-----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, VRCKw/XSnCcdlUnPy3ljQsvADWNlybhPSOCVsb/HipyK6FaKrlrgs9cSIub1i2Jj gxkk0GtPELrri/O4xuLY+Q== 0001072613-01-500538.txt : 20010515 0001072613-01-500538.hdr.sgml : 20010515 ACCESSION NUMBER: 0001072613-01-500538 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLUMBIA BANKING SYSTEM INC CENTRAL INDEX KEY: 0000887343 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 911422237 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20288 FILM NUMBER: 1632994 BUSINESS ADDRESS: STREET 1: 1102 BROADWAY PLAZA CITY: TACOMA STATE: WA ZIP: 98402 BUSINESS PHONE: 2533051900 MAIL ADDRESS: STREET 1: 1102 BROADWAY PLAZA CITY: TACOMA STATE: WA ZIP: 98402 10-Q 1 form10-q_10671.txt QUARTERLY REPORT FOR PERIOD ENDED 3/31/2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001. / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________. Commission File Number 0-20288 ------- COLUMBIA BANKING SYSTEM, INC. - -------------------------------------------------------------------------------- (Exact name of issuer as specified in its charter) Washington 91-1422237 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1301 "A" Street Tacoma, Washington 98402 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (253) 305-1900 - -------------------------------------------------------------------------------- (Issuer's telephone number, including area code) 1102 Broadway Plaza Tacoma, Washington, 98402 - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of the issuer's Common Stock outstanding at April 30, 2001 was 11,923,399 ================================================================================ TABLE OF CONTENTS PART I -- FINANCIAL INFORMATION Page ---- Item 1. Condensed unaudited Financial statements Consolidated Condensed Statements of Operations - three months ended March 31, 2001 and 2000 2 Consolidated Condensed Balance Sheets - March 31, 2001 and December 31, 2000 3 Consolidated Condensed Statements of Shareholders' Equity - twelve months ended December 31, 2000, and three months ended March 31, 2001 4 Consolidated Condensed Statements of Cash Flows - three months ended March 31, 2001 and 2000 5 Notes to Consolidated Condensed Financial statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk 21 PART II -- OTHER INFORMATION Item 6. Exhibits and reports on Form 8-K 22 Signatures 22 1 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS COLUMBIA BANKING SYSTEM, INC. (UNAUDITED) Three Months Ended March 31, -------------------------- (IN THOUSANDS EXCEPT PER SHARE) 2001 2000 - --------------------------------------------- -------- -------- INTEREST INCOME Loans $ 26,358 $ 23,343 Securities available for sale 1,477 1,389 Securities held to maturity 68 64 Deposits with banks 744 17 - --------------------------------------------- -------- -------- Total interest income 28,647 24,813 INTEREST EXPENSE Deposits 13,574 10,009 Federal Home Loan Bank advances 690 891 Other borrowings 114 59 - --------------------------------------------- -------- -------- Total interest expense 14,378 10,959 - --------------------------------------------- -------- -------- NET INTEREST INCOME 14,269 13,854 Provision for loan losses 900 900 - --------------------------------------------- -------- -------- Net interest income after provision for loan losses 13,369 12,954 NONINTEREST INCOME Service charges and other fees 1,596 1,528 Mortgage banking 561 155 Merchant services fees 942 772 Loss on sale of investment securities, net (23) Other 249 138 - --------------------------------------------- -------- -------- Total noninterest income 3,325 2,593 NONINTEREST EXPENSE Compensation and employee benefits 6,429 5,574 Occupancy 1,621 1,591 Merchant processing 527 394 Advertising and promotion 340 441 Data processing 462 529 Taxes, licenses & fees 546 428 Other 2,007 1,866 - --------------------------------------------- -------- -------- Total noninterest expense 11,932 10,823 - --------------------------------------------- -------- -------- Income before income taxes 4,762 4,724 Provision for income taxes 1,633 1,628 - --------------------------------------------- -------- -------- NET INCOME $ 3,129 $ 3,096 ============================================= ======== ======== Net income per common share: Basic $ 0.27 $ 0.27 Diluted 0.26 0.26 Average number of common shares outstanding 11,763 11,553 Average number of diluted common shares outstanding 11,870 11,893 See accompanying notes to consolidated condensed financial statements. 2 CONSOLIDATED CONDENSED BALANCE SHEETS COLUMBIA BANKING SYSTEM, INC. (UNAUDITED) March 31, December 31, (IN THOUSANDS) 2001 2000 - --------------------------------------------- ---------- ---------- ASSETS Cash and due from banks $ 62,823 $ 72,292 Interest-earning deposits with banks 20,617 48,153 - --------------------------------------------- ---------- ---------- Total cash and cash equivalents 83,440 120,445 Securities available for sale (at fair value) 86,421 103,287 Securities held to maturity (fair value of $7,468 and $7,501 respectively) 7,335 7,435 Federal Home Loan Bank stock 8,676 8,539 Loans held for sale 38,666 14,843 Loans, net of unearned income 1,211,100 1,192,520 Less: allowance for loan losses 18,958 18,791 - --------------------------------------------- ---------- ---------- Loans, net 1,192,142 1,173,729 Interest receivable 8,705 10,306 Premises and equipment, net 49,129 48,357 Real estate owned 1,291 1,291 Other 8,066 8,263 - --------------------------------------------- ---------- ---------- Total Assets $1,483,871 $1,496,495 ============================================= ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 231,013 $ 232,247 Interest-bearing 1,073,429 1,094,776 - --------------------------------------------- ---------- ---------- Total deposits 1,304,442 1,327,023 Federal Home Loan Bank advances 40,000 40,000 Other borrowings 8,000 4,500 Other liabilities 13,075 11,149 - --------------------------------------------- ---------- ---------- Total liabilities 1,365,517 1,382,672 Shareholders' equity: Preferred stock (no par value) Authorized, 2 million shares; none outstanding March 31, December 31, Common stock 2001 2000 (no par value) ---------- ---------- Authorized shares 51,975 51,975 Issued and outstanding 11,898 11,867 93,080 92,673 Retained earnings 24,778 21,649 Accumulated other comprehensive income (loss) - Unrealized gains (losses) on securities available for sale, net of tax 496 (499) - --------------------------------------------- ---------- ---------- Total shareholders' equity 118,354 113,823 - --------------------------------------------- ---------- ---------- Total Liabilities and Shareholders' Equity $1,483,871 $1,496,495 ============================================= ========== ========== See accompanying notes to consolidated condensed financial statements. 3 CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY COLUMBIA BANKING SYSTEM, INC. (UNAUDITED)
Common stock Accumulated ---------------------- Other Total Number of Retained Comprehensive Shareholders' (IN THOUSANDS) Shares Amount Earnings Income (Loss) Equity - ---------------------------------------------- --------- --------- --------- ------------- ------------- BALANCE AT JANUARY 1, 2000 10,603 $ 78,285 $ 23,916 $ (2,987) $ 99,214 Comprehensive income: Net income for 1999 10,070 Change in unrealized gains and (losses) on securities available for sale, net of tax of $1,295 2,488 Total comprehensive income 12,558 Issuance of stock under stock option and other plans 203 1,673 1,673 Tax benefits from exercise of stock options 378 378 Issuance of shares of common stock-- 5% stock dividend 1,061 12,337 (12,337) - ---------------------------------------------- --------- --------- --------- ------------- ------------- BALANCE AT DECEMBER 31, 2000 11,867 92,673 21,649 (499) 113,823 - ---------------------------------------------- --------- --------- --------- ------------- ------------- Comprehensive income: Net income for 2000 3,129 Change in unrealized gains and (losses) on securities available for sale, net of tax of $536 995 Total comprehensive income 4,124 Issuance of stock under stock option and other plans 31 407 407 - ---------------------------------------------- --------- --------- --------- ------------- ------------- BALANCE AT MARCH 31, 2001 11,898 $ 93,080 $ 24,778 $ 496 $ 118,354 ============================================== ========= ========= ========= ============= =============
See accompanying notes to consolidated condensed financial statements. 4 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS COLUMBIA BANKING SYSTEM, INC. (UNAUDITED)
Three Months Ended March 31, ----------------------- (IN THOUSANDS) 2001 2000 - --------------------------------------------------------------------------- --------- --------- OPERATING ACTIVITIES Net income $ 3,129 $ 3,096 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 900 900 Depreciation and amortization 297 480 Deferred income tax (benefit) expense 432 (111) Net realized (gains) losses on sale of assets 16 (1) Increase in loans held for sale (23,823) (1,745) Decrease in interest receivable 1,601 13 Net changes in other assets and liabilities 1,221 2,987 - --------------------------------------------------------------------------- --------- --------- Net cash provided (used) by operating activities (16,227) 5,619 INVESTING ACTIVITIES Proceeds from sales of securities available for sale 46,712 Proceeds from maturities of securities available for sale 14,586 11 Purchases of securities available for sale (29,277) Proceeds from maturities of mortgage-backed securities available for sale 136 130 Purchase of mortgage-backed securities available for sale (13,761) Proceeds from maturities of securities held to maturity 100 280 Purchases of securities held to maturity (291) Purchases of Federal Home Loan Bank stock (137) (1,291) Loans originated and acquired, net of principal collected (18,841) (53,675) Purchases of premises and equipment (1,630) (8,869) Other, net 8 6 - --------------------------------------------------------------------------- --------- --------- Net cash used by investing activities (2,104) (63,627) FINANCING ACTIVITIES Net (decrease) increase in deposits (22,581) 142,598 Net increase in long-term borrowings 3,500 3,500 Net decrease in Federal Home Loan Bank advances (69,300) Proceeds from issuance of common stock, net 407 172 - --------------------------------------------------------------------------- --------- --------- Net cash provided by financing activities (18,674) 76,970 - --------------------------------------------------------------------------- --------- --------- Increase (decrease) in cash and cash equivalents (37,005) 18,962 Cash and cash equivalents at beginning of period 120,445 43,197 - --------------------------------------------------------------------------- --------- --------- Cash and cash equivalents at end of period $ 83,440 $ 62,159 =========================================================================== ========= ========= Supplemental information: Cash paid for interest $ 14,005 $ 8,711 Cash paid for income taxes 1,600 1,940
See accompanying notes to consolidated condensed financial statements. 5 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS COLUMBIA BANKING SYSTEM, INC. Columbia Banking System, Inc. (the "Company") is a registered bank holding company whose wholly owned subsidiary, Columbia State Bank ("Columbia Bank"), conducts a full-service commercial banking business. Headquartered in Tacoma, Washington, the Company provides a full range of banking services to small and medium-sized businesses, professionals and other individuals through banking offices located in the Tacoma metropolitan area and contiguous parts of the Puget Sound region of Washington, as well as the Longview and Woodland communities in southwestern Washington. Substantially all of the Company's loans, loan commitments and core deposits are geographically concentrated in its service areas. 1. BASIS OF PRESENTATION The interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for condensed interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments consisting only of normal recurring accruals necessary for a fair presentation of the financial condition and the results of operations for the interim periods included herein have been made. The results of operations for the three months ended March 31, 2001, are not necessarily indicative of results to be anticipated for the year ending December 31, 2001. For additional information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2000. 2. EARNINGS PER SHARE Earnings per share ("EPS") 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 and restricted stock awards increasing the shares outstanding diluted earnings per share of 107,000 and 340,000 for the three months ended March 31, 2001 and 2000, respectively. 3. BUSINESS SEGMENT INFORMATION The Company is managed along three major lines of business: commercial banking, retail banking, and real estate lending. The treasury function of the Company, although not considered a line of business, is responsible for the management of investments and interest rate risk. The principal activities conducted by commercial banking are the delivery of commercial business and private banking services with the emphasis on commercial business loans. Retail banking includes all deposit products, with their related fee income, and all consumer loan products as well as commercial loan products offered in the Bank's branch offices. Real estate lending includes single-family residential, multi-family residential, and commercial real estate loans, and the associated loan servicing activities. The financial results of each segment were derived from the Company's general ledger system. Since the Company is not specifically organized around lines of business, most reportable segments are comprised of more than one operating segment. Expenses incurred directly by sales and back office support functions are not allocated to the major lines of business. 6 Since Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information," requires no segmentation or methodology standardization, the organizational structure of the Company and its business line financial results are not necessarily comparable across companies. As such, the Company's business line performance may not be directly comparable with similar information from other financial institutions. Financial highlights by lines of business: CONDENSED STATEMENTS OF OPERATIONS:
THREE MONTHS ENDED MARCH 31, 2001 Commercial Retail Real Estate (IN THOUSANDS) Banking Banking Lending Other Total - ----------------------------------- ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses $ 2,744 $ 8,979 $ 2,450 $ (804) $ 13,369 Other income 146 1,115 576 1,488 3,325 Other expense (670) (4,899) (540) (5,823) (11,932) - ----------------------------------- ---------- ---------- ---------- ---------- ---------- Contribution to overhead and profit $ 2,220 $ 5,195 $ 2,486 $ (5,139) 4,762 Income taxes (1,633) - ----------------------------------- ---------- ---------- ---------- ---------- ---------- Net income $ 3,129 =================================== ========== ========== ========== ========== ========== Total assets $ 332,595 $ 647,622 $ 349,704 $ 153,950 $1,483,871 =================================== ========== ========== ========== ========== ========== THREE MONTHS ENDED MARCH 31, 2000 Commercial Retail Real Estate (IN THOUSANDS) Banking Banking Lending Other Total - ----------------------------------- ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses $ 2,479 $ 9,629 $ 1,559 $ (713) $ 12,954 Other income 155 1,016 157 1,265 2,593 Other expense (629) (3,489) (530) (6,175) (10,823) - ----------------------------------- ---------- ---------- ---------- ---------- ---------- Contribution to overhead and profit $ 2,005 $ 7,156 $ 1,186 $ (5,623) 4,724 Income taxes (1,628) - ----------------------------------- ---------- ---------- ---------- ---------- ---------- Net income $ 3,096 =================================== ========== ========== ========== ========== ========== Total assets $ 352,463 $ 555,758 $ 278,835 $ 133,130 $1,320,186 =================================== ========== ========== ========== ========== ==========
7 4. ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities". In June 2000, the FASB issued SFAS 138, which amends certain provisions of SFAS 133 to clarify specific areas causing difficulties in implementation. The Company has not historically engaged in any hedging activities, and does not anticipate that it will enter into any transaction that will qualify for hedge accounting as defined by SFAS 133. The Company adopted SFAS 133 and the corresponding amendments under SFAS 138 effective on January 1, 2001. The adoption of SFAS 133, as amended by SFAS 138, did not have a material impact on the Company's consolidated results of operations, financial position or cash flows. SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", was issued in September 2000 and replaces SFAS No. 125 of the same title. This statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over most of SFAS No. 125's provisions without reconsideration. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of this statement by the Company is not expected to materially affect the results of operations or financial condition of the Company. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COLUMBIA BANKING SYSTEM, INC. This discussion should be read in conjunction with the unaudited 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 FORM 10-Q INCLUDES FORWARD LOOKING STATEMENTS, WHICH MANAGEMENT BELIEVES ARE A BENEFIT TO SHAREHOLDERS. THESE FORWARD LOOKING STATEMENTS DESCRIBE COLUMBIA'S MANAGEMENT'S EXPECTATIONS REGARDING FUTURE EVENTS AND DEVELOPMENTS SUCH AS FUTURE OPERATING RESULTS, GROWTH IN LOANS AND DEPOSITS, CONTINUED SUCCESS OF COLUMBIA'S STYLE OF BANKING AND THE STRENGTH OF THE LOCAL ECONOMY. THE WORDS "WILL," "BELIEVE," "EXPECT," "SHOULD," AND "ANTICIPATE" AND WORDS OF SIMILAR CONSTRUCTION ARE INTENDED IN PART TO HELP IDENTIFY FORWARD LOOKING STATEMENTS. FUTURE EVENTS ARE DIFFICULT TO PREDICT, AND THE EXPECTATIONS DESCRIBED ABOVE ARE NECESSARILY SUBJECT TO RISK AND UNCERTAINTY THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY AND ADVERSELY. IN ADDITION TO DISCUSSIONS ABOUT RISKS AND UNCERTAINTIES SET FORTH FROM TIME TO TIME IN COLUMBIA'S FILINGS WITH THE SEC, FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE FOLLOWING POSSIBILITIES: (1) LOCAL AND NATIONAL GENERAL AND ECONOMIC CONDITIONS ARE LESS FAVORABLE THAN EXPECTED OR HAVE A MORE DIRECT AND PRONOUNCED EFFECT ON COLUMBIA THAN EXPECTED AND ADVERSELY AFFECT COLUMBIA'S ABILITY TO CONTINUE ITS INTERNAL GROWTH AT HISTORICAL RATES AND MAINTAIN THE QUALITY OF ITS EARNING ASSETS; (2) CHANGES IN INTEREST RATES REDUCE INTEREST MARGINS MORE THAN EXPECTED AND NEGATIVELY AFFECT FUNDING SOURCES; (3) PROJECTED BUSINESS INCREASES FOLLOWING STRATEGIC EXPANSION OR OPENING OR ACQUIRING NEW BRANCHES ARE LOWER THAN EXPECTED; (4) COSTS OR DIFFICULTIES RELATED TO THE INTEGRATION OF ACQUISITIONS ARE GREATER THAN EXPECTED; (5) COMPETITIVE PRESSURE AMONG FINANCIAL INSTITUTIONS INCREASES SIGNIFICANTLY; (6) LEGISLATION OR REGULATORY REQUIREMENTS OR CHANGES ADVERSELY AFFECT THE BUSINESSES IN WHICH COLUMBIA IS ENGAGED. OVERVIEW 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 28 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. Columbia Bank is a Washington state-chartered commercial bank, the deposits of which are insured by the Federal Deposit Insurance Corporation (the "FDIC"). The 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. 9 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 28 branch offices and has plans to open additional branches in 2001 as discussed below. In the five years ended December 31, 2000, the Company has achieved significant growth in profitability, assets, loans and deposits, as shown in the following chart. At/For Year Ended Five Year Compounded (DOLLARS IN THOUSANDS) December 31, 2000 Annual Growth Rate - ---------------------- ----------------- ------------------ Net Income $ 10,070 22% Assets 1,496,495 24 Loans 1,192,520 23 Deposits 1,327,023 24 The Company's goal is to become the premier super community bank headquartered in the Pacific Northwest while establishing a significant presence in selected northwest markets. Internal growth will be augmented by strategic business combinations. The Company will build on its reputation for excellent customer service in order to be recognized in all markets it serves as the bank of choice for retail deposit customers, small to medium-sized businesses and affluent households. The Company also expects to achieve superior financial performance at the earliest practical date, consistent with development of its northwest franchise. Management believes the ongoing consolidation among financial institutions in the northwest part of the U.S. has created significant gaps in the ability of large banks operating in the states comprising that area 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 banking company 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, deposits, and other financial services in the markets it now serves and in areas contiguous to those markets. The Company has closely followed the recent changes to federal banking laws which allow financial institutions to engage in a broader range of activities than previously permitted. The new legislation also authorizes the creation of financial holding companies to facilitate such expanded activity. As the Company pursues its aggressive growth strategy, it is likely that the Company will utilize the new financial holding company structure to accommodate an expansion of its products and services. The Company intends to effect its 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), Columbia On Call(TM) telephone banking, Columbia OnLine(TM) internet banking, development of complimentery lines of business, and acquisitions. In particular, the Company anticipates continued expansion in Pierce County, north into King County, south into Thurston County and northwest into Kitsap County. Aggressive expansion within the Seattle and "Eastside" areas of King County was begun in 2000 with the hiring of additional experienced bankers with extensive knowledge of the market. During the year 2001, the Company intends to establish a private banking and commercial banking presence in Seattle, expand its presence in Bellevue, establish retail banking offices in Issaquah and Redmond and determine other appropriate expansion locations. 10 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 expense 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 has consistently emphasized control of noninterest expense. The Company has 28 branches, 15 in Pierce County, 7 in King County, 4 in Cowlitz County, 1 in Kitsap County, and 1 in Thurston County. Since beginning its major Pierce County expansion in August 1993, the Company has expanded from 4 branches primarily through internal growth. In February 2001, construction was completed on a permanent West Olympia facility. During the first quarter of 2001, the Company continued its planned expansion in the King County market. In the second quarter of 2001, the Company expects to open a private banking and commercial banking office in downtown Seattle, continue it's expansion in Bellevue, and open a retail office in Issaquah. Later this year, the Company expects to open an office in Redmond. In addition to the King County expansion, the Company continues to expand in it's traditional market areas. Construction is underway for Pierce County branches at 84th & Pacific and 11th & Martin Luther King Way in Tacoma; and a Bonney Lake facility is targeted for completion this summer. The Company is in the process of moving it's headquarters to a new building at 13th & A Streets in downtown Tacoma. As the named tenant, the building will provide excellent visibility and additional space to accommodate growth, as well as demonstrating the Company's commitment to revitalizing the communities it serves. New branches normally do not contribute to net income for many months after opening. In addition to the ongoing expansion of its branch network, the Company continuously reviews new products and services to give its customers more financial service options. Also, new technology and services are reviewed for business development and cost saving purposes. During 2000, the Company introduced its new online banking service Columbia On-Line (TM). Customers are able to conduct a full range of services on a real time basis, including, balance inquiries, transfers, bill paying, loan information, and check image viewing. This online service has also enhanced the delivery of cash management services to its commercial customers. The economy of the Company's principal market areas, 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. Additionally, four military bases are located in the market areas. The Washington economy and that of the Puget Sound region generally have experienced strong growth and stability in recent years. 11 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, merchant services fees, and income from mortgage banking operations. The Company's operating expenses consist primarily of compensation and employee benefits expense, and occupancy expense. Like most financial institutions, the Company's interest income and cost of funds are affected significantly by general economic conditions, particularly changes in market interest rates, and by government policies and actions of regulatory authorities. Net income for the first quarter of 2001 was $3.1 million, or $0.26 per diluted share, unchanged compared to $3.1 million, or $0.26 per diluted share, for the first quarter of 2000. During the quarter total revenue (net interest income plus noninterest income), increased $1.1 million, or 7.0% from the first quarter of 2000, while noninterest expense increased $1.1 million, or 10.2% compared with the first quarter of 2000. NET INTEREST INCOME Net interest income for the first quarter of 2001 increased 3% to $14.3 million, from $13.9 million in the first quarter of 2000. The increase in net interest income was largely due to the overall growth of the Company and was negatively impacted by increased costs of deposits and other liabilities. During the first quarter of 2001 interest rates decreased dramatically as the "prime rate" declined 150 basis points. As a result, the Company's loan yields, approximately 40% of which adjust immediately with a change in the prime rate, decreased rapidly. Additionally, in the third and fourth quarters of 2000,competition for deposits to fund loan demand placed upward pressure on the cost of deposits and borrowings, thus increasing the Company's cost of funding. Since reductions in deposit and other funding costs lag reductions in interest-earning asset yields, when interest rates declined during the first quarter of 2001, the yield on interest-earning assets declined faster than the recently increased cost of interest-bearing liabilities. During the first quarter of 2001, the Company took steps to lower its cost of deposits. The effect of these adjustments will lag the effect of reduced loan yields. Net interest margin (net interest income divided by average interest-earning assets) decreased to 4.24% in the first quarter of 2001 from 4.75% in the first quarter of 2000. Average interest-earning assets increased to $1.4 billion, or 17%, during the first quarter of 2001, compared with $1.2 billion for the same period in 2000. The average yield on interest-earning assets was relatively unchanged at 8.48% during the first quarter of 2001 compared with 8.49% during the same period of 2000. In comparison, average interest-bearing liabilities increased to $1.1 billion, or 17%, and the average cost of interest-bearing liabilities increased 61 basis points to 5.13% during the first quarter of 2001 from 4.52% in the same period of 2000. In comparison with the fourth quarter of 2000, net interest income for the first quarter 2001 decreased 6% to $14.3 million, from $15.1 million. The decrease in net interest income was due to the rapid decrease in interest rates during the first quarter of 2001. The net interest margin decreased to 4.24% in the first quarter of 2001 from 4.44% in the fourth quarter of 2000. Average interest-earning assets increased $15.8 million, or 1%, to $1.4 billion compared with the fourth quarter of 2000. The average yield on interest-earning assets decreased 27 basis points to 8.48% from 8.75% in the fourth quarter of 2000. During the first quarter, average interest bearing liabilities increased $10.5 million, or 1%, to $1.1 billion compared with the fourth quarter of 2000. The average cost of interest-bearing liabilities decreased 7 basis points to 5.13% during the first quarter of 2001 compared with 5.20% in the fourth quarter of 2000. 12 LOOKING FORWARD The additional decline in short term interest rates by 50 basis points in April 2001, and expected further reductions, will continue to reduce the Company's net interest margin in the short term. Management currently expects that the rate environment will impact earnings. As a result, management expects that the Company's 2001 earnings will be in the range of $1.20 - $1.24 per share. CONSOLIDATED AVERAGE BALANCES--NET CHANGES COLUMBIA BANKING SYSTEM, INC. Three Months Ended Increase March 31, (Decrease) (IN THOUSANDS) 2001 2000 Amount - -------------------------------------- ---------- ---------- ---------- ASSETS Loans $1,216,685 $1,081,735 $ 134,950 Securities 103,904 95,392 8,512 Interest-earning deposits with banks 53,535 1,111 52,424 - -------------------------------------- ---------- ---------- ---------- Total interest-earning assets 1,374,124 1,178,238 195,886 Noninterest-earning assets 110,240 98,724 11,516 - -------------------------------------- ---------- ---------- ---------- Total assets $1,484,364 $1,276,962 $ 207,402 ====================================== ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits $1,090,317 $ 912,310 $ 178,007 Federal Home Loan Bank advances 40,000 59,434 (19,434) Other borrowings 6,039 3,077 2,962 - -------------------------------------- ---------- ---------- ---------- Total interest-bearing liabilities 1,136,356 974,821 161,535 Noninterest-bearing deposits 219,379 191,959 27,420 Other noninterest-bearing liabilities 11,959 8,832 3,127 Shareholders' equity 116,670 101,350 15,320 - -------------------------------------- ---------- ---------- ---------- Total liabilities and $1,484,364 $1,276,962 $ 207,402 shareholders' equity ====================================== ========== ========== ========== NONINTEREST INCOME Noninterest income increased $732,000, or 28% in the first quarter of 2001, compared with the same period in 2000. Increases during the first quarter of 2001 were primarily centered in mortgage banking operations, and merchant services income. Mortgage banking income has been favorably impacted by increased residential mortgage originations due to the effect of lower long-term interest rates. Increases in merchant services income is due to the overall growth of the Company. Noninterest income increased 17% from the fourth quarter of 2000 to the first quarter of 2001. During the first quarter of 2001, the Company recorded a net loss on sale of investment securities of $23,000. 13 NONINTEREST EXPENSE Total noninterest expense increased $1.1 million, or 10%, for the first quarter of 2001, compared with the same periods in 2000. The increase was primarily due to personnel costs associated with the Company's expansion as well as merchant services, taxes and licenses, and other expenses. The personnel cost increases reflect significant hiring in the fourth quarter of 2000 and the first quarter 2001, of experienced bankers in connection with the Company's King County expansion. The Company's efficiency ratio (noninterest expense divided by the sum of net interest income plus noninterest income) was 67.7% for the first quarter of 2001, compared to 65.8% for the same period in 2000. INCOME TAXES The Company recorded income tax provisions of $1.6 million for each of the quarters ending March 31, 2001 and 2000. CREDIT RISK MANAGEMENT The extension of credit in the form of loans or other credit substitutes 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 or judged by its risk rating size or potential risk of loss. In contrast, the monitoring process for the commercial business, private banking, 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 non-accrual status even though the loan may be current as to principal and interest payments. Additionally, the Company would assess whether an impairment of a loan as provided in SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", would warrant specific reserves or a write-down of the loan. See "Provision and Allowance For Loan Losses." Loan policies, credit quality criteria, portfolio guidelines and other controls are established under the guidance of the Company's chief 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 on-site examination to ensure continued performance and proper risk assessment. 14 LOAN PORTFOLIO ANALYSIS 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 composition by type of loan for the dates indicated:
March 31, % of December 31, % of (IN THOUSANDS) 2001 Total 2000 Total - --------------------------------------- ---------- ---------- ---------- ---------- Commercial business $ 506,428 41.8% $ 496,125 41.6% Real estate: One-to four-family residential 55,307 4.6 55,922 4.7 Five or more family residential and commercial properties 437,294 36.1 428,884 36.0 - --------------------------------------- ---------- ---------- ---------- ---------- Total real estate 492,601 40.7 484,806 40.7 Real estate construction: One-to four-family residential 31,020 2.5 33,548 2.8 Five or more family residential and commercial properties 78,293 6.5 74,451 6.3 - --------------------------------------- ---------- ---------- ---------- ---------- Total real estate construction 109,313 9.0 107,999 9.1 Consumer 105,665 8.7 106,633 8.9 - --------------------------------------- ---------- ---------- ---------- ---------- Sub-total loans 1,214,007 100.2 1,195,563 100.3 Less: Deferred loan fees (2,907) (0.2) (3,043) (0.3) - --------------------------------------- ---------- ---------- ---------- ---------- Total loans $1,211,100 100.0% $1,195,520 100.0% ======================================= ========== ========== ========== ========== Loans held for sale $ 38,666 $ 14,843 ======================================= ========== ========== ========== ==========
Total loans (excluding loans held for sale) at March 31, 2001, increased $15.6 million, or 1.3%, to $1.2 billion from year-end 2000. Commercial business loans and five or more family residential and commercial properties were the categories contributing a majority of the increase. COMMERCIAL LOANS: Commercial loans increased $10.3 million, or 2.1%, to $506.4 million from year-end 2000, representing 41.8% of total loans compared with 41.6% of total loans at December 31, 2000. Management is committed to providing 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 affluent individuals. REAL ESTATE LOANS: Residential one- to four-family loans decreased $615,000 to $55.3 million at March 31, 2001, representing 4.6% of total loans, compared with $55.9 million, or 4.7% of total loans at December 31, 2000. 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. The loan amounts may 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 $8.4 million, or 2.0%, to $437.3 million at March 31, 2001, representing 36.1% of total loans, from $428.9 million, or 36.0% of total loans at December 31, 2000. The increase in multi-family and commercial real estate lending during 2000 reflects a mix of owner occupied and income property transactions. Generally, multi-family and commercial real estate loans are made to borrowers who have existing banking relationships with the Company. The Company's underwriting standards generally require that the loan-to-value ratio for multi-family and commercial loans 15 not exceed 75% of appraised value or cost, whichever is lower, and that commercial properties maintain debt coverage ratios (net operating income divided by annual debt servicing) of 1.2 or better. Underwriting standards can be influenced by competition. The Company endeavors to maintain the highest practical underwriting standards while balancing the need to remain competitive in its lending practices. REAL ESTATE CONSTRUCTION LOANS: The Company originates a variety of real estate construction loans. One- to four-family residential construction loans are originated for the construction of custom homes (where the home buyer is the borrower) and provides financing to builders for the construction of pre-sold homes and speculative residential construction. Construction loans on one- to four-family residences decreased $2.5 million to $31.0 million at March 31, 2001, representing 2.5% of total loans, from $33.5 million, or 2.8% of total loans at December 31, 2000. Multi-family and commercial real estate construction loans increased $3.8 million to $78.3 million at March 31, 2001, representing 6.5% of total loans, from $74.5 million, or 6.3% of total loans at December 31, 2000. The Company endeavors to limit its construction lending risk through adherence to strict underwriting procedures. CONSUMER LOANS: At March 31, 2001, the Company had $105.7 million of consumer loans outstanding, representing 8.7% of total loans, as compared with $106.6 million, or 8.9% of total loans, at December 31, 2000. Consumer loans made by the Company include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans and miscellaneous personal loans. FOREIGN OUTSTANDING: Columbia Bank is not involved with loans to foreign companies and foreign countries. 16 NONPERFORMING ASSETS Nonperforming assets consist of: (i) nonaccrual loans, which generally are loans placed on a nonaccrual basis 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) real estate owned. The following tables set forth, at the dates indicated, information with respect to nonaccrual loans, restructured loans, total nonperforming loans (nonaccrual loans plus restructured loans), real estate owned, and total nonperforming assets of the Company: March 31, December 31, (IN THOUSANDS) 2001 2000 - ---------------------------------------------- -------- -------- Nonaccrual: One-to four-family residential $ 149 $ 410 Commercial real estate 518 698 Commercial business 10,756 11,091 Consumer 180 307 - ---------------------------------------------- -------- -------- Total 11,603 12,506 Restructured: One-to four-family residential construction 1,774 1,136 Commercial business - ---------------------------------------------- -------- -------- Total 1,774 1,136 - ---------------------------------------------- -------- -------- Total nonperforming loans $ 13,377 $ 13,642 ============================================== ======== ======== Real estate owned $ 1,291 $ 1,291 - ---------------------------------------------- -------- -------- Total nonperforming assets $ 14,668 $ 14,933 ============================================== ======== ======== 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. Nonaccrual loans and other nonperforming assets are centered in a small number of lending relationships which management considers to be adequately reserved. In the fourth quarter 2000, deterioration of a single large credit relationship with a principal amount of $8.0 million caused the Company to place the loan on nonaccrual and include it in impaired loans. Based on information currently known to the Company, management believes that additional collateral being obtained to support the loan may reduce the Company's loss exposure. Substantially, all nonperforming loans are to borrowers within the State of Washington. Nonperforming loans were $13.4 million, or 1.10% of total loans (excluding loans held for sale) at March 31, 2001, compared to $13.6 million, or 1.14% of total loans at December 31, 2000. Restructured loans increased to $1.8 million at March 31, 2001, from $1.1 million, at December 31, 2000. 17 Real estate owned, which is comprised of foreclosed real estate loans, was unchanged at March 31, 2001, from its balance of $1.3 million at December 31, 2000. During the first three months of 2001, there were no REO transactions. At March 31, 2001, REO consisted of three foreclosed properties. Total nonperforming assets totaled $14.7 million, or 0.99% of period-end assets at March 31, 2001, compared to $14.9 million, or 1.00% of period-end assets at December 31, 2000. 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 in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." 3. Unallocated allowance. 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 March 31, 2001, the Company's allowance for loan losses was $19.0 million, or 1.57% of the total loans (excluding loans held for sale), and 141.7% of nonperforming loans. This compares with an allowance of $18.8 million, or 1.58% of the total loan portfolio, and 137.7% of nonperforming loans, at December 31, 2000. 18 In the fourth quarter 2000, the Company took an additional loan loss provision of $6.0 million to increase its allowance for loan losses to reflect the deterioration of a single substantial credit relationship. As a result of the deterioration of this single relationship, the Company undertook a comprehensive review of the process currently in place to detect and react to other potential loan portfolio deterioration. Based on that review, management is confident that the problems with the single loan are not symptomatic of other similar problems in the loan portfolio. In addition, management has retained the Secura Group, a nationally recognized firm with expertise in commercial loan credit review, to conduct an independent assessment of the Company's loan and collateral monitoring procedures. The additional $6.0 million provision to the allowance for loan losses was set aside to provide against the loss that may result from the loan, and to further protect against pressures that might arise from a slowing economy. Net loan charge-offs amounted to $733,000 for the first three months of 2001 compared with net loan recoveries of $30,000 for the same period in 2000. During the first three months of 2001, the Company set aside $900,000 of provisions for loan losses as unchanged from $900,000 for the same period in 2000. Management anticipates that continued growth of the loan portfolio and a slowing of growth in the local economy will require continued additions to the allowance for loan losses during the year 2001. The following table provides an analysis of net losses by loan type at the dates indicated: Three Months Ended March 31, (IN THOUSANDS) 2001 2000 - --------------------------------------------- ---------- ---------- Beginning balance $ 18,791 $ 9,967 Charge-offs: One-to-four family residential construction Commercial business (798) (187) Consumer (7) (59) - --------------------------------------------- ---------- ---------- Total charge-offs (805) (246) Recoveries: Commercial business 62 266 Consumer 10 10 - --------------------------------------------- ---------- ---------- Total recoveries 72 276 - --------------------------------------------- ---------- ---------- Net (charge-offs) recoveries (733) 30 Provision charged to expense 900 900 - --------------------------------------------- ---------- ---------- Ending balance $ 18,958 $ 10,897 ============================================= ========== ========== 19 LIQUIDITY AND SOURCES OF FUNDS The Company's primary sources of funds are customer deposits, advances from the Federal Home Loan Bank of Seattle (the "FHLB"). These funds, together with loan repayments, loan sales, retained earnings, equity and other borrowed funds, are used to make loans, to acquire securities and other assets and to fund continuing operations. DEPOSIT ACTIVITIES The Company's deposit products include a wide variety of transaction accounts, savings accounts and time deposit accounts. Total deposits decreased $22.6 million, or 1.7%, to $1.304 billion at March 31, 2001 from $1.327 billion at December 31, 2000. The decrease was primarily centered in certificates of deposit balances, as the Company reduced the rates of interest offered on the certificates. Average core deposits (demand deposit, savings, and money market accounts) increased to $691.5 million, or 1.03%, during the first quarter of 2001, from $684.5 million during the fourth quarter ending December 31, 2000. The Company has established a branch system catering primarily to retail depositors, supplemented by business customer deposits and other borrowings. The branch system deposits are intended to provide a stable core funding base for the Company. Together with that stable core deposit base, management's strategy for funding growth is also to make use of brokered and other wholesale deposits. The Company's use of brokered and other wholesale deposits increased in 2000, and management anticipates continued use of such deposits to fund increasing loan demand. At March 31, 2001, brokered and other wholesale deposits (excluding public deposits) totaled $40.2 million, or 3.1% of total deposits, compared with $53.0 million, or 4% of total deposits at December 31, 2000. The brokered deposits have varied maturities up to 5 years. BORROWINGS The Company relies on FHLB advances to supplement its funding sources, and the FHLB serves as the Company's primary source of long-term borrowings. In addition, the Company uses short-term borrowings from the FHLB when necessary. FHLB advances are secured by one- to four-family real estate mortgages and certain other assets. At March 31, 2001, the Company had short-term advances of $40.0 million unchanged from the balance at December 31, 2000. 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. The Company has a $20 million line of credit with a large commercial bank. The interest rate on the line is indexed to the prime rate and at March 31, 2001, the balance outstanding was $8.0 million compared with a balance of $4.5 million at December 31, 2000. In the event of the discontinuance of the line by either party, the Company has up to two years to repay the debt. 20 CAPITAL Shareholders' equity at March 31, 2001, was $118.4 million compared with $113.8 million at December 31, 2000. The increase is due primarily to net income of $3.1 million during the first three months of 2001. Shareholders' equity was 7.98% and 7.61% of total period-end assets at March 31, 2000, and December 31, 2000, 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 March 31, 2001, the Company's leverage ratio was 7.94%, compared with 7.77% at December 31, 2000. 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% of risk-adjusted assets to be considered "adequately capitalized". The Company's Tier I and total capital ratios were 8.70% and 9.65%, respectively, at March 31, 2001, compared with 8.58% and 9.54%, respectively, at December 31, 2000. During 1992, the Federal Deposit Insurance Corporation (the "FDIC") published the qualifications necessary to be classified as a "well capitalized" bank, primarily for assignment of FDIC insurance premium rates beginning in 1993. To qualify as "well capitalized," banks must have a Tier I risk-adjusted capital ratio of at least 6%, a total risk-adjusted capital ratio of at least 10%, and a leverage ratio of at least 5%. Columbia Bank qualified as "well-capitalized" at March 31, 2001. Failure to qualify as "well capitalized" can negatively impact a bank's ability to expand and to engage in certain activities. Applicable federal and Washington state regulations restrict capital distributions by institutions such as Columbia Bank, including dividends. Such restrictions are tied to the institution's capital levels after giving effect to distributions. The Company's ability to pay cash dividends is substantially dependent upon receipt of dividends from the Bank. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK A number of measures are used to monitor and manage interest rate risk, including income simulations and interest sensitivity (gap) analyses. An income simulation model is the primary tool used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Key assumptions in the model include prepayment speeds on mortgage-related assets, cash flows and maturities of other investment securities, loan and deposit volumes and pricing. These assumptions are inherently subjective 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. At March 31, 2001, based on the measures used to monitor and manage interest rate risk, there has not been a material change in the Company's interest rate risk since December 31, 2000. For additional information, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" referenced in the Company's annual report on Form 10-K for the year ended December 31, 2000. 21 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10 Data processing servicing agreement dated January 1, 2001 between the Company and Metavante Corporation. (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COLUMBIA BANKING SYSTEM, INC. (Registrant) Date May 14, 2001 By /s/ J. James Gallagher ---------------- ------------------------------ J. James Gallagher Vice Chairman and Chief Executive Officer Date May 14, 2001 By /s/ Gary R. Schminkey ---------------- ------------------------------ Gary R. Schminkey Executive Vice President and Chief Financial Officer 22 EX-10 2 ex10_10671.txt OUTSOURCING AGREEMENT OUTSOURCING AGREEMENT (renewal) BY AND BETWEEN COLUMBIA STATE BANK and METAVANTE CORPORATION DATED AS OF JANUARY 1,200l TABLE OF CONTENTS 1. BACKGROUND ................................................................ 1 1.1 Definitions ............................................................ 1 1.2 References ............................................................. 1 1.3 Interpretation ......................................................... 1 2. TERM ...................................................................... 1 2.1 Initial Term ........................................................... l 2.2 Extensions.............................................................. 1 3. APPOINTMENT ............................................................... l 3.1 Performance by Metavante Affiliates or Subcontractors .................. 1 3.2 Third Party Products/Services .......................................... 1 3.3 Proper Instructions .................................................... 1 4. CONVERSION ................................................................ 1 5. BANKING APPLICATION SERVICES .............................................. 1 5.1 ADP Services ........................................................... l 5.2 New Services ........................................................... 1 5.3 Automated Clearing House Services ...................................... 1 5.4 Data Warehouse Services ................................................ 2 5.5 Connectware Services ................................................... 2 6. HOME BANKING AND RETAIL DELIVERY SERVICES ................................. 2 6.1 DirectPC Services intentionally omitted ................................ 2 6.2 Internet Banking Services intentionally omitted ........................ 2 6.3 Business Express Services intentionally omitted ........................ 2 7. ELECTRONIC FUNDS DELIVERY ................................................. 2 7.1 Cardholder and Merchant Accounts intentionally omitted ................. 2 7.2 EFT Services ........................................................... 2 8. FEES ...................................................................... 2 8.1 Fee Structure .......................................................... 2 8.2 Pricing and Operational Assumptions .................................... 2 8.3 EFT Services ........................................................... 2 8.4 Training and Education ................................................. 2 8.5 Excluded Costs ......................................................... 2 8.6 Disputed Amounts ....................................................... 2 8.7 Terms of Payment ....................................................... 2 8.8 Modification of Terms and Pricing ...................................... 3 9. PERFORMANCE WARRANTY/EXCLUSIVE REMEDY/DISCLAIMER OF ALL OTHER WARRANTIES .. 3 9.1 Performance Warranty ................................................... 3 9.2 Performance Warranty Exclusions ........................................ 3 9.3 Notice of and Correction of Defects .................................... 3 9.4 Backup Remedy .......................................................... 3 9.5 DISCLAIMER OF ALL OTHER WARRANTIES ..................................... 3 10. MODIFICATION OR PARTIAL TERMINATION ...................................... 3 10.1 Modifications to Services ............................................. 3 10.2 Partial Termination by Metavante ...................................... 3 10.3 Partial Termination by Customer ....................................... 3 10.4 Ownership and Proprietary Rights ...................................... 3 11. TERMINATION .............................................................. 4 11.1 Early Termination ..................................................... 4 11.2 For Cause ............................................................. 4 11.3 For Insolvency ........................................................ 4 11.4 For Force Majeure ..................................................... 4 12. SERVICES FOLLOWING TERMINATION ........................................... 4 -i- 12.1 Termination Assistance ................................................ 4 12.2 Continuation of Services .............................................. 4 13. LIMITATION OF LIABILITY/MAXIMUM DAMAGES ALLOWED .......................... 4 13.1 Equitable Relief ...................................................... 4 13.2 Exclusion of Incidental and Consequential Damages ..................... 4 13.3 Maximum Damages Allowed ............................................... 4 13.4 Statute of Limitations ................................................ 4 13.5 Economic Loss Waiver .................................................. 5 13.6 Liquidated Damages .................................................... 5 13.7 Essential Elements .................................................... 5 14. INSURANCE AND INDEMNITY .................................................. 5 14.1 Insurance ............................................................. 5 14.2 Indemnity ............................................................. 5 14.3 Indemnification Procedures ............................................ 5 15. DISPUTE RESOLUTION ....................................................... 5 15.1 Representatives of Parties ............................................ 5 15.2 Continuity of Performance ............................................. 5 16. AUTHORITY ................................................................ 6 16.1 By Metavante .......................................................... 6 16.2 By Customer ........................................................... 6 17. CONFIDENTIALITY AND OWNERSHIP ............................................ 6 17.1 Customer Data ......................................................... 6 17.2 Metavante Systems ..................................................... 6 17.3 Confidential Information .............................................. 6 17.4 Obligations of the Parties ............................................ 6 17.5 Security .............................................................. 6 18. MANAGEMENT OF PROJECT .................................................... 6 18.1 Account Representatives ............................................... 6 18.3 Development Projects and Technical Support ............................ 6 19. REGULATORY COMPLIANCE .................................................... 6 20. DISASTER RECOVERY ........................................................ 7 20.1 Services Continuity Plan .............................................. 7 20.2 Relocation ............................................................ 7 20.3 Resumption of Services ................................................ 7 20.4 Annual Test ........................................................... 7 21. GENERAL TERMS AND CONDITIONS ............................................. 7 21.l Transmission of Data .................................................. 7 21.2 Equipment and Network ................................................. 7 21.3 Reliance on Data ...................................................... 7 21.4 Data Backup ........................................................... 7 21.5 Balancing and Controls ................................................ 7 21.6 Use of Services ....................................................... 7 21.7 Regulatory Assurances ................................................. 8 21.8 IRS Filing ............................................................ 8 21.9 Affiliates ............................................................ 8 21.10 Future Acquisitions .................................................. 8 22. MISCELLANEOUS PROVISIONS ................................................. 9 22.1 Governing Law ......................................................... 9 22.2 Venue and Jurisdiction ................................................ 9 22.3 Entire Agreement; Amendments .......................................... 9 22.4 Assignment ............................................................ 9 22.5 Relationship of Parties ............................................... 9 22.6 Notices ............................................................... 9 22.7 Headings .............................................................. 9 22.8 Counterparts .......................................................... 9 -ii- 22.9 Waiver ................................................................ 9 22.10 Severability ........................................................ l0 22.11 Attorneys' Fees and Costs ........................................... 10 22.12 Financial Statements ................................................ 10 22.13 Publicity ........................................................... 10 22.14 Solicitation ........................................................ l0 22.15 No Third Party Beneficiaries ........................................ 1O 22.16 Force Majeure ....................................................... l0 22.17 Construction ........................................................ 10 22.18 Waiver of Jury Trial ................................................ 10 Schedules - --------- 1.1 Definitions 1.2 Customer Affiliates 5.1 ADP Services 5.3 ACH Services 5.4 Data Warehouse Services 5.5 Connectware 5.6 7.2 EFT Services 8.1 Fee Schedule 9.1 ADP Performance Standards 11.1 Termination Fee Exhibits - -------- A ACH Authorization Agreement B Attorney-in-Fact Appointment C Affidavit -iii- OUTSOURCING AGREEMENT Outsourcing Agreement ("Agreement") is made as of the 1st day of January 1, 2001, by and between Columbia State Bank, a Washington corporation ("Customer") and Metavante Corporation, a Wisconsin corporation. Metavante and Customer entered into a Data Processing Services Agreement ("DP Agreement") for the provision of certain data processing services. Metavante and Customer wish to continue the business relationship, in accordance with the terms and conditions of this Agreement. In consideration of the payments to be made and services to be performed hereunder, the parties agree as follows: 1. BACKGROUND 1.l. DEFINITIONS. The defined terms of this Agreement shall have the meaning ascribed to them on attached Schedule 1 .I. 1.2. As of the Effective Date (as defined in Schedule 1.11, the DP Agreement is hereby terminated and of no further force and effect. Such termination is effective without any penalty or payment due from Customer to Metavante for early termination, 1.3. REFERENCES. In this Agreement and the schedules and exhibits attached hereto, which are hereby incorporated and deemed a part of this Agreement, references and mention of the word "include" and "including" shall mean "includes, without limitation" and "including, without limitation," as applicable. 1.4. INTERPRETATION. In the event of a conflict between this Agreement and the terms of any exhibits and schedules attached hereto, the terms of the schedules and exhibits shall prevail and control the interpretation of the Agreement. The exhibits and schedules together with the Agreement shall be interpreted as a single document. 2. TERM 2.1. INITIAL TERM. This Agreement shall commence on the Effective Date and end on the fifth (5lh) anniversary of the last day of the month in which the Effective Date occurs ("Initial Term"). 2.2. EXTENSIONS. Unless this Agreement has been earlier terminated, at least one (1) year prior to the expiration of the Initial Term, Metavante shall submit to Customer a written proposal for renewal of this Agreement. Customer will respond to such proposal within three (3) months following receipt and inform Metavante in writing whether or not Customer desires to renew this Agreement. If Metavante and Customer are unable to agree upon the terms for renewal of this Agreement at least six (6) months prior to the expiration of the Initial Term, then this Agreement shall be automatically renewed on a month-to-month basis at Metavante's then-current standard prices, until either party gives the other six (6) months notice of intent to terminate. 3. APPOINTMENT 3.1. PERFORMANCE BY METAVANTE AFFILIATES OR SUBCONTRACTORS. Customer understands and agrees that the actual performance of the Services may be made by the divisions or subsidiaries of Marshall & Ilsley Corporation, Affiliates Controlled by Marshall & Ilsley Corporation, or subcontractors of any of the foregoing Entities (collectively, the "Eligible Providers"). For purposes of this Agreement, performance of the Services by any Eligible Provider shall be deemed performance by Metavante Corporation itself. Metavante shall remain fully responsible for the performance or non-performance of each Eligible Provider under this Agreement, to the same extent if Metavante itself performed or failed to perform such services. Customer agrees to look solely to Metavante, and not to any Eligible Provider, for satisfaction of any claims Customer may have arising out of this Agreement or the performance or nonperformance of Services. 3.2. THIRD PARTY PRODUCTS/SERVICES. The parties acknowledge that certain services and products necessary for the performance of the Services are being, and in the future may be, provided by Third Parties who will contract directly with Customer. Metavante shall have no liability to Customer for information and products supplied by, or services performed by, such Third Parties in conjunction with the Services. 3.3. PROPER INSTRUCTIONS. "Proper Instructions" shall mean those instructions sent to Metavante by letter, memorandum, telegram, cable, telex, telecopy facsimile, computer terminal, e-mail or other "on line" system or similar means of communication or given orally over the telephone or given in person by one or more of the person(s) whose name(s) and signature(s) are listed on the most recent certificate delivered by Customer to Metavante which lists those persons authorized to give orders, corrections and instructions in the name of and on behalf of Customer. Proper Instructions shall specify the action requested to be taken or omitted. 4. CONVERSION Intentionally Omitted 5. BANKING APPLICATION SERVICES 5.1. ADP SERVICES. Metavante agrees to provide Customer with the ADP Services set forth on Schedule 5.1. 5.2. NEW SERVICES. If Customer wishes to receive any New Service which is identified on Metavante's then-current standard price list, Customer shall notify Metavante and the parties shall implement the same in accordance with a mutually acceptable schedule. If the New Service is not identified on Metavante's then-current standard price list, Customer shall submit a written request to Metavante in accordance with Section 18.2 of this Agreement. Nothing contained herein shall obligate Metavante to develop a New Service for Customer. 5.3. AUTOMATED CLEARING HOUSE SERVICES. The automated clearing house services ("ACH Services") to be provided by Metavante shall be subject to the terms and conditions set forth on attached Schedule 5.3. -1- 5.4. DATA WAREHOUSE SERVICES. The data warehouse services ("Data Warehouse Services") to be provided by Metavante shall be subject to the terms and conditions set forth on attached Schedule 5.4. 5.5. CONNECTWARE SERVICES. The Connectware Services to be provided by Metavante shall be subject to the terms and conditions set forth on attached Schedule 5.5. 6. HOME BANKING AND RETAIL DELIVERY SERVICES 6.1. DIRECTPC SERVICES. intentionally omitted 6.2. INTERNET BANKING SERVICES. intentionally omitted 6.3. BUSINESS EXPRESS SERVICES. intentionally omitted 7. ELECTRONIC FUNDS DELIVERY 7.1. CARDHOLDER AND MERCHANT ACCOUNTS. Intentionally omitted 7.2. EFT SERVICES. The electronic funds transfer services ("EFT Services") to be provided by Metavante shall be subject to the terms and conditions set forth on attached Schedule 7.2. 8. FEES 8.1. FEE STRUCTURE. Schedule 8.1 attached hereto (the "Fee Schedule") sets forth the costs and charges for the Services and Customer agrees to pay Metavante the fees specified in the Fee Schedule for the Services rendered by Metavante. These costs and charges are included in one or more of the following categories: A. one-time fees associated with any conversion; B. a minimum monthly fee for certain recurring, aggregated data processing services based on stated volumes; actual volumes in excess of stated volumes shall result in additional charges as further described in the Fee Schedule; C. an hourly or daily fee for programming, training and related Services requested by Customer; and D. fees based on Metavante's then current price list for New Services not included in the foregoing categories. 8.2. PRICING AND OPERATIONAL ASSUMPTIONS. The Fee Schedule sets forth the operational and pricing assumptions made by Metavante. If the parties determine that one or more of the pricing or operational assumptions listed in the Fee Schedule is inaccurate or incomplete in any material respect, the parties will negotiate in good faith regarding an equitable adjustment to any materially and adversely impacted provisions of this Agreement. 8.3. EFT SERVICES. In addition to the charges specified on the Fee Schedule, Customer shall be responsible for all interchange and network provider fees and all dues, fees and assessments established by and owed to Visa and/or Mastercard for the processing of Customers transactions, and for all costs and fees associated with changes to ATM (as defined in Schedule 7.2) protocol caused by Customer's use of the EFT Services. 8.4. TRAINING AND EDUCATION. A. Metavante shall provide training as requested by Customer and agreed to by Metavante. The sessions shall be held at a location mutually agreed upon by the parties. Customer shall be responsible for all Expenses incurred by the participants and Metavante's trainers in connection with such education and training. If Customer requests that training be conducted at a non-Metavante facility, Customer shall be responsible for additional fees as quoted by Metavante. B. Metavante will provide to Customer, at no charge, one set of each of the User Manuals. When the User Manuals are updated, Metavante will provide the updates to Customer at no additional charge. Additional sets of the User Manuals may be purchased by Customer at Metavante's then current price list. 8.5. EXCLUDED COSTS. The fees set forth in the Fee Schedule do not include shipping and courier costs, telecommunication charges, LU charges, Expenses, Third Party pass-through charges, workshop fees, training fees, late fees or charges and Taxes. 8.6. DISPUTED AMOUNTS. If Customer disputes any charge or amount on any invoice and such dispute cannot be resolved promptly through good faith discussions between the parties, Customer shall pay the amounts due under this Agreement less the disputed amount, and the parties shall diligently proceed to resolve such disputed amount. An amount will be considered disputed in good faith if(i) Customer delivers a written statement to Metavante on or before the due date of the invoice, describing in detail the basis of the dispute and the amount being withheld by Customer, (ii) such written statement represents that the amount in dispute has been determined after due investigation of the facts and that such disputed amount has been determined in good faith, and (iii) all other amounts due from Customer that are not in dispute have been paid in accordance with the terms of this Agreement. 8.7. TERMS OF PAYMENT. Any "one-time" fees shall be paid to Metavante as set forth in the Fee Schedule. Customer shall pay the Monthly Base Fee in advance on the first day of the calendar month in which the Services are to be performed. To effect payment, Customer hereby authorizes Metavante to initiate debit entries from and, if necessary, initiate credit entries and adjustments to Customers account at the depository institution designated in the ACH Authorization Agreement attached hereto as Exhibit A, which shall be executed by Customer contemporaneously with the execution of this Agreement. All other amounts due hereunder shall be paid within thirty (30) days of invoice, unless otherwise provided in the Fee Schedule. Undisputed charges not paid by the due date shall be subject to annual interest -2- at the rate of 12% or the highest rate permitted by law, whichever is lower. Customer shall also pay any collection fees and Damages incurred by Metavante in collecting payment of the charges and any other amounts for which Customer is liable under the terms and conditions of this Agreement. 8.8. MODIFICATION OF TERMS AND PRICING. All charges for Services shall be subject to the annual adjustments (including CPI adjustments) set forth in the Fee Schedule. 9. PERFORMANCE WARRANTY/EXCLUSIVE REMEDY/DISCLAIMER OF ALL OTHER WARRANTIES 9.1. PERFORMANCE WARRANTY. Metavante warrants that it will provide the ADP Services covered by this Agreement in accordance with the Performance Standards and where such Performance Standards are not applicable, in a commercially reasonable manner in substantial conformity with the applicable User Manuals (the "Performance Warranty"). THIS PERFORMANCE WARRANTY IS SUBJECT TO THE WARRANTY EXCLUSIONS SET FORTH BELOW IN SECTION 9.2 AND THE REMEDY LIMITATIONS SET FORTH BELOW IN SECTION 9.3. 9.2. PERFORMANCE WARRANTY EXCLUSIONS. Except as may be expressly agreed in writing by Metavante, Metavante's Performance Warranty does not apply to: A. defects, problems, or failures caused by the Customer's nonperformance of obligations essential to Metavante's performance of its obligations; and/or B. defects, problems, or failures caused by an event of force majeure. 9.3. NOTICE OF AND CORRECTION OF DEFECTS. Customer shall notify Metavante in writing of any alleged breach of this Performance Warranty. If the breach relates to a Performance Standard, Metavante shall have ninety (90) days to correct the alleged breach; for all other breaches of the Performance Warranty, Metavante shall have thirty (30) days to correct the alleged breach. During this time period, Metavante shall use reasonable efforts, at its own expense, to remedy the breach. Customer shall be responsible for making whatever appropriate adjustments may be necessary to mitigate adverse effects on Customer until Metavante remedies the breach. Metavante will, at Metavante's expense, assist Customer in making such corrections through the most cost-effective means, whether manual, by system reruns or program modifications. 9.4. BACKUP REMEDY. If Metavante fails to remedy the breach in the time periods specified in Section 9.3 above, Customer may file a claim for Damages pursuant to the dispute resolution procedure set forth in Section 15.1 below and, in addition, terminate the Agreement for cause pursuant to Section 11.2 below. THE BACKUP REMEDY SET FORTH IN THIS SECTION 9.4 IS CUSTOMERS SOLE AND EXCLUSIVE REMEDY FOR Metavante's BREACH OF THE PERFORMANCE WARRANTY, TO THE EXCLUSION OF ALL OTHER REMEDIES, IN CONTRACT, TORT, OR OTHERWISE. 9.5. DISCLAIMER OF ALL OTHER WARRANTIES. THIS PERFORMANCE WARRANTY, AND THE REPRESENTATIONS IN ARTICLE 16. ARE IN LIEU OF. AND Metavante DISCLAIMS ANY AND ALL OTHER WARRANTIES. CONDITIONS. OR REPRESENTATIONS (EXPRESS OR IMPLIED, ORAL OR WRITTEN) WITH RESPECT TO THE SERVICES PROVIDED UNDER THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, ANY AND ALL IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS OR SUITABILITY FOR ANY PURPOSE (WHETHER OR NOT Metavante KNOWS, HAS REASON TO KNOW, HAS BEEN ADVISED, OR IS OTHERWISE IN FACT AWARE OF ANY SUCH PURPOSE), WHETHER ALLEGED TO ARISE BY LAW, BY REASON OF CUSTOM OR USAGE IN THE TRADE, OR BY COURSE OF DEALING. IN ADDITION, Metavante DISCLAIMS ANY WARRANTY OR REPRESENTATION TO ANY PERSON OTHER THAN THE CUSTOMER WITH RESPECT TO THE SERVICES PROVIDED UNDER THIS AGREEMENT. 10. MODIFICATION OR PARTIAL TERMINATION 10.1. MODIFICATIONS TO SERVICES. Metavante may modify, amend, enhance, update, or provide an appropriate replacement for the software used to provide the Services, or any element of its systems or processes at any time to: (i) improve the Services or (ii) facilitate the continued economic provision of the Services to Customer or Metavante, provided that neither the functionality of the Services nor any applicable Performance Standards are materially adversely affected. 10.2. PARTIAL TERMINATION BY METAVANTE. Metavante may, at any time, withdraw any of the Services (other than the Core Services) upon providing ninety (90) days' prior written notice to Customer. Metavante may also terminate any of the Services immediately upon any final regulatory, legislative, or judicial determination that providing such Services is inconsistent with applicable law or regulation. If Metavante terminates any Service, Metavante agrees to assist Customer, without additional charge, in identifying an alternate provider of such terminated Service. 10.3. PARTIAL TERMINATION BY CUSTOMER. A. Customer agrees that, during the Term, Customer shall obtain exclusively from Metavante all of its requirements covered by the Initial Services. If Customer breaches the foregoing covenant, Customer shall pay Metavante a Termination Fee for the discontinued Service, as liquidated damages and not as a penalty. StarView product without payment of any Termination Fee. Notwithstanding the foregoing, Customer may terminate the receipt of the B. Unless otherwise agreed to by the parties in writing, Customer may terminate any New Service upon one hundred eighty (180) days prior written notice to Metavante. Termination of New Services shall not be subject to any Termination Fee, unless the entire Agreement is terminated in a manner which would entitle Metavante to receive a Termination Fee. 10.4. OWNERSHIP AND PROPRIETARY RIGHTS. Metavante reserves the right to determine the hardware, software and tools to be used by Metavante in fulfilling its duties under this Agreement. Metavante and Customer intend and agree that Metavante shall retain title and all -3- other ownership and proprietary rights in and to the Metavante Proprietary Materials and information. Such ownership and proprietary rights shall include any and all rights in and to patents, trademarks, copyrights, and trade secret rights. Metavante and Customer agree that Metavante Proprietary Materials and Information are not "work made for hire" within the meaning of U.S. Copyright Act 17 U.S.C. Section 101. 11. TERMINATION 11.1. EARLY TERMINATION. The terms and conditions set forth in attached Schedule 11.1 shall govern the early termination of this Agreement (or any Service which is part of the Initial Services). 11.2. FOR CAUSE. If either party fails to perform any of its material obligations under this Agreement and does not cure such failure within thirty (30) days (or any other cure period specifically set forth in the Agreement) after being given notice specifying the nature of the failure, then the non-defaulting party may, by giving notice to the other party, terminate this Agreement as of the date specified in such notice of termination, or such later date agreed to by the parties, without prejudice to the non-defaulting party's right to collect Damages (if the non-defaulting party is the Customer) or the Termination Fee (if the nondefaulting party is Metavante). 11.3. FOR INSOLVENCY. In addition to the termination rights set forth in Sections 11 .I and 11.2, subject to the provisions of Title 11, United States Code, if either party becomes or is declared insolvent or bankrupt, is the subject to any proceedings relating to its liquidation, insolvency or for the appointment of a receiver or similar officer for it, makes an assignment for the benefit of all or substantially all of its creditors, or enters into an agreement for the composition, extension, or readjustment of all or substantially all of its obligations, or is subject to regulatory sanction by any Federal Regulator, then the other party may, by giving written notice to such party, may terminate this Agreement as of a date specified in such notice of termination; provided that the foregoing shall not apply with respect to any involuntary petition in bankruptcy filed against a party unless such petition is not dismissed within sixty (60) days of such filing. 11.4. FOR FORCE MAJEURE. In the event that Metavante fails to provide the Services in accordance with this Agreement for a period of forty-five (45) days due to an event of force majeure (as described in Section 22.16 hereof), Customer may terminate this Agreement upon written notice to Metavante delivered within thirty (30) days thereafter, without payment of any Termination Fee. 12. SERVICES FOLLOWING TERMINATION 12.1. TERMINATION ASSISTANCE. Following the expiration or early termination of this Agreement, Metavante shall provide Customer, at Customers expense, Customer's data and all necessary assistance to facilitate the orderly transition of Services to Customer or its designee ("Termination Assistance"). As part of the Termination Assistance, Metavante shall assist Customer to develop a plan for the transition of all Services then being performed by Metavante under this Agreement, from Metavante to Customer or its designee, on a reasonable schedule developed jointly by Metavante and Customer. Prior to providing any Termination Assistance, Metavante shall deliver to Customer a good faith estimate of all such Expenses and charges including charges for custom programming services. Customer understands and agrees that all Expenses and charges for Termination Assistance shall be computed in accordance with Metavante's then- current standard prices for such products, materials and services. Provided Customer does not request any custom programming or other special services, based on the way Metavante performs Termination Assistance as of the date of this Agreement, the charges for Termination Assistance would consist of per tape charges only. Nothing contained herein shall obligate Customer to receive Termination Assistance from Metavante. 12.2. CONTINUATION OF SERVICES. Unless Metavante terminates this Agreement pursuant to Section 11.2 above, upon at least ninety (90) days' prior written request by Customer, Metavante shall continue to provide Customer all Services and the Effective Date of Termination shall be extended for a maximum period of twelve (12) months. If Customer elects to receive the Services for such period, Metavante's then-current standard pricing shall continue to apply to the provision and receipt of such Services, 13. LIMITATION OF LIABILITY/MAXIMUM DAMAGES ALLOWED 13.1. EQUITABLE RELIEF. Either party may seek equitable remedies, including injunctive relief, for a breach of the other party's obligations under Article 17 of this Agreement, prior to commencing the dispute resolution procedures set forth in Section 15.1 below. 13.2. EXCLUSION OF INCIDENTAL AND CONSEQUENTIAL DAMAGES. Independent of, severable from, and to be enforced independently of any other provision of this Agreement, NEITHER PARTY WILL BE LIABLE TO THE OTHER PARTY (NOR TO ANY PERSON CLAIMING RIGHTS DERIVED FROM THE OTHER PARTY'S RIGHTS) IN CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, FOR INCIDENTAL, CONSEQUENTIAL, SPECIAL, PUNITIVE, OR EXEMPLARY DAMAGES OF ANY KIND--including lost profits, loss of business, or other economic damage, and further including injury to property, AS A RESULT OF BREACH OF ANY WARRANTY OR OTHER TERM OF THIS AGREEMENT, INCLUDING ANY FAILURE OF PERFORMANCE, REGARDLESS OF WHETHER THE PARTY LIABLE OR ALLEGEDLY LIABLE WAS ADVISED, HAD OTHER REASON TO KNOW, OR IN FACT KNEW OF THE POSSIBILITY THEREOF. 13.3. MAXIMUM DAMAGES ALLOWED. Notwithstanding any other provision of this Agreement, and for any reason, including breach of any duty imposed by this contract or independent of this contract, and regardless of any claim in contract, tort (including negligence) or otherwise, Metavante's total, aggregate liability under this Agreement shall in no circumstance exceed payments made to Metavante by Customer under this Agreement during the three (3) months prior to the act or event giving rise to such claim. No such limitation shall apply with respect to Metavante's willful misconduct or intentional failure to perform. 13.4. STATUTE OF LIMITATIONS. No lawsuit or other action may be brought by either party hereto, or on any claim or controversy based upon or arising in any way out of this Agreement, after one (1) year from the date on which the cause of action arose regardless of the nature of the claim or form of action, whether in contract, tort (including negligence) or otherwise; provided, however, the foregoing limitation shall not apply to the collection of any amounts due under this Agreement. -4- 13.5. ECONOMIC LOSS WAIVER. In addition to and not in limitation of any other provision of this Article 13, each party hereby knowingly, voluntarily, and intentionally waives any right to recover from the other party, and Customer waives any right to recover from any Eligible Provider, any economic losses or damages in any action brought under tort theories, including, misrepresentation, negligence and/or strict liability and/or relating to the quality or performance of any products or services provided by Metavante. For purposes of this waiver, economic losses and damages include monetary losses or damages caused by a defective product or service except personal injury or damage to other tangible property. Even if remedies provided under this Agreement shall be deemed to have failed of their essential purpose, neither party shall have any liability to the other party under tort theories for economic losses or damages. 13.6. LIQUIDATED DAMAGES. Customer acknowledges that Metavante shall suffer a material adverse impact on its business if this Agreement is terminated prior to expiration of the Term, and that the resulting Damages may not be susceptible of precise determination. Customer acknowledges that the Termination Fee is a reasonable approximation of such Damages and shall be deemed to be liquidated Damages and not a penalty. 13.7. ESSENTIAL ELEMENTS. Customer and Metavante acknowledge and agree that the limitations contained in this Article 13 are essential to this Agreement, and that Metavante has expressly relied upon the inclusion of each and every provision of this Article 13 as a condition to executing this Agreement. 14. INSURANCE AND INDEMNITY 14.1. INSURANCE. Metavante shall maintain for its own protection fidelity bond coverage for the Operations Center personnel; insurance coverage for loss from fire, disaster or the causes contributing to interruption of normal services, reconstruction of data file media and related processing costs; additional expenses incurred to continue operations; and business interruption to reimburse Metavante for losses resulting from suspension of the Operation Center's activities due to physical loss of equipment. 14.2. INDEMNITY. A. By Customer. Customer shall indemnify Metavante from, defend Metavante against, and pay any final judgments awarded against Metavante, resulting from: (i) any breach of this Agreement by Customer (ii) the operation of Customer's business; (iii) breach by Customer of its obligations under Section I7 of this Agreement; (iv) work-related injury or death caused by Customer or its employees or agents; (v) tangible personal or real property damage resulting from Customer's acts or omissions; and (vi) the data, information and/or instructions furnished by Customer and any inaccuracy or inadequacy therein. B. By Metavante. Metavante shall indemnify Customer from, defend Customer against, and pay any final judgment awarded against Customer, resulting from: (i) any claim by a Third Party that the Services or the Metavante Software infringe upon any patent, copyright or trademark of a Third Party under the laws of the United States; (ii) any breach of this Agreement by Metavante; (iii) breach by Metavante of its obligations under Section I7 of this Agreement; (iv) the operation of Metavante's business; (v) work-related injury or death caused by Metavante, its employees, or agents; and (vi) tangible personal or real property damage resulting from Metavante's acts or omissions. 14.3. INDEMNIFICATION PROCEDURES. If any Third Party makes a claim covered by this Section against an indemnitee with respect to which such indemnitee intends to seek indemnification under this Section, such indemnitee shall give notice of such claim to the indemnifying party, including a brief description of the amount and basis therefor, if known. Upon giving such notice, the indemnifying party shall be obligated to defend such indemnitee against such claim, and shall be entitled to assume control of the defense of the claim with counsel chosen by the indemnifying party, reasonably satisfactory to the indemnitee. Indemnitee shall cooperate fully with, and assist, the indemnifying party in its defense against such claim in all reasonable respects. The indemnifying party shall keep the indemnitee fully apprised at all times as to the status of the defense. Notwithstanding the foregoing, the indemnitee shall have the right to employ its own separate counsel in any such action, but the fees and expenses of such counsel shall be at the expense of such indemnitee. Neither the indemnifying party nor any indemnitee shall be liable for any settlement of action or claim effected without its consent. Notwithstanding the foregoing, the indemnitee shall retain, assume, or reassume sole control over all expenses relating to every aspect of the defense that it believes is not the subject of the indemnification provided for in this Section. Until both (a) the indemnitee receives notice from indemnifying party that it will defend, and (b) the indemnifying party assumes such defense, the indemnitee may, at any time after ten (10) days from the date notice of claim is given to the indemnifying party by the indemnitee, resist or otherwise defend the claim or, after consultation with and consent of the indemnifying party, settle or otherwise compromise or pay the claim. The indemnifying party shall pay all costs of indemnity arising out of or relating to that defense and any such settlement, compromise, or payment. The indemnitee shall keep the indemnifying party fully apprised at all times as to the status of the defense. Following indemnification as provided in this Section, the indemnifying party shall be subrogated to all tights of the indemnitee with respect to the matters for which indemnification has been made. 15. DISPUTE RESOLUTION 15.1. REPRESENTATIVES OF PARTIES. All disputes arising under or in connection with this Agreement shall initially be referred to the Account Representatives. If the Account Representatives are unable to resolve the dispute within five (5) business days after referral of the matter to them, the managers of the Account Representatives shall attempt to resolve the dispute. resolve the dispute, senior executives of the parties shall attempt to resolve the dispute. If, after five (5) days they are unable to If, after five (5) days they are unable to resolve the dispute, the parties shall submit the dispute to the chief executive officers of the parties for resolution. Neither party shall commence legal proceedings with regard to a dispute until completion of the dispute resolution procedures set forth in this Section 15.1, except to the extent necessary to preserve its rights or maintain a superior position. 15.2. CONTINUITY OF PERFORMANCE. During the pendency of the dispute resolution proceedings described in this Article 15, Metavante shall continue to provide the Services so long as Customer shall continue to pay all undisputed amounts to Metavante in a timely manner. -5- 16. AUTHORITY 16.1. Metavante represents and warrants that: A. Metavante has the right to provide the Services hereunder, using all computer software required for that purpose. B. Metavante is a corporation validly existing and in active status under the laws of the State of Wisconsin. It has all the requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement has been duly authorized by Metavante and this Agreement is enforceable in accordance with its terms against Metavante. No approval, authorization or consent of any governmental or regulatory authorities is required to be obtained or made by Metavante in order for Metavante to enter into and perform its obligations under this Agreement. 16.2. Customer represents and warrants that It is a corporation validly existing and in good standing under the laws of the state of its incorporation. It has all the requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement has been duly authorized by Customer and this Agreement is enforceable in accordance with its terms against Customer. No approval, authorization or consent of any governmental or regulatory authorities required to be obtained or made by Customer in order for Customer to enter into and perform its obligations under this Agreement. 17. CONFIDENTIALITY AND OWNERSHIP 17.1. CUSTOMER DATA. Customer shall remain the sole and exclusive owner of all Customer Data and other Confidential Information (as hereinafter defined), regardless of whether such data is maintained on magnetic tape, magnetic disk, or any other storage or processing device. All such Customer Data and other Confidential Information shall, however, be subject to regulation and examination by the appropriate auditors and regulatory agencies to the same extent as if such information were on Customers premises. "Customer Data" means any and all data and information of any kind or nature submitted to Metavante by Customer, or received by Metavante on behalf of Customer, in connection with the Services. 17.2. METAVANTE SYSTEMS. Customer acknowledges that it has no rights in any software, systems, documentation, guidelines, procedures and similar related materials or any modifications thereof provided by Metavante, except with respect to Customers use of the same during the Term to process its data. 17.3. CONFIDENTIAL INFORMATION. "Confidential Information" of a party shall mean all confidential or proprietary information and documentation of such party, whether or not marked as such, including without limitation with respect to Customer, all Customer Data. Confidential Information shall not include: (i) information which is or becomes publicly available (other than by the person or entity having the obligation of confidentiality) without breach of this Agreement; (ii) information independently developed by the receiving party; (iii) information received from a third party not under a confidentiality obligation to the disclosing party; or (iv) information already in the possession of the receiving party without obligation of confidence at the time first disclosed by the disclosing party. The parties acknowledge and agree that the substance of the negotiations of this Agreement, and the terms of this Agreement are considered Confidential Information subject to the restrictions contained herein. Neither party shall use, copy, sell, transfer, publish, disclose, display, or otherwise make any of the other party's Confidential Information available to any Third Party without the prior written consent of the other. 17.4. OBLIGATIONS OF THE PARTIES. Metavante and Customer shall hold the Confidential Information of the other party in confidence and shall not disclose or use such Confidential Information other than for the purposes contemplated by this Agreement, and shall instruct their employees, agents, and contractors to use the same care and discretion with respect to the Confidential Information of the other party or of any Third Party utilized hereunder that Metavante and Customer each require with respect to their own most confidential information, but in no event less than a reasonable standard of care, including but not limited to, the utilization of security devices or procedures designed to prevent unauthorized access to such materials. Each party shall instruct its employees, agents, and contractors of its confidentiality obligations hereunder and not to attempt to circumvent any such security procedures and devices. Each party's obligation under the preceding sentence may be satisfied by the use of its standard form of confidentiality agreement, if the same reasonably accomplishes the purposes here intended. All such Confidential Information shall be distributed only to persons having a need to know such information to perform their duties in conjunction with this Agreement. 17.5. SECURITY. Metavante shall be responsible for, and shall establish and maintain safeguards against, any disaster, loss or alteration of the Customer Data in the possession of Metavante. Such safeguards shall be no less rigorous than that Metavante uses to protect its own data of a similar nature. 18. MANAGEMENT OF PROJECT 18.1. ACCOUNT REPRESENTATIVES. Each party shall cause an individual to be assigned ("Account Representative") to devote time and effort to management of the Services under this Agreement. 18.2. DEVELOPMENT PROJECTS AND TECHNICAL SUPPORT. Upon Customers written request, Metavante will develop and provide to Customer a good faith estimate of any additional charges which Customer may incur in connection with the operation of any new software, major modification or enhancements developed by Metavante or the acquisition of Third Party software, Nothing contained herein shall obligate Metavante to develop enhancements requested by Customer. 19. REGULATORY COMPLIANCE A. Customer shall be solely responsible for monitoring and interpreting (and for complying with, to the extent such compliance requires no action by Metavante) the federal and state laws, rules and regulations pertaining to Customers business (the "Legal Requirements"). Based on Customers Proper Instructions, Metavante shall select the processing parameter settings, features and options -6- (collectively, the "Parameters") within Metavante's system that will apply to Customer. Customer shall be responsible for determining that such selections are consistent with the Legal Requirements and with the terms and conditions of any agreements between Customer and its clients. In making such determinations, Customer may rely upon the written descriptions of such Parameters contained in the User Manuals. Metavante shall perform system processing in accordance with the Parameters. B. Subject to the foregoing, Metavante shall perform an on-going review of federal laws, rules and regulations. Metavante shall maintain the features and functions set forth in the User Manuals for each of the Services in accordance with all changes in federal laws, rules and regulations applicable to such features and functions, in a non-custom environment at no additional charge to Customer. For any new federal laws, rules and regulations, Metavante will perform a business review, with input from Metavante's customers and user groups. If Metavante elects to support a new federal law, rule or regulation through changes to the Metavante Software, Metavante shall develop and implement modifications to the Services to enable Customer to comply with such new federal laws, rules and regulations. In all other circumstances relating to regulatory compliance of the Services, including state laws, rules and regulations, the provisions of Section 5.2 above (New Services) shall apply. C. In any event, Metavante shall work with Customer in developing and implementing a suitable procedure or direction to enable Customer to comply with federal and state laws, rules and regulations applicable to the Services being provided by Metavante to Customer, including in those instances when Metavante has elected to, but it is not commercially practicable to, modify the Metavante Software prior to the regulatory deadline for compliance. 20. DISASTER RECOVERY 20.1. SERVICES CONTINUITY PLAN. Metavante shall maintain throughout the Term of the Agreement a Services Continuity Plan (the "Plan") in compliance with applicable regulatory requirements. "Disaster" shall have the meaning set forth in the Plan. Review and acceptance of the Plan as may be required by any applicable regulatory agency shall be the responsibility of Customer. Metavante shall cooperate with Customer in conducting such reviews as such regulatory agency may from time to time reasonably request. A detailed Executive Summary of the Plan has been provided to Customer. Updates to the Plan shall be provided to Customer without charge. 20.2. RELOCATION. If appropriate, Metavante shall relocate all affected Services to an alternate disaster recovery site as expeditiously as possible after declaration of a Disaster, and shall coordinate with Customer all requisite telecommunications modifications necessary to achieve full connectivity to the disaster recovery site, in material compliance with all regulatory requirements. 20.3. RESUMPTION OF SERVICES. The Plan provides that, in the event of a Disaster, Metavante will be able to resume the Services in accordance therewith within the time periods specified in the Plan. In the event Metavante is unable to resume the Services to Customer within the time periods specified in the Plan, Customer shall have the right to terminate this Agreement without payment of the Termination Fee upon written notice to Metavante delivered within forty-five (45) days after declaration of such Disaster. 20.4. ANNUAL TEST. Metavante shall test its Plan by conducting one (1) test annually and shall provide Customer with a description of the test results in accordance with applicable laws and regulations. 21. GENERAL TERMS AND CONDITIONS 21.1. TRANSMISSION OF DATA. The responsibility and expense for transportation and transmission of, and the risk of loss for, data and media transmitted between Metavante and Customer shall be borne by Customer. Data lost by Metavante following processing, including loss of data transmission, shall either be restored by Metavante from its backup media or shall be reprocessed from Customers backup media at no additional charge to Customer. 21.2. EQUIPMENT AND NETWORK. Customer shall obtain and maintain at its own expense its own data processing and communications equipment as may be necessary or appropriate to facilitate the proper use and receipt of the Services. Customer shall pay all installation, monthly, and other charges relating to the installation and use of communications lines between Customers datacenter and the Operations Center. Metavante maintains and will continue to maintain a network control center with diagnostic capability to monitor reliability and availability of the communication lines used to access the Services, but Metavante shall not be responsible for the continued availability or reliability of such communications lines. Metavante agrees to provide services to install, configure, and support the wide-area network to interconnect Customer to the Operations Center. 21.3. RELIANCE ON DATA. Metavante will perform the Services described in this Agreement on the basis of information furnished by Customer. Metavante shall be entitled to rely upon any such data, information, or instructions as provided by Customer. If any error results from incorrect input supplied by Customer, Customer shall be responsible for discovering and reporting such error and supplying the data necessary to correct such error to Metavante for processing at the earliest possible time. 21.4. DATA BACKUP. Customer shall maintain adequate records for at least ten (10) business days including (i) microfilm images of items being transported to Metavante or (ii) backup on magnetic tape or other electronic media where transactions are being transmitted to Metavante, from which reconstruction of lost or damaged items or data can be made. Customer assumes all responsibility and liability for any loss or damage resulting from failure to maintain such records. 21.5. BALANCING AND CONTROLS. Customer shall (a) on a daily basis, review all input and output, controls, reports, and documentation, to ensure the integrity of data processed by Metavante; and (b) on a daily basis, check exception reports to verity that all file maintenance entries and nondollar transactions were correctly entered. Customer shall be responsible for initiating timely remedial action to correct any improperly processed data which these reviews disclose and Metavante will promptly reprocess such data. 21.6. USE OF SERVICES. Customer assumes exclusive responsibility for the consequences of any Proper Instructions Customer may give Metavante, for Customer's failure to properly access the Services in the manner prescribed by Metavante, and for Customer's -7- failure to supply accurate input information. Customer agrees that, except as otherwise permitted in this Agreement or in writing by Metavante, Customer will use the Services only for its own internal business purposes to service its banking customers and clients and will not sell or otherwise provide, directly or indirectly, any of the Services or any portion thereof to any Third Party. 21.7. REGULATORY ASSURANCES. Metavante and Customer acknowledge and agree that the performance of these Services will be subject to regulation and examination by Customer's regulatory agencies to the same extent as if such Services were being performed by Customer. Upon request, Metavante agrees to provide any appropriate assurances to such agency and agrees to subject itself to any required examination or regulation. Customer agrees to reimburse Metavante for reasonable costs actually incurred due to any such examination or regulation that is performed primarily for the purpose of examining Services used by Customer. A. Notice Requirements. Customer shall be responsible for complying with all regulatory notice provisions to any applicable governmental agency, which shall include providing timely and adequate notice to the Office of Thrift Supervision, the Office of the Comptroller of the Currency, The Federal Deposit Insurance Corporation, the Federal Reserve Board, or their successors, as applicable (collectively, the "Federal Regulators"), as of the Effective Date of this Agreement, identifying those records to which this Agreement shall apply and the location at which such Services are to be performed. B. Examination of Records. The parties agree that the records maintained and produced under this Agreement shall, at all times, be available at the Operations Center for examination and audit by governmental agencies having jurisdiction over the Customer's business, including any Federal Regulator. The Director of Examinations of any Federal Regulator or his or her designated representative shall have the right to ask for and to receive directly from Metavante any reports, summaries, or information contained in or derived from data in the possession of Metavante related to the Customer. Metavante shall notify Customer as soon as reasonably possible of any formal request by any authorized governmental agency to examine Customer's records maintained by Metavante, if Metavante is permitted to make such a disclosure to Customer under applicable law or regulations. Customer agrees that Metavante is authorized to provide all such described records when formally required to do so by a Federal Regulator. C. Audits. Metavante shall cause a Third Party review of the Operations Center and related internal controls, to be conducted annually by its independent auditors. Metavante shall provide to Customer, upon written request, one copy of the audit report resulting from such review. Remote datacenters used by Metavante in providing some of the Services shall be reviewed by Metavante's internal auditors in accordance with procedures and on a schedule satisfactory to the Federal Regulator responsible for supervision of Metavante. 21.8. IRS FILING. Customer represents it has complied with all laws, regulations, procedures, and requirements in attempting to secure correct tax identification numbers (TINS) for Customer's payees and customers and agrees to attest to this compliance by an affidavit provided annually. Customer authorizes Metavante to act as Customers agent and sign on Customers behalf the Affidavit required by the Internal Revenue Service on Form 4804, or any successor form. Exhibit B (Attorney-in-Fact Appointment) and Exhibit C (Affidavit) shall be executed by Customer contemporaneously with the execution of this Agreement. Customer acknowledges that Metavante's execution of the Form 4804 Affidavit on Customer's behalf does not relieve Customer of responsibility to provide accurate TINS or liability for any penalties which may be assessed for failure to comply with TIN requirements. 21.9. AFFILIATES. Customer agrees that it is responsible for assuring compliance with this Agreement by those Affiliates receiving Services under this Agreement. Customer agrees to be responsible for the submission of its Affiliates' data to Metavante for processing and for the transmission to Customer's Affiliates of such data processed by and received from Metavante. Customer agrees to pay any and all fees owed under this Agreement for Services rendered to its Affiliates. 21.10. FUTURE ACQUISITIONS. Customer acknowledges that Metavante has established the Fee Schedule and enters into this Agreement on the basis of Metavante's understanding of the Customers current need for Services and Customers anticipated future need for Services as a result of internally generated expansion of its customer base. If the Customer expands its operations by acquiring Control of additional financial institutions or the Customer experiences a Change in Control (as hereinafter defined), the following provisions shall apply: A. Acquisition of Additional Entities. If Customer acquires Control after the date hereof of one or more bank holding companies, banks, savings and loan associations or other financial institutions that are not currently Affiliates, if requested by Customer, Metavante agrees to provide Services for such new Affiliates and such Affiliates shall automatically be included in the definition of "Customer"; provided that (a) the Conversion of each new Affiliate must be scheduled at a mutually agreeable time (taking into account, among other things, the availability of Metavante Conversion resources) and must be completed before Metavante has any obligation to provide Services to such new Affiliate; (b) the Customer will be liable for any and all Expenses in connection with the Conversion of such new Affiliate; and (c) Customer shall pay Conversion Fees in an amount to be mutually agreed upon with respect to each new Affiliate. In no event shall Customer be required to convert any portion of such acquired financial institution's data processing services to Metavante's systems or pay any fee in lieu of Conversion. B. Change in Control of Customer. If a Change in Control occurs with respect to Customer, Metavante agrees to continue to provide Services under this Agreement; provided that (a) Metavante's obligation to provide Services shall be limited to the entities comprising the Customer prior to such Change in Control and (b) Metavante's obligation to provide Services shall be limited in any and all circumstances to the number of accounts and items processed in the 3-month period prior to such Change in Control occurring plus 25%. C. If Customer acquires another financial institution that is not currently an affiliate, and the new affiliate is converted to Customers system in accordance with subparagraph A above, and the new affiliate, prior to such acquisition, has been operating under an outsourcing agreement with Metavante, Customer shall be required to pay normal processing fees in accordance with Customers contract plus the lesser of (a) the new affiliate's termination fees or (b) the difference of the Estimated Remaining Value of the new affiliate's contract -8- less the increase in revenue from processing of the new affiliate under Customers contract. If Customer chooses (b), payment will be spread over the shorter of the remaining terms on Customers contract or the new affiliate's contract. 22. MISCELLANEOUS PROVISIONS 22.1. GOVERNING LAW. The validity, construction and interpretation of this Agreement and the rights and duties of the parties hereto shall be governed by the internal laws of the State of Wisconsin, excluding its principles of conflict of laws. 22.2. VENUE AND JURISDICTION. In the event of litigation to enforce the terms of this Agreement, the parties consent to venue in an exclusive jurisdiction of the courts of Milwaukee County, Wisconsin and the Federal District Court for the Eastern District of Wisconsin. The parties further consent to the jurisdiction of any federal or state court located within a district which encompasses assets of a party against which a judgment has been rendered, either through arbitration or litigation, for the enforcement of such judgment or award against such party or the assets of such party. 22.3. ENTIRE AGREEMENT; AMENDMENTS. This Agreement, together with the exhibits and schedules hereto, constitutes the entire agreement between Metavante and the Customer with respect to the subject matter hereof. There are no restrictions, promises, warranties, covenants or undertakings other than those expressly set forth herein and therein. This Agreement supersedes all prior negotiations, agreements, and undertakings between the parties with respect to such matter. This Agreement, including the exhibits and schedules hereto, may be amended only by an instrument in writing executed by the parties or their permitted assignees. 22.4. ASSIGNMENT. This Agreement may not be assigned by either party, by operation of law or otherwise, without the prior written consent of the other party, which consent shall not be unreasonably withheld, provided that (a) Metavante's consent need not be obtained in connection with the assignment of this Agreement pursuant to a merger in which Customer is a party and as a result of which the surviving Entity becomes an Affiliate of another bank holding company, bank, savings and loan association or other financial institution, so long as the provisions of Section 21 .lO are complied with; and (b) Metavante may freely assign this Agreement (i) in connection with a merger, corporate reorganization or sale of all or substantially all of its assets, stock or securities, or (ii) to any Entity which is a successor to the assets or the business of the Metavante Corporation, provided that any such successor entity shall, at the time of transfer, possess a capacity to perform under the terms of this Agreement at least equal to the capacity then possessed by Metavante. 22.5. RELATIONSHIP OF PARTIES. The performance by Metavante of its duties and obligations under this Agreement shall be that of an independent contractor and nothing contained in this Agreement shall create or imply an agency's relationship between Customer and Metavante, nor shall this Agreement be deemed to constitute a joint venture or partnership between Customer and Metavante. 22.6. NOTICES. Except as otherwise specified in the Agreement, all notices, requests, approvals, consents and other communications required or permitted under this Agreement shall be in writing and shall be personally delivered or sent by (i) first class U.S. mail, registered or certified, return receipt requested, postage pre-paid; or (ii) U.S. express mail, or other, similar overnight courier service to the address specified below. Notices shall be deemed given on the day actually received by the party to whom the notice is addressed. In the case of Customer: Columbia State Bank 1102 Broadway Tacoma WA Attn: Melanie Dressel, President For Billing Purposes: Columbia Bank Attn: Cyndi Smith 5210 74th Street West, Suite B Lakewood, WA 98499 In the case of Metavante: Metavante Corporation 4900 West Brown Deer Road Brown Deer WI 53223 Attn: Thomas J. McBride Senior Vice President, Client Services Division Nonie J. Daroga Senior Vice President and General Counsel 22.7. HEADINGS. Headings in this Agreement are for reference purposes only and shall not effect the interpretation or meaning of this Agreement. 22.6. COUNTERPARTS. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original but all of which together constitute one and the same agreement. 22.9. WAIVER. No delay or omission by either party to exercise any right or power it has under this Agreement shall impair or be construed as a waiver of such right or power. A waiver by any party of any breach or covenant shall not be construed to be a waiver of any succeeding breach or any other covenant. All waivers must be in writing and signed by the party waiving its rights. -9- 22.10. SEVERABILITY. If any provision of this Agreement is held by court or arbitrator of competent jurisdiction to be contrary to law, Severability. then the remaining provisions of this Agreement will remain in full force and effect. Articles 11,13, and 17 and Sections 22.1,22.2 and 22.18 shall survive the expiration or earlier termination of this Agreement for any reason. 22.11. ATTORNEYS' FEES AND COSTS. If any legal action is commenced in connection with the enforcement of this Agreement or any instrument or agreement required under this Agreement, the prevailing party shall be entitled to costs, attorneys' fees actually incurred, and necessary disbursements incurred in connection with such action, as determined by the court. 22.12. FINANCIAL STATEMENTS. Metavante agrees to furnish to the Customer copies of the then-current annual report for the Metavante Corporation, within 45 days after such document is made publicly available. 22.13. PUBLICITY. Neither party shall use the other party's name or trademark or refer to the other party directly or indirectly in any Public&v. media release, public announcement or public disclosure relating to this Agreement or its subject matter, in any promotional or marketing materials, lists or business presentations, without consent from the other party for each such use or release in accordance with this Section, provided that Metavante may include Customer's name in Metavante's customer list and may identify Customer as its customer in its sales presentations and marketing materials without obtaining Customers prior consent. Customer agrees that neither it, its directors, officers, employees or agents shall disclose this Agreement or any of the terms or provisions of this Agreement to any other party. Notwithstanding the foregoing, at Metavante's request Customer agrees to issue a joint press release prepared by Metavante to announce the relationship established by the parties hereunder. Customer agrees that such press release shall be deemed approved by Customer in the event that, within ten (10) business days of receiving Metavante's proposed press release, Customer does not provide written notice to Metavante describing in reasonable detail Customers objections to the press release. All other media releases, public announcements, and public disclosures by either party relating to this Agreement or the subject matter of this Agreement (each, a "Disclosure"), including promotional or marketing material, but not including (i) announcements intended solely for internal distribution, or (ii) disclosures to the extent required to meet legal or regulatory requirements beyond the reasonable control of the disclosing party, shall be subject to review and approval, which approval shall not be unreasonably withheld, by the other party prior to release. Such approval shall be deemed to be given if a party does not object to a proposed Disclosure within ten (10) business days of receiving same. Disputes regarding the reasonableness of objections to the joint press release or any Disclosures shall be subject to the Dispute Resolution Procedures of Section 15.1. 22.14. SOLICITATION. Neither party shall solicit the employees of the other party during the Term of this Agreement, for any reason, 22.15. NO THIRD PARTY BENEFICIARIES. Each party intends that this Agreement shall not benefit, or create any right or cause of action in or on behalf of, any person or entity other than the Customer and Metavante. 22.16. FORCE MAJEURE. Notwithstanding any provision contained in this Agreement, neither party shall be liable to the other to the extent fulfillment or performance if any terms or provisions of this Agreement is delayed or prevented by revolution or other civil disorders; wars; acts of enemies; strikes: lack of available resources from persons other than parties to this Agreement; labor disputes; electrical equipment or availability failure; fires; floods; acts of God; federal, state or municipal action; statute; ordinance or regulation; or, without limiting the foregoing, any other causes not within its control, and which by the exercise of reasonable diligence it is unable to prevent, whether of the class of causes hereinbefore enumerated or not. This clause shall not apply to the payment of any sums due under this Agreement by either party to the other. 22.17. CONSTRUCTION. Metavante and Customer each acknowledge that the limitations and exclusions contained in this Agreement have been the subject of active and complete negotiation between the parties and represent the parties' voluntary agreement based upon the level of risk to Customer and Metavante associated with their respective obligations under this Agreement and the payments to be made to Metavante and the charges to be incurred by Metavante pursuant to this Agreement. The parties agree that the terms and conditions of this Agreement shall not be construed in favor of or against any party by reason of the extent to which any party or its professional advisors participated in the preparation of this document. 22.18. WAIVER OF JURY TRIAL. Each of Customer and Metavante hereby knowingly, voluntarily and intentionally waives any and all rights it may have to a trial by jury in respect of any litigation based on, or arising out of, under, or in connection with, this Agreement or any course of conduct, course of dealing, statements (whether verbal or written), or actions of Metavante or Customer, regardless of the nature of the claim or form of action, written contract or tort, including negligence. -10- IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in their names as of the date first above written. METAVANTE CORPORATION ("Metavante") By: Michael E. Touhey Name: Michael E. Touhey Title: President, Market Solutions and Products By: Owen J. Sullivan Name: Owen J. Sullivan Title: President, Client Development and Services COLUMBIA STATE BANK ("Customer") By: Melanie Dressel Name: Melanie Dressel Title: President -11- EXHIBIT A AUTHORIZATION AGREEMENT The undersigned ("Customer") hereby authorizes Metavante Corporation, ("Metavante") to initiate debit entries and to initiate, if necessary, credit entries and adjustments for any excess debit entries or debit entries made in error, to Customer's account indicated below and the depository named below, to debit and/or credit the same such account. This authority is to remain in full force and effect for the period coinciding with the term (and any renewals thereof) of the Outsourcing Agreement made the 1st day of January, 2001, and any addenda thereto (the "Agreement'), pursuant to the terms and conditions specified in the Agreement. DEPOSITORY NAME: Columbia State Bank ---------------------------------------- ADDRESS: 1102 Broadway Plaza ---------------------------------------- CITY/STATE/ZIP: Tacoma, WA 98402 ---------------------------------------- TELEPHONE NUMBER: 253-305-1900 ---------------------------------------- ROUTING TRANSIT NUMBER: 125108272 ---------------------------------------- ACCOUNT NUMBER: 9000000100 ---------------------------------------- COLUMBIA STATE BANK ("CUSTOMER") By: Melanie Dressel Name: Melanie Dressel Title: President -12- EXHIBIT B ATTORNEY-IN-FACT APPOINTMENT Customer hereby appoints Metavante Corporation ("Metavante") as: (1) customer's attorney-in-fact and empowers Metavante to authorize the Internal Revenue Service (IRS) to release information return documents supplied to the IRS by Metavante to states which participate in the "Combined Federal/State Program"; and (2) Customers agent to sign on Customer's behalf the Affidavit required by the Internal Revenue Service on Form 4884, or any successor form. COLUMBIA STATE BANK ("CUSTOMER") By: Melanie Dressel Name: Melanie Dressel Title: President -13- EXHIBIT C AFFIDAVIT STATE OF WASHINGTON COUNTY OF PIERCE I, Melanie J. Dressel, being first duly sworn, on oath, depose and say: 1. I am an employee of Columbia State Bank, I have personal knowledge of my employer's practices with regard to procuring and reporting tax identification numbers (TINS) and authority to execute this Affidavit on my employer's behalf, 2.Columbia State Bank has complied with all laws, regulations, procedures, and requirements in attempting to secure correct TINS for its payees. This compliance has been pursued with due diligence, and any failure to secure correct TINS is due to reasonable cause. COLUMBIA STATE BANK ("Customer") By: Melanie J. Dressel Name: Melanie J. Dressel Title: President & CEO Subscribed and sworn to before me this 30th day of January, 2000. Leslie R. Burton, Notary Public My Commission expires: 8-29-01 -14- -----END PRIVACY-ENHANCED MESSAGE-----