------------------------- Total $ 6,358 $147 $ 6,505 =============================================================================================================== 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 ===============================================================================================================
The following table provides the carrying values, maturities and weighted average yields of the Company's securities held to maturity at December 31, 1998.
Securities Held To Maturity Maturing ------------------------------------------------------------------- After 1 But After 5 But Within 1 Within 5 Within 10 After 10 (dollars in thousands) Year Years Years Years Total - ------------------------------------------------------------------------------------------------------ U.S. government agency Balance $ 497 $ 497 Weighted Average Yield 7.10% 7.10% State and municipal securities * Balance $ 732 2,670 $1,713 5,115 Weighted Average Yield 6.63% 6.46% 6.36% 6.45% Other securities Balance 496 496 Weighted Average Yield 6.77% 6.77% FHLMC stock Balance 250 250 Weighted Average Yield 6.72% 6.72% - ------------------------------------------------------------------------------------------------------ Total Balance $ 982 $3,663 $1,713 $6,358 Weighted Average Yield 6.65% 6.59% 6.36% 6.54% - ------------------------------------------------------------------------------------------------------
* 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, 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ Commercial business $332,638 $270,946 $194,843 $133,885 $ 89,546 Real estate: One-to four-family residential 61,132 71,095 77,359 77,603 83,582 Five or more family residential and commercial properties 291,868 206,628 151,179 113,784 80,010 - ------------------------------------------------------------------------------------------------------------------------ Total real estate 353,000 277,723 228,538 325,272 253,138 Real estate construction: One- to four-family residential 26,444 29,695 31,446 32,819 23,462 Five or more family residential and commercial properties 23,213 33,806 10,724 8,985 4,307 - ------------------------------------------------------------------------------------------------------------------------ Total real estate construction 49,657 63,501 42,170 41,804 27,769 Consumer 94,572 74,710 58,249 51,788 38,120 - ------------------------------------------------------------------------------------------------------------------------ Subtotal 829,867 686,880 523,800 418,864 319,027 Less deferred loan fees and other (1,228) (991) (649) (807) (953) - ------------------------------------------------------------------------------------------------------------------------ Total loans $828,639 $685,889 $523,151 $418,057 $318,074 ======================================================================================================================== Loans held for sale $ 10,023 $ 4,377 $ 11,341 $ 1,367 $ 1,612 ========================================================================================================================
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, 1998 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, 1998. The following table presents at December 31, 1998, (i) the aggregate maturities of loans in each major reportable category of the Company's loan portfolio and (ii) the aggregate amounts of variable and fixed rate loans that mature after one year.
Maturing ----------------------------------------------------------------- (in thousands) Within 1 Year After 1 But After Five Within 5 Years Years Total - ------------------------------------------------------------------------------------------------------ Commercial business $191,824 $128,428 $12,386 $332,638 Real estate construction 44,332 2,707 2,618 49,657 - ------------------------------------------------------------------------------------------------------ Total $236,156 $131,135 $15,004 $382,295 ====================================================================================================== Fixed rate loans $ 55,285 $ 6,363 $ 61,648 Variable rate loans 75,850 8,641 84,491 - ------------------------------------------------------------------------------------------------------ Total $131,135 $15,004 $146,139 ======================================================================================================
10 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, total nonperforming assets, accruing loans past-due 90 days or more and potential problem loans of the Company.
(in thousands) December 31, 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------ Nonaccrual $3,603 $1,462 $2,256 $ 449 $ 452 Restructured 1,783 20 25 29 44 - ------------------------------------------------------------------------------------------------------------------ Total nonperforming loans $5,386 $1,482 $2,281 $ 478 496 Real estate owned 901 231 484 3,304 3,227 - ------------------------------------------------------------------------------------------------------------------ Total nonperforming assets $6,287 $1,713 $2,765 $3,782 $3,723 ================================================================================================================== Accruing loans past-due 90 days or more $ 40 $ 111 $ 154 $ 82 ================================================================================================================== Potential problem loans $1,862 $ 669 $ 346 $ 239 ==================================================================================================================
For information pertaining to risk elements, see the appropriate sections in "Management Discussion - Credit Risk Management" beginning at page 16 of the Annual Report, "Management Discussion - Nonperforming Assets" beginning at page 17 of the Annual Report, "Management Discussion Provision and Allowance for Loan Losses" beginning at page 18 of the Annual Report, and Note 7 of "Notes to Consolidated Financial Statements" beginning at page 37 of the Annual Report, all of which are incorporated herein by reference. 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 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, 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- % of % of % of % of % of Balance at End Amount Total Amount Total Amount Total Amount Total Amount Total of Period Loans* Loans* Loans* Loans* Loans* Applicable to: - ------------------------------------------------------------------------------------------------------------------------------------ Commercial business $5,540 40.0% $4,109 39.4% $3,178 37.2% $2,006 32.0% $1,537 28.1% Real estate and construction: One- to four-family residential 972 10.6 1,041 14.7 1,115 20.8 699 26.3 773 33.6 Five or more family residential and commercial properties 2,008 38.0 1,414 35.0 490 30.9 330 29.3 249 26.4 Consumer 482 11.4 334 10.9 499 11.1 386 12.4 295 11.9 Unallocated 1,542 919 321 - ------------------------------------------------------------------------------------------------------------------------------------ Total $9,002 100.0% $8,440 100.0% $5,282 100.0% $4,340 100.0% $3,175 100.0% ====================================================================================================================================
*Represents the total of all outstanding loans in each category as a percent of total loans outstanding. 11 Deposits The following table presents the average balances outstanding and weighted average interest rate for each major category of deposits:
years ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ 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 $287,007 3.43% $223,514 3.45% $160,020 3.53% Savings accounts 39,768 2.51 38,301 2.75 32,438 2.91 Certificates of deposit 337,557 5.60 282,899 5.66 240,214 5.73 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 664,332 4.48 544,714 4.55 432,672 4.71 Demand and other noninterest- bearing 149,353 111,492 74,940 - ------------------------------------------------------------------------------------------------------------------------------------ Total deposits $813,685 $656,206 $507,612 ====================================================================================================================================
The following table shows the amount and maturity of certificates of deposit that had balances of more than $100,000:
(in thousands) December 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Remaining maturity Three months or less $ 52,673 Over three through six months 23,827 Over six through twelve months 28,596 Over twelve months 7,681 - ------------------------------------------------------------------------------------------------------------------------------------ Total $112,777 ====================================================================================================================================
Significant Financial Ratios Ratios for the last three years, based on daily average balances, are as follows:
1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Return on assets 1.09% 1.21% 0.78% Return on equity 12.05 14.41 10.15 Dividend payout ratio Equity to assets 9.02 8.42 7.67
Short-term Borrowings At December 31, 1998, 1997 and 1996, 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 is a bank holding company within the meaning of the Bank Holding Company Act of 1956 ("BHC Act") registered with and subject to examination by the Federal Reserve Board ("FRB"). The Company's Bank subsidiary is a Washington state chartered bank and is subject to examination, supervision, and regulation by the Washington State Department of Financial Institutions - Division of Banks ("Division"). The FDIC insures Columbia Bank's deposits and in that capacity also regulates the Bank. 12 The Company's earnings and activities are affected by legislation, by actions of the FRB, the Division, the FDIC and other regulators, and by local legislative and administrative bodies and decisions of courts in Washington state. For example, these include limitations on the ability of Columbia Bank to pay dividends to the Company, numerous federal and state consumer protection laws imposing requirements on the making, enforcement, and collection of consumer loans, and restrictions by regulators on the sale of mutual funds and other uninsured investment products to customers. Legislation may be enacted or regulations imposed to further regulate banking and financial services or to limit finance charges or other fees or charges earned in such activities. There can be no assurance whether any such legislation or regulation will place additional limitations on the Company's operations or adversely affect its earnings. Federal law imposes certain restrictions on transactions between the Company and any nonbank subsidiaries, on the one hand, and Columbia Bank on the other. With certain exceptions, federal law also imposes limitations on, and requires collateral for, extensions of credit by insured depository institutions, such as Columbia Bank, to their non-bank affiliates, such as the Company. Subject to certain limitations and restrictions, a bank holding company, with prior approval of the FRB, may acquire an out-of-state bank. Banks in states that do not prohibit out-of-state mergers may merge with the approval of the appropriate federal banking agency. A state bank may establish a de novo branch out of state if such branching is expressly permitted by the other state. The activities of bank holding companies are generally limited to managing or controlling banks. Nonbank acquisitions are generally limited to 5% of voting shares unless the FRB determines that the acquisition is so closely related to banking as to be a proper incident to banking or managing or controlling banks. Among other things, applicable federal and state statutes and regulations which govern a bank's activities 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. Under longstanding FRB policy, a bank holding company is expected to act as a source of financial strength for its subsidiary banks and to commit resources to support such banks. The Company could be required to commit resources to its subsidiary banks in circumstances where it might not do so, absent such policy. The Company and Columbia Bank are subject to risk-based capital and leverage guidelines issued by federal banking agencies for banks and bank holding companies. These agencies are required by law to take specific prompt corrective actions with respect to institutions that do not meet minimum capital standards and have defined five capital tiers, the highest of which is "well-capitalized. 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. 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. In the liquidation or other resolution of a failed insured depository institution, deposits in offices and certain claims for administrative expenses and employee compensation are afforded a priority over other general unsecured claims, including non-deposit claims, and claims of a parent company such as the Company. Such priority creditors would include the FDIC, which succeeds to the position of insured depositors. The Company is also subject to the information, proxy solicitation, insider trading restrictions and other requirements of the Securities Exchange Act of 1934. 13 The earnings of the Company are affected by general economic conditions and the conduct of monetary policy by the U. S. government. Item 2. Properties The Company's executive offices and the Main Office of Columbia Bank are located in approximately 51,000 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 $50,745 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, 1998, Columbia Bank had 15 offices in Pierce County, including the Main Office (7 leased and 8 owned), three offices in Longview (two owned and one leased), 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 other tenants. For additional information pertaining to properties, see Note 8 of "Notes to Consolidated Financial Statements" at page 37 of the Annual Report, which is incorporated herein by reference. Item 3. Legal Proceedings For information concerning legal proceedings, see Note 14 of "Notes to Consolidated Financial Statements" at page 42 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 26 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 2, 47 and 48, respectively, of the Annual Report, which are incorporated herein by reference. 14 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 13 through 26 of the Annual Report and "Consolidated Five-Year Summary of Average Balances and Net Interest Revenue" at page 48 of the Annual Report, all of which are incorporated herein by reference. Item 7a. Market Risk Disclosure For market risk disclosure, see "Credit Risk Management" at page 16 of the Annual Report which is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data For consolidated financial statements of the Company, see "Audited Financial Statements" beginning at page 28 of the Annual Report which is incorporated herein by reference. Note 17, the "Summary of Quarterly Financial Information (Unaudited)" on page 46 of the Annual Report is also incorporated herein by reference. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None 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 26, 1999 (the "Proxy Statement") for the annual meeting of shareholders to be held April 28, 1999. 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. 15 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, 1998, are incorporated by reference in Item 8:
Page ---- Consolidated Statements of Operations--Years ended December 31, 1998, 1997 and 1996 28 Consolidated Balance Sheets--December 31, 1998 and 1997 29 Consolidated Statements of Shareholders' Equity--Years ended December 31, 1998, 1997, and 1996 30 Consolidated Statements of Cash Flows--Years ended December 31, 1998, 1997 and 1996 31 Notes to Consolidated Financial Statements 32 Report of Independent Auditors 27
(2) Exhibits: See "Index to Exhibits" at page 19 of this Form 10-K. (b) Reports on Form 8-K: None 16 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 26th day of March, 1999. Columbia Banking System, Inc. (Registrant) By /s/ W. W. Philip ------------------ W. W. Philip Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on the 26th day of March, 1999. Principal Executive Officer: /s/ W. W. Philip ------------------ W. W. Philip Chairman and Chief Executive Officer Principal Financial Officer: /s/ Gary R. Schminkey --------------------- Gary R. Schminkey Executive Vice President and Chief Financial Officer 17 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 26, 1999, as attorney-in-fact for the following directors who constitute a majority of the board of directors. [Richard S. DeVine] [John Halleran] [Melanie J. Dressel] [Thomas L. Matson] [Jack Fabulich] [John Powell] [Jonathan Fine] [Robert E. Quoidbach] [John P. Folsom] [Donald Rodman] [J. James Gallagher] [Sidney Snyder] [Margel S. Gallagher] [William T. Weyerhaeuser] [W. Kelso Gillenwater] [James M. Will]
/s/ W. W. Philip ------------------ W. W. Philip Attorney-in-fact March 26, 1999 18 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. (7) *(d) Employment agreement between the Company and J. James Gallagher effective July 1, 1998, except with respect to section 4.3 (granting restricted stock award) which is effective April 22, 1998. (e) Data processing servicing agreement dated May 3, 1993 between the Company and M&I Data Services. (2) (f) Deferred Compensation Plan for directors and certain key employees effective April 1, 1995. (7) 11 Statement re computation of per share earnings. 13 The Company's Annual Report to Shareholders for the fiscal year ended December 31, 1998. (6) 21 Subsidiaries of the Company are: (a) Columbia State Bank, Tacoma, Washington, a Washington state- chartered commercial bank. 19 24 Powers of Attorney dated March 9, 10, and 12, 1999. 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 June 30, 1998 previously filed by the Company. (6) Portions of the Annual Report to Shareholders have been specifically incorporated by reference elsewhere in this report. (7) Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1997 previously filed by the Company.
* The listed documents are management contracts which contain compensatory arrangements. 20 EX-10.D 2 EMPLOYMENT AGREEMENT Exhibit 10 *(d) Exhibit 10 *(d) 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 J. JAMES GALLAGHER (the "Executive"). This Agreement shall become effective as of July 1, 1998. RECITALS Executive has served as outside legal counsel to Employer and has substantial knowledge of Employer's affairs and of the business of financial institutions in general. Employer has incurred substantial growth and is looking to continue expansion of its operations, with the assistance of Executive. Executive is willing to so assist the Employer and to discontinue his outside legal practice, in return for consideration provided herein. 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 July 1, 1998 and will continue until June 30, 2003, unless extended or sooner terminated as provided in this Agreement. 3. Duties. (a) Executive will be Vice-Chairman of Columbia Bank and CBSI. In such capacities, and subject to the authority of the Chairman and the Board of Directors of Columbia Bank and CBSI, as appropriate, Executive will be responsible for strategic planning, merger and acquisition activity, legal and regulatory compliance and will in addition 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 Chairman or the Board, or that are provided in the Bylaws, of Columbia Bank or CBSI. He will also report to the Chairman. (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 (calendar year) base salary of not less than $175,000 per year (payable at the rate of $14,583.33 per month) beginning July 1, 1998. (b) Columbia Bank 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 June 30, 2003, 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 1998 Restricted Stock Award. (a) Grant of Restricted Stock Award. In order to further incent Executive in 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 ten thousand (10,000) shares of the no par value common stock of CBSI (the "1998 Shares"). The date of grant is April 22, 1998. (b) Consideration for Issuance of 1998 Shares. In consideration for the issuance of the 1998 Shares, the Executive agrees to become Vice Chairman effective July 1, 1998 and to remain as an active executive officer and/or Board member of CBSI and Columbia Bank from July 1, 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. (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 April 22, 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) April 22, 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 4.3(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 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 June 30, 2003 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, benefits accrued and all reimbursable expenses hereunder incurred through such termination date and, in addition, liquidated damages in an amount equal to the greater of (i) two years' salary, or (ii) salary for the then-remaining term of the Agreement 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, benefits accrued 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 (i) willful misfeasance or gross negligence in the performance of his duties; (ii) 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 (iii) 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. 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, 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 until two years following termination or June 30, 2003, whichever is longer; 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. 7.2 Definitions. 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. Miscellaneous. 8.1 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. 8.2 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. 8.3 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. 8.4 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. 8.5 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: 23 Lagoon Lane North Lakewood, WA 98498 This Agreement is dated as of May 27, 1998. COLUMBIA STATE BANK By: /s/ W.W. Philip --------------- W.W. Philip Its: Chairman, President and Chief Executive Officer COLUMBIA BANKING SYSTEM, INC. By: /s/ W.W. Philip --------------- W.W. Philip Its: Chairman, President and Chief Executive Officer /s/ J. James Gallagher ---------------------- J. James Gallagher EX-11 3 COMPUTATION OF PER SHARE NET INCOME Exhibit 11 Exhibit 11 Statement re computation of per share net income Columbia Banking System, Inc.
Twelve Months Ended December 31, (in thousands, except per share data) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stock $10,201 $ 9,275 $4,635 ================================================================================================================================ Average number of basic common shares outstanding 10,046 9,875 7,192 Dilutive effect of stock options unexercised 313 291 205 - -------------------------------------------------------------------------------------------------------------------------------- Average number of diluted common shares outstanding 10,359 10,166 7,397 ================================================================================================================================ Diluted net income per share $ 0.98 $ 0.91 $ 0.63 ================================================================================================================================
On April 22, 1998, the Company announced a three shares for two stock split payable on May 20, 1998, to shareholders of record on May 6, 1998. Common shares issued and outstanding, average shares outstanding and net income per share for all periods presented have been retroactively adjusted to give effect to this transaction. For additional information on earnings per share, please see the "Capital" section of the "Management Discussion and Analysis of Financial Condition and Results of Operations" beginning at page 24 of the Annual Report, which is incorporated herein by reference. EX-13 4 ANNUAL REPORT AND FINANCIAL STATEMENT EXHIBIT 13 COLUMBIA BANKING SYSTEM, INC. 1998 ANNUAL REPORT COLUMBIA BANKING SYSTEM, INC. is a Tacoma, Washington-based bank holding company which operates Columbia Bank, a state-chartered full-service commercial bank with 26 banking offices in Pierce, King, Cowlitz and Kitsap 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. BANKING IS WHAT BANKING WAS (PHOTO) 1
consolidated highlights (dollars in thousands percent except per share amounts) 1998 1997 change for the year Net interest income $ 41,960 $ 35,231 19.1% Provision for loan losses 1,900 4,726 (59.8) Net income 10,201 9,275 10.0 Net income excluding unusual items * 10,201 8,165* 25.0 per share Net income (basic) $ 1.02 $ 0.94 8.5% Net income (diluted) 0.98 0.91 7.7 Net income excluding unusual items * (basic) 1.02 0.83* 22.9 Net income excluding unusual items * (diluted) 0.98 0.80* 22.5 Book value 8.90 7.93 12.2 at year-end Assets $1,059,919 $864,555 22.6% Loans 828,639 685,889 20.8 Allowance for loan losses 9,002 8,440 6.7 Deposits 938,345 740,430 26.7 Shareholders' equity 89,566 78,353 14.3 Number of full-time equivalent employees 439 327 Number of banking offices at year end 25 21 financial ratios Net interest margin 4.87% 4.96% Return on average assets 1.09 1.21 Return on average equity 12.05 14.41 Return on average assets excluding unusual items * 1.09 1.07* Return on average equity excluding unusual items * 12.05 12.68* Efficiency ratio 67.84 69.00 Average equity to average assets 9.02 8.42 risk-based capital ratios Tier I capital 9.89% 10.77% Total capital 10.88 11.93 Leverage ratio 8.72 9.33
* 1997 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). 2 to our shareholders As Columbia prepares to move into the year 2000, we remain committed to the values and service that helped us surpass our original goals. The heart and soul of Columbia Bank is the trust we have in our people and in their connection with the customers they serve. Our people and the values they embrace leave us well positioned as we enter the new millennium. I am pleased to announce strong earnings and loan growth for 1998. Comparing 1998 earnings with 1997 is a bit confusing due to certain unusual, non-recurring items that occurred in 1997. Excluding those items, net income in 1998 increased 25 percent. Our profit for the year was $10.2 million, or $0.98 on a diluted per share basis. The Bank's deposit generation continued to grow with ongoing branch expansion and demand for our service. Deposits reached $938 million at year-end, up 27 percent from one year ago, further increasing our growing share of the retail market. On September 1, 1993 when we started Columbia Bank, we were last in market share in Pierce County. We are proud to announce that we have now grown to number 2 in deposits in Pierce County. Strong loan demand contributed to growth of 21 percent for the year, with loans totaling $828.6 million at December 31, 1998, up from $685.9 million at year-end 1997. Within five years of implementing our aggressive expansion strategy targeting Pierce and South King counties, your Company reached one billion in assets by the end of September 1998. At year-end 1998, Columbia Banking System's assets were $1.1 billion, up 23 percent from $864.6 million at year-end 1997. Of course, size alone is not the primary measure of our performance. Operating efficiency continued to improve during a year of expansion, down to 67.8 percent for 1998, from 69 percent in 1997. Loan growth remains balanced with careful attention to asset quality. Nonperforming assets were 0.59 percent of total assets, and nonaccrual loans were 0.43 percent of total loans at year-end. During 1998, we expanded lending operations in several major areas. We established a dealer banking program that helped diversify our loan portfolio. We also created a Correspondent Banking Department, with the purpose of providing banking services of all kinds to smaller commercial banks throughout the northwest. This allows us to sell banking products and services these banks don't currently offer to their customers. To offer additional support to these small banks, we enhanced our Merchant Services Department in May of last year. The department brings in bank card fees and more business deposits. Our consumer loan portfolio expanded to $95 million in 1998 from $75 million in 1997, an increase of 27 percent. As the number of retail branches increase, our ability to provide consumer loans is also improved. 3 In 1998 we made a commitment to hire management and staff for a full- service International Department. Our search led to the hiring of well-seasoned, experienced international bankers; the department was up and running by the end of February, 1999. On a personal note, I announced last year that I will be stepping aside as an active officer later in 1999. I am very pleased that we have in place the senior executive team that will guide the Bank's future growth and expansion. During the third quarter of 1998 we announced the appointment of Melanie Dressel as President and Chief Operating Officer of Columbia Bank, and Jim Gallagher as Vice Chairman of the Bank and Columbia Banking System, Inc. Evans "Tex" Whitney was also appointed as Executive Vice President with responsibility for the bank's branch network. H.R. Russell, our Executive Vice President of commercial banking, continues to maintain responsibility for all lending, production and administration. Gary Schminkey, our Executive Vice President and Chief Financial Officer, rounds out this group. This accomplished and experienced team will guide the Company as we meet the opportunities and challenges that lie ahead. I am very proud of this team and of what we've accomplished so far - and we're just beginning. I also thank you, our shareholders, for your continued support. /s/ W. W. Philip ------------------------------------ W. W. PHILIP Chairman and Chief Executive Officer A MESSAGE FROM MELANIE J. DRESSEL The financial services environment today continues to create opportunities for your Bank due to the impact of industry consolidations. Your Company will continue to focus on commitment to high quality customer service, while aggressively pursuing growth through acquisition and branching in appropriate markets. Our philosophy and practice continues to be hiring the right banker familiar with his or her own market - because it works. Our branch network is built around the experience, skills and individualized relationships of these bankers with their customers and their community. Last year, Columbia Bank continued to expand the franchise in selected markets as we opened four new branches, bringing the total number of banking locations to twenty-five in Pierce, King and Cowlitz counties. The branches we opened in Tacoma's Westgate and Stadium areas, and 176th and Meridian in Puyallup are traditional, full-service branch facilities. We also added the Triangle Mall branch in Longview's Thriftway store, offering customers 7-day-a- week banking and extended hours. 4 Our first Kitsap County branch opened mid-February, 1999 in Port Orchard. We have identified a potential expansion opportunity in Olympia in Thurston County and expect a small branch facility to open by the end of first quarter 1999. While expansion and growth are important, we must also provide our customers with the highest quality products and services, through the delivery channels they demand. Columbia Bank offers choices - to do business face-to- face, over the phone, by mail, and during 1999, over the Internet. Offering these choices requires sound technology that's used to enhance, not diminish customer relationships. Through our website at www.columbiabank.com, we expect to offer home banking during 1999. Customers will be able to check their transactions and account balances, and transfer funds without the need to visit a branch office. This will be coupled with a redesign of our home page to provide easier access to products, services and information for our existing and potential customers. Like all banks last year, we saw compressed net interest margins as a result of lower interest rates and competitive pressure in our market. Loans are always priced competitively with special attention paid to the overall relationship and its benefit to both the customer and the Bank. A substantial portion of Columbia Bank's readiness strategy for the Year 2000 date change has been completed to our satisfaction. We are continuing our efforts to ensure our systems, and those provided to us by outside companies will operate smoothly in the Year 2000. We are confident that our internal systems will be in compliance well before January 1, 2000, and we expect all equipment and software in our control will be Year 2000 compliant by this spring. All of us at Columbia are committed to growing your organization and building long-term value for our shareholders. We know that the foundation of our growth is the strength of the communities we serve, and in giving back for the greater good. In that spirit, Columbia Bank and our volunteers give generously of both their time and money to support a wide variety of programs for health, education and youth programs, the arts, and community revitalization. Our progress and strong 1998 performance show that our strategies are working well. We thank our employees, shareholders and customers, all of whom have contributed to our success. /s/ Melanie J. Dressel -------------------------------------- MELANIE J. DRESSEL Executive Vice President, Columbia Banking System, Inc. President and Chief Operating Officer, Columbia Bank 5 Come into any of our twenty-six branches. Look us up @ www.columbiabank.com. Or just call on the phone. You'll be treated the way you expect to be treated: not as a number or as a too small for our attention account, but as an individual. With your own specific preferences, ideas, needs and goals. To make sure that banking is what banking was, everything we do begins with the customer: after all, without customers, what sort of business could we possibly have? (PHOTO) 6 WE MAKE A POINT OF GETTING INVOLVED (PHOTO) 7 EXPERIENCE TO MAKE DECISIONS ON THE SPOT (PHOTO) 8 No one likes to wait. No one likes to be viewed as just another customer with just another loan. Which are just a few reasons for the way we've built our business around experienced bankers: people who have the knowledge, insight and authority to respond to a customer. On the spot. By working from the perspective of customers, we've developed a culture that has a responsive, one-of-a-kind mentality. Supported by all the tools and systems to be effective for customers and for our Company. (PHOTO) 9 It all comes back to loyalty. We find ways to show it to our employees, to our vendors, to our customers, shareholders and communities every day. In how we develop new business, and keep relationships strong with the people who have stayed with us. And we feel loyalty is returned to us. You can measure that loyalty through our record growth in assets and income, and you can measure it in the trust customers show us. Not to mention the thanks that come our way for a job well done. (PHOTO) 10 WE BRING LOYALTY BACK TO BANKING (PHOTO) 11 MD&A.............................................................. 13 REPORT OF INDEPENDENT AUDITORS.................................... 27 AUDITED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF OPERATIONS............................. 28 CONSOLIDATED BALANCE SHEETS....................................... 29 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY................... 30 CONSOLIDATED STATEMENTS OF CASH FLOWS............................. 31 NOTES............................................................. 32 SUPPLEMENTAL FINANCIAL DATA (UNAUDITED) CONSOLIDATED FIVE-YEAR STATEMENTS OF OPERATIONS................... 47 CONSOLIDATED FIVE-YEAR SUMMARY OF AVERAGE BALANCES AND NET INTEREST REVENUE............................................ 48 CORPORATE DIRECTORY............................................... 50 SHAREHOLDER INFORMATION........................................... 51 BRANCH LOCATIONS.................................................. N/A 12 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 acquiring other banks, or opening and acquiring new branches, controlling expenses, 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 25 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, 1998, the Company had total assets of $1.1 billion. 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 25 branch offices and has regulatory approval to open three additional branch offices in its market area. Between January 1, 1993 and December 31, 1998, the Company increased its consolidated assets to $1.1 billion from $198.2 million, its loans to $828.6 million from $146.2 million and its deposits to $938.3 million from $151.9 million. Net interest income per year increased to $42.0 million from $14.8 million and net income per year increased to $10.2 million from a loss of $139,000 during the 5 year period ending December 31, 1998. 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. Management believes the ongoing consolidation among financial institutions in Washington has created significant gaps in the ability of large banks operating in Washington to serve certain customers, particularly the Company's target customer base of small and medium-sized businesses, professionals and other individuals. The Company's business strategy is to provide its customers with the financial sophistication and breadth of products of a regional bank while retaining the appeal and service level of a community bank. Management believes that as a result of the Company's strong commitment to highly personalized relationship-oriented customer service, its varied products, its strategic branch locations and the long-standing community presence of its managers, lending officers and branch personnel, it is well positioned to attract new customers and to increase its market share of loans and deposits. The Company's goal over the next several years is to create a well- capitalized, customer focused, Pacific Northwest banking institution with a significant presence in selected markets. The Company intends to effect this growth strategy through a combination of growth at existing branch offices, new branch openings (usually following the hiring of an experienced branch manager and/or lending officer with strong community ties and banking relationships) and acquisitions. In particular, the Company anticipates continued expansion in Pierce County, north into King County (the location of Auburn and Bellevue), south into Thurston County (the location of the state capitol, Olympia) and northwest into Kitsap County (the location of Bremerton and Port Orchard). Expansion by acquisition into these and other markets will be considered as promising opportunities arise. In order to fund its lending activities and to allow for increased contact with customers, the Company is establishing a branch system catering primarily to retail depositors, supplemented by business customer deposits and other borrowings. The Company believes this mix of funding sources will enable it to expand lending activities rapidly while attracting a stable core deposit base. In order to support its strategy of growth, without compromising its personalized banking approach or its commitment to asset quality, the Company has made significant investments in experienced branch, lending and administrative personnel and has incurred significant costs related to its branch expansion. Although the Company's expense ratios have improved since 1993, management anticipates that the ratios will remain relatively high by industry standards for the foreseeable future due to the Company's aggressive growth strategy and emphasis on convenience and personal service. Management is placing increased emphasis on control of noninterest expense. 13 During 1998, Columbia Bank opened four new branches. The Westgate branch in north Tacoma opened in January and the 176th and Meridian branch in eastern Pierce County opened in February. Both are newly constructed, full-service facilities. In November, its fifteenth Pierce County location opened in the Stadium district of Tacoma. Also, in November the Bank opened its fourth Cowlitz County branch inside the Triangle Mall Thriftway store in Longview. The Company's future plans include new locations in Pierce, King, Kitsap and Thurston counties of western Washington. The Company currently has regulatory approval to open three additional branches in its market area. 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. The Company opened its twenty-sixth branch and first Kitsap County location in mid-February 1999 in Port Orchard. Located just south of the port city of Bremerton, Port Orchard is a fast growing residential community that provides easy access for employees of the Bremerton Naval shipyard and the Trident Submarine Base. In addition to its ongoing expansion, 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 purposes. During the third quarter, the Company occupied a new state-of- the-art Operations Center that will allow for substantial future growth. 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 "Five years after it started in late 1992, the Pierce County economy continued its growth through the first half of 1998. The local economy has grown at an average rate of just under 2.5%, that's 0.5% above the long-term historical growth rate. The outlook is for some cooling off and slower growth over the six quarters from the second half of 1998 through 1999." In the third quarter of 1998 the Company was named in the Fortune magazine annual ranking of America's 100 fastest growing companies as judged by earnings growth. The Company was the only banking company on the list and was ranked 82/nd/. 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, occupancy expense, and merchant services and bank card expenses. 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 1998, the Company recorded net income of $10.2 million, compared with net income of $9.3 million in 1997 and net income of $4.6 million in 1996. On a diluted per share basis, net income for 1998 was $0.98 per share, compared with $0.91 per share in 1997, and $0.63 per share in 1996. Excluding certain unusual items which occurred in 1997 and 1996, net income was $10.2 million in 1998, compared with net income of $8.2 million in 1997, and $5.2 million in 1996, increases of 25% and 58% for the years ended December 31, 1998 and 1997, respectively. On a diluted per share basis, 1998 net income was $0.98 per share compared with net income excluding unusual items of $0.80 per share in 1997, and $0.71 per share in 1996. 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 completed mergers. Also, excluded was an additional loan loss provision made in the fourth quarter to reflect increased credit risk and portfolio growth during 1997. In the 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. The Company completed its first bank acquisitions during the fourth quarter of 1997, merging Cascade Community Bank and Bank of Fife into Columbia Bank. The mergers were accounted for on a pooling-of-interest basis, and Company financial statements for all reported periods have been restated to reflect the mergers. NET INTEREST INCOME Net interest income increased $6.7 million, or 19%, in 1998 compared with $9.9 million, or 39%, in 1997. The 1998 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 $151.7 million and $156.5 million in 1998 and 1997, respectively, while average interest-bearing liabilities increased only $116.9 million and $111.8 million, respectively. Net interest margin (net interest income divided by average interest-earning assets) decreased to 4.87% for 1998, compared with 4.96% in 1997 and 4.58% in 1996. While interest-earning assets grew during 1998, the average yield on interest-earning assets decreased to 8.54%, from 8.73% in 1997. In comparison, the average cost of interest-bearing liabilities decreased to 4.53% in 1998 from 4.61% in 1997. The decrease in net interest margin is primarily due to decreasing interest rates and to deposit growth exceeding loan growth with consequent investments in lower 14 yielding assets. Competition and declining interest rates have caused loan yields to decline to a greater degree than corresponding decreases in deposit and borrowing costs, causing the net interest margin to decrease. Interest rates in general have exhibited a downward trend during 1998 due to a variety of economic factors, including slowing of economic growth and low inflation. PROVISION FOR LOAN LOSSES For the years ended December 31, 1998, 1997 and 1996, net loan charge-offs amounted to $1.3 million, $1.6 million and $693,000, respectively. The Company's provision for loan losses was $1.9 million for 1998, compared with $4.7 million for 1997 and $1.6 million for 1996. During 1998, the allowance for loan losses increased $562,000 to $9.0 million as compared with $8.4 million and $5.3 million at the end of 1997 and 1996, respectively. The allowance for loan losses as a percentage of loans (excluding loans held for sale at each date) decreased to 1.09% at December 31, 1998 as compared to 1.23% and 1.01% of loans at December 31, 1997 and 1996, respectively. At year-end 1998, the allowance for loan losses to nonperforming loans was 167.14% compared to 569.50% and 231.57% at December 31, 1997 and 1996, respectively. NONINTEREST INCOME Total noninterest income, excluding proceeds from a Key Man Life Insurance policy, increased $2.7 million, or 29%, in 1998, and $3.0 million, or 47%, in 1997. Increases in noninterest income during 1998 were centered in account service charges, merchant services and mortgage banking income. In general, increases in account service charges and merchant services are due to the growth of the Company, and increases in mortgage banking income reflect a greater volume of residential real estate loan originations due to lower long term interest rates, as compared with the year ended December 31, 1997. NONINTEREST EXPENSE Excluding nonrecurring items (merger expense in 1997 and SAIF assessment in 1996), total noninterest expense increased $6.6 million, or 22.0%, in 1998 and $5.7 million, or 23.5%, in 1997. The increase was primarily due to personnel costs associated with the Company's expansion as well as occupancy, merchant services and bank card, advertising, and other expenses. The Company's efficiency ratio (noninterest expense, excluding unusual and nonrecurring items, divided by the sum of net interest income plus noninterest income, excluding unusual and nonrecurring items) was 67.8% for 1998 compared with 69.0% and 76.7% for 1997 and 1996, respectively. A 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. Set forth below is a schedule showing additional detail concerning increases and decreases in the Company's noninterest expense.
YEAR ENDED DECEMBER 31, INCREASE/ INCREASE/ (IN THOUSANDS) 1998 (DECREASE) 1997 (DECREASE) 1996 Compensation and employee benefits $17,925 $ 2,669 $15,256 $2,671 $12,585 Less: loan origination costs 2,109 182 1,927 (373) 2,300 - ------------------------------------------------------------------------------------------ Net compensation and employee benefits (as reported) 15,816 2,487 13,329 3,044 10,285 Occupancy 5,215 727 4,488 240 4,248 Professional services 951 353 598 (73) 671 Advertising and promotion 1,848 584 1,264 458 806 Printing and supplies 688 (51) 739 192 547 Regulatory assessments 198 (47) 245 (97) 342 Data processing 1,731 187 1,544 322 1,222 Losses on real estate owned 62 (62) 124 124 Telephone and network 465 (35) 500 127 373 Postage & delivery 473 (58) 531 175 356 ATM network 281 60 221 12 209 Merchant services and bank card 3,308 1,314 1,994 513 1,481 Taxes, licenses and fees 1,320 330 990 202 788 Other 4,247 814 3,433 468 2,965 SAIF special assessment (612) 612 Merger expenses (1,234) 1,234 1,234 - ------------------------------------------------------------------------------------------ Total noninterest expense $36,603 $ 5,369 $31,234 $6,329 $24,905 ==========================================================================================
15 CREDIT RISK MANAGEMENT The extension of credit in the form of loans to individuals and businesses is a major portion of the Company's principal business activity. Company policies and applicable laws and regulations require risk analysis as well as ongoing portfolio and credit management. The Company manages its credit risk through lending limit constraints, credit review, approval policies and extensive, ongoing internal monitoring. The Company also manages credit risk through diversification of the loan portfolio by type of loan, type of industry, aggregation of debt limits to a single borrower and the type of borrower. In analyzing its existing portfolio, the Company reviews its consumer and residential loan portfolios by risk rating each loan and analyzing their performance as a pool of loans since no single loan is individually significant, judged by its risk rating size or potential risk of loss. In contrast, the monitoring process for the commercial business, real estate construction, and commercial real estate portfolios includes periodic reviews of individual loans with risk ratings assigned to each loan and performance judged on a loan by loan basis. The Company reviews these loans to assess the ability of the borrower to service all of its interest and principal obligations and as a result the risk rating may be adjusted accordingly. In the event that full collection of principal and interest is not reasonably assured, the loan is appropriately downgraded and, if warranted, placed on nonaccrual status even though the loan may be current as to principal and interest payments. Loan policies, credit quality criteria, portfolio guidelines and other controls are established under the guidance of the Company's Senior Credit Officer and approved, as appropriate, by the Board. Credit Administration, together with appropriate loan committees, has the responsibility for administering the credit approval process. As another part of its control process, the Company uses an independent internal credit review and examination function to provide assurance that loans and commitments are made and maintained as prescribed by its credit policies. This includes a review of documentation when the loan is initially extended and subsequent examination to ensure continued performance and proper risk assessment. LENDING ACTIVITIES The Company is a full service commercial bank, which originates a wide variety of loans. Consistent with the trend begun in 1993, the Company continues to have success originating commercial business and commercial real estate loans. The following table sets forth the Company's loan portfolio by type of loan for the dates indicated:
(IN THOUSANDS) % OF % OF % OF DECEMBER 31, 1998 TOTAL 1997 TOTAL 1996 TOTAL Commercial business $332,638 40.1% $270,946 39.5% $194,843 37.2% Real estate: One- to four-family residential 61,132 7.4 71,095 10.4 77,359 14.8 Five or more family residential and commercial properties 291,868 35.2 206,628 30.1 151,179 28.9 - ------------------------------------------------------------------------------------------- Total real estate 353,000 42.6 277,723 40.5 228,538 43.7 Real estate construction: One- to four-family residential 26,444 3.2 29,695 4.3 31,446 6.0 Five or more family residential and commercial properties 23,213 2.8 33,806 4.9 10,724 2.1 - ------------------------------------------------------------------------------------------- Total real estate construction 49,657 6.0 63,501 9.2 42,170 8.1 Consumer 94,572 11.4 74,710 10.9 58,249 11.1 - ------------------------------------------------------------------------------------------- Subtotal 829,867 100.1 686,880 100.1 523,800 100.1 Less deferred loan fees and other (1,228) (0.1) (991) (0.1) (649) (0.1) - ------------------------------------------------------------------------------------------- Total loans $828,639 100.0% $685,889 100.0% $523,151 100.0% =========================================================================================== Loans held for sale $ 10,023 $ 4,377 $ 11,341 ===================================================================================
Total loans at year-end increased $142.8 million, or 20.8%, from year-end 1997. All loan categories except for one- to four-family residential and real estate construction loans contributed significantly to the increase. Commercial loans increased to $332.6 million at December 31, 1998, representing 40.1% of total loans, from 16 $270.9 million, or 39.5% of total loans, at December 31, 1997. This increase reflects management's ongoing commitment to provide competitive commercial lending in the Company's primary market areas. The Company expects to continue to expand its commercial lending products and to emphasize in particular its relationship banking with businesses, business owners and professional individuals. Residential one- to four-family loans decreased $10.0 million to $61.1 million at December 31, 1998, representing 7.4% of total loans, compared with $71.1 million, or 10.4% of total loans, at December 31, 1997. The decrease is attributable to maturities and prepayments of the portfolio. These loans are used by the Company to collateralize advances from the FHLB. The Company's underwriting standards require that one- to four-family portfolio loans generally be owner-occupied and that loan amounts not exceed 80% (90% with private mortgage insurance) of the appraised value or cost, whichever is lower, of the underlying collateral at 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. The Company makes multi-family and commercial real estate loans in its primary market areas. Multi-family and commercial real estate lending increased to $291.9 million at December 31, 1998, representing 35.2% of total loans, from $206.6 million, or 30.1% of total loans, at December 31, 1997. The Company's underwriting standards generally require that the loan-to-value ratio for multi- family and commercial loans not exceed 75% of appraised value or cost, whichever is lower, and that commercial properties maintain debt coverage ratios (net operating income divided by annual debt servicing) which management considers adequate. Underwriting standards can be influenced by competition. The Company endeavors to maintain the highest practical underwriting standards while balancing the need to remain competitive in its lending practices. The Company originates a variety of real estate construction loans. One- to four-family residential construction loans are originated for the construction of custom homes (where the home buyer is the borrower) and provides financing to builders for the construction of pre-sold homes and speculative residential construction. Construction loans on one- to four-family residences decreased to $26.4 million at December 31, 1998, representing 3.2% of total loans, from $29.7 million, or 4.3% of total loans at December 31, 1997. Multi-family and commercial real estate construction loans decreased to $23.2 million at December 31, 1998, representing 2.8% of total loans, from $33.8 million, or 4.9% of total loans, at December 31, 1997. The decrease is a result of growing competition fueled in part by declining interest rates during 1998 as well as management's intention to focus on commercial loans. The Company endeavors to limit its construction lending risk through adherence to strict underwriting procedures. At December 31, 1998, the Company had $94.6 million of consumer loans outstanding, representing 11.4% of total loans, as compared with $74.7 million, or 10.9% of total loans, at December 31, 1997. Consumer loans made by the Company include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans and miscellaneous personal loans. At December 31, 1998, the Company had no loans to foreign domiciled businesses or foreign countries, or loans related to highly leveraged transactions. Management's growth strategy to date 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. Management has recently turned its attention to growth in Thurston County, south King County and the Bellevue/Eastside areas.
(IN THOUSANDS) INCREASE DECEMBER 31, 1998 1997 AMOUNT PERCENT Pierce County $619,688 $485,863 $133,825 27.5% All other counties 208,951 200,026 8,925 4.5 - ---------------------------------------------------------------------------------------- Total $828,639 $685,889 $142,750 20.8% ========================================================================================
NONPERFORMING ASSETS Nonperforming assets 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); and (iii) accruing loans which are contractually past due ninety days or more as to interest or principal payments. Potential problem loans are 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 which may later be included in nonaccrual, past due or restructured loans. 17 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, total nonperforming assets, accruing loans past-due 90 days or more and potential problem loans of the Company:
(IN THOUSANDS) DECEMBER 31, 1998 1997 1996 Nonaccrual: One- to four-family residential $ 722 $ 661 $1,645 Commercial real estate 1,542 Commercial business 1,214 728 385 Consumer 125 73 226 - ------------------------------------------------------------------------- Total 3,603 1,462 2,256 Restructured: One- to-four-family residential 15 20 25 One- to-four-family residential construction 1,768 - ------------------------------------------------------------------------- Total 1,783 20 25 Total nonperforming loans $5,386 $1,482 $2,281 ========================================================================= Real estate owned 901 231 484 - ------------------------------------------------------------------------- Total nonperforming assets $6,287 $1,713 $2,765 ========================================================================= Accruing loans past due 90 days or more $ 40 $ 111 Impaired loans 2,756 $ 728 385 Potential problem loans 1,862 669 346 Allowance for loan losses 9,002 8,440 5,282 Nonperforming loans to loans 0.65% 0.22% 0.44% Nonperforming assets to total assets 0.59 0.20 0.39 =========================================================================
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. The policy of the Company generally is to discontinue the accrual of interest on all loans past due 90 days or more and place them on nonaccrual status. Impaired loans, generally, refer to non-homogeneous 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. Nonperforming loans increased to $5.4 million, or 0.65% of total loans (excluding loans held for sale), at December 31, 1998, from $1.5 million, or 0.22% of total loans at December 31, 1997 due principally to increases in the commercial business, commercial real estate, and residential construction loan categories. The increase in nonaccrual loans and other nonperforming assets is centered in a small number of lending relationships which management considers to be adequately reserved. All nonperforming loans are to Washington businesses. Real estate owned, which is comprised of foreclosed real estate loans ("REO"), increased to $901,000 at December 31, 1998, from $231,000 at December 31, 1997. During 1998, the Company foreclosed on $1.0 million of loans collateralized by real estate and transferred the real estate to REO. Also, the Company reduced REO by $343,000, with proceeds of $308,000 from sales and net losses on sales of $35,000. At year-end 1998, REO consisted of two foreclosed properties. Total nonperforming assets increased to $6.3 million, or 0.59% of period-end assets at December 31, 1998, from $1.7 million, or 0.20% of period-end assets at December 31, 1997. PROVISION AND ALLOWANCE FOR LOAN LOSSES The Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The size of the allowance is determined through quarterly assessments of the probable estimated losses in the loan portfolio. The Company's methodology for making such assessments and determining the adequacy of the allowance includes the following key elements: 1. Formula based allowances calculated on minimum thresholds and historical performance of the portfolio for the past five years 2. Specific allowances for identified problem loans and/or portfolio segments 3. Unallocated allowance 18 In addition, the allowance incorporates the results of measuring impaired loans as provided in the Statement of Financial Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan", and SFAS No. 118, which amended SFAS No. 114. These accounting standards prescribe the measurement methods, income recognition and disclosures concerning impaired loans. On a quarterly basis (semi-annual in the case of economic and business conditions reviews) the senior credit officers of the Company review with Executive Management and the Board of Directors the various additional factors that management considers when determining the adequacy of the allowance. These factors include the following as of the applicable balance sheet date: 1. Existing general economic and business conditions affecting the Company's market place 2. Credit quality trends, including trends in nonperforming loans 3. Collateral values 4. Seasoning of the loan portfolio 5. Bank regulatory examination results 6. Findings of internal credit examiners 7. Duration of current business cycle The allowance is increased by provisions charged to operations, and is reduced by loans charged off, net of recoveries. While management believes it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in determining the allowance. At December 31, 1998, the Company's allowance for loan losses was $9.0 million, or 1.09% of the total loan portfolio, and 167% of nonperforming loans. This compares with an allowance of $8.4 million, or 1.23% of the total loan portfolio, and 570% of nonperforming loans, at December 31, 1997. During the year ended December 31, 1998, the Company set aside $1.9 million as a provision for loan losses as compared with $4.7 million during 1997. For the years ended December 31, 1998, 1997 and 1996, net loan charge-offs amounted to $1.3 million, $1.6 million, and $693,000, respectively. During 1998, there were no changes in estimation methods or assumptions that affected the Company's methodology for assessing the appropriateness of the allowance, except that certain changes in assumptions regarding the effect of portfolio maturity and of economic and business conditions on borrowers affected the assessment of the appropriate provision for the year 1998. In 1997 management concluded that loss potential had increased in the loan portfolio as a result of average annual growth in the portfolio of approximately 31% since 1993 combined with indications of a business downturn resulting from the effect of global economic conditions from the Asian financial crisis and, in particular, potential adverse effects on the aerospace, foreign trade and timber industries. This judgement was made despite the absence of a manifested increase in nonaccrual loans or nonperforming assets but after considering the additional factors management considers when determining the adequacy of the allowance, as discussed above. Thus management substantially increased the provision in 1997 to reserve for such loss potential. During 1998, nonperforming loan levels did rise significantly but the reasons for the increase were determined by management to be a reflection of the maturing of the portfolio rather than problems in the aerospace, foreign trade and timber industries. Those borrowers who were downgraded to nonperforming status received close supervision by the Bank with the objective of seeing substantial improvement in performance or elimination from the portfolio by refinancing outside the Bank or other means. Progress in improving their condition was made by several borrowers during 1998. Also, the stability of other borrowers despite the downturn convinced management that a similarly large provision in 1998 was not required. Thus the 1998 provision was reduced to an amount which did not anticipate further significant deterioration in the quality of the loan portfolio. Further, management has determined that, absent an unanticipated decline in credit quality, the provision in 1999 will be maintained at an amount which holds the allowance in a range of 1.00% to 1.20% of average outstanding loans, in line with industry norms. 19 The following table provides an analysis of net losses by loan type for the last five years.
(DOLLARS IN THOUSANDS) December 31, 1998 1997 1996 1995 1994 Total loans, net at end of period /(1)/ $828,639 $685,889 $523,151 $418,057 $318,075 Daily average loans 748,587 613,671 473,887 373,560 264,761 - -------------------------------------------------------------------------------------------------------- Balance of allowance for loan losses at beginning of period $ 8,440 $ 5,282 $ 4,340 $ 3,175 $ 2,354 Charge-offs: One- to four-family residential (57) (364) (7) Commercial business (1,195) (1,025) (514) (148) (258) Consumer (333) (270) (199) (119) (111) - --------------------------------------------------------------------------------------------------------- Total charge-offs (1,585) (1,659) (720) (267) (369) Recoveries: One- to four-family residential 1 7 Commercial business 175 43 17 45 83 Consumer 72 47 3 5 - --------------------------------------------------------------------------------------------------------- Total recoveries 247 91 27 50 83 Net charge-offs (1,338) (1,568) (693) (217) (286) Provision charged to expense 1,900 4,726 1,635 1,382 1,107 - --------------------------------------------------------------------------------------------------------- Balance of allowance for loan losses at end of period $ 9,002 $ 8,440 $ 5,282 $ 4,340 $ 3,175 ========================================================================================================= Net charge-off to average loans outstanding 0.18% 0.26% 0.15% 0.06% 0.11% Allowance for loan losses to loans 1.09 1.23 1.01 1.04 1.01 Allowance for loan losses to nonperforming loans 167.14 569.50 231.57 907.95 640.12 ========================================================================================================= /(1)/ Excludes loans held for sale
SECURITIES The Company's securities (securities available for sale and securities held to maturity) increased by $34.1 million to $100.1 million from year-end 1997 to year-end 1998. The Company had no sales of securities during 1998. Purchases during the year totaled $92.9 million while maturities and prepayments totaled $59.0 million. U.S. Treasury and government agency securities comprise 82.5% of the investment portfolio, with mortgage-backed securities at 10.7% and state and municipal securities at 5.1%. The average maturity of the securities portfolio was 5 years, 10 months at December 31, 1998. Approximately 93.6% 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 5 to the consolidated financial statements. PREMISES AND EQUIPMENT In 1998, fixed assets increased $9.8 million, or 36% from 1997. The net change includes purchases of $12.5 million, disposals of $54,000 and depreciation expense of $2.6 million. The Company's capital expenditures in 1999 are anticipated to be approximately $2.1 million. Such expenditures are expected to include approximately $1.6 million for new buildings and for remodeling existing structures, and $500,000 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. 20 DEPOSIT ACTIVITIES The Company experienced overall average deposit growth of 24.0% and 29.3% in 1998 and 1997, respectively. All categories of deposits increased during both years. The average interest-bearing and noninterest-bearing demand deposits increased 28.4% and 34.0% in 1998, and 39.7% and 48.8% in 1997, respectively. Average deposits are summarized in the following table:
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1998 1997 1996 Demand and other noninterest-bearing $149,353 $111,492 $ 74,940 Interest-bearing demand 287,007 223,514 160,020 Savings 39,768 38,301 32,438 Certificates of deposit 337,557 282,899 240,214 Total average deposits $813,685 $656,206 $507,612 ====================================================================
The Company is establishing a branch system catering primarily to retail depositors, supplemented by business 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. During 1998, total deposits increased $197.9 million to $938.3 million at December 31, 1998. The increase occurred primarily in "core deposits". Brokered and other wholesale deposits (excluding public deposits) increased $3.8 million to $7.3 million, or 0.78% of total deposits, at December 31, 1998, from $3.5 million, or 0.47% of total deposits, at December 31, 1997. Brokered and other wholesale deposits are summarized below. The average interest rate for these deposits was 5.59% and 5.77% at December 31, 1998 and 1997, respectively.
December 31, 1998 1997 (dollars in thousands) PERCENT PERCENT OF TOTAL OF TOTAL AMOUNT DEPOSITS AMOUNT DEPOSITS Maturing within one year $2,000 0.21% $1,486 0.20% Maturing after one year but within three years 5,327 0.57 2,000 0.27 - ---------------------------------------------------------------------------------------- Total brokered and other wholesale deposits $7,327 0.78% $3,486 0.47% ========================================================================================
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, 1998 1997 AMOUNT PERCENT Pierce County $678,019 $505,212 $172,807 34.2% All other counties 260,326 235,218 25,108 10.7 - ------------------------------------------------------------ Total $938,345 $740,430 $197,915 26.7% ============================================================
BORROWINGS The Company relies on FHLB advances to supplement its funding sources, and the FHLB serves as the Company's primary source of long-term borrowing. FHLB advances are secured by one- to four-family real estate mortgages and certain other assets. At December 31, 1998, the Company had one advance of $25.0 million at an interest rate of 5.39%. At December 31, 1998 the maximum borrowing line from the FHLB was $123.1 million. Management anticipates that the Company will continue to rely on the same sources of funds in the future, and will use those funds primarily to make loans and purchase securities. 21 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 consequences from a change in interest rates that arises 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 or 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, 1998. The amounts in the table are derived from the Company's internal data and are based upon regulatory reporting formats. Therefore, they may not be consistent with financial information appearing elsewhere herein that has been prepared in accordance with generally accepted accounting principles. The amounts could be significantly affected by external factors such as changes in prepayment assumptions, early withdrawal of deposits and competition. 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. 22
ESTIMATED MATURITY OR REPRICING ------------------------------- (DOLLARS IN THOUSANDS) 0-3 4-12 1-5 5-10 MORE THAN DECEMBER 31, 1998 MONTHS MONTHS YEARS YEARS 10 YEARS TOTAL INTEREST-EARNING ASSETS Interest-earning deposits $ 22,816 $ 22,816 Securities 8,191 $ 3,653 $ 38,966 $ 45,814 $ 9,010 105,634 Loans: Business and commercial real estate 284,040 23,665 172,913 24,245 2,233 507,096 One- to four-family and owner- occupied residential real estate 76,512 56,027 75,463 8,931 10,021 226,954 Consumer 32,634 31,533 30,290 6,264 683 101,404 - ----------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $424,193 $114,878 $317,632 $ 85,254 $ 21,947 $ 963,904 ======================================================================================================================= Noninterest-earning assets 3,207 92,808 96,015 - ----------------------------------------------------------------------------------------------------------------------- Total assets $424,193 $118,085 $317,632 $ 85,254 $114,755 $1,059,919 ======================================================================================================================= Percent of total interest- earning assets 44.01% 11.92% 32.95% 8.84% 2.28% 100.00% ======================================================================================================================= INTEREST-BEARING LIABILITIES Deposits: Money market checking $267,372 $ 267,372 NOW accounts 18,286 $ 73,144 91,430 Savings accounts 14,447 $ 14,447 $ 14,447 43,341 Time certificates of deposit 130,007 $183,668 43,489 357,164 FHLB advances 25,000 25,000 - ----------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $430,112 $183,668 $141,633 $ 14,447 $ 14,447 $ 784,307 ======================================================================================================================= Noninterest-bearing liabilities and equity 143,230 35,808 96,574 275,612 ======================================================================================================================= Total liabilities and equity $573,342 $183,668 $177,441 $ 14,447 $111,021 $1,059,919 ======================================================================================================================= Percent of total interest- earning assets 44.62% 19.06% 14.69% 1.50% 1.50% 81.37% ======================================================================================================================= Rate sensitivity gap $ (5,919) $(68,790) $175,999 $ 70,807 $ 7,500 $ 179,597 Cumulative rate sensitivity gap (5,919) (74,709) 101,290 172,097 179,597 - ----------------------------------------------------------------------------------------------------------------------- Rate sensitivity gap as a percentage of interest-earning assets (0.61)% (7.14)% 18.26% 7.34% 0.78% 18.63% Cumulative rate sensitivity gap as a percentage of interest- earning assets (0.61)% (7.75)% 10.51% 17.85% 18.63% =======================================================================================================================
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 certain 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, 1998, the Company would expect an increase in net interest income of $470,000 and a decrease in net interest income of $461,000 if interest rates gradually decrease or increase, respectively, from current rates by 100 basis points over a twelve- month period. Similarly, 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 the then current rates by 100 basis points over a twelve-month period. 23 INCOME TAX Prior to December 31, 1996, for federal income tax purposes, the Company had net operating loss ("NOL") carryforwards. The carryforwards 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, 1998 and 1997, the Company recorded income tax provisions of $5.2 million and $2.8 million, respectively. CAPITAL Shareholders' equity increased to $89.6 million at December 31, 1998, from $78.4 million at December 31, 1997. The increase is due primarily to net income for the year of $10.2 million. Shareholders' equity was 8.45% and 9.06% of total assets at December 31, 1998 and December 31, 1997, 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, 1998, the Company's leverage ratio was 8.72%, compared with 9.33% at December 31, 1997. In addition, banking regulators have adopted risk-based capital guidelines, under which risk percentages are assigned to various categories of assets and off-balance sheet items to calculate a risk- adjusted capital ratio. Tier I capital generally consists of common shareholders' equity, 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 9.89% and 10.88%, respectively, at December 31, 1998, compared with 10.77% and 11.93%, respectively, at December 31, 1997. 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 22, 1998, the Company announced a three shares for two stock split payable on May 20, 1998, to shareholders of record on May 6, 1998. Common shares issued and outstanding, average shares outstanding and net income per share for all periods presented have been retroactively adjusted to give effect to this transaction. 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 (Y2K) 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. Financial institutions, such as Columbia, are dependent on many types of automated computer systems for their day to day operations. The failure of any of theses systems to recognize the Year 2000, could have a material effect on the Company's business, results of operations, and/or financial condition. THE COMPANY'S STATE OF READINESS The Company currently is preparing its operations for the Year 2000 and has established a project team, which has developed a project plan intended to insure that the Company will be Y2K compatible well before December 31, 1999. The project plan incorporates five phases: awareness, assessment, renovation, validation, and implementation. The awareness phase is ongoing and incorporates monthly updates to the Board of Directors, management, and staff. In addition, shareholders and customers are informed through mailings and financial reports. The Y2K project team meets regularly. Loan officers have been trained in interviewing and surveying credit customers on the state of readiness of their businesses and have begun those activities. The Company has completed its assessment of all of its computer systems, hardware, software, networks, telecommunications, ATM, property, and equipment that could potentially be either directly or indirectly affected by Y2K. The Company has identified all vendors that supply services and/or products that could be considered critical to day-to-day operations to determine if they are Y2K compatible. The Company is identifying all customers who have a total borrowing relationship of $250,000 or more or otherwise have the potential to adversely affect the Company's asset quality or profitability if they do not become Y2K compatible. 24 Based on its assessment, the Company has essentially completed renovating all systems and equipment that have been identified needing Y2K up-grades. In early October, the Company's data processing provider advised the Company that it had successfully converted its systems to Y2K compatibility. Testing is scheduled to be completed and the Company's data processing system is expected to be fully compliant by March 31, 1999. All other systems and equipment have been upgraded or are in process of being upgraded. The Company is monitoring vendors that are in the process of upgrading or have not begun upgrading their businesses. The validation process involves testing all systems and equipment for Y2K compatibility. Bank hardware has been tested and the Company is in the process of replacing obsolete equipment as part of our normal business operations. The implementation phase is ongoing and incorporates the development of contingency plans for the century date change. The Company has developed a credit risk mitigation plan, a liquidity contingency plan, and ongoing disclosures and inquiries to customers and vendors. THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES The Company has expended approximately $53,000 in staff time and travel expenses in addressing the Y2K issue. Equipment upgrades are expected to cost approximately $543,000. Much of the Company's equipment, such as PCs, was upgraded in 1998 as part of normal business operations. The Company is relatively new and the majority of its hardware and software are recent purchases or are being upgraded to meet growth demands. The Company moved into a new state-of-the-art operations center in August 1998. The center included the installation of new item processing hardware and software, a new voice response unit, a new wire transfer system, and a new optical storage system, all of which are Y2K compatible. Future expenses cannot be predicted with certainty at this time, however, management does not believe that expenses relating to meeting the Company's Y2K challenges will have a material effect on its operations or financial performance. THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES Although the Company can and will prepare its operations for the century change, there can be no assurance that forces beyond its control will not impact its operations. The Company purchases systems, equipment, and data processing services from vendors and suppliers. It also depends on many other vendors for various services needed for day-to-day operations. The Company's customers could also be impacted adversely by the century change and thereby impact the financial performance of the Company. In spite of the Company's diligent efforts in assuring its outside suppliers, vendors and customers are Y2K compliant, there can be no assurance that when the century changes, certain systems, technology and equipment of Columbia, its vendors and its customers will not be impacted and consequently impact the operations of the Company. THE COMPANY'S CONTINGENCY PLANS The Company has developed a comprehensive Year 2000 contingency plan. Although the Company has taken precautions to assure its technology is Y2K ready, it will continue to address possible emergency scenarios. The Company's new state-of-the-art operations center has a generator backup to run the entire facility. All branches have special procedures in order to operate without the usual telecommunications links so that, in the event of a telecommunications failure, the Company is able to process its data through a remote site. 25 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, 1998, the last sale price for the Company's stock in the over-the-counter market was $18/1/2/. The Company presently intends to retain earnings to support anticipated growth. Accordingly, the Company does not intend to pay cash dividends on its common stock in the foreseeable future. Please refer to the "Capital" section of the "Management Discussion and Analysis of Financial Condition and Results of Operations" and Note 4 to the consolidated financial statements, contained elsewhere in this report, for regulatory capital requirements and restrictions on dividends to shareholders. The Company is aware that large blocks of its stock are held in street name by brokerage firms. At December 31, 1998, the number of shareholders of record was 1,349. The following are high and low sales prices as reported in Nasdaq according to information furnished by the National Association of Securities Dealers. Prices do not include retail mark-ups, mark-downs or commissions. 1998 1997 HIGH LOW HIGH LOW First quarter $ 21/1/4/ $ 17/7/8/ $ 11/9/16/ $9/27/32/ Second quarter 27/5/32/ 19/7/8/ 13/3/4/ 9/3/8/ Third quarter 23/1/2/ 14/3/8/ 17/5/32/ 13/5/32/ Fourth quarter 22/1/2/ 15/7/16/ 18/27/32/ 15 For the year 27/5/32/ 14/3/8/ 18/27/32/ 9/3/8/ 26 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, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for the years 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 audits. 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 audits provide 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, 1998 and 1997, and the results of its operations and its cash flows for the two years 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 3 to the consolidated financial statements. The consolidated financial statements of the Company for the year ended December 31, 1996, 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 77% of restated net income in 1996. Separate financial statements of the other companies included in the Company's restated consolidated financial statements for the year ended December 31, 1996 were audited and reported on separately by other auditors. We have audited the statements of operations, shareholders' equity, and cash flows for the year ended December 31, 1996, after restatement for the 1997 poolings of interests; in our opinion, such consolidated statements have been properly combined on the basis as described in Note 3 of the notes to the consolidated financial statements. /s/ Deloitte & Touche LLP _____________________________ Deloitte & Touche LLP Seattle, Washington January 29, 1999 27 CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE) YEARS ENDED DECEMBER 31, 1998 1997 1996 INTEREST INCOME Loans $ 66,858 $ 56,176 $ 43,240 Securities available for sale 4,696 3,800 2,360 Securities held to maturity 419 628 702 Deposits with banks 1,654 1,457 1,583 - -------------------------------------------------------------------------------------------------------------------------------- Total interest income 73,627 62,061 47,885 INTEREST EXPENSE Deposits 29,759 24,775 20,370 Federal Home Loan Bank advances 1,908 1,971 1,938 Other borrowings 84 233 - -------------------------------------------------------------------------------------------------------------------------------- Total interest expense 31,667 26,830 22,541 - -------------------------------------------------------------------------------------------------------------------------------- Net Interest Income 41,960 35,231 25,344 Provision for loan losses 1,900 4,726 1,635 - -------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 40,060 30,505 23,709 NONINTEREST INCOME Service charges and other fees 5,679 4,234 2,837 Mortgage banking 1,677 1,032 701 Gains on sales of loans, net 1,035 Other 4,635 2,973 2,772 Key Man Life Insurance 3,518 - -------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 11,991 12,792 6,310 NONINTEREST EXPENSE Compensation and employee benefits 15,816 13,329 10,285 Occupancy 5,215 4,488 4,248 Advertising and promotion 1,848 1,264 806 Data processing 1,731 1,544 1,222 Other 11,993 9,375 7,732 SAIF special assessment 612 Merger expenses 1,234 - -------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 36,603 31,234 24,905 - -------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 15,448 12,063 5,114 Provision for income taxes 5,247 2,788 479 - -------------------------------------------------------------------------------------------------------------------------------- Net Income $ 10,201 $ 9,275 $ 4,635 ================================================================================================================================ NET INCOME PER COMMON SHARE: Basic $1.02 $0.94 $0.64 Diluted 0.98 0.91 0.63 Average number of common shares outstanding 10,046 9,875 7,192 Average number of diluted common shares outstanding 10,359 10,166 7,397
See accompanying notes to consolidated financial statements. 28 CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS) DECEMBER 31, 1998 1997 ASSETS Cash and due from banks $ 53,602 $ 47,604 Interest-earning deposits with banks 22,816 28,108 Securities available for sale 93,726 56,279 Securities held to maturity 6,358 9,679 FHLB stock 5,550 5,144 Loans held for sale 10,023 4,377 Loans 828,639 685,889 Less: allowance for loan losses 9,002 8,440 - -------------------------------------------------------------------------------------------------------------------------------- Loans, net 819,637 677,449 Interest receivable 6,420 5,023 Premises and equipment, net 37,077 27,246 Real estate owned 901 231 Other 3,809 3,415 - -------------------------------------------------------------------------------------------------------------------------------- Total Assets $1,059,919 $ 864,555 ================================================================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 180,445 $ 146,063 Interest-bearing 757,900 594,367 - -------------------------------------------------------------------------------------------------------------------------------- Total deposits 938,345 740,430 Federal Home Loan Bank advances 25,000 39,000 Other liabilities 7,008 6,772 - -------------------------------------------------------------------------------------------------------------------------------- Total liabilities 970,353 786,202 Commitments and contingent liabilities (Note 14) Shareholders' equity:' Preferred stock (no par value) Authorized, 2 million shares; none outstanding DECEMBER 31, Common stock (no par value) 1998 1997 Authorized shares 45,000 16,500 Issued and outstanding 10,062 9,880 68,612 67,901 Retained earnings 20,616 10,415 Accumulated other comprehensive income Unrealized gains on securities available for sale, net of tax 338 37 - -------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 89,566 78,353 Total Liabilities and Shareholders' Equity $1,059,919 $864,555 ================================================================================================================================
See accompanying notes to consolidated financial statements. 29 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED COMMON STOCK OTHER TOTAL NUMBER OF RETAINED COMPREHENSIVE SHAREHOLDERS' (IN THOUSANDS) SHARES AMOUNT EARNINGS INCOME (LOSS) EQUITY Balance at December 31, 1995 6,505 $37,414 $ 2,804 $ (98) $ 40,120 Comprehensive income: Net income for 1996 4,635 Change in unrealized gains and (losses) on securities available for sale, net of tax 60 Total comprehensive income 4,695 Issuance of shares of common stock, net 2,238 20,900 20,900 Issuance of shares of common stock - 5% stock dividend 246 2,157 (2,157) Conversion of Convertible Subordinated Notes 383 2,509 2,509 - -------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 9,372 62,980 5,282 (38) 68,224 Comprehensive income: Net income for 1997 9,275 Change in unrealized gains and (losses) on securities available for sale, net of tax 75 Total comprehensive income 9,350 Issuance of shares of common stock, net 117 779 779 Issuance of shares of common stock -- 5% stock dividend 391 4,142 (4,142) - -------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 9,880 67,901 10,415 37 78,353 Comprehensive income: Net income for 1998 10,201 Change in unrealized gains and (losses) on securities available for sale, net of tax 301 Total comprehensive income 10,502 Issuance of shares of common stock, net 182 711 711 - -------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 10,062 $68,612 $ 20,616 $ 338 $ 89,566 ================================================================================================================================
See accompanying notes to consolidated financial statements. 30 CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) 1998 1997 1996 OPERATING ACTIVITIES Net income $ 10,201 $ 9,275 $ 4,635 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 1,900 4,726 1,635 Deferred income tax expense (benefit) 30 956 (12) Losses on real estate owned 35 105 41 Depreciation and amortization 2,304 2,189 2,681 Net realized losses (gains) on sale of assets (55) (971) 218 (Increase) decrease in loans held for sale (5,646) 6,964 (9,974) Increase in interest receivable (1,397) (903) (1,109) Increase in interest payable 660 528 423 Net changes in other assets and liabilities (883) (3,546) 208 - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 7,149 19,323 (1,254) INVESTING ACTIVITIES Proceeds from maturities of securities available for sale 49,250 25,337 17,885 Purchase of securities available for sale (83,186) (34,831) (46,770) Proceeds from maturities of mortgage-backed securities available for sale 5,075 3,814 1,682 Purchase of mortgage-backed securities available for sale (8,710) Proceeds from maturities of securities held to maturity 4,698 4,414 1,471 Purchases of securities held to maturity (1,380) (1,470) (3,014) Loans originated and acquired, net of principal collected (144,585) (173,877) (106,888) Proceeds from sales of loans 10,177 Purchases of premises and equipment (12,546) (11,043) (7,181) Proceeds from disposal of premises and equipment 20 400 1,273 Proceeds from sale of real estate owned 308 588 3,307 Other, net (13) (83) (495) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (191,069) (176,574) (138,730) FINANCING ACTIVITIES Net increase in deposits 197,915 143,926 149,605 Proceeds from FHLB advances and other long-term debt 25,000 32,800 Repayment of FHLB advances and other long-term debt (14,000) (20,000) (23,800) Increase in securities sold under repurchase agreements 1,366 Proceeds from issuance of common stock, net 711 779 20,900 - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 184,626 149,705 180,871 - ---------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 706 (7,546) 40,887 Cash and cash equivalents at beginning of period 75,712 83,258 42,371 - ---------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 76,418 $ 75,712 $ 83,258 ================================================================================================================================== SUPPLEMENTAL INFORMATION: Cash paid for interest $ 31,007 $ 26,302 $ 22,117 Cash paid for income taxes 5,547 3,380 460 Transfer from securities available for sale to held to maturity 996 Loans foreclosed and transferred to real estate owned 1,000 440 528 Issuance of common stock from conversion of convertible subordinated notes 2,509 See accompanying notes to consolidated financial statements.
31 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 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, 1998 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 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 are amortized, using the interest method, over periods which approximate the average life of the loans. 32 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. 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 Earnings per share is computed using the weighted average number of common and diluted common shares outstanding during the period. Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The only reconciling item affecting the calculation of earnings per share is the inclusion of stock options affecting the shares outstanding in diluted earnings per share of 313,000, 291,000, and 205,000 in 1998, 1997, and 1996 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. 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 1997 and 1996 consolidated financial statements have been reclassified to conform with the 1998 presentation. These reclassifications had no effect on net income. PROSPECTIVE ACCOUNTING PRONOUNCEMENT In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" ("SFAS 130"). The 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 is effective in the Company's 1998 financial statements and all prior periods shown on the financial statements have been restated. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The statement provides standards for reporting of information about operating segments in annual financial statements that public business enterprises report and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No.131 is effective for financial statements for periods beginning after December 15, 1997. The Company, after reviewing SFAS No. 131, has determined that its current business and operations are not divided and reported on in segments. All of the Company's operations are interrelated and to breakout any of its operations into segments would not be meaningful or consistent with its current management and reporting practices and therefore could possibly be misleading to the reader and/or investor. 33 In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The Statement revises employers' disclosures about pension and other postretirement benefit plans to facilitate financial analysis, and to eliminate disclosures that are no longer useful. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. Adoption of SFAS No. 132 has no material effect on the Company's financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet measured at its fair value. This Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The Company currently has no activity in derivative instruments and hedging activities, and does not expect adopting of SFAS No. 133 to have a material effect on the financial statements. In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." The Statement establishes accounting and reporting standards requiring that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interests based on its ability and intent to sell or hold those investments. SFAS No. 134 is effective for the first fiscal quarter beginning after December 15, 1998. The Company currently has no activity in securitizing mortgage loans held for sale, and does not expect adopting of SFAS No. 134 to have a material effect on the financial statements. NOTE 2. STOCK SPLIT On April 22, 1998, the Company announced a three shares for two stock split payable on May 20, 1998, to shareholders of record on May 6, 1998. Common shares authorized, issued and outstanding, average shares outstanding and net income per share for all periods presented have been retroactively adjusted to give effect to this transaction. NOTE 3. BUSINESS COMBINATIONS/RESTRUCTURING On December 1,1997, the Company merged with Cascade Bancorp ("Cascade") and Bank of Fife ("Fife"). At December 1, 1997, Cascade Bancorp had assets of $90.3 million, deposits of $78.7 million and shareholder's equity of $6.8 million. At December 1, 1997, Bank of Fife had assets of $34.0 million, deposits of $30.2 million and stockholder's equity of $3.5 million. The Company issued 1,128,758 shares of common stock to complete the merger with Cascade Bancorp and 465,276 shares to complete the merger with Bank of Fife (adjusted for 1998 stock split, see Note 2). The mergers were treated as a pooling 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 stockholders' equity of Cascade Bancorp and Bank of Fife were recorded on the books of the resulting institution at their values as reported on the books of Cascade Bancorp and Bank of 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. NOTE 4. RESTRICTIONS ON SUBSIDIARY CASH, LOANS AND DIVIDENDS Columbia Bank is required to maintain reserve balances with the Federal Reserve Bank. The average required reserves for the year ended December 31, 1998 were approximately $4.4 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. 34 NOTE 5. 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, 1998: U.S. Treasury & government agency $81,549 $474 $82,023 Mortgage-backed 10,672 1 10,673 Other securities 992 38 1,030 - ---------------------------------------------------------------------------------- Total $93,213 $513 $93,726 ================================================================================== 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 ==================================================================================
There were no sales of securities available for sale during the years ended December 31, 1998 and 1997. At December 31, 1998 and 1997, securities available for sale with a fair value of $4.8 million and $4.3 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:
AMORTIZED MARKET (IN THOUSANDS) DECEMBER 31, 1998 COST VALUE Amount maturing: Within one year $ 9,988 $10,010 Greater than one year and less than five years 35,127 35,301 Greater than five years and less than ten years 39,088 39,405 After ten years 9,010 9,010 - ---------------------------------------------------------------------------------------------- Total $93,213 $93,726 ==============================================================================================
SECURITIES HELD TO MATURITY GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET (IN THOUSANDS) COST GAINS LOSSES VALUE December 31, 1998: U.S. Treasury & government agency $ 497 $ 7 $ 504 State and municipal securities 5,115 121 5,236 Other Securities 496 18 514 FHLMC preferred stock 250 1 251 - ---------------------------------------------------------------------------------------------- Total $6,358 $147 $ 6,505 ============================================================================================== 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 ==============================================================================================
35 AMORTIZED MARKET (IN THOUSANDS) DECEMBER 31, 1998 COST VALUE Amount maturing: Within one year $ 982 $ 990 Greater than one year and less than five years 3,663 3,751 Greater than five years and less than ten years 1,713 1,764 - ---------------------------------------------------------------------------------------------- Total $ 6,358 $ 6,505 ==============================================================================================
There were no sales of securities held to maturity during the years ended December 31, 1998 and 1997. NOTE 6. LOANS The following is an analysis of the loan portfolio by major types of loans:
(IN THOUSANDS) DECEMBER 31, 1998 1997 Commercial business $332,638 $270,946 Real estate: One- to four-family residential 61,132 71,095 Five or more family residential and commercial properties 291,868 206,628 - --------------------------------------------------------------------------------- Total real estate 353,000 277,723 Real estate construction: One- to four-family residential 26,444 29,695 Five or more family residential and commercial properties 23,213 33,806 - --------------------------------------------------------------------------------- Total real estate construction 49,657 63,501 Consumer 94,572 74,710 - --------------------------------------------------------------------------------- Subtotal 829,867 686,880 Less deferred loan fees, net and other (1,228) (991) - --------------------------------------------------------------------------------- Total loans $828,639 $685,889 ================================================================================= Loans held for sale $ 10,023 $ 4,377 =================================================================================
At December 31, 1998 and 1997, residential real estate loans with recorded values of $30.0 million and $46.8 million, respectively, were pledged to secure Federal Home Loan Bank advances and for other purposes. The following table summarizes certain information related to nonperforming loans:
(IN THOUSANDS) DECEMBER 31, 1998 1997 1996 Loans accounted for on a nonaccrual basis $3,603 $1,462 $2,256 Restructured loans 1,783 20 25 - ------------------------------------------------------------------- Total nonperforming loans $5,386 $1,482 $2,281 =================================================================== Originally contracted interest $ 408 $ 68 $ 219 Recorded interest 221 12 102 - ------------------------------------------------------------------- Reduction in interest income $ 187 $ 56 $ 117 ===================================================================
At December 31, 1998 and 1997, the recorded investment in impaired loans was $1.2 million and $728,000, respectively. No specific allocated allowance for loan losses has been made for impaired loans. The average recorded investment in impaired loans for the period ended December 31, 1998 and 1997 was $1.5 million and $570,000, respectively. At December 31, 1998 and 1997, there were no commitments for additional funds for loans accounted for on a nonaccrual basis. At December 31, 1998 and 1997, the Company had no loans to foreign domiciled businesses or foreign countries, or loans related to highly leveraged transactions. The Company's banking subsidiary has granted loans to officers and directors of the Company and their associates. These loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. The aggregate dollar amount of these loans was $27.6 million and $5.9 million at December 31, 1998 and 1997, respectively. During 1998, $21.8 million of new related party loans were made, and repayments and transfers totaled $100,000. 36 NOTE 7. ALLOWANCE FOR LOAN LOSSES Transactions in the allowance for loan losses are summarized as follows:
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1998 1997 1996 Balance at beginning of period $ 8,440 $ 5,282 $4,340 Loans charged off (1,585) (1,659) (720) Recoveries 247 91 27 - --------------------------------------------------------------------- Net charge-offs (1,338) (1,568) (693) Provision charged to operating expense 1,900 4,726 1,635 - --------------------------------------------------------------------- Balance at end of period $ 9,002 $ 8,440 $5,282 =====================================================================
NOTE 8. PREMISES AND EQUIPMENT Land, buildings, and furniture and equipment, less accumulated depreciation and amortization, were as follows:
(IN THOUSANDS) DECEMBER 31, 1998 1997 Land $ 8,667 $ 5,452 Buildings 21,337 17,762 Leasehold improvements 1,583 1,424 Furniture and equipment 13,180 9,303 Vehicles 181 118 Computer software 2,610 1,360 - -------------------------------------------------------------------- Total cost 47,558 35,419 Less accumulated depreciation and amortization (10,481) (8,173) - -------------------------------------------------------------------- Total $ 37,077 $27,246 ====================================================================
Total depreciation and amortization expense on buildings and furniture and equipment was $2.6 million, $2.1 million, and $2.1 million for the years ended December 31, 1998, 1997 and 1996, 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) YEAR ENDING DECEMBER 31, 1999 $1,270 2000 1,000 2001 610 2002 478 2003 404 2004 and thereafter 2,827 - ------------------------------------------------------------- Total minimum payments $6,589 =============================================================
Total rental expense on buildings and equipment was $1.2 million for each of the years ended December 31, 1998, 1997 and 1996, respectively. 37 NOTE 9. FEDERAL HOME LOAN BANK ADVANCES AND LONG-TERM DEBT The Company had Federal Home Loan Bank ("FHLB") advances of $25.0 million and $39.0 million at December 31, 1998 and 1997, respectively. FHLB advances are at the following interest rates:
(DOLLARS IN THOUSANDS) DECEMBER 31, 1998 1997 6.14% $ 2,000 6.07 2,000 5.39 $25,000 25,000 5.32 5,000 5.20 5,000 - ---------------------------------------------------------------------------------------- Total $25,000 $39,000 ========================================================================================
Aggregate maturities of FHLB advances due in years ending after December 31, 1998, are as follows:
(IN THOUSANDS) AMOUNT 2002 $25,000 ========================================================================================
FHLB advances are collateralized by residential real estate loans with a recorded value of approximately $30.0 million at December 31, 1998, and $46.8 million at December 31, 1997 (see Note 6). Penalties are generally required for prepayments of certain long-term FHLB advances. 38 NOTE 10. INCOME TAX The components of income tax expense are as follows:
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1998 1997 1996 Current $5,217 $ 4,258 $ 491 Deferred (benefit) 30 (1,470) (12) - ------------------------------------------------------------------ Total $5,247 $ 2,788 $ 479 ==================================================================
Significant components of the Company's deferred tax assets and liabilities at December 31, 1998 and 1997 are as follows:
(IN THOUSANDS) DECEMBER 31, 1998 1997 Deferred tax assets: Allowance for loan losses $ 3,099 $ 2,914 - ------------------------------------------------------------------------------------------------------------------- Total deferred tax assets 3,099 2,914 Deferred tax liabilities: FHLB stock dividends (938) (775) Unrealized gain on investment securities available for sale (174) (22) Depreciation (100) (157) Other (195) (238) - ------------------------------------------------------------------------------------------------------------------- Total deferred tax liabilities (1,407) (1,192) - ------------------------------------------------------------------------------------------------------------------- Net deferred tax assets $ 1,692 $ 1,722 ===================================================================================================================
A reconciliation of the Company's effective income tax rate with the federal statutory tax rate is as follows: (DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1998 1997 1996 AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT Income tax based on statutory rate $5,252 34% $ 4,101 34% $ 1,739 34% Increase (reduction) resulting from: Tax-exempt income (32) (1) (1,252) (10) (40) (1) Other nondeductible items 27 1 707 5 23 Valuation allowance (768) (6) (1,243) (24) - ------------------------------------------------------------------------------------------------------------ Income tax $5,247 34% $ 2,788 23% $ 479 9% ============================================================================================================
39 NOTE 11. STOCK OPTIONS The Company has an employee stock option plan ("the Plan") to provide additional incentives to key employees, thereby helping to attract and retain the best available personnel. The Company applies APB Opinion 25 and related interpretations in accounting for the Plan. Accordingly, no compensation cost has been recognized for the Plan. At December 31, 1998 and 1997, the Company had stock options outstanding of 549,953 shares and 522,224 shares, respectively, for the purchase of common stock at options prices ranging from $3.67 to $26.00 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, 1998, a maximum of 797,823 shares were authorized under the stock option plan. Additionally, at December 31, 1998, 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 43,228 and 16,497 shares of common stock at exercise prices of approximately $3.91 and $5.59 per share, respectively. These options are generally exercisable in whole or in part at any time before September 26, 2000. The following table outlines the stock option activity for 1998, 1997 and 1996:
(IN THOUSANDS) WEIGHTED NUMBER OF AVERAGE PRICE OPTION OF OPTION SHARES SHARES Balance at December 31, 1995 527,418 $ 5.39 Issued 123,602 9.93 Exercised (27,795) 2.75 Terminated (10,145) 6.98 - -------------------------------------------------------------- Balance at December 31, 1996 613,080 6.40 Issued 94,230 11.59 Exercised (105,273) 5.34 Terminated (787) 6.19 - -------------------------------------------------------------- Balance at December 31, 1997 601,250 7.40 Issued 92,427 24.44 Exercised (100,121) 4.99 Terminated (375) 18.50 Balance at December 31, 1998 593,181 $10.37 ============================================================== Total vested at December 31, 1998 392,614 $ 7.36 ==============================================================
Financial data pertaining to outstanding stock options were as follows:
DECEMBER 31, 1998 WEIGHTED WEIGHTED WEIGHTED AVERAGE RANGES OF AVERAGE AVERAGE NUMBER OF EXERCISE PRICE EXERCISE NUMBER OF REMAINING EXERCISE PRICE OF EXERCISABLE OF EXERCISABLE PRICES OPTION SHARES CONTRACTUAL LIFE OPTION SHARES OPTION SHARES OPTION SHARES $3.67 - $5.37 75,220 2.2 Years $ 3.85 75,220 $ 3.85 5.59 - 7.97 251,125 3.3 6.69 237,894 6.62 9.53 - 13.49 158,336 7.2 10.63 63,000 11.59 18.00 - 26.00 108,500 6.8 23.02 16,500 18.00 - ------------------------------------------------------------------------------------------------------------ 593,181 4.8 Years $10.37 392,614 $ 7.37 ============================================================================================================
40 Had compensation cost for the Company's Plan been determined based on the fair value at the option grant dates, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS EXCEPT PER SHARE) 1998 1997 1996 Net income attributable to common stock: As reported $10,201 $9,275 $4,635 Pro forma 9,947 9,163 4,601 Net income per common share: Basic: As reported $ 1.02 $ 0.94 $ 0.64 Pro forma 0.99 0.93 0.64 Diluted: As reported $ 0.98 $ 0.91 $ 0.63 Pro forma 0.96 0.90 0.62
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 1998, 1997 and 1996; expected volatility of 57.0% in 1998, 37.0% in 1997 and 40.1% in 1996; risk-free rates of 4.5% for 1998, 5.6% for 1997 and 6.0% for 1996; no annual dividend yields; and expected lives of five years for all years. NOTE 12. 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 judgment by the regulators about components, risk weightings, and other factors. 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, 1998, that the Bank meets all capital adequacy requirements, but is slightly below the criteria necessary to be "well capitalized" as defined by regulations. As of September 30, 1997, the most recent notification from the FDIC categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's category. The Bank's actual capital amounts and ratios are as follows:
FOR CAPITAL TO BE WELL CAPITALIZED ADEQUACY UNDER PROMPT CORRECTIVE ACTUAL PURPOSES ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AS OF DECEMBER 31, 1998 Total Capital (to risk-weighted assets) $87,693 9.8% $71,863 8.0% $89,829 10.0% Tier 1 Capital (to risk-weighted assets) 78,691 8.8% 35,931 4.0% 53,897 6.0% Tier 1 Capital (to average assets) 78,691 7.8% 40,515 4.0% 50,644 5.0% AS OF DECEMBER 31, 1997 Total Capital (to risk-weighted assets) $77,164 10.7% $57,711 8.0% $72,139 10.0% Tier 1 Capital (to risk-weighted assets) 68,724 9.5% 28,856 4.0% 43,284 6.0% Tier 1 Capital (to average assets) 68,724 8.3% 32,966 4.0% 41,207 5.0%
41 NOTE 13. EMPLOYEE BENEFIT PLAN The Company maintains a defined contribution plan which allows employees to contribute up to 15% of their compensation to the plan. Employees who are at least 20 1/2 years of age and have completed 6 months of service are eligible to participate in the plan. The Company is required to match 50% of employee contributions up to 3% of each employee's total compensation. The Company contributed approximately $273,000, $211,000 and $153,000 in matching funds to the plan during the years ended December 31, 1998, 1997 and 1996, 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 1999 and 1998, the Company announced discretionary contributions of approximately $581,000 and $439,000 for the years ended 1998 and 1997, respectively. The Company maintains an "Employee Stock Purchase Plan" ("ESPP"). Substantially all employees of the Company who have been continuously employed for six months are eligible to participate in the ESPP under which Common Stock is issued at quarterly intervals for cash at a price of 90% of the fair market value of the stock. Under the ESPP, 13,238 shares were acquired by employees for approximately $258,000 in 1998. There is no charge to income as a result of issuance of stock under this plan. At December 31, 1998, 105,270 shares of common stock were reserved for issuance under this plan. NOTE 14. COMMITMENTS AND CONTINGENT LIABILITIES 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, 1998 and 1997, the Company's loan commitments amounted to $267.5 million and $206.3 million, respectively. Standby letters of credit were $8.8 million and $6.1 million at December 31, 1998 and 1997, respectively. In addition, commitments under commercial letters of credit used to facilitate customers' trade transactions amounted to $591,000 and $3.1 million at December 31, 1998 and 1997, 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. 42 NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS 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:
(IN THOUSANDS) DECEMBER 31, 1998 1997 ASSUMPTIONS USED IN CARRYING FAIR CARRYING FAIR ESTIMATING FAIR VALUE AMOUNT VALUE AMOUNT VALUE ASSETS Cash and due from banks Approximately equal to carrying value $53,602 $53,602 $47,604 $47,604 Interest-earning deposits Approximately equal to with banks carrying value 22,816 22,816 28,108 28,108 Securities available for sale Quoted market prices 99,276 99,276 61,423 61,423 Securities held for sale Quoted market prices 6,358 6,505 9,679 9,754 Loans held for sale Approximately equal to carrying value 10,023 10,023 4,377 4,377 Loans Discounted expected future cash flows, net of allowance for loan losses 819,637 882,836 677,449 739,687 LIABILITIES Deposits Fixed-rate certificates of deposit: Discounted expected future cash flows All other deposits: Approximately equal to carrying value $938,345 $948,718 $740,430 $740,803 Federal Home Loan Bank advances Discounted expected future cash flows 25,000 24,994 39,000 39,032 Other borrowings
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, 1998 and 1997 approximates the recorded amounts of the related fees. 43 NOTE 16. PARENT COMPANY FINANCIAL INFORMATION CONDENSED BALANCE SHEETS PARENT COMPANY ONLY
(IN THOUSANDS) DECEMBER 31, 1998 1997 ASSETS Cash and due from subsidiary banks $ 479 Interest-earning deposits with unrelated banks $ 4,020 1,878 Securities available for sale 5,998 6,794 Loans 360 360 Investments in bank subsidiaries 79,032 68,785 Premises and equipment, net 11 Other assets 304 256 - ------------------------------------------------------------------------------------------------------- Total assets $89,714 $ 78,563 - ------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Other liabilities $ 148 $ 210 - ------------------------------------------------------------------------------------------------------- Total liabilities 148 210 Shareholders' equity 89,566 78,353 - ------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $89,714 $ 78,563 =======================================================================================================
CONDENSED STATEMENTS OF OPERATIONS PARENT COMPANY ONLY (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1998 1997 1996 INCOME Interest on loans $ 20 $ 44 $ 48 Interest on securities available for sale 376 322 20 Interest-earning deposits with unrelated banks 154 177 53 Other 67 3,518 55 - ------------------------------------------------------------------------------------------------------- Total income 550 4,061 176 EXPENSE Compensation and employee benefits (16) 313 346 Interest 204 Other 278 330 309 - ------------------------------------------------------------------------------------------------------- Total expenses 262 643 859 - ------------------------------------------------------------------------------------------------------- Income (loss) before income tax benefit and equity in undistributed net income of subsidiaries 355 3,418 (683) Income tax expense (benefit) 100 (14) - ------------------------------------------------------------------------------------------------------- Income (loss) before equity in undistributed net income of subsidiaries 255 3,432 (683) Equity in undistributed net income of subsidiaries: 9,946 5,843 5,318 - ------------------------------------------------------------------------------------------------------- Net income $10,201 $ 9,275 $ 4,635 =======================================================================================================
44 CONDENSED STATEMENTS OF CASH FLOWS PARENT COMPANY ONLY
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 1998 1997 1996 OPERATING ACTIVITIES Net income $10,201 $ 9,275 $ 4,635 Adjustments to reconcile net income to net cash provided (used) by operating activities: Equity in undistributed earnings of subsidiaries (9,946) (5,843) (5,318) Loss on sale of real estate owned 41 Provision for depreciation and amortization 14 31 35 Net changes in other assets and liabilities (124) 181 (140) - ------------------------------------------------------------------------------------------ Net cash provided (used) by operating activities 145 3,644 (747) INVESTING ACTIVITIES Purchase of securities available for sale (5,995) (9,792) (4,000) Proceeds from maturities of securities available for sale 6,800 7,000 Loans originated or acquired, net of principal collected 360 134 Contribution of capital - bank subsidiaries (3,500) (16,800) Return of capital to parent 3,800 Proceeds from sale of real estate owned 3,263 Other, net 2 (162) - ------------------------------------------------------------------------------------------ Net cash provided (used) by investing activities 807 (6,094) (13,603) FINANCING ACTIVITIES Proceeds from other borrowings 7,000 Repayment of other borrowings (9,600) Proceeds from issuance of common stock 711 779 20,868 - ------------------------------------------------------------------------------------------ Net cash provided by financing activities 711 779 18,268 - ------------------------------------------------------------------------------------------ Increase (decrease) in cash and cash equivalents 1,663 (1,670) 3,918 Cash and cash equivalents at beginning of period 2,357 4,027 109 - ------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 4,020 $ 2,357 $ 4,027 ========================================================================================== Supplemental information: Cash paid for interest $ 204 Issuance of common stock from conversion of convertible subordinated notes 2,509
45 NOTE 17. SUMMARY OF QUARTERLY FINANCIAL INFORMATION - UNAUDITED Quarterly financial information for the years ended December 31, 1998 and 1997 is summarized as follows:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FIRST SECOND THIRD FOURTH YEAR ENDED quarter QUARTER QUARTER QUARTER DECEMBER 31, 1998 Total interest income $17,407 $17,885 $19,009 $19,326 $73,627 Total interest expense 7,376 7,572 8,281 8,438 31,667 - -------------------------------------------------------------------------------------------- Net interest income 10,031 10,313 10,728 10,888 41,960 Provision for loan losses 550 450 450 450 1,900 Noninterest income 2,520 2,871 3,134 3,466 11,991 Noninterest expense 8,258 8,837 9,456 10,052 36,603 - -------------------------------------------------------------------------------------------- Income before income tax 3,743 3,897 3,956 3,852 15,448 Provision for income tax 1,330 1,349 1,362 1,206 5,247 - -------------------------------------------------------------------------------------------- Net income $ 2,413 $ 2,548 $ 2,594 $ 2,646 $10,201 ============================================================================================ Net income per common share: Basic $0.24 $0.25 $0.26 $0.26 $1.02 Diluted 0.23 0.25 0.25 0.26 0.98 1997 Total interest income $13,728 $15,183 $16,322 $16,828 $62,061 Total interest expense 6,143 6,505 6,967 7,215 26,830 - -------------------------------------------------------------------------------------------- Net interest income 7,585 8,678 9,355 9,613 35,231 Provision for loan losses 449 1,259 582 2,436 4,726 Noninterest income 1,719 3,095 2,053 5,925 12,792 Noninterest expense 6,904 7,418 7,607 9,305 31,234 - -------------------------------------------------------------------------------------------- Income before income tax 1,951 3,096 3,219 3,797 12,063 Provision for income tax 574 918 981 315 2,788 - -------------------------------------------------------------------------------------------- Net income $ 1,377 $ 2,178 $ 2,238 $ 3,482 $ 9,275 ============================================================================================ Net income per common share: Basic $0.15 $0.22 $0.23 $0.35 $0.94 Diluted 0.14 0.22 0.22 0.34 0.91
46 CONSOLIDATED FIVE-YEAR STATEMENTS OF OPERATIONS/(1)/
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994 INTEREST INCOME: Loans $66,858 $56,176 $43,240 $36,013 $23,199 Securities held to maturity 4,696 628 702 1,491 1,547 Securities available for sale 419 3,800 2,360 705 319 Deposits with banks 1,654 1,457 1,583 667 650 - ------------------------------------------------------------------------------------------------ Total interest income 73,627 62,061 47,885 38,876 25,715 INTEREST EXPENSE: Deposits 29,759 24,775 20,370 16,369 9,121 Federal Home Loan Bank advances 1,908 1,971 1,938 1,503 1,160 Other borrowings 84 233 302 625 - ------------------------------------------------------------------------------------------------ Total interest expense 31,667 26,830 22,541 18,174 10,906 - ------------------------------------------------------------------------------------------------ Net Interest Income 41,960 35,231 25,344 20,702 14,809 Provision for loan losses 1,900 4,726 1,635 1,382 1,107 - ------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 40,060 30,505 23,709 19,320 13,702 Noninterest income 11,991 9,274 6,310 4,766 3,530 Key Man Life Insurance proceeds 3,518 Noninterest expense 36,603 30,000 24,293 19,979 17,061 SAIF special assessment 612 Merger expenses 1,234 - ------------------------------------------------------------------------------------------------ Noninterest expense 36,603 31,234 24,905 19,979 17,061 Income (loss) from continuing operations before income tax 15,448 12,063 5,114 4,107 171 Provision for income tax 5,247 2,788 479 416 156 - ------------------------------------------------------------------------------------------------ Income (loss) from continuing operations 10,201 9,275 4,635 3,691 15 Extraordinary loss on extinguishment of debt, net (154) - ------------------------------------------------------------------------------------------------- Net income (loss) $10,201 $ 9,275 $ 4,635 $ 3,691 $ (139) ================================================================================================= NET INCOME PER COMMON SHARE: Income (loss) from continuing operations $1.02 $0.94 $0.64 $0.57 $0.00 Extraordinary loss on extinguishment of debt, net (0.02) Net Income (loss) Basic 1.02 0.94 0.64 0.57 (0.02) Net Income (loss) Diluted 0.98 0.91 0.63 0.56 (0.02) Average number of common shares outstanding (basic) 10,046 9,875 7,192 6,461 6,270 Average number of common shares outstanding (diluted) 10,359 10,166 7,397 6,578 6,378 ================================================================================================= Total assets at end of period $1,059,919 $864,555 $706,448 $520,059 $394,365 Long-term obligations 25,000 39,000 34,000 27,695 19,735 Cash dividends =================================================================================================
/(1)/ These unaudited schedules provide selected financial information concerning the Company which should be read in conjunction with the Management Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report. 47 CONSOLIDATED FIVE-YEAR SUMMARY OF AVERAGE BALANCES AND NET INTEREST REVENUE
1998 AVERAGE AVERAGE (DOLLARS IN THOUSANDS) BALANCES/(1)/ INTEREST RATE INTEREST-EARNING ASSETS Loans: Commercial business $307,174 $28,039 9.13% Real estate/(2)/: One- to four-family residential 96,999 8,512 8.78 Five or more family residential and commercial properties 264,314 23,008 8.70 Consumer 80,100 7,299 9.11 - --------------------------- -------- ------- ------ Total loans 748,587 66,858 8.93 Securities/(3)/ 83,657 5,221 6.24 Interest-earning deposits 30,949 1,654 5.35 with banks -------- ------- ------ Total interest-earning assets 863,193 73,733 8.54 Noninterest-earning assets 76,081 - --------------------------- -------- Total assets $939,274 =========================== ======== INTEREST-BEARING LIABILITIES Certificates of deposit $337,557 $18,917 5.60% Savings accounts 39,768 997 2.51 Interest-bearing demand and money market accounts 287,007 9,845 3.43 - --------------------------- -------- ------- ------ Total interest-bearing deposits 664,332 29,759 4.48 Federal Home Loan Bank advances 34,538 1,908 5.52 Other borrowings - --------------------------- Total interest-bearing liabilities 698,870 31,667 4.53 Demand and other noninterest-bearing deposits 149,353 Other noninterest-bearing liabilities 6,371 Shareholders' equity 84,680 - --------------------------- -------- Total liabilities and shareholders' equity $939,274 =========================== ======== Net interest revenue $42,066 =========================== ======= Net interest spread 4.01% =========================== ====== Net interest margin 4.87% =========================== ====== Average interest-earning assets to average interest-bearing liabilities 123.51% =========================== ======
48
1997 AVERAGE AVERAGE (DOLLARS IN THOUSANDS) BALANCES/(1)/ INTEREST RATE INTEREST-EARNING ASSETS Loans: Commercial business $218,560 $20,172 9.23% Real estate/(2)/: One- to four-family residential 109,659 10,936 9.97 Five or more family residential and commercial properties 217,412 18,727 8.61 Consumer 68,040 6,341 9.32 - --------------------------- -------- ------- ------ Total loans 613,671 56,176 9.15 Securities/(3)/ 71,424 4,512 6.32 Interest-earning deposits 26,389 1,457 5.52 with banks -------- ------- ------ Total interest-earning assets 711,484 62,145 8.73 Noninterest-earning assets 53,244 - --------------------------- -------- Total assets $764,728 =========================== ======== INTEREST-BEARING LIABILITIES Certificates of deposit $282,899 $16,017 5.66% Savings accounts 38,301 1,054 2.75 Interest-bearing demand and money market accounts 223,514 7,704 3.45 - --------------------------- -------- ------- ------ Total interest-bearing deposits 544,714 24,775 4.55 Federal Home Loan Bank advances 35,597 1,971 5.54 Other borrowings 1,681 84 5.02 - --------------------------- -------- ------- ------ Total interest-bearing liabilities 581,992 26,830 4.61 Demand and other noninterest-bearing deposits 111,492 Other noninterest-bearing liabilities 6,860 Shareholders' equity 64,384 - --------------------------- -------- Total liabilities and shareholders' equity $764,728 =========================== ======== Net interest revenue $35,315 =========================== ======= Net interest spread 4.12% =========================== ====== Net interest margin 4.96% =========================== ====== Average interest-earning assets to average interest-bearing liabilities 122.25% =========================== ====== 1996 AVERAGE AVERAGE (DOLLARS IN THOUSANDS) BALANCES/(1)/ INTEREST RATE INTEREST-EARNING ASSETS Loans: Commercial business $158,460 $14,153 8.93% Real estate/(2)/: One- to four-family residential 112,986 10,468 9.26 Five or more family residential and commercial properties 144,340 13,473 9.33 Consumer 58,101 5,146 8.86 - --------------------------- -------- ------- ------ Total loans 473,887 43,240 9.12 Securities/(3)/ 51,056 3,126 6.12 Interest-earning deposits 29,998 1,583 5.28 with banks -------- ------- ------ Total interest-earning assets 554,941 47,949 8.64 Noninterest-earning assets 40,311 - --------------------------- -------- Total assets $595,252 =========================== ======== INTEREST-BEARING LIABILITIES Certificates of deposit $240,214 $13,771 5.73% Savings accounts 32,438 943 2.91 Interest-bearing demand and money market accounts 160,020 5,656 3.53 - --------------------------- -------- ------- ------ Total interest-bearing deposits 432,672 20,370 4.71 Federal Home Loan Bank advances 34,096 1,914 5.61 Other borrowings 3,454 257 7.44 - --------------------------- -------- ------- ------ Total interest-bearing liabilities 470,222 22,541 4.79 Demand and other noninterest-bearing deposits 74,940 Other noninterest-bearing liabilities 4,421 Shareholders' equity 45,669 - --------------------------- -------- Total liabilities and shareholders' equity $595,252 =========================== ======== Net interest revenue $25,408 =========================== ======= Net interest spread 3.85% =========================== ====== Net interest margin 4.58% =========================== ====== Average interest-earning assets to average interest-bearing liabilities 118.02% =========================== ====== 1995 AVERAGE AVERAGE (DOLLARS IN THOUSANDS) BALANCES/(1)/ INTEREST RATE INTEREST-EARNING ASSETS Loans: Commercial business $110,500 $10,855 9.82% Real estate/(2)/: One- to four-family residential 113,341 10,861 9.58 Five or more family residential and commercial properties 103,878 9,942 9.57 Consumer 45,841 4,355 9.50 - --------------------------- -------- ------- ------ Total loans 373,560 36,013 9.64 Securities/(3)/ 38,353 2,241 5.84 Interest-earning deposits 11,055 667 6.03 with banks -------- ------- ------ Total interest-earning assets 422,968 38,921 9.20 Noninterest-earning assets 35,370 - --------------------------- -------- Total assets $458,338 =========================== ======== INTEREST-BEARING LIABILITIES Certificates of deposit $203,978 $11,680 5.73% Savings accounts 33,145 971 2.93 Interest-bearing demand and money market accounts 97,326 3,718 3.82 - --------------------------- -------- ------- ------ Total interest-bearing deposits 334,449 16,369 4.89 Federal Home Loan Bank advances 24,915 1,503 6.03 Other borrowings 3,331 302 9.07 - --------------------------- -------- ------- ------ Total interest-bearing liabilities 362,695 18,174 5.01 Demand and other noninterest-bearing deposits 54,878 Other noninterest-bearing liabilities 3,315 Shareholders' equity 37,450 - --------------------------- -------- Total liabilities and shareholders' equity $458,338 =========================== ======== Net interest revenue $20,747 =========================== ======= Net interest spread 4.19% =========================== ==== Net interest margin 4.91% =========================== ==== Average interest-earning assets to average interest-bearing liabilities 116.62% =========================== ====== 1994 AVERAGE AVERAGE (DOLLARS IN THOUSANDS) BALANCES/(1)/ INTEREST RATE INTEREST-EARNING ASSETS Loans: Commercial business $ 77,279 $ 6,561 8.49% Real estate/(2)/: One- to four-family residential 90,123 7,722 8.57 Five or more family residential and commercial properties 68,584 6,418 9.36 Consumer 28,775 2,498 8.68 - --------------------------- -------- ------- ------ Total loans 264,761 23,199 8.76 Securities/(3)/ 35,316 1,891 5.36 Interest-earning deposits 16,172 650 4.02 with banks -------- ------- ------ Total interest-earning assets 316,249 25,740 8.14 Noninterest-earning assets 29,805 - --------------------------- -------- Total assets $346,054 =========================== ======== INTEREST-BEARING LIABILITIES Certificates of deposit $148,229 $ 6,795 4.58% Savings accounts 41,448 1,104 2.66 Interest-bearing demand and money market accounts 54,789 1,222 2.23 - --------------------------- -------- ------- ------ Total interest-bearing deposits 244,466 9,121 3.73 Federal Home Loan Bank advances 21,452 1,160 5.41 Other borrowings 6,329 625 9.88 - --------------------------- -------- ------- ------ Total interest-bearing liabilities 272,247 10,906 4.01 Demand and other noninterest-bearing deposits 36,819 Other noninterest-bearing liabilities 2,063 Shareholders' equity 34,925 - --------------------------- -------- Total liabilities and shareholders' equity $346,054 =========================== ======== Net interest revenue $14,834 =========================== ======= Net interest spread 4.13% =========================== ==== Net interest margin 4.69% =========================== ==== Average interest-earning assets to average interest-bearing liabilities 116.16% =========================== ======
/(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. 49 BOARD OF DIRECTORS, EXECUTIVE OFFICERS AND SHAREHOLDER INFORMATION BOARD OF DIRECTORS Richard S. DeVine President, Chinook Resources, Inc. Chairman, Raleigh, Schwartz & Powell, Inc. Melanie J. Dressel Executive Vice President, Columbia Banking System, Inc. President and Chief Operating Officer, Columbia Bank 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. J. James Gallagher Vice Chairman, Columbia Banking System, Inc. and Columbia Bank Margel S. Gallagher President, Viva Imports, Ltd. W. Kelso Gillenwater Private Investor John A. Halleran Private Investor Thomas L. Matson Owner and President, Tom Matson Dodge, Inc. W. W. Philip Chairman, 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. Sidney R. Snyder Washington State Senator, Owner of Sid's Food Market and Midtown Market William T. Weyerhaeuser Clinical Psychologist Chairman, Comerco, Inc. (local telephone holding company) James M. Will President, Titus-Will Enterprises EXECUTIVE OFFICERS W. W. Philip Chairman and Chief Executive Officer J. James Gallagher Vice Chairman Melanie J. Dressel Executive Vice President, Columbia Banking System, Inc. President and Chief Operating Officer, Columbia Bank H. R. Russell Executive Vice President, Senior Credit Officer Gary R. Schminkey Executive Vice President, Chief Financial Officer Evans Q. Whitney Executive Vice President, Retail Banking Donald A. Andersen Senior Vice President, Senior Loan Production Officer Janet D. Hildebrand Senior Vice President, Credit Administrator 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 Eugene Horan Senior Vice President, Fircrest Branch Manager Avery Johnson Senior Vice President, Consumer Services 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 Racardo McLaughlin Senior Vice President, Residential Lending Samuel R. Noel Executive Vice President, Southwest Region Richard Plummer Senior Vice President, Commercial Loans, Auburn Valley Ernie Smith Senior Vice President, Commercial Loans, Bellevue 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 Division Manager Brett R. Willis Senior Vice President, Commercial Loans, Pierce County Kenneth M. Yokoyama Senior Vice President, Commercial Loans, Bellevue 50 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. Everen Securities, Inc. Herzog, Heine, Geduld, Inc. Keefe, Bruyette & Woods, Inc. Mayer & Schweitzer Inc. Pacific Crest Securities Ragen MacKenzie Inc. Troster Singer Corp. LEGAL COUNSEL Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, PLLC ANNUAL MEETING Sheraton Tacoma Hotel 1320 Broadway Plaza Tacoma, Washington Wednesday, April 28, 1999 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 1998 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: Jo Anne Coy Vice President, Marketing Director P.O. Box 2156, MS 8300 Tacoma, WA 98401-2156 tel (253) 305-1965 fax (253) 305-0317 E-mail: jcoy@columbiabank.com 51 EX-24 5 POWER OF ATTORNEYS 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 10 day of March , 1999. ---- --------------
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 10 day of March , 1999. ----- --------------
Signature Title - --------- ----- /s/ Melanie J. Dressel Director - ---------------------------- Melanie J. Dressel
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 10 day of March , 1999. ----- --------------
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 10 day of March , 1999. ----- --------------
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 10 day of March , 1999. ---- --------------
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 9 day of March , 1999. ----- --------------
Signature Title - --------- ----- /s/ J. James Gallagher Director - ------------------------ J. James 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 10 day of March , 1999. ---- --------------
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 10 day of March , 1999. ----- --------------
Signature Title - --------- ----- /s/ W. Kelso Gillenwater Director - ------------------------- W. Kelso Gillenwater
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 10 day of March , 1999. ----- --------------
Signature Title - --------- ----- /s/ John Halleran Director - -------------------------- John 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 10 day of March , 1999. ----- --------------
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 10 day of March , 1999. ------ --------------
Signature Title - --------- ----- /s/ John Powell Director - --------------------------- John 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 10 day of March , 1999. ---- --------------
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 9 day of March , 1999. ----- --------------
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 10 day of March , 1999. ------ --------------
Signature Title - --------- ----- /s/ Sidney Snyder Director - ------------------------- Sidney 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 10 day of March , 1999. ----- --------------
Signature Title - --------- ----- /s/ William T. Weyerhaeuser Director - --------------------------- William T. Weyerhaeuser
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 12 day of March , 1999. ------ --------------
Signature Title - --------- ----- /s/ James M. Will Director - ------------------------- James M. Will
EX-27 6 FINANCIAL DATA STATEMENT
9 YEAR YEAR DEC-31-1998 DEC-31-1997 DEC-31-1998 DEC-31-1997 53,602 47,604 22,816 28,108 0 0 0 0 93,726 56,279 6,358 9,679 0 0 828,639 685,889 9,002 8,440 1,059,919 864,555 938,345 740,430 0 0 7,008 6,772 25,000 39,000 0 0 0 0 68,612 67,901 20,954 10,452 1,059,919 864,555 66,858 56,176 5,115 4,428 1,654 1,457 73,627 62,061 29,759 24,775 31,667 26,830 41,960 35,231 1,900 4,726 0 0 36,603 31,234 15,448 12,063 10,201 9,275 0 0 0 0 10,201 9,275 1.02 0.94 0.98 0.91 4.87 4.96 3,603 1,462 0 0 1,783 20 1,862 669 8,440 5,282 1,585 1,659 247 91 9,002 8,440 9,002 8,440 0 0 0 1,542
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