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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission File Number 0-20288
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COLUMBIA BANKING SYSTEM, INC.
- --------------------------------------------------------------------------------
(Exact name of issuer as specified in its charter)
Washington 91-1422237
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1301 "A" Street
Tacoma, Washington 98402
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(253) 305-1900
- --------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
1102 Broadway Plaza
Tacoma, Washington, 98402
- --------------------------------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares of the issuer's Common Stock
outstanding at April 30, 2001 was 11,923,399
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TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Page
----
Item 1. Condensed unaudited Financial statements
Consolidated Condensed Statements of Operations -
three months ended March 31, 2001 and 2000 2
Consolidated Condensed Balance Sheets -
March 31, 2001 and December 31, 2000 3
Consolidated Condensed Statements of Shareholders' Equity -
twelve months ended December 31, 2000, and
three months ended March 31, 2001 4
Consolidated Condensed Statements of Cash Flows -
three months ended March 31, 2001 and 2000 5
Notes to Consolidated Condensed Financial statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
PART II -- OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 22
Signatures 22
1
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
COLUMBIA BANKING SYSTEM, INC.
(UNAUDITED)
Three Months Ended
March 31,
--------------------------
(IN THOUSANDS EXCEPT PER SHARE) 2001 2000
- --------------------------------------------- -------- --------
INTEREST INCOME
Loans $ 26,358 $ 23,343
Securities available for sale 1,477 1,389
Securities held to maturity 68 64
Deposits with banks 744 17
- --------------------------------------------- -------- --------
Total interest income 28,647 24,813
INTEREST EXPENSE
Deposits 13,574 10,009
Federal Home Loan Bank advances 690 891
Other borrowings 114 59
- --------------------------------------------- -------- --------
Total interest expense 14,378 10,959
- --------------------------------------------- -------- --------
NET INTEREST INCOME 14,269 13,854
Provision for loan losses 900 900
- --------------------------------------------- -------- --------
Net interest income after provision
for loan losses 13,369 12,954
NONINTEREST INCOME
Service charges and other fees 1,596 1,528
Mortgage banking 561 155
Merchant services fees 942 772
Loss on sale of investment securities, net (23)
Other 249 138
- --------------------------------------------- -------- --------
Total noninterest income 3,325 2,593
NONINTEREST EXPENSE
Compensation and employee benefits 6,429 5,574
Occupancy 1,621 1,591
Merchant processing 527 394
Advertising and promotion 340 441
Data processing 462 529
Taxes, licenses & fees 546 428
Other 2,007 1,866
- --------------------------------------------- -------- --------
Total noninterest expense 11,932 10,823
- --------------------------------------------- -------- --------
Income before income taxes 4,762 4,724
Provision for income taxes 1,633 1,628
- --------------------------------------------- -------- --------
NET INCOME $ 3,129 $ 3,096
============================================= ======== ========
Net income per common share:
Basic $ 0.27 $ 0.27
Diluted 0.26 0.26
Average number of common
shares outstanding 11,763 11,553
Average number of diluted common
shares outstanding 11,870 11,893
See accompanying notes to consolidated condensed financial statements.
2
CONSOLIDATED CONDENSED BALANCE SHEETS
COLUMBIA BANKING SYSTEM, INC.
(UNAUDITED)
March 31, December 31,
(IN THOUSANDS) 2001 2000
- --------------------------------------------- ---------- ----------
ASSETS
Cash and due from banks $ 62,823 $ 72,292
Interest-earning deposits with banks 20,617 48,153
- --------------------------------------------- ---------- ----------
Total cash and cash equivalents 83,440 120,445
Securities available for sale (at fair value) 86,421 103,287
Securities held to maturity (fair value of
$7,468 and $7,501 respectively) 7,335 7,435
Federal Home Loan Bank stock 8,676 8,539
Loans held for sale 38,666 14,843
Loans, net of unearned income 1,211,100 1,192,520
Less: allowance for loan losses 18,958 18,791
- --------------------------------------------- ---------- ----------
Loans, net 1,192,142 1,173,729
Interest receivable 8,705 10,306
Premises and equipment, net 49,129 48,357
Real estate owned 1,291 1,291
Other 8,066 8,263
- --------------------------------------------- ---------- ----------
Total Assets $1,483,871 $1,496,495
============================================= ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 231,013 $ 232,247
Interest-bearing 1,073,429 1,094,776
- --------------------------------------------- ---------- ----------
Total deposits 1,304,442 1,327,023
Federal Home Loan Bank advances 40,000 40,000
Other borrowings 8,000 4,500
Other liabilities 13,075 11,149
- --------------------------------------------- ---------- ----------
Total liabilities 1,365,517 1,382,672
Shareholders' equity:
Preferred stock (no par value)
Authorized, 2 million shares; none outstanding
March 31, December 31,
Common stock 2001 2000
(no par value) ---------- ----------
Authorized shares 51,975 51,975
Issued and outstanding 11,898 11,867 93,080 92,673
Retained earnings 24,778 21,649
Accumulated other comprehensive income (loss) -
Unrealized gains (losses) on securities
available for sale, net of tax 496 (499)
- --------------------------------------------- ---------- ----------
Total shareholders' equity 118,354 113,823
- --------------------------------------------- ---------- ----------
Total Liabilities and Shareholders' Equity $1,483,871 $1,496,495
============================================= ========== ==========
See accompanying notes to consolidated condensed financial statements.
3
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
COLUMBIA BANKING SYSTEM, INC.
(UNAUDITED)
Common stock Accumulated
---------------------- Other Total
Number of Retained Comprehensive Shareholders'
(IN THOUSANDS) Shares Amount Earnings Income (Loss) Equity
- ---------------------------------------------- --------- --------- --------- ------------- -------------
BALANCE AT JANUARY 1, 2000 10,603 $ 78,285 $ 23,916 $ (2,987) $ 99,214
Comprehensive income:
Net income for 1999 10,070
Change in unrealized gains and
(losses) on securities available
for sale, net of tax of $1,295 2,488
Total comprehensive income 12,558
Issuance of stock under stock option and
other plans 203 1,673 1,673
Tax benefits from exercise of stock options
378 378
Issuance of shares of common stock--
5% stock dividend 1,061 12,337 (12,337)
- ---------------------------------------------- --------- --------- --------- ------------- -------------
BALANCE AT DECEMBER 31, 2000 11,867 92,673 21,649 (499) 113,823
- ---------------------------------------------- --------- --------- --------- ------------- -------------
Comprehensive income:
Net income for 2000 3,129
Change in unrealized gains and
(losses) on securities available
for sale, net of tax of $536 995
Total comprehensive income 4,124
Issuance of stock under stock option and
other plans 31 407 407
- ---------------------------------------------- --------- --------- --------- ------------- -------------
BALANCE AT MARCH 31, 2001 11,898 $ 93,080 $ 24,778 $ 496 $ 118,354
============================================== ========= ========= ========= ============= =============
See accompanying notes to consolidated condensed financial statements.
4
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
COLUMBIA BANKING SYSTEM, INC.
(UNAUDITED)
Three Months Ended
March 31,
-----------------------
(IN THOUSANDS) 2001 2000
- --------------------------------------------------------------------------- --------- ---------
OPERATING ACTIVITIES
Net income $ 3,129 $ 3,096
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 900 900
Depreciation and amortization 297 480
Deferred income tax (benefit) expense 432 (111)
Net realized (gains) losses on sale of assets 16 (1)
Increase in loans held for sale (23,823) (1,745)
Decrease in interest receivable 1,601 13
Net changes in other assets and liabilities 1,221 2,987
- --------------------------------------------------------------------------- --------- ---------
Net cash provided (used) by operating activities (16,227) 5,619
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 46,712
Proceeds from maturities of securities available for sale 14,586 11
Purchases of securities available for sale (29,277)
Proceeds from maturities of mortgage-backed securities available for sale 136 130
Purchase of mortgage-backed securities available for sale (13,761)
Proceeds from maturities of securities held to maturity 100 280
Purchases of securities held to maturity (291)
Purchases of Federal Home Loan Bank stock (137) (1,291)
Loans originated and acquired, net of principal collected (18,841) (53,675)
Purchases of premises and equipment (1,630) (8,869)
Other, net 8 6
- --------------------------------------------------------------------------- --------- ---------
Net cash used by investing activities (2,104) (63,627)
FINANCING ACTIVITIES
Net (decrease) increase in deposits (22,581) 142,598
Net increase in long-term borrowings 3,500 3,500
Net decrease in Federal Home Loan Bank advances (69,300)
Proceeds from issuance of common stock, net 407 172
- --------------------------------------------------------------------------- --------- ---------
Net cash provided by financing activities (18,674) 76,970
- --------------------------------------------------------------------------- --------- ---------
Increase (decrease) in cash and cash equivalents (37,005) 18,962
Cash and cash equivalents at beginning of period 120,445 43,197
- --------------------------------------------------------------------------- --------- ---------
Cash and cash equivalents at end of period $ 83,440 $ 62,159
=========================================================================== ========= =========
Supplemental information:
Cash paid for interest $ 14,005 $ 8,711
Cash paid for income taxes 1,600 1,940
See accompanying notes to consolidated condensed financial statements.
5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
COLUMBIA BANKING SYSTEM, INC.
Columbia Banking System, Inc. (the "Company") is a registered bank holding
company whose wholly owned subsidiary, Columbia State Bank ("Columbia Bank"),
conducts a full-service commercial banking business. Headquartered in Tacoma,
Washington, the Company provides a full range of banking services to small and
medium-sized businesses, professionals and other individuals through banking
offices located in the Tacoma metropolitan area and contiguous parts of the
Puget Sound region of Washington, as well as the Longview and Woodland
communities in southwestern Washington. Substantially all of the Company's
loans, loan commitments and core deposits are geographically concentrated in its
service areas.
1. BASIS OF PRESENTATION
The interim unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for condensed interim financial information and with instructions to
Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all
adjustments consisting only of normal recurring accruals necessary for a fair
presentation of the financial condition and the results of operations for the
interim periods included herein have been made. The results of operations for
the three months ended March 31, 2001, are not necessarily indicative of results
to be anticipated for the year ending December 31, 2001. For additional
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 2000.
2. EARNINGS PER SHARE
Earnings per share ("EPS") is computed using the weighted average number of
common and diluted common shares outstanding during the period. Basic EPS is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. The only
reconciling item affecting the calculation of earnings per share is the
inclusion of stock options and restricted stock awards increasing the shares
outstanding diluted earnings per share of 107,000 and 340,000 for the three
months ended March 31, 2001 and 2000, respectively.
3. BUSINESS SEGMENT INFORMATION
The Company is managed along three major lines of business: commercial banking,
retail banking, and real estate lending. The treasury function of the Company,
although not considered a line of business, is responsible for the management of
investments and interest rate risk.
The principal activities conducted by commercial banking are the delivery of
commercial business and private banking services with the emphasis on commercial
business loans. Retail banking includes all deposit products, with their related
fee income, and all consumer loan products as well as commercial loan products
offered in the Bank's branch offices. Real estate lending includes single-family
residential, multi-family residential, and commercial real estate loans, and the
associated loan servicing activities.
The financial results of each segment were derived from the Company's general
ledger system. Since the Company is not specifically organized around lines of
business, most reportable segments are comprised of more than one operating
segment. Expenses incurred directly by sales and back office support functions
are not allocated to the major lines of business.
6
Since Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information," requires no
segmentation or methodology standardization, the organizational structure of the
Company and its business line financial results are not necessarily comparable
across companies. As such, the Company's business line performance may not be
directly comparable with similar information from other financial institutions.
Financial highlights by lines of business:
CONDENSED STATEMENTS OF OPERATIONS:
THREE MONTHS ENDED MARCH 31, 2001
Commercial Retail Real Estate
(IN THOUSANDS) Banking Banking Lending Other Total
- ----------------------------------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses $ 2,744 $ 8,979 $ 2,450 $ (804) $ 13,369
Other income 146 1,115 576 1,488 3,325
Other expense (670) (4,899) (540) (5,823) (11,932)
- ----------------------------------- ---------- ---------- ---------- ---------- ----------
Contribution to overhead and profit $ 2,220 $ 5,195 $ 2,486 $ (5,139) 4,762
Income taxes (1,633)
- ----------------------------------- ---------- ---------- ---------- ---------- ----------
Net income $ 3,129
=================================== ========== ========== ========== ========== ==========
Total assets $ 332,595 $ 647,622 $ 349,704 $ 153,950 $1,483,871
=================================== ========== ========== ========== ========== ==========
THREE MONTHS ENDED MARCH 31, 2000
Commercial Retail Real Estate
(IN THOUSANDS) Banking Banking Lending Other Total
- ----------------------------------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses $ 2,479 $ 9,629 $ 1,559 $ (713) $ 12,954
Other income 155 1,016 157 1,265 2,593
Other expense (629) (3,489) (530) (6,175) (10,823)
- ----------------------------------- ---------- ---------- ---------- ---------- ----------
Contribution to overhead and profit $ 2,005 $ 7,156 $ 1,186 $ (5,623) 4,724
Income taxes (1,628)
- ----------------------------------- ---------- ---------- ---------- ---------- ----------
Net income $ 3,096
=================================== ========== ========== ========== ========== ==========
Total assets $ 352,463 $ 555,758 $ 278,835 $ 133,130 $1,320,186
=================================== ========== ========== ========== ========== ==========
7
4. ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities". In June 2000, the FASB issued
SFAS 138, which amends certain provisions of SFAS 133 to clarify specific areas
causing difficulties in implementation. The Company has not historically engaged
in any hedging activities, and does not anticipate that it will enter into any
transaction that will qualify for hedge accounting as defined by SFAS 133. The
Company adopted SFAS 133 and the corresponding amendments under SFAS 138
effective on January 1, 2001. The adoption of SFAS 133, as amended by SFAS 138,
did not have a material impact on the Company's consolidated results of
operations, financial position or cash flows.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", was issued in September 2000 and replaces SFAS
No. 125 of the same title. This statement revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but carries over most of SFAS No. 125's provisions
without reconsideration. This statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after March 31,
2001 and is effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. The adoption of this statement by the
Company is not expected to materially affect the results of operations or
financial condition of the Company.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COLUMBIA BANKING SYSTEM, INC.
This discussion should be read in conjunction with the unaudited consolidated
financial statements of Columbia Banking System, Inc. (the "Company") and notes
thereto presented elsewhere in this report. In the following discussion, unless
otherwise noted, references to increases or decreases in average balances in
items of income and expense for a particular period and balances at a particular
date refer to the comparison with corresponding amounts for the period or date
one year earlier.
THIS FORM 10-Q INCLUDES FORWARD LOOKING STATEMENTS, WHICH MANAGEMENT BELIEVES
ARE A BENEFIT TO SHAREHOLDERS. THESE FORWARD LOOKING STATEMENTS DESCRIBE
COLUMBIA'S MANAGEMENT'S EXPECTATIONS REGARDING FUTURE EVENTS AND DEVELOPMENTS
SUCH AS FUTURE OPERATING RESULTS, GROWTH IN LOANS AND DEPOSITS, CONTINUED
SUCCESS OF COLUMBIA'S STYLE OF BANKING AND THE STRENGTH OF THE LOCAL ECONOMY.
THE WORDS "WILL," "BELIEVE," "EXPECT," "SHOULD," AND "ANTICIPATE" AND WORDS OF
SIMILAR CONSTRUCTION ARE INTENDED IN PART TO HELP IDENTIFY FORWARD LOOKING
STATEMENTS. FUTURE EVENTS ARE DIFFICULT TO PREDICT, AND THE EXPECTATIONS
DESCRIBED ABOVE ARE NECESSARILY SUBJECT TO RISK AND UNCERTAINTY THAT MAY CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY AND ADVERSELY. IN ADDITION TO DISCUSSIONS
ABOUT RISKS AND UNCERTAINTIES SET FORTH FROM TIME TO TIME IN COLUMBIA'S FILINGS
WITH THE SEC, FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE
FOLLOWING POSSIBILITIES: (1) LOCAL AND NATIONAL GENERAL AND ECONOMIC CONDITIONS
ARE LESS FAVORABLE THAN EXPECTED OR HAVE A MORE DIRECT AND PRONOUNCED EFFECT ON
COLUMBIA THAN EXPECTED AND ADVERSELY AFFECT COLUMBIA'S ABILITY TO CONTINUE ITS
INTERNAL GROWTH AT HISTORICAL RATES AND MAINTAIN THE QUALITY OF ITS EARNING
ASSETS; (2) CHANGES IN INTEREST RATES REDUCE INTEREST MARGINS MORE THAN EXPECTED
AND NEGATIVELY AFFECT FUNDING SOURCES; (3) PROJECTED BUSINESS INCREASES
FOLLOWING STRATEGIC EXPANSION OR OPENING OR ACQUIRING NEW BRANCHES ARE LOWER
THAN EXPECTED; (4) COSTS OR DIFFICULTIES RELATED TO THE INTEGRATION OF
ACQUISITIONS ARE GREATER THAN EXPECTED; (5) COMPETITIVE PRESSURE AMONG FINANCIAL
INSTITUTIONS INCREASES SIGNIFICANTLY; (6) LEGISLATION OR REGULATORY REQUIREMENTS
OR CHANGES ADVERSELY AFFECT THE BUSINESSES IN WHICH COLUMBIA IS ENGAGED.
OVERVIEW
Columbia Banking System, Inc. (the "Company") is a registered bank holding
company whose wholly owned subsidiary, Columbia State Bank ("Columbia Bank"),
conducts a full-service commercial banking business. Headquartered in Tacoma,
Washington, the Company provides a full range of banking services to small and
medium-sized businesses, professionals and other individuals through 28 banking
offices located in the Tacoma metropolitan area and contiguous parts of the
Puget Sound region of Washington, as well as the Longview and Woodland
communities in southwestern Washington. Substantially all of the Company's
loans, loan commitments and core deposits are geographically concentrated in its
service areas. Columbia Bank is a Washington state-chartered commercial bank,
the deposits of which are insured by the Federal Deposit Insurance Corporation
(the "FDIC"). The Bank is subject to regulation by the FDIC and the Washington
State Department of Financial Institutions (Division of Banks). Although
Columbia Bank is not a member of the Federal Reserve System, the Board of
Governors of the Federal Reserve System has certain supervisory authority over
the Company, which can also affect Columbia Bank.
9
The Company was reorganized and additional management was added in 1993 in order
to take advantage of commercial banking business opportunities resulting from
increased consolidation of banks in the Company's principal market area,
primarily through acquisitions by out-of-state holding companies, and the
resulting dislocation of customers. Since the reorganization, Columbia Bank has
grown from four branch offices at January 1, 1993 to its present 28 branch
offices and has plans to open additional branches in 2001 as discussed below. In
the five years ended December 31, 2000, the Company has achieved significant
growth in profitability, assets, loans and deposits, as shown in the following
chart.
At/For Year Ended Five Year Compounded
(DOLLARS IN THOUSANDS) December 31, 2000 Annual Growth Rate
- ---------------------- ----------------- ------------------
Net Income $ 10,070 22%
Assets 1,496,495 24
Loans 1,192,520 23
Deposits 1,327,023 24
The Company's goal is to become the premier super community bank headquartered
in the Pacific Northwest while establishing a significant presence in selected
northwest markets. Internal growth will be augmented by strategic business
combinations. The Company will build on its reputation for excellent customer
service in order to be recognized in all markets it serves as the bank of choice
for retail deposit customers, small to medium-sized businesses and affluent
households. The Company also expects to achieve superior financial performance
at the earliest practical date, consistent with development of its northwest
franchise.
Management believes the ongoing consolidation among financial institutions in
the northwest part of the U.S. has created significant gaps in the ability of
large banks operating in the states comprising that area to serve certain
customers, particularly the Company's target customer base of small and
medium-sized businesses, professionals and other individuals. The Company's
business strategy is to provide its customers with the financial sophistication
and breadth of products of a regional banking company while retaining the appeal
and service level of a community bank. Management believes that as a result of
the Company's strong commitment to highly personalized relationship-oriented
customer service, its varied products, its strategic branch locations and the
long-standing community presence of its managers, lending officers and branch
personnel, it is well positioned to attract new customers and to increase its
market share of loans, deposits, and other financial services in the markets it
now serves and in areas contiguous to those markets. The Company has closely
followed the recent changes to federal banking laws which allow financial
institutions to engage in a broader range of activities than previously
permitted. The new legislation also authorizes the creation of financial holding
companies to facilitate such expanded activity. As the Company pursues its
aggressive growth strategy, it is likely that the Company will utilize the new
financial holding company structure to accommodate an expansion of its products
and services.
The Company intends to effect its growth strategy through a combination of
growth at existing branch offices, new branch openings (usually following the
hiring of an experienced branch manager and/or lending officer with strong
community ties and banking relationships), Columbia On Call(TM) telephone
banking, Columbia OnLine(TM) internet banking, development of complimentery
lines of business, and acquisitions. In particular, the Company anticipates
continued expansion in Pierce County, north into King County, south into
Thurston County and northwest into Kitsap County. Aggressive expansion within
the Seattle and "Eastside" areas of King County was begun in 2000 with the
hiring of additional experienced bankers with extensive knowledge of the market.
During the year 2001, the Company intends to establish a private banking and
commercial banking presence in Seattle, expand its presence in Bellevue,
establish retail banking offices in Issaquah and Redmond and determine other
appropriate expansion locations.
10
In order to fund its lending activities and to allow for increased contact with
customers, the Company is establishing a branch system catering primarily to
retail depositors, supplemented by business customer deposits and other
borrowings. The Company believes this mix of funding sources will enable it to
expand lending activities rapidly while attracting a stable core deposit base.
In order to support its strategy of growth, without compromising its
personalized banking approach or its commitment to asset quality, the Company
has made significant investments in experienced branch, lending and
administrative personnel and has incurred significant costs related to its
branch expansion. Although the Company's expense ratios have improved since
1993, management anticipates that the expense ratios will remain relatively high
by industry standards for the foreseeable future due to the Company's aggressive
growth strategy and emphasis on convenience and personal service. Management has
consistently emphasized control of noninterest expense.
The Company has 28 branches, 15 in Pierce County, 7 in King County, 4 in Cowlitz
County, 1 in Kitsap County, and 1 in Thurston County. Since beginning its major
Pierce County expansion in August 1993, the Company has expanded from 4 branches
primarily through internal growth. In February 2001, construction was completed
on a permanent West Olympia facility.
During the first quarter of 2001, the Company continued its planned expansion in
the King County market. In the second quarter of 2001, the Company expects to
open a private banking and commercial banking office in downtown Seattle,
continue it's expansion in Bellevue, and open a retail office in Issaquah. Later
this year, the Company expects to open an office in Redmond.
In addition to the King County expansion, the Company continues to expand in
it's traditional market areas. Construction is underway for Pierce County
branches at 84th & Pacific and 11th & Martin Luther King Way in Tacoma; and a
Bonney Lake facility is targeted for completion this summer. The Company is in
the process of moving it's headquarters to a new building at 13th & A Streets in
downtown Tacoma. As the named tenant, the building will provide excellent
visibility and additional space to accommodate growth, as well as demonstrating
the Company's commitment to revitalizing the communities it serves. New branches
normally do not contribute to net income for many months after opening.
In addition to the ongoing expansion of its branch network, the Company
continuously reviews new products and services to give its customers more
financial service options. Also, new technology and services are reviewed for
business development and cost saving purposes. During 2000, the Company
introduced its new online banking service Columbia On-Line (TM). Customers are
able to conduct a full range of services on a real time basis, including,
balance inquiries, transfers, bill paying, loan information, and check image
viewing. This online service has also enhanced the delivery of cash management
services to its commercial customers.
The economy of the Company's principal market areas, while primarily dependent
upon aerospace, foreign trade and natural resources, including agriculture and
timber, has become more diversified over the past decade as a result of the
success of software companies such as Microsoft and the establishment of
numerous research and biotechnology firms. Additionally, four military bases are
located in the market areas. The Washington economy and that of the Puget Sound
region generally have experienced strong growth and stability in recent years.
11
RESULTS OF OPERATIONS
The results of operations of the Company are dependent to a large degree on the
Company's net interest income. The Company also generates noninterest income
through service charges and fees, merchant services fees, and income from
mortgage banking operations. The Company's operating expenses consist primarily
of compensation and employee benefits expense, and occupancy expense. Like most
financial institutions, the Company's interest income and cost of funds are
affected significantly by general economic conditions, particularly changes in
market interest rates, and by government policies and actions of regulatory
authorities.
Net income for the first quarter of 2001 was $3.1 million, or $0.26 per diluted
share, unchanged compared to $3.1 million, or $0.26 per diluted share, for the
first quarter of 2000. During the quarter total revenue (net interest income
plus noninterest income), increased $1.1 million, or 7.0% from the first quarter
of 2000, while noninterest expense increased $1.1 million, or 10.2% compared
with the first quarter of 2000.
NET INTEREST INCOME
Net interest income for the first quarter of 2001 increased 3% to $14.3 million,
from $13.9 million in the first quarter of 2000. The increase in net interest
income was largely due to the overall growth of the Company and was negatively
impacted by increased costs of deposits and other liabilities. During the first
quarter of 2001 interest rates decreased dramatically as the "prime rate"
declined 150 basis points. As a result, the Company's loan yields, approximately
40% of which adjust immediately with a change in the prime rate, decreased
rapidly. Additionally, in the third and fourth quarters of 2000,competition for
deposits to fund loan demand placed upward pressure on the cost of deposits and
borrowings, thus increasing the Company's cost of funding. Since reductions in
deposit and other funding costs lag reductions in interest-earning asset yields,
when interest rates declined during the first quarter of 2001, the yield on
interest-earning assets declined faster than the recently increased cost of
interest-bearing liabilities. During the first quarter of 2001, the Company took
steps to lower its cost of deposits. The effect of these adjustments will lag
the effect of reduced loan yields.
Net interest margin (net interest income divided by average interest-earning
assets) decreased to 4.24% in the first quarter of 2001 from 4.75% in the first
quarter of 2000. Average interest-earning assets increased to $1.4 billion, or
17%, during the first quarter of 2001, compared with $1.2 billion for the same
period in 2000. The average yield on interest-earning assets was relatively
unchanged at 8.48% during the first quarter of 2001 compared with 8.49% during
the same period of 2000. In comparison, average interest-bearing liabilities
increased to $1.1 billion, or 17%, and the average cost of interest-bearing
liabilities increased 61 basis points to 5.13% during the first quarter of 2001
from 4.52% in the same period of 2000.
In comparison with the fourth quarter of 2000, net interest income for the first
quarter 2001 decreased 6% to $14.3 million, from $15.1 million. The decrease in
net interest income was due to the rapid decrease in interest rates during the
first quarter of 2001. The net interest margin decreased to 4.24% in the first
quarter of 2001 from 4.44% in the fourth quarter of 2000. Average
interest-earning assets increased $15.8 million, or 1%, to $1.4 billion compared
with the fourth quarter of 2000. The average yield on interest-earning assets
decreased 27 basis points to 8.48% from 8.75% in the fourth quarter of 2000.
During the first quarter, average interest bearing liabilities increased $10.5
million, or 1%, to $1.1 billion compared with the fourth quarter of 2000. The
average cost of interest-bearing liabilities decreased 7 basis points to 5.13%
during the first quarter of 2001 compared with 5.20% in the fourth quarter of
2000.
12
LOOKING FORWARD
The additional decline in short term interest rates by 50 basis points in April
2001, and expected further reductions, will continue to reduce the Company's net
interest margin in the short term. Management currently expects that the rate
environment will impact earnings. As a result, management expects that the
Company's 2001 earnings will be in the range of $1.20 - $1.24 per share.
CONSOLIDATED AVERAGE BALANCES--NET CHANGES
COLUMBIA BANKING SYSTEM, INC. Three Months Ended Increase
March 31, (Decrease)
(IN THOUSANDS) 2001 2000 Amount
- -------------------------------------- ---------- ---------- ----------
ASSETS
Loans $1,216,685 $1,081,735 $ 134,950
Securities 103,904 95,392 8,512
Interest-earning deposits with banks 53,535 1,111 52,424
- -------------------------------------- ---------- ---------- ----------
Total interest-earning assets 1,374,124 1,178,238 195,886
Noninterest-earning assets 110,240 98,724 11,516
- -------------------------------------- ---------- ---------- ----------
Total assets $1,484,364 $1,276,962 $ 207,402
====================================== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits $1,090,317 $ 912,310 $ 178,007
Federal Home Loan Bank advances 40,000 59,434 (19,434)
Other borrowings 6,039 3,077 2,962
- -------------------------------------- ---------- ---------- ----------
Total interest-bearing liabilities 1,136,356 974,821 161,535
Noninterest-bearing deposits 219,379 191,959 27,420
Other noninterest-bearing liabilities 11,959 8,832 3,127
Shareholders' equity 116,670 101,350 15,320
- -------------------------------------- ---------- ---------- ----------
Total liabilities and $1,484,364 $1,276,962 $ 207,402
shareholders' equity
====================================== ========== ========== ==========
NONINTEREST INCOME
Noninterest income increased $732,000, or 28% in the first quarter of 2001,
compared with the same period in 2000. Increases during the first quarter of
2001 were primarily centered in mortgage banking operations, and merchant
services income. Mortgage banking income has been favorably impacted by
increased residential mortgage originations due to the effect of lower long-term
interest rates. Increases in merchant services income is due to the overall
growth of the Company. Noninterest income increased 17% from the fourth quarter
of 2000 to the first quarter of 2001. During the first quarter of 2001, the
Company recorded a net loss on sale of investment securities of $23,000.
13
NONINTEREST EXPENSE
Total noninterest expense increased $1.1 million, or 10%, for the first quarter
of 2001, compared with the same periods in 2000. The increase was primarily due
to personnel costs associated with the Company's expansion as well as merchant
services, taxes and licenses, and other expenses. The personnel cost increases
reflect significant hiring in the fourth quarter of 2000 and the first quarter
2001, of experienced bankers in connection with the Company's King County
expansion. The Company's efficiency ratio (noninterest expense divided by the
sum of net interest income plus noninterest income) was 67.7% for the first
quarter of 2001, compared to 65.8% for the same period in 2000.
INCOME TAXES
The Company recorded income tax provisions of $1.6 million for each of the
quarters ending March 31, 2001 and 2000.
CREDIT RISK MANAGEMENT
The extension of credit in the form of loans or other credit substitutes to
individuals and businesses is a major portion of the Company's principal
business activity. Company policies and applicable laws and regulations require
risk analysis as well as ongoing portfolio and credit management. The Company
manages its credit risk through lending limit constraints, credit review,
approval policies and extensive, ongoing internal monitoring. The Company also
manages credit risk through diversification of the loan portfolio by type of
loan, type of industry, aggregation of debt limits to a single borrower and the
type of borrower.
In analyzing its existing portfolio, the Company reviews its consumer and
residential loan portfolios by risk rating each loan and analyzing their
performance as a pool of loans since no single loan is individually significant
or judged by its risk rating size or potential risk of loss. In contrast, the
monitoring process for the commercial business, private banking, real estate
construction, and commercial real estate portfolios includes periodic reviews of
individual loans with risk ratings assigned to each loan and performance judged
on a loan by loan basis. The Company reviews these loans to assess the ability
of the borrower to service all of its interest and principal obligations and as
a result the risk rating may be adjusted accordingly. In the event that full
collection of principal and interest is not reasonably assured, the loan is
appropriately downgraded and, if warranted, placed on non-accrual status even
though the loan may be current as to principal and interest payments.
Additionally, the Company would assess whether an impairment of a loan as
provided in SFAS No. 114, "Accounting by Creditors for Impairment of a Loan",
would warrant specific reserves or a write-down of the loan.
See "Provision and Allowance For Loan Losses."
Loan policies, credit quality criteria, portfolio guidelines and other controls
are established under the guidance of the Company's chief credit officer and
approved, as appropriate, by the Board. Credit Administration, together with
appropriate loan committees, has the responsibility for administering the credit
approval process. As another part of its control process, the Company uses an
independent internal credit review and examination function to provide assurance
that loans and commitments are made and maintained as prescribed by its credit
policies. This includes a review of documentation when the loan is initially
extended and subsequent on-site examination to ensure continued performance and
proper risk assessment.
14
LOAN PORTFOLIO ANALYSIS
The Company is a full service commercial bank, which originates a wide variety
of loans. Consistent with the trend begun in 1993, the Company continues to have
success originating commercial business and commercial real estate loans.
The following table sets forth the Company's loan portfolio composition by type
of loan for the dates indicated:
March 31, % of December 31, % of
(IN THOUSANDS) 2001 Total 2000 Total
- --------------------------------------- ---------- ---------- ---------- ----------
Commercial business $ 506,428 41.8% $ 496,125 41.6%
Real estate:
One-to four-family residential 55,307 4.6 55,922 4.7
Five or more family residential
and commercial properties 437,294 36.1 428,884 36.0
- --------------------------------------- ---------- ---------- ---------- ----------
Total real estate 492,601 40.7 484,806 40.7
Real estate construction:
One-to four-family residential 31,020 2.5 33,548 2.8
Five or more family residential
and commercial properties 78,293 6.5 74,451 6.3
- --------------------------------------- ---------- ---------- ---------- ----------
Total real estate construction 109,313 9.0 107,999 9.1
Consumer 105,665 8.7 106,633 8.9
- --------------------------------------- ---------- ---------- ---------- ----------
Sub-total loans 1,214,007 100.2 1,195,563 100.3
Less: Deferred loan fees (2,907) (0.2) (3,043) (0.3)
- --------------------------------------- ---------- ---------- ---------- ----------
Total loans $1,211,100 100.0% $1,195,520 100.0%
======================================= ========== ========== ========== ==========
Loans held for sale $ 38,666 $ 14,843
======================================= ========== ========== ========== ==========
Total loans (excluding loans held for sale) at March 31, 2001, increased $15.6
million, or 1.3%, to $1.2 billion from year-end 2000. Commercial business loans
and five or more family residential and commercial properties were the
categories contributing a majority of the increase.
COMMERCIAL LOANS: Commercial loans increased $10.3 million, or 2.1%, to $506.4
million from year-end 2000, representing 41.8% of total loans compared with
41.6% of total loans at December 31, 2000. Management is committed to providing
competitive commercial lending in the Company's primary market areas. The
Company expects to continue to expand its commercial lending products and to
emphasize in particular its relationship banking with businesses, business
owners and affluent individuals.
REAL ESTATE LOANS: Residential one- to four-family loans decreased $615,000 to
$55.3 million at March 31, 2001, representing 4.6% of total loans, compared with
$55.9 million, or 4.7% of total loans at December 31, 2000. These loans are used
by the Company to collateralize advances from the FHLB. The Company's
underwriting standards require that one- to four-family portfolio loans
generally be owner-occupied. The loan amounts may not exceed 80% (90% with
private mortgage insurance) of the appraised value or cost, whichever is lower,
of the underlying collateral at origination. Generally, management's policy is
to originate for sale to third parties residential loans secured by properties
located within the Company's primary market areas.
The Company makes multi-family and commercial real estate loans in its primary
market areas. Multi-family and commercial real estate lending increased $8.4
million, or 2.0%, to $437.3 million at March 31, 2001, representing 36.1% of
total loans, from $428.9 million, or 36.0% of total loans at December 31, 2000.
The increase in multi-family and commercial real estate lending during 2000
reflects a mix of owner occupied and income property transactions. Generally,
multi-family and commercial real estate loans are made to borrowers who have
existing banking relationships with the Company. The Company's underwriting
standards generally require that the loan-to-value ratio for multi-family and
commercial loans
15
not exceed 75% of appraised value or cost, whichever is lower, and that
commercial properties maintain debt coverage ratios (net operating income
divided by annual debt servicing) of 1.2 or better. Underwriting standards can
be influenced by competition. The Company endeavors to maintain the highest
practical underwriting standards while balancing the need to remain competitive
in its lending practices.
REAL ESTATE CONSTRUCTION LOANS: The Company originates a variety of real estate
construction loans. One- to four-family residential construction loans are
originated for the construction of custom homes (where the home buyer is the
borrower) and provides financing to builders for the construction of pre-sold
homes and speculative residential construction. Construction loans on one- to
four-family residences decreased $2.5 million to $31.0 million at March 31,
2001, representing 2.5% of total loans, from $33.5 million, or 2.8% of total
loans at December 31, 2000. Multi-family and commercial real estate construction
loans increased $3.8 million to $78.3 million at March 31, 2001, representing
6.5% of total loans, from $74.5 million, or 6.3% of total loans at December 31,
2000.
The Company endeavors to limit its construction lending risk through adherence
to strict underwriting procedures.
CONSUMER LOANS: At March 31, 2001, the Company had $105.7 million of consumer
loans outstanding, representing 8.7% of total loans, as compared with $106.6
million, or 8.9% of total loans, at December 31, 2000. Consumer loans made by
the Company include automobile loans, boat and recreational vehicle financing,
home equity and home improvement loans and miscellaneous personal loans.
FOREIGN OUTSTANDING: Columbia Bank is not involved with loans to foreign
companies and foreign countries.
16
NONPERFORMING ASSETS
Nonperforming assets consist of: (i) nonaccrual loans, which generally are loans
placed on a nonaccrual basis when the loan becomes past due 90 days or when
there are otherwise serious doubts about the collectibility of principal or
interest; (ii) restructured loans, for which concessions, including the
reduction of interest rates below a rate otherwise available to that borrower or
the deferral of interest or principal, have been granted due to the borrower's
weakened financial condition (interest on restructured loans is accrued at the
restructured rates when it is anticipated that no loss of original principal
will occur); and (iii) real estate owned.
The following tables set forth, at the dates indicated, information with respect
to nonaccrual loans, restructured loans, total nonperforming loans (nonaccrual
loans plus restructured loans), real estate owned, and total nonperforming
assets of the Company:
March 31, December 31,
(IN THOUSANDS) 2001 2000
- ---------------------------------------------- -------- --------
Nonaccrual:
One-to four-family residential $ 149 $ 410
Commercial real estate 518 698
Commercial business 10,756 11,091
Consumer 180 307
- ---------------------------------------------- -------- --------
Total 11,603 12,506
Restructured:
One-to four-family residential construction 1,774 1,136
Commercial business
- ---------------------------------------------- -------- --------
Total 1,774 1,136
- ---------------------------------------------- -------- --------
Total nonperforming loans $ 13,377 $ 13,642
============================================== ======== ========
Real estate owned $ 1,291 $ 1,291
- ---------------------------------------------- -------- --------
Total nonperforming assets $ 14,668 $ 14,933
============================================== ======== ========
The consolidated financial statements are prepared according to the accrual
basis of accounting. This includes the recognition of interest income on the
loan portfolio, unless a loan is placed on a nonaccrual basis, which occurs when
there are serious doubts about the collectibility of principal or interest. The
policy of the Company generally is to discontinue the accrual of interest on all
loans past due 90 days or more and place them on nonaccrual status.
Nonaccrual loans and other nonperforming assets are centered in a small number
of lending relationships which management considers to be adequately reserved.
In the fourth quarter 2000, deterioration of a single large credit relationship
with a principal amount of $8.0 million caused the Company to place the loan on
nonaccrual and include it in impaired loans. Based on information currently
known to the Company, management believes that additional collateral being
obtained to support the loan may reduce the Company's loss exposure.
Substantially, all nonperforming loans are to borrowers within the State of
Washington.
Nonperforming loans were $13.4 million, or 1.10% of total loans (excluding loans
held for sale) at March 31, 2001, compared to $13.6 million, or 1.14% of total
loans at December 31, 2000.
Restructured loans increased to $1.8 million at March 31, 2001, from $1.1
million, at December 31, 2000.
17
Real estate owned, which is comprised of foreclosed real estate loans, was
unchanged at March 31, 2001, from its balance of $1.3 million at December 31,
2000. During the first three months of 2001, there were no REO transactions. At
March 31, 2001, REO consisted of three foreclosed properties.
Total nonperforming assets totaled $14.7 million, or 0.99% of period-end assets
at March 31, 2001, compared to $14.9 million, or 1.00% of period-end assets at
December 31, 2000.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for loan losses to absorb losses inherent in
the loan portfolio. The size of the allowance is determined through quarterly
assessments of the probable estimated losses in the loan portfolio. The
Company's methodology for making such assessments and determining the adequacy
of the allowance includes the following key elements:
1. Formula based allowances calculated on minimum thresholds and historical
performance of the portfolio for the past five years.
2. Specific allowances for identified problem loans in accordance with SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan."
3. Unallocated allowance.
On a quarterly basis (semi-annual in the case of economic and business
conditions reviews) the senior credit officers of the Company review with
Executive Management and the Board of Directors the various additional factors
that management considers when determining the adequacy of the allowance. These
factors include the following as of the applicable balance sheet date:
1. Existing general economic and business conditions affecting the Company's
market place
2. Credit quality trends, including trends in nonperforming loans
3. Collateral values
4. Seasoning of the loan portfolio
5. Bank regulatory examination results
6. Findings of internal credit examiners
7. Duration of current business cycle
The allowance is increased by provisions charged to operations, and is reduced
by loans charged off, net of recoveries.
While management believes it uses the best information available to determine
the allowance for loan losses, unforeseen market conditions could result in
adjustments to the allowance, and net income could be significantly affected, if
circumstances differ substantially from the assumptions used in determining the
allowance.
At March 31, 2001, the Company's allowance for loan losses was $19.0 million, or
1.57% of the total loans (excluding loans held for sale), and 141.7% of
nonperforming loans. This compares with an allowance of $18.8 million, or 1.58%
of the total loan portfolio, and 137.7% of nonperforming loans, at December 31,
2000.
18
In the fourth quarter 2000, the Company took an additional loan loss provision
of $6.0 million to increase its allowance for loan losses to reflect the
deterioration of a single substantial credit relationship. As a result of the
deterioration of this single relationship, the Company undertook a comprehensive
review of the process currently in place to detect and react to other potential
loan portfolio deterioration. Based on that review, management is confident that
the problems with the single loan are not symptomatic of other similar problems
in the loan portfolio. In addition, management has retained the Secura Group, a
nationally recognized firm with expertise in commercial loan credit review, to
conduct an independent assessment of the Company's loan and collateral
monitoring procedures. The additional $6.0 million provision to the allowance
for loan losses was set aside to provide against the loss that may result from
the loan, and to further protect against pressures that might arise from a
slowing economy.
Net loan charge-offs amounted to $733,000 for the first three months of 2001
compared with net loan recoveries of $30,000 for the same period in 2000. During
the first three months of 2001, the Company set aside $900,000 of provisions for
loan losses as unchanged from $900,000 for the same period in 2000.
Management anticipates that continued growth of the loan portfolio and a slowing
of growth in the local economy will require continued additions to the allowance
for loan losses during the year 2001.
The following table provides an analysis of net losses by loan type at the dates
indicated:
Three Months Ended
March 31,
(IN THOUSANDS) 2001 2000
- --------------------------------------------- ---------- ----------
Beginning balance $ 18,791 $ 9,967
Charge-offs:
One-to-four family residential construction
Commercial business (798) (187)
Consumer (7) (59)
- --------------------------------------------- ---------- ----------
Total charge-offs (805) (246)
Recoveries:
Commercial business 62 266
Consumer 10 10
- --------------------------------------------- ---------- ----------
Total recoveries 72 276
- --------------------------------------------- ---------- ----------
Net (charge-offs) recoveries (733) 30
Provision charged to expense 900 900
- --------------------------------------------- ---------- ----------
Ending balance $ 18,958 $ 10,897
============================================= ========== ==========
19
LIQUIDITY AND SOURCES OF FUNDS
The Company's primary sources of funds are customer deposits, advances from the
Federal Home Loan Bank of Seattle (the "FHLB"). These funds, together with loan
repayments, loan sales, retained earnings, equity and other borrowed funds, are
used to make loans, to acquire securities and other assets and to fund
continuing operations.
DEPOSIT ACTIVITIES
The Company's deposit products include a wide variety of transaction accounts,
savings accounts and time deposit accounts. Total deposits decreased $22.6
million, or 1.7%, to $1.304 billion at March 31, 2001 from $1.327 billion at
December 31, 2000. The decrease was primarily centered in certificates of
deposit balances, as the Company reduced the rates of interest offered on the
certificates. Average core deposits (demand deposit, savings, and money market
accounts) increased to $691.5 million, or 1.03%, during the first quarter of
2001, from $684.5 million during the fourth quarter ending December 31, 2000.
The Company has established a branch system catering primarily to retail
depositors, supplemented by business customer deposits and other borrowings. The
branch system deposits are intended to provide a stable core funding base for
the Company. Together with that stable core deposit base, management's strategy
for funding growth is also to make use of brokered and other wholesale deposits.
The Company's use of brokered and other wholesale deposits increased in 2000,
and management anticipates continued use of such deposits to fund increasing
loan demand. At March 31, 2001, brokered and other wholesale deposits (excluding
public deposits) totaled $40.2 million, or 3.1% of total deposits, compared with
$53.0 million, or 4% of total deposits at December 31, 2000. The brokered
deposits have varied maturities up to 5 years.
BORROWINGS
The Company relies on FHLB advances to supplement its funding sources, and the
FHLB serves as the Company's primary source of long-term borrowings. In
addition, the Company uses short-term borrowings from the FHLB when necessary.
FHLB advances are secured by one- to four-family real estate mortgages and
certain other assets. At March 31, 2001, the Company had short-term advances of
$40.0 million unchanged from the balance at December 31, 2000. Management
anticipates that the Company will continue to rely on the same sources of funds
in the future, and will use those funds primarily to make loans and purchase
securities.
The Company has a $20 million line of credit with a large commercial bank. The
interest rate on the line is indexed to the prime rate and at March 31, 2001,
the balance outstanding was $8.0 million compared with a balance of $4.5 million
at December 31, 2000. In the event of the discontinuance of the line by either
party, the Company has up to two years to repay the debt.
20
CAPITAL
Shareholders' equity at March 31, 2001, was $118.4 million compared with $113.8
million at December 31, 2000. The increase is due primarily to net income of
$3.1 million during the first three months of 2001. Shareholders' equity was
7.98% and 7.61% of total period-end assets at March 31, 2000, and December 31,
2000, respectively.
Banking regulations require bank holding companies to maintain a minimum
"leverage" ratio of core capital to adjusted quarterly average total assets of
at least 3%. At March 31, 2001, the Company's leverage ratio was 7.94%, compared
with 7.77% at December 31, 2000. In addition, banking regulators have adopted
risk-based capital guidelines, under which risk percentages are assigned to
various categories of assets and off-balance sheet items to calculate a
risk-adjusted capital ratio. Tier I capital generally consists of common
shareholders' equity, less goodwill and certain identifiable intangible assets,
while Tier II capital includes the allowance for loan losses and subordinated
debt, both subject to certain limitations. Regulatory minimum risk-based capital
guidelines require Tier I capital of 4% of risk-adjusted assets and total
capital (combined Tier I and Tier II) of 8% of risk-adjusted assets to be
considered "adequately capitalized". The Company's Tier I and total capital
ratios were 8.70% and 9.65%, respectively, at March 31, 2001, compared with
8.58% and 9.54%, respectively, at December 31, 2000.
During 1992, the Federal Deposit Insurance Corporation (the "FDIC") published
the qualifications necessary to be classified as a "well capitalized" bank,
primarily for assignment of FDIC insurance premium rates beginning in 1993. To
qualify as "well capitalized," banks must have a Tier I risk-adjusted capital
ratio of at least 6%, a total risk-adjusted capital ratio of at least 10%, and a
leverage ratio of at least 5%. Columbia Bank qualified as "well-capitalized" at
March 31, 2001. Failure to qualify as "well capitalized" can negatively impact a
bank's ability to expand and to engage in certain activities.
Applicable federal and Washington state regulations restrict capital
distributions by institutions such as Columbia Bank, including dividends. Such
restrictions are tied to the institution's capital levels after giving effect to
distributions. The Company's ability to pay cash dividends is substantially
dependent upon receipt of dividends from the Bank.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A number of measures are used to monitor and manage interest rate risk,
including income simulations and interest sensitivity (gap) analyses. An income
simulation model is the primary tool used to assess the direction and magnitude
of changes in net interest income resulting from changes in interest rates. Key
assumptions in the model include prepayment speeds on mortgage-related assets,
cash flows and maturities of other investment securities, loan and deposit
volumes and pricing. These assumptions are inherently subjective and, as a
result, the model cannot precisely estimate net interest income or precisely
predict the impact of higher or lower interest rates on net interest income.
Actual results will differ from simulated results due to timing, magnitude and
frequency of interest rate changes and changes in market conditions and
management strategies, among other factors. At March 31, 2001, based on the
measures used to monitor and manage interest rate risk, there has not been a
material change in the Company's interest rate risk since December 31, 2000. For
additional information, refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" referenced in the Company's
annual report on Form 10-K for the year ended December 31, 2000.
21
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10 Data processing servicing agreement dated January 1, 2001
between the Company and Metavante Corporation.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COLUMBIA BANKING SYSTEM, INC.
(Registrant)
Date May 14, 2001 By /s/ J. James Gallagher
---------------- ------------------------------
J. James Gallagher
Vice Chairman and
Chief Executive Officer
Date May 14, 2001 By /s/ Gary R. Schminkey
---------------- ------------------------------
Gary R. Schminkey
Executive Vice President and
Chief Financial Officer
22