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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 September 30, 2002.
/_/ 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.
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(Exact name of issuer as specified in its charter)
Washington 91-1422237
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1301 "A" Street
Tacoma, Washington 98401
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(Address of principal (Zip Code)
executive offices)
(253) 305-1900
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(Issuer's telephone number, including area code)
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(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
October 31, 2002 was 13,266,433
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TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Page
----
Item 1. Consolidated Condensed Unaudited Financial Statements
Consolidated Condensed Statements of Operations -
three months and nine months ended September 30, 2002 and 2001 ... 1
Consolidated Condensed Balance Sheets -
September 30, 2002 and December 31, 2001 ......................... 2
Consolidated Condensed Statements of Shareholders' Equity -
twelve months ended December 31, 2001, and
nine months ended September 30, 2002 ............................. 3
Consolidated Condensed Statements of Cash Flows -
nine months ended September 30, 2002 and 2001 .................... 4
Notes to Consolidated Condensed Financial Statements ............. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk ....... 23
Item 4. Controls and Procedures .......................................... 24
PART II -- OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K ................................. 24
Signatures ....................................................... 25
Certifications ................................................... 26
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
COLUMBIA BANKING SYSTEM, INC.
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
(IN THOUSANDS EXCEPT PER SHARE) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ 19,976 $ 24,135 $ 60,384 $ 76,027
Securities available for sale 2,814 1,329 8,356 4,226
Securities held to maturity 52 67 164 202
Deposits with banks 129 105 184 943
- ----------------------------------------------------- -------- -------- -------- --------
Total interest income 22,971 25,636 69,088 81,398
INTEREST EXPENSE
Deposits 6,020 10,029 18,834 35,598
Federal Home Loan Bank advances 427 326 1,632 1,639
Trust preferred obligations 305 272 920 272
Other borrowings 39 279
- ----------------------------------------------------- -------- -------- -------- --------
Total interest expense 6,752 10,666 21,386 37,788
- ----------------------------------------------------- -------- -------- -------- --------
NET INTEREST INCOME 16,219 14,970 47,702 43,610
Provision for loan losses 4,035 1,250 13,080 3,050
- ----------------------------------------------------- -------- -------- -------- --------
Net interest income after provision for loan losses 12,184 13,720 34,622 40,560
NONINTEREST INCOME
Service charges and other fees 2,347 1,863 6,265 5,214
Mortgage banking 900 571 2,059 1,772
Merchant services fees 1,412 1,195 3,691 3,258
Gain on sale of investment securities, net 183 70 417 107
Bank owned life insurance (BOLI) 332 196 936 196
Other 334 264 824 791
- ----------------------------------------------------- -------- -------- -------- --------
Total noninterest income 5,508 4,159 14,192 11,338
NONINTEREST EXPENSE
Compensation and employee benefits 7,285 6,780 21,984 19,923
Occupancy 2,086 1,997 6,107 5,573
Merchant processing 584 421 1,507 1,387
Advertising and promotion 313 556 1,636 1,353
Data processing 446 491 1,378 1,421
Taxes, licenses and fees 436 489 1,287 1,558
Gains on, and net cost of, other real estate owned (1,159) (329) (1,193) (314)
Other 2,482 2,306 7,612 6,900
- ----------------------------------------------------- -------- -------- -------- --------
Total noninterest expense 12,473 12,711 40,318 37,801
- ----------------------------------------------------- -------- -------- -------- --------
Income before income taxes 5,219 5,168 8,496 14,097
Provision for income taxes 1,532 1,696 2,083 4,753
- ----------------------------------------------------- -------- -------- -------- --------
NET INCOME $ 3,687 $ 3,472 $ 6,413 $ 9,344
===================================================== ======== ======== ======== ========
Net income per common share:
Basic $ 0.28 $ 0.25 $ 0.49 $ 0.68
Diluted 0.28 0.25 0.48 0.67
Average number of common shares outstanding 13,172 13,666 13,158 13,656
Average number of diluted common shares outstanding 13,325 13,885 13,307 13,846
See accompanying notes to consolidated condensed financial statements.
1
CONSOLIDATED CONDENSED BALANCE SHEETS
COLUMBIA BANKING SYSTEM, INC.
(IN THOUSANDS)
(UNAUDITED)
September 30, December 31,
2002 2001
- -------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 74,546 $ 57,628
Interest-earning deposits with banks 60,001 9,361
- ---------------------------------------------------------------- ---------- ----------
Total cash and cash equivalents 134,547 66,989
Securities available for sale at fair value (amortized cost
of $235,754 and $145,550 respectively) 236,770 144,465
Securities held to maturity (fair value of $7,014 and $8,024
respectively) 6,787 7,856
Federal Home Loan Bank stock 9,557 9,141
Loans held for sale 21,121 29,364
Loans, net of unearned income of ($2,700) and ($2,894) respectively 1,167,633 1,170,633
Less: allowance for loan losses 18,426 14,734
- ---------------------------------------------------------------- ---------- ----------
Loans, net 1,149,207 1,155,899
Interest receivable 6,827 6,405
Premises and equipment, net 53,554 52,297
Real estate owned 4,681 197
Other 38,319 25,681
- ---------------------------------------------------------------- ---------- ----------
Total Assets $1,661,370 $1,498,294
================================================================ ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 287,964 $ 242,971
Interest-bearing 1,149,764 1,063,779
- ---------------------------------------------------------------- ---------- ----------
Total deposits 1,437,728 1,306,750
Federal Home Loan Bank advances 65,637 40,000
Trust preferred obligations 21,416 21,367
Other liabilities 8,890 11,211
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Total liabilities 1,533,671 1,379,328
Shareholders' equity:
Preferred stock (no par value)
Authorized, 2 million shares; none outstanding
September 30, December 31,
Common stock (no par value) 2002 2001
------ ------
Authorized shares 60,032 60,032
Issued and outstanding 13,265 13,207 110,814 101,892
Retained earnings 16,224 17,779
Accumulated other comprehensive income (loss) -
Unrealized gains (losses) on securities available
for sale, net of tax 661 (705)
- ---------------------------------------------------------------- ---------- ----------
Total shareholders' equity 127,699 118,966
- ---------------------------------------------------------------- ---------- ----------
Total Liabilities and Shareholders' Equity $1,661,370 $1,498,294
================================================================ ========== ==========
See accompanying notes to consolidated condensed financial statements.
2
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
COLUMBIA BANKING SYSTEM, INC.
COMMON STOCK ACCUMULATED
---------------------- OTHER TOTAL
NUMBER OF RETAINED COMPREHENSIVE SHAREHOLDERS'
(IN THOUSANDS) SHARES AMOUNT EARNINGS INCOME (LOSS) EQUITY
- ---------------------------------------- -------- -------- -------- -------- --------
BALANCE AT JANUARY 1, 2001 13,689 $ 92,673 $ 21,649 $ (499) $113,823
Comprehensive income:
Net income for 2001 12,513
Realized gains on securities
available for sale included in (1,118)
net income, net of tax of $602
Change in unrealized losses on
securities available for sale,
net of tax of $491 912
Total comprehensive income 12,307
Issuance of stock under stock option
and other plans 178 1,796 1,796
Issuance of shares of common stock--
10% stock dividend 16,383 (16,383)
Retirement of shares of common stock--
Stock repurchase plan (660) (8,960) (8,960)
- ---------------------------------------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 2001 13,207 101,892 17,779 (705) 118,966
- ---------------------------------------- -------- -------- -------- -------- --------
(UNAUDITED)
Comprehensive income:
Net income for 2002 6,413
Realized gains on securities
available for sale included in (271)
net income, net of tax of $146
Change in unrealized gains and
losses on securities available for
sale, net of tax of $882 1,637
Total comprehensive income 7,779
Issuance of stock under stock option
and other plans 58 954 954
Issuance of shares of common stock--
5% stock dividend 7,968 (7,968)
- ---------------------------------------- -------- -------- -------- -------- --------
BALANCE AT SEPTEMBER 30, 2002 13,265 $110,814 $ 16,224 $ 661 $127,699
======================================== ======== ======== ======== ======== ========
See accompanying notes to consolidated condensed financial statements.
3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
COLUMBIA BANKING SYSTEM, INC.
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
(IN THOUSANDS) 2002 2001
- ----------------------------------------------------------------------------------- ---------- ----------
OPERATING ACTIVITIES
Net income $ 6,413 $ 9,344
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 13,080 3,050
Gains on sale of real estate owned (53) (373)
Depreciation and amortization 3,261 1,316
Deferred income tax expense 426 714
Net realized gain on sale of assets (419) (99)
Decrease (increase) in loans held for sale 8,243 (7,983)
(Increase) decrease in interest receivable (422) 2,725
Decrease in interest payable (2,757) (2,736)
Net changes in other assets and liabilities (12,227) (19,006)
- ----------------------------------------------------------------------------------- ---------- ----------
Net cash provided (used) by operating activities 15,545 (13,048)
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 12,733 66,756
Proceeds from maturities of securities available for sale 449 17,898
Purchases of securities available for sale (20,089) (34,827)
Proceeds from sales of mortgage-backed securities available for sale 10,376
Proceeds from maturities of mortgage-backed securities available for sale 28,674 1,801
Purchases of mortgage-backed securities available for sale (113,419) (42,772)
Proceeds from maturities of securities held to maturity 1,068 388
Stock dividends from Federal Home Loan Bank stock (416) (444)
Loans originated and acquired, net of principal collected (13,072) (4,252)
Purchases of premises and equipment (4,092) (6,335)
Proceeds from disposal of premises and equipment 38 980
Proceeds from sale of real estate owned 2,341 2,190
Proceeds from sale of other personal property owned 179
- ----------------------------------------------------------------------------------- ---------- ----------
Net cash (used) provided by investing activities (105,606) 11,759
FINANCING ACTIVITIES
Net increase (decrease) in deposits 130,978 (31,155)
Net decrease in other borrowings (4,500)
Net increase (decrease) in Federal Home Loan Bank advances 25,637 (12,700)
Proceeds from issuance of trust preferred obligations 21,350
Proceeds from issuance of common stock, net 954 1,272
Repurchase of common stock (4,046)
Other, net 50
- ----------------------------------------------------------------------------------- ---------- ----------
Net cash provided (used) by financing activities 157,619 (29,779)
- ----------------------------------------------------------------------------------- ---------- ----------
Increase (decrease) in cash and cash equivalents 67,558 (31,068)
Cash and cash equivalents at beginning of period 66,989 120,445
- ----------------------------------------------------------------------------------- ---------- ----------
Cash and cash equivalents at end of period $ 134,547 $ 89,377
=================================================================================== ========== ==========
Supplemental information:
Cash paid for interest $ 24,144 $ 40,524
Cash paid for income taxes 2,605 3,153
Loans foreclosed and transferred to real estate owned
or other personal property owned 8,099 948
See accompanying notes to consolidated condensed financial statements.
4
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
COLUMBIA BANKING SYSTEM, INC.
Columbia Banking System, Inc. (the "Company" or "CBSI") 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
36 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 condensed 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 and nine months ended September 30, 2002 are not
necessarily indicative of results to be anticipated for the year ending December
31, 2002. 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, 2001.
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 in diluted earnings per share of 153,000 and 219,000 for the three
months ended September 30, 2002 and 2001, respectively, and 149,000 and 190,000
for the nine months ended September 30, 2002 and 2001, respectively.
3. STOCK DIVIDEND
On April 2, 2002, the Company announced a 5% stock dividend payable on April 30,
2002, to shareholders of record as of April 16, 2002. Average shares outstanding
and net income per share for all periods presented have been retroactively
adjusted to give effect to this transaction.
4. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
Under SFAS No. 142, goodwill is no longer subject to amortization over its
estimated useful life. The Statement also establishes a new method of testing
goodwill for impairment. The Company implemented SFAS No. 142 on January 1,
2002, and the adoption of this Statement did not have a material impact on the
Company's financial condition or results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which takes effect for fiscal years beginning after June 15, 2002.
SFAS No. 143 establishes the initial and subsequent accounting for legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or normal operation of a
long-lived asset. The Company will adopt SFAS No. 143 as of January 1, 2003. The
adoption of SFAS No. 143 is not expected to materially impact the Company's
consolidated results of operations, financial position, or cash flows.
5
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which supercedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 144 retains the fundamental provisions of SFAS No. 121 but sets
forth new criteria for asset classification and broadens the scope of qualifying
discontinued operations. The new standard is effective for fiscal years
beginning after December 15, 2001. The Company adopted SFAS No. 144 as of
January 1, 2002 and the impact to its consolidated results of operations and
financial condition was not material.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement eliminates extraordinary accounting treatment for reporting gain
or loss on debt extinguishment, and amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The lease provisions of
the statement are effective for transactions after May 15, 2002, with the
remaining provisions effective for financial statements issued after that date.
The Company adopted SFAS No. 145 in the second quarter of 2002 and the adoption
did not have a material impact to its consolidated results of operations and
financial condition.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement requires recording costs
associated with exit or disposal activities when a liability has been incurred.
Under previous guidance, certain exit costs were accrued upon management's
commitment to an exit plan, which is generally before an actual liability has
been incurred. The new standard is effective for transactions initiated after
December 31, 2002. The Company will adopt SFAS No. 146 as of January 1, 2003.
The adoption of SFAS No. 146 is not expected to materially impact the Company's
consolidated results of operations, financial position, or cash flows.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain Financial
Institutions" allowing financial institutions meeting certain criteria to
reclassify unidentifiable intangible asset balances to goodwill and cease
amortization. The new standard is effective for acquisition transactions
completed on or after October 1, 2002. The Company adopted SFAS No. 147 as of
October 1, 2002, and the adoption is not expected to materially impact the
Company's consolidated results of operations, financial position, or cash flows.
5. 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 certain commercial loan
products offered in the Bank's branch offices. Real estate lending includes
single-family residential, multi-family residential, 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 marketing and back office support
functions are not allocated to the major lines of business.
Since 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:
6
CONDENSED STATEMENTS OF OPERATIONS:
THREE MONTHS ENDED SEPTEMBER 30, 2002
COMMERCIAL RETAIL REAL ESTATE
(IN THOUSANDS) BANKING BANKING LENDING OTHER TOTAL
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------
Net interest income after provision
for loan losses $ 2,989 $ 8,789 $ 3,505 $ (3,099) $ 12,184
Other income 254 1,634 910 2,710 5,508
Other expense (742) (4,768) (639) (6,324) (12,473)
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------
Contribution to overhead and profit $ 2,501 $ 5,655 $ 3,776 $ (6,713) $ 5,219
Income taxes 1,532
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------
Net income $ 3,687
============================================ ============ ============ ============ ============ ============
Total assets $ 344,458 $ 599,434 $ 327,861 $ 389,617 $ 1,661,370
============================================ ============ ============ ============ ============ ============
THREE MONTHS ENDED SEPTEMBER 30, 2001
COMMERCIAL RETAIL REAL ESTATE
(IN THOUSANDS) BANKING BANKING LENDING OTHER TOTAL
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------
Net interest income after provision
for loan losses $ 2,693 $ 8,814 $ 3,319 $ (1,106) $ 13,720
Other income 210 1,266 572 2,111 4,159
Other expense (697) (3,124) (583) (8,307) (12,711)
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------
Contribution to overhead and profit $ 2,206 $ 6,956 $ 3,308 $ (7,302) $ 5,168
Income taxes (1,696)
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------
Net income $ 3,472
============================================ ============ ============ ============ ============ ============
Total assets $ 311,293 $ 649,996 $ 336,233 $ 180,693 $ 1,478,215
============================================ ============ ============ ============ ============ ============
7
NINE MONTHS ENDED SEPTEMBER 30, 2002
COMMERCIAL RETAIL REAL ESTATE
(IN THOUSANDS) BANKING BANKING LENDING OTHER TOTAL
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------
Net interest income after provision $ 8,560 $ 24,566 $ 11,387 $ (9,891) $ 34,622
for loan losses
Other income 631 4,271 2,072 7,218 14,192
Other expense (2,150) (14,380) (2,063) (21,725) (40,318)
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------
Contribution to overhead and profit $ 7,041 $ 14,457 $ 11,396 $ (24,398) $ 8,496
Income taxes (2,083)
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------
Net income $ 6,413
============================================ ============ ============ ============ ============ ============
Total assets $ 344,458 $ 599,434 $ 327,861 $ 389,617 $ 1,661,370
============================================ ============ ============ ============ ============ ============
NINE MONTHS ENDED SEPTEMBER 30, 2001
COMMERCIAL RETAIL REAL ESTATE
(IN THOUSANDS) BANKING BANKING LENDING OTHER TOTAL
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------
Net interest income after provision $ 8,612 $ 25,441 $ 8,962 $ (2,455) $ 40,560
for loan losses
Other income 514 3,605 1,797 5,422 11,338
Other expense (1,997) (13,221) (1,803) (20,780) (37,801)
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------
Contribution to overhead and profit $ 7,129 $ 15,825 $ 8,956 $ (17,813) $ 14,097
Income taxes (4,753)
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------
Net income $ 9,344
============================================ ============ ============ ============ ============ ============
Total assets $ 311,293 $ 649,996 $ 336,233 $ 180,693 $ 1,478,215
============================================ ============ ============ ============ ============ ============
6. STOCK REPURCHASE
In March 2002 the Board of Directors approved a stock repurchase program whereby
the Company may systematically repurchase up to 500,000 of its outstanding
shares of Common Stock. The Company intends to repurchase shares from time to
time in the open market or in private transactions, under conditions which allow
such repurchases to be accretive to earnings while maintaining capital ratios
that exceed the guidelines for a well-capitalized financial institution. As of
September 30, 2002 the Company had not repurchased any shares of common stock in
this current stock repurchase program.
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
condensed 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 MAY BE DEEMED TO INCLUDE 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,
INCLUDING THE IMPACT OF THE EVENTS OF SEPTEMBER 11, 2001, OR ANY SIMILAR EVENTS,
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, AND (7)
THE COMPANY'S ABILITY TO REALIZE THE EFFICIENCIES IT EXPECTS TO RECEIVE FROM ITS
INVESTMENTS IN PERSONNEL AND INFRASTRUCTURE.
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 36 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"). Columbia 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's vision is to become the leading community bank headquartered in
the Pacific Northwest while establishing a significant presence in selected
northwest markets and to achieve superior financial performance at the earliest
practical date, consistent with development of its northwest franchise.
Strategic business combinations may augment internal growth. The Company intends
to build on its reputation for excellent customer service in order to be
recognized in all markets it serves as the bank of choice for small to
medium-sized businesses, business owners and consumers.
Management believes the 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
significant changes to federal banking laws, which allow financial institutions
to engage in a broader range of activities than previously permitted. That
legislation also authorized the creation of financial holding companies to
facilitate such expanded activity. As the Company pursues its growth strategy,
it is possible that the Company will utilize the financial holding company
structure to accommodate an expansion of its products and services.
The Company intends to effect its long-term 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
complementary lines of business, and acquisitions. In particular, the Company
anticipates continued growth in its market areas of Pierce, King, Thurston,
Cowlitz and Kitsap Counties through its existing branch network.
The Company has 36 branches: 21 in Pierce County, 10 in King County, three in
Cowlitz County, one in Kitsap County, and one in Thurston County. Since
beginning its major Pierce County expansion in August 1993, the Company has
expanded from four branches primarily through internal growth. During the third
quarter of 2002, a new branch in downtown Gig Harbor was opened. In light of the
soft economy in the Pacific Northwest, the Company has moderated its branch
growth and does not have any additional branch openings planned in the near
term. Management intends to balance future branch expansion with improved
financial results. New branches normally do not contribute to net income for
many months after opening.
In addition to its branch network, the Company continuously reviews new products
and services to give its customers more financial service options. New
technology and services are reviewed for business development and cost saving
purposes. The Company's online banking service, "Columbia On-Line (TM)" enables
customers 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 commercial customers.
In order to fund its lending activities and to allow for increased contact with
customers, the Company has established a branch system primarily designed to
attract and meet the needs of 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 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. Management anticipates that the Company's expense
ratios will decline as its branches mature.
10
The Company is committed to improving its earnings by focusing on its core
business processes and asset quality while maintaining its commitment to
excellent customer service. The Company has retained the consulting services of
Metavante Corporation to assist earnings improvement by realizing certain cost
reductions and by enhancing revenue. Management expects the implementation of
initiatives identified through this business process improvement project to
decrease noninterest expense growth, increase noninterest income, and improve
net earnings.
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 through 2000;
however, growth slowed noticeably during 2001, and continued to be slow through
the third quarter of 2002. Washington state economists believe the mixed
economic indicators for the Puget Sound region signal the end of the economic
decline; however, the region's growth and recovery is expected to continue to be
slow throughout the remainder of 2002 and into 2003. The labor conflict causing
container shipping to be at a standstill in West Coast ports in late September
and early October has been estimated to have a $1.3 million impact per day on
the state economy. The commercial airline and aerospace industries have
contracted in the Puget Sound region and were significantly impacted by
September 11, 2001 terrorism experienced on the East Coast. After September 11,
Boeing Company press releases estimated a 25% to 27% decline of its 2002
commercial airplane deliveries from deliveries forecasted in the first half of
2001. Consequently, Boeing announced employment layoffs approximating 30,000 by
mid-2002. Over 30,000 layoff notices have been distributed to employees, and
Boeing anticipates continued monthly layoff notices through the end of 2002.
Over 60% of the layoffs to date have affected western Washington employees.
Boeing's Commercial Airlines Chief warned in September 2002 that if airplane
deliveries drop below 2003 projections, employment levels could also drop in
2003. The full impact and timing of these job reductions on the Puget Sound
economy are not yet known; however, economic activity in many areas served by
Columbia Bank is expected to remain relatively weak throughout 2003.
RECENT EVENTS
Mr. Mark Nelson joined the Company in October 2002 as Executive Vice President
and Senior Credit Officer. Mr. Hal Russell, Executive Vice President, and Senior
Loan Production Officer has assumed the Company's loan production
responsibilities.
During the third quarter 2002, the Company finalized a separation and release
agreement with Mr. Gallagher, the Company's former Vice Chairman and Chief
Executive Officer. A consulting agreement with Mr. Gallagher was also entered
into in the third quarter 2002. Both agreements are attached as Exhibits to this
Form 10-Q.
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 costs, and occupancy expense. Similar to
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.
CRITICAL ACCOUNTING POLICIES
Various elements of the Company's accounting policies, by their nature, are
inherently subject to estimation techniques, valuation assumptions and other
subjective assessments. In particular, management has identified several
accounting policies that, due to the judgments, estimates and assumptions
inherent in those policies, are critical to an understanding of the Company's
financial statements. These policies relate to the methodology for the
determination of the allowance for loan losses and the valuation of real estate
owned. These policies and the judgments, estimates and assumptions are described
in greater detail in subsequent sections of Management's Discussion and Analysis
and in the consolidated financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the year ended December 31, 2001.
Management believes that the judgments, estimates and assumptions used in the
preparation of the financial statements are appropriate given the factual
circumstances at the time. However, given the sensitivity of the financial
statements to these critical accounting policies, the use of other judgments,
estimates and assumptions could result in material differences in the results of
operations or financial condition.
NET INCOME
Net income for the third quarter of 2002 was $3.7 million, or $0.28 per diluted
share, compared to $3.5 million, or $0.25 per diluted share, for the third
quarter of 2001, an increase in net income of 6%. Net income for the nine months
ended September 30, 2002, was $6.4 million, or $0.48 per diluted share, a
decrease of 31% compared to $9.3 million, or $0.67 per diluted share for the
same period in 2001. The net income increase for the third quarter 2002 as
compared to the third quarter 2001 is due to a slightly higher net interest
margin and increased noninterest income. The Company recorded higher provisions
for loan losses in the third quarter 2002 as compared to third quarter 2001 as
well as nonrecurring income received from real estate owned (REO). The net
income decrease for the nine-month period is due primarily to a large loan loss
provision leading to a loss in the first quarter 2002.
TOTAL REVENUE
During the third quarter of 2002, total revenue (net interest income plus
noninterest income), increased $2.6 million, or 14% to $21.7 million from $19.1
million in the third quarter of 2001. Total revenue for the first nine months of
2002 increased $6.9 million, or 13%, to $61.9 million from $54.9 million for the
first nine months of 2001. These increases are due to a higher net interest
margin and increased noninterest income during the third quarter and first nine
months of 2002 as compared to the same periods a year ago.
12
NET INTEREST INCOME
Net interest income for the third quarter of 2002 increased 8% to $16.2 million,
from $15.0 million in the third quarter of 2001. For the nine months ended
September 30, 2002, net interest income increased 9% to $47.7 million from $43.6
million for the same period in 2001. Stable interest rates and the Company's
management of its deposit costs in the first nine months of 2002 provided
improved net interest income as compared to the first nine months of 2001, a
period in which interest rates decreased dramatically as the "prime rate"
declined 350 basis points. (A basis point is 1/100th of one percent).
Net interest margin (net interest income divided by average interest-earning
assets) increased to 4.52% in the third quarter of 2002 from 4.49% in the third
quarter of 2001. Average interest-earning assets grew to $1.45 billion, or 9%,
during the third quarter of 2002, compared with $1.33 billion for the same
period in 2001. The yield on average interest-earning assets decreased 130 basis
points (a basis point is 1/100th of 1 percent) to 6.36% during the third quarter
of 2002 compared with 7.66% during the same period of 2001. In comparison,
average interest-bearing liabilities grew to $1.21 billion, or 11%, compared
with $1.09 billion for the same period in 2001, and the average cost of
interest-bearing liabilities decreased 167 basis points to 2.22% during the
third quarter of 2002 from 3.89% in the same period of 2001.
For the first nine months of 2002, net interest margin increased to 4.53% from
4.34% for the same period in 2001. Average interest-earning assets grew 6% to
$1.43 billion during the first nine months of 2002, compared with $1.35 billion
for the same period in 2001. The yield on average interest-earning assets
decreased 155 basis points to 6.53% during the first nine months of 2002 from
8.08% in the same period of 2001. In comparison, average interest-bearing
liabilities grew 8% to $1.19 billion, compared with $1.11 billion for the same
period in 2001, and the cost of average interest-bearing liabilities decreased
to 2.39% during the first nine months of 2002 from 4.56% in the same period of
2001.
Average interest-earning assets increased $20.7 million, or 1%, in the third
quarter 2002 to $1.45 billion compared with the second quarter of 2002. An
increase of $1.7 million in average loans in the third quarter from the second
quarter 2002 was offset by a decrease of $8.3 million in average investments.
The yield on average interest-earning assets decreased 15 basis points to 6.36%
during the third quarter from 6.51% in the second quarter of 2002. During the
third quarter 2002, average interest bearing liabilities increased $8.4 million,
or 1%, to $1.21 billion compared with the second quarter of 2002, including an
increase of $46.9 million in interest-bearing deposits partially offset by a
decrease of $38.6 million in borrowings. The cost of average interest-bearing
liabilities decreased 13 basis points to 2.22% during the third quarter of 2002
from 2.35% in the second quarter of 2002. On November 6, 2002 the Federal
Reserve Board lowered the federal funds rate by 50 basis points and in turn, the
prime rate also declined by 50 basis points. The majority of the Company's
commercial business loan portfolio is indexed to the prime rate and will reprice
immediately. Management expects that a reduction in deposit costs will lag the
current change in prime rate by several months, which may decrease the Company's
net interest margin in the fourth quarter 2002.
13
CONSOLIDATED AVERAGE BALANCES--NET CHANGES
COLUMBIA BANKING SYSTEM, INC.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE SEPTEMBER 30, INCREASE
--------------------------- (DECREASE) --------------------------- (DECREASE)
(IN THOUSANDS) 2002 2001 AMOUNT 2002 2001 AMOUNT
- ------------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
ASSETS
Loans $ 1,178,493 $ 1,219,182 $ (40,689) $ 1,182,924 $ 1,224,533 $ (41,609)
Securities 242,844 95,389 147,455 235,751 99,588 136,163
Interest-earning deposits with banks 30,162 12,301 17,861 14,518 24,391 (9,873)
Other interest-earning assets 4,740 (4,740) 2,161 (2,161)
- ------------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Total interest-earning assets 1,451,499 1,331,612 119,887 1,433,193 1,350,673 82,520
Other earning assets 27,722 14,978 12,744 24,196 5,138 19,058
Noninterest-earning assets 128,610 105,612 22,998 120,828 107,747 13,081
- ------------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Total assets $ 1,607,831 $ 1,452,202 $ 155,629 $ 1,578,217 $ 1,463,558 $ 114,659
==================================== ============ ============ ============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits $ 1,114,269 $ 1,038,043 $ 76,226 $ 1,078,523 $ 1,056,731 $ 21,792
Federal Home Loan Bank advances 72,375 32,215 40,160 95,080 40,745 54,335
Trust preferred obligations 21,406 14,383 7,023 21,389 4,847 16,542
Other borrowings 2,696 (2,696) 5,566 (5,566)
- ------------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Total interest-bearing liabilities 1,208,050 1,087,337 120,713 1,194,992 1,107,889 87,103
Noninterest-bearing deposits 264,127 229,692 34,435 250,772 223,509 27,263
Other noninterest-bearing liabilities 10,233 11,460 (1,227) 10,056 12,003 (1,947)
Shareholders' equity 125,421 123,713 1,708 122,397 120,157 2,240
- ------------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Total liabilities and shareholders'
equity $ 1,607,831 $ 1,452,202 $ 155,629 $ 1,578,217 $ 1,463,558 $ 114,659
==================================== ============ ============ ============ ============ ============ ============
NONINTEREST INCOME
Noninterest income increased $1.3 million, or 32% in the third quarter of 2002,
and $2.9 million, or 25%, for the first nine months of 2002 as compared with the
same periods in 2001. Increases during the third quarter and the first nine
months of 2002 were primarily centered in service charges and other fees,
mortgage banking, and merchant services fees. The growth in core deposits has
contributed to an increase in service charges and fees. Mortgage banking
increases are due to increased volumes as interest rates have continued to
decline for mortgage borrowers. Increases in merchant services income is due to
the overall growth of the customer base and the continued emphasis on expanding
the market for that product. The Company recorded net gains on sale of
investment securities of $183,000 in the third quarter 2002 and $417,000 in the
first nine months of 2002 as compared to $70,000 and $107,000 for the same
periods of 2001. Quarter to quarter, noninterest income increased 19% from the
second quarter of 2002 to the third quarter of 2002.
NONINTEREST EXPENSE
Total noninterest expense decreased $238,000, or 2%, for the third quarter of
2002, and increased $2.5 million, or 7%, for the first nine months of 2002,
compared with the same periods in 2001. During the quarter, the Company received
a one-time lease termination payment of $1.2 million from the tenant of a
property included in Real Estate Owned (REO). Excluding this payment, the
Company's noninterest expense increased $974,000, or 8%, from the third quarter
2001 and increased $3.7 million, or 10%, for the first nine months of 2002
compared to the same period in 2001. The increases were primarily due to
personnel, occupancy and advertising costs associated with the Company's
scheduled branch expansions in 2001 and early 2002. The personnel and occupancy
cost increases reflect the full operations of the Company's recent expansion in
King and Pierce counties. The Company's efficiency ratio (noninterest expense
less nonrecurring expenses divided by the sum of net interest income plus
noninterest income less nonrecurring income) was 63.5% for the third quarter
2002 and 67.6% for the first nine months of 2002, compared to 66.7% and 68.9%
for the same respective periods in 2001.
14
INCOME TAXES
The Company recorded income tax provisions of $1.5 million and $2.1 million for
the third quarter and first nine months of 2002, respectively, compared with
provisions of $1.7 million and $4.8 million for the same periods in 2001.
CREDIT RISK MANAGEMENT
The extension of credit in the form of loans or other credit products 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 placed on nonaccrual status even though the loan
may be current as to principal and interest payments. Additionally, the Company
assesses whether an impairment of a loan as provided in SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan", warrants specific reserves
or a write-down of the loan. See "Provision and Allowance For Loan Losses" on
page 19.
Loan policies, credit quality criteria, portfolio guidelines and other controls
are established under the guidance of the Company's Senior 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 examination to ensure continued performance and proper
risk assessment.
15
LOAN PORTFOLIO ANALYSIS
The Company is a full service commercial bank, which originates a wide variety
of loans, and concentrates its efforts on 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:
SEPTEMBER 30, % OF DECEMBER 31, % OF
(IN THOUSANDS) 2002 TOTAL 2001 TOTAL
- -------------------------------------------------- ----------- --------- ----------- ---------
Commercial business $ 444,274 38.0% $ 466,638 39.9%
Real estate:
One-to-four family residential 52,692 4.5 52,852 4.5
Five or more family residential and
commercial properties 433,270 37.1 432,419 37.0
- -------------------------------------------------- ----------- --------- ----------- ---------
Total real estate 485,962 41.6 485,271 41.5
Real estate construction:
One-to-four family residential 20,452 1.8 20,693 1.8
Five or more family residential and
commercial properties 106,632 9.1 91,080 7.7
- -------------------------------------------------- ----------- --------- ----------- ---------
Total real estate construction 127,084 10.9 111,773 9.5
Consumer 113,013 9.7 109,845 9.4
- -------------------------------------------------- ----------- --------- ----------- ---------
Sub-total loans 1,170,333 100.2 1,173,527 100.3
Less: Deferred loan fees (2,700) (0.2) (2,894) (0.3)
- -------------------------------------------------- ----------- --------- ----------- ---------
Total loans $ 1,167,633 100.0% $ 1,170,633 100.0%
================================================== =========== ========= =========== =========
Loans held for sale $ 21,121 $ 29,364
================================================== =========== ========= =========== =========
Total loans (excluding loans held for sale) at September 30, 2002 decreased $3.0
million, to $1.168 billion from $1.171 billion at year-end 2001. The decrease in
commercial loans was partially offset by increases in real estate construction
and consumer loans.
COMMERCIAL LOANS: As of September 30, 2002, commercial loans decreased $22.4
million, or 5%, to $444.3 million from $466.6 million at year-end 2001,
representing 38.0% of total loans at September 30, 2002 as compared with 39.9%
of total loans at December 31, 2001. The Company is committed to providing
competitive commercial lending in its market areas. Management believes the
slowdown in commercial lending in 2001 and continuing through the third quarter
of 2002 was primarily due to the slow economy as businesses reduced inventories
and paid down debt. The Company plans to remain competitive yet cautious with
its commercial lending products due to the current state of the economy and will
continue to emphasize in particular its relationship banking with businesses,
and business owners.
REAL ESTATE LOANS: Residential one-to-four family loans decreased $160,000, or
0.3%, to $52.7 million at September 30, 2002, representing 4.5% of total loans,
compared with $52.9 million, or 4.5% of total loans at December 31, 2001. 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, the Company's policy is
to originate for sale to third parties residential loans secured by properties
located within the Company's primary market areas.
16
Five or more family residential and commercial real estate lending increased
$851,000, or 0.2%, to $433.3 million at September 30, 2002, representing 37.1%
of total loans, from $432.4 million, or 37.0% of total loans at December 31,
2001. Generally, five or more family residential 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 these loans not exceed 75% of appraised value, cost, or
discounted cash flow value, as appropriate, and that commercial properties
maintain debt coverage ratios (net operating income divided by annual debt
servicing) of 1.2 or better. However, underwriting standards can be influenced
by competition and other factors. 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 provide financing to builders for the construction of pre-sold
homes and speculative residential construction. Construction loans on
one-to-four family residences decreased $241,000, or 1%, to $20.5 million at
September 30, 2002, representing 1.8% of total loans, from $20.7 million, or
1.8% of total loans at December 31, 2001. Five or more family and commercial
real estate construction loans increased $15.6 million, or 17%, to $106.6
million at September 30, 2002, representing 9.1% of total loans, from $91.1
million, or 7.7% of total loans at December 31, 2001.
The Company endeavors to limit its construction lending risk through adherence
to sound underwriting and monitoring procedures.
CONSUMER LOANS: At September 30, 2002, the Company had $113.0 million of
consumer loans outstanding, representing 9.7% of total loans, an increase of
$3.2 million, or 3%, compared with $109.8 million, at December 31, 2001.
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 LOANS: Columbia Bank is not involved with loans to foreign companies or
foreign countries.
NONPERFORMING ASSETS
Nonperforming assets consist of: (i) nonaccrual loans, which 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); (iii) real estate owned; and (iv) personal property owned.
Total nonperforming assets increased 15% in the first nine months of 2002 to
$21.3 million, or 1.28% of period-end assets at September 30, 2002, compared to
$18.5 million, or 1.24% of period-end assets at December 31, 2001. Nonperforming
assets decreased to $21.3 million at September 30, 2002 from $24.3 million at
June 30, 2002 and $24.6 million at March 31, 2002.
17
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, other personal property
owned, and total nonperforming assets of the Company:
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 2002 2001
- --------------------------------------------------------------- ---------- ----------
Nonaccrual:
Commercial business $ 10,857 $ 15,393
Real estate:
One-to-four family residential 642 593
Five or more family residential and commercial properties 2,022 1,415
Real estate construction:
One-to-four family residential 1,459
Consumer 47 234
- --------------------------------------------------------------- ---------- ----------
Total nonaccrual 15,027 17,635
Restructured:
One-to-four family residential construction 425 716
- --------------------------------------------------------------- ---------- ----------
Total restructured 425 716
- --------------------------------------------------------------- ---------- ----------
Total nonperforming loans $ 15,452 $ 18,351
=============================================================== ========== ==========
Real estate owned $ 4,681 $ 197
Other personal property owned 1,148
- --------------------------------------------------------------- ---------- ----------
Total nonperforming assets $ 21,281 $ 18,548
=============================================================== ========== ==========
NONPERFORMING LOANS. 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. 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.
Nonperforming loans were $15.5 million, or 1.32% of total loans (excluding loans
held for sale) at September 30, 2002, compared to $18.4 million, or 1.57% of
total loans at December 31, 2001. Nonaccrual loans and other nonperforming
assets are centered in a relatively small number of lending relationships which
management considers adequately reserved. Nonaccrual loans decreased $2.6
million, or 15% from year-end 2001 to $15.0 million at September 30, 2002, as a
number of loans were either exited, returned to accrual status, or were
uncollectible; and therefore, were charged-down or charged-off. Loans placed
into nonaccrual during the third quarter 2002 were primarily commercial business
and commercial real estate loans. Restructured loans remained unchanged at
$425,000 at September 30, 2002, from the second quarter 2002, and decreased 41%
from $716,000 at December 31, 2001.
The Company will continue its collection efforts and liquidation of collateral
to recover as large a portion of the nonaccrual assets as possible.
Substantially all nonperforming loans are to borrowers within the State of
Washington.
REAL ESTATE AND OTHER PERSONAL PROPERTY OWNED. Real estate owned (REO), which is
comprised of property from foreclosed real estate loans, increased $4.5 million
to $4.7 million at September 30, 2002, from $197,000 at December 31, 2001.
During the quarter, the Company sold two properties and did not foreclose on any
loans secured by real estate. At September 30, 2002, REO consisted of two
properties, one of which is the commercial real estate property previously
charged down and reported in the first quarter 2002. Other personal property
owned, which is comprised of other, non-real estate property from foreclosed
loans, decreased $127,000 to $1.1 million from $1.3 million during the third
quarter of 2002. The Company continues to liquidate the other personal property
owned as quickly as possible to maximize recovery.
18
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. General Valuation Allowance consistent with SFAS No. 5, "Accounting for
Contingencies."
2. Criticized/Classified Loss Reserve on specific relationships.
3. Specific allowances for identified problem loans in accordance with SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan."
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 Audit Committee of 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 expense, 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 September 30, 2002, the Company's allowance for loan losses was $18.4
million, or 1.58% of total loans (excluding loans held for sale), and 119.25% of
nonperforming loans. This compares with an allowance of $14.7 million, or 1.26%
of the total loan portfolio, and 80.29% of nonperforming loans, at December 31,
2001. In the third quarter 2002 the Company's provision for loan losses totaled
$4.0 million, compared to $1.3 million in the third quarter 2001. During the
first nine months of 2002, the Company's provision for loan losses was $13.1
million, an increase of $10.0 million over the same period in 2001. In the first
quarter 2002, the Company's provision for loan losses was $7.1 million,
principally to reflect the deterioration of a troubled credit relationship
reported in the first quarter 2002, which was transferred to real estate owned
during the second quarter 2002.
Net loan charge-offs amounted to $1.4 million and $9.4 million for the third
quarter and first nine months of 2002, respectively, compared with net loan
charge-offs of $7.1 and $8.4 million for the same periods in 2001. The $1.4
million charged-off during the quarter was comprised of several loans, while the
year to date charge-offs were largely impacted by the relationship requiring a
significant charge-off during the first quarter 2002.
19
The Company increased its provision for loan losses during the third quarter and
the first nine months of 2002 due to softness in the economy of its market area
and historical charge-off activity as compared to the same periods of 2001. At
September 30, 2002, management believes the Company's allowance for loan losses
provides adequate reserves for its loan portfolio, including the nonaccrual
loans and nonperforming assets. Management regularly evaluates the necessity of
any additions to the allowance for loan losses based upon the Company's credit
quality, loan growth, the economy and other factors.
The following table provides an analysis of the Company's allowance for loan
losses at the dates and the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
(IN THOUSANDS) 2002 2001 2002 2001
- -------------------------------------------- -------- -------- -------- --------
Beginning balance $ 15,767 $ 19,224 $ 14,734 $ 18,791
Charge-offs:
Commercial business (1,142) (7,003) (5,849) (8,457)
Real estate:
One-to-four family residential (6) (6)
Five or more family residential
and commercial properties (3,500)
Real estate construction:
One-to-four family residential (110) (316) (110)
Consumer (304) (14) (425) (24)
- -------------------------------------------- -------- -------- -------- --------
Total charge-offs (1,452) (7,127) (10,096) (8,591)
Recoveries:
Commercial business 73 40 154 112
Real estate:
Five or more family residential
and commercial properties 3
Real estate construction:
One-to-four family residential 1 537
Consumer 2 10 14 35
- -------------------------------------------- -------- -------- -------- --------
Total recoveries 76 50 708 147
- -------------------------------------------- -------- -------- -------- --------
Net (charge-offs) recoveries (1,376) (7,077) (9,388) (8,444)
Provision charged to expense 4,035 1,250 13,080 3,050
- -------------------------------------------- -------- -------- -------- --------
Ending balance $ 18,426 $ 13,397 $ 18,426 $ 13,397
============================================ ======== ======== ======== ========
20
SECURITIES
At September 30, 2002, the Company's securities (securities available for sale
and securities held to maturity) increased $91.2 million, or 60% from its
balance at year-end 2001. The Company purchased $27.8 million of available for
sale securities and sold $5.0 million of securities during the third quarter
2002, for realized gains of $183,000. For the first nine months of 2002, the
Company purchased $133.9 million of available for sale securities and sold $12.3
million for realized gains of $417,000. Approximately 97% of the Company's
securities are classified as available for sale and carried at fair value. These
securities are used by management as part of its asset/liability management
strategy and may be sold in response to changes in interest rates and/or
significant prepayment risk. In accordance with the Company's investment
strategy, management monitors market conditions with a view to realize gains on
its available for sale securities portfolio as market conditions allow.
LIQUIDITY AND SOURCES OF FUNDS
The Company's primary sources of funds are customer deposits and 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 increased $131.0
million, or 10%, to $1.44 billion at September 30, 2002 from $1.31 billion at
December 31, 2001. Core deposits increased $99.0 million, or 12% during the
first nine months of 2002 and certificates of deposit balances increased $32.0
million compared to year-end 2001. Average core deposits (demand deposit,
savings, and money market accounts) increased to $894 million during the third
quarter of 2002, from $858 million in the second quarter 2002 and from $836
million in the first quarter of 2002.
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. In addition to the core deposit base, management's strategy for
funding growth includes brokered and other wholesale deposits. At September 30,
2002, brokered and other wholesale deposits (excluding public deposits) totaled
$40.7 million, or 2.8% of total deposits, compared with $40.2 million, or 3.1%
of total deposits at December 31, 2001. The brokered deposits have varied
maturities up to three years.
BORROWINGS
The Company relies on FHLB advances to supplement its funding sources, and the
FHLB serves as a source of both short and long-term borrowings. One-to-four
family real estate mortgages and certain other assets secure FHLB advances. At
September 30, 2002, the Company had advances of $65.6 million with maturities of
less than one year and no advances expiring after one year. In comparison, at
December 31, 2001, the Company had advances of $40.0 million with maturities
greater than one year and no advances with terms expiring within one year.
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 LIBOR and at September 30, 2002, there
was no balance outstanding. In the event of discontinuance of the line by either
party, the Company has up to two years to repay any outstanding balance.
21
TRUST PREFERRED OBLIGATIONS
The Company's $22 million of trust preferred obligations are at a quarterly
adjusted floating rate based on the 3-month LIBOR plus 3.58%. At September 30,
2002 the rate on the Company's trust preferred obligations was 5.39%. The
Company can call the debt in 2006 for a premium and in 2011 at par, allowing the
Company to retire the debt early if conditions are favorable.
CAPITAL
Shareholders' equity at September 30, 2002 was $127.7 million, up 7% from $119.0
million at December 31, 2001. The increase is due primarily to net income of
$6.4 million during the first nine months of 2002 and unrealized gains in its
securities available for sale portfolio. Shareholders' equity was 7.69%, and
7.94% of total period-end assets at September 30, 2002, and December 31, 2001,
respectively.
CAPITAL RATIOS
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%. 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 and trust
preferred obligations 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 FDIC
published the qualifications necessary to be classified as a "well capitalized"
bank, primarily for assignment of FDIC insurance premium rates. To qualify as
"well capitalized," banks must have a Tier I risk-adjusted capital ratio of at
least 6%, a total risk-adjusted capital ratio of at least 10%, and a leverage
ratio of at least 5%. Failure to qualify as "well capitalized" can negatively
impact a bank's ability to expand and to engage in certain activities.
Columbia Bank qualified as "well-capitalized" at September 30, 2002 and December
31, 2001.
- -------------------------------------------------------------------------------------------------------
COLUMBIA BANKING
SYSTEM, INC. COLUMBIA STATE BANK REQUIREMENTS
- ------------------------------- --------------------- --------------------- ---------------------
ADEQUATELY WELL-
9/30/2002 12/31/2001 9/30/2002 12/31/2001 CAPITALIZED CAPITALIZED
- ------------------------------- --------- ---------- --------- ---------- --------- ----------
Total risk-based capital ratio 12.06% 11.65% 11.55% 11.15% 8% 10%
- ------------------------------- --------- ---------- --------- ---------- --------- ----------
Tier 1 risk-based capital ratio 10.81% 10.55% 10.30% 10.04% 4% 6%
- ------------------------------- --------- ---------- --------- ---------- --------- ----------
Leverage ratio 9.23% 9.72% 8.83% 9.29% 4% 5%
- -------------------------------------------------------------------------------------------------------
DIVIDENDS
On April 2, 2002, the Company announced a 5% stock dividend payable on April 30,
2002, to shareholders of record as of April 16, 2002. Applicable federal and
Washington State regulations restrict cash 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.
STOCK REPURCHASE PROGRAM
In March 2002 the Board of Directors approved a stock repurchase program whereby
the Company may systematically repurchase up to 500,000 of its outstanding
shares of Common Stock. The Company intends to repurchase shares from time to
time in the open market or in private transactions, under conditions which allow
such repurchases to be accretive to earnings while maintaining capital ratios
that exceed the guidelines for a well-capitalized financial institution. As of
September 30, 2002 the Company had not repurchased any shares of common stock in
this current stock repurchase program.
22
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.
Basic 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 September 30, 2002, 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, 2001. 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, 2001.
23
Item 4. CONTROLS AND PROCEDURES
EVALUATION AND DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer, Chief Operating Officer and Chief
Financial Officer have reviewed and evaluated the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rules
240.13a-14(c) and 15d-14(c)) as of a date within 90 days before the filing date
of this quarterly report. Based on that evaluation the Chief Executive Officer,
Chief Operating Officer and Chief Financial Officer have concluded that the
Company's current disclosure controls and procedures are effective and timely,
providing them with material information relating to the Company required to be
disclosed in the reports we file or submit under the Exchange Act.
CHANGES IN INTERNAL CONTROLS
There have not been any significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation. We are not aware of any significant deficiencies or material
weaknesses; therefore no corrective actions were taken.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Separation and Release Agreement between J. James
Gallagher and Columbia Banking System, Inc.
10.2 Consulting Agreement between J. James Gallagher and
Columbia Banking System, Inc.
99.1 Certifications Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
(b) Reports on Form 8-K
None
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COLUMBIA BANKING SYSTEM, INC.
Date November 13, 2002 By /s/ William T. Weyerhaeuser
----------------- ------------------------------------
William T. Weyerhaeuser
Chairman and Chief Executive Officer
Date November 13, 2002 By /s/ Melanie J. Dressel
----------------- ------------------------------------
Melanie J. Dressel
President and Chief Operating Officer
Columbia Banking System, Inc.
President and Chief Executive Officer
Columbia State Bank
(Principal Executive Officer)
Date November 13, 2002 By /s/ Gary R. Schminkey
----------------- ------------------------------------
Gary R. Schminkey
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
25
CERTIFICATION
I, William T. Weyerhaeuser, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Columbia Banking
System, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ William T. Weyerhaeuser
----------------- -----------------------------------
William T. Weyerhaeuser
Chairman and Chief Executive Officer
CERTIFICATION
I, Melanie J. Dressel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Columbia Banking
System, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Melanie J. Dressel
----------------- -------------------------------------
Melanie J. Dressel
President and Chief Operating Officer
Columbia Banking System, Inc.
President and Chief Executive Officer
Columbia State Bank
CERTIFICATION
I, Gary R. Schminkey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Columbia Banking
System, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Gary R. Schminkey
----------------- -----------------------
Gary R. Schminkey
Executive Vice President and
Chief Financial Officer