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, 1998.
/ / 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 small business issuer as specified in its charter)
Washington 91-1422237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1102 Broadway Plaza
Tacoma, Washington 98402
(Address of principal executive offices) (Zip Code)
(253) 305-1900
(Issuer's telephone number, including area code)
(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, 1998 was 10,030,257.
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Page
Item 1. Financial statements
Consolidated Statements of Operations - three months
ended March 31, 1998 and 1997 2
Consolidated Balance Sheets - March 31, 1998
and December 31, 1997 3
Consolidated Statements of Shareholders' Equity -
twelve months ended December 31, 1997 and
three months ended March 31, 1998 4
Consolidated Statements of Cash Flows -
three months ended March 31, 1997 and 1996 5
Notes to consolidated financial statements 6
Item 2. Management Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 3. Interest Rate Sensitivity 16
PART II -- OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 17
Signatures 17
1
CONSOLIDATED STATEMENTS OF OPERATIONS
Columbia Banking System, Inc.
Three Months Ended
March 31,
(in thousands except per share) 1998 1997
- -----------------------------------------------------------------------------
Interest Income
Loans $15,853 $12,228
Securities available for sale 1,058 859
securities held to maturity 136 168
Deposits with banks 360 473
- -----------------------------------------------------------------------------
Total interest income 17,407 13,728
Interest Expense
Deposits 6,849 5,661
Federal Home Loan Bank advances 527 461
Other borrowings 21
- -----------------------------------------------------------------------------
Total interest expense 7,376 6,143
- -----------------------------------------------------------------------------
Net Interest Income 10,031 7,585
Provision for loan losses 550 449
- -----------------------------------------------------------------------------
Net interest income after
provision for loan losses 9,481 7,136
Noninterest Income
Service charges and other fees 1,285 868
Mortgage banking 398 104
Other fees 837 747
- -----------------------------------------------------------------------------
Total noninterest income 2,520 1,719
Noninterest Expense
Compensation and employee benefits 3,771 3,127
Occupancy 1,123 1,096
Advertising and promotion 366 237
Data processing 407 344
Other 2,591 2,100
- -----------------------------------------------------------------------------
Total noninterest expense 8,258 6,904
- -----------------------------------------------------------------------------
Income before income taxes 3,743 1,951
Provision for income taxes 1,330 574
- -----------------------------------------------------------------------------
Net Income $ 2,413 $ 1,377
=============================================================================
Net income per common share:
Basic $ 0.24 $ 0.15
Diluted 0.23 0.14
Average number of common
shares outstanding 9,970 9,368
Average number of diluted common
shares oustanding 10,309 9,606
See accompanying notes to consolidated financial statements.
2
CONSOLIDATED BALANCE SHEETS
Columbia Banking System, Inc.
March 31, December 31,
(in thousands) 1998 1997
- -----------------------------------------------------------------------------
Assets
Cash and due from banks $ 44,907 $ 47,604
Interest-earning deposits with banks 29,868 28,108
Securities available for sale 58,216 56,279
Securities held to maturity 8,755 9,679
FHLB stock 5,242 5,144
Loans held for sale 6,987 4,377
Loans 716,837 685,889
Less: allowance for loan losses 8,987 8,440
- -----------------------------------------------------------------------------
Loans, net 707,850 677,449
Interest Receivable 5,612 5,023
Premises and equipment, net 28,960 27,246
Real estate owned 190 231
Other 5,556 3,415
- -----------------------------------------------------------------------------
Total Assets $902,143 $864,555
=============================================================================
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing $150,936 $146,063
Interest-bearing 622,267 594,367
- -----------------------------------------------------------------------------
Total Deposits 773,203 740,430
Federal Home Loan Bank advances 39,000 39,000
Other liabilities 8,873 6,772
- ----------------------------------------------------------------------------
Total liabilities 821,076 786,202
Shareholders' equity:
Preferred stock (no par value)
Authorized, 2,000,000 shares;
None outstanding
March 31, December 31,
Common stock (no par value) 1998 1997
--------- ----------
Authorized shares 11,000 11,000
Issued and outstanding 9,988 9,880 68,221 67,901
Retained Earnings 12,828 10,415
Unrealized gains on securities
available for sale, net of tax 18 37
- -----------------------------------------------------------------------------
Total shareholders' equity 81,067 78,353
- -----------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $902,143 $864,555
=============================================================================
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Columbia Banking System, Inc.
Common stock Unrealized Total
Number of Retained Gains and Shareholders'
(in thousands) Shares Amount Earnings (Losses) Equity
- -----------------------------------------------------------------------------
Balance at
December 31, 1996 9,372 $62,980 $5,282 ($38) $68,224
Net income 9,275 9,275
Issuance of shares
of common stock, net 117 779 779
Issuance of shares
of common stock -
5% stock dividend 391 4,142 (4,142)
Change in unrealized
gains and (losses) 75 75
- -----------------------------------------------------------------------------
Balance at
December 31, 1997 9,880 67,901 10,415 37 78,353
Net income 2,413 2,413
Issuance of shares
of common stock, net 108 320 320
Change in unrealized gains
and (losses),net of tax (19) (19)
- -----------------------------------------------------------------------------
Balance at
March 31, 1998 9,988 $68,221 $12,828 $18 $81,067
=============================================================================
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Columbia Banking System, Inc.
Three Months Ended
March 31,
(in thousands) 1998 1997
- -----------------------------------------------------------------------------
Operating Activities
Net income $ 2,413 $ 1,377
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 550 434
Depreciation and amortization 546 686
Deferred income taxes 258 192
Increase in loans held for sale (2,610) (162)
Increase in interest receivable (589) (99)
Increase in interest payable 157 101
Net changes in other assets and liabilities (461) (816)
- -----------------------------------------------------------------------------
Net cash provided by operating activities 264 1,713
Investing Activities
Proceeds from maturities of securities
available for sale 11,284 521
Purchases of securities available for sale (15,014) (935)
Proceeds from maturities of mortgage-backed
securities available for sale 1,673 385
Proceeds from maturities of securities held to maturity 1,250 1,406
Purchases of securities held to maturity (325) (694)
Loans originated and acquired, net of principal collected (30,951) (30,187)
Purchases of premises and equipment (2,276) (4,241)
Other, net 65 50
- -----------------------------------------------------------------------------
Net cash used by investing activities (34,294) (33,695)
Financing Activities
Net increase in deposits 32,773 31,469
Net decrease in other borrowings (700)
Repayment of FHLB advances and other long-term debt (10,000)
Proceeds from issuance of common stock 320 5
- -----------------------------------------------------------------------------
Net cash provided by financing activities 33,093 20,774
- -----------------------------------------------------------------------------
Decrease in cash and cash equivalents (937) (11,208)
Cash and cash equivalents at beginning of period 75,712 83,258
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of period $74,775 $72,050
=============================================================================
Supplemental information:
Cash paid for interest $ 7,219 $ 5,971
Loans foreclosed and transferred to real estate owned 260
See accompanying notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED 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 commercial banking services
to small and medium-sized businesses, professionals and other individuals
through banking offices located in the Tacoma metropolitan area and
contiguous parts of the Puget Sound region of Washington, as well as the
Longview and Woodland communities in southwestern Washington. Substantially
all of the Company's loans, loan commitments and core deposits are
geographically concentrated in its service areas.
1. Basis of Presentation
The interim unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments including normal recurring accruals necessary for
a fair presentation of results of operations for the interim periods included
herein have been made. The results of operations for the three months ended
March 31, 1998, are not necessarily indicative of results to be anticipated
for the year ending December 31, 1998. Certain amounts in the 1997 financial
statements have been reclassified to conform with the 1998 presentation. For
additional information, refer to the consolidated financial statements and
footnotes thereto included in Columbia Banking System's (the Company) annual
report on Form 10-K for the year ended December 31, 1997.
2. Subsequent Event - Stock Split
On April 22, 1998, the Company announced a three shares for two stock split
payable on May 20, 1998, to shareholders of record on May 6, 1998. Common
shares issued and outstanding, average shares outstanding and net income per
share for all periods presented have been retroactively adjusted to give
effect to this transaction.
3. Comprehensive Income
Beginning in 1998, the Company adopted the Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 requires the reporting
of comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting methodology that
includes disclosure of certain financial information that historically has
not been recognized in the calculation of net income.
The Company holds securities classified as available-for-sale, which have
unrealized losses of $29,000 and $186,000 (before tax) for the periods ended
March 31, 1998 and 1997, respectively. The before tax and after tax amounts
for each of these categories, as well as the tax benefit of each period is
summarized below.
Three Months Ended
March 31,
(in thousands) 1998 1997
- -----------------------------------------------------------------
Unrealized gain (loss) on securities:
Gain (loss) arising during the period $ (29) $ (186)
- -----------------------------------------------------------------
Other comprehensive income before tax (29) (186)
- -----------------------------------------------------------------
Provision for income taxes 10 63
- -----------------------------------------------------------------
Other comprehensive income after tax $ (19) $ (123)
=================================================================
6
CONSOLIDATED AVERAGE BALANCES--NET CHANGES
Columbia Banking System, Inc.
March 31, (Decrease)
(in thousands) 1998 1997 Amount
- --------------------------------------------------------------------------------
ASSETS
Loans $700,018 $545,565 $154,453
Securities 75,186 67,543 7,643
Interest-earning deposits with banks 26,456 36,246 (9,790)
- --------------------------------------------------------------------------------
Total interest-earning assets 801,660 649,354 152,306
Noninterest-earning assets 71,711 51,954 19,757
- --------------------------------------------------------------------------------
Total assets $873,371 $701,308 $172,063
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits $611,511 $498,948 $112,563
Federal Home Loan Bank advances 39,000 32,778 6,222
Other borrowings 1,800 (1,800)
- --------------------------------------------------------------------------------
Total interest-bearing liabilities $650,511 533,526 116,985
Noninterest-bearing deposits 130,715 93,763 36,952
Other noninterest-bearing liabilities 11,332 4,872 6,460
Shareholders' Equity 80,813 69,147 11,666
- --------------------------------------------------------------------------------
Total liabilities and shareholders'equity $873,371 $701,308 $172,063
================================================================================
7
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Columbia Banking System, Inc.
This discussion should be read in conjunction with the consolidated financial
statements of Columbia Banking System, Inc. (the "Company"), and notes
thereto presented elsewhere in this report. In the following discussion,
unless otherwise noted, references to increases or decreases in average
balances in items of income and expense for a particular period and balances
at a particular date refer to the comparison with corresponding amounts for
the period or date one year earlier.
This discussion contains certain forward-looking statements within the
meaning of the federal securities laws. Actual results and the timing of
certain events could differ materially from those projected in the
forward-looking statements due to a number of factors. Specific factors
include, among others, the effect of interest rate changes, risk associated
with bank acquisitions or opening new branches, expense control and general
economic conditions.
Overview
Columbia Banking System, Inc., a Washington corporation, is a registered bank
holding company whose wholly owned subsidiary, Columbia State Bank ("Columbia
Bank"), conducts a full-service commercial banking business. Headquartered
in Tacoma, Washington, the Company serves small and medium-sized businesses,
professionals and other individuals through 23 banking offices located in the
Tacoma metropolitan area and contiguous parts of the Puget Sound region of
Washington, as well as the Longview and Woodland communities in southwestern
Washington. At March 31, 1998, the Company had total assets of $902.1 million.
Management believes the ongoing consolidation among financial institutions in
Washington has created significant gaps in the ability of large banks
operating in Washington to serve certain customers, particularly the Company's
target customer base of small and medium-sized businesses, professionals and
other individuals. The Company's business strategy is to provide its
customers with the financial sophistication and breadth of products of a
regional bank while retaining the appeal and service level of a community
bank. Management believes that as a result of the Company's strong commitment
to highly personalized relationship-oriented customer service, its varied
products, its strategic branch locations and the long-standing community
presence of its managers, lending officers and branch personnel, it is well
positioned to attract new customers and to increase its market share of loans
and deposits.
The Company's goal over the next several years is to create a well-capitalized,
customer focused, Pacific Northwest commercial banking institution with a
significant presence in selected markets. The Company intends to effect this
growth strategy through a combination of growth at existing branch offices,
new branch openings (usually following the hiring of an experienced branch
manager and/or lending officer with strong community ties and banking
relationships) and acquisitions. In particular, the Company anticipates
continued expansion in Pierce County, north into King County (the location
of Seattle and Bellevue), south into Thurston County (the location of the
state capitol, Olympia) and northwest into Kitsap County (the location of
Bremerton and Port Orchard). In order to fund its commercial and consumer
lending activities and to allow for increased contact with customers, the
Company is establishing a branch system catering primarily to retail
depositors, supplemented by business customer deposits and other borrowings.
The Company believes this mix of funding sources will enable it to expand its
commercial lending activities rapidly while attracting a stable core deposit
base. In order to support its strategy of growth, without compromising its
personalized banking approach or its commitment to asset quality, the Company
has made significant investments in experienced branch, lending and
administrative personnel and has incurred significant costs related to its
branch expansion. Although the Company's expense ratios have improved since
1993, management
8
anticipates that the ratios will remain relatively high by industry standards
for the foreseeable future due to the Company's aggressive growth strategy
and emphasis on convenience and personal service.
The Company completed its first bank acquisitions during the fourth quarter
of 1997, merging Cascade Bancorp, Inc ("Cascade") and Bank of Fife ("Fife")
into Columbia Bank, thereby adding three branch office locations. Cascade
operated three banking offices in the south King County market area. Two of
the branches are located in Auburn (a market in which Columbia did not have
a branch) and the third in downtown Kent. Columbia consolidated its Kent
branch office into the Cascade branch location. Fife operated one banking
office in downtown Fife, a commercial market in which Columbia did not have
a branch.
During the first quarter of 1998, Columbia Bank opened two new branches. The
Westgate branch in north Tacoma opened in January, and the 176th and Meridian
branch in eastern Pierce County opened in February. Both are newly
constructed, full-service facilities. The Company's upcoming expansion plans
include new locations in Kitsap, Thurston, Pierce and Cowlitz counties of
western Washington. Specifically, construction will begin during the second
quarter on a site in Port Orchard on the Kitsap Peninsula, and Columbia's
fourth Cowlitz County location will open later this year inside the Triangle
Mall Thriftway store in Longview. In addition, management is currently
seeking property in Olympia and near 84th and Pacific in Tacoma. New
branches normally do not contribute to net income for many months after
opening.
At March 31 1998, the Company had 23 branches, 14 in Pierce County, 6 in King
County, and 3 in Cowlitz County. Since beginning its major Pierce County
expansion in August 1993, the Company has grown from four to twenty-three
branches through a combination of internal and external growth by acquisition.
In addition to the ongoing expansion of its branch network, the Company
continuously reviews new products and services to give its customers more
banking options. In addition, new technology and services are reviewed for
business development and cost saving.
The economy of the Company's principal market area, while primarily dependent
upon aerospace, foreign trade and natural resources, including agriculture
and timber, has become more diversified over the past decade as a result of
the success of software companies such as Microsoft and the establishment of
numerous research and biotechnology firms. The Washington economy and that
of the Puget Sound region generally have experienced strong growth and
stability in recent years. The Pierce County Economic Index, a regional
publication providing economic forecasts and commentary reports, "The 1997
growth rate was almost twice the twenty-year average growth rate of the local
economy. Continued expansion will take place in 1998, but not at the
gallop-like pace of 1997. When 1998 comes to a close, economic activity in
Pierce County's economy will have increased by 10% in just three years."
Results of Operations
The results of operations of the Company are dependent to a large degree on
the Company's net interest income. The Company also generates noninterest
income through service charges and fees and income from mortgage banking
operations. The Company's operating expenses consist primarily of
compensation and employee benefit expense and occupancy expense. Like most
financial institutions, the Company's interest income and cost of funds are
affected significantly by general economic conditions, particularly changes
in market interest rates, and by government policies and actions of
regulatory authorities.
For the three months ended March 31, 1998, the Company's net income increased
75% to $2.4 million, compared with net income of $1.4 million for the same
period in 1997. Net income per share amounted to $0.24 during the first
quarter, compared with $0.15 per share for the same period in 1997. The
increase in net income was primarily due to increased revenue resulting
from continued loan and deposit growth at improved net interest margins.
9
With the completion of the Company's first acquisitions in December 1997,
Cascade Community Bank and Bank of Fife were merged into Columbia Bank. The
mergers were accounted for on a pooling of interests basis, and Company
financial statements for all reported periods have been restated to reflect
the mergers.
Additionally, on April 22, 1998, the Company announced a three shares for two
stock split payable on May 20, 1998, to shareholders of record on May 6, 1998.
Common shares issued and outstanding, average shares outstanding and net
income per share for all periods presented have been retroactively adjusted
to give effect to this transaction.
Net Interest Income
Net interest income for the first quarter of 1998 increased 32% to $10.0
million, from $7.6 million in the first quarter of 1997. The increase in
net interest income was largely due to the overall growth of the Company.
Net interest income was favorably affected by average interest-earning assets
increasing more rapidly than average interest-bearing liabilities, with the
difference funded by noninterest-bearing deposits and shareholders' equity.
Average interest-earning assets increased $152.3 million, while average
interest-bearing liabilities increased only $117.0 million, compared with
the same period in 1997.
Net interest margin (net interest income divided by average interest-earning
assets) increased to 5.07% in the first quarter of 1998 from 4.74% in the
first quarter of 1997. Average interest-earning assets grew to $801.7
million during the first quarter of 1998, compared with $649.4 million at
March 31, 1997. The average yield on interest-earning assets increased to
8.81% during the first quarter of 1998, compared with 8.57% in the first
quarter of 1997. In comparison, the average cost of interest-bearing
liabilities decreased to 4.60% during the first quarter of 1998 from 4.67%
in the first quarter of 1997. The increase in net interest margin was
primarily due to a combination of higher yields obtained on loans and to
decreasing deposit rates. The increase in loan yields was primarily caused
by a change in loan mix whereby commercial business loans and multi-family
and commercial real estate loans increased as a percentage of total loans.
The decrease in deposit rates is primarily a result of decreasing rates in
the markets in which the Company competes for funds. Interest rates, in
general, exhibited a downward trend during the past year due to a variety
of factors such as low inflation.
Noninterest Income
Total noninterest income increased $801,000, or 47%, in the first quarter
of 1998, compared with the same period in 1997. Increases during the first
quarter were primarily centered in account service charges and mortgage
banking income. In general, increases in account service charges are due to
the growth of the Company and increases in mortgage banking income reflect
lower long-term interest rates with corresponding greater volumes compared
to the first quarter of 1997.
Noninterest Expense
Total noninterest expense increased $1.4 million, or 20%, in the first
quarter of 1998, compared with the same period in 1997. The increase was
primarily due to personnel costs associated with the Company's expansion as
well as advertising, data processing and other expenses. The Company's
efficiency ratio (noninterest expense excluding unusual and nonrecurring
items, divided by the sum of net interest income plus noninterest income
excluding unusual and nonrecurring items) was 65.8% and 74.2% for the first
quarter of 1998 and 1997, respectively. The portion of compensation expense
related to loan originations is deferred and deducted from interest income
over the life of the related loans. Other categories of expense are volume
driven and reflect the Company's rapid growth. Total noninterest expense for
the Company is expected to decline in relation to revenues as the Company's
asset base grows.
10
Income Taxes
For the first quarter of 1998, the Company recorded an income tax provision
of $1.3 million.
Lending Activities
The Company originates a wide variety of loans. Consistent with the trend
beginning in 1993, the Company continues to increase commercial business
loans as a percentage of its total loan portfolio. The Company also
emphasizes Private Banking services to high income and high net worth
individuals.
Loan Portfolio
The following table sets forth at the dates indicated the Company's loan
portfolio composition by type:
March 31, % of December 31, % of
(in thousands) 1998 Total 1997 Total
- -----------------------------------------------------------------------------
Commercial $300,467 41.9% $270,946 39.5%
Real estate:
One-to four-family residential 66,604 9.3 71,095 10.4
Five or more family residential and
commercial properties 216,463 30.2 206,628 30.1
- -----------------------------------------------------------------------------
Total real estate 283,067 39.5 277,723 40.5
Real estate construction:
One-to four-family residential 28,312 4.0 29,695 4.3
Five or more family residential and
commercial properties 30,451 4.2 33,806 4.9
- -----------------------------------------------------------------------------
Total real estate construction 58,763 8.2 63,501 9.2
Consumer 75,403 10.5 74,710 10.9
- -----------------------------------------------------------------------------
Sub-total loans 717,700 100.1 686,880 100.1
Less: Deferred loan fees (863) (0.1) (991) (0.1)
- -----------------------------------------------------------------------------
Total loans $716,837 100.0% $685,889 100.0%
=============================================================================
Loans held for sale $ 6,987 $ 4,377
=============================================================================
Total loans increased $30.9 million, or 4.5%, to $716.8 million from year end
1997. All categories contributed to the increase except for the one-to four
family residential and real estate construction loans which decreased during
the first quarter.
Commercial and Private Banking Lending
Commercial loans increased to $300.5 million at March 31, 1998, representing
41.9% of total loans, from $270.9 million at December 31, 1997. This increase
reflects management's commitment to provide competitive commercial lending in
the Company's primary market areas. The Company expects to continue to expand
its commercial lending products and to emphasize in particular its
relationship banking with businesses, business owners and professional
individuals.
11
Real Estate Lending
One- to Four-Family Residential.
- --------------------------------
Residential one- to four-family loans decreased $4.5 million to $66.6 million
at March 31, 1998, representing 9.3% of total loans, compared with $71.1
million at December 31, 1997. The decrease is attributable to maturities and
prepayments of the portfolio. These loans are used by the Company to
collateralize advances from the FHLB. The Company's underwriting standards
require that one- to four-family portfolio loans generally be owner-occupied
and that loan amounts not exceed 80% (90% with private mortgage insurance) of
the appraised value or cost, whichever is lower, of the underlying collateral
at origination. Generally, management's policy is to originate for sale to
third parties residential loans secured by properties located within the
Company's primary market areas.
Five or More Family Residential and Commercial Properties.
- ----------------------------------------------------------
The Company makes multi-family and commercial real estate loans in its
primary market areas. Multi-family and commercial real estate lending
increased to $216.5 million at March 31, 1998, representing 30.2% of total
loans, from $206.6 million at December 31, 1997. The Company's underwriting
standards generally require that the loan-to-value ratio for multi-family and
commercial loans not exceed 75% of appraised value or cost, whichever is
lower, and that commercial properties maintain debt coverage ratios (net
operating income divided by annual debt servicing) of 1.2 or better.
Underwriting standards can be influenced by competition. The Company
endeavors to maintain the highest practical underwriting standards while
balancing the need to remain competitive in its lending practices.
Construction Loans
The Company originates a variety of real estate construction loans. One- to
four-family residential construction loans are originated for the construction
of custom homes (where the home buyer is the borrower) and provides financing
to builders for the construction of pre-sold homes and speculative residential
construction. Construction loans on one- to four-family residences decreased
to $28.3 million at March 31, 1998, representing 4.0% of total loans, from
$29.7 million at December 31, 1997. Multi-family and commercial real estate
construction loans decreased to $30.5 million at March 31, 1998, representing
4.2% of total loans, from $33.8 million at December 31, 1997. The decrease
is a result of growing competition fueled in part by declining interest rates
during the first quarter.
The Company endeavors to limit its construction lending risk through
adherence to strict underwriting procedures.
Consumer Lending
At March 31, 1998, the Company had $75.4 million of consumer loans
outstanding, representing 10.5% of total loans, as compared with $74.7 million
at December 31, 1997. Consumer loans made by the Company include automobile
loans, boat and recreational vehicle financing, home equity and home
improvement loans and miscellaneous personal loans.
At March 31, 1998, the Company had no foreign loans.
12
Nonperforming Assets
Nonperforming assets consist of nonaccrual loans, restructured loans and real
estate owned. The following tables set forth, at the dates indicated,
information with respect to nonaccrual loans, restructured loans, total
nonperforming loans (nonaccrual loans plus restructured loans), real estate
owned and total nonperforming assets of the Company:
March 31, December 31,
(in thousands) 1998 1997
- -----------------------------------------------------------------------------
Nonaccrual:
One-to four-family residential $1,170 $ 661
Commercial business 1,329 728
Consumer 148 73
- -----------------------------------------------------------------------------
Total nonaccrual loans 2,647 1,462
- -----------------------------------------------------------------------------
Restructured:
One-to four-family residential 19 20
- -----------------------------------------------------------------------------
Total restructured loans 19 20
- -----------------------------------------------------------------------------
Total nonperforming loans $2,666 $1,482
=============================================================================
Real estate owned $ 190 $ 231
=============================================================================
Total nonperforming assets $2,856 $1,713
=============================================================================
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.
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. Restructured loans are those for which concessions have been
granted due to the borrower's weakened financial condition. This includes
the reduction of interest rates below a rate otherwise available to that
borrower or the deferral of interest or principal. Interest on restructured
loans is accrued at the restructured rates when it is anticipated that no
loss of original principal will occur.
Nonperforming loans increased to $2.7 million, or 0.37% of total loans
(excluding loans held for sale), at March 31, 1998, from $1.5 million, or
0.22% of total loans at December 31, 1997 due to increases in the "one-to
four-family residential" and "commercial business" loans.
During the first three months of 1998, the Company reduced real estate owned
("REO") by $41,000 through a sale and recorded a gain of $5,000.
Total nonperforming assets increased to $2.9 million, or 0.32% of period-end
assets at March 31, 1998, from $1.7 million, or 0.20% of period-end assets at
December 31, 1997.
13
Provision and Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered by
management to be adequate to provide for anticipated loan losses based on
management's assessment of various factors affecting the loan portfolio.
This includes a review of problem loans, business conditions and loss
experience, and overall evaluation of the quality of the underlying
collateral, holding and disposal costs, and costs of capital. The allowance
is increased by provisions charged to operations, and is reduced by loans
charged off, net of recoveries.
While management believes that it uses the best information available to
determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance for loan losses, and net income could
be significantly affected, if circumstances differ substantially from the
assumptions used in determining the allowance.
The allowance for loan losses at March 31, 1998, increased to 1.25%, from
1.23% of loans at December 31, 1997 (excluding loans held for sale at each
date). The increase was due to $550,000 in loan loss provisions during the
first three months of 1998. Net loan charge-offs amounted to $3,000 for the
first quarter of 1998 compared with net loan charge-offs of $123,000 for the
same period in 1997.
The following table sets forth at the dates indicated the changes in the
Company's allowance for loan losses:
Three Months Ended
March 31,
(in thousands) 1998 1997
- ----------------------------------------------------------------------------
Beginning balance $8,440 $5,282
Charge offs:
Commercial business (37) (5)
Consumer (65) (137)
- ----------------------------------------------------------------------------
Total charge-offs (102) (142)
Recoveries:
Commercial business 95 18
Consumer 4 1
- ----------------------------------------------------------------------------
Total recoveries 99 19
- ----------------------------------------------------------------------------
Net (charge-offs) recoveries (3) (123)
Provision charged to expense 550 449
- ----------------------------------------------------------------------------
Ending balance $8,987 $5,608
============================================================================
14
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") and brokered deposits.
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 increased $32.8
million, or 4.4%, to $773.2 million at March 31, 1998, from $740.4 million at
December 31, 1997.
The Company is establishing a branch system catering primarily to retail
depositors, supplemented by business banking customer deposits and other
borrowings. While that stable core deposit base is being established,
management's strategy for funding growth has been to make use of brokered and
other wholesale deposits. The Company's use of brokered and other wholesale
deposits decreased in 1997, though management anticipates continued use of
such deposits, as needed, to fund increasing loan demand. The deposit
increase of $32.8 million during the first three months of 1998 occurred
entirely in "core deposits." Brokered and other wholesale deposits
(excluding public deposits) decreased $300,000 to $3.2 million, or 0.41% of
total deposits, at March 31, 1998.
Borrowings
The Company relies on advances from the FHLB to supplement its funding
sources. FHLB advances of $39.0 million did not change during the first
three months of 1998. FHLB advances are secured by one- to four-family
real estate mortgages and certain other assets.
Capital
Shareholders' equity at March 31, 1998, was $81.1 million compared with
$78.4 million at December 31, 1997. The increase is due to improved net
income during the first three months of 1998. Shareholders' equity was 8.99%
and 9.06% of total period-end assets at March 31, 1998, and December 31, 1997,
respectively.
Banking regulations require bank holding companies and banks to maintain a
minimum "leverage" ratio of core capital to adjusted quarterly average total
assets of at least 3%. At March 31, 1998, the Company's leverage ratio was
9.27%, compared with 9.33% at December 31, 1997. In addition, banking
regulators have adopted risk-based capital guidelines, under which risk
percentages are assigned to various categories of assets and off-balance
sheet items to calculate a risk-adjusted capital ratio. Tier I capital
generally consists of common shareholders' equity (which does not include
unrealized gains and losses on securities), less goodwill and certain
identifiable intangible assets, while Tier II capital includes the allowance
for loan losses and subordinated debt, both subject to certain limitations.
Regulatory minimum risk-based capital guidelines require Tier I capital of 4%
of risk-adjusted assets and total capital (combined Tier I and Tier II) of 8%.
The Company's Tier I and total capital ratios were 10.61% and 11.79%,
respectively, at March 31, 1998, compared with 10.77% and 11.93%,
respectively, at December 31, 1997.
15
The Federal Deposit Insurance Corporation (the "FDIC") established the
qualifications necessary to be classified as a "well-capitalized" bank,
primarily for assignment of FDIC insurance premium rates. 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, 1998. Federal laws generally bar institutions which are not
well-capitalized from accepting brokered deposits. The FDIC has issued rules
which prohibit under-capitalized institutions from soliciting or accepting
such deposits. Adequately capitalized institutions are allowed to solicit
such deposits, but only to accept them if a waiver is obtained from the FDIC.
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. The Company
presently intends to retain earnings to support anticipated growth.
Accordingly, the Company does not intend to pay cash dividends on its common
stock in the foreseeable future.
On April 22, 1998, the Company announced a three shares for two stock split
payable on May 20, 1998, to shareholders of record on May 6, 1998. Common
shares issued and outstanding, average shares outstanding and net income per
share for all periods presented have been retroactively adjusted to give
effect to this transaction.
Interest Rate Sensitivity
The Company uses a number of measures to monitor and manage interest rate risk,
including income simulations and interest sensitivity (gap) analyses. An
income simulation model is the primary tool used to assess the direction and
magnitude of changes in net interest income resulting from changes in
interest rates. Key assumptions in the model include prepayment speeds on
mortgage-related assets, cash flows and maturities of other investment
securities, loan and deposit volumes and pricing. These assumptions are
inherently uncertain and, as a result, the model cannot precisely estimate
net interest income or precisely predict the impact of higher or lower
interest rates on net interest income. Actual results will differ from
simulated results due to timing, magnitude and frequency of interest rate
changes, changes in market conditions and management strategies, among other
factors. At March 31, 1998, based on the measures to monitor and manage
interest rate risk, there has not been a material change in the Company's
interest rate risk since December 31, 1997. For additional information,
refer to the Company's annual report on Form 10-K for the year ended
December 31, 1997.
Impact of the Year 2000 Issue
Many existing computer systems, including the systems used by the Company,
use only two digits to identify a year in the date field. These programs
were designed and developed without considering the impact of the upcoming
change in the century. If not corrected, many computer applications could
fail or create erroneous results by or at the Year 2000. The Company
currently is preparing its operations for the year 2000 and also has begun
to identify which customers and their respective operations will not be in
compliance with the Year 2000. The Company also has received assurances from
its data processing service provider that it is aggressively addressing its
capacity to achieve Year 2000 compliance.
16
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit 11 - Statement re computation of per share net income
See Exhibit 27 - Financial Data Schedule
(b) On May 4, 1998, the Company filed Form 8-K, announcing a three for two
shares stock split payable on May 20, 1998 to shareholders of record on
May 6, 1998. Also, the Company announced the appointment of J. James
Gallagher as Vice Chairman and a member of the Board. Mr. Gallagher will
be responsible for strategic planning, mergers and acquisitions, and legal
and regulatory compliance.
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 13, 1998 By /s/ W.W. Philip
----------------------------- -----------------------------
W.W. Philip
Chairman, President and
Chief Executive Officer
Date May 13, 1998 By /s/ Gary R. Schminkey
----------------------------- -----------------------------
Gary R. Schminkey
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
17
Exhibit 11
Statement re computation of per share net income
Columbia Banking System, Inc.
Three Months Ended
March 31,
(in thousands, except per share data) 1998 1997
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Net income applicable to common stock $ 2,413 $1,377
==============================================================================
Average number of basic common shares outstanding 9,970 9,368
Dilutive effect of stock options unexcersized 339 238
- --------------------------------------------------------------------------------
Average number of diluted common shares outstanding 10,309 9,606
================================================================================
Diluted net income per share $ 0.23 $ 0.14
================================================================================
On April 22, 1998, the Company announced a three shares for two stock split
payable on May 20, 1998, to shareholders of record on May 6, 1998. Common
shares issued and outstanding, average shares outstanding and net income
per share for all periods presented have been retroactively adjusted to give
effect to this transaction.
For additional information on earnings per share, please see the "Capital"
section of the "Management Discussion and Analysis of Financial Condition
and Results of Operations".