it’s all about customers and c o m m u n i t i e s 2 0 0 1 A N N U A L R E P O R T Columbia Banking System Inc. You’ll notice the difference. B U I L D I N G C O M M U N I T I E S F R O M T H E G R O U N D U P. How did we build a better bank? With the core belief employees providing customers with superior service. that our success depends upon the vitality of our We act as a constant catalyst for local investment and communities and the satisfaction of our customers. improvement by contributing time, talent and dollars to That’s why Columbia Bank is much more than just the growth and leadership of the communities we serve. C O M M U N I T Y - M I N D E D. C O M M U N I T Y - M A D E . An interesting thing happens when you build a bank one community at a time—you soon realize people truly do make the difference. So while other banks typically build a branch and then find N E W L O C A T I O N S A T M A R T I N L U T H E R K I N G W A Y , 1 3 T H & A B R A N C H , 1 3 T H & A H E A D Q U A R T E R S people to manage it, Columbia Bank finds the most respected bankers in the area, then builds the branch around them. This model has proven to be very successful. We’re able to immediately establish ourselves as a trusted member of the community, thus attracting significant deposit and loan customers from day one. It also provides us with a strong and committed financial base with which we can help increase our presence in surrounding communities. This year, we have opened 4 new branches, with plans calling for 2 more in the first quarter of 2002. O U R C H A R T S • H O W W E ’ R E G R O W I N G all dollar figures on this page are in thousands * 5 year compound annual growth rate S T E S S A E G A R E V A 1997 $764,728 1998 $939,274 1999 $1,131,416 2000 $1,375,600 2001 $1,460,263 * E G N A H C % 0 2 S N A O L E G A R E V A 1997 $613,671 1998 $748,587 1999 $927,373 2000 $1,149,013 2001 $1,218,906 * E G N A H C % 1 2 O U R G R O W T H P O T E N T I A L I S S U B S T A N T I A L . 1 0 0 2 S T H G I L H G I H D E T A D I L O S N O C 2001 2000 % change F O R T H E Y E A R Net interest income Provision for loan losses Noninterest income Noninterest expense Net income P E R S H A R E Basic earnings Diluted earnings Book value AV E R AG E S Total assets Interest earning assets Loans Securities Deposits Core deposits Shareholders’ equity F I N A N C I A L R AT I O S Net interest margin Return on average assets Return on average equity Efficiency ratio Average equity to average assets AT Y E A R - E N D Total assets Loans Allowance for loan losses Deposits Core deposits Shareholders’ equity Number of full-time equivalent employees Number of banking offices $58,205 5,800 17,451 50,954 12,513 $0.97 0.96 9.46 $1,460,263 1,343,410 1,218,906 100,343 1,281,748 718,262 120,403 4.36% 0.86 10.39 68.92 8.25 $1,498,294 1,170,633 14,734 1,306,750 846,546 118,966 580 32 $58,268 9,800 11,587 44,753 10,070 $0.78 0.76 8.72 $1,375,600 1,265,716 1,149,013 97,585 1,197,653 654,095 107,555 4.62% 0.73 9.36 64.07 7.82 $1,496,495 1,192,520 18,791 1,327,023 695,343 113,823 513 28 ** -41% 51% 14% 24% 24% 26% 8% 6% 6% 6% 3% 7% 10% 12% ** -2% -22% -2% 22% 5% 13% 14% ** less than 1% all dollar figures on this page are in thousands * 5 year compound annual growth rate S T I S O P E D E G A R E V A 1997 $656,206 1998 $813,685 1999 $994,096 2000 $1,197,653 2001 $1,281,748 * E G N A H C % 0 2 E M O C N I T E N 1997 $9,275 1998 $10,201 1999 $11,670 2000 $10,070 2001 $12,513 * E G N A H C % 2 2 T H E L A S T 5 Y E A R S H A V E B E E N E X C E P T I O N A L . T O O U R S H A R E H O L D E R S • U P D A T E 2 0 0 1 2001 was a year of challenges for the country, the Northwest and for Columbia. These challenges caused us to refocus on the core beliefs that are the foundation of our success. Employees, officers, and board members share a common, well-defined sense of purpose for our existence, and values which guide our decisions and actions (these core beliefs are included on the back cover of this report). As always, at the center of our values is our commitment to the customers and communities we serve. Holding true to these commitments will, in the long run, be the best way to attain our goal of becoming the leading supercommunity banking company headquartered in the Pacific Northwest, and thus creating superior value for our shareholders. C O R E B E L I E F S The most significant challenge we faced in 2001 was the economic environment and volatile interest rates, which declined an unprecedented eleven times during the year, reducing yields on loans and other assets. We took steps to lower our costs of funding; however, the result was a continuing squeeze on our net interest margin, as the cost of deposits repriced more slowly than the yield on loans. Loan growth also slowed dramatically for commercial loans, an area of focus for Columbia Bank, as the economy slowed. Despite the difficult interest rate and economic environment, net income for the year increased 24 percent to $12.5 million, compared with net income of $10.1 million in 2000. On a diluted per-share basis, net income for 2001 was $0.96 per share, compared with $0.76 per share in 2000, an increase of 26 percent. Return on average assets and return on average equity were 0.86 percent and 10.39 percent, respectively, compared to 0.73 and 9.36 percent, respectively, for the year 2000. Net income for the fourth quarter was $3.2 million, or $0.25 per diluted share, up from a net loss of ($136,000), or ($0.01) per diluted share for the fourth quarter of 2000. Profitability for the year increased as the provision for loan losses declined from the unusually high level in 2000. Net interest income was flat, however, as interest-related revenue and expense both declined substantially in the rapidly declining interest rate environment. Noninterest income was up significantly due to improvements in several revenue categories, but noninterest expense increases offset the revenue improvements. I M P R O V E M E N T S Charge-offs in 2001 included $6 million of a troubled loan that was reserved for at year-end 2000. We strengthened our loan monitoring systems and controls in 2001, including the separation of our credit administration function from loan production. These steps continue to improve our ability to more closely monitor credit quality. We are carefully monitoring current weaknesses within the local and national economies, as well as potential weaknesses within our existing loan portfolio, and we will further build loan loss reserves if we determine that to be appropriate. Substantial balance sheet improvement was achieved. Regulatory capital was increased by the issuance of $22 million in trust preferred securities, and the mix of deposits was improved, thus lowering costs. The Company also repurchased 5 percent of its outstanding common shares, improving earnings per share. While our rate of growth slowed in 2001 compared with the early years of Columbia Bank, (Dollars in Thousands) At/For Year Ended December 31, 2001 Five Year Compounded Annual Growth Rate Net Income Assets Loans Deposits Core Deposits $ 12,513 $ 1,498,294 $ 1,170,633 $ 1,306,750 $ 846,546 22% 16% 17% 17% 21% we continue to believe in our substantial growth potential, even including the performance of the year 2001. Our record for the past five years is exceptional. . s n o i t a c o l d e t n e i r o - h t w o r g n i s e h c n a r b w e N During 2001, we continued to focus on our expansion activity, particularly in the important metropolitan King County area, a deposit market approximately four times the size of Pierce County. We expanded our presence in Bellevue and opened a retail branch in the Issaquah Commons in June. We were pleased with the response to our Redmond branch, which opened in early February 2002. We were also pleased with the reception of our street level downtown Seattle office, which also opened in February of this year at 2nd & Columbia in the Millennium Building. The expenses incurred to prepare these new offices and hire outstanding bankers to staff them impacted our earnings in 2001. The opening of these additional offices has, however, positioned Columbia Bank for significant growth and improved profitability for the year 2002. Expansion continued last year in our more traditional markets as well. In February, our West Olympia branch staff moved into their permanent quarters, and in May, the 84th & Pacific branch opened in Tacoma. During the third quarter, our Bonney Lake office also opened, along with a branch at 11th & Martin Luther King Way in the Hilltop community of downtown Tacoma. During the 4th quarter, we closed the Triangle Mall, an in-store branch in Longview that was not performing up to expectations. S T R A T E G I C G R O W T H During the second quarter, we moved into our new headquarters building at 13th & A Streets in downtown Tacoma; a small retail branch next to the lobby opened in July. Construction is underway for a separate drive-up facility to our Summit branch in Puyallup, and a new, more visible branch in Fife, to replace the existing facility which we have sold. We anticipate that these expansion efforts, along with our experienced team of local bankers, will contribute to solid growth and improved earnings, as cost increases associated with the expansion will moderate. The year 2001 saw volume slow and margins decline, while expansion costs increased. We expect the year 2002 to see volumes rise, margins increase slightly and costs to be under much better control. All in all, we made progress in a difficult year and look forward to 2002. We are convinced that times of economic uncertainty, such as these, can provide banks like Columbia —community-oriented, with a good knowledge of the local economy and strong credit skills — with excellent opportunities to acquire attractive new business relationships from larger banks unable to provide our high level of customer service. We will focus our efforts and attention on seeing that 2002 is a year in which Columbia reestablishes acceptable growth, begins to gain real traction in the Greater Seattle metropolitan market, improves expense controls and continues to emphasize credit quality. We want to thank you, our shareholders, for your continued support. J. James Gallagher Melanie J. Dressel O U R C O R P O R A T E O F F I C E • E X E C U T I V E O F F I C E R S , B O A R D O F D I R E C T O R S G E T T I N G I N V O L V E D I N T H E C O M M U N I T Y Jim Gallagher, 2002 Chair of the Executive Committee of the Economic Development Board for Tacoma-Pierce County, pictured to the right of Bruce Kendall, President & CEO of the EDB; Melanie Dressel, Chair of Mary Bridge Children's Foundation, in the pediatric intensive care unit at Mary Bridge Children's Hospital; Hal Russell, board member of the Pierce County American Red Cross, serving meals at the Lighthouse Senior Center in Tacoma. E X E C U T I V E O F F I C E R S J. James Gallagher Vice Chairman and Chief Executive Officer, Columbia Banking System, Inc.; Vice Chairman, Columbia Bank Melanie J. Dressel President and Chief Operating Officer, Columbia Banking System, Inc.; President and Chief Executive Officer, Columbia Bank Don L. Hirtzel Executive Vice President, Corporate Banking H. R. Russell Executive Vice President, Chief Credit Officer Gary R. Schminkey Executive Vice President, Chief Financial Officer Tex Whitney Executive Vice President, Retail Banking O N E P E R S O N A T A T I M E . . . Gary Schminkey, tutoring math and reading to elementary school students in Tacoma and Puyallup school districts; Tex Whitney, board member of Safe Streets, in front of a community mural, part of a crime prevention project; Don Hirtzel, incoming Chairman of the Board of the Better Business Bureau for Western Washington/Oregon, pictured with Bob Andrew (r), President of the BBB, at the construction site of the BBB’s new office in Dupont. B O A R D O F D I R E C T O R S Richard S. Devine President, Chinook Resources, Inc. Melanie J. Dressel President and Chief Operating Officer, Columbia Banking System, Inc.; President and Chief Executive Officer, Columbia Bank Jack Fabulich Honorary Chairman of Parker Paint Manufacturing, Inc.; Commissioner, Port of Tacoma Jonathan Fine Chief Executive Officer, United Way of King County John P. Folsom President and Chief Executive Officer, Brown & Brown Insurance, Inc. J. James Gallagher Vice Chairman and Chief Executive Officer, Columbia Banking System, Inc.; Vice Chairman, Columbia Bank John A. Halleran Private Investor Thomas M. Hulbert President and Chief Executive Officer, Winsor Corporation Thomas L. Matson Owner and President, Tom Matson Dodge, Inc. Donald Rodman Owner and Executive Officer, Rodman Realty Sidney R. Snyder Vice Chairman, Pacific Financial Corporation; Washington State Senator; Owner of Sid's Food Market William T. Weyerhaeuser Chairman, Columbia Banking System, Inc.; Clinical Psychologist; Director, Potlatch Corporation James M. Will President, Titus-Will Enterprises C O R P O R A T E D I R E C T O R Y • S H A R E H O L D E R I N F O R M A T I O N T H E R E S T O F T H E S T O R Y. N E W L O C A T I O N S I N B O N N E Y L A K E , I S S A Q U A H , 8 4 T H & P A C I F I C Corporate Headquarters Stock Listing Columbia Banking System, Inc. 1301 South A Street, Suite 800 P.O. Box 2156 Tacoma, WA 98401-2156 253.305.1900 Independent Auditors Deloitte & Touche, LLP Transfer Agent & Registrar American Stock Transfer & Trust Company Market Makers Dain Rauscher Hoefer & Arnett, Inc. Keefe, Bruyette & Woods, Inc. Knight Securities LP NDB Capital Markets Corp. Spear, Leeds & Kellogg Capital Regulatory & Securities Counsel Davis Wright Tremaine, LLP Annual Meeting Best Western Executive Inn 5700 Pacific Highway East Fife, WA Tuesday, April 2, 2002 1:00 p.m. The Company's common stock trades on the Nasdaq National Market tier of The Nasdaq Stock Markets under the symbol: COLB. Financial Information Columbia news and financial results are available through the Internet and mail. Internet: For information about Columbia, including news and financial results, product information and service locations, access our home page on the World Wide Web, at http://www.columbiabank.com. You can also view or retrieve copies of Columbia's financial reports on the Internet by connecting to http://www.sec.gov. Immediate access to the Company's quarterly earnings news release via the Internet is provided by Company News On Call at http://www.prnewswire.com. Mail: At your request, we will mail you our quarterly earnings news release, quarterly financial data on Form 10-Q and additional annual reports. To be added to Columbia's mailing list for quarterly earnings news releases, or to request other infor- mation, please contact: Jo Anne Coy Vice President, Marketing Director P.O. Box 2156, MS 8300 Tacoma, WA 98401-2156 Tel 253.305.1965 Fax 253.305.0317 E-Mail: jcoy@columbiabank.com B R A N C H L O C A T I O N S 1 2 3 4 5 6 7 8 9 PIERCE COUNTY 13th & A 1301 A Street Suite 100 Tacoma, WA 98402 253.396.6900 Michael Block ALLENMORE 1959 South Union Tacoma, WA 98405 253.627.6909 Robert Bruback BONNEY LAKE 19925 State Rte 410 E Bonney Lake, WA 98390 253.863.8500 Keith Brown BROADWAY PLAZA 1102 Broadway Plaza Tacoma, WA 98402 253.305.1940 Michael Block EDGEWOOD/MILTON 1250 Meridian E Milton, WA 98354 253.952.6646 Dolores Ehli FIFE 5501 Pacific Hwy. E Fife, WA 98424 253.922.7870 Doug Hedger FIRCREST 2401 Mildred St. W Fircrest, WA 98466 253.566.1172 Dan Patjens GIG HARBOR 5303 Point Fosdick Dr. NW Gig Harbor, WA 98335 253.858.5105 Chris Gullett LAKEWOOD 6202 Mount Tacoma Dr.SW Lakewood, WA 98499 253.581.4232 Jay Mayer 10 11 12 13 14 15 16 17 18 MARTIN LUTHER KING 1102 Martin Luther King Jr. Way Tacoma, WA 98405 253.597.8000 Julie Borell OLD TOWN 2200 North 30th St. Tacoma, WA 98403 253.272.0412 Connie Nelson PUYALLUP 4220 S. Meridian Puyallup, WA 98373 253.770.0770 Stan Ausmus 176th & MERIDIAN 17208 Meridian E Puyallup, WA 98373 253.445.6748 Alana Rouff SOUTH HILL MALL 3500 S. Meridian Suite 503 Puyallup, WA 98373 253.770.8161 Kathleen Knapper SPANAWAY 17502 Pacific Ave. S Spanaway, WA 98387 253.539.3094 Joy Johnson STADIUM 601 N. 1st. Tacoma, WA 98403 253.597.8811 Monica Stevens SUMMIT 10409 Canyon Road E Puyallup, WA 98373 253.770.9323 Debra Hamilton 84th & PACIFIC 201 S. 84th Street Tacoma, WA 98444 253.471.7000 Dean Piotrowski 19 20 21 22 23 24 25 26 WESTGATE 5727 N. 21st St. Tacoma, WA 98406 253.761.8170 Connie Pentecost KING COUNTY AUBURN 25 16th St. NE Auburn, WA 98002 253.939.9600 Patty Osthus BELLEVUE PLAZA 777 108th Ave. NE Suite 100 Bellevue, WA 98004 425.646.9696 Rebecca Holverson BELLEVUE WAY 10350 NE 10th St. Bellevue, WA 98004 425.452.7323 Bob MacIsaac FEDERAL WAY 33370 Pacific Highway S Federal Way, WA 98003 253.925.9323 Mike Harris FOREST VILLA 2749 Auburn Way S. Auburn, WA 98002 253.887.1186 Lillian McGinnis ISSAQUAH 775 NW Gilman Blvd. Suite F Issaquah, WA 98027 425.369.9200 Kirk Fultz KENT 504 W. Meeker Kent, WA 98032 253.852.0475 Shirley McGregor 27 28 29 30 31 32 33 34 REDMOND 8201 164th Avenue NE Redmond, WA 98052 425.558.7500 Judi Lindsay SOUTH AUBURN 4101 A St. SE Auburn, WA 98002 253.939.9800 Rod Clemmer 2nd & COLUMBIA 721 Second Avenue Seattle, WA 98104 206.223.1000 Kellie Walker COWLITZ COUNTY COMMERCE 1338 Commerce Ave. Longview, WA 98632 360.636.9200 Faith Pacheco 30th AVENUE 2207 30th Ave. Longview, WA 98632 360.423.8760 Faith Pacheco WOODLAND 782 Goerig St. Woodland, WA 98674 360.225.9421 Carol Rounds KITSAP COUNTY PORT ORCHARD 228 Bravo Terrace Port Orchard, WA 98367 360.876.8384 Rob Putas THURSTON COUNTY WEST OLYMPIA 2820 Harrison Ave NW Olympia, WA 98502 360.375.5800 Diane Avery our core beliefs Columbia Banking System, Inc. is a Washington-based bank holding company that operates Columbia Bank, a full-service commercial bank with over 30 offices in Western Washington. Columbia’s philosophy is to provide a local, friendly approach to doing business, coupled with all the modern conveniences and true customer service. We are proud to be a local company, strongly committed to our customers and the communities we serve. S T A T E M E N T O F P U R P O S E The employees, officers and board members of Columbia share a common, well-defined sense of purpose: Provide outstanding financial services and products to all current and future customers. Remain a forward-looking, growth-oriented company that continually innovates to provide superior performance. Be a catalyst for investment and improvement in the communities we serve. Our commitment to these communities is constant. We give back to them with our leadership, time, talent and dollars. Conduct business with the highest ethical standards and in a manner that provides maximum opportunity and satisfaction for all concerned. Earn superior profits that support our other objectives while building long-term value for our shareholders. S T A T E M E N T O F V A L U E S Outstanding Customer Service: Customers are our first priority. We must always provide them with flexible, responsive service and the best value in products. This is the driving force behind everything we do. Conviction: We believe passionately in our purpose and values. We take pride in our organization and expect outstanding opportunities for advancement. Integrity: We deal honestly and forthrightly with our customers, employees, shareholders and others with whom we do business. We believe honesty, integrity and accountability for what we do and say are essential. Progress: We will always strive to improve the way we do business. Change will be constant. We will provide opportunities for innovative solutions. Excellence: We never give up on the idea that we expect to be the best financial institution in each of the communities we serve. Columbia Banking System Inc. You’ll notice the difference.