SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended DECEMBER 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
[No Fee Required]
Commission File Number 0-20288
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COLUMBIA BANKING SYSTEM, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1422237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1102 BROADWAY PLAZA
TACOMA, WASHINGTON 98402
(Address of principal executive offices) (Zip code)
Registrant's Telephone Number, Including Area Code: (253) 305-1900
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (17 C.F.R. 229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
The aggregate market value of Common Stock held by non-affiliates of registrant
at February 28, 1998 was $204,949,093.
The number of shares of registrant's Common Stock outstanding
at February 28, 1998 was 6,532,242
Documents incorporated by reference and parts of Form 10-K
into which incorporated:
Registrant's Annual Report to Shareholders Parts I and II
for the year ended December 31, 1997
Registrant's definitive Proxy Statement Part III
dated March 18, 1998
CROSS REFERENCE SHEET
Location in Annual Report to Shareholders and Definitive Proxy Statement
of Items required by Form 10-K
Annual Report to Shareholders and
Form 10-K Definitive Proxy Statement
- -------------------------------------------------------- -------------------------------------------------------
Part and Page
Item No. Caption Caption Number
- ----------- ---------------------------------------- ------------------------------------------- --------
PART I ANNUAL REPORT TO SHAREHOLDERS
Item 1 Business
Consolidated Average Balance Sheet Consolidated Five-Year Summary of
and Analysis of Net Interest Income Average Balances and Net Interest Revenue 86
and Expense
Management Discussion and Analysis of
Financial Condition and Results of
Operations ("Management Discussion") 26
Investments Note 4, Notes to Consolidated Financial
Statements 63
Management Discussion - Securities 36
Lending Activities Management Discussion - Loan Portfolio 31
Management Discussion - Nonperforming
Assets 34
Note 5, Notes to Consolidated Financial
Statements 65
Summary of Loan Loss Experience Note 6, Allowance for Loan Losses 66
Management Discussion - Provision and
Allowance for Loan Losses 35
Supervision and Regulation Management Discussion - Capital 43
Item 2 Properties Note 7, Notes to Consolidated Financial
Statements 66
Item 3 Legal Proceedings Note 13, Notes to Consolidated Financial
Statements 73
Annual Report to Shareholders and
Form 10-K Definitive Proxy Statement
- -------------------------------------------------------- -------------------------------------------------------
Part and Page
Item No. Caption Caption Number
- ----------- ---------------------------------------- ------------------------------------------- --------
PART II ANNUAL REPORT TO SHAREHOLDERS
Item 5 Market for the Registrant's Common Management's Discussion - Quarterly Common
Stock and Related Stockholder Matters Stock Prices and Dividend Payments 46
Item 6 Selected Financial Data Consolidated Highlights 16
Consolidated Five-Year Statements of
Operations 84
Consolidated Five-Year Summary of Average
Balances and Net Interest Revenue 86
Item 7 Management's Discussion and Analysis Management Discussion 26
of Financial Condition and Results
of Operations Consolidated Five-Year Summary of Average
Balances and Net Interest Revenue 86
Item 8 Financial Statements and Audited Financial Statements 50
Supplementary Data Note 18, Summary of Quarterly Financial
Information (Unaudited) 80
Item 9 Changes in and Disagreements With Change in Accounting Firms 46
Accountants on Accounting and
Financial Disclosure
PART III DEFINITIVE PROXY STATEMENT
Item 10 Directors and Executive Officers Election of Directors 4
of the Registrant Section 16(a) Beneficial Ownership
Reporting Compliance 15
Item 11 Executive Compensation Executive Compensation 7
Item 12 Security Ownership of Certain Security Ownership of Management 2
Beneficial Owners and
Management
Item 13 Certain Relationships and Related Interest of Management in Certain
Transactions Transactions 15
COLUMBIA BANKING SYSTEM, INC.
FORM 10-K
December 31, 1997
TABLE OF CONTENTS
PART I Page
----
Item 1. Business
General.................................................................................... 1
Strategy................................................................................... 1
Market Area................................................................................ 3
Competition................................................................................ 4
Employees.................................................................................. 4
Executive Officers of the Company.......................................................... 5
Effects of Governmental Monetary Policies.................................................. 6
Consolidated Average Balance Sheet and Analysis of Net Interest Income and Expense......... 6
Consolidated Analysis of Changes in Interest Income and Expense............................ 7
Investments................................................................................ 7
Lending Activities......................................................................... 10
Summary of Loan Loss Experience............................................................ 12
Deposits................................................................................... 13
Significant Financial Ratios............................................................... 14
Short-term Borrowings...................................................................... 14
Supervision and Regulation................................................................. 14
Item 2. Properties................................................................................. 18
Item 3. Legal Proceedings.......................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders........................................ 18
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters................... 18
Item 6. Selected Financial Data.................................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................ 18
Item 8. Financial Statements and Supplementary Data................................................ 19
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure....... 19
PART III
Item 10 Directors and Executive Officers of the Registrant......................................... 19
Item 11. Executive Compensation..................................................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 19
Item 13. Certain Relationships and Related Transactions............................................. 19
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 20
PART I
ITEM 1. BUSINESS
GENERAL
Columbia Banking System, Inc. ("the Company"), a Washington corporation, is a
registered bank holding company whose wholly owned subsidiary, Columbia State
Bank ("Columbia Bank"), conducts a full-service commercial banking business.
Headquartered in Tacoma, Washington, the Company serves small and medium-sized
businesses, professionals and other individuals through 21 banking offices
located in the Tacoma metropolitan area and contiguous parts of the Puget Sound
region of Washington, as well as the Longview and Woodland communities in
southwestern Washington. At December 31, 1997, based on total assets of $864.6
million, the Company was the largest publicly traded bank holding company
headquartered in Washington engaged primarily in commercial banking.
The Company was reorganized and additional management was added in 1993 in order
to take advantage of commercial banking business opportunities resulting from
increased consolidation of banks in the Company's principal market area,
primarily through acquisitions by out-of-state holding companies, and the
resulting dislocation of customers. Since the reorganization, Columbia Bank has
grown from four branch offices at January 1, 1993 to its present 21 branch
offices and has regulatory approval to open four additional branch offices in
its market area. Between January 1, 1993 and December 31, 1997, the Company
increased its consolidated assets to $864.6 million from $198.2 million, its
loans to $685.9 million from $146.2 million and its deposits to $740.4 million
from $151.9 million. While accomplishing this expansion, the Company's asset
quality has improved. At December 31, 1997, the Company's nonperforming assets
constituted 0.20% of total assets, as compared with 0.39%, 0.73%, and 0.94% at
December 31, 1996, 1995 and 1994, respectively. Although nonperforming assets
are currently low, rapid growth could increase future losses. Accordingly, the
Company increased the loan loss provision by $2.0 million in the fourth quarter
of 1997, as well as adding $1.0 million in the second quarter of 1997, and
increasing the monthly provision to $130,000 from $110,000 in April 1997.
The Company's sole subsidiary, Columbia Bank, is a Washington state-chartered
commercial bank, the deposits of which are insured by the Federal Deposit
Insurance Corporation (the "FDIC"). Columbia Bank is subject to regulation by
the FDIC and the Washington State Department of Financial Institutions, Division
of Banks (the "Division"). Although Columbia Bank is not a member of the
Federal Reserve System, the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board") has certain supervisory authority over the Company
which can also affect Columbia Bank.
STRATEGY
Management believes the ongoing consolidation among financial institutions in
Washington has created significant gaps in the ability of large banks operating
in Washington to serve certain customers, particularly the Company's target
customer base of small and medium-sized businesses, professionals and other
individuals. The Company's business strategy is to provide its customers with
the financial sophistication and breadth of products of a regional bank while
retaining the appeal and service level of a community bank. Management believes
that as a result of the Company's strong commitment to highly personalized
relationship-oriented customer service, its varied products, its strategic
branch locations and the long-standing community presence of its managers,
lending officers and branch personnel, it is well positioned to attract new
customers and to increase its market share of loans and deposits.
1
The Company's goal over the next several years is to create a well-capitalized,
customer focused, Pacific Northwest commercial banking institution with a
significant presence in selected markets. The Company intends to effect this
growth strategy through a combination of growth at existing branch offices, new
branch openings (usually following the hiring of an experienced branch manager
and/or lending officer with strong community ties and banking relationships) and
acquisitions. In order to fund its commercial and consumer lending activities
and to allow for increased contact with customers, the Company is establishing a
branch system catering primarily to retail depositors, supplemented by business
banking customer deposits and other borrowings. The Company believes this mix
of funding sources will enable it to expand its commercial lending activities
rapidly while attracting a stable core deposit base. In order to support its
strategy of growth, without compromising its personalized banking approach or
its commitment to asset quality, the Company has made significant investments in
experienced branch, lending and administrative personnel and has incurred
significant costs related to its branch expansion. Although the Company's
expense ratios have improved since 1993, management anticipates that the ratios
will remain relatively high by industry standards for the foreseeable future due
to the Company's aggressive growth strategy and emphasis on convenience and
personal service.
In November and December 1996, the Company issued approximately 1.445 million
additional shares of common stock in a public offering. The issuance raised
approximately $20.7 million in new capital. The Company contributed
approximately $10.0 million of these proceeds to Columbia Bank primarily to
fund additional expansion in Pierce County, and, over the next several years,
into neighboring south King, Thurston, and Kitsap Counties. The remainder was
used to repay a $3.0 million borrowing and for general corporate purposes.
During the first quarter of 1997, the Company opened a second Bellevue branch
and a new branch in the south King County commercial market of downtown Kent.
The Company completed its first bank acquisitions during the fourth quarter of
1997, merging Cascade Bancorp, Inc. ("Cascade") and Bank of Fife ("Fife") into
Columbia Bank, thereby adding three branch office locations. Cascade operated
three banking offices in the south King County market area. Two of the branches
are located in Auburn (a market in which Columbia did not have a branch) and the
third in downtown Kent. Columbia consolidated its Kent branch office into the
Cascade branch location. Fife operated one banking office in downtown Fife, a
commercial market in which Columbia did not have a branch.
At the end of 1997, the Company had twenty-one branches, twelve in Pierce
County, six in King County and three in Cowlitz County. Since beginning its
major Pierce County expansion in August 1993, the Company has grown from four
to twenty-one branches through a combination of internal and external growth by
acquisition. Also, at the end of the year, construction was nearing completion
on two more offices in Tacoma.
The Company opened its twenty-second branch in mid-January 1998, located in the
Westgate area of north Tacoma. The Westgate branch is the thirteenth location
in Pierce County. The next Pierce County branch will open in February 1998,
located at 176th and Meridian in Puyallup. The Company currently has regulatory
approval to open one additional branch in Pierce County and one in King County.
Management continues to pursue opportunities for expansion via a combination of
internal and external growth by acquisition. New branches normally do not
contribute to net income for many months after opening.
In addition to the ongoing expansion of its branch network, the Company
continuously reviews new products and services to give its customers more
banking options. In addition, new technology and services are reviewed for
business development and cost saving.
2
MARKET AREA
The economy of the Company's principal market area, while primarily dependent
upon aerospace, foreign trade and natural resources, including agriculture and
timber, has become more diversified over the past decade as a result of the
success of software companies such as Microsoft and the establishment of
numerous research and biotechnology firms. The Washington economy and that of
the Puget Sound region generally have experienced strong growth and stability in
recent years. The Pierce County Economic Index, a regional publication providing
economic forecasts and commentary, reports that "The 1997 growth rate was
almost twice the twenty-year average growth rate of the local economy.
Continued expansion will take place in 1998, but not at the gallop-like pace of
1997. When 1998 comes to a close, economic activity in Pierce County's economy
will have increased by 10% in just three years."
Pierce County, the area in which the Company's expansion is primarily focused,
is located in the South Puget Sound region. With 12 branch offices in Pierce
County at the end of 1997, and two new branch offices opening during the first
quarter of 1998, the Company is positioning itself to increase its market share
in this County of approximately 674,000 residents, the second largest populated
county in Washington State. Over a year ago, Forbes magazine published its
prediction that the Tacoma area would be among the top twenty-five cities in the
United States in terms of job growth, especially in the area of computers and
semiconductors.
Bellevue, where the Company has two banking offices, is located in an area known
as the "Eastside," a metropolitan area with a population of approximately
215,000 that includes several King County cities located east of Seattle. A
large portion of the Eastside economy is linked to aerospace, construction,
computer software and biotechnology industries. Microsoft is headquartered just
north of Bellevue and several biotech firms are located on the Eastside. In
recent years, the Eastside has experienced relatively rapid growth in population
and employment, and household incomes in the Eastside are among the highest in
Washington.
During 1997, the Company further expanded into neighboring south King County, an
area of several residential communities whose employment base is supported by
light industrial, aerospace, and forest products industries. In early 1997, the
Company opened a branch office in Kent and with the merger of Cascade added two
branches in Auburn, a market where Columbia had no branch offices, and merged
its newly opened Kent branch into Cascade's Kent branch location. The merger
brings the Company's branch office total in south King County to four, including
the Federal Way office which opened during 1995. With its close proximity to
Tacoma, the south King County market area is considered an important natural
extension of the Company's Pierce County market area. The Weyerhaeuser
Corporation maintains its world headquarters in Federal Way, which is located in
south King County adjacent to the King/Pierce County line. The Auburn and Kent
Valley areas to the east of Federal Way are high residential and commercial
growth markets and considered by management to be natural areas of expansion for
the Company.
The Company's market area also includes the Longview and Woodland communities in
southwest Washington. The population of Cowlitz County, in which Longview and
Woodland are located, is approximately 91,000. Cowlitz County's economy has
become more diversified in recent years, but remains materially dependent on the
forest products industry and, as a result, is relatively vulnerable to the
cyclical downturns of that industry as well as environmental disputes.
The Company anticipates continued expansion in Pierce County, north into King
County, south into Thurston County (the location of the state capitol, Olympia),
and northwest into Kitsap County (the location of Bremerton and Port Orchard).
3
Olympia, with a population of approximately 39,000, and the neighboring
community of Lacey, with a population of approximately 28,000, are the principal
cities in Thurston County. The county has an approximate population of 198,000.
The area enjoys a stable economic climate due largely to state government
employment and the proximity of the Fort Lewis Army Base and McChord Air Force
Base. According to the Washington State Almanac (an annual publication of
demographic information of Washington State counties and cities), approximately
40% of the average employment was through federal, state, and local government
agencies. The area also has a significant population of retired military
personnel.
Kitsap County, with a population of approximately 229,000 (sixth largest in the
State), is home to the Bremerton Naval shipyard and the Trident Submarine Base.
Directly west of Seattle across Puget Sound, commuters and visitors are able to
travel by ferry in 30 to 60 minutes to jobs and entertainment in Seattle from
residences in Kitsap County. According to the Washington State Almanac,
approximately 39% of the average employment was government related.
COMPETITION
The Company anticipates that the substantial consolidation among financial
institutions in Washington that has occurred to date will continue, due in part
to recent federal legislation concerning interstate banking. Federal law (see
"Supervision and Regulation -- Other Regulatory Developments") allows mergers or
other combinations, relocations of a bank's main office and branching across
state lines. Many other financial institutions, most of which have greater
resources than the Company, compete with the Company for banking business in the
Company's market area. Among the advantages of some of these institutions are
their ability to make larger loans, finance extensive advertising campaigns,
access international money markets and allocate their investment assets to
regions of highest yield and demand. The Company currently does not have a
significant market share of the deposit-taking or lending activities in the
areas in which it conducts operations, however, its share of commercial bank
deposits in Pierce County has grown substantially over the last several years.
The Company's strategy involves significant expansion throughout the
Tacoma/Pierce County metropolitan area and contiguous parts of the Puget Sound
region of Washington. Although, the Company has been able to compete
effectively in its market areas to date, there can be no assurance that it will
be able to continue to do so in the future.
EMPLOYEES
At December 31, 1997, the Company had 327 full-time equivalent employees. The
Company has placed an increased emphasis and high priority on staff development.
This development involves selective hiring and extensive training (including
customer service training). New hires are selected on the basis of both
technical skills and customer service capabilities. Emphasis has been placed
upon hiring and retaining additional key officers in areas such as lending,
administration and finance. None of the Company's employees are covered by a
collective bargaining agreement with the Company, and management believes that
its relationship with its employees is satisfactory.
4
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information about the executive officers
of the Company.
Has Served as an
Executive Officer of
the Company
Name Age Position Since
- ---------------------------------------------------------------------------------------------------------------
W. W. Philip/1/ 71 Director, Chairman, President and Chief Executive 1993
Officer
Melanie J. Dressel/2/ 45 Executive Vice President - Retail Banking 1997
H. R. Russell/3/ 43 Executive Vice President - Commercial Banking 1996
Donald A. Andersen/4/ 52 Senior Vice President, Senior Loan Production 1996
Officer - Columbia Bank
Julie A. Healy/5/ 42 Senior Vice President, Operations Manager - 1994
Columbia Bank
Gary R. Schminkey/6/ 40 Senior Vice President and Chief Financial Officer 1993
Evans Q. Whitney/7/ 54 Senior Vice President, Human Resources Director 1994
1 Mr. Philip has been a director of the Company since July 1993. He became
President and Chief Operating Officer of the Company and President and Chief
Executive Officer of Columbia Bank in August 1993 when the Company's
reorganization was completed and the Company began operations in Tacoma. In
November 1997, Mr. Philip was appointed Chairman, President and Chief
Executive Officer of the Company and Columbia Bank. Until his retirement in
December 1992, Mr. Philip was Chairman of the Board and Chief Executive
Officer of Puget Sound Bancorp ("PSB") since its inception in 1981 and was
Chairman of the Board and Chief Executive Officer of Puget Sound National
Bank prior to and after the inception of PSB, having served with that
institution for more than 40 years.
2 Ms. Dressel joined Columbia Bank as Senior Vice President -- Private Banking
in June 1993. She was appointed Executive Vice President - Retail Banking for
Columbia Bank in November 1997. Ms. Dressel served as Senior Vice President
and directed the private banking division of Puget Sound National Bank for
nearly five years and was employed by Bank of California for over 14 years.
3 Mr. Russell joined Columbia Bank as Senior Vice President -- Commercial Loans
in October 1993. He was appointed Executive Vice President - Senior Credit
Officer for Columbia Bank in November 1997. Mr. Russell was employed by Puget
Sound National Bank and its successor institution for nearly 14 years, having
served as Vice President -- Commercial Loan Officer from 1991 to 1993.
4 Mr. Andersen joined Columbia Bank as Senior Vice President -- Commercial
Loans in January 1995. Mr. Andersen was employed by Puget Sound National Bank
and its successor institution for nearly 25 years, having served as Vice
President -- Commercial Loan Officer from 1991 to 1995.
5 Ms. Healy joined Columbia Bank as Senior Vice President -- Operations in June
1993. Ms. Healy was employed by Puget Sound National Bank for nearly 12
years, having served as Vice President -- Operations from 1991 to 1993.
6 Mr. Schminkey joined Columbia Bank as Vice President and Controller in March
1993. He was appointed Senior Vice President -- Chief Financial Officer of
Columbia Bank and the Company in 1994. Mr. Schminkey was employed by PSB,
Puget Sound National Bank and its successor institution for nearly 10 years,
having served from 1991 to 1993 as Assistant Vice President -- Assistant
Controller for PSB and during that same period as Vice President --
Accounting and Finance for Puget Sound National Bank and its successor
institution.
5
7 Mr. Whitney joined Columbia Bank as Senior Vice President -- Human Resources
in March 1993. Mr. Whitney is also the Senior Vice President -- Human
Resources of the Company. Mr. Whitney was employed by PSB and Puget Sound
National Bank for nearly 27 years, having served as Senior Vice President --
Human Resources for PSB and Puget Sound National Bank from 1991 to 1993.
All officers are elected by the Board of Directors and serve at the pleasure of
the Board for an unspecified term.
EFFECTS OF GOVERNMENTAL MONETARY POLICIES
Profitability in banking depends on interest rate differentials. In general,
the difference between the interest earned on a bank's loans, securities and
other interest-earning assets and the interest paid on a bank's deposits and
other interest-bearing liabilities is the major source of a bank's earnings.
Thus, the earnings and growth of the Company are affected not only by general
economic conditions, but also by the monetary and fiscal policies of the United
States and its agencies, particularly the Federal Reserve. The Federal Reserve
implements national monetary policy for such purposes as controlling inflation
and recession by its open-market operations in United States government
securities, control of the discount rate applicable to borrowings from the
Federal Reserve and the establishment of reserve requirements against certain
deposits. The actions of the Federal Reserve in these areas influence growth of
bank loans, investments and deposits and also affect interest rates charged on
loans and paid on deposits. The nature and impact of future changes in monetary
policies and their impact on the Company are not predictable.
CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME AND
EXPENSE
For information concerning consolidated daily average balances, along with
average yields for earning assets and average interest rates for interest-
bearing liabilities, see "Consolidated Five-Year Summary of Average Balances and
Net Interest Revenue" at page 86 of the Annual Report to Shareholders for the
year ended December 31, 1997 ("Annual Report"), which is incorporated herein by
reference. See also "Management Discussion and Analysis of Financial Condition
and Results of Operations" ("Management Discussion") beginning at page 26 of the
Annual Report for additional details on various asset and liability categories.
6
CONSOLIDATED ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
The following table sets forth the amounts of the changes in consolidated net
interest income attributable to changes in volume and changes in interest rates
for the Company. Changes attributable to the combined effect of volume and
interest rates have been allocated proportionately to the changes due to volume
and the changes due to interest rates.
1997 Compared to 1996 1996 Compared to 1995
Increase (Decrease) Due to Increase (Decrease) Due to
----------------------------- -------------------------------
(in thousands) Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans:
Commercial business $ 5,532 $ 487 $ 6,019 $ 4,170 $ (872) $3,298
One- to four-family residential (293) 761 468 (34) (359) (393)
Five or more family residential and
commercial properties 6,199 (945) 5,254 3,770 (239) 3,531
Consumer 916 279 1,195 1,059 (268) 791
- ---------------------------------------------------------------------------------------------------------------
Total loans 12,354 582 12,936 8,965 (1,738) 7,227
Securities 1,284 103 1,387 773 112 885
Interest-earning deposits with banks (204) 77 (127) 988 (72) 916
- ---------------------------------------------------------------------------------------------------------------
Total interest revenue $13,434 $ 762 $14,196 $10,726 $(1,698) $9,028
===============================================================================================================
INTEREST EXPENSE
Deposits:
Certificates of deposit $ 2,414 $(168) $ 2,246 $ 2,077 $ 14 $2,091
Savings accounts 158 (47) 111 (21) (7) (28)
Interest-bearing demand 2,185 (137) 2,048 2,192 (254) 1,938
- ---------------------------------------------------------------------------------------------------------------
Total interest on deposits 4,757 (352) 4,405 4,248 (247) 4,001
Federal Home Loan Bank advances 83 (26) 57 506 (95) 411
Other borrowings (106) (67) (173) 12 (57) (45)
- ---------------------------------------------------------------------------------------------------------------
Total interest expense $ 4,734 $(445) $ 4,289 $ 4,766 $ (399) $4,367
===============================================================================================================
INVESTMENTS
For additional information concerning securities (securities available for sale
and held to maturity), see Note 4 of "Notes to Consolidated Financial
Statements" at page 63 of the Annual Report and "Management Discussion -
Securities" at page 36 of the Annual Report, all of which are incorporated
herein by reference.
Securities to be held for indefinite periods of time and not intended to be held
to maturity or on a long-term basis are classified as available for sale and
carried at market value. Unrealized gains and losses are recorded directly to a
component of shareholders' equity. Securities available for sale include
securities that management intends to use as part of its asset/liability
management strategy and that may be sold in response to changes in interest
rates and/or significant prepayment risk.
Securities held to maturity are those securities which the Company has the
ability and intent to hold to maturity. Events which may be reasonably
anticipated are considered when determining the Company's intent to hold
investment securities until maturity. Investment securities are carried at
cost, adjusted for amortization of premiums and accretion of discounts using a
method that approximates the interest method. Gains and losses on the sale of
all securities are determined using the specific identification method.
At December 31, 1997, there were no securities of any issuer that exceeded ten
percent of shareholders' equity.
7
The following table summarizes the amortized cost, gross unrealized gains and
losses and the resulting market value of Company's securities available for sale
for the years ended December 31, 1997, 1996, and 1995.
SECURITIES AVAILABLE FOR SALE Gross Gross
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
December 31, 1997:
U.S. Treasury & government agency $48,178 $ 78 $48,256
Mortgage-backed 7,046 $ (27) 7,019
Other securities 990 14 1,004
- ---------------------------------------------------------------------------------------------------------------
Total $56,214 $ 92 $ (27) $56,279
===============================================================================================================
December 31, 1996:
U.S. Treasury & government agency $40,562 $104 $ (19) $40,647
Mortgage-backed 10,874 (114) 10,760
FHLMC preferred stock 250 8 258
Other securities 249 (3) 246
State and municipal securities 130 3 133
- ---------------------------------------------------------------------------------------------------------------
Total $52,065 $115 $(136) $52,044
===============================================================================================================
December 31, 1995:
U.S. Treasury & government agency $13,891 $ 38 $ (6) $13,923
Mortgage-backed 12,572 (126) 12,446
FHLMC preferred stock 250 8 258
Other securities
State and municipal securities 130 4 134
- ---------------------------------------------------------------------------------------------------------------
Total $26,843 $ 50 $(132) $26,761
===============================================================================================================
The following table provides the carrying values, maturities and weighted
average yields of the Company's securities available for sale at December 31,
1997.
SECURITIES AVAILABLE FOR SALE Maturing
-------------------------------------------------------------------------------
After 5 But
After 1 But Within 10
(dollars in thousands) Within 1 Year Within 5 Years Years After 10 Years Total
-----------------------------------------------------------------------------------------------------------------------
U.S. Treasury
Balance $15,967 $ 3,515 $19,482
Weighted Average Yield 5.76% 6.19% 5.83%
U.S. government agency
Balance 701 19,256 $6,938 $1,879 28,774
Weighted Average Yield 5.96% 6.49% 7.70% 7.39% 6.82%
Mortgage-backed (1)
Balance 5,037 1,982 7,019
Weighted Average Yield 5.37% 6.36% 5.65%
Other Securities
Balance 1,004 1,004
Weighted Average Yield 6.75% 6.75%
- -----------------------------------------------------------------------------------------------------------------------
Total
Balance $21,705 $23,775 $8,920 $1,879 $56,279
Weighted Average Yield 5.67% 6.45% 7.40% 7.39% 6.33%
- -----------------------------------------------------------------------------------------------------------------------
(1) The maturities reported for mortgage-backed securities are based on
contractual maturities and principal amortization.
8
The following table summarizes the recorded value, gross unrealized gains and
losses and the resulting market value of securities held to maturity for the
years ended December 31, 1997, 1996, and 1995.
SECURITIES HELD TO MATURITY Gross Gross
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------
December 31, 1997:
U.S. Treasury & government agency $ 4,743 $ 8 $ 4,751
State and municipal securities 4,191 54 4,245
Other Securities 495 6 501
FHLMC preferred stock 250 7 257
- --------------------------------------------------------------------------------------------------
Total $ 9,679 $75 $ 9,754
==================================================================================================
December 31, 1996:
U.S. Treasury & government agency $ 8,484 $15 $(56) $ 8,443
State and municipal securities 2,482 31 (2) 2,511
Other Securities 655 1 656
- --------------------------------------------------------------------------------------------------
Total $11,621 $47 $(58) $11,610
==================================================================================================
December 31, 1995:
U.S. Treasury & government agency $ 6,731 $40 $(25) $ 6,746
State and municipal securities 2,275 20 (7) 2,288
Other Securities 1,063 4 (5) 1,062
- --------------------------------------------------------------------------------------------------
Total $10,069 $64 $(37) $10,096
==================================================================================================
The following table provides the carrying values, maturities and weighted
average yields of the Company's securities held to maturity at December 31,
1997.
SECURITIES HELD TO MATURITY Maturing
-------------------------------------------------------------------------------
After 5 But
After 1 But Within 10
(dollars in thousands) Within 1 Year Within 5 Years Years After 10 Years Total
-----------------------------------------------------------------------------------------------------------------------
U.S. government agency
Balance $ 998 $3,495 $ 250 $4,743
Weighted Average Yield 6.20% 6.41% 7.00% 6.40%
State and municipal securities *
Balance 441 1,972 1,778 4,191
Weighted Average Yield 7.34% 7.16% 7.02% 7.12%
Other securities
Balance 495 495
Weighted Average Yield 6.77% 6.77%
FHLMC stock
Balance 250 250
Weighted Average Yield 6.72% 6.72%
-----------------------------------------------------------------------------------------------------------------------
Total
Balance $1,689 $5,962 $2,028 $9,679
Weighted Average Yield 5.92% 5.88% 5.19% 5.75%
-----------------------------------------------------------------------------------------------------------------------
* Yields on fully taxable equivalent basis, based on a marginal tax rate of
34%.
9
LENDING ACTIVITIES
The following table sets forth the composition of the Company's loan portfolio
by type of loan at the dates indicated.
(in thousands) December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
Commercial business $270,946 $194,843 $133,885 $ 89,546 $ 56,631
Real estate:
One-to four-family residential 71,095 77,359 77,603 83,582 59,738
Five or more family residential and
commercial properties 206,628 151,179 113,784 80,010 54,796
- -------------------------------------------------------------------------------------------------------------------
Total real estate 277,723 228,538 325,272 253,138 171,165
Real estate construction:
One- to four-family residential 29,695 31,446 32,819 23,462 22,227
Five or more family residential and
commercial properties 33,806 10,724 8,985 4,307 4,945
- -------------------------------------------------------------------------------------------------------------------
Total real estate construction 63,501 42,170 41,804 27,769 27,172
Consumer 74,710 58,249 51,788 38,120 20,436
- -------------------------------------------------------------------------------------------------------------------
Subtotal 686,880 523,800 418,864 319,027 218,773
Less deferred loan fees and other (991) (649) (807) (953) (328)
- -------------------------------------------------------------------------------------------------------------------
Total loans $685,889 $523,151 $418,057 $318,074 $218,445
===================================================================================================================
Loans held for sale $ 4,377 $ 11,341 $ 1,367 $ 1,612 $ 1,777
===================================================================================================================
NOTE: During 1994, as part of its focus on loan quality, management developed
more detailed statistical information on various types of lending. In this
connection, the December 31, 1994 through December 31, 1997 loan balances
in the table above reflect changes in classifications from prior periods.
Due to the impracticality of developing similar information for prior
period balances, prior period balances have not been restated and, as a
result, are not comparable with balances at December 31, 1994 through
December 31, 1997.
The following table presents at December 31, 1997, (i) the aggregate maturities
of loans in each major category of the Company's loan portfolio and (ii) the
aggregate amounts of variable and fixed rate loans that mature after one year.
SECURITIES AVAILABLE FOR SALE Maturing
------------------------------------------------------------
After 1 But
(in thousands) Within 1 Year Within 5 Years After 5 Years Total
-----------------------------------------------------------------------------------------------------
Commercial business $169,382 $87,771 $13,793 $270,946
Real estate construction 59,299 1,866 2,335 63,501
- ------------------------------------------------------------------------------------------------------
Total $228,681 $89,637 $16,128 $334,447
======================================================================================================
Fixed rate loans $38,722 $ 4,331 $ 43,053
Variable rate loans 50,915 11,797 62,712
- ------------------------------------------------------------------------------------------------------
Total $89,637 $16,128 $105,765
======================================================================================================
10
Risk Elements
Risk elements consist of: (i) nonaccrual loans, which are loans placed on a
nonaccrual basis generally when the loan becomes past due 90 days or when there
are otherwise serious doubts about the collectibility of principal or interest;
(ii) restructured loans, for which concessions, including the reduction of
interest rates below a rate otherwise available to that borrower or the deferral
of interest or principal, have been granted due to the borrower's weakened
financial condition (interest on restructured loans is accrued at the
restructured rates when it is anticipated that no loss of original principal
will occur); (iii) accruing loans which are contractually past due ninety days
or more as to interest or principal payments; and (iv) potential problem loans,
which are currently performing and are not included in nonaccrual or
restructured loans, but about which there are serious doubts as to the
borrower's ability to comply with present repayment terms and, therefore, will
likely be included later in nonaccrual, past due or restructured loans.
The following table sets forth, at the dates indicated, information with respect
to nonaccrual loans, restructured loans, total nonperforming loans (nonaccrual
loans plus restructured loans), real estate owned ("REO"), total nonperforming
assets, accruing loans past-due 90 days or more and potential problem loans of
the Company.
(in thousands) December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
Nonaccrual $1,462 $2,256 $ 449 $ 452 $1,631
Restructured 20 25 29 44 94
- ------------------------------------------------------------------------------------------------------------------
Total nonperforming loans $1,482 $2,281 $ 478 496 1,725
Real estate owned 231 484 3,304 3,227 3,305
- ------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $1,713 $2,765 $3,782 $3,723 $5,030
==================================================================================================================
Accruing loans past-due 90 days or more $ 111 $ 154 $ 82 $ 2
==================================================================================================================
Potential problem loans $ 669 $ 346 $ 239
==================================================================================================================
For information pertaining to risk elements, see the appropriate sections in
"Management Discussion - Loan Portfolio" beginning at page 31 of the Annual
Report, "Management Discussion - Nonperforming Assets" beginning at page 34 of
the Annual Report and Note 5 of "Notes to Consolidated Financial Statements"
beginning at page 65 of the Annual Report, all of which are incorporated herein
by reference.
11
SUMMARY OF LOAN LOSS EXPERIENCE
The following table provides an analysis of net losses by loan type for the last
five years.
(dollars in thousands) December 31, 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
Total loans, net at end of period $685,889 $523,151 $418,057 $318,075 $218,448
Daily average loans 613,671 473,887 373,560 264,761 170,701
- ----------------------------------------------------------------------------------------------------------------------
Balance of allowance for loan losses
at beginning of period $ 5,282 $ 4,340 $ 3,175 $ 2,354 $ 1,792
Charge-offs:
One- to four-family residential (364) (7)
Commercial business (1,025) (514) (148) (258) (87)
Consumer (270) (199) (119) (111) (47)
- ----------------------------------------------------------------------------------------------------------------------
Total charge-offs (1,659) (720) (267) (369) (134)
Recoveries:
One- to four-family residential 1 7
Commercial business 43 17 45 83 56
Consumer 47 3 5 5
- ----------------------------------------------------------------------------------------------------------------------
Total recoveries 91 27 50 83 61
- ----------------------------------------------------------------------------------------------------------------------
Net charge-offs (1,568) (693) (217) (286) (73)
Provision charged to expense 4,726 1,635 1,382 1,107 635
- ----------------------------------------------------------------------------------------------------------------------
Balance of allowance for loan losses
at end of period $ 8,440 $ 5,282 $ 4,340 $ 3,175 $ 2,354
======================================================================================================================
Ratio of net charge-offs during period
to average loans outstanding 0.26% 0.15% 0.06% 0.11% 0.04%
======================================================================================================================
In determining the adequacy of the allowance, management considered numerous
factors including the level of nonperforming loans, loan loss experience, credit
concentrations, a review of the quality of the loan portfolio, collateral values
and uncertain economic conditions.
For additional information, see "Management Discussion - Provision and Allowance
for Loan Losses" at page 35 of the Annual Report and Note 6 of "Notes to
Consolidated Financial Statements" beginning at page 66 of the Annual Report,
both of which are incorporated herein by reference.
12
The table below shows the allocation of the Allowance for Loan Losses for the
last five years. The allocation is based on an evaluation of defined loan
problems, historical ratios of loan losses and other factors which may affect
future loan losses in the categories of loans shown.
(dollars in thousands)
December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
Balance at End of Period % of Total % of Total % of Total % of Total % of Total
Applicable to: Amount Loans* Amount Loans* Amount Loans* Amount Loans* Amount Loans*
- ------------------------------------------------------------------------------------------------------------------------------
Commercial business $4,109 39.4% $3,403 37.2% $2,006 32.0% $1,537 28.1% $ 421 25.9%
Real estate and
construction:
One- to four-family
residential 1,041 14.7 1,115 20.8 699 26.3 773 33.6 513 37.5
Five or more family
residential and
commercial properties 1,414 35.0 490 30.9 330 29.3 249 26.4 560 27.3
Consumer 334 10.9 499 11.1 386 12.4 295 11.9 144 9.3
Unallocated 1,542 (225) 919 321 716
- ------------------------------------------------------------------------------------------------------------------------------
Total $8,440 100.0% $5,282 100.0% $4,340 100.0% $3,175 100.0% $2,354 100.0%
==============================================================================================================================
*Represents the total of all outstanding loans in each category as a percent of
total loans outstanding.
DEPOSITS
The following table presents the average balances outstanding and weighted
average interest rate for each major category of deposits:
years ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
(dollars in thousands) Balance Rate Paid Balance Rate Paid Balance Rate Paid
- --------------------------------------------------------------------------------------------------------------------
Interest-bearing demand and
money market accounts $223,514 3.45% $160,020 3.53% $ 97,326 3.82%
Savings accounts 38,301 2.75 32,438 2.91 33,145 2.93
Certificates of deposit 282,899 5.66 240,214 5.73 203,978 5.73
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 544,714 4.55 432,672 4.71 334,449 4.89
Demand and other noninterest-bearing 111,492 74,940 54,878
- --------------------------------------------------------------------------------------------------------------------
Total deposits $656,206 $507,612 $389,327
====================================================================================================================
The following table shows the amount and maturity of certificates of deposit
that had balances of more than $100,000:
(in thousands) December 31, 1997
- -----------------------------------------------------------
Remaining maturity
Three months or less $ 42,432
Over three through six months 21,879
Over six through twelve months 28,288
Over twelve months 8,686
- -----------------------------------------------------------
Total $101,285
===========================================================
13
SIGNIFICANT FINANCIAL RATIOS
Ratios for the last three years, based on daily average balances, are as
follows:
1997 1996 1995
- ------------------------------------------------------------------------
Return on assets 1.21% 0.78% 0.81%
Return on equity 14.41 10.15 9.86
Dividend payout ratio
Equity to assets 8.42 7.67 8.17
SHORT-TERM BORROWINGS
At December 31, 1997, 1996 and 1995, there were no short-term (original maturity
of one year or less) borrowings that exceeded 30 percent of shareholders' equity
at the end of the period.
SUPERVISION AND REGULATION
The Company and Columbia Bank are subject to extensive federal and Washington
state legislation, regulation and supervision. These laws and regulations are
primarily intended to protect depositors and the FDIC rather than shareholders
of the Company. The laws and regulations affecting banks and bank holding
companies have changed significantly over recent years, and there is reason to
expect that similar changes will continue in the future. Any change in
applicable laws, regulations or regulatory policies may have a material effect
on the business, operations and prospects of the Company. The Company is unable
to predict the nature or extent of the effects on its business and earnings that
any fiscal or monetary policies or new federal or state legislation may have in
the future. The following information is qualified in its entirety by reference
to the particular statutory and regulatory provisions described herein.
THE COMPANY
The Company is subject to regulation as a bank holding company within the
meaning of the Bank Holding Company Act of 1956 (the "BHCA"), as amended. As
such, the Company is supervised by the Federal Reserve Board.
The Federal Reserve Board has the authority to order bank holding companies to
cease and desist from unsound practices and violations of conditions imposed by
the Board. The Federal Reserve Board is also empowered to assess civil money
penalties against companies and individuals who violate the BHCA or orders or
regulations thereunder in amounts up to $1.0 million per day or order
termination of non-banking activities of non-banking subsidiaries of bank
holding companies, and to order termination of ownership and control of a non-
banking subsidiary by a bank holding company. Certain violations may also
result in criminal penalties. The FDIC is authorized to exercise comparable
authority under the Federal Deposit Insurance Act and other statutes with
respect to state nonmember banks such as Columbia Bank.
The Federal Reserve Board takes the position that a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Board's position that in serving as a source of
strength to its subsidiary banks, bank holding companies should be prepared to
use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary banks
will generally be considered by the Board to be an unsafe and unsound banking
practice or a violation of the Board's regulations of both. The Federal Deposit
Insurance Act requires an undercapitalized institution to submit to the Federal
Reserve Board a capital restoration plan with a guarantee by each company having
control of the bank's compliance with the plan.
14
The BHCA prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of any company which is not a
bank or from engaging in any activities other than those of banking, managing or
controlling banks and certain other subsidiaries, or furnishing services to or
performing services for its subsidiaries. One principal exception to these
prohibitions allows a bank holding company to acquire an interest in companies
whose activities are found by the Federal Reserve Board, by order or by
regulation, to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. The Company must obtain the approval of the
Federal Reserve before it acquires all, or substantially all, of any bank, or
ownership or control of more than 5 percent of the voting shares of a bank.
The Company is required under the BHCA to file an annual report and periodic
reports with the Federal Reserve Board and such additional information as the
Federal Reserve Board may require pursuant to the BHCA. The Board may examine a
bank holding company and any of its subsidiaries and charge the company for the
cost of such an examination.
The Company and any subsidiaries which it may control are deemed "affiliates"
within the meaning of the Federal Reserve Act, and transactions between bank
subsidiaries of the Company and its affiliates are subject to certain
restrictions. With certain exceptions, the Company and its subsidiaries also
are prohibited from tying the provision of certain services, such as extensions
of credit, to other services offered by the Company or its affiliates.
Banking regulations require bank holding companies and banks to maintain a
minimum "leverage ratio" of core capital to adjusted quarterly average total
assets of a least 3%. In addition, banking regulators have adopted risk-based
capital guidelines under which risk percentages are assigned to various
categories of assets and off-balance sheet items to calculate a risk-adjusted
capital ratio. Tier I capital generally consists of common shareholders' equity
(which does not include unrealized gains and losses on securities) less goodwill
and certain intangible assets, while Tier II capital includes the allowance for
loan losses and subordinated debt, both subject to certain limitations.
Regulatory risk-based capital guidelines require Tier I capital of 4% of risk-
adjusted assets and minimum total capital ratio (combined Tier I and Tier II) of
8%. At December 31, 1997, the Company's leverage ratio was 9.33% compared with
10.17% at December 31, 1996. The Company's Tier I and total capital ratios were
10.77% and 11.93%, respectively, at December 31, 1997, compared with 12.51% and
13.48%, respectively, at December 31, 1996.
BANKING SUBSIDIARY
Columbia Bank is a Washington state-chartered commercial bank, the deposits of
which are insured by the FDIC. It is subject to regulation by the FDIC and the
Division. Although Columbia Bank is not a member of the Federal Reserve System,
the Federal Reserve Board's supervisory authority over the Company can also
affect Columbia Bank.
Among other things, applicable federal and state statutes and regulations which
govern a bank's operations relate to minimum capital requirements, required
reserves against deposits, investments, loans, legal lending limits, mergers and
consolidations, borrowings, issuance of securities, payment of dividends,
establishment of branches and other aspects of its operations. The Division and
the FDIC also have authority to prohibit banks under their supervision from
engaging in what they consider to be unsafe and unsound practices.
Columbia Bank is required to file periodic reports with the FDIC and the
Division and is subject to periodic examinations and evaluations by those
regulatory authorities. Based upon such an evaluation, the regulators may
revalue the assets of an institution and require that it establish specific
reserves to compensate for the differences between the regulator-determined
value and the book value of such assets. These examinations must be conducted
every 12 months, except that certain well-capitalized banks may be examined
every 18 months. The FDIC and the Division may each accept the results of an
examination by the other in lieu of conducting an independent examination.
15
As a subsidiary of a bank holding company, Columbia Bank is subject to certain
restrictions in its dealings with the Company and with other companies that may
become affiliated with the Company.
Columbia Bank's deposits are insured by the FDIC through the Bank Insurance Fund
(the "BIF") and the Savings Association Insurance Fund (the "SAIF"). Prior to
enactment of recent legislation and promulgation of regulations thereunder, the
FDIC's annual assessment rate for deposits ranged from 0.0% to 0.27% of insured
deposits for the BIF and 0.23% to 0.31% of insured deposits for the SAIF,
depending on an institution's risk classification. The recent legislation was
enacted to resolve the difference in rates between the two funds. Pursuant to
this legislation, the FDIC adopted regulations lowering the SAIF assessment
rates to a range of 0.04% to 0.31% and then through application of an adjustment
factor further reducing SAIF assessment rates to an effective range of 0.0% to
0.27%. The FDIC has also proposed to maintain the BIF assessment rate within a
range of 0.0% and 0.27% of covered deposits. These rates essentially became
effective October 1, 1996 for certain institutions, such as Columbia Bank. The
legislation also resulted in a one-time special assessment of $612,000 for the
Company. The special assessment, which is tax deductible, was recognized during
the third quarter of 1996. Moreover, the legislation requires assessments on
both SAIF and BIF members in order to service bonds issued in connection with
the government resolution of the savings and loan crisis. This assessment is
not tied to an institution's risk classification. The FDIC has estimated that
through December 31, 1999, an annual assessment of approximately 0.064% of
covered deposits and 0.013% of covered deposits will be assessed upon SAIF- and
BIF-insured deposits, respectively, and from January 1, 2000 through December
31, 2017, the assessment rate will be 0.024% of covered deposits for all insured
institutions. If the deposit insurance funds are merged on January 1, 1999
pursuant to the legislation, then the uniform assessment rate to service the
bonds will apply from that date forward. Management anticipates that its total
assessment rate for deposits deemed to be SAIF-insured will be 0.062% for the
year 1998. Management also anticipates that its total assessment rate for BIF-
insured deposits will be 0.012% for the year 1998. At December 31, 1997,
approximately $253.4 million, or 34.2%, of Columbia Bank's deposits were deemed
to be SAIF-insured under the allocation formula.
Other Regulatory Developments
Congress has enacted significant federal banking legislation in recent years.
Included in this legislation have been the Financial Institution Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). FIRREA, among other
things, (i) created two deposit insurance pools within the FDIC; (ii) permitted
commercial banks that meet certain housing-related asset requirements to secure
advances and other financial services from local Federal Home Loan Banks; (iii)
restructured the federal regulatory agencies for savings associations; and (iv)
greatly enhanced the regulators' enforcement powers over financial institutions
and their affiliates.
FDICIA went substantially farther than FIRREA in establishing a more rigorous
regulatory environment. Under FDICIA, regulatory authorities are required to
enact a number of new regulations, substantially all of which are now effective.
These regulations include, among other things, (i) a new method for calculating
deposit insurance premiums based on risk, (ii) restrictions on acceptance of
brokered deposits except by well-capitalized institutions, (iii) additional
limitations on loans to executive officers and directors of banks, (iv) the
employment of interest rate risk in the calculation of risk-based capital, (v)
safety and soundness standards that take into consideration, among other things,
management, operations, asset quality, interest rate sensitivity, earnings and
compensation, (vi) a five-tiered rating system from well-capitalized to
critically undercapitalized, along with the prompt corrective action the
agencies may take depending on the category, and (vii) new disclosure and
advertising requirements with respect to interest paid on savings accounts.
FDICIA and regulations adopted by the FDIC impose additional requirements for
annual independent audits and reporting when a bank begins a fiscal year with
assets of $500 million or more. Such banks, or their holding companies, are
also required to establish audit committees comprised of directors who are
independent of management. The Company had $588.9 million in assets at December
31, 1996, and thus became subject to the FDIC regulations on January 1, 1997.
The Bank has an Audit Committee of independent directors which meets the audited
financial statement requirements of applicable regulations.
16
Also, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act") provides banks with greater opportunities to
merge with other institutions and to open branches nationwide. The Interstate
Banking Act also allows a bank holding company whose principal operations are in
one state to apply to the Federal Reserve for approval to acquire a bank that is
headquartered in a different state. States cannot "opt out" but may impose
minimum time periods, not to exceed five years, for the target bank's existence.
The Interstate Banking Act also allows bank subsidiaries of bank holding
companies to establish "agency" relationships with their depository institution
affiliates. In an agency relationship, a bank can accept deposits, renew time
deposits, close and service loans, and receive payments for a depository
institution affiliate. States cannot "opt out."
In addition, the Interstate Banking Act allows banks whose principal operations
are located in different states to apply to federal regulators to merge. This
provision took effect June 1, 1997, unless states enact laws to either (i)
authorize such transactions at an earlier date or (ii) prohibit such
transactions entirely. The Interstate Banking Act also allows banks to apply to
establish de novo branches in states in which they do not already have a branch
office. This provision took effect June 1, 1997, but (i) states must enact laws
to permit such branching and (ii) a bank's primary federal regulator must
approve any such branch establishment. The Washington legislature passed
legislation that allows, subject to certain conditions, mergers or other
combinations, relocations of banks' main offices and branching across state
lines in advance of the June 1, 1997 date established by federal law.
Further effects on the Company may result from the Riegle Community Development
and Regulatory Improvement Act of 1994 (the "Community Development Act"). The
Community Development Act (i) establishes and funds institutions that are
focused on investing in economically distressed areas and (ii) streamlines the
procedures for certain transactions by financial institutions with federal
banking agencies.
Among other things, the Community Development Act requires the federal banking
agencies to (i) consider the burdens that are imposed on financial institutions
when new regulations are issued or new compliance burdens are created and (ii)
coordinate their examinations of financial institutions when more than one
agency is involved. The Community Development Act also streamlines the
procedures for forming certain one-bank holding companies and engaging in
authorized non-banking activities.
In addition to the changes to the BIF and SAIF assessment rates implemented by
the legislation which was recently passed as part of the 1996 Omnibus spending
bill, various regulatory relief provisions were enacted. The new legislation
includes, among other things, changes to (I) the Truth in Lending Act and the
Real Estate Settlement Procedures Act to coordinate and simplify the disclosure
requirements of the two laws; (ii) eliminate civil liability for violations of
the Truth in Savings Act after five years; and (iii) streamline the application
process for a number of bank holding company and bank applications; (iv)
establish a privilege from discovery in any civil or administrative proceeding
or bank examination for any fair lending self-test results conducted by, or on
behalf of, a financial institution in certain circumstances; (v) repeal the
FDICIA requirement that independent public accountants attest to compliance with
designated safety and soundness regulations; (vi) impose a continuous regulatory
review of regulations to identify and eliminate outdated and unnecessary rules;
and (vii) various other miscellaneous provisions to reduce bank regulatory
burden.
The foregoing is just a brief summary of certain important statutes and
regulations. It is impossible to determine with any certainty the impact, both
operationally and financially, that enacted and proposed statutes and
regulations will have on the Company and its subsidiary. Implementation of the
new regulations has resulted and will result in initial costs to financial
institutions. In addition, many of the new regulations include additional
reporting requirements which will result in increased and recurring personnel
and other costs.
17
ITEM 2. PROPERTIES
The Company's executive offices and the Main Office of Columbia Bank are located
in approximately 42,000 square feet of leased space in downtown Tacoma. The
lease of the downtown Tacoma office has an initial lease term of seven years.
With an expiration of August 2000, the lease agreement provides for one renewal
option for three years and two additional renewal options for five years each.
The base rent is approximately $38,000 per month for the first four years,
subject to certain increases for landlord operating expenses. Beginning in the
sixth year of the lease and at each five-year renewal date, the base rent may be
adjusted pursuant to a formula which limits the adjustments to an average of 3%
of the base rent per year or 15% of the base rent over the five-year renewal
term. The downtown lease also includes customer and employee parking spaces at
rates at or below current market rates for downtown parking. As of December 31,
1997, Columbia Bank had 12 offices in Pierce County, including the Main Office
(7 leased and 5 owned), two offices in Longview (both owned), two offices in
Bellevue (1 leased and 1 owned), two offices in Auburn (both owned), one office
in Federal Way (owned), one office in Kent (owned) and one office in Woodland
(owned). Commerce Plaza, one of Columbia Bank's banking offices in Longview,
houses a retail banking office and numerous retail and other tenants.
For additional information pertaining to properties, see Note 7 of "Notes to
Consolidated Financial Statements" at page 66 of the Annual Report, which is
incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
For information concerning legal proceedings, see Note 13 of "Notes to
Consolidated Financial Statements" at page 73 of the Annual Report, which is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
For information concerning the Company's common stock and related security
holder matters, see "Quarterly Common Stock Prices and Dividend Payments" at
page 46 of the Annual Report, which is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
For selected financial data concerning the Company, see "Consolidated
Highlights," "Consolidated Five-Year Statements of Operations" and "Consolidated
Five-Year Summary of Average Balances and Net Interest Revenue" at pages 16, 84
and 86, respectively, of the Annual Report, which are incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For management's discussion and analysis, see "Consolidated Analysis of Changes
in Interest Income and Expense" in Part I of this report, "Management Discussion
and Analysis of Financial Condition and Results of Operations" at pages 26
through 47 of the Annual Report and "Consolidated Five-Year Summary of Average
Balances and Net Interest Revenue" at page 86 of the Annual Report, all of which
are incorporated herein by reference.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For consolidated financial statements of the Company, see "Audited Financial
Statements" beginning at page 50 of the Annual Report which is incorporated
herein by reference. Note 18, the "Summary of Quarterly Financial Information
(Unaudited)" on page 80 of the Annual Report is also incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
For information concerning a change in the Company's independent accountant ,
see "Change in Accounting Firms" on page 46 of the Annual Report, which is
incorporated herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors of the registrant is incorporated herein by
reference to the section entitled "Election of Directors" beginning at page 4 of
the Company's definitive Proxy Statement dated March 18, 1998 (the "Proxy
Statement") for the annual meeting of shareholders to be held April 22, 1998.
The required information with respect to the executive officers of the Company
is included under the caption "Executive Officers of the Company" in Part I of
this report. Part I of this report is incorporated herein by reference.
The required information with respect to compliance with Section 16(a) of the
Exchange Act is incorporated herein by reference to the section entitled
"Section 16(a) Beneficial Ownership Reporting Compliance" beginning at page 15
of the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
For information concerning executive compensation see "Executive Compensation"
beginning at page 7 of the Proxy Statement, which is incorporated herein by
reference. Neither the Report of the Personnel and Compensation Committee on
Executive Compensation nor the Stock Performance Graph, both of which are
contained in the Proxy Statement, are incorporated by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning security ownership of certain beneficial owners and
of management see "Security Ownership of Management" beginning at page 2 of the
Proxy Statement, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning certain relationships and related transactions, see
"Interest of Management in Certain Transactions" beginning at page 15 of the
Proxy Statement, which is incorporated herein by reference.
19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
List of Financial Statements and Financial Statement Schedules.
(a) (1) Financial Statements:
The following consolidated financial statements of the Company,
included in the Annual Report of the registrant to its shareholders
for the year ended December 31, 1997, are incorporated by reference in
Item 8:
Page
----
Consolidated Statements of Operations--Years ended
December 31, 1997, 1996 and 1995 50
Consolidated Balance Sheets--December 31, 1997 and 1996 52
Consolidated Statements of Shareholders' Equity--Years ended
December 31, 1997 and 1996 54
Consolidated Statements of Cash Flows--Years ended
December 31, 1997, 1996 and 1995 56
Notes to Consolidated Financial Statements 58
Report of Independent Auditors 49
(2) Exhibits:
See "Index to Exhibits" at page 23 of this Form 10-K.
(b) Reports on Form 8-K:
None
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 19th day of March,
1998.
Columbia Banking System, Inc.
(Registrant)
By /s/ W. W. Philip
--------------------------
W. W. Philip
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated, on the 19th day of March, 1998.
Principal Executive Officer:
/s/ W. W. Philip
--------------------------
W. W. Philip
Chairman, President and
Chief Executive Officer
Principal Financial Officer:
/s/ Gary R. Schminkey
--------------------------
Gary R. Schminkey
Senior Vice President and
Chief Financial Officer
21
W. W. Philip, pursuant to powers of attorney which are being filed with this
Annual Report on Form 10-K, has signed this report on March 19, 1998, as
attorney-in-fact for the following directors who constitute a majority of the
board of directors.
Richard S. DeVine John H. Powell
Jack Fabulich Robert E. Quoidbach
Jonathan Fine Donald Rodman
John P. Folsom Frank H. Russell
Margel S. Gallagher Sidney R. Snyder
John A. Halleran James M. Will
Thomas L. Matson
/s/ W. W. Philip
----------------------
W. W. Philip
Attorney-in-fact
March 19, 1998
22
INDEX TO EXHIBITS
Exhibit
No.
- --------
3 (a) Restated Articles of Incorporation of the Company.(5)
(b) Restated Bylaws of the Company.(3)
10 (a) Lease dated May 7, 1993 between the Company and William B. Swensen
Enterprises for Tacoma Main Office premises of Columbia Bank.(1)
(b) Stock Option Plan as amended and restated effective April 23, 1997.(4)
*(c) Employment agreement between the Company and W. W. Philip effective
January 1, 1998, except with respect to sections 4.3 and 4.4
(granting restricted stock awards) which are effective August 28,
1996 and January 28, 1998, respectively.
(d) Data processing servicing agreement dated May 3, 1993 between the
Company and M&I Data Services.(2)
(e) Deferred Compensation Plan for directors and certain key employees
effective April 1, 1995.
11 Statement re computation of per share earnings.
13 The Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1997.(6)
21 Subsidiaries of the Company
23
24 Powers of Attorney dated February 25, 1998.
27 Financial Data Schedule
(1) Incorporated by reference to the Form SB-2 (Registration No. 33-66224)
previously filed by the Company, declared effective on August 16, 1993.
(2) Incorporated by reference to the Annual Report on Form 10-KSB for the
year ended December 31, 1993 previously filed by the Company.
(3) Incorporated by reference to the Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997 previously filed by the Company.
(4) Incorporated by reference to the definitive Proxy Statement dated March
20, 1997 for the Annual Meeting of Shareholders held April 23, 1997.
(5) Incorporated by reference to the Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997 previously filed by the
Company.
(6) Portions of the Annual Report to Shareholders have been specifically
incorporated by reference elsewhere in this report.
* The listed documents are management contracts which contain compensatory
arrangements.
24