1
1998 COLUMBIA BANCORP ANNUAL REPORT
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1998
COLUMBIA BANCORP
ANNUAL REPORT
C O N T E N T S
Columbia Bancorp Today 2
A Message to Shareholders 3
Community Conscious Banking 4
Financial Highlights 6
Management's Discussion
and Analysis 7
Consolidated Financial Statements
Consolidated Balance Sheets 12
Income Statement 13
Shareholders' Equity Statement 14
Cash Flow Statements 15
Notes to Consolidated Financial
Statements 16
Auditor's Report 25
The Faces of Columbia Bancorp 26
Banking Services 31
Branch Locations 32
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COLUMBIA BANCORP
TODAY
The success of any financial institution is integrally linked to the
financial condition of the communities in which it operates. There is a
synergistic relationship between thriving communities and the banks that serve
them, which is why we consider it an important part of our mission to act as
"prosperity-building partners" with our customers, shareholders and employees.
As a community banking organization, we tailor each branch to the specific needs
of its community, and put that community's dollars back to work to support the
local people and economy.
Columbia Bancorp currently has eleven banking offices serving the financial
needs of the people and businesses of The Dalles, Hood River, White Salmon,
Goldendale, Hermiston, Pendleton, Madras, Redmond, Bend and McMinnville. Our
staff is committed to achieving consistent financial performance and providing
responsive service as we work to ensure the continued prosperity of our region.
[PHOTOGRAPH]
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A MESSAGE TO
SHAREHOLDERS
To Our Shareholders, Customers and Friends,
This was a landmark year for Columbia Bancorp. We continued to grow our
asset base and profitability, as well as offer our customers more services and
benefits. We completed a one million share public stock offering that culminated
in a listing on the Nasdaq National Market, and we reached record levels in
financial performance, which our 18% return on average equity bears out.
One of the more visible changes for our customers was the renaming of our
Juniper Banking Company and Klickitat Valley Bank branches to Columbia River
Bank. The transition was smooth, alleviating customer confusion and providing
additional cost efficiencies.
Using proceeds from the public stock offering, we made our third major
acquisition, Valley Community Bank located in McMinnville, Oregon. Historically,
we've been very successful in integrating new banks into the family. With each
new branch, we've been able to offer a broader range of services, realize
economies and diversify our loan portfolio. The acquisition of Valley Community
Bank follows in this tradition. We are confident that its outstanding management
team, its strong financial performance and the healthy McMinnville economy will
make this an exceptionally sound investment.
Geographic expansion continued with new Columbia River Bank branches in the
fast growing communities of Pendleton (the largest town in Eastern Oregon) and
Hermiston. This region is currently enjoying a vibrant economy as a result of
three large construction projects: the Wal-Mart Western Regional Distribution
Center, the U.S. Army's chemical decommissioning plant and a new Union Pacific
Railroad facility. All three projects are drawing new residents and will employ
large numbers of people for years to come.
While new branches increase operating expenses and can create a drag on
earnings in the early stages, deposits at the new branches are coming in
stronger than anticipated, and we expect the Pendleton and Hermiston branches to
break even as early as 1999. In addition, a second branch in Bend, Oregon is on
schedule to open by mid-1999.
Our stellar financial performance continues with 1998 marking eleven
consecutive years of income growth. We reached record net income of $4.7
million, or $.65 per diluted share. This is a 21% increase over 1997, despite
the costs related to the acquisition, the opening of new branches, the public
offering and the Nasdaq listing. Assets increased 48%, loans grew by 33% and
deposits jumped 47% from a year ago. We're especially pleased with the
performance of our mortgage group, which helped boost non-interest income 89%.
The Board of Directors declared a $.06 per share quarterly dividend in December.
Finally, I'd like to thank Steve Martin, who resigned as Chairman in
December for health reasons, for his invaluable contributions to the success of
Columbia Bancorp. He was a founding director of Columbia River Bank in 1977,
served as Chairman of the Bank Board since 1995 and also served as Chairman of
the holding company since its formation in 1996. We wish Steve all the best. Don
Mitchell, formerly Vice-Chairman and a founding director of Columbia Bancorp,
was elected as Chairman to replace Steve, and Bill Booth was elected
Vice-Chairman. I also wish to thank retiring director Ted Freeman for his
service to Columbia Bancorp. Ted was formerly the chairman of Juniper Banking
Company and an integral part of the formation of Columbia Bancorp.
I'm looking forward to building on our strong 1998 performance in 1999 as
we bring our commitment to high quality personal service to new customers
throughout the region. We will continue to strive for the solid financial
performance that creates value for our shareholders.
TERRY L. COCHRAN
President and CEO
[PHOTOGRAPH]
"OUR STELLAR FINANCIAL PERFORMANCE CONTINUES WITH 1998 MARKING ELEVEN
CONSECUTIVE YEARS OF INCOME GROWTH."
TERRY L. COCHRAN
President and CEO
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[PHOTOGRAPH]
COMMUNITY CONSCIOUS
BANKING
Part of our commitment to the financial well-being of the communities we
serve is determining how best to respond to their specific needs. We develop
programs that are unique to each community's financial infrastructure and goals.
In some cases we donate time and services. In others, we fund community projects
through corporate sponsorship. In every instance, we get involved in doing
whatever is needed to improve the quality of life for our friends and neighbors.
In the Columbia River Gorge, where agriculture is a significant economic
part of the community, we developed a special lending program for farmers to
finance state-of-the-art equipment purchases and to bridge operating costs
between harvests. When windsurfing gave birth to a burgeoning tourist industry,
we offered loans specially tailored to small businesses with seasonal highs and
lows.
In rapidly growing Central Oregon, we're at the forefront in financing new
construction. A lending program we developed has been so successful that we'll
be opening a second branch in 1999 on Bend's westside. And, through volunteer
employee efforts we're helping to make the new Deschutes County Fairgrounds a
reality. The spacious new multi-use facility will serve as a hub of Central
Oregon activity, attracting major national conventions and quality entertainment
as well as continuing to host the annual county fair and scores of other
community and commercial events.
[PHOTOGRAPH]
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[PHOTOGRAPH]
In Pendleton, we help support one of the area's largest tourist attractions,
the Pendleton Roundup. We have employees that volunteer many hours to make sure
the West's oldest rodeo delivers the economic impact the community depends on.
With as many as 70,000 visitors each year, the Pendleton Roundup can account for
more than 50 percent of a local merchant's annual income.
In McMinnville, where we've recently acquired Valley Community Bank, our
loans and other services are working to support one of the largest commercial
nursery operations in the world. And in Madras, we're especially proud of our
continued involvement with the Collage of Cultures, a festival celebrating
cultural diversity in Central Oregon. It not only represents important
employment opportunities for the community, it supports cultural pride and
preservation statewide.
From mortgage lending to agricultural partnerships, small business loans to
Primevest investment services, Columbia Bancorp offers a lifetime of
personalized banking services. We strive to be responsive to our customers'
changing needs, from the time they open their first checking accounts, through
college, careers, buying homes, building security, and on into retirement.
"COLUMBIA RIVER BANK IS A WELCOME ADDITION TO UMATILLA COUNTY. THEY PROVIDE
PROFESSIONAL BANKING SERVICES FOR CORPORATE ACCOUNTS AS WELL AS QUALITY PERSONAL
BANKING SERVICES FOR INDIVIDUALS. IN TODAY'S BIG BANKING CLIMATE OF 1-800
NUMBERS, IT IS REFRESHING FOR US TO BE ABLE TO WORK WITH COLUMBIA RIVER BANK'S
STAFF FACE-TO-FACE FOR ALL OUR BANKING NEEDS. AT COLUMBIA RIVER BANK OUR COMPANY
HAS FOUND COMPETITIVE RATES, COMPREHENSIVE SERVICES, AND TIMELY DECISIONS
EXCEEDING EVEN OUR HIGHEST LEVEL OF EXPECTATIONS."
DOUGLAS FLATT
VP Administration
Mid-Columbia Bus Company
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FINANCIAL
HIGHLIGHTS
Columbia Bancorp had net income for 1998 of $4.7 million, or $.65 per
diluted share. This represents a 21% increase over the $3.9 million or $.55 per
diluted share earned in 1997. Total assets increased 48% to $342.4 million
compared to $231.8 million the previous year. This was due in part to the
acquisition of Valley Community Bank, as well as significant internal growth.
After provision for loan losses, net interest income was up 16% to $13.1 million
compared to $11.3 million in 1997. Non-interest income was up 89% in 1998 to
$4.7 million compared to $2.5 million the previous year. This increase resulted
from service charges, fees generated from mortgage lending, and gains on
mortgage servicing rights. Operating expenses totaled $10.6 million for 1998, up
from $8.1 million in 1997. This was primarily due to the costs related to the
acquisition of Valley Community Bank and the opening of new branches in
Pendleton and Hermiston. Net loans increased 33% to $206.6 million from $155.2
million in 1997.
1998 1997 1996
-------- -------- --------
(in thousands,except for per share amounts)
At December 31:
ASSETS $342,413 $231,827 $200,302
DEPOSITS $295,680 $201,568 $178,744
NET LOANS $206,552 $155,218 $118,228
SHAREHOLDERS' EQUITY $ 34,756 $ 22,987 $ 19,600
For the year:
NET EARNINGS $ 4.72 $ 3.89 $ 2.73
BASIC EARNINGS PER SHARE $ .67 $ .57 $ .41
DILUTED EARNINGS PER SHARE $ .65 $ .55 $ .40
ASSETS
[PERFORMANCE GRAPH]
[millions]
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
$162,202 $178,486 $200,302 $231,827 $342,413
DEPOSITS
[PERFORMANCE GRAPH]
[millions]
1994 1995 1996 1997 1998
- -------- -------- -------- -------- --------
$142,803 $158,874 $178,744 $201,568 $295,680
NET LOANS
[PERFORMANCE GRAPH]
[millions]
1994 1995 1996 1997 1998
- ------- -------- -------- -------- --------
$90,070 $104,178 $118,228 $155,218 $206,552
NET EARNINGS
[PERFORMANCE GRAPH]
[millions]
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
$2,337 $2,489 $2,727 $3,886 $4,718
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MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
From its origins as a one-branch bank in The Dalles, Columbia Bancorp
("Columbia") has grown as a result of merger and acquisition activity, new
branch openings, the introduction of new business lines, and the expansion and
cross-marketing of its existing products and community bank lending expertise.
In 1995, Columbia River Bank ("CRB") merged with Juniper Banking Company, and in
1996 Columbia was formed as CRB's holding company. In 1996, Columbia acquired
Washington-based Klickitat Valley Bank. Further growth came from CRB's Hood
River and Bend branch openings, and from the expansion in 1997 of CRB's
residential mortgage business. In November 1998, Columbia acquired Valley
Community Bank ("VCB"), and in September CRB opened a new branch in Hermiston,
Oregon. CRB opened a new branch in Pendleton, Oregon in January 1999, and plans
to complete construction of a second Bend branch, including facilities for a
business lending group, by mid-1999. According to information published by the
State of Oregon, if the acquisition of VCB had been completed as of September
30, 1998, Columbia would rank as the 3rd largest community banking organization
in Oregon as measured by total pro forma assets of $313 million. Collectively,
these growth and acquisition activities have enabled Columbia to diversify its
portfolio and its operating risk over several market areas and local economies.
Columbia's goal is to grow its earning assets while maintaining a high
return on equity and keeping asset quality high. The key to this, in Columbia's
view, is to emphasize personal, quality banking products and services for its
customers, to hire and retain competent branch management and administrative
personnel, and to respond quickly to customer demand and growth opportunities.
Columbia also intends to increase its market penetration in its existing
markets, and to expand into new markets through further suitable acquisitions
and through new branch openings. Columbia's goal continues to be increasing
earning assets without compromising its commitment to high asset quality.
For the year ended December 31, 1998, net income was $4.72 million,
representing an increase of 21.39% over net income of $3.89 million earned
during the year ended December 31, 1997. Net income for 1997 was up 42.49% over
net income of $2.73 million earned during the year ended December 31, 1996. Net
income for 1996 was up 9.64% from $2.49 million for the year ended December 31,
1995. Diluted earnings per share were $0.65, $0.55, and $0.40 for the years
ended December 31, 1998, 1997, and 1996, respectively. Return on average assets
was 1.83% for the year ended December 31, 1998, compared with 1.77% for the year
ended December 31, 1997, and 1.45% in 1996. Return on average equity was 18.10%
for the year ended December 31, 1998, compared with 18.37% for the year ended
December 31, 1997, and 14.91% for the year ended December 31, 1996. The increase
in earnings for the year ended December 31, 1998, versus the comparable period
in 1997 can be attributed to growth in earning assets, deposits, fee income
growth, increased customer activity at the Bend branch, and greater operating
efficiency.
Return on average daily assets and equity and certain other ratios for the
periods indicated are presented below:
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(dollars in thousands except
per share data)
Net income $ 4,718 $ 3,887 $ 2,727 $ 2,489 $ 2,336
Average assets $ 257,664 $ 219,905 $ 188,061 $ 170,352 $ 161,671
RETURN ON AVERAGE ASSETS $ 1.83% 1.77% $ 1.45% $ 1.46% $ 1.45%
Net income $ 4,718 $ 3,887 $ 2,727 $ 2,489 $ 2,336
Average equity $ 26,069 $ 21,157 $ 18,292 $ 16,114 $ 14,122
RETURN ON AVERAGE EQUITY 18.10% 18.37% 14.91% 15.45% 16.54%
Cash dividends declared
and paid per share $ 0.22 $ 0.12 $ 0.13 $ 0.08 $ 0.07
Basic earnings
per common share $ 0.67 $ 0.57 $ 0.41 $ 0.37 $ 0.35
DIVIDEND PAYOUT RATIO 33.64% 21.67% 32.37% 22.30% 20.21%
Average equity $ 26,069 $ 21,157 $ 18,292 $ 16,144 $ 14,122
Average assets $ 257,664 $ 219,905 $ 188,061 $ 170,352 $ 161,671
AVERAGE EQUITY TO ASSET RATIO 10.12% 9.62% 9.73% 9.48% 8.74%
RESULTS OF OPERATIONS
NET INTEREST INCOME. Net interest income, before provision for loan loss,
for the year ended December 31, 1998 was $14.12 million, an increase of 18.94%
compared to net interest income of $11.87 million in 1997, which was $2.23
million or 23.13% higher than the $9.64 million in 1996. The overall
tax-equivalent earning asset yield was 9.25% in 1998 compared to 9.30% in 1997
and 9.02% in 1996. For the same years, rates on interest-bearing liabilities
were 3.97%, 4.01%, and 4.09%, respectively. These results were primarily due to
an increase in the volume of earning assets and the growth of
noninterest-bearing deposits. For the three-year period 1996 through 1998, the
average yield on earning assets increased 0.23% while rates paid on
interest-bearing liabilities decreased by 0.12%. Average loans increased 57.00%
while average noninterest-bearing deposits increased 72.91%.
Total interest-earning assets averaged $235.28 million for the year ended
December 31, 1998, compared to $199.27 million for the corresponding period in
1997. Most of the increase was due to an increase in loans. Increases in the
loan portfolio are attributed to the acquisition of Valley Community Bank,
growth from the Columbia River Bank Mortgage Group in Bend, Oregon which opened
during the third quarter of 1997, opportunities afforded by the banking
industry's consolidation and closure of branches in Columbia's market areas, and
the hiring of additional senior lending personnel in strategic branch locations
and administrative capacities.
Interest-bearing liabilities averaged $181.40 million for the year ended
December 31, 1998 compared to $156.41 million during the same period in 1997.
Although further competitive pressure is expected in expanding deposit
relationships, management, as a matter of policy, does not seek to attract
high-priced, brokered deposits. In the near-term, management does not anticipate
Columbia's net interest margins will be significantly impacted by competitive
pressure for deposit accounts.
Loans, which generally carry a higher yield than investment securities and
other earning assets, comprised 74.63% of average earning assets during 1998,
compared to 70.71% in 1997 and 63.95% in 1996. During the same periods, average
yields on
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SELECTED FINANCIAL DATA
(in thousands) 1998 1997 1996 1995
-------- -------- -------- --------
INTEREST INCOME $ 21,328 $ 18,144 $ 15,385 $ 13,815
INTEREST EXPENSE $ 7,205 $ 6,269 $ 5,745 $ 5,216
NET INTEREST INCOME $ 13,123 $ 11,293 $ 9,393 $ 8,511
LOAN LOSS PROVISION $ 1,000 $ 581 $ 246 $ 88
NET INCOME $ 4,718 $ 3,886 $ 2,727 $ 2,489
TOTAL ASSETS $342,413 $231,827 $200,302 $178,486
TOTAL DEPOSITS $295,680 $201,568 $178,744 $158,874
SHAREHOLDERS' EQUITY $ 34,756 $ 21,557 $ 19,533 $ 17,484
TOTAL LOANS TO DEPOSITS 69.86% 77.00% 66.14% 65.57%
RETURN ON AVERAGE ASSETS 1.83% 1.77% 1.45% 1.46%
RETURN ON AVERAGE EQUITY 18.10% 18.37% 14.91% 15.45%
AVERAGE ASSETS TO AVERAGE EQUITY 10.12% 9.62% 9.73% 9.48%
loans were 10.22% in 1998, 10.48% in 1997, and 10.60% in 1996. Investment
securities comprised 20.62% of average earning assets in 1998, which was down
from 26.06% in 1997 and 28.44% in 1996. The decrease in the portfolio of
investment securities has provided funds for Columbia's strong loan growth. Tax
equivalent interest yields on investment securities have ranged from 6.54% in
1998 to 6.57% in 1997 and 6.52% in 1996.
Interest cost, as a percentage of earning assets, decreased to 3.06% in
1998, compared to 3.15% in 1997 and 3.29% in 1996. Local competitive pricing
conditions and funding needs for Columbia's investments in loans have been the
primary determinants of rates paid for deposits during these three years.
PROVISION FOR LOAN LOSSES. The provision for loan losses represents charges
made to earnings to maintain an adequate allowance for loan losses. The
allowance is maintained at an amount believed to be sufficient to absorb losses
in the loan portfolio. Factors considered in establishing an appropriate
allowance include a careful assessment of the financial condition of the
borrower, a realistic determination of the value and adequacy of underlying
collateral, the condition of the local economy and the condition of the specific
industry of the borrower, a comprehensive analysis of the levels and trends of
loan categories, and a review of delinquent and classified loans. Columbia
applies a systematic process for determining the adequacy of the allowance for
loan losses, including an internal loan review function and a quarterly analysis
of the adequacy of the allowance. The quarterly analysis includes the
determination of specific potential loss factors on individual classified loans,
historical potential loss factors derived from actual net charge-off experience
and trends in nonperforming loans, and potential loss factors for other loan
portfolio risks such as loan concentrations, the condition of the local economy,
and the nature and volume of loans.
The recorded values of loans actually removed from the consolidated balance
sheets are referred to as charge-offs and, after netting out recoveries on
previously charged-off assets, become net charge-offs. Columbia's policy is to
charge off loans when, in management's opinion, the loan or a portion thereof is
deemed uncollectible, although concerted efforts are made to maximize recovery
after the charge-off. When a charge to the loan loss provision is recorded, the
amount is based on past charge-off experience, a careful analysis of the current
portfolio, and an evaluation of future economic trends in Columbia's market
areas. Management will continue to closely monitor the loan quality of new and
existing relationships through stringent review and evaluation procedures and by
making loan officers accountable for collection efforts.
For the years ended December 31, 1996 through 1998, Columbia charged
$246,000, $581,000, and $1,000,000, respectively, to its provision for loan
losses. The 72.12% increase in 1998 over the provision for loan losses recorded
in 1997 was necessary to accommodate the growth in Columbia's loan portfolio, to
establish a reserve for potential losses consistent with revisions in Columbia's
loan policy, and to replenish the allowance for loan losses for charge-offs
incurred during 1998. During this period, average outstanding loans grew 57.00%
and the allowance for loan losses kept pace by increasing 139.32% through
charges to the provision for loan losses. Columbia's increase in the provision
for loan losses has primarily been a function of strong loan demand and the
resulting growth in the loan portfolio.
For the year ended December 31, 1998, loan charge-offs exceeded recoveries
by $669,000 as compared to 1997, when loan recoveries exceeded charge-offs by
$63,000. Nearly one-third of the loss experienced in 1998 was due to a loss from
one loan. All remaining net charge-offs incurred by Columbia were smaller in
amount and generally distributed evenly among all branch locations.
NONINTEREST INCOME. Total noninterest income increased through year-end 1998
from 1996. Over this three-year period, noninterest income has increased from
$1.80 million in 1996, to $2.48 million in 1997, and to $4.68 million in 1998.
Noninterest income is primarily derived from service charges and related fees,
as well as mortgage origination and processing fees. Such income increased $2.20
million, or 88.57% for the year ended December 31, 1998, compared to the year
ended December 31, 1997. The principal reason for this increase was income
generated by Columbia's mortgage lending division, which was formed in September
of 1997, and which operates under the name "Columbia River Bank Mortgage Group."
For the year ended 1998, this division generated $924,000 in income from
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originating, processing, servicing, and selling mortgage loans. The increase was
also the result of increasing deposit volumes and related service fees. Service
charges were $1.74 million for the year ended December 31, 1998, compared to
$1.55 million for the year ended December 31, 1997. Management attributes this
12.91% increase to the increase in customers served at all of Columbia's
branches. The remainder of the increase in noninterest income is primarily
attributable to improved revenues received from credit card discounts and fees,
investment fee income provided by Columbia's financial services department, and
other noninterest fees and charges.
NONINTEREST EXPENSE. Noninterest expenses consist principally of employees'
salaries and benefits, occupancy costs, data processing expenses, and other
noninterest expenses. A measure of Columbia's ability to contain noninterest
expenses is the efficiency ratio. This statistic is derived by dividing total
noninterest expenses by total net interest income and noninterest income. For
the year ended December 31, 1998, the ratio decreased to 56.56% compared to
56.37% for the corresponding period of 1997. The decrease in the efficiency
ratio primarily reflects increased expenses discussed further below.
Noninterest expense was $10.63 million for the year ended December 31, 1998,
an increase from $8.09 million for the year ended December 31, 1997, and $7.18
million for the year ended December 31, 1996. This was due to an increase in
staffing costs, as well as increases in other key operating costs such as
occupancy expense and supplies, primarily relating to the formation and staffing
of the Columbia River Bank Mortgage Group and the opening of the Hermiston and
Pendleton, Oregon branches of CRB. Columbia's investments in new and expanded
technology for the Mortgage Group's operations, to support internal services,
and to provide additional technology-based products for customers also resulted
in expense increases. In 1998, Columbia's total noninterest expense was 56.56%
of net revenues, while in 1997 and 1996 it was 56.37% and 62.78%, respectively,
of net revenues.
Salary and benefit expense was $6.01 million in 1998, $4.46 million in 1997,
and $3.97 million in 1996. As of December 31, 1998, Columbia had 187 full-time
equivalent employees, which compares to 133 as of December 31, 1997 and 132 as
of December 31, 1996. The increase in this expense category was the result of a
full year of staffing the Columbia River Bank Mortgage Group, the staffing of
the new Hermiston and Pendleton branches and the normal expense increases
associated with maintaining an expanded employee base.
Net occupancy expense consists of depreciation on premises and equipment,
maintenance and repair expenses, utilities, and related expenses. Columbia's net
occupancy expense increased steadily over the three-year period. This expense
category was $948,000 in 1998, an increase of $212,000, or 28.87%, over the
$736,000 reported in 1997. From 1996 to 1998, net occupancy expense increased by
$294,000, from $654,000 to $948,000, an increase of 44.95%. These increases
reflect the operation of the Bend branch, the occupancy costs associated with
the new Hermiston and Pendleton facilities and the formation in 1997 of the
Columbia River Bank Mortgage Group. This also reflects the costs relating to
continued investment in Columbia's computer systems, which have been upgraded
throughout the organization.
FDIC insurance premiums are a function of outstanding deposit liabilities.
Because the Bank Insurance Fund has since been adequately capitalized, Columbia
was required to make only nominal premium payments in 1996, 1997 and 1998. For
the three year period ended December 31, 1998, Columbia paid the lowest premium
available for its deposit insurance coverage.
Other noninterest expense increases arose from investments in technology and
data processing, and in new service delivery channels to enable Columbia to
continue its focus on efficient, personal service. Data processing expenses
increased 32.30% in 1998 over the previous year, which reflects both the growth
of Columbia's customer and account base and ongoing upgrades to data processing
operations.
One factor that will impact expenses in the immediate and near-term future
is the Year 2000 issue. Management has initiated an organization-wide program to
prepare Columbia's computer systems and applications for the year 2000. This
program involves computer system upgrades, systems testing, contingency planning
and personnel training. For a discussion of the Year 2000 issue and its
potential impact on Columbia's business and operations, see the information
below under the heading "The Year 2000 Issue."
INCOME TAXES. The provision for income taxes was $2.45 million in 1998,
$1.80 million in 1997, and $1.29 million in 1996. The provision resulted in
effective combined federal and state tax rates of 34.18% in 1998, 31.60% in
1997, and 32.03% in 1996. Effective tax rates differ from combined estimated
statutory rates of 38% principally due to the effects of nontaxable interest
income which is recognized for book but not for tax purposes. In addition,
Columbia's state income tax rate was reduced from 6.6% to 3.81% in 1997 as a
result of surplus revenues received by the State of Oregon.
SHAREHOLDERS' EQUITY. Shareholders' equity increased $11.77 million during
1998. Shareholders' equity at December 31, 1998 was $34.76 million compared to
$22.99 million at December 31, 1997. This increase reflects net income and
comprehensive income of $4.76 million, $237,000 in exercised stock options, and
sales of common stock of $8.36 million. These additions to equity were partially
offset by cash dividends paid or declared of $1.59 million.
Dividends declared and paid were $0.22 per share in 1998, $0.12 per share in
1997, and $0.13 per share in 1996. Dividends in 1996 exceeded those for 1997 as
a result of a change in Columbia's dividend policy from annual to quarterly
payments and a special $.07 per share dividend paid to shareholders following
Columbia's acquisition of Klickitat Valley Bank in 1996.
ASSET-LIABILITY MANAGEMENT & INTEREST RATE SENSITIVITY. Columbia's results
of operations depend substantially on its net interest income. Interest income
and interest expense are affected by general economic conditions and by
competition in the market-place. Columbia's interest and pricing strategies are
driven by its asset-liability management analysis and by local market
conditions.
Columbia seeks to manage its assets and liabilities to generate a stable
level of earnings in response to changing interest rates and to manage its
interest rate risk. Columbia further strives to serve its communities and
customers through deployment of its resources on a corporate-wide basis so that
qualified loan demands may be funded wherever necessary in its branch banking
system. Asset/liability management involves managing the relationship between
interest rate sensitive assets and interest rate sensitive liabilities. If
assets and liabilities do not mature or reprice simultaneously, and in equal
amounts, the potential for exposure to interest rate risk exists, and an
interest rate "gap" is said to be present.
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Rising and falling interest rate environments can have various effects on a
bank's net interest income, depending on the interest rate gap, the relative
changes in interest rates that occur when assets and liabilities are repriced,
unscheduled repayments of loans, early withdrawals of deposits, and other
factors.
The following table sets forth the dollar amount of maturing
interest-earning assets and interest-bearing liabilities at December 31, 1998,
and the difference between them for the maturing or repricing periods indicated.
The amounts in the table are derived from Columbia's internal data, which varies
from amounts classified in its financial statements. Although this information
may be useful as a general measure of interest rate risk, the data could be
significantly affected by external factors such as prepayments of loans or early
withdrawals of deposits. Each of these factors may greatly influence the timing
and extent of actual repricing of interest-earning assets and interest-bearing
liabilities.
DECEMBER 31, 1998
-----------------------------------------------------------------------
LESS THAN ONE YEAR
(dollars in thousands) VARIABLE RATE ONE YEAR OR LONGER TOTAL
------------ --------- --------- ---------
ASSETS
Investments $ 37,177 $ 7,957 $ 45,890 $ 91,024
Loans 79,533 35,032 91,987 206,552
--------- --------- --------- ---------
Total assets $ 116,710 $ 42,989 $ 137,877 $ 297,576
LIABILITIES
Core deposits $ 162,601 $ 42,414 $ 79,787 $ 284,802
Jumbo CD's -- 9,565 1,313 10,878
Borrowings 8,066 -- 1,668 9,734
Total liabilities $ 170,667 $ 51,979 $ 82,768 $ 305,414
--------- --------- --------- ---------
$ (53,957) $ (8,990) $ 55,109 $ (7,838)
=========
Net cumulative position $ (53,957) $ (62,947) $ (7,838)
========= ========= =========
Cumulative gap as a percent of assets (15.76)% (18.38)% (2.29)%
========= ========= =========
The net cumulative gap position is somewhat negative since more liabilities
than assets will reprice during the next year. This exposure to increasing rates
is currently exaggerated by "sticky" deposit rates (not expected to reprice
rapidly in an increasing rate environment) and a higher than normal level of
short-term cash (not included in rate-sensitive assets). However, Columbia's
asset rates change more than deposit rates, and management feels Columbia's
asset yields will change more than the cost of funds when rates change.
Management believes that Columbia has a relatively low interest rate risk
that is somewhat asset-sensitive. The net interest margin should increase
slightly when rates increase and shrink somewhat when rates fall. This interest
rate risk is driven by a concentration of rate sensitive variable rate and
short-term commercial loans, one of Columbia's major business lines. Columbia
does have significant amounts of fixed rate loans to offset most of the impact
from the repricing of short-term loans. However, there can be no assurance that
fluctuations in interest rates will not have a material adverse impact on
Columbia.
Columbia's sensitivity to gains or losses in future earnings due to
hypothetical decreases or increases in interest rates is as follows:
INCREASE IN FINANCIAL IMPACT ON DECREASE IN FINANCIAL IMPACT ON
INTEREST RATES NET INTEREST MARGIN INTEREST RATES NET INTEREST MARGIN
+1% $ 801,000 -1% $ 839,000
+2% $ 1,602,000 -2% $ 1,762,000
LIQUIDITY. Columbia has adopted policies to maintain a relatively
liquid position to enable it to respond to changes in the financial environment
and ensure sufficient funds are available to meet customers' needs for borrowing
and deposit withdrawals. Generally, Columbia's major sources of liquidity are
customer deposits, sales and maturities of investment securities, the use of
federal funds markets, and net cash provided by operating activities. Scheduled
loan repayments are a relatively stable source of funds, while deposit inflows
and unscheduled loan prepayments, which are influenced by general interest rate
levels, interest rates available on other investments, competition, economic
conditions, and other factors, are not. Liquid asset balances include cash,
amounts due from other banks, federal funds sold, and securities
available-for-sale and securities held-to-maturity with maturities in the next
three months. At December 31, 1998, these liquid assets totaled $95.88 million
or 28.00% of total assets as compared to $50.94 million or 21.98% of total
assets at December 31, 1997. Another source of liquidity is the ability to
borrow from the Federal Home Loan Bank of Seattle and other correspondent banks.
At December 31, 1998, credit limits through these institutions totaled
approximately $58.12 million.
The analysis of liquidity also includes a review of the changes that appear
in the consolidated statements of cash flows for the year ended December 31,
1998. The statement of cash flows includes operating, investing and financing
categories. Operating activities include net income of $4.72 million, which is
adjusted for noncash items and increases or decreases in cash due to changes in
certain assets and liabilities. Investing activities consist primarily of both
proceeds from and purchases of securities, and the impact of the net growth in
loans. Financing activities present the cash flows associated with deposit
accounts, and reflect dividends paid to shareholders.
At December 31, 1998, Columbia had outstanding commitments to make loans of
$57.66 million. Nearly all of these commitments represented unused portions of
credit lines available to consumers under credit card and other arrangements and
to businesses. Many of these credit lines will not be fully drawn upon and,
accordingly, the aggregate commitments do not necessarily represent actual
future cash requirements. Management believes that Columbia's sources of
liquidity are more than adequate to meet likely calls on outstanding
commitments, although there can be no assurance in this regard.
CAPITAL. The Federal Reserve Board and the Federal Deposit Insurance
Corporation have established minimum requirements for capital adequacy for bank
holding companies and member banks. The requirements address both risk-based
capital and leveraged capital. The regulatory agencies may establish higher
minimum requirements if, for example, a corporation has previously received
special attention or has a high susceptibility to interest rate risk.
The following reflects Columbia's various capital ratios at December 31,
1998 and December 31, 1997, as compared to regulatory minimums for capital
adequacy purposes:
At December 31, 1998 At December 31, 1997 Regulatory Minimum
-------------------- ------------------- -----------------
Tier I capital 10.90% 13.70% 4.00%
Total risk-based capital 11.90% 13.70% 8.00%
Leverage ratio 8.90% 10.60% 4.00%
THE YEAR 2000 ISSUE
The widely-publicized Year 2000 issue raises considerable uncertainties and
risks for financial institutions such as Columbia. The challenge arises because
many computers utilized for processing date-sensitive information cannot
recognize the Year 2000 as the beginning of a new century. Consequently, the
calculations performed by such computers may be erroneous, causing these
computer systems to produce incorrect data or, in some cases, to fail
completely. This raises a special problem for financial institutions, since many
financial
12
[11]
transactions, such as interest accruals and payments, are date sensitive. The
issue may also affect the operations of those with whom Columbia does business,
including its correspondent banks, suppliers, utility companies, and customers.
The possible interruption of Columbia's business operations, and the operations
of those with whom it does business, has the potential to materially impact
Columbia's financial condition, revenues and liquidity. The extent to which such
risks and effects will actually materialize cannot be known with complete
certainty. However, Columbia believes it will be prepared to avoid any
significant adverse Year 2000 consequences arising from factors which Columbia
has the ability to control, such as the readiness of Columbia's own computer
systems. In addition, Columbia intends to have in place reasonable contingency
plans for addressing problems arising from events it cannot directly control.
As of the date of this Annual Report, Columbia does not expect the known and
reasonably anticipated costs of preparing for the Year 2000 issue, including
software and hardware upgrades, system testing and personnel training, to be
material. Through December 31, 1998, Columbia spent approximately $100,000 on
direct and indirect costs to address the issue. For the years 1999 and 2000,
Columbia expects to spend between $450,000 and $750,000 on continuing technology
upgrades, contingency planning, system testing and personnel training. However,
no assurance can be given that Columbia's Year 2000-related costs will not be
substantially higher as a result of factors that cannot be foreseen at the
present time. Such unanticipated costs could have a material adverse effect on
Columbia's business and operations.
A detailed discussion of Columbia's plans for addressing the Year 2000 issue
may be found in Columbia's Form 10-K Annual Report for 1998, which will be filed
on or before March 31, 1999 with the United States Securities and Exchange
Commission.
DISCLOSURE REGARDING
FORWARD-LOOKING STATEMENTS
This Annual Report includes forward-looking statements as defined in
applicable federal securities laws and regulations. Such forward-looking
statements are based on certain assumptions made by Columbia's management,
information currently available to management, and management's present beliefs
about Columbia's business and operations. All statements, other than statements
of historical fact, in this Annual Report concerning Columbia's financial
position, its business strategy, and the plans and objectives of management
regarding Columbia's future growth and operations, are forward-looking
statements. Forward-looking statements can be identified by words such as
"believe," "estimate," "anticipate," "expect," "intend," "will," "may,"
"should," or other similar phrases or words. Although Columbia believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Readers are therefore cautioned not to place undue reliance on such
forward-looking statements. Such factors as changed conditions, incorrect
assumptions or the materialization of a risk or uncertainty could cause actual
results to differ materially from results described in this Annual Report as
believed, anticipated, estimated, expected or intended. Columbia does not intend
to publish revisions to any forward-looking statements in this Annual Report to
reflect events or circumstances arising after the date of its publication, or to
describe the occurrence of unanticipated events, other than in Columbia's
quarterly and annual reports and other public filings required under applicable
securities laws.
MARKET PRICE OF COMMON STOCK
Columbia has only one class of issued and outstanding stock, its common
stock. The common stock is quoted on the Nasdaq National Market under the symbol
"CBBO". Trading in Columbia's stock on Nasdaq commenced on November 6, 1998.
Through December 31, 1997, the common stock was not listed or quoted on any
exchange or quotation system, and Columbia endeavored to facilitate transactions
between shareholders and potential investors by keeping an informal record of
persons who had expressed an interest in buying or selling common stock, and by
acting as an intermediary between buyers and sellers. Columbia also kept
informal records as to transaction prices. Many transactions between buyers and
sellers occurred without Columbia's knowledge and involvement, and came to its
attention only after the fact when it was notified of a change in record
ownership. Consequently, the transaction price information for 1997 is based
solely on prices which were reported to Columbia for specific transactions by
persons whose transactions came to its attention. The reported prices may not
represent all transactions in the shares traded for 1997, and no assurance can
be given as to the accuracy of the reported prices, as the prices were not
independently verified.
Beginning in January 1998, several brokerage firms began serving as market
makers for the common stock, and stock price information for the common stock
became available on the OTC Bulletin Board. The transaction prices through
November 5, 1998 were obtained from the high and low prices listed on the OTC
Bulletin Board, and do not include private transactions, if any.
The following table sets forth high and low bid and sales prices as
indicated, for the common stock for the last two years. All prices for the
periods shown have been adjusted for all stock splits. Prices do not include
retail markups, markdowns, or commissions, and may not represent actual
transactions.
On February 2, 1999 Columbia's common stock was held of record by
approximately 1,170 shareholders.
HIGH LOW
------- -------
1997(1)
First quarter $ 5.67 $ 5.00
Second quarter $ 6.67 $ 5.17
Third quarter $ 7.33 $ 6.00
Fourth quarter $ 8.33 $ 6.67
1998(2)
First quarter $ 12.00 $ 8.17
Second quarter $ 11.63 $ 10.13
Third quarter $ 10.75 $ 9.00
Fourth quarter(through November 5) $ 8.88 $ 8.25
Fourth quarter (3) $ 9.37 $ 8.75
(1) Based solely on prices reported to Columbia without independent
verification.
(2) Prices for the first three quarters and the fourth quarter through November
5 are bid prices quoted on the OTC Bulletin Board.
(3) Sales prices quoted on the Nasdaq National Market for the period November 6
through December 31, 1998.
DIVIDENDS
Columbia's Board of Directors declared quarterly dividends of $.03 per share
of Columbia's common stock in 1997, for total 1997 dividends of $.12 per share.
In 1998, Columbia's Board declared quarterly dividends per share of $.05, $.05,
$.06, and $.06, respectively, for total 1998 dividends of $.22 per share. All
dividend amounts have been adjusted for all stock splits in 1997 and 1998.
13
[12]
CONSOLIDATED
BALANCE SHEETS
ASSETS
December 31
-----------------------------
1998 1997
------------ ------------
Cash and due from banks $ 22,643,895 $ 15,353,965
Interest-bearing deposits with other banks 30,575,012 1,524,173
Federal funds sold 12,554,775 2,834,363
------------ ------------
TOTAL CASH AND CASH EQUIVALENTS 65,773,682 19,712,501
------------ ------------
Investment securities available-for-sale 29,466,769 31,309,883
Investment securities held-to-maturity 17,310,222 16,728,036
Restricted equity securities 1,117,200 765,900
------------ ------------
TOTAL INVESTMENT SECURITIES 47,894,191 48,803,819
------------ ------------
Loans held-for-sale 7,818,603 2,713,665
Loans, net of allowance for loan losses and unearned loan fees 198,733,188 152,504,671
Property and equipment, net of depreciation 8,190,068 5,256,561
Accrued interest receivable 2,487,122 2,185,544
Goodwill 9,286,832 -
Other real estate owned 280,800 -
Other assets 1,948,763 649,982
------------ ------------
TOTAL ASSETS $342,413,249 $231,826,743
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS
Noninterest-bearing demand deposits $ 67,408,747 $ 46,377,081
Interest-bearing demand deposits 134,716,357 85,502,927
Savings accounts 27,969,402 26,835,712
Time certificates 65,585,883 42,852,424
------------ ------------
TOTAL DEPOSITS 295,680,389 201,568,144
------------ ------------
Notes payable 9,734,095 5,263,824
Accrued interest payable and other liabilities 2,242,545 2,007,289
------------ ------------
TOTAL LIABILITIES 307,657,029 208,839,257
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, no par value, 10,000,000 shares authorized, 7,949,032
issued and outstanding at December 31, 1998 (2,288,451 in 1997) 14,125,315 5,528,218
Additional paid-in capital 6,317,732 6,317,732
Retained earnings 14,257,975 11,131,444
Accumulated other comprehensive income, net of taxes 55,198 10,092
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 34,756,220 22,987,486
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $342,413,249 $231,826,743
============ ============
See Independent Auditor's Report and accompanying notes.
14
[13]
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31
-----------------------------------------------
1998 1997 1996
------------ ------------ ------------
INTEREST INCOME
Interest and fees on loans $ 17,938,902 $ 14,764,313 $ 11,854,765
Interest on investments:
Taxable investment securities 1,719,464 2,257,934 2,094,413
Nontaxable investment securities 847,508 735,421 770,631
Interest on federal funds sold 492,361 221,167 589,264
Other interest and dividend income 329,615 164,685 75,632
------------ ------------ ------------
TOTAL INTEREST INCOME 21,327,850 18,143,520 15,384,705
------------ ------------ ------------
INTEREST EXPENSE
Interest on interest-bearing deposit and savings accounts 3,570,752 3,313,451 2,967,193
Interest on time deposit accounts 3,195,414 2,771,986 2,717,481
Other borrowed funds 438,588 183,637 60,717
------------ ------------ ------------
TOTAL INTEREST EXPENSE 7,204,754 6,269,074 5,745,391
------------ ------------ ------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 14,123,096 11,874,446 9,639,314
PROVISION FOR LOAN LOSSES 1,000,000 581,000 246,479
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 13,123,096 11,293,446 9,392,835
------------ ------------ ------------
NONINTEREST INCOME
Service charges and fees 1,744,620 1,545,174 1,093,346
Credit card discounts and fees 420,577 389,965 288,075
Financial services department income 311,925 230,405 158,575
Mortgage servicing revenue 664,666 -- --
Gain on sale of loans, net of discounts 197,154 -- --
Mortgage loan origination income 766,913 118,818 --
Other noninterest income 571,963 196,361 259,064
------------ ------------ ------------
TOTAL NONINTEREST INCOME 4,677,818 2,480,723 1,799,060
------------ ------------ ------------
NONINTEREST EXPENSES
Salaries and employee benefits 6,014,344 4,463,483 3,965,087
Occupancy expense 948,287 735,858 653,541
Data processing expense 364,431 304,456 231,817
Credit card processing fees 282,041 254,299 213,887
Office supplies 200,439 199,930 164,680
FDIC assessment 24,042 19,749 5,742
Other noninterest expenses 2,799,578 2,114,509 1,945,259
------------ ------------ ------------
TOTAL NONINTEREST EXPENSES 10,633,162 8,092,284 7,180,013
------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 7,167,752 5,681,885 4,011,882
PROVISION FOR INCOME TAXES 2,449,899 1,795,476 1,285,011
------------ ------------ ------------
NET INCOME 4,717,853 3,886,409 2,726,871
OTHER COMPREHENSIVE INCOME
Unrealized gains (losses) on securities:
Unrealized holding gains arising during the period 148,939 13,059 11,826
Reclassification adjustments for (gains)
losses included in net income (103,833) 8,265 279
------------ ------------ ------------
OTHER COMPREHENSIVE INCOME 45,106 21,324 12,105
------------ ------------ ------------
COMPREHENSIVE INCOME $ 4,762,959 $ 3,907,733 $ 2,738,976
============ ============ ============
BASIC EARNINGS PER SHARE OF COMMON STOCK $ 0.67 $ 0.57 $ 0.41
DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 0.65 $ 0.55 $ 0.40
See Independent Auditor's Report and accompanying notes.
15
[14]
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED
COMMON STOCK ADDITIONAL COMPREHENSIVE TOTAL
-------------------------- PAID-IN RETAINED INCOME STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS (LOSS) EQUITY
--------- ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1995 2,237,817 $ 4,974,400 $ 4,848,953 $ 7,683,876 $ (23,337) $ 17,483,892
Stock options exercised 10,156 66,262 27,899 -- -- 94,161
Sale of common stock 6,868 98,556 -- -- -- 98,556
Transfer to surplus -- -- 1,440,880 (1,440,880) -- --
Cash dividends -- -- -- (702,215) -- (702,215)
Cash dividends declared -- -- -- (180,388) -- (180,388)
Net income & comprehensive income -- -- -- 2,726,871 12,105 2,738,976
--------- ------------ ------------ ------------ --------- ------------
BALANCE, December 31, 1996 2,254,841 5,139,218 6,317,732 8,087,264 (11,232) 19,532,982
Stock options exercised 21,415 214,001 -- -- -- 214,001
Sale of common stock 12,195 174,999 -- -- -- 174,999
Cash dividends -- -- -- (613,384) -- (613,384)
Cash dividends declared -- -- -- (228,845) -- (228,845)
Net income & comprehensive income -- -- -- 3,886,409 21,324 3,907,733
--------- ------------ ------------ ------------ --------- ------------
BALANCE, December 31, 1997 2,288,451 5,528,218 6,317,732 11,131,444 10,092 22,987,486
Stock options exercised 26,110 236,607 -- -- -- 236,607
Sale of common stock 1,009,375 8,360,490 -- -- -- 8,360,490
3 for 2 stock split & cash paid
for fractional shares 1,154,755 -- -- (4,037) -- (4,037)
2 for 1 stock split 3,470,341 -- -- -- -- --
Cash dividends -- -- -- (1,110,343) -- (1,110,343)
Cash dividends declared -- -- -- (476,942) -- (476,942)
Net income & comprehensive income -- -- -- 4,717,853 45,106 4,762,959
--------- ------------ ------------ ------------ --------- ------------
BALANCE, December 31, 1998 7,949,032 $ 14,125,315 $ 6,317,732 $ 14,257,975 $ 55,198 $ 34,756,220
========= ============ ============ ============ ========= ============
See Independent Auditor's Report and accompanying notes.
16
[15]
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
------------------------------------------------
1998 1997 1996
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,717,853 $ 3,886,409 $ 2,726,871
Adjustments to reconcile net income to net cash
from operating activities:
Amortization of premiums and
discounts of investment securities (8,385) 30,775 -
Loss (gain) on sale or write-down of
property and equipment (10,393) (1,576) 145
Loss (gain) on sale of available-for-sale
securities (142,320) 4,940 -
Loss (gain) on call of
held-to-maturity investment securities (15,003) 7,583 422
Depreciation and amortization 552,955 449,048 380,198
Federal Home Loan Bank stock dividend (59,600) (53,000) (49,500)
Deferred income tax benefit (186,665) (278,770) (168,112)
Provision for loan losses 1,000,000 581,000 246,479
Increase (decrease) in cash due to changes in
certain assets and liabilities:
Accrued interest receivable (76,406) (237,100) (132,568)
Other assets (865,964) (8,756) 477,221
Accrued interest payable and other liabilities (946,616) 533,915 272,868
------------ ------------ ------------
NET CASH FROM OPERATING ACTIVITIES 3,959,456 4,914,468 3,754,024
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of available-for-sale securities 16,220,625 1,647,406 -
Proceeds from the maturity of available-for-sale securities 7,665,000 12,517,460 4,718,237
Proceeds from the maturity of held-to-maturity securities 2,524,291 3,576,370 14,795,881
Purchases of held-to-maturity securities (3,097,129) (4,534,473) (15,266,716)
Purchases of available-for-sale securities (15,995,790) (10,454,096) (6,769,594)
Purchase of restricted equity securities - (41,000) -
Net change in loans made to customers (32,594,458) (37,571,668) (14,296,125)
Cash paid, net of cash received from acquisition (709,364) - -
Proceeds from the sale of property and equipment 10,393 - 40,200
Payments made for purchase of property and equipment (1,847,077) (822,715) (1,446,111)
------------ ------------ ------------
NET CASH FROM INVESTING ACTIVITIES (27,823,509) (35,682,716) (18,224,228)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in demand deposit and savings accounts 43,715,064 24,253,865 19,753,977
Net change in time deposits 15,860,017 (1,429,579) 115,572
Net increase in short term borrowings 2,693,811 4,000,000 224,712
Borrowings of long-term debt 402,471 663,824 -
Repayments of long-term debt - - (600,000)
Fractional share payments (4,037) - -
Dividends paid (1,339,189) (793,772) (702,215)
Proceeds from stock options
exercised and sales of common stock 470,982 389,000 192,717
Proceeds from public stock offering, net of expenses 8,126,115 - -
------------ ------------ ------------
NET CASH FROM FINANCING ACTIVITIES 69,925,234 27,083,338 18,984,763
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 46,061,181 (3,684,910) 4,514,559
CASH AND CASH EQUIVALENTS, beginning of year 19,712,501 23,397,411 18,882,852
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 65,773,682 $ 19,712,501 $ 23,397,411
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid in cash $ 7,270,325 $ 6,250,774 $ 5,677,890
Taxes paid in cash $ 2,582,783 $ 2,069,541 $ 1,459,808
SCHEDULE OF NONCASH ACTIVITIES
Unrealized gain on securities
transferred from held-to-maturity to
available-for-sale, net of tax $ - $ 23,991 $ -
Change in unrealized loss on
available-for-sale securities, net of tax $ 45,106 $ (2,667) $ 12,105
Cash dividend declared and payable after year-end $ 476,942 $ 228,845 $ 180,388
See Independent Auditor's Report and accompanying notes.
17
[16]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION & SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS. Columbia Bancorp ("Columbia") was
incorporated on October 3, 1995, and became the holding company of Columbia
River Bank ("CRB") effective January 1, 1996.
CRB is a state-chartered institution authorized to provide banking services
by the States of Oregon and Washington. With its administrative headquarters in
The Dalles, Oregon, CRB operates branch facilities in The Dalles, Hood River,
Hermiston, Pendleton, Madras, Redmond and Bend, Oregon. In Washington, it
operates branches in Goldendale and White Salmon.
As further discussed in Note 2, Columbia acquired Valley Community Bancorp
and its subsidiaries, Valley Community Bank ("VCB") and Valley Community
Mortgage Services, Inc. in November 1998. VCB is a state-chartered institution
authorized to provide banking services from its single office location in
McMinnville, Oregon.
Substantially all activity of Columbia is conducted through its two
subsidiary banks, CRB and VCB (collectively, the "Banks"), which, along with
Columbia, are subject to the regulations of certain Federal and State agencies
and undergo periodic examinations by those regulatory authorities. All
significant intercompany accounts and transactions between Columbia, CRB and VCB
have been eliminated in the preparation of the consolidated financial
statements.
BUSINESS ACQUISITION AND EXPANSION ACTIVITY. In June 1996, Columbia acquired
Klickitat Valley Bank ("Klickitat"), a community bank headquartered in
Goldendale, Washington and with a branch in White Salmon, Washington. The
acquisition was accomplished through the exchange of 8.5 shares of Columbia
common stock for each share of Klickitat common stock. The transaction was
accounted for as a pooling-of-interests and, accordingly, the assets,
liabilities, and stockholders' equity, and results of operations of the separate
entities have been combined for 1996, 1997, and 1998 as though the entities had
been combined as of the beginning of 1995. In 1997 Klickitat was merged into
CRB, and in 1998 CRB changed the "Klickitat Valley Bank" name of its Washington
branches to "Columbia River Bank."
In 1997, CRB began operations of a mortgage banking division, Columbia River
Bank Mortgage Group (the "Mortgage Group"), which is headquartered in Bend,
Oregon. The Mortgage Group has an office in The Dalles, Oregon and provides
services to all commercial banking branches of Columbia.
In November 1998 Columbia acquired Valley Community Bancorp and its
subsidiaries, Valley Community Bank and Valley Community Mortgage Services,
Inc., and opened new CRB branches in Hermiston and Pendleton, Oregon. With this
acquisition and new branch openings, Columbia's operations as of December 31,
1998 include eight bank branches and two mortgage banking division offices in
Oregon and two bank branches in Southwest Washington.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results could
differ significantly from those estimates. Significant estimations made by
management primarily involve the calculation of the allowance for loan losses.
INVESTMENT SECURITIES. Columbia is required to specifically identify its
investment securities as "held-to-maturity," "available-for-sale," or "trading
accounts." Accordingly, management has determined that all investment securities
held at December 31, 1998 and 1997, are either "available-for-sale" or
"held-to-maturity" and conform to the following accounting policies:
Securities held-to-maturity. Bonds, notes, and debentures for which Columbia has
the intent and ability to hold to maturity are reported at cost, adjusted for
premiums and discounts that are recognized in interest income using the interest
method over the period to maturity.
Securities available-for-sale. Available-for-sale securities consist of bonds,
notes, debentures, and certain equity securities not classified as
held-to-maturity securities. Securities are generally classified as
available-for-sale if the instrument may be sold in response to such factors as:
(1) changes in market interest rates and related changes in the prepayment risk,
(2) needs for liquidity, (3) changes in the availability of and the yield on
alternative instruments, and (4) changes in funding sources and terms.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as other comprehensive income and carried as accumulated
comprehensive income within stockholders' equity. Fair values for these
investment securities are based on quoted market prices. Gains and losses on the
sale of available-for-sale securities are determined using the
specific-identification method.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary
result in write-downs of the individual securities to their fair value. The
related write-downs would be included in earnings as realized losses. Premiums
and discounts are recognized in interest income using the effective interest
method over the period to maturity.
RESTRICTED EQUITY SECURITIES. Columbia's equity investments in the Federal
Home Loan Bank, Federal Agriculture Mortgage Corporation and Federal Reserve
Bank stock are classified as restricted equity securities since ownership of
these instruments is restricted and they do not have an active market. As
restricted equity securities, these investments are carried at cost.
LOANS, NET OF ALLOWANCE FOR LOAN LOSSES AND UNEARNED INCOME. Loans are
stated at the amount of unpaid principal, reduced by an allowance for loan
losses and unearned income. Interest on loans is calculated by using the
simple-interest method on daily balances of the principal amount outstanding.
The allowance for loan losses is established through a provision for loan losses
charged to expenses. Loans are charged against the allowance for loan losses
when management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the
18
[17]
borrower's ability to pay. Various regulatory agencies, as a regular part of
their examination process, periodically review the Banks' reserve for loan
losses. Such agencies may require the Banks to recognize additions to the
allowance based on their judgment of information available to them at the time
of their examinations.
Impaired loans are carried at the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's market price,
or the fair value of the collateral if the loan is collateral dependent. Accrual
of interest is discontinued on impaired loans when management believes, after
considering economic and business conditions, collection efforts, and collateral
position, that the borrower's financial condition is such that collection of
interest is doubtful. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield of the related loan.
LOANS HELD-FOR-SALE. Mortgage loans held-for-sale are carried at the lower
of cost or estimated market value. Market value is determined on an aggregate
loan basis. At December 31, 1998 and 1997, mortgage loans held-for-sale were
carried at cost which approximated market.
LOAN SERVICING. The cost of mortgage servicing rights is amortized in
proportion to, and over the period of, estimated net servicing revenues.
Impairment of mortgage servicing rights is assessed based on the fair value of
those rights. Fair values are estimated using discounted cash flows based on a
current market interest rate. The amount of impairment recognized is the amount
by which the capitalized mortgage servicing rights exceed fair value.
Rights to future interest income from serviced loans that exceeds
contractually specified servicing fees are classified as interest-only strips
and accounted for as debt securities that are available-for-sale.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost, less
accumulated depreciation. Depreciation is computed by the straight-line and
accelerated methods over the estimated useful lives of the assets, which range
from three to seven years for furniture and equipment and 31-1/2 years for
building premises.
OTHER REAL ESTATE. Other real estate, acquired through foreclosure or
deeds in lieu of foreclosure, is carried at the lower of cost or estimated net
realizable value. When property is acquired, any excess of the loan balance over
its estimated net realizable value is charged to the reserve for loan losses.
Subsequent write-downs to net realizable value, if any, or any disposition gains
or losses are included in noninterest income and expense.
GOODWILL. Goodwill represents the excess of cost over the fair value of
net assets acquired from the purchase of Valley Community Bancorp (see Note 2),
and is being amortized over a 15 year period using the straight line method.
INCOME TAXES. Deferred income tax assets and liabilities are determined
based on the tax effects of the differences between the book and tax bases of
the various balance sheet assets and liabilities. Deferred tax assets and
liabilities are reflected at currently enacted income tax rates applicable to
the period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.
ADVERTISING. Advertising costs are charged to expense during the year in
which they are incurred.
STATEMENT OF CASH FLOWS. Cash equivalents are generally all short-term
investments with a maturity of three months or less. Cash and cash equivalents
normally include cash on hand, amounts due from banks, and federal funds sold.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS. Columbia holds no derivative
financial instruments. However, in the ordinary course of business, the Banks
have entered into off-balance-sheet financial instruments consisting of
commitments to extend credit, commitments under credit card arrangements,
commercial letters of credit, and standby letters of credit. These financial
instruments are recorded in the financial statements when they are funded or
related fees are incurred or received.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The following methods and assumptions
were used by Columbia in estimating fair values of financial instruments as
disclosed herein:
Cash and cash equivalents. The carrying amounts of cash and short-term
instruments approximate their fair value.
Held-to-maturity and available-for-sale securities. Fair values for
investment securities, excluding restricted equity securities, are based on
quoted market prices. The carrying values of restricted equity securities
approximate fair values.
Loans receivable. For variable-rate loans that reprice frequently and have
no significant change in credit risk, fair values are based on carrying values.
Fair values for certain mortgage loans (for example, one-to-four family
residential), credit card loans, and other consumer loans are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. Fair values for
commercial real estate and commercial loans are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values for impaired
loans are estimated using discounted cash flow analyses or underlying collateral
values, where applicable.
Deposit liabilities. The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate, fixed-term
money market accounts and certificates of deposit (CDs) approximate their fair
values at the reporting date. Fair values for fixed-rate CDs are estimated using
a discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on time deposits.
19
[18]
Short-term borrowings. The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings maturing
within 90 days approximate their fair values. Fair values of other short-term
borrowings are estimated using discounted cash flow analyses based on the Banks'
current incremental borrowing rates for similar types of borrowing arrangements.
Long-term debt. The fair values of the Banks' long-term debt are estimated
using discounted cash flow analyses based on the Banks' current incremental
borrowing rates for similar types of borrowing arrangements.
Accrued interest. The carrying amounts of accrued interest approximate their
fair values.
Off-balance-sheet instruments. The Banks' off-balance-sheet instruments
include unfunded commitments to extend credit and standby letters of credit. The
fair value of these instruments is not considered practicable to estimate
because of the lack of quoted market prices and the inability to estimate fair
value without incurring excessive costs.
STOCK OPTIONS. In October 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation." This standard defines a fair value
based method of accounting for an employee stock option or similar equity
instrument. This statement gives entities a choice between recognizing related
compensation expense by adopting the new fair value method or continue to
measure compensation using the intrinsic value approach under Accounting
Principles Board ("APB") Opinion No. 25, the former standard. If the former
standard for measurement were elected, SFAS No. 123 requires supplemental
disclosure to show any significant effects of using the new measurement
criteria. Columbia has elected to continue using the measurement prescribed by
APB Opinion No. 25, and accordingly, this pronouncement has had no effect on
Columbia's financial position or results of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS. In June 1997, the FASB issued SFAS No.
130 "Reporting Comprehensive Income" which Columbia is required to adopt for
years beginning after December 15, 1997. This statement establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general purpose financial
statements. This statement requires that Columbia recognize the unrealized gain
or loss on available-for-sale securities as a component of comprehensive income.
Other issued but not yet required FASB statements are not currently
applicable to Columbia's operations. Management believes these pronouncements
will have no material effect upon Columbia's financial position or results of
operation.
RECLASSIFICATIONS. Certain reclassifications have been made
to the 1997 and 1996 financial statements to conform with current
year presentations.
NOTE 2 -- ACQUISITION OF VALLEY COMMUNITY BANCORP
Effective November 30, 1998, Columbia completed its acquisition of Valley
Community Bancorp and its wholly-owned subsidiaries, VCB and Valley Community
Mortgage Services, Inc., headquartered in McMinnville, Oregon. As consideration
for the acquisition, Columbia paid $15.1 million in exchange for all of the
outstanding common and preferred stock held by shareholders of Valley Community
Bancorp. Following the acquisition, Valley Community Bancorp was effectively
dissolved and its subsidiaries became direct subsidiaries of Columbia. As of
December 31, 1998, substantially all activity is conducted through VCB. Valley
Community Mortgage Services, Inc. was not engaged in any business activities in
1998.
The business combination has been accounted for as a purchase for accounting
purposes. Accordingly, under generally accepted accounting principles, the
assets and liabilities of Valley Community Bancorp have been recorded by
Columbia at their respective fair market values as of the effective date of the
acquisition. As a result, goodwill, which is the excess of the purchase price
over the net fair value of the assets acquired and liabilities assumed, was
recorded at $9,339,217. Amortization of goodwill over a 15-year period will
result in a charge to earnings of approximately $629,000 per year. The following
summarizes the fair values of the assets acquired and liabilities assumed as of
the November 30, 1998 acquisition date (in thousands):
Cash and due from banks $14,334
Investment securities 5,863
Restricted equity securities 292
Loans,net 20,020
Premises and equipment, net 1,587
Accrued interest and other assets 460
Goodwill 9,339
-------
Total assets $51,895
=======
Deposits $34,537
Notes payable 1,374
Accrued interest and other liabilities 882
-------
Total liabilities 36,793
Cash paid for acquisition 15,102
-------
Total liabilities assumed and cash paid for acquisition $51,895
=======
The financial statements for the year ended December 31, 1998, include the
operations of VCB from December 1, 1998 to December 31, 1998. The following
information presents the pro forma results of operations for the years ended
December 31, 1998 and 1997, as though the acquisition had occurred on January 1,
1997. The pro forma results do not necessarily indicate the actual result that
would have been obtained nor are they necessarily indicative of the future
operations of the combined companies.
YEARS ENDED DECEMBER 31,
-----------------------------
UNAUDITED PRO FORMA
(in thousands) 1998 1997
---------- ----------
Net interest income before provision for loan loss $ 16,137 $ 13,783
Net income $ 5,446 $ 4,054
Earnings per common share:
Basic $ 0.80 $ 0.52
Diluted $ 0.78 $ 0.51
20
[19]
NOTE 3 --INVESTMENT SECURITIES
The book value and approximate market values of Columbia's investment
securities at December 31, 1998 and 1997, are summarized as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
December 31, 1998
AVAILABLE FOR SALE SECURITIES
U.S. Treasury securities $ 4,794,749 $ 39,640 $-- $ 4,834,389
Obligation of U.S.
government agencies 23,092,877 91,876 (16,546) 23,168,207
Corporate debt securities 604,896 230 (93) 605,033
Corporate equity securities 300,000 -- -- 300,000
Municipal securities 558,786 354 -- 559,140
------------ ------------ ------------ ------------
$ 29,351,308 $ 132,100 $ (16,639) $ 29,466,769
============ ============ ============ ============
HELD-TO-MATURITY SECURITIES
Mortgage-backed securities $ 973,836 $ 792 $ (2,148) $ 972,480
Municipal securities 16,336,386 472,033 (12,207) 16,796,212
------------ ------------ ------------ ------------
$ 17,310,222 $ 472,825 $ (14,355) $ 17,768,692
============ ============ ============ ============
December 31,1997
AVAILABLE FOR SALE SECURITIES
U.S. Treasury securities $ 3,210,274 $ 6,017 $ (2,996) $ 3,213,295
Obligation of U.S.
government agencies 26,929,960 72,640 (59,483) 26,943,117
Corporate debt securities 853,967 149 (645) 853,471
Corporate equity securities 300,000 -- --- 300,000
------------ ------------ ------------ ------------
$ 31,294,201 $ 78,806 $ (63,124) $ 31,309,883
============ ============ ============ ============
HELD-TO-MATURITY SECURITIES
Mortgage-backed securities $ 156,509 $ 1,833 $ (2,641) $ 155,701
Municipal securities 16,571,527 356,342 (70) 16,927,799
------------ ------------ ------------ ------------
$ 16,728,036 $ 358,175 $ (2,711) $ 17,083,500
============ ============ ============ ============
The amortized cost and estimated market value of investment securities at
December 31, 1998, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
AVAILABLE FOR SALE HELD-TO-MATURITY
-------------------------- --------------------------
COST MARKET COST MARKET
----------- ----------- ----------- -----------
Due in one year or less $ 4,568,194 $ 4,574,263 $ 3,382,551 $ 3,415,655
Due after one year through five years 23,483,704 23,591,913 6,233,726 6,423,050
Due after five years through ten years 999,410 1,000,593 2,038,647 2,091,962
Due after ten years -- -- 5,655,298 5,838,025
----------- ----------- ----------- -----------
29,051,308 29,166,769 17,310,222 17,768,692
Corporate equity securities 300,000 300,000 -- --
----------- ----------- ----------- -----------
$29,351,308 $29,466,769 $17,310,222 $17,768,692
=========== =========== =========== ===========
For the purpose of the maturity table, mortgage-backed securities, which are
not due at a single maturity date, have been allocated over maturity groupings
based on the weighted-average contractual maturities of underlying collateral.
Mortgage-backed securities mature earlier than their weighted-average
contractual maturities because of principal prepayments.
Effective with Columbia's acquisition of Klickitat (see Note 1), Columbia
reclassified certain investments in debt securities, held by Klickitat, from
held-to-maturity to available-for-sale to maintain its existing interest rate
risk position and credit risk policy as permitted by financial accounting
standards. At the time of transfer, the investment securities had an amortized
cost of $25,242,573 and an estimated market value of $25,205,592. Recognition of
the market value of the transferred investment securities resulted in an after
tax adjustment to stockholders' equity at December 31, 1997, of $23,991.
As of December 31, 1998 and 1997, investment securities with a book value of
$8,092,616 and $5,337,367 respectively, have been pledged to secure public
deposits as required by law.
NOTE 4 -- RESTRICTED EQUITY SECURITIES
The composition of restricted equity securities is summarized as follows:
1998 1997
---------- ----------
Federal Home Loan Bank stock $ 999,800 $ 756,500
Federal Agriculture Mortgage Corporation stock 9,400 9,400
Federal Reserve Bank stock 108,000 --
---------- ----------
$1,117,200 $ 765,900
========== ==========
NOTE 5 -- LOANS
The loan portfolio consists of the following:
1998 1997
------------- -------------
Commercial $ 41,274,990 $ 38,012,762
Agriculture 34,603,691 22,365,007
Real estate 108,516,555 75,003,128
Consumer 16,568,629 17,385,488
Other loans 933,494 1,989,591
------------- -------------
201,897,359 154,755,976
Less:
Allowance for loan losses (2,380,220) (1,638,633)
Unearned loan fees (783,951) (612,672)
------------- -------------
$ 198,733,188 $ 152,504,671
============= =============
Impairment of loans having recorded investments of $1,906,757 at December
31, 1998, and $1,041,389 at December 31, 1997, have been recognized in
conformity with SFAS No. 114 as amended by SFAS No. 118. The Banks' average
investment in impaired loans, measured on the basis of the present value of
expected future cash flows discounted at the loans' effective interest rate, was
$2,020,428 during 1998 and $461,586 during 1997. The total allowance for loan
losses related to these loans at December 31, 1998 and 1997 was approximately
$293,000, and $221,000, respectively. Had the impaired loans performed according
to their original terms, additional interest income of $113,298, $58,533,
$10,991 would have been recognized in 1998, 1997, and 1996, respectively. No
interest income has been recognized on impaired loans during the period of
impairment.
NOTE 6 -- ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
1998 1997 1996
----------- ----------- -----------
BALANCE, beginning of year $ 1,638,633 $ 994,576 $ 1,071,494
Acquired with the acquisition of
Valley Community Bancorp 410,540 -- --
Provision for loan losses 1,000,000 581,000 246,479
Loans charged-off (766,632) (40.144) (391,873)
Loan Recoveries 97,679 103,201 68,476
----------- ----------- -----------
BALANCE, end of year $ 2,380,220 $ 1,638,633 $ 994,576
=========== =========== ===========
NOTE 7 -- LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
mortgage loans serviced for others was $44,530,731 at December 31, 1998. There
were no mortgage loans serviced for others as of December 31, 1997.
Mortgage servicing rights of $667,961 were capitalized in 1998. Amortization
of mortgage servicing rights was $18,119 for the year then ended.
21
[20]
NOTE 8 -- PROPERTY AND EQUIPMENT
The major classifications of property and equipment are summarized as
follows:
1998 1997
------------ ------------
Land $ 2,019,606 $ 1,049,281
Construction in progress 710,410 --
Buildings and improvements 5,632,191 4,134,478
Furniture and equipment 3,702,965 2,917,131
------------ ------------
12,065,172 8,100,890
Less accumulated depreciation (3,875,104) (2,844,329)
------------ ------------
$ 8,190,068 $ 5,256,561
============ ============
NOTE 9 -- TIME DEPOSITS
Time certificates of deposit of $100,000 and over, aggregated $10,878,017
and $8,937,725 at December 31, 1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities for all time deposits are as
follows:
1999 $52,557,896
2000 10,319,094
2001 1,477,122
2002 432,450
2003 and thereafter 799,321
-----------
$65,585,883
===========
NOTE 10 -- INCOME TAXES
The provision for income taxes consists of the following:
1998 1997 1996
----------- ----------- -----------
Current tax provision
Federal $ 2,225,178 $ 1,901,578 $ 1,280,500
State 411,386 172,668 172,623
----------- ----------- -----------
2,636,564 2,074,246 1,453,123
----------- ----------- -----------
Deferred tax benefit
Federal (165,276) (252,657) (142,785)
State (21,389) (26,113) (25,327)
----------- ----------- -----------
(186,665) (278,770) (168,112)
----------- ----------- -----------
$ 2,449,899 $ 1,795,476 $ 1,285,011
=========== =========== ===========
The components of the deferred tax benefit consists of the following:
1998 1997 1996
--------- --------- ---------
Loan loss provision not deductible for tax $(127,122) $(236,640) $ (92,993)
Difference between book & tax recognition
of deferred loan fees -- -- 34,513
Difference between book & tax depreciation
methods 37,698 36,577 (6,996)
Difference between accrual & cash
basis tax reporting (102,083) (58,547) (71,077)
Deferred compensation expense 7,233 (43,025) (51,908)
Difference between book & tax recognition
of Federal Home Loan Bank stock dividends 22,979 22,865 20,349
Other differences (25,370) -- --
--------- --------- ---------
Deferred tax benefit $(186,665) $(278,770) $(168,112)
========= ========= =========
The net deferred tax asset in the accompanying consolidated balance sheets
consists of the following:
1998 1997
----------- -----------
Deferred tax assets:
Allowance for loan losses $ 725,309 $ 437,156
Net operating loss carryforward 61,471 --
Deferred compensation 221,132 101,849
----------- -----------
1,007,912 539,005
----------- -----------
Deferred tax liabilities:
Accumulated depreciation (581,023) (58,698)
Conversion to accrual basis tax reporting (62,970) --
Federal Home Loan Bank stock dividends (92,497) (76,238)
Other (13,046) (50,898)
(749,536) (185,834)
----------- -----------
Net deferred tax assets $ 258,376 $ 353,171
=========== ===========
Management believes, based upon Columbia's historical performance, that the
deferred tax asset will be realized in the normal course of operations and,
accordingly, management has not reduced deferred tax assets by a valuation
allowance.
As a result of Columbia's acquisition of Valley Community Bancorp, Columbia
recorded an additional net deferred tax liability of $281,460 at November 30,
1998.
The tax provision differs from the federal statutory rate of 34% due
principally to the effect of tax exemptions for interest received on municipal
investments. The 1997 provision for income taxes reflects a reduction in the
state income tax rate from 6.6% to 3.8%.
A reconciliation between the statutory federal income tax rate and the
effective tax rate is as follows:
1998 1997 1996
----------- ----------- -----------
Federal income taxes at statutory rate $ 2,437,036 $ 1,931,841 $ 1,364,039
State income tax expense, net of
federal tax benefit 271,503 126,501 174,757
Effect of nontaxable interest income (255,867) (220,901) (221,674)
Other (2,773) (41,965) (32,111)
----------- ----------- -----------
$ 2,449,899 $ 1,795,476 $ 1,285,011
=========== =========== ===========
34% 32% 32%
NOTE 11 -- TRANSACTIONS WITH RELATED PARTIES
Certain directors, executive officers, and principal stockholders are
customers of and have had banking transactions with the Banks, and the Banks
expect to have such transactions in the future. All loans and commitments to
loan included in such transactions were made in compliance with applicable laws
on substantially the same terms (including interest rates and collateral) as
those prevailing at the time for comparable transactions with other persons and
do not involve more than the normal risk of collectibility or present any other
unfavorable features. The amount of loans outstanding to directors, executive
officers, principal stockholders, and companies with which they are associated
was as follows:
1998 1997
----------- -----------
BALANCE, beginning of year $ 2,297,536 $ 2,967,310
Acquired with Valley Community Bancorp 798,564 --
Loans made 972,945 634,100
Loans repaid (1,247,257) (1,303,874)
----------- -----------
BALANCE, end of year $ 2,821,788 $ 2,297,536
=========== ===========
Columbia has a 28.6% shareholder interest in Datatech of Oregon, Inc.
("Datatech"), a bank service corporation functioning as a data processing
facility for the Banks and five other community banks in Oregon. The investment
in Datatech is accounted for by the cost method. Under this accounting method,
Columbia recognizes income from its investment as dividends are distributed.
Dividends received in excess of earnings are considered a return of investment
and are recorded as reductions of cost of the investment. For the periods ended
December 31, 1998, 1997, and 1996, Columbia's recorded data processing expenses
paid to Datatech were $361,782, $304,456, and $194,696, respectively. Columbia
had prime rate, unsecured loans to Datatech of $167,323 at December 31, 1998,
and $23,353 at December 31, 1997. As of December 31, 1998, Columbia's recorded
investment in Datatech was $66,506.
22
[21]
NOTE 12 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business to meet the financing needs of its
customers, the Banks are a party to financial instruments with off-balance-sheet
risk. These financial instruments include commitments to extend credit and the
issuance of letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the statement of financial position. The contract amounts of those instruments
reflect the extent of involvement the Banks have in particular classes of
financial instruments.
The Banks' exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
letters of credit written is represented by the contractual amount of those
instruments. The Banks use the same credit policies in making commitments and
conditional obligations as they do for on-balance-sheet instruments.
Unless noted otherwise, the Banks do not require collateral or other
security to support financial instruments with credit risk.
CONTRACT AMOUNTS AT DECEMBER 31
-------------------------------
1998 1997
----------- -----------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $50,735,130 $31,314,369
Undisbursed credit card lines of credit 6,329,831 4,707,097
Commercial and standby letters of credit 597,797 287,684
----------- -----------
$57,662,758 $36,309,150
=========== ===========
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained, if deemed
necessary by the Bank upon an extension of credit, is based on management's
credit evaluation of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property and equipment, and income-producing
properties.
Letters of credit written are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third-party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Banks hold cash, marketable
securities or real estate as collateral supporting those commitments for which
collateral is deemed necessary.
NOTE 13 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table estimates fair value and the related carrying values of
Columbia's financial instruments at December 31, 1998 and 1997 (in thousands):
1998 1997
--------------------- ---------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- ---------
FINANCIAL ASSETS
Cash and due from banks $ 53,219 $ 53,219 $ 16,878 $ 16,878
Federal funds sold 12,555 12,555 2,834 2,834
Securities available for sale 29,467 29,467 31,310 31,310
Securities held to maturity 17,310 17,769 16,728 17,084
Restricted equity securities 1,117 1,117 766 766
Loans held for sale 7,819 7,819 2,714 2,714
Loans,net 198,733 204,334 152,505 149,981
FINANCIAL LIABILITIES
Demand and savings deposits 230,095 230,095 154,624 154,624
Time deposits 65,586 65,735 46,944 46,894
Notes payable 9,734 9,734 5,264 5,264
While estimates of fair value are based on management's judgment of the most
appropriate factors, there is no assurance that were Columbia to have disposed
of such items at December 31, 1998 and 1997, the estimated fair values would
necessarily have been achieved at that date, since market values may differ
depending on various circumstances. The estimated fair values at December 31,
1998 and 1997 should not necessarily be considered to apply at subsequent dates.
In addition, other assets and liabilities of Columbia that are not defined
as financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not recognized
in the financial statements nevertheless may have value but are not included in
the above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the earnings potential of loan servicing rights,
the trained work force, customer goodwill, and similar items.
NOTE 14 -- CONCENTRATIONS OF CREDIT RISK
All of the Banks' loans, commitments and commercial and standby letters of
credit have been granted to customers in the Banks' market area. The majority of
such customers are also depositors of the Banks. Investments in state and
municipal securities are not significantly concentrated within any one region of
the United States. The concentrations of credit by type of loan are set forth in
Note 5. The distribution of commitments to extend credit approximates the
distribution of loans outstanding. Commercial and standby letters of credit were
granted primarily to commercial borrowers as of December 31, 1998. The Banks'
loan policies do not allow the extension of credit to any single borrower or
group of related borrowers in excess of $1,000,000 without approval from the
Banks' respective loan committees.
23
[22]
NOTE 15 -- COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments - As of December 31, 1998, Columbia leased
certain properties. The annual commitment for rentals under these noncancellable
operating leases is summarized as follows:
1999 $ 89,290
2000 44,025
----------
$ 133,315
==========
Rental expense for all operating leases was $65,457, $44,510, and $28,303
for the periods ended December 31, 1998, 1997, and 1996, respectively.
Legal Contingencies - Columbia may become a defendant in certain claims and
legal actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, there are no matters
presently known to Columbia that are expected to have a material adverse effect
on the consolidated financial condition of Columbia.
Year 2000 Compliance - The Year 2000 ("Y2K") issue is the result of older
computer programs being written using two digits rather than four to define the
applicable year. A computer program that has date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruption of
operations including, among other things, a temporary inability to process
transactions, send statements, or engage in similar normal business activities.
Based on an assessment of computer hardware, software, and other equipment
operated by Columbia, management presently believes that all equipment and
programs should be Y2K compliant by December 31, 1999. A program for addressing
the Y2K issue through awareness, assessment, renovation and testing has been
developed and implemented. The costs of implementing and completing the
program's phases have not been of a material nature and should continue to not
be material through program completion.
Columbia has initiated formal communications with all significant suppliers
to determine the extent to which they are vulnerable to those third parties'
failures to remedy their own Y2K impact issues. Third-party responses have
generally indicated satisfactory progress in addressing any needs for equipment
or software renovation. Columbia's large customers are also being contacted to
build Y2K awareness and encourage early solutions regarding potential business
disruption due to processing failures. There can be no guarantee that the
systems of other companies on which Columbia's systems rely will be timely
converted, or that a failure to convert by another company, or a conversion that
is incompatible with Columbia's systems, would not have a material adverse
effect on Columbia. However, Columbia will test for the Y2K preparedness of all
internal functions and external functions provided by third parties whenever
possible.
NOTE 16 -- NOTES PAYABLE
The Banks are members of the Federal Home Loan Bank ("FHLB") of Seattle. As
members, the Banks entered into "Advances, Security and Deposit Agreements"
which provide a credit arrangement with FHLB. Borrowings under the credit
arrangement are the Banks' FHLB stock as well as deposits or other instruments
which may be pledged. As of December 31, 1998 and 1997, the Banks had borrowings
outstanding with the FHLB of $8,667,800 and $4,600,000, respectively. The
promissory notes mature in 1999 and 2001 and carry interest rates from 5.30% to
6.00%.
CRB also participates in the U.S. Treasury Department's Treasury Investment
Program which facilitates the acceptance and processing of federal tax deposits.
Under this program, CRB is authorized to accumulate daily tax payments, up to
authorized limits, and deploy the funds in short-term investments. In exchange,
CRB is required to issue a fully collateralized demand note to the Treasury and
pay interest at the federal funds rate minus 25 basis points. As of December 31,
1998 and 1997, CRB had $1,066,295 and $663,824, respectively, outstanding under
this program.
NOTE 17 -- STOCK INCENTIVE PLANS
Columbia maintains a Stock Incentive Plan (the "Plan") originally adopted by
CRB in 1993 prior to Columbia's formation. The Plan allows for the granting of
both incentive stock options and nonstatutory stock options. The option price
for incentive stock options is determined by Columbia's Board of Directors and
cannot be less than 100% of the fair market value of the shares on the date of
grant. The incentive stock options expire ten years from the date of grant. The
option price and duration of options for nonstatutory stock options is
determined by the Board of Directors.
The following, as adjusted for 1998 stock splits and dividends, summarizes
options available and outstanding under this plan as of December 31, 1998:
WEIGHTED
NUMBER AVERAGE
OF OPTIONS EXERCISE PRICE
---------- --------------
Options under grant December 31, 1995 266,100 $ 3.00
Options exercised in 1996:
Incentive stock options (19,968) $ 2.94
Nonstatutory stock options (10,500) $ 3.33
Options expired or forfeited in 1996 (3,600) $ 3.00
--------
Options under grant and excercisable
December 31, 1996 232,032 $ 3.03
Options granted in 1997:
Incentive stock options 129,000 $ 5.58
Nonstatutory stock options 78,000 $ 5.58
Options exercised in 1997:
Incentive stock options (52,244) $ 2.81
Nonstatutory stock options (12,000) $ 5.58
Options expired or forfeited in 1997 (1,800) $ 3.34
-------
Options under grant and exercisable
December 31, 1997 372,988 $ 4.39
Options granted in 1998:
Incentive stock options 5,000 $10.50
Gifted shares in 1998 400 $
Options exercised in 1998:
Incentive stock options (31,000) $ 3.84
Nonstatutory stock options (24,900) $ 4.72
-------
Options under grant and exercisable
December 31, 1998 322,488 $ 4.53
=======
Options reserved, December 31, 1998 78,000
=======
24
[23]
Had compensation cost for Columbia's 1998 and 1997 grants
for stock-based compensation plans been determined consistent
with SFAS No. 123, its net income and net income per common
share for December 31, 1998 and 1997, would approximate the pro
forma amounts below. The disclosure requirements of SFAS No. 123
were not material to the 1996 consolidated financial statements. (In
thousands):
1998 1997
-------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
Net income $4,718 $4,512 $3,887 $3,669
Basic earnings per common share $ 0.67 $ 0.64 $ 0.57 $ 0.54
Diluted earnings per common share $ 0.65 $ 0.62 $ 0.55 $ 0.52
The fair value of each option granted during 1997 is estimated on the date
of grant using the Black-Scholes option pricing model with the following
assumptions: (1) dividend yield of 2.09%, (2) expected volatility of 32.57%,
(3) risk-free rate of 6.36%, and (4) expected life of 3.75 years.
The fair value of each option granted during 1998 is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions: (1) dividend yield of 2.08%, (2) expected volatility of 34.89%,
(3) risk-free rate of 4.55%, and (4) expected life of 3.92 years.
The effects of applying SFAS No. 123 in this pro forma disclo-
sure are not indicative of future amounts. SFAS No. 123 does not
apply to awards prior to 1995, and additional awards in future years
are anticipated.
NOTE 18 -- EMPLOYEE BENEFIT PLANS
Columbia has in place an Employee Stock Ownership Plan ("ESOP") for the
benefit of its employees. The plan allows participation by all employees over
the age of 20 who have also met minimum service requirements. Contributions to
the plan are at the discretion of the Board of Directors and are used to
purchase shares of Columbia's common stock. Employees are not permitted to
contribute individually to the plan but vest in their proportionate share of the
plan interest after six years of participation. For the periods ending December
31, 1998, 1997, and 1996, Columbia contributed $230,000, $222,966 and $163,279,
respectively, to the plan.
The ESOP's assets as of December 31, 1998 and 1997, were as follows:
1998 1997
-------- --------
Allocated shares 284,766 85,400
Cash on hand $ 19,588 $ 12,685
Columbia has also adopted a 401(k) Savings Investment Plan which allows
employees to defer certain amounts of compensation for income tax purposes under
Section 401(k) of the Internal Revenue Code. Essentially, all full-time
employees over the age of 20 and meeting length of service requirements are
eligible to participate in the plan. Employees may elect to defer and
contribute, within statutory limits, up to 10% of their annual compensation into
the plan. Their contributions and those of Columbia, which are limited to 25% of
employee contributions up to 4% of total participant compensation, are invested
by Plan trustees in employee designated funds. For the periods ending December
31, 1998, 1997, and 1996, Columbia contributed $45,474, $31,278, and $21,932,
respectively, to the Plan.
Columbia has established an employee bonus program which provides eligible
participants additional compensation based upon the achievement of annual return
on asset targets established by the Board of Directors. For the periods ending
December 31, 1998, 1997, and 1996, additional compensation of $636,169,
$428,890, and $158,979, respectively, was paid to eligible employees.
Klickitat also maintained a profit sharing plan covering substantially all
employees. The plan provided for a discretionary employer contribution each
year. Klickitat's maximum profit sharing contribution was 15% of taxable
compensation for the year, limited to $150,000. There were no employer or
employee contributions to this plan in 1997 when it was terminated and all
covered employees became eligible under Columbia's plan. The employer
contribution was $111,382 for the year ended December 31, 1996.
Beginning 1996 and as later amended, Columbia entered into both employment
and retirement agreements with its chief executive officer. The employment
agreement provides for the executive's salary and customary benefits until
termination of the agreement in May 2000. The retirement agreement provides
annual post-retirement compensation for a seven-year period after the chief
executive's retirement. A portion of Columbia's obligation under the agreement
has been funded with a $120,000 interest-earning investment and will be paid in
annual installments of $26,000 plus interest earned on invested funds. For the
year ended December 31, 1998, Columbia recorded a liability of $222,757 as its
obligation for current services pursuant to the retirement plan. In the event
employment of the chief executive officer is terminated prior to expiration of
the agreements, all salary and benefits accrued as of the termination date and
all retirement payments provided in the retirement agreement will be paid to the
executive.
During 1996, Klickitat entered into both employment and retirement
agreements with its chief executive officer. Klickitat's chief executive retired
on December 31, 1996, and pursuant to the agreement, will be paid in annual
installments of $60,000. For the year ended December 31, 1998, Columbia recorded
a liability of $60,000 as its remaining obligation for services pursuant to this
retirement agreement.
25
[24]
NOTE 19 -- EARNINGS PER SHARE
In 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which is
effective for financial statements issued for periods ending after December 15,
1997. SFAS No. 128 replaced standards for computing and presenting earnings per
share and requires a dual presentation of basic and diluted earnings per share.
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the year. Diluted earnings per share reflect the potential
dilution that could occur if common shares were issued pursuant to the exercise
of options under existing stock option plans. Comparative earnings per share
data for the years ended December 31, 1998, 1997 and 1996 have been restated to
conform with the current year presentation. The following table illustrates the
computations of basic and diluted earnings per share for the years ended
December 31, 1998, 1997 and 1996.
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
1998
Basic earnings per share
Income available to common shareholders $4,717,853 7,066,229 $ 0.67
Effect of dilutive securities
Outstanding common stock options -- 172,236
---------- ---------
Income available to common shareholders
plus assumed conversions $4,717,853 7,238,465 $ 0.65
========== ========= ========
1997
Basic earnings per share
Income available to common shareholders $3,886,409 6,813,264 $ 0.57
Effect of dilutive securities
Outstanding common stock options -- 200,225
---------- ---------
Income available to common shareholders
plus assumed conversions $3,886,409 7,013,489 $ 0.55
========== ========= ========
1996
Basic earnings per share
Income available to common shareholders $2,726,871 6,732,393 $ 0.41
Effect of dilutive securities
Outstanding common stock options -- 114,465
---------- ---------
Income available to common shareholders
plus assumed conversions $2,726,871 6,846,858 $ 0.40
========== ========= ========
NOTE 20 -- PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Columbia Bancorp (unconsolidated parent
company only) is as follows:
1998 1997
------------ ------------
ASSETS
Cash $ 180,369 $ 186,018
Investment securities 300,000 300,000
Investment in subsidiaries 25,503,434 22,561,360
Goodwill 9,286,832 --
Other assets 281,411 168,953
------------ ------------
Total assets $ 35,552,046 $ 23,216,331
============ ============
LIABILITIES
Dividend payable $ 476,942 $ 228,845
Deferred compensation 318,884 --
------------ ------------
Total liabilities 795,826 228,845
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 14,125,315 5,528,218
Additional paid-in capital 6,317,732 6,317,732
Retained earnings 14,257,975 11,131,444
Unrealized gain on available-for-sale
investment securities 55,198 10,092
------------ ------------
34,756,220 22,987,486
------------ ------------
Total liabilities and stockholders' equity $ 35,552,046 $ 23,216,331
============ ============
REVENUES
Equity in undistributed (excess
distribution of) earnings
of subsidiary banks $ (3,046,307) $ 3,541,345
Dividends 7,975,000 468,956
EXPENSES
Goodwill and administrative expenses
of subsidiary banks (210,840) (123,892)
------------ ------------
Net income $ 4,717,853 $ 3,886,409
============ ============
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,717,853 $ 3,886,409
Adjustments to reconcile net income
to net cash from operating activities:
Excess distribution of (equity in
undistributed) earnings of subsidiary bank 3,046,307 (3,541,345)
Amortization of goodwill 52,384 -
Changes in other assets and liabilities (7,513) 5,584
------------ ------------
Net cash from operating activities 7,809,031 350,648
============ ============
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from public stock offering, net of costs 8,126,115 -
Cash dividends and fractional share payments (1,343,226) (793,772)
Proceeds from stock options exercised
and sales of common stock 470,982 389,000
------------ ------------
Net cash from financing activities 7,253,871 (404,772)
------------ ------------
cash flows from investing activities
Cash paid, net of cash received from acquisition (15,068,551) -
------------ ------------
Net cash from investing activities (15,068,551) -
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,649) (54,124)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 186,018 240,142
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 180,369 $ 186,018
============ ============
SCHEDULE OF NONCASH ACTIVITIES
Change in unrealized gain (loss) on
available-for-sale securities, net of tax $ 45,106 $ (2,667)
Unrealized gain on securities
transferred from held-to-maturity
to available-for-sale, net of taxes $ - $ 23,991
Cash dividend, payable after year-end $ 476,942 $ 228,845
NOTE 21 -- REGULATORY MATTERS
Banks are subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum requirements can initiate
certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on a bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, banks must meet specific capital
guidelines that involve quantitative measures of the banks' assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. Capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require Columbia and the Banks to maintain minimum amounts and ratios (set forth
in the following table) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined). Management believes, as of December 31, 1998, that
Columbia and the Banks meet all capital adequacy requirements to which they are
subject.
As of the most recent notifications from their regulatory agencies, Columbia
and the Banks were categorized as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as adequately
capitalized, Columbia and the Banks must maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios as set forth in the table on the
following page. There are no conditions or events since that notification that
management believes have changed the institutions' category.
The Banks' actual capital amounts and ratios are also presented in the
following table.
26
[25]
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY CORRECTIVE PROMPT
ACTUAL PURPOSES ACTION
------------------------ ---------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
AS OF DECEMBER 31, 1998
Columbia Bancorp
Total capital to risk
weighted assets $27,588 11.9% $18,544 >=8.0% $23,180 >=10.0%
Tier I capital to risk
weighted assets 25,207 10.9% 9,272 >=4.0% 13,908 >=6.0%
Tier I capital to
average assets 25,207 8.9% 11,283 >=4.0% 14,104 >=5.0%
AS OF DECEMBER 31, 1998
Columbia River Bank
Total capital to risk
weighted assets $22,852 11.3% $16,186 >=8.0% $20,232 >=10.0%
Tier I capital to risk
weighted assets 20,822 10.3% 8,093 >=4.0% 12,139 >=6.0%
Tier I capital to
average assets 20,822 7.7% 10,860 >=4.0% 13,575 >=5.0%
AS OF DECEMBER 31, 1998
Valley Community Bank
Total capital to risk
weighted assets $ 4,812 16.6% $ 2,320 >=8.0% $ 2,900 >=10.0%
Tier I capital to risk
weighted assets 4,449 15.3% 1,160 >=4.0% 1,740 >=6.0%
Tier I capital to
average assets 4,449 8.9% 1,993 >=4.0% 2,491 >=5.0%
AS OF DECEMBER 31, 1997
Columbia Bancorp
Total capital to risk
weighted assets $22,987 13.7% $13,420 >=8.0% $16,775 >=10.0%
Tier I capital to risk
weighted assets 22,977 13.7% 6,710 >=4.0% 10,065 >=6.0%
Tier I capital to
average assets 22,977 10.6% 8,641 >=4.0% 10,801 >=5.0%
AS OF DECEMBER 31, 1997
Columbia River Bank
Total capital to risk
weighted assets $24,190 14.5% $13,382 >=8.0% $16,728 >=10.0%
Tier I capital to risk
weighted assets 22,551 13.5% 6,691 >=4.0% 10,037 >=6.0%
Tier I capital to
average assets 22,551 10.0% 9,028 >=4.0% 11,285 >=5.0%
NOTE 22 -- STOCK OFFERING
During November 1998, Columbia registered 1,000,000 shares of common stock
for sale to the public at a price of $9 per share, for an aggregate offering
price of $9,000,000. All shares were sold, resulting in net proceeds of
$8,126,115, after deducting $873,885 for underwriting discounts and commissions,
legal, accounting, printing fees, and other offering expenses. Net proceeds were
used in connection with Columbia's expansion plans, including the acquisition of
Valley Community Bancorp (see Note 2). Pending such use, the net proceeds were
invested in short-term, investment-grade securities.
INDEPENDENT
AUDITOR'S REPORT
To the Board of Directors of Columbia Bancorp
We have audited the accompanying consolidated balance sheets of Columbia
Bancorp and Subsidiaries as of December 31, 1998 and 1997, and the related
statements of income and comprehensive income, changes in stockholders' equity,
and cash flows for the years ended December 31, 1998, 1997, and 1996. These
financial statements are the responsibility of Columbia Bancorp's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Columbia
Bancorp and Subsidiaries as of December 31, 1998 and 1997, and the results of
its operations and cash flows for the years ended December 31, 1998, 1997, and
1996, in conformity with generally accepted accounting principles.
Moss Adams LLP
Portland, Oregon
January 28, 1999
27
[26]
COLUMBIA BANCORP AND COLUMBIA RIVER BANK BOARD OF DIRECTORS
The directors of Columbia Bancorp and Columbia River Bank bring their
experience in business and community projects to their work as board members.
ROBERT L.R. BAILEY has been a director of Columbia Bancorp since its formation
and a director of Columbia River Bank since 1977. Mr. Bailey is the president
and general manager of Orchard View Farms, Inc., a fruit growing and packing
company headquartered in The Dalles, Oregon.
DENNIS CARVER was elected to the Columbia Bancorp Board in 1997 and was
previously a director of Klickitat Valley Bank since 1984. He was elected to the
Board of Columbia River Bank in 1996. He has worked as a chiropractor in
Goldendale, Washington, since 1973, and presently runs the Goldendale
Chiropractic Clinic.
DONALD T. MITCHELL has been a director of Columbia Bancorp since its inception
and has served as Chairman since December 18, 1998. He was a director of Juniper
Banking Company. Since 1982, he has been a partner in Lacy Forest Products, a
lumber brokerage firm.
CHARLES F. BEARDSLEY has served as a director of Columbia Bancorp since its
formation, and as a director of Columbia River Bank since April 1994. Since 1972
Mr. Beardsley has been a principal owner of Hershner & Bell Realty, a real
estate brokerage firm, and of Hershner & Bell-Farrell Agency, an insurance
agency, both in Hood River, Oregon.
WILLIAM A. BOOTH has served as a director of Columbia Bancorp since its
formation, and as a director of Columbia River Bank since 1977. Since 1968 Mr.
Booth has been a principal in Booth & Kelly Insurance and Real Estate, a real
estate and insurance agency in The Dalles, Oregon.
TERRY L. COCHRAN has been a director and Chief Executive Officer of Columbia
Bancorp since its inception and has been Columbia River Bank's Chief Executive
Officer and a director since 1981. After Columbia Bancorp acquired Valley
Community Bank in 1998, he was elected to the board of that bank.
JANE F. LEE was elected to the Columbia Bancorp Board in 1977 and has been a
director of Klickitat Valley Bank since 1987. She was elected to the board of
Columbia River Bank in 1996. She has worked in cattle ranching and hay
operations since 1972, and is the president of the Washington State Association
of Cattle Women.
JEAN MCKINNEY has been a director of Columbia Bancorp since its formation, and
has been a director of Columbia River Bank since April 1994. Ms. McKinney has
served for over 20 years as president and business manager of McKinney Ranches,
Inc., a grain farming business in Wasco, Oregon.
JAMES B. ROBERSON was elected to the Columbia Bancorp Board in 1998 and has been
a director of Klickitat Valley Bank since 1977. He became a director of Columbia
River Bank in 1996. Prior to his retirement in 1996, Mr. Roberson was an
optometrist in the Bingen/White Salmon, Washington area for 34 years.
GREG WALDEN has been a director of Columbia Bancorp since its formation, and has
been director of Columbia River Bank since April 1994. Congressman Walden was
elected to the U.S. House of Representatives in 1998. Since 1986, he has served
as president of Columbia Gorge Broadcasters, Inc. in Hood River, Oregon.
TED M. FREEMAN was director of Juniper Banking Company for eight years. He
served as chairman of its Board for a number of years prior to its merger with
Columbia River Bank, and became a director of Columbia River Bank following the
merger. Prior to his retirement in 1993, Mr. Freeman managed a seed, fertilizer,
and grain business for 35 years.
[PHOTOGRAPH]
Pictured from left to right, front row: Ted Freeman and Jane Lee. 2nd row: Jean
McKinney, James Roberson, Donald Mitchell. 3rd row: Charles Beardsley, Terry
Cochran, Greg Walden, William Booth. Back row; Dennis Carver and Robert Bailey.
28
[27]
[PHOTOGRAPH]
Pictured from left to right, Terry L. Cochran, Dan Corrigan, Ward Eason, Jim
Doran, Ray Kauer and Bruce G. Bryant.
VALLEY COMMUNITY BANK BOARD OF DIRECTORS
DAN CORRIGAN, founding Board Member since 1983 and original Board Chairman. Mr.
Corrigan has lived in the area for several years and operates an insurance
agency and financial planning firm.
JIM DORAN has been a director since 1986 and serves as Vice Chairman. Mr. Doran
operates three local new car dealerships and has been in the McMinnville area
since the early 1980's.
WARD EASON has been a director since 1986 and currently serves as Board
Chairman. Mr. Eason is a part-time farmer and real estate salesman.
RAY KAUER, founding Board member since 1983 and has been actively involved in
the area as a farmer and a real estate developer.
TERRY L. COCHRAN has been a director and Chief Executive Officer of Columbia
Bancorp since its inception and has been Columbia River Bank's Chief Executive
Officer and a director since 1981. After Columbia Bancorp acquired Valley
Community Bank in 1998, he was elected to the Valley Community Bank Board of
Directors.
NORMAN BERNARDS, (not pictured) founding Board Member since 1983 and lifetime
resident of the McMinnville area with extensive family ties in the county.
Formerly owned a local John Deere dealership and has since retired.
[PHOTOGRAPH]
VALLEY COMMUNITY BANK MANAGEMENT TEAM
BRUCE G. BRYANT, (on left) President. Mr. Bryant joined Valley Community Bank in
April 1987 as president and director. He also serves as the loan administrator
and investment officer. He is a graduate of the University of Oregon and has a
MBA from Portland State University.
JON R. JOHNSON, (on right) Vice President & Cashier. Mr. Johnson has been part
of senior management since June 1993, and is responsible for overall operating
activities including data processing and human resources. He is a graduate of
the University of North Dakota with a business degree.
RICK A. ANDERSEN, (not pictured) Vice President/Loans. Mr. Andersen joined the
bank in 1997 as a lending officer. He holds a business degree from Iowa State
University.
29
[28]
COLUMBIA BANCORP AND COLUMBIA RIVER BANK EXECUTIVE OFFICERS
TERRY L. COCHRAN, President and Chief Executive Officer. Mr.
Cochran has been a director and Chief Executive Officer of Columbia
Bancorp since its inception and has been Columbia River Bank's Chief
Executive Officer and a director since 1981. After Columbia Bancorp
acquired Valley Community Bank in 1998, he was elected to the board
of Valley Community Bank. He holds an A.A. degree from Yakima Valley
College, a B.A. degree in Business Administration from Washington State
University, and is a graduate of Pacific Coast Banking School at the
University of Washington.
JAMES C. MC CALL, Executive Vice President and Chief Lending
Officer of Columbia River Bank. Mr. McCall has been employed by CRB
since April 1982, and performed the duties of Chief Lending Officer
Since November 1988. He holds a B.S. degree in Business from Oregon
State University, and is a 1993 graduate of the Pacific Coast Banking
School at the University of Washington. Mr. McCall has 29 years of
banking experience. He presently is a director of Network of Oregon
Affordable Housing, and is past Chairman of the Oregon Bankers
Association Lending Committee.
CRAIG J. ORTEGA, Executive Vice President and Head of Community
Banking of Columbia River Bank. Mr. Ortega has performed these
duties since July of 1997. Prior to that, he was manager of CRB's Hood
River branch. He attended Blue Mountain Community College and holds
a B.S. degree in Business Administration from Eastern Oregon State
College, and is a graduate of the Pacific Coast Banking School at the
University of Washington.
NEAL T. MC LAUGHLIN, Executive Vice President and Chief Financial
Officer of Columbia Bancorp and Columbia River Bank. Mr.
McLaughlin has performed these duties since July of 1997. He has held
a number of positions with CRB and most recently was Vice President
and Controller. He holds a B.S. degree in Accounting from the University
of Oregon, and is also a Certified Public Accountant in the State of
Oregon. He is a graduate of the Northwest Intermediate Banking School
and the Northwest Intermediate Commercial Lending School, and has
attended the Pacific Coast Banking School at the University of Washing-
ton. Mr. McLaughlin is a member of the Financial Officers/Investment
Committee of the Oregon Bankers Association.
Pictured from left to right, Terry L. Cochran, James C. McCall, Craig J. Ortega
and Neal T. McLaughlin.
[PHOTOGRAPH]
30
[29]
[PHOTOGRAPH]
Pictured from left to right, Ann Marie Jelderks, Regena Kepler, Phil Hamilton,
Tom McDonald and Charla Herman.
COLUMBIA RIVER BANK DEPARTMENT HEADS
PHIL S. HAMILTON, Vice President of Residential Lending and Manager of Columbia
River Bank Mortgage Group. Phil organized the Mortgage Group in 1997 and is
recognized for his strategic and business planning expertise, team building and
organizational development. Phil's keen understanding and structuring of
strategic real estate alliances has been a proven success in Central Oregon.
Phil is a member of the Board of Realtors, Oregon Mortgage Bankers Association,
National Mortgage Bankers Association and Mount Bachelor Rotary Club.
CHARLA L. HERMAN, Assistant Vice President and Human Resource Director. Charla
was instrumental in setting up the operations of a Human Resource Department in
1992. She has been in banking for 20 years and has extensive knowledge in human
resource management. Charla is currently involved as the Secretary of the
Wahtonka High School Booster Club and Treasurer for the Society of Human
Resource Management.
TOM P. MC DONALD, Vice President & Lending Group Manager. Tom helped organize
the Bend lending group for Columbia River Bank which specializes in construction
and small business lending and relationship management. Tom is a Board member of
the Bend Little League program.
REGENA E. KEPLER, Assistant Vice President and Bankcard Manager. Regena
spearheaded the organization of the bankcard department in 1994. She has been in
banking for 22 years and through this experience has a broad range of knowledge
in operations and management. Regena is an Ambassador for The Dalles Chamber of
Commerce and a Board member of the Northwest Credit Card Association.
ANN MARIE JELDERKS, Vice President and Manager of Financial Services. Ann Marie
helped organize the financial services department in 1990 and is a joint
employee of Primevest. She has 18 years in the investment services area. Her
real estate, business, and teaching background enable her to take an educational
approach to investing. She is currently involved in Rotary and is director of
citizens for the Columbia Gorge Discovery Center.
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COLUMBIA RIVER BANK BRANCH MANAGERS
MIKE TESTERMAN, Asst. Vice President & Branch Manager, Bend. Mike has 11 years
experience in banking including branch operations, internal auditing,
management, consumer, construction and commercial lending. He has been with
Columbia River Bank since 1997. He is active in the COIC Finance Committee,
Central Oregon Economic Development Council and has taught classes for the
American Institute of Banking.
NORM GLOVER, Sr. Vice President & Branch Manager, Goldendale. Norm has 33 years
of banking experience. He is responsible for overall management of the branch's
operations with a primary focus on lending. Norm is an active member of the
Goldendale Chamber of Commerce and Kiwanas Club.
MARSHALL CORNETT, Vice President & Branch Manager, Hood River. With 25 years of
banking experience, Marshall provides key knowledge for reaching sales goals and
optimizing market development. His supervision includes personnel, planning and
results management. Marshall is actively involved with the Hood River Memorial
Hospital Board of Directors and many community volunteer groups.
KYLE SAGER, Vice President & Branch Manager, Redmond. Kyle has nearly 40 years
of banking experience. His extensive background provides a large network of
knowledge, benefiting his co-workers and customers. Kyle is a member of the
Executive Committee for the Redmond Economic Development Assistance Partnership,
and a board member of the Redmond Rotary Club.
GARY HERTEL, Sr. Vice President & Branch Manager, The Dalles. Gary puts his 30
years of banking experience to use as he effectively manages a large
commercial/agricultural loan portfolio. Gary has been a member of the Lions Club
for 27 years, a member of The Dalles Chamber of Commerce, and an active
supporter of local youth sport programs.
BILL HUMPHREYS, Vice President & Branch Manager, White Salmon. Bill is a fourth
generation banker, with eight years banking experience. A graduate of the
University of Oregon, he is now attending the University of Wisconsin Graduate
School of Banking. Bill joined Klickitat Valley Bank as its manager in April
1997. He serves on the Skyline Hospital Foundation Board and is a member of the
White Salmon Rotary.
PETE MCCABE, Vice President & Branch Manager, Madras. Pete is a native Central
Oregonian with 14 years banking experience. He graduated with honors from the
Northwest Agriculture Credit School. He is also a graduate of the Northwest
Intermediate Banking School. Pete is an active member of the Lions Club and an
advisory board member for Madras High School's business department. He is also
chairman for the Oregon Banker's Association Ag Committee.
Sandi Olson, Asst. Vice President & Branch Manager, The Dalles, Westside Branch.
Sandi has 17 years experience in the banking industry and provides her expertise
in customer relations, sales and loans. She is a member of the Regional
Strategies Board, serves on the budget committees for Columbia Gorge Community
College and the Port of The Dalles and is a director of citizens for the
Columbia Gorge Discovery Center.
SHANE CORREA, Vice President & Branch Manager, Hermiston. Shane was instrumental
in setting up and opening the Hermiston branch, and leads his team in commercial
and agricultural lending as well as overall management of the branch. Shane is
involved in the Pendleton Rotary Club and is a member of the Greater Eastern
Oregon Development Corporation Loan Committee.
HAP COOLEY, Vice President & Branch Manager, Pendleton. Hap was instrumental in
setting up and opening the Pendleton branch. He has 27 years of banking
experience and provides extensive experience in management, sales and
operations. Hap is currently on the Board of St. Anthony Hospital, the executive
committee for the City of Pendleton Economic Development, and a member of the
Pendleton Chamber of Commerce.
Pictured from left to right, front: Gary Hertel, Sandi Olson, Marshall Cornett.
Back: Hap Cooley, Pete McCabe, Bill Humphreys, Shane Correa and Kyle Sager. Not
pictured: Norman Glover and Mike Testerman.
[PHOTOGRAPH]
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BANKING SERVICES OTHER SERVICE LOCATIONS
PERSONAL DEPOSIT BUSINESS DEPOSIT SERVICES MAUPIN (ATM Only)
SERVICES Regular Business Checking Deschutes Avenue
Regular Checking Interest Business Checking Maupin, Oregon 97037
Interest Checking Merchant Visa and Mastercard
Budget Checking Business Money Market VALLEY COMMUNITY BANK
Senior Citizen Checking Analysis Checking Hillside Manor Retirement Center
Money Market Account 900 NW Hill Road
Statement Savings CONVENIENCE SERVICES McMinnville, Oregon 97128
Minor Savings 24 Hour ATM 503/435-0371
Time Certificates of Deposit 24 Hour Telephone Banking
Safe Deposit Boxes Mail Banking COLUMBIA RIVER BANK MORTGAGE GROUP
Visa Check Card (Debit Card) Automatic Direct Deposit 1701 NE Third Street, Suite B
Official Checks Automatic Loan Payments Bend, Oregon 97701
Overdraft Protection Drive-Up Tellers 541/330-0261
Wire Transfers
LOAN SERVICES COLUMBIA RIVER BANK LENDING GROUP
Personal Loans 1701 NE Third Street, Suite C
Line Plus+ Bend, Oregon 97701
Credit Life Insurance 541/617-6061
Mortgage Loans
Business Loans PRIMEVEST FINANCIAL SERVICES, INC.
Term Loans 316 E. Third Street
Credit Lines The Dalles, Oregon 97058
Equipment Financing 541/298-6646
Construction Financing
Equity Lines of Credit SHEVLIN CENTER BRANCH (Opening mid-1999)
Automobile Loans 925 SW Emkay Drive
Bend, Oregon 97701
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CORPORATE AND SHAREHOLDER INFORMATION
STOCK TRADING MARKET ADMINISTRATION VALLEY COMMUNITY BANK
ADMINISTRATIVE OFFICE
Columbia Bancorp common stock is quoted COLUMBIA BANCORP AND 723 N. Baker
on the NASDAQ National Market under the COLUMBIA RIVER BANK McMinnville, Oregon 97128
symbol CBBO. ADMINISTRATIVE OFFICE 503/472-0534
420 E. Third Street, Suite 200 fax: 503/472-0538
TRANSFER AGENT PO Box 1050
The Dalles, Oregon 97058 MCMINNVILLE --
Shareholder Relations 541/298-6649 VALLEY COMMUNITY BANK
Norwest Bank Minnesota, NA fax: 541/298-3157 723 N. Baker
PO Box 64854 McMinnville, Oregon 97128
St. Paul, Minnesota 55164-0854 BANKING OFFICES 503/472-0534
1-800-468-9716
OREGON HERMISTON
OUTSIDE COUNSEL THE DALLES 1055 S. Hwy. 395, Suite 323
Bennett H. Goldstein 316 E. Third Street PO Box 827
Attorney At Law PO Box 1030 Hermiston, Oregon 97838
2548 SW St. Helens Court The Dalles, Oregon 97058 541/564-6800
Portland, Oregon 97201 541/298-6647
PENDLETON
INDEPENDENT AUDITORS THE DALLES WESTSIDE 16 SE Court Avenue
Moss Adams, LLP 520 Mt. Hood Street PO Box 848
1001 SW Fifth Avenue, Suite 1700 PO Box 1030 Pendleton, Oregon 97801
Portland, Oregon 97204-1152 The Dalles, Oregon 97058 541/278-1796
541/296-1157
INVESTOR RELATIONS WASHINGTON
Len Cereghino & Company, Oregon HOOD RIVER WHITE SALMON
928 SE 35th Avenue 2650 Cascade Avenue 390 NE Tohomish Street
Portland, Oregon 97214 PO Box 980 PO Box 279
Hood River, Oregon 97031 White Salmon, Washington 98672
541/387-2444 509/493-2500
MADRAS GOLDENDALE
624 SW Fourth Street 202 W. Main Street
PO Box 0 Madras, Oregon 97741 PO Box 167
541/475-7221 Goldendale, Washington 98620
509/773-5716
BEND
1701 NE Third Street
Bend, Oregon 97701
541/330-1701
REDMOND
434 N. Fifth Street
PO Box 520
Redmond, Oregon 97756
541/923-3702
34
[COLUMBIA BANCORP LOGO]
420 EAST THIRD STREET, SUITE 200
PO BOX 1050
THE DALLES, OREGON 97058