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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
[Fee Required]
For the fiscal year ended DECEMBER 31, 1996 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
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: (206) 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, 1997 was $90,418,214.
The number of shares of registrant's Common Stock outstanding at
February 28, 1997 was 5,203,926
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, 1996
Registrant's definitive Proxy Statement Part III
dated March 20, 1997
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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 Consolidated Five-Year Summary of
Sheet and Analysis of Net Average Balances and Net Interest
Interest Income and Expense Revenue 62
Management Discussion and Analysis of
Financial Condition and Results of
Operations("Management Discussion")
20
Investments Note 4, Notes to Consolidated
Financial Statements 46
Management Discussion - Securities 28
Lending Activities Management Discussion - Loan
Portfolio 24
Management Discussion - Nonperforming
Assets 26
Note 5, Notes to Consolidated
Financial Statements 47
Summary of Loan Loss Experience Management Discussion - Provision and
Allowance for Loan Losses 27
Supervision and Regulation Management Discussion - Capital 31
Item 2 Properties Note 7, Notes to Consolidated
Financial Statements 49
Item 3 Legal Proceedings Note 12, Notes to Consolidated
Financial Statements 53
3
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 Management Discussion - Quarterly
Common Stock and Related Common Stock Prices & Dividend
Stockholder Matters Payments 33
Item 6 Selected Financial Data Consolidated Highlights 15
Consolidated Five-Year Statements of
Operations 60
Consolidated Five-Year Summary of
Average Balances and Net Interest
Revenue 62
Item 7 Management's Discussion and Management Discussion 20
Analysis of Financial
Condition and Results of
Operations
Consolidated Five-Year Summary of
Average Balances and Net Interest
Revenue 62
Item 8 Financial Statements and Audited Financial Statements 36
Supplementary Data
Summary of Quarterly Financial
Information (Unaudited) 59
Item 9 Changes in and Disagreements With Recent Change in Accounting Firms 33
Accountants on Accounting and
Financial Disclosure
PART III DEFINITIVE PROXY STATEMENT
--------------------------
Item 10 Directors and Executive Officers Election of Directors 2
of the Registrant
Item 11 Executive Compensation Executive Compensation 6
Item 12 Security Ownership of Certain Election of Directors 2, 12
Beneficial Owners and
Management
Item 13 Certain Relationships and Related Interest of Management in Certain
Transactions Transactions 13
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COLUMBIA BANKING SYSTEM, INC.
FORM 10-K
December 31, 1996
TABLE OF CONTENTS
PART I Page
----
Item 1. Business
General 1
Strategy 2
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 8
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
5
PART I
ITEM 1. BUSINESS
GENERAL
Columbia Banking System, Inc. (the "Company"), a Washington corporation, was
originally organized in 1988 under the name "First Federal Corporation" in
connection with the acquisition by an investor group, which included recently
deceased director emeritus Stanley Rose and current director Sidney Snyder, of
a savings association, which was later named Columbia Savings Bank, a Federal
Savings Bank ("the Savings Bank"). In 1990, an investor group headed by Arnold
Espe, (Chairman and Chief Executive Officer of the Company) and financed in
part by NorCap, LLC acquired from Mr. Rose a controlling interest in the
Company, a second corporation, Columbia National Bankshares, Inc. ("CNBI"), and
CNBI's sole subsidiary, Columbia National Bank, located in Longview,
Washington. See "Security Ownership of Certain Beneficial Owners and
Management" and "Certain Transactions -- NorCap Options." In connection with
the 1993 reorganization of the Company, CNBI was merged into the Company,
Columbia National Bank was merged into the newly chartered Columbia State Bank
("Columbia Bank") and additional management was added. In 1994, the Savings
Bank was merged into Columbia Bank.
The 1993 reorganization was undertaken 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. In
August 1993, the Company completed a public offering of common stock with net
proceeds of approximately $17.2 million, of which the Company contributed
approximately $16.3 million to the capital of Columbia Bank. In connection
with the reorganization, the Company moved its headquarters to Tacoma,
Washington, with the intent of focusing on growth opportunities in the Tacoma
metropolitan area and contiguous parts of the Puget Sound region. 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 business strategy of the Company 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. As a result
of the Company's strong commitment to highly personalized customer service, its
varied products, and the long-standing community presence of its managers,
lending officers and branch personnel, the Company believes it is well
positioned to attract new customers and to increase its market share in lending
and deposits.
In November and December 1996, the Company issued approximately 1.445 million
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 south King
and Thurston Counties. The remainder was used to repay a $3.0 million
borrowing and for general corporate purposes.
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. Columbia Bank provides a wide
range of banking services to small- and medium-sized businesses and
individuals.
At December 31, 1996, the Company had total consolidated assets of $588.9
million, loans of $446.1 million and deposits of $493.2 million.
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STRATEGY
The Company's goal is to create, over the next several years, a
well-capitalized, customer-focused Pacific Northwest commercial banking
institution with a significant presence in selected markets and total assets in
excess of $1.0 billion. Management believes that the ongoing consolidation in
its principal market area affords an opportunity for aggressive growth in loans
and deposits. The Company's growth strategy consists of the following
elements:
* Focus on relationship lending to small and medium-sized businesses,
professionals and other individuals whom the Company believes are
underserved by larger banks in its market area and are attracted by
the Company's emphasis on relationship banking.
* Fund loan growth through the creation of a branch system catering
primarily to retail depositors, supplemented by business banking
customer deposits and other borrowings.
* Continue growth in the Tacoma metropolitan area and selectively expand
into neighboring King and Thurston Counties.
* Control credit risk through established loan underwriting and
monitoring procedures, loan concentration limits, product and industry
diversification, and the hiring of experienced lending personnel with
a high degree of familiarity with their market area.
Focus on Relationship Lending. The Company focuses on lending to small and
medium-sized businesses, professionals and other individuals who value high
levels of customer service from a locally based institution. The Company
believes that there are significant commercial banking business opportunities
arising from the ongoing consolidation of banks in its principal market area,
primarily through acquisitions by out-of- state holding companies, and the
resulting dislocation of customers. Management believes that many business
customers of previously acquired banks are dissatisfied with low levels of
service and the lack of personal contact, flexibility and local decision-making
authority at these institutions, and thus willing to transfer their primary
banking relationship to a customer-service oriented institution like the
Company which can be more responsive to their specific needs. As part of its
effort to provide responsive service to its target customers, the Company
markets a varied menu of relationship banking products, including private
banking and cash management services. Management continually strives to
develop a business culture in which customers are accorded the highest priority
in all aspects of the Company's operations. This philosophy is combined with
the Company's emphasis on personalized, local decision-making in each of the
markets it serves.
Create a Branch-Based Deposit Franchise. In order to fund its lending
activities, 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 establishing a stable
core deposit base. Additionally, the Company's strategically placed branch
offices allow for increased contact with customers. While the Company's
primary lending focus will continue to be on business lending, management
believes that its customer deposit and lending activities will produce
significant benefits, including increased core deposits and greater loan
portfolio diversification.
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Geographic Expansion. The Company currently has regulatory approval to open
four additional branches in Pierce County, and anticipates opening several more
branches in the next few years to strengthen its local market position and
capitalize on expansion opportunities resulting from strong demand for a
locally based banking institution. The Company also currently anticipates
expansion into neighboring Thurston County (the location of Olympia, the
capital of Washington) and parts of neighboring King County, such as Bellevue
and surrounding areas and the Auburn and Kent Valley areas. The Company plans
to effect its growth strategy through a combination of growth at existing
branch facilities, new branch openings and acquisitions. Typically, expansion
into new markets will be in connection with the hiring of an experienced branch
manager and /or lending officers with strong community ties and banking
relationships.
Control credit Risk. Management considers the maintenance of high asset
quality, with corresponding low levels of nonperforming assets and charge-offs,
to be of utmost importance as it pursues its growth strategy. The Company has
implemented loan underwriting and monitoring procedures and loan concentration
limits which management believes permit continued portfolio expansion without
materially increasing credit risk. The Company will also seek to control
credit risk as it grows through increased product and industry diversification,
by expanding its loan product offerings and related services, and through the
hiring of experienced lending personnel with a high degree of familiarity with
their market area.
MARKET AREA
The Company's principal market area is the Tacoma metropolitan area and
contiguous parts of the Puget Sound region of Washington state. The economy of
that 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 Microsoft and the establishment
of numerous research and biotechnology firms. The Washington economy and that
of the Puget Sound region generally have experienced moderate growth and
stability in recent years. According to the Puget Sound Economic Forecaster, a
regional publication providing economic forecasts and commentary, the greater
Puget Sound economy is projected to expand at nearly twice the national rate
for the years 1997 through 1999. The region is projected to add 220,000 new
jobs and 290,000 new residents during this time. Boeing, the region's largest
employer, has announced increased production after recent years of declining
orders for aircraft and related reductions in its work force. Microsoft and
other major employers in the area east of Seattle also anticipate continued
growth.
Pierce County, the area in which the Company's expansion is primarily focused,
is located in the South Puget Sound region. The economy of this area is
well-diversified, with the principal industries being aerospace, shipping,
military-related government employment, agriculture and forest products.
Pierce County's economy is expected to benefit over the next few years because
of Intel's decision to build a computer chip facility in DuPont and the
expansion of the Matsushita semiconductor plant in Puyallup, east of Tacoma.
The Puget Sound Economic Forecaster predicts that Pierce County will likely
have the strongest economic performance in the Puget Sound region through 1999.
Forbes magazine recently 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 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.
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The Company anticipates further expanding into neighboring south King County,
which contains several residential communities whose employment base is
supported by light industrial, aerospace, and forest products industries. With
its close proximity to Tacoma, this 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 also considered by management
to be natural areas of expansion for the Company.
Expansion south of Tacoma into Thurston County is also considered by management
to be an extension of the Company's Pierce County market area. Olympia, with a
population of approximately 38,000, and the neighboring community of Lacey,
with a population of approximately 26,000, are the principal cities in Thurston
County. As of April 1996, the county had an approximate population of 193,000.
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 Thurston County Regional Planning Council, out of a
total civilian work force of 88,000, approximately 33% were employed by
federal, state, and local government. The area also has a significant
population of retired military personnel.
The Company's market area also includes the Longview and Woodland communities
in southwestern Washington. The population of Cowlitz County, in which
Longview and Woodland are located, is approximately 85,000. 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.
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. Legislation has
recently been passed by the Washington legislature (effective June 1996) that
allows, subject to certain conditions, mergers or other combinations,
relocations of a bank's main office and branching across state lines in advance
of the June 1, 1997 date established by federal law (see "Supervision and
Regulation -- Other Regulatory Developments"). 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. The Company's strategy involves significant expansion throughout
the Tacoma 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, 1996, the Company had 247 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.
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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
- -----------------------------------------------------------------------------------------------------
A. G. Espe(1) 60 Director, Chairman and Chief Executive Officer 1990
W. W. Philip(2) 70 Director, President and Chief Operating Officer 1993
Donald A. Andersen(3) 51 Senior Vice President, Senior Credit 1996
Administrator - Columbia Bank
Julie A. Healy(4) 41 Senior Vice President, Operations Manager 1994
H. R. Russell(5) 42 Senior Vice President, Senior Loan Production 1996
Officer - Columbia Bank
Gary R. Schminkey(6) 39 Senior Vice President and Chief Financial 1993
Officer
Evans Q. Whitney(7) 53 Senior Vice President, Human Resources Director 1994
(1) Mr. Espe has been Chairman of the Board of the Company since September 1990
and Chief Executive Officer of the Company since march 1993. Mr. Espe, who
is also Chairman of the Board of Columbia Bank and of Northrim Bank, has
extensive banking and business experience. From 1985 to 1989, Mr. Espe
served as Chairman of the Board, President and Chief Executive Officer of
Key Pacific Bancorp.
(2) 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.
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.
(3) 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.
(4) 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.
(5) Mr. Russell joined Columbia Bank as Senior Vice President -- Commercial
Loans in October 1993. 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.
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(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.
(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 62 of the Annual Report to
Shareholders for the year ended December 31, 1996 ("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 20 of the Annual Report for additional details on various
asset and liability categories.
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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.
1996 Compared to 1995 1995 Compared to 1994
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------- --------------------------
(in thousands) Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans:
Commercial business $3,628 $ (832) $2,796 $2,728 $ 986 $3,714
One- to four-family residential (349) (304) (653) 1,693 885 2,578
Five or more family residential and
commercial properties 3,291 (146) 3,145 3,002 85 3,087
Consumer 967 (245) 722 1,439 230 1,669
- ----------------------------------------------------------------------------------------------------------------
Total loans 7,537 (1,527) 6,010 8,862 2,186 11,048
Securities 492 18 510 (40) 76 36
Interest-earning deposits with banks 850 (28) 822 55 (75) (20)
- ----------------------------------------------------------------------------------------------------------------
Total interest revenue $8,879 $(1,537) $7,342 $8,877 $2,187 $11,064
================================================================================================================
INTEREST EXPENSE
Certificates of deposit $1,176 $ (29) $1,147 $2,424 $1,546 $3,970
Savings accounts (81) 20 (61) (257) 31 (226)
Interest-bearing demand 2,236 (238) 1,998 1,261 1,076 2,337
- ----------------------------------------------------------------------------------------------------------------
Total interest on deposits 3,331 (247) 3,084 3,428 2,653 6,081
Federal Home Loan Bank advances 459 (97) 362 200 143 343
Other borrowings (70) (17) (87) (324) (17) (341)
- ----------------------------------------------------------------------------------------------------------------
Total interest expense $3,720 $ (361) $3,359 $3,304 $2,779 $6,083
================================================================================================================
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INVESTMENTS
For additional information concerning securities (securities available for
sale), see Note 4 of "Notes to Consolidated Financial Statements" at page 46 of
the Annual Report and "Management Discussion - Securities" at page 28 of the
Annual Report, all of which are incorporated herein by reference.
Investment securities are those securities which the Company has the ability
and the intent to hold to maturity. Events which may be reasonably anticipated
are considered when determining the Company's intent to hold investment
securities for the foreseeable future. Investment securities are carried at
cost, adjusted for amortization of premiums and accretion of discounts.
Securities to be held for indefinite periods of time and not intended to be
held to maturity are classified as available for sale and carried at fair
value. Securities held for indefinite periods of time 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 risks.
At December 31, 1996, all of the Company's securities were classified in the
"available for sale" portfolio. At December 31, 1996, there were no securities
of any issuer that exceeded ten percent of shareholders' equity.
The following table summarizes the amortized cost, gross unrealized gains and
losses and the resulting market value of securities available for sale.
Gross Gross
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------
December 31, 1996:
U.S. Treasury & government agency $30,441 $40 $30,481
Mortgage-backed 10,874 ($114) 10,760
FHLB stock 4,248 4,248
- -----------------------------------------------------------------------------------------------------------
Total $45,563 $40 ($114) $45,489
===========================================================================================================
December 31, 1995:
U.S. Treasury & government agency $ 6,935 $13 $ 6,948
Mortgage-backed 12,572 ($126) 12,446
FHLB stock 3,281 3,281
- -----------------------------------------------------------------------------------------------------------
Total $22,788 $13 ($126) $22,675
===========================================================================================================
December 31, 1994:
Mortgage-backed $ 3,079 ($361) $ 2,718
===========================================================================================================
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At December 31, 1996 and 1995, the Company had no securities held for
investment purposes. The following table summarizes the recorded value, gross
unrealized gains and losses and the resulting market value of investment
securities as of December 31, 1994:
Gross Gross
Recorded Unrealized Unrealized Market
- -----------------------------------------------------------------------------------------------------------
(in thousands) Value Gains Losses Value
December 31, 1994:
U.S. Treasury $ 1,003 ($ 17) $ 986
Mortgage-backed 16,389 ( 863) 15,526
FHLB stock and other 2,149 2,149
- -----------------------------------------------------------------------------------------------------------
Total $19,541 ($880) $18,661
===========================================================================================================
The following table provides the carrying values, maturities and weighted
average yields of the Company's "available for sale" portfolio at December 31,
1996.
Maturing
------------------------------------------------------------------
After 1 After 5
Within 1 But Within But Within After 10
(dollars in thousands) Year 5 Years 10 Years Years Total
- --------------------------------------------------------------------------------------------------------------
U.S. Treasury
Balance $15,040 $ 2,000 $ 17,040
Weighted Average Yield 5.74% 5.68% 5.73%
U.S. government agency
Balance 11,728 $1,713 13,441
Weighted Average Yield 6.56% 6.51% 6.55%
Mortgage-backed (1)
Balance 8,801 $1,959 10,760
Weighted Average Yield 5.32% 6.17% 5.47%
FHLB stock and other (2)
Balance 4,248 4,248
Weighted Average Yield 7.80% 7.80%
- --------------------------------------------------------------------------------------------------------------
Total
Balance $15,040 $22,529 $1,959 $5,961 $45,489
Weighted Average Yield 5.74% 6.00% 6.17% 7.43% 6.11%
- --------------------------------------------------------------------------------------------------------------
(1) The maturities reported for mortgage-backed securities are based on
contractual maturities and principal amortization.
(2) The weighted average yield on FHLB stock is based upon the dividend yield
and average balances for the 12 months ended December 31, 1996.
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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, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
Commercial business $169,318 $113,775 $ 72,829 $ 44,772 $ 16,511
Real estate:
One-to four-family residential 67,709 67,991 76,260 55,804 53,161
Five or more family residential and
commercial properties 128,803 97,103 68,531 45,193 30,681
- -----------------------------------------------------------------------------------------------------------
Total real estate 196,512 165,094 144,791 100,997 83,842
Real estate construction:
One- to four-family residential 21,380 22,741 17,411 16,328 9,408
Five or more family residential and
commercial properties 10,680 8,884 4,004 4,799 4,689
- -----------------------------------------------------------------------------------------------------------
Total real estate construction 32,060 31,625 21,415 21,127 14,097
Consumer 48,807 43,343 30,860 14,417 6,584
- -----------------------------------------------------------------------------------------------------------
Subtotal 446,697 353,837 269,895 181,313 121,034
Less deferred loan fees and other (602) (744) (899) (297) (237)
- -----------------------------------------------------------------------------------------------------------
Total loans $446,095 $353,093 $268,996 $181,016 $120,797
===========================================================================================================
Loans held for sale $ 11,341 $ 1,367 $ 1,612 $ 1,777 $ 2,021
===========================================================================================================
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, 1996, 1995 and 1994
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 December 31,
1996, 1995 and 1994.
The following table presents at December 31, 1996, (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.
Maturing
------------------------------------------------------------------
After 1 But After Five
(in thousands) Within 1 Year Within 5 Years Years Total
- -----------------------------------------------------------------------------------------------------------
Commercial business $146,357 $22,509 $452 $169,318
Real estate construction 31,852 55 153 32,060
- -----------------------------------------------------------------------------------------------------------
Total $178,209 $22,564 $605 $201,378
===========================================================================================================
Fixed rate loans $17,561 $605 $ 18,166
Variable rate loans 5,003 5,003
- -----------------------------------------------------------------------------------------------------------
Total $22,564 $605 $ 23,169
===========================================================================================================
10
15
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, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
Nonaccrual $2,227 $ 435 $ 452 $1,631 $ 650
Restructured 25 29 44 94 109
- -----------------------------------------------------------------------------------------------------------
Total nonperforming loans 2,252 464 496 1,725 759
Real estate owned 40 3,304 3,227 3,305 2,959
- -----------------------------------------------------------------------------------------------------------
Total nonperforming assets $2,292 $3,768 $3,723 $5,030 $3,718
===========================================================================================================
Accruing loans past-due 90 days or $ 152 $ 82
more
===========================================================================================================
Potential problem loans $ 213
===========================================================================================================
For information pertaining to risk elements, see the appropriate sections in
"Management Discussion - Loan Portfolio" beginning at page 24 of the Annual
Report, "Management Discussion - Nonperforming Assets" beginning at page 26 of
the Annual Report and Note 5 of "Notes to Consolidated Financial Statements"
beginning at page 47 of the Annual Report, all of which are incorporated herein
by reference.
11
16
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, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
Total loans, net at end of period $446,095 $353,093 $268,996 $181,016 $120,797
Daily average loans 405,131 318,039 222,236 140,353 107,182
- -----------------------------------------------------------------------------------------------------------
Balance of allowance for loan losses
at beginning of period $ 3,748 $ 2,711 $ 1,992 $ 1,539 $ 1,426
Charge-offs:
Real estate:
One- to four-family residential (31)
Five or more family residential and
commercial properties (18)
Commercial business (514) (148) (258) (72) (45)
Consumer (170) (115) (106) (38) (32)
- -----------------------------------------------------------------------------------------------------------
Total charge-offs (684) (263) (364) (110) (126)
Recoveries:
Real estate:
One-to four-family residential 1
Five or more family residential and
commercial properties
Commercial business 17 45 83 56 47
Consumer 3 5 5 16
- -----------------------------------------------------------------------------------------------------------
Total recoveries 20 50 83 61 64
- -----------------------------------------------------------------------------------------------------------
Net charge-offs (664) (213) (281) (49) (62)
Provision charged to expense 1,420 1,250 1,000 502 170
Allowance acquired in purchase of
branch 5
- -----------------------------------------------------------------------------------------------------------
Balance of allowance for loan losses at
end of period $ 4,504 $ 3,748 $ 2,711 $ 1,992 $ 1,539
===========================================================================================================
Ratio of net charge-offs during period
to average loans outstanding 0.16% 0.07% 0.13% 0.03% 0.06%
===========================================================================================================
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 27 of the Annual Report, which is
incorporated herein by reference.
12
17
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, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
Balance at End of Total Total Total Total Total
Period Applicable to: Amount Loans* Amount Loans* Amount Loans* Amount Loans* Amount Loans*
- -------------------------------------------------------------------------------------------------------------------
Commercial business $3,103 37.9% $1,796 32.2% $1,369 27.0% $ 389 23.6% $ 348 13.2%
Real estate and
construction:
One- to four-family 933 19.9 560 25.6 687 34.7 489 42.6 390 53.4
residential
Five or more family
residential 294 31.3 187 30.0 146 26.9 545 26.3 264 28.2
and commercial
properties
Consumer 402 10.9 284 12.2 216 11.4 138 7.5 88 5.2
Unallocated (228) 921 293 431 449
- -------------------------------------------------------------------------------------------------------------------
Total $4,504 100.0% $3,748 100.0% $2,711 100% $1,992 100% $1,539 100%
===================================================================================================================
*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, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
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 $142,103 3.62% $ 79,706 3.95% $ 38,962 2.09%
Savings accounts 21,673 2.80 24,547 2.73 33,938 2.64
Certificates of deposit 189,122 5.66 168,351 5.68 122,198 4.58
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 352,898 4.67 272,604 4.91 195,098 3.74
Demand and other
noninterest-bearing 60,691 42,167 26,238
- -------------------------------------------------------------------------------------------------------------------
Total deposits $413,589 $314,771 $221,336
===================================================================================================================
The following table shows the amount and maturity of certificates of deposit
that had balances of more than $100,000:
(in thousands) December 31, 1996
- ------------------------------------------------------------------------------------------------
Remaining maturity
Three months or less $38,318
Over three through six months 16,408
Over six through twelve months 18,870
Over twelve months 7,626
- ------------------------------------------------------------------------------------------------
Total $81,222
================================================================================================
13
18
SIGNIFICANT FINANCIAL RATIOS
Ratios for the last three years, based on daily average balances, are as
follows:
1996 1995 1994
- ------------------------------------------------------------------------------------------------------
Return on assets 0.73% 0.74% (0.22%)
Return on equity 9.68 9.25 (2.12)
Dividend payout ratio
Equity to assets 7.55 7.95 10.38
SHORT-TERM BORROWINGS
At December 31, 1996, 1995 and 1994, 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
19
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, 1996, the Company's leverage ratio was
10.62% compared with 7.72% at December 31, 1995. The Company's Tier I and
total capital ratios were 12.81% and 13.79%, respectively, at December 31,
1996, compared with 9.10% and 10.95% at December 31, 1995.
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
20
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 for the next three years beginning
on January 1, 1997 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 0.064% for the year 1997. Management also anticipates
that its total assessment rate for BIF-insured deposits will be 0.013% for the
year 1997. At December 31, 1996, approximately $169.8 million, or 34.4%, 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, 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
21
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 takes 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 takes 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 office 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 two laws'
disclosure requirements; (ii) eliminate civil liabiltity 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
22
ITEM 2. PROPERTIES
The Company's executive offices and the Main Office of Columbia Bank are
located in approximately 37,500 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 $34,000 per month for the
first five 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, 1996, Columbia Bank had 11 offices in
Pierce County, including the Main Office ( 8 leased and 3 owned), two offices
in Longview (both owned), one office in Bellevue (leased), one office in
Federal Way (leased), 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 49 of the Annual Report, which is
incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
For information concerning legal proceedings, see Note 12 of "Notes to
Consolidated Financial Statements" at page 53 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 & Dividend Payments" at page
33 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 15, 60 and 62, respectively, of the Annual Report, which is
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 20 through 33 of the Annual Report and "Consolidated Five-Year Summary of
Average Balances and Net Interest Revenue" at page 62 of the Annual Report, all
of which are incorporated herein by reference.
18
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For consolidated financial statements of the Company, see "Audited Financial
Statements" beginning at page 36 of the Annual Report which is incorporated
herein by reference. The "Summary of Quarterly Financial Information
(Unaudited)" on page 59 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 "Recent Change in Accounting Firms" on page 33 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 "Information With Respect to Nominees"
beginning at page 2 of the Company's definitive Proxy Statement dated March 20,
1997 (the "Proxy Statement") for the annual meeting of shareholders to be held
April 23, 1997.
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.
ITEM 11. EXECUTIVE COMPENSATION
For information concerning executive compensation see "Executive Compensation"
beginning at page 6 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 "Information With Respect to Nominees" beginning at page 2
and 12 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 13 of the
Proxy Statement, which is incorporated herein by reference.
19
24
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, 1996, are incorporated by reference
in Item 8:
Page
----
Consolidated Statements of Operations--Years ended December 31, 1996, 1995 and 1994 36
Consolidated Balance Sheets--December 31, 1996 and 1995 38
Consolidated Statements of Shareholders' Equity--Years ended
December 31, 1996, 1995 and 1994 40
Consolidated Statements of Cash Flows--Years ended December 31, 1996, 1995 and 1994 42
Notes to Consolidated Financial Statements 44
Report of Independent Accountants 35
(2) Exhibits:
See "Index to Exhibits" at page 23 of this Form 10-K.
(b) Reports on Form 8-K:
None
20
25
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 24th day of March,
1997.
Columbia Banking System, Inc.
(Registrant)
By /s/ A. G. Espe
------------------------------
A. G. Espe
Chairman 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 24th day of March, 1997.
Principal Executive Officer:
/s/ A. G. Espe
------------------------------
A. G. Espe
Chairman and
Chief Executive Officer
Principal Financial Officer:
/s/ Gary R. Schminkey
------------------------------
Gary R. Schminkey
Senior Vice President and
Chief Financial Officer
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A. G. Espe, pursuant to powers of attorney which are being filed with this
Annual Report on Form 10-K, has signed this report on March 24, 1997 as
attorney-in-fact for the following directors who constitute a majority of the
board of directors.
W. Barry Connoley Robert Quoidbach
Richard S. DeVine Donald Rodman
Jack Fabulich Frank Russell
Jonathan Fine Sidney R. Snyder
Margel Gallagher James M. Will, Jr.
John A. Halleran
/s/ A. G. Espe
------------------------------
A. G. Espe
Attorney-in-fact
March 24, 1997
22
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INDEX TO EXHIBITS
Exhibit
No.
- --------
3 (a) Restated Articles of Incorporation of the Company. (1)
(b) Restated Bylaws of the Company. (4)
4 Form of Indenture. (1)
10 (a) Lease dated May 7, 1993 between the Company and William B.
Swensen Enterprises for Tacoma Main Office
premises of Columbia Bank. (2)
(b) Amended Employee Stock Option Plan dated July 19, 1993. (2)
*(c) Amended Employment Agreement dated December 30, 1993 between the
Company and A. G. Espe. (3)
*(d) Amended Employment Agreement between the Company and A. G. Espe,
dated as of September 25, 1996, effective January 1, 1997. (6)
*(e) Amended Employment Agreement dated December 30, 1993 between the
Company and W. W. Philip, as further amended effective
December 29, 1995. (7)
*(f) Amended Employment Agreement between the Company and W. W.
Philip dated as of September 25, 1996, effective January 1,
1997, except with respect to section 4.3 (granting restricted
stock award) which is immediately effective. (6)
(g) Agreement of September 30, 1994 with the Federal Deposit
Insurance Corporation regarding termination of the
Assistance Agreement dated August 2, 1988 among the Federal
Savings and Loan Insurance Corporation, Columbia Savings Bank
and the Company. The termination agreement also resulted in the
termination of the Regulatory Capital Maintenance Agreement
dated August 2, 1988 among the Company, Stanley B. Rose
Company, Stanley B. Rose, Columbia Savings Bank and the Federal
Savings and Loan Insurance Corporation. (4)
(h) Amended Agreement Granting Options to NorCap, Ltd. to Purchase
Shares of Common Stock of the Company dated September 26,
1990. (1)
(i) Cash or Deferred Profit Sharing Plan effective as of July 1,
1992. (2)
(j) Data processing servicing agreement dated May 3, 1993 between
the Company and M&I Data Services. (3)
11 Statement re computation of per share earnings.
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13 The Company's Annual Report to Shareholders for the fiscal year
ended December 31, 1996. (5)
21 Subsidiaries of the Company are:
(a) Columbia State Bank, Tacoma, Washington, a Washington
state-chartered commercial bank.
24 Powers of Attorney dated February 26, 1997.
(1) Incorporated by reference to the Form S-1 (Registration No.
33-47711) previously filed by the Company, declared
effective on June 16, 1992.
(2) Incorporated by reference to the Form SB-2 (Registration No.
33-66224) previously filed by the Company, declared
effective on August 16, 1993.
(3) Incorporated by reference to the Annual Report on Form 10-KSB
for the year ended December 31, 1993 previously
filed by the Company.
(4) Incorporated by reference to the Annual Report on Form 10-K
for the year ended December 31, 1994 previously
filed by the Company.
(5) Portions of the Annual Report to Shareholders have been
specifically incorporated by reference elsewhere in this
report.
(6) Incorporated by reference to the Form S-2 (Registration No.
333-14465) previously filed by the Company, declared
effective November 12, 1996.
(7) Incorporated by reference to the Annual Report on Form 10-K
for the year ended December 31, 1995 previously
filed by the Company.
* The listed documents are management contracts which contain
compensatory arrangements.
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