<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 25, 1998
REGISTRATION NO. 333-44355
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
COWLITZ BANCORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
WASHINGTON 6712 91-1529841
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
927 COMMERCE AVENUE, LONGVIEW, WASHINGTON 98632 (360) 423-9800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CHARLES W. JARRETT, PRESIDENT AND CHIEF OPERATING OFFICER
COWLITZ BANCORPORATION
927 COMMERCE AVENUE, LONGVIEW, WASHINGTON 98632 (360) 423-9800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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<S> <C>
DAVID R. WILSON STEPHEN M. KLEIN
BERNARD L. RUSSELL MARK C. LEWINGTON
FOSTER PEPPER & SHEFELMAN PLLC GRAHAM & DUNN PC
1111 THIRD AVENUE, SUITE 3400 1420 FIFTH AVENUE, SUITE 3300
SEATTLE, WASHINGTON 98101 SEATTLE, WASHINGTON 98101
(206) 447-4400 (206) 624-8300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value............. 1,150,000 shares $13.00 $14,950,000 $4,531
===========================================================================================================
</TABLE>
(1) Includes 150,000 shares that may be purchased by the Underwriters to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(a).
(3) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 25, 1998
1,000,000 SHARES
LOGO
COWLITZ BANCORPORATION
COMMON STOCK
------------------------
All of the shares of Common Stock ("Common Stock") of Cowlitz
Bancorporation (the "Company") offered hereby (the "Offering") are being sold by
the Company. Prior to the Offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $11.00 and $13.00 per share of Common Stock. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The Company's Common Stock has been approved
for quotation on the Nasdaq National Market under the symbol "CWLZ."
SEE "RISK FACTORS" COMMENCING ON PAGE 6 OF THIS PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
THE SHARES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS OR OTHER
OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE BANK INSURANCE FUND OF THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
======================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------
Per Share........................... $ $ $
- ------------------------------------------------------------------------------------------------------
Total(3)............................ $ $ $
======================================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $300,000.
(3) The Company and the Selling Shareholders have granted to the Underwriters a
30-day option to purchase up to 133,000 and 17,000 additional shares of
Common Stock, respectively, on the same terms and conditions set forth above
solely to cover over-allotments, if any. If the Underwriters exercise this
option in full, the Price to Public will total $ , the Underwriting
Discount will total $ , the Proceeds to Company will total
$ and the Proceeds to Selling Shareholders will total $ .
See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, when, as and if delivered and accepted by the Underwriters and subject
to their right to reject any order in whole or in part. It is expected that the
delivery of the certificates representing such shares will be made against
payment therefor at the offices of Black & Company, Inc. on or about
, 1998.
------------------------
BLACK & COMPANY, INC. PACIFIC CREST SECURITIES INC.
The date of this Prospectus is , 1998.
<PAGE> 3
[COWLITZ FINANCIAL CENTER LOGO]
[PHOTOGRAPH OF COWLITZ FINANCIAL CENTER]
THE COWLITZ FINANCIAL CENTER PROVIDES CUSTOMERS ONE-STOP ACCESS TO A COMPLETE
LINE OF COMMERCIAL AND PERSONAL FINANCIAL SERVICES INCLUDING TRADITIONAL BANKING
TRUST MANAGEMENT, ESTATE PLANNING, INSURANCE AND SECURITIES BROKERAGE.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH SECURITY, AND THE IMPOSITION OF A PENALTY BID, IN
CONNECTION WITH THE OFFERING. SUCH TRANSACTIONS MAY BE EFFECTED IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE> 4
SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data, including
the financial statements and notes thereto, included elsewhere in this
Prospectus. Except as otherwise noted, all information in this Prospectus (i)
assumes no exercise of the Underwriters' over-allotment option and (ii) reflects
an adjustment for all stock splits to the date of this Prospectus. Unless the
context requires otherwise, references to the "Company" mean Cowlitz
Bancorporation and its wholly-owned subsidiary, The Cowlitz Bank (the "Bank").
THE COMPANY
With its five full-service offices, the Company has the largest market
share of deposits among commercial banks in Cowlitz County, Washington, and is
the only community bank headquartered in the county. The Company has grown from
one branch with assets of $39.4 million, deposits of $31.0 million and
shareholders' equity of $2.5 million at January 1, 1992 to five branches with
assets of $173.3 million, deposits of $136.2 million and shareholders' equity of
$13.9 million at December 31, 1997. The Company emphasizes personal service and
customer relationships and believes that such emphasis is the primary reason for
its rapid growth. The Bank was formed in 1977 and became a wholly-owned
subsidiary of the Company in 1992. The Company was formed in 1991 to act as a
holding company for the Bank.
The Company offers or makes available a broad range of financial services
to its customers, primarily small and medium-sized businesses, professionals and
retail customers. In addition to its normal commercial and personal banking
services, which include commercial and real estate lending, consumer lending,
mortgage origination and trust services, the Company has developed relationships
with a securities brokerage firm and an insurance agency with an estate planner
to provide its customers access to a variety of financial services which are
generally not available in community banks. In 1997, the Company established a
trust department to offer trust services to individuals, corporations and
institutions. It is the only such trust department located in Cowlitz County. By
combining its array of traditional commercial banking products with these
enhanced customer services, the Company is able to provide its customers with
similar banking services offered by its larger competitors while retaining the
character of a community bank and the level of personal service which larger
banks generally no longer provide.
Based on reports of the Federal Home Loan Bank of Seattle ("FHLB"), at June
30, 1996, the Company held approximately 25% of the deposits in commercial banks
in Cowlitz County, which was the largest share of deposits of any commercial
bank. Since June 30, 1996, the Company has taken several steps to increase its
market share in Cowlitz County. Historically, the Company operated from one
location in Longview. In November 1996, the Company opened a de novo branch in
neighboring Kelso, Washington. Two recent acquisitions of competitors in Cowlitz
County presented the Company with additional opportunities for in-market growth.
In 1996, Wells Fargo Bank acquired First Interstate Bank, which was a principal
competitor of the Company. The Company successfully bid for three Wells Fargo
branches in Cowlitz County and acquired those branches in July 1997. In the
second half of 1997, U.S. Bank was acquired by First Bank, which has recently
announced its intention to close the U.S. Bank branch in Kelso, Washington,
creating additional opportunities for the Company. The Company is aggressively
marketing to its new customers from the former Wells Fargo branches as well as
the customers of U.S. Bank in Kelso. The Company is introducing its full array
of financial products to these new customers while emphasizing personal service
as a way of increasing its market share within its existing market area.
Management believes that the Company's historical growth and recent successful
expansion activities strongly position the Company to continue to increase its
market share in Cowlitz County and to expand into other similar markets.
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<PAGE> 5
The Company's expansion since 1992 has been marked by the following
highlights:
<TABLE>
<S> <C> <C>
1992 - Arranged $2 million in long-term debt for capital infusion into Cowlitz
Bank
- Increased assets by 85% to $73.1 million
- Initiated quarterly dividends
- Began relationship with Robert Thomas Securities
1993 - Increased earnings per share by 96% over prior year
1994 - Increased loans by 35% over prior year
- Established mortgage department
- Sold $2.2 million of common stock in Regulation A offering
1995 - Increased loans by 40% over prior year
1996 - Opened Kelso branch
- Remodeled and expanded main branch to become the Cowlitz Financial Center
1997 - Acquired three Wells Fargo branches
- Opened trust department
- Began relationship with Commerce Business and Estate Services
</TABLE>
BUSINESS STRATEGY
The Company's goal is to maintain its position as the leading community
based provider of financial services in Cowlitz County and to become one of the
leading community based providers of financial services in other selected areas
of Washington and Oregon. The Company's growth strategy is based on providing
both exceptional personal service and a wide range of financial services to its
customers. The Company's strategy consists of the following:
- Emphasize personal service and develop strong community ties. Based on
its experience, the Company believes that providing a high level of
personal service and customer attention attracts and retains customers.
The Company's employees work with specific customers on an individual,
personalized basis. As a result of this level of customer attention, the
Company believes that it can make business decisions regarding its
customers more quickly and efficiently than its competitors. The
Company's philosophy is that of a true community bank -- to provide the
highest level of service to its communities. The Company's "outstanding"
Community Reinvestment Act ("CRA") rating is evidence of its commitment
to serve all the citizens in its communities. The Company believes that
its intense focus on customer service coupled with its deep community
relationships serve to differentiate the Company from its competitors.
- Provide a broad range of financial products and services. The Company
believes that offering a wide range of financial products and services is
an important competitive factor. In addition to deposit and loan products
typically offered by commercial banks, the Company has developed a real
estate loan division to originate mortgage loans and has established a
trust department. To execute this strategy, the Company has hired
experienced personnel to market and deliver these services. The Company
leases space in its main financial center to a securities brokerage firm
and an insurance agency in order to provide its customers with access to
a wider range of financial services. This combination of products and
services is designed to both increase its customer base and to enhance
cross-selling opportunities to its customer base.
- Increase business volume in existing market. The Company believes there
is an opportunity to increase its business volume in its existing market
area by promoting its complete array of financial products as well as
emphasizing personal service, especially in relationships with new
customers obtained in the acquisition of the Wells Fargo branches and by
establishing new customer relationships as a result of the announced
closure of a U.S. Bank branch in Kelso. The Company believes that
additional opportunities for growth exist in Cowlitz County as a result
of new business entrants such as
4
<PAGE> 6
BHP Coated Steel, Prudential Steel and Foster Farms. The Company
presently has the largest share of deposits held by commercial banks in
Cowlitz County and believes that its reputation for a high level of
personal service will help it attract new customers as the larger banks
continue their consolidation and reduction of personal service to their
customers.
- Explore opportunities for regional expansion through acquisition. The
Company intends to explore the acquisition of other community banks and
branches of larger banks in non-metropolitan communities in Washington
and Oregon. The Company intends to retain the local character of
institutions which it acquires and to promote deposit and asset growth in
the acquired institutions through implementation of its customer service
policies and product offerings. Although the Company is not presently
engaged in any acquisition discussions, it believes that such
opportunities are available and that its ability to consummate such
acquisitions will be enhanced by completion of this Offering and the
creation of a public market for the Company's Common Stock.
The Company was organized in 1991 under Washington law to become the
holding company for the Bank, a Washington state chartered bank that commenced
operations in 1978. The principal executive offices of the Company are located
at 927 Commerce Avenue, Longview, Washington 98632, and its telephone number is
(360) 423-9800.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company..................... 1,000,000 Shares
Common Stock to be outstanding after the Offering....... 3,619,796 Shares
Use of proceeds......................................... To repay approximately $1.1 million
of outstanding indebtedness, and to
use approximately $9.6 million to
increase the capital of the Company
and for future acquisitions.
Directed Shares......................................... 100,000 shares, or 10.0% of the
Offering, have been reserved for
existing shareholders, employees
and customers and, subject to
availability, other residents of
Cowlitz County, consistent with the
local orientation of the Company.
Proposed Nasdaq National Market symbol.................. CWLZ
</TABLE>
5
<PAGE> 7
RISK FACTORS
This Prospectus contains certain forward-looking statements. Actual results
could differ materially from those projected in these forward-looking statements
as a result of certain of the risk factors set forth below and elsewhere in this
Prospectus. Prospective investors should carefully consider and evaluate all of
the information set forth in this Prospectus, including the Risk Factors set
forth below. This list of risk factors may not be exhaustive.
EXPOSURE TO LOCAL ECONOMY
The Company's performance is materially dependent upon and sensitive to the
economy of its market area consisting of Cowlitz County and the surrounding
areas in southwest Washington and northwest Oregon. Adverse economic
developments may affect loan demand and the collectibility of existing loans,
and have a negative effect on the Company's earnings and financial condition.
Historically, the economy of Cowlitz County depended primarily on the forest
products industry. Particularly in the 1980s, the Company's market area
experienced high unemployment as a result of the reduction in forest products
manufacturing jobs. While the forest products industry is still the leading
employer in Cowlitz County, the economy is becoming more diverse as
manufacturers enter the region and tourism centered around Mount St. Helens
expands. Subsequent developments have reduced the dependence of the local
economy on forest products manufacturing and have increased the number of
non-manufacturing jobs. There can be no assurance that future economic changes
will not have a significant adverse effect on the Company. See
"Business -- Market Area."
ABILITY TO EXPAND OPERATIONS
An important element of the Company's business strategy is to expand its
market area through acquisitions. The Company has not identified any specific
acquisition candidates. Although the Company has not acquired any whole banks in
the past, it successfully bid for and acquired three branches from Wells Fargo
Bank and believes it has successfully integrated those branches into its
operations. No assurance can be given that the Company will be able to enter
into and consummate any acquisitions or the timing of any acquisitions that may
occur. The rate of growth of the Company will be directly affected by its
ability to identify and consummate acquisitions. If the Company is not able to
consummate one or more acquisitions, it has no other current intended use for a
substantial portion of the offering proceeds, and pending application of those
proceeds, the Company's return on equity and earnings per share would be
adversely affected. No assurance can be given that such funds will be
effectively deployed in the future.
COMPETITION
In recent years, competition for deposits and loans has intensified. Two
super-regional banks in the Company's market area have been acquired by even
larger banks, although one has sold branches to the Company and the other has
announced it is closing one of its branches in Cowlitz County. These
institutions have competitive advantages over the Company in that they may have
higher public visibility and are able to maintain advertising and marketing
activities on a much larger scale than the Company can economically sustain.
Single-borrower lending limits imposed by law are dependent on the capital of
the financial institution, giving branches of larger banks an additional
competitive advantage with respect to loan applications which are in excess of
the Company's legal lending limits. Furthermore, competition from outside the
traditional banking system from credit unions, investment banking firms,
insurance companies and related industries offering bank-like products has
increased the competition for deposits and loans. In the Company's primary
market area, credit unions held approximately 51% of local deposits as of June
30, 1996, the latest date for which information is available. See
"Business -- Competition."
CREDIT RISK
The Company, like other lenders, is subject to credit risk, which is the
risk of losing principal and interest due to customers' failure to repay loans
in accordance with their terms. Although the Company has established lending
criteria and most loans are secured by collateral, a downturn in the economy or
the real
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<PAGE> 8
estate market in Cowlitz County or a rapid increase in interest rates could have
a negative effect on collateral values and borrowers' ability to repay. In
addition, seven of the Company's eleven loan officers were hired by the Company
within the last twelve months. Although these seven recent hires are experienced
loan officers, the Company's experience with these loan officers' underwriting
abilities is limited.
At December 31, 1997, the Company's nonperforming assets were $2.4 million,
an increase of $1.8 million from December 31, 1996. This increase is primarily
due to management's decision to classify loans with four borrowers with an
aggregate principal balance of $1.2 million as nonperforming. Although
management believes that its allowance for loan losses at December 31, 1997 is
adequate, no assurance can be given that an additional provision for loan losses
will not be required. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Loans."
INTEREST RATE RISK
The Company's earnings are largely derived from net interest income, which
is interest income and fees earned on loans and investment income, less interest
expense paid on deposits and other borrowings. Interest rates are highly
sensitive to many factors which are beyond the control of the Company's
management, including general economic conditions, and the policies of various
governmental and regulatory authorities. As interest rates change, net interest
income is affected. With fixed rate assets (such as fixed rate loans) and
liabilities (such as certificates of deposit), the effect on net interest income
depends on the maturity of the asset or liability. Although the Company strives
to minimize interest rate risk through asset/liability management policies, from
time to time maturities are not balanced. Further, while rates have remained
stable in recent periods, an unanticipated rapid decrease or increase in
interest rates could have an adverse effect on the spreads between the interest
rates earned on assets and the rates of interest paid on liabilities, and
therefore on the level of net interest income.
The Company historically used borrowings from the FHLB and, to a lesser
extent, higher interest rate certificates of deposits, as a means of achieving
faster asset growth than would have been possible through normal deposit growth.
As a result of the acquisition of the Wells Fargo branches in July 1997, the
Company at December 31, 1997 had reduced its dependence on FHLB borrowings and
higher interest rate certificates of deposits. The Company may increase its use
of FHLB borrowings and higher interest rate certificates of deposit in the
future if circumstances warrant. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
DEPENDENCE ON KEY PERSONNEL
The Company's success is dependent on the services of Benjamin Namatinia,
Chairman and Chief Executive Officer, and Charles W. Jarrett, President and
Chief Operating Officer. The loss of services of either of these executives, or
of certain other key officers, could adversely affect the Company. No assurance
can be given that replacement officers of comparable abilities could be found.
The Company maintains key person life insurance on these individuals. See
"Management."
OFFERING PRICE
The price of the shares being offered hereby will be determined by
negotiation between the Company and the representative of the Underwriters.
There can be no assurance that the market will sustain the offering price or
that the offering price necessarily indicates the fair value of the Common
Stock. See "Underwriting."
LIMITED MARKET FOR THE SHARES
Although shares of Common Stock are traded between shareholders from time
to time, there is currently no market for the Company's shares. The Company's
Common Stock is presently held by 289 holders of record. One effect of the
Offering will be to establish a more liquid market for the shares of current
shareholders of the Company. The Company's Common Stock has been approved for
quotation on the Nasdaq National Market but no assurances can be made that an
active public market will develop or be maintained for the shares. Moreover, the
market price could be subject to significant fluctuations in
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<PAGE> 9
response to variations in the Company's quarterly operating results, general
conditions of the banking industry and other factors. In addition, the price of
the shares may fluctuate substantially due to the effect of supply and demand in
a limited market. Even if an active market for the shares does develop,
investors in this Offering cannot be assured of being able to resell shares
purchased in the Offering at or above the offering price.
REGULATION
The Company is subject to extensive regulations under federal and state
laws. These laws and regulations are intended primarily to protect depositors
and the deposit insurance fund, rather than shareholders. The Bank is a state
chartered commercial bank which is not a member of the Federal Reserve System
and is subject to primary regulation and supervision by the Director of
Financial Institutions of the State of Washington (the "Washington Director")
and by the Federal Deposit Insurance Corporation (the "FDIC"), which also
insures bank deposits. The Company is also subject to regulation and supervision
by the Board of Governors of the Federal Reserve System (the "Federal Reserve").
Federal and state regulations place banks at a competitive disadvantage compared
to less regulated competitors such as finance companies, credit unions, mortgage
banking companies and leasing companies. Although the Company has been able to
compete effectively in its market area in the past, there can be no assurance
that it will be able to continue to do so. Further, future changes in federal
and state banking regulations could adversely affect the Company's operating
results and ability to continue to compete effectively. See
"Business -- Regulation and Supervision."
CONTROL BY EXISTING SHAREHOLDERS
After consummation of the Offering, officers and directors of the Company
and their families will beneficially own in the aggregate approximately 38% of
the outstanding Common Stock (down from approximately 47% prior to the
Offering). As a result of such ownership, these shareholders as a practical
matter will be able to control many matters requiring shareholder approval under
Washington law, including the election of directors.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
The Board of Directors and the shareholders of the Company have adopted an
amendment to the Company's Articles of Incorporation which gives the Board of
Directors the authority to issue up to 5,000,000 shares of Preferred Stock and
to determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the shareholders. The rights of the holders of Common Stock may be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock may have
the effect of delaying, deferring or preventing a change of control of the
Company without further action by shareholders and may adversely affect the
voting and other rights of the holders of Common Stock. The Company has no
present plans to issue shares of Preferred Stock. See "Description of Capital
Stock."
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<PAGE> 10
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after deducting the
underwriting discount and estimated Offering expenses of $300,000, are estimated
to be $10,860,000 (approximately $12,344,280 if the Underwriters' over-allotment
option is exercised in full), based on the assumed initial public offering price
of $12.00 per share.
The net cash proceeds of the Offering will be used to repay approximately
$1,000,000 of outstanding subordinated notes which bear interest at 8.5% per
annum, to repay approximately $146,000 of bank debt which currently bears
interest at 9.5% per annum, with the remaining approximately $9.6 million
available to increase the capital of the Company and the Bank in order to expand
its existing business and for future acquisitions. The Company is not presently
a party to any acquisition discussions or agreements. Initially, the Company
plans to invest the proceeds in money-market accounts at the Bank, which in turn
will invest the funds in short-term investment securities.
In the event that the Underwriters' over-allotment option is exercised, up
to 17,000 shares will be sold for the account of the Selling Shareholders. The
Company will not receive any proceeds from the sale of Shares by the Selling
Shareholders.
DIVIDEND POLICY
The Company has paid the following annual amounts on a per share basis as
dividends to its shareholders since 1993:
<TABLE>
<CAPTION>
YEAR AMOUNT
------------------------------------------------------------ ------
<S> <C>
1993........................................................ $.029
1994........................................................ .029
1995........................................................ .033
1996........................................................ .039
1997........................................................ .048
</TABLE>
The Board of Directors' dividend policy is to review the Company's
financial performance, capital adequacy, regulatory compliance and cash
resources, and if such review is favorable, to declare and pay a cash dividend
to shareholders quarterly. Although the Company anticipates payment of a regular
quarterly cash dividend, future dividends are subject to these limitations and
to the discretion of the Board of Directors, and could be reduced or eliminated.
The Company's ability to pay cash dividends to its shareholders is dependent on
earnings generated by the Bank. Washington and federal banking laws and
regulations place restrictions on the payment of dividends by a bank to its
shareholders. See "Business -- Regulation and Supervision."
9
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CAPITALIZATION
The following table sets forth, as of December 31, 1997, the total
capitalization of the Company on an actual basis and as adjusted to give effect
to the sale of Common Stock offered by the Company at an assumed initial public
offering price of $12.00 per share and the application of the estimated net
proceeds to the Company therefrom. This table should be read in conjunction with
the historical financial statements of the Company and the related notes thereto
included elsewhere in this Prospectus. See "Use of Proceeds" and "Selected
Historical Financial Information and Other Data."
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1997
--------------------
AS
ACTUAL ADJUSTED
------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Shareholders' equity:
Preferred Stock, no par value; no shares authorized; no shares issued
and outstanding or as adjusted...................................... $ -- $ --
Common Stock, no par value; 3,937,500 shares
authorized; 2,604,543 shares issued and
outstanding; 3,604,543 shares issued and
outstanding as adjusted(1).......................................... 3,262 14,122
Additional paid-in capital............................................. 1,538 1,538
Net unrealized gain on available-for-sale securities................... 16 16
Retained earnings...................................................... 9,071 9,071
------- -------
Total shareholders' equity............................................. $13,887 $ 24,747
======= =======
Capital ratios(2):
Tier 1 capital ratio
(Regulatory minimum: 4.00%)............................................ 9.61% 17.97%
Total risk-based capital ratio
(Regulatory minimum: 8.00%)............................................ 11.34% 19.70%
Leverage capital ratio
(General regulatory minimum: 4.00-5.00%)............................... 6.86% 12.31%
</TABLE>
- ---------------
(1) Does not include 525,000 shares of Common Stock authorized for issuance
under the Company's stock option plan. See "Management -- 1997 Stock Option
Plan."
(2) Minimum ratios for the Company are established by Federal Reserve
regulations. See "Business -- Regulation and Supervision."
10
<PAGE> 12
DILUTION
The net tangible book value of the Company at December 31, 1997 was
approximately $12.0 million, or $4.62 per share of Common Stock. Net tangible
book value per share represents the Company's total tangible assets less its
total liabilities, divided by the total number of outstanding shares of Common
Stock. After giving effect to the sale of 1,000,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$12.00 per share and the application of the estimated net proceeds therefrom,
the pro forma net tangible book value of the Company at December 31, 1997 would
have been approximately $22.9 million or $6.35 per share of Common Stock. This
represents an immediate increase in such net tangible book value of $1.73 per
share to the existing shareholders of the Company and an immediate dilution in
net tangible book value of $5.65 per share to purchasers of Common Stock in the
Offering. The following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................... $12.00
Net tangible book value per share before the Offering............ $4.62
Increase per share attributable to new investors................. 1.73
-----
Pro forma net tangible book value per share after the Offering........ 6.35
------
Dilution per share to new investors................................... $ 5.65
======
</TABLE>
The following table sets forth, as of December 31, 1997, the number of
shares of Common Stock purchased, the total consideration paid therefor and the
average price paid per share by the existing shareholders of the Company and the
purchasers of Common Stock in the Offering, at an assumed initial public
offering price of $12.00 per share (before deducting the estimated underwriting
discount and offering expenses payable by the Company). The following table does
not include 133,000 shares of Common Stock which the Underwriters may purchase
from the Company pursuant to their over-allotment option. See "Underwriting."
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
-------------------- ----------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- -------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders............................ 2,604,543 72.3% $ 4,801 28.6% $ 1.84
New investors(1)................................. 1,000,000 27.7 12,000 71.4 $ 12.00
--------- ----- ------- -----
Total.......................................... 3,604,543 100.0% $16,801 100.0% $ 4.66
========= ===== ======= =====
</TABLE>
- ---------------
(1) Purchasers of Common Stock in the Offering.
11
<PAGE> 13
SELECTED HISTORICAL FINANCIAL INFORMATION AND OTHER DATA
The following table sets forth certain information concerning the
consolidated financial condition, operating results, and key operating ratios
for the Company at the dates and for the periods indicated. This information
does not purport to be complete, and should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and the Consolidated Financial Statements of the Company and Notes
thereto included in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest income.......................................... $ 6,015 $ 7,492 $ 10,644 $ 13,633 $ 15,086
Interest expense......................................... 2,720 2,841 4,548 6,174 6,943
---------- ---------- ---------- ---------- ----------
Net interest income...................................... 3,295 4,651 6,096 7,459 8,143
Provision for loan loss.................................. 310 533 694 281 375
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan loss........ 2,985 4,118 5,402 7,178 7,768
Non-interest income...................................... 449 287 877 296 749
Non-interest expense..................................... 2,016 2,363 3,093 3,682 5,284
---------- ---------- ---------- ---------- ----------
Income before provision for income taxes................. 1,418 2,042 3,186 3,792 3,233
Provision for income taxes............................... 442 697 1,088 1,295 1,109
---------- ---------- ---------- ---------- ----------
Net income............................................... $ 976 $ 1,345 $ 2,098 $ 2,497 $ 2,124
========== ========== ========== ========== ==========
DIVIDENDS
Cash..................................................... $ 49 $ 49 $ 80 $ 101 $ 126
Ratio of dividends to net income......................... 5.02% 3.64% 3.81% 4.04% 5.93%
PER SHARE DATA(1)
Diluted earnings per share............................... $ 0.51 $ 0.70 $ 0.77 $ 0.90 $ 0.76
Cash dividends per common share.......................... $ 0.03 $ 0.03 $ 0.03 $ 0.04 $ 0.05
Weighted average shares outstanding...................... 1,925,399 1,925,399 2,714,074 2,788,365 2,796,906
BALANCE SHEET DATA (AT PERIOD END)
Investment securities.................................... $ 6,726 $ 3,565 $ 3,263 $ 5,391 $ 8,481
Trading assets........................................... 3,986 2,781 2,016 -- --
Loans, net............................................... 55,887 75,564 105,900 124,657 129,993
Total assets............................................. 76,383 94,728 131,348 159,157 173,293
Total deposits........................................... 64,340 81,083 106,371 123,297 136,209
Total short-term borrowings.............................. 4,525 1,350 2,625 550 725
Total long-term borrowings............................... 3,255 6,811 12,393 22,842 21,900
Total shareholders' equity............................... 3,886 5,182 9,391 11,813 13,887
SELECTED RATIOS
Return on average total assets........................... 1.26% 1.57% 1.90% 1.75% 1.28%
Return on average shareholders' equity................... 28.93% 30.21% 26.06% 23.93% 16.65%
Net interest margin...................................... 4.67% 5.94% 5.91% 5.56% 5.33%
Efficiency ratio(2)...................................... 53.85% 47.85% 44.36% 47.48% 59.42%
ASSET QUALITY RATIOS
Allowance for loan losses to:
Ending total loans..................................... 1.33% 1.50% 1.64% 1.50% 1.49%
Nonperforming assets(3)................................ 1,831.71% 548.57% 540.80% 328.82% 81.51%
Nonperforming assets to ending total assets.............. 0.05% 0.22% 0.25% 0.36% 1.39%
Net loan charge-offs to average loans.................... 0.31% 0.20% 0.09% 0.13% 0.23%
CAPITAL RATIOS
Average shareholders' equity to average assets........... 4.36% 5.21% 7.30% 7.31% 7.69%
Tier 1 capital ratio(4).................................. 7.80% 7.68% 9.86% 10.11% 9.61%
Total risk based capital ratio(5)........................ 11.06% 10.42% 11.96% 11.88% 11.34%
</TABLE>
- ---------------
(1) Per share data has been adjusted to reflect all stock dividends and stock
splits to the date of the Prospectus. The Company had a 5 for 1 stock split
effective on October 17, 1997 and a 3.5 for 1 stock split effective on
January 12, 1998.
(2) Efficiency ratio is noninterest expense divided by the sum of net interest
income plus noninterest income.
(3) Nonperforming assets consist of nonaccrual loans, loans contractually past
due 90 days or more and other real estate owned.
(4) Tier 1 capital divided by risk-weighted assets.
(5) Total risk-based capital divided by risk-weighted assets.
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations includes a discussion of certain significant business
trends and uncertainties as well as other forward-looking statements and is
intended to be read in conjunction with and is qualified in its entirety by
reference to the consolidated financial statements of the Company and
accompanying notes included elsewhere in this Prospectus. For a discussion of
important factors that could cause actual results to differ materially from such
forward-looking statements, see "Risk Factors."
INTRODUCTION
The Company has grown from assets of $39.4 million and deposits of $31.0
million at January 1, 1992 to assets of $173.3 million and deposits of $136.2
million at December 31, 1997. Until November 1996, the Company had only one
location in Longview, Washington. The Company has operated very efficiently
during this period of rapid growth, in part due to operating from one location.
The Company has recently undertaken significant business changes to
strengthen its position as the leading bank in Cowlitz County. Beginning in
November 1996, the Company expanded its operating base by opening a branch in
Kelso, Washington. In July 1997, the Company acquired three Wells Fargo Bank
branches, located in Castle Rock, Kalama and Longview, Washington (the "Branch
Acquisition"). In this acquisition, the Company acquired the branch sites,
retained the existing employees and assumed approximately $25.2 million in
deposit liabilities, but did not acquire any loans or other revenue producing
assets. During 1997, the Company also established a trust department at its main
office in Longview. As a result of the recent expansion of the Company and the
associated increased staff costs and amortization of the core deposit premium
from the Branch Acquisition, non-interest expense for the year ended 1997 is
substantially higher as a percentage of revenue than in prior periods. Although
the higher non-interest expense is partially offset by a lower cost of funds due
to increased deposits resulting from the establishment and acquisition of
branches, diluted earnings per share are lower for 1997 than for 1996. In
addition, certain of the Company's performance ratios, such as ROE and return on
assets ("ROA"), are lower in 1997 than in prior years as a result of the
investment of cash received in the Branch Acquisition in lower yielding
short-term investments pending utilization of these funds by the Company,
coupled with the increased noninterest expense described above. As a result of
the Branch Acquisition, however, the Company's reliance on borrowings from the
FHLB has decreased from 14.5% of total liabilities at December 31, 1996 to 12.9%
of total liabilities at December 31, 1997.
RESULTS OF OPERATIONS
NET INTEREST INCOME
For financial institutions, the primary component of earnings is net
interest income. Net interest income is the difference between interest income,
principally from loans and investment securities portfolios, and interest
expense, principally on customer deposits. Changes in net interest income result
from changes in "volume," "spread" and "margin." Volume refers to the dollar
level of interest-earning assets and interest-bearing liabilities. Spread refers
to the difference between the yield on interest-earning assets and the cost of
interest-bearing liabilities. Net interest margin is the ratio of net interest
income to total interest-earning assets and is influenced by the level and
relative mix of interest-earning assets and interest-bearing liabilities.
Net interest income for the year ended December 31, 1997 was $8.1 million,
which was an increase of 9.2% from $7.5 million in 1996, which was $1.4 million
higher than 1995. The year to year increase was due primarily to the increase in
average earning assets during each year, the largest component of which was an
increase in the volume of loans. The overall tax-equivalent earning asset yield
was 9.87% in 1997 compared to 10.16% in 1996 and 10.31% in 1995. During the same
periods, average yields on loans were 10.51% in 1997, 10.69% in 1996 and 10.86%
in 1995. The lower yields were primarily attributable to lower interest rates on
loans due to current market conditions and increased competition for loans in
the Company's market area.
13
<PAGE> 15
Interest expense as a percentage of earning assets decreased to 4.54% in
1997, compared to 4.60% in 1996 and 4.41% in 1995. The average cost of interest
bearing liabilities declined to 5.30% for the year ended December 31, 1997
compared to 5.35% for 1996 and 5.21% for 1995. The Company did not aggressively
price certain higher interest rate certificates of deposit following the Branch
Acquisition. The net interest spread decreased to 4.57% for the year ended
December 31, 1997 from 4.81% for the year ended December 31, 1996 and 5.10% for
the year ended December 31, 1995. Local competitive pricing conditions and
funding needs for the Company's investments and loans were the primary
determinants of rates paid for deposits during 1997, 1996 and 1995.
Average Balances and Average Rates Earned and Paid. The following table
sets forth, for the periods indicated, information with regard to (i) average
balances of assets and liabilities, (ii) the total dollar amounts of interest
income on interest earning assets and interest expense on interest bearing
liabilities, (iii) resulting yields or costs, (iv) net interest income and (v)
net interest spread. Nonaccrual loans have been included in the tables as loans
carrying a zero yield. Loan fees are recognized as income using the interest
method over the life of the loan.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------------------
1995 1996 1997
------------------------------------ ------------------------------------ ------------------------------------
AVERAGE AVERAGE AVERAGE
OUTSTANDING INTEREST OUTSTANDING INTEREST OUTSTANDING INTEREST
BALANCE EARNED/PAID YIELD/RATE BALANCE EARNED/PAID YIELD/RATE BALANCE EARNED/PAID YIELD/RATE
----------- ----------- ---------- ----------- ----------- ---------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans......... $ 91,616 $ 9,954 10.86% $ 118,957 $12,721 10.69% $ 130,362 $13,700 10.51%
Taxable
securities... 5,570 269 4.83% 6,890 386 5.60% 10,261 577 5.62%
Nontaxable
securities(1)... 42 5 11.90% 36 3 8.33% -- -- 0.00%
Trading
assets...... 2,454 129 5.26% 589 34 5.77% -- -- 0.00%
Federal funds
sold........ 23 -- 0.00% -- -- 0.00% -- -- 0.00%
Interest
earning
balances due
from
banks....... 3,534 289 8.18% 7,777 490 6.30% 12,259 809 6.60%
-------- ------- -------- ------- ------- ------
Total
interest
earning
assets.... $ 103,239 $10,646 10.31% $ 134,249 $13,634 10.16% $ 152,882 $15,086 9.87%
Cash and due
from
banks....... 5,728 6,021 7,553
Premises and
equipment,
net......... 1,696 2,309 5,064
Allowance for
loan
losses...... (1,399) (1,801) (1,935)
Net
Intangibles... 580
Other
assets...... 1,010 1,861 1,846
-------- -------- -------
Total
assets.... $ 110,274 $ 142,639 $ 165,990
======== ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings and
interest-bearing
demand
deposits.... $ 31,215 $ 1,061 3.40% $ 30,834 $ 1,031 3.34% $ 37,568 $ 1,253 3.34%
Certificates
of
deposit..... 43,521 2,657 6.11% 64,863 3,960 6.11% 70,641 4,246 6.01%
Long-term
borrowings... 9,186 653 7.11% 17,315 1,073 6.20% 21,773 1,401 6.43%
Short-term
borrowings... 3,418 177 5.18% 2,359 110 4.66% 955 43 4.50%
-------- ------- -------- ------- ------- ------
Total
interest-bearing
liabilities... $ 87,340 $ 4,548 5.21% $ 115,371 $ 6,174 5.35% $ 130,937 $ 6,943 5.30%
Non-interest
bearing
deposits.... 14,396 16,196 21,621
Other
liabilities... 488 639 675
-------- -------- -------
Total
liabilities... 102,224 132,206 153,233
Shareholders'
equity...... 8,050 10,433 12,757
-------- -------- -------
Total
liabilities
and
shareholders'
equity.... $ 110,274 $ 142,639 $ 165,990
======== ======== =======
Net interest
income...... $ 6,098 $ 7,460 $ 8,143
======= ======= ======
Net interest
spread...... 5.10% 4.81% 4.57%
Average yield
on earning
assets...... 10.31% 10.16% 9.87%
Interest
expense to
earning
assets...... 4.41% 4.60% 4.54%
Net interest
income to
earning
assets...... 5.91% 5.56% 5.33%
</TABLE>
- ---------------
(1) Interest earned on nontaxable securities has been computed on a 34 percent
tax equivalent basis.
14
<PAGE> 16
Analysis of Changes in Interest Differential. The following table shows the
dollar amount of the increase (decrease) in the Company's net interest income
and expense and attributes such dollar amounts to changes in volume as well as
changes in rates. Rate/volume variance have been allocated to volume changes:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1996 VERSUS 1995 1997 VERSUS 1996
----------------------------- ------------------------------
INCREASE INCREASE
(DECREASE) DUE (DECREASE) DUE
TO TOTAL TO TOTAL
--------------- INCREASE/ ---------------- INCREASE/
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
------ ----- ---------- ------ ----- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Interest earning balances due from
banks........................... $ 267 $ (66) $ 201 $ 296 $ 23 $ 319
Trading account income............. (108) 13 (95) (34) -- (34)
Investment security income:
Taxable securities................. 74 43 117 190 1 191
Nontaxable securities(1)........... (1) (1) (2) (3) -- (3)
Loans, including fees on loans..... 2,923 (156) 2,767 1,193 (214) 979
------ ----- ------ ------ ----- ------
Total interest income(1)... 3,155 (167) 2,988 1,642 (190) 1,452
------ ----- ------ ------ ----- ------
Interest expense:
Savings and interest bearing
demand.......................... (11) (19) (30) 222 -- 222
Certificates of deposit............ 1,303 -- 1,303 351 (65) 286
Short-term borrowings.............. (49) (18) (67) (63) (4) (67)
Long-term borrowings............... 504 (84) 420 288 40 328
------ ----- ------ ------ ----- ------
Total interest expense..... 1,747 (121) 1,626 798 (29) 769
------ ----- ------ ------ ----- ------
Net interest spread(1)............... $1,408 $ (46) $1,362 $ 844 $(161) $ 683
====== ===== ====== ====== ===== ======
</TABLE>
- ---------------
(1) Interest earned on nontaxable securities has been computed on a 34 percent
tax equivalent basis.
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses was $375,000 for the year ended
December 31, 1997, which increased the allowance for loan losses to $2.0 million
compared to $1.9 million at December 31, 1996 and $1.8 million at December 31,
1995. The provision for loan losses was higher in 1997 than in 1996 due to
increased growth in the loan portfolio and increased levels of net charge-offs
and nonperforming assets in 1997. The Company's ratio of allowance for loan
losses to total loans was 1.49% at December 31, 1997, 1.50% at December 31, 1996
and 1.64% at December 31, 1995. See "-- Financial Condition -- loans."
Recoveries have been minimal over the past three-year period. Net
chargeoffs for 1997 were approximately $299,000 which compares to net
charge-offs of approximately $150,000 in 1996 and $83,000 in 1995. At December
31, 1997 nonaccrual loans totaled $1.9 million compared to $407,000 at December
31, 1996 and $237,000 at December 31, 1995. The increase in nonaccrual loans
from 1996 to 1997 is primarily the result of loans to four borrowers with an
aggregate principal balance of $1.2 million going on nonaccrual status. When a
provision for loan losses is recorded, the amount is based on past charge-off
experience, a careful analysis of the current portfolio, and evaluation of
future economic trends in the Company's market area. Management continues to
closely monitor the loan quality of new and existing relationships.
NON-INTEREST INCOME
Non-interest income, primarily consisting of service charges and related
fees, has ranged from $749,000 in 1997 to $296,000 for 1996 and $877,000 for
1995. Service charges on deposit accounts increased to $563,000 for 1997,
compared to $387,000 for 1996 and $367,000 for 1995, largely as a result of an
increase in the amount of deposits. The differences in income between periods
primarily reflects the results of the Company's trading account which had a gain
of $258,000 in 1995 and a loss of $309,000 in 1996. The Company did not conduct
any trading activity during 1997. The loss and gain were due primarily to the
volatility of interest rates during these periods.
15
<PAGE> 17
NON-INTEREST EXPENSE
Non-interest expense consists principally of employees' salaries and
benefits, occupancy costs, data processing and communication expenses, FDIC
insurance premiums, professional fees, and other non-interest expenses.
Non-interest expense increased 43.5% to $5.3 million for the year ended December
31, 1997 compared to $3.7 million for the year ended December 31, 1996,
primarily due to staffing costs, as well as increases in other operating costs
such as occupancy expense and amortization of the deposit premium from the
Branch Acquisition in July 1997. Non-interest expense increased $589,000 or
19.0% to $3.7 million for the year ended December 31, 1996 from $3.1 million for
the year ended December 31, 1995. The increase is primarily attributable to an
increase in staff costs due to the opening of a new branch in Kelso in November
1996 which required hiring additional employees beginning in April 1996.
A measure of the Company's ability to contain non-interest expenses is the
efficiency ratio. This statistic is derived by dividing total non-interest
expenses by total net interest income and non-interest income. The Company's
efficiency ratio increased to 59.42% for the year ended December 31, 1997
compared to 47.48% for the corresponding period of 1996 and 44.36% for the year
ended December 31, 1995, largely as a result of the Company's expansion
activities in late 1996 and in 1997.
Salaries and benefits expense of $2.8 million in 1997 represented an
increase of $641,000 from the $2.1 million reported in 1996 which was $428,000
or 25.0% higher than the $1.7 million reported in 1995. At December 31, 1997,
the Company had 99 full-time equivalent employees compared to 63 and 54 at
December 31, 1996 and 1995, respectively.
Net occupancy expenses consist of depreciation on premises, lease costs and
equipment, maintenance and repair expenses, utilities and related expenses. The
Company's net occupancy expense in 1997 of $724,000 was $331,000 or 84.2% higher
than the $393,000 reported in 1996, which was $83,000 or 26.8% higher than the
$310,000 reported in 1995. The increase in occupancy expense in 1997 and 1996
was due primarily to an expansion of the Company's main office facility in
Longview and the opening of a branch in Kelso and the addition of three branches
in the Branch Acquisition.
INCOME TAXES
The provision for income taxes amounted to $1.1 million, $1.3 million, and
$1.1 million for 1997, 1996, and 1995, respectively. The provision resulted in
an effective tax rate of 34.3% in 1997, 34.2% in 1996 and of 34.1% in 1995.
LOAN LOSSES AND RECOVERIES
Management recorded a provision for loan losses of $375,000 in 1997 to
support loan portfolio growth. At December 31, 1997, management considered the
allowance for loan losses of $2.0 million sufficient to absorb possible losses
on loans which may become uncollectible based on evaluations by management.
The amount of the allowance for loan losses is assessed by management on a
regular basis to ensure that it is sufficient to cover potential future loan
losses. Percentages are assigned for each class of specifically identified
problem loans and then combined with an assessment of the balance of the loan
portfolio based upon historical charge-off experience to arrive at a minimum,
midpoint, and maximum range of potential loss in evaluating the adequacy of the
allowance for loan losses. The allowance balance and amount of provision charged
to operations is based primarily on management's evaluation of the entire
portfolio. This analysis includes review of the following factors: (a) the
volume and mix of the existing loan portfolio, including the volume and severity
of nonperforming loans and adversely classified credits, as well as analysis of
net charge-offs experienced on previously classified loans; (b) the extent to
which loan renewals and extensions are used to maintain loans on a current basis
and the degree of risk associated with such loans; (c) the nature and value of
the collateral securing a loan; (d) the trend in loan growth, including any
rapid increase in loan volume within a relatively short period of time; (e)
general and local economic conditions affecting the collectibility of the
Company's loans; (f) the relationship and trend over the past several years of
recoveries as a percentage of previous years' charge-offs; and (g) available
outside information of a comparable nature regarding the loan portfolios of
other banks, including peer group banks.
16
<PAGE> 18
The following table shows the Company's loan loss performance for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans outstanding at end of period......................... $107,633 $126,551 $131,963
Average loans outstanding during the period................ $ 91,616 $118,957 $130,362
Allowance for loan losses, beginning of period............. $ 1,152 $ 1,763 $ 1,894
Loans charged off:
Commercial............................................... 5 36 186
Real estate.............................................. -- 30 3
Consumer................................................. 9 22 23
Credit cards............................................. 99 70 112
-------- -------- --------
Total loans charged-off............................... 113 158 324
-------- -------- --------
Recoveries:
Commercial............................................... 24 5 5
Real estate.............................................. -- -- --
Consumer................................................. 2 1 20
Credit cards............................................. 4 2 --
-------- -------- --------
Total recoveries...................................... 30 8 25
-------- -------- --------
Provision for loan losses.................................. 694 281 375
-------- -------- --------
Allowance for loan losses, end of period................... $ 1,763 $ 1,894 $ 1,970
======== ======== ========
Ratio of net loans charged-off to average loans
outstanding.............................................. 0.12% 0.13% 0.25%
Ratio of allowance for loan losses to loans at year end.... 1.64% 1.50% 1.49%
</TABLE>
FINANCIAL CONDITION
SUMMARY BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1996 1997
-------- -------- -------- INCREASE (DECREASE)
---------------------------------------------
12/31/95-12/31/96 12/31/96-12/31/97
--------------------- --------------------
(DOLLARS) (PERCENT) (DOLLARS) (PERCENT)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks............ $ 14,702 $ 20,905 $ 23,109 $ 6,203 42.2% $ 2,204 10.5%
Investment securities.............. 3,263 5,391 8,481 2,128 65.2% 3,090 57.3%
Trading assets..................... 2,016 -- -- (2,016) (100.0)% -- --
Loans, net......................... 105,900 124,657 129,993 18,757 17.7% 5,336 4.3%
Other assets....................... 5,467 8,204 11,710 2,737 50.1% 3,506 42.7%
-------- -------- -------- ------- --------
Total assets..................... $131,348 $159,157 $173,293 $27,809 21.2% $14,136 8.9%
======== ======== ======== ======= ========
LIABILITIES
Non-interest-bearing
deposits......................... $ 17,099 $ 16,821 $ 27,141 $ (278) (1.6)% $10,320 61.4%
Interest-bearing deposits.......... 89,272 106,476 109,068 17,204 19.3% 2,592 2.4%
Total deposits..................... 106,371 123,297 136,209 16,926 15.9% 12,912 10.5%
Other liabilities.................. 15,586 24,047 23,197 8,461 54.3% (850) (3.5)%
SHAREHOLDERS' EQUITY................. 9,391 11,813 13,887 2,422 25.8% 2,074 17.6%
-------- -------- -------- ------- --------
Total liabilities and shareholders'
equity........................... $131,348 $159,157 $173,293 $27,809 21.2% $14,136 8.9%
======== ======== ======== ======= ========
</TABLE>
17
<PAGE> 19
INVESTMENT SECURITIES
At December 31, 1997, the Company's portfolio of investment securities
totaled $8.5 million, a 57.3% increase when compared to a securities portfolio
of $5.4 million at December 31, 1996. Investment in FHLB stock was $2.7 million
at December 31, 1997.
Investment securities held at December 31, 1996, totaled $5.4 million
representing a 65.2% increase when compared to $3.3 million at December 31,
1995. At December 31, 1995, the Company held $2.0 million of trading assets. The
Company ceased its trading activities during 1996 and had no trading assets at
December 31, 1997 and 1996.
The Company follows a financial accounting principle which requires the
identification of investment securities as held-to-maturity, available-for-sale
or trading assets. Securities designated as held-to-maturity are those that the
Company has the intent and ability to hold until they mature or are called.
Available-for-sale securities are those that management may sell if liquidity
requirements dictate or alternative investment opportunities arise. Trading
assets are purchased and held principally for the purpose of reselling them
within a short period of time. The mix of available-for-sale and
held-to-maturity investment securities is considered in the context of the
Company's overall asset-liability policy and illustrates management's assessment
of the relative liquidity of the Company. At December 31, 1997, the investment
portfolio consisted of 47.4% available-for-sale securities and 52.6%
held-to-maturity investments. At December 31, 1996, available-for-sale
securities were 37.3% and held-to-maturity investments were 62.7% of the
investment portfolio. At December 31, 1995, the Company had 100%
held-to-maturity investments. See Note 2 to the Consolidated Financial
Statements.
At December 31, 1997, the Company's investment portfolio had total net
unrealized gains of approximately $46,000. This compares to net unrealized gains
of approximately $18,000 at December 31, 1996, and $38,000 at December 31, 1995.
Unrealized gains and losses reflect changes in market conditions and do not
represent the amount of actual profits or losses the Company may ultimately
realize. Actual realized gains and losses occur at the time investment
securities are sold or redeemed.
In 1991, the Company became a member and shareholder in the Federal Home
Loan Bank of Seattle. The Company's relationship and stock investment with the
FHLB provides a borrowing source for meeting liquidity requirements, in addition
to dividend earnings.
The following table provides the book value of the Company's portfolio of
investment securities as of December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1995 1996 1997
------------------ ------------------ ------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ------ --------- ------ --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury securities................ $ -- $ -- $ 2,001 $2,011 $ 3,993 $4,017
------ ------ ------ ------ ------ ------
Total......................... $ -- $ -- $ 2,001 $2,011 $ 3,993 $4,017
====== ====== ====== ====== ====== ======
HELD-TO-MATURITY
U.S. Treasury securities................ $ 1,996 $2,034 $ 1,998 $2,006 $ 2,978 $3,000
Municipal bond.......................... 80 80 -- -- -- --
Certificates of deposit................. 1,187 1,187 1,382 1,382 1,486 1,486
------ ------ ------ ------ ------ ------
Total......................... $ 3,263 $3,301 $ 3,380 $3,388 $ 4,464 $4,486
====== ====== ====== ====== ====== ======
</TABLE>
At December 31, 1997, net unrealized gains on available-for-sale securities
were $24,000 representing .28% of the total portfolio. Management has no current
plans to sell any of these securities.
18
<PAGE> 20
The following table summarizes the contractual maturities and weighted
average yields of investment securities at December 31, 1997:
<TABLE>
<CAPTION>
DUE
ONE THROUGH
ONE YEAR THROUGH 10
OR LESS YIELD 5 YEARS YIELD YEARS YIELD TOTAL YIELD
-------- ----- ------- ----- ------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S Treasury securities................ $1,001 5.88% $ 4,014 6.06% $ -- -- $5,015 6.02%
Other securities(1).................... 1,486 5.99% 1,980 6.15% -- -- 3,466 6.08%
------ ------ ------ ------
Total(2)..................... $2,487 5.95% $ 5,994 6.09% $ -- -- $8,481 6.05%
====== ====== ====== ======
</TABLE>
- ---------------
(1) Does not reflect anticipated maturity from prepayments on mortgage-based and
asset-based securities. Anticipated lives are shorter than contractual
maturities.
(2) There was no interest earned on nontaxable securities.
LOANS
Net outstanding loans totaled $130.0 million at December 31, 1997,
representing an increase of 4.3% compared to $124.7 million at December 31,
1996. Loan commitments were $16.6 million at December 31, 1997. Loan commitments
amounted to $19.7 million at December 31, 1996.
The following table presents the composition of the Company's loan
portfolio at the dates indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1997
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial.............................................. $ 86,161 67.7% $ 93,829 70.8%
Real estate construction................................ 3,584 2.8 3,495 2.6
Real estate commercial.................................. 2,721 2.1 5,475 4.1
Real estate mortgage.................................... 28,766 22.6 24,167 18.2
Consumer and other...................................... 6,016 4.7 5,571 4.2
Contracts purchased..................................... 116 0.1 81 .1
-------- ----- -------- -----
127,364 100.0% 132,618 100.0%
===== =====
Deferred loan fees...................................... (813) (655)
-------- --------
Total loans.................................... 126,551 131,963
Allowance for loan losses............................... (1,894) (1,970)
-------- --------
Total loans, net............................... $124,657 $129,993
======== ========
</TABLE>
The following table shows the maturities and sensitivity of the Company's
loans to changes in interest rates at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------------
DUE
AFTER ONE
DUE IN ONE THROUGH 5 DUE AFTER 5
YEAR OR LESS YEARS YEARS TOTAL LOANS
------------ ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial loans.............................. $ 35,113 $50,376 $ 8,340 $ 93,829
Real estate construction...................... 1,308 1,876 311 3,495
Real estate commercial........................ 2,048 2,940 487 5,475
Real estate mortgage.......................... 9,044 12,975 2,148 24,167
Consumer and other............................ 2,085 2,991 495 5,571
Contracts purchased........................... 30 44 7 81
------- ------- ------ --------
$ 49,628 $71,202 $11,788 $ 132,618
======= ======= ====== ========
Loans with fixed interest rates............... $ 98,739
Loans with floating interest rates............ 33,879
--------
Total............................... $ 132,618
========
</TABLE>
19
<PAGE> 21
\In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No.
114, "Accounting by Creditors for Impairment of a Loan" and in October 1996
issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition Disclosures, an amendment to SFAS No. 114." The adoption of SFAS
Nos. 114 and 118 did not have a material impact on the comparability of the
tables provided herein. The Company, during its normal loan review procedures,
considers a loan to be impaired when it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. A loan is not considered to be impaired during a period of minimal
delay (less than 90 days). The Company measures impaired loans based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair market value of the collateral if the loan is collateral
dependent. Impaired loans are charged to the allowance when management believes,
after considering economic and business conditions, collection efforts, and
collateral position, that the borrowers financial condition is such that
collection of principal is not probable.
At December 31, 1997 and 1996, the Company's recorded investment in certain
loans that were considered to be impaired was $2,270 and $446, respectively. Of
these impaired loans, $302 and $232 have related valuation allowances of $199
and $122, while $1,968 and $214 did not require a valuation allowance. The
balance of the allowance for loan losses in excess of these specific reserves is
available to absorb losses from all loans. The average recorded investment in
impaired loans for the years ended December 31, 1997, 1996 and 1995, was
approximately $1,300, $342, and $261, respectively. The Company's policy is to
disclose as impaired loans all loans that are past due 90 days or more as to
either principal or interest, except for loans that are currently measured at
fair value or at lower of cost or fair value and residential mortgage and credit
card receivables, which are considered large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment. Interest
payments received on impaired loans are recorded as interest income, unless
collection of the remaining recorded investment is not probable, in which case
payments received are recorded as a reduction of principal. For the years ended
December 31, 1997, 1996 and 1995, interest income recognized on impaired loans
totaled $36, $14 and $9 respectively, all of which was recognized on a cash
basis.
Generally, no interest is accrued on loans when factors indicate collection
of interest is doubtful or when the principal or interest payment becomes 90
days past due, unless collection of principal and interest are anticipated
within a reasonable period of time and the loans are well secured. For such
loans, previously accrued but uncollected interest is charged against current
earnings, and income is only recognized to the extent payments are subsequently
received and collection of the remaining recorded principal balance is
considered probable.
The Company manages the general risks inherent in the loan portfolio by
following loan policies and underwriting practices designed to result in prudent
lending activities. The following table presents information with respect to
nonperforming assets:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
---- ------
<S> <C> <C>
Loans on nonaccrual status.......................................... $407 $1,897
Loans past due greater than 90 days but not on nonaccrual status.... 169 432
Other real estate owned............................................. -- 88
Troubled debt restructurings........................................ -- --
---- ------
Total nonperforming assets................................ $576 $2,417
==== ======
Percentage of nonperforming assets to total assets.................. 0.36% 1.39%
</TABLE>
The increase in nonperforming loans from December 31, 1996 to December 31,
1997 is primarily the result of management's decision to classify loans with
four borrowers with an aggregate principal balance of $1.2 million as
nonperforming. Each of these loans is secured by real estate and management
believes that in each case the value of the collateral exceeds the principal
balance of the loan. Management does not believe that it will incur any loss
with respect to any of these four borrowers.
20
<PAGE> 22
DEPOSITS
The following table sets forth the average balances of the Company's
interest bearing liabilities, interest expense and average rates paid for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1995 1996 1997
---------------------------- ---------------------------- ----------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- ------- ------- -------- ------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing checking........ $ 13,897 $ 457 3.29% $ 16,209 $ 533 3.29% $ 21,956 $ 766 3.49%
Savings.......................... 17,318 604 3.49% 14,625 498 3.41% 15,612 487 3.12%
Certificates of deposit.......... 43,521 2,657 6.11% 64,863 3,960 6.11% 70,641 4,246 6.01%
Long-term borrowings............. 9,186 653 7.11% 17,315 1,073 6.20% 21,773 1,401 6.43%
Short-term borrowings............ 3,418 177 5.18% 2,359 110 4.66% 955 43 4.50%
-------- ----- -------- ------ -------- ------
Total interest-bearing
liabilities............ $ 87,340 $4,548 5.21% $115,371 $6,174 5.35% $130,937 $6,943 5.30%
===== ====== ======
Total noninterest-bearing
liabilities.................... 14,884 16,835 22,296
-------- -------- --------
Total interest and
noninterest-bearing
liabilities............ $102,224 $132,206 $153,233
======== ======== ========
</TABLE>
Deposits grew to $136.2 million at December 31, 1997, an increase of 10.5%
from $123.3 million at December 31, 1996, primarily as a result of the Branch
Acquisition in July 1997 which added $25.2 million in deposits. Deposits in 1996
grew 15.9% from $106.4 million at December 31, 1995. Deposit growth is due to
management's decision to promote an attractive pricing strategy, increased
marketing and increased emphasis on implementing a sales culture within the
Company. The growth in deposits has primarily been in time deposits.
Nonvolatile, non-interest bearing demand deposits, also referred to as core
deposits, however, represent a significant percentage of the Company's deposit
base. To the extent that the Company is able to fund operations with
non-interest bearing core deposits, net interest spread, the difference between
interest income and interest expense, will improve. At December 31, 1997,
non-interest bearing demand deposits accounted for 19.9% of total deposits,
compared to 13.6% of total deposits at December 31, 1996 and 16.1% at December
31, 1995.
Interest bearing deposits consist of NOW, money market, savings and time
certificate accounts. By their nature, interest bearing account balances will
tend to grow or decline as the Company reacts to changes in competitors' pricing
and interest payment strategies. At December 31, 1997, total interest bearing
deposit accounts of $109.1 million increased $2.6 million or 2.4% from December
31, 1996. Deposit growth was primarily concentrated in interest bearing checking
accounts.
The Company has from time to time funded its growth with higher interest
rate certificates of deposit over $100,000. At December 31, 1997, time
certificates of deposits in excess of $100,000 totaled $18.6 million or 29.7% of
total outstanding time deposits, compared to $26.0 million or 34.3% of total
outstanding time deposits at December 31, 1996, and 32.3% at December 31, 1995.
The lower percentage at December 31, 1997 reflects management's decision to
allow these deposits to run-off following the Branch Acquisition in July 1997.
The following table sets forth, by time remaining to maturity, all time
certificates of deposit accounts outstanding at December 31, 1997:
<TABLE>
<CAPTION>
TIME DEPOSITS
OF $100,000 OR MORE(1) ALL OTHER TIME DEPOSITS(2)
---------------------- ----------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Reprice/Mature in three months or less............. $ 4,306 23.1% $ 8,695 19.8%
Reprice/Mature after three months through six
months........................................... 5,498 29.5 13,546 30.8
Reprice/Mature after six months through one year... 4,413 23.7 13,310 30.3
Reprice/Mature after one year through five years... 4,196 22.5 8,325 18.9
Reprice/Mature after five years.................... 220 1.2 105 .2
------- ------- ------- -------
Total......................................... $ 18,633 100.00% $ 43,981 100.00%
======= ======= ======= =======
</TABLE>
21
<PAGE> 23
- ---------------
(1) Time deposits of $100,000 or more represent 13.7% of total deposits at
December 31, 1997.
(2) All other time deposits represent 32.3% of total deposits at December 31,
1997.
At December 31, 1997, other borrowings have the following times remaining
to maturity:
<TABLE>
<CAPTION>
DUE
AFTER
DUE IN 3 MONTHS DUE AFTER ONE DUE
3 MONTHS THROUGH YEAR THROUGH AFTER
OR LESS ONE YEAR 5 YEARS 5 YEARS TOTAL
-------- -------- ------------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Short-term borrowings.................. $725 $ -- $ -- $ -- $ 725
Long-term borrowings................... -- 3,000 15,103 3,797 21,900
---- ------ ------- ------ -------
Total borrowings.................. $725 $3,000 $15,103 $ 3,797 $22,625
==== ====== ======= ====== =======
</TABLE>
ASSET-LIABILITY MANAGEMENT/INTEREST RATE SENSITIVITY
The principal purpose of asset-liability management is to manage the
Company's sources and uses of funds to maximize net interest income under
different interest rate conditions with minimal risk. A part of asset-liability
management involves interest rate sensitivity, the difference between repricing
assets and repricing liabilities in a specific time period. The policy of the
Company is to control the exposure of the Company's earnings to changing
interest rates by generally maintaining a position within a narrow range around
an "earnings neutral" or "balanced" position. The Board of Directors has
established guidelines for maintaining the Company's earnings risk due to future
interest rate changes. This analysis provides an indication of the Company's
earnings risk due to future interest rate changes. At December 31, 1997, the
analysis indicated that the earnings risk was within the Company's policy
guidelines.
A key component of the asset-liability management is the measurement of
interest-rate sensitivity. Interest-rate sensitivity refers to the volatility in
earnings resulting from fluctuations in interest rates, variability in spread
relationships, and the mismatch of repricing intervals between assets and
liabilities. Interest-rate sensitivity management attempts to maximize earnings
growth by minimizing the effects of changing market rates, asset and liability
mix, and prepayment trends.
22
<PAGE> 24
The following table presents interest-rate sensitivity data at December 31,
1997. The interest rate gaps reported in the table arise when assets are funded
with liabilities having different repricing intervals. Since these gaps are
actively managed and change daily as adjustments are made in interest rate views
and market outlook, positions at the end of any period may not be reflective of
the Company's interest rate view in subsequent periods. Active management
dictates that longer-term economic views are balanced against the prospects of
short-term interest rate changes in all repricing intervals.
<TABLE>
<CAPTION>
ESTIMATED MATURITY OR REPRICING AT DECEMBER 31, 1997
---------------------------------------------------------------------------
0-3 MONTHS 3-6 MONTHS 6-12 MONTHS 1-5 YEARS OVER 5 YEARS TOTAL
---------- ---------- ----------- --------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Interest earning balances due
from banks................ $ 13,450 $ -- $ -- $ -- $ -- $ 13,450
Investments available for
sale(1)................... -- 1,001 -- 3,016 -- 4,017
Investments held to
maturity.................. 694 198 594 2,978 -- 4,464
Federal Home Loan Bank
Stock(1).................. 2,658 -- -- -- -- 2,658
Loans, including fees........ 40,539 2,704 6,385 71,202 11,133 131,963
------- -------- -------- ------- ------- --------
Total interest
earning assets..... $ 57,341 $ 3,903 $ 6,979 $77,196 $ 11,133 $156,552
======= ======== ======== ======= =======
Allowance for loan losses...... (1,970)
Cash and due from banks........ 9,659
Other assets................... 9,052
--------
Total assets......... $173,293
========
Interest Bearing Liabilities:
Savings and interest demand
deposits.................. $ 28,070 $ -- $ -- $18,384 $ -- $ 46,454
Certificates of deposit...... 13,001 19,044 17,723 12,521 325 62,614
Borrowings................... 15,794 -- 3,000 2,034 1,797 22,625
------- -------- -------- ------- ------- --------
Total interest
bearing
liabilities........ 56,865 19,044 20,723 32,939 2,122 $131,693
======= ======== ======== ======= =======
Other liabilities.............. 27,713
Shareholders' equity........... 13,887
--------
Total liabilities &
shareholders'
equity............. $173,293
========
Interest sensitivity gap....... 476 (15,141) (13,744) 44,257 9,011 $ 24,859
========
------- -------- -------- ------- -------
Cumulative interest sensitivity
gap.......................... $ 476 $(14,665) $ (28,409) $15,848 $ 24,859
======= ======== ======== ======= =======
</TABLE>
- ---------------
(1) Equity investments have been placed in the 0-3 month category
The table illustrates that the Company is asset-sensitive 0-3 months,
liability-sensitive from 3 months through 12 months and asset-sensitive
thereafter. In an environment of increasing interest rates, the theoretical net
interest margins of the Company would be adversely affected for the 12 months
following December 31, 1997, and favorably affected thereafter. Conversely, in a
declining interest-rate environment, the Company's theoretical net interest
margins would be favorably affected for the 12 month period following December
31, 1997, and adversely thereafter.
MARKET RISK
Interest rate and credit risks are the most significant market risks
impacting the Company's performance. Other types of market risk, such as foreign
currency exchange rate risk and commodity price risk, do not arise in the normal
course of the Company's business activities. The Company relies on loan reviews,
prudent loan underwriting standards and an adequate allowance for loan losses to
mitigate credit risk.
23
<PAGE> 25
Interest rate risk is managed through the monitoring of the Company's gap
position (see Asset-Liability Management/Interest Rate Sensitivity) and
sensitivity to interest rate risk by subjecting the Company's balance sheet to
hypothetical interest rate shocks. The Company's primary objective in managing
interest rate risk is to minimize the adverse impact of changes in interest
rates on the Company's net interest income and capital, while structuring the
Company's asset/liability position to obtain the maximum yield-cost spread on
that structure.
Rate shock is an instantaneous and complete adjustment in market rates of
various magnitudes on a static or level balance sheet to determine the effect
such a change in rates would have on the Company's net interest income for the
succeeding twelve months, and the fair values of financial instruments.
The Company utilizes asset/liability-modeling software to determine the
effect of a shift in market interest rates, with scenarios of interest rates
increasing 100 and 200 basis points and decreasing 100 and 200 basis points. The
model utilized to create the table presented below is based on the concept that
all rates do not move by the same amount or at the same time. Although certain
assets and liabilities may have similar maturities or periods to repricing, they
may not react correspondingly to changes in market interest rates. In addition,
interest rates on certain types of assets and liabilities may fluctuate with
changes in market interest rates, while interest rates on other types of assets
may lag behind changes in market rates. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate from
those assumed in the table. The ability of certain borrowers to make scheduled
payments on their adjustable rate loans may decrease in the event of an interest
rate increase due to adjustments in the amount of the payments.
The model attempts to account for such limitations by imposing weights on
the gaps between assets and liabilities. These weights are based on the ratio
between the amount of rate change of each category of asset/liability, and the
amount of any change in the federal funds rate. Local conditions and the
strategy of the Company determine the weights for loan and core deposits; the
others are set by national markets. In addition, a timing factor has been used
as (a) fixed rate instruments do not reprice immediately; (b) renewals may have
a different term than original maturities; and (c) there is a timing factor
between rates on different instruments (i.e. core deposits usually reprice well
after there has been a change in the federal funds rate). Due to the various
assumptions used for this simulation analysis, no assurance can be given that
actual results will correspond with projected results.
The following table shows the estimated impact of the interest rate shock
on net interest income and the fair values of financial instruments at December
31, 1997:
<TABLE>
<CAPTION>
FAIR VALUES OF FINANCIAL INSTRUMENTS
-----------------------------------------------
NET INTEREST INCOME ASSETS LIABILITIES
------------------- --------------------- ---------------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
------ -------- -------- -------- -------- --------
(ALL AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
+200 basis points............ $7,825 0.7% $160,628 (2.3)% $157,467 (0.8)%
+100 basis points............ $7,817 0.6% $161,499 (1.7)% $157,994 (0.4)%
Static....................... $7,768 0.0% $164,363 0.0% $158,668 0.0%
- -100 basis points............ $7,719 (0.6)% $169,394 3.1% $159,230 0.4%
- -200 basis points............ $7,711 (0.7)% $172,607 5.0% $159,791 0.7%
</TABLE>
Loans and certificates of deposit represent the majority of interest rate
exposure. Investments only represent 5.4% of interest earning assets and
therefore, the impact of the investments on net interest income of moving
interest rates would not be significant. Historically, savings and
interest-bearing checking accounts have not repriced in proportion to changes in
overall market interest rates. The change in net interest income can be
attributed to the balances of loans and certificates of deposit
maturing/repricing in the next year. The Company's variable rate loans reprice
faster than certificates of deposit. As a result, in an increasing/decreasing
interest rate environment net interest income would increase/decrease.
The change in fair values of financial assets is mainly a result of total
loans representing 84.3% of total interest-earning assets. Of these loans 74.5%
have fixed interest rates, which decline in value during a period of rising
interest rates.
24
<PAGE> 26
While asset/liability models have become a main focus of risk management,
the Company believes that statistical models alone do not provide a reliable
method for monitoring and controlling risk. The quantitative risk information
provided is limited by the parameters established in creating the related
models. Therefore, the Company uses these models only as a supplement to other
risk management tools.
RETURN ON EQUITY AND ASSETS
Net income for the year ended December 31, 1997, totaled $2.1 million for a
return on average shareholders' equity of 16.65% and a return on average total
assets of 1.28%. These returns compare to a 23.93% return on average equity and
1.75% return on average total assets for the corresponding period in 1996. These
declines reflect lower income and increased assets for the year ended December
31, 1997 due to the Company's expansion activities.
Return on daily average assets and equity and certain other ratios for the
periods indicated are presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
-------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Net income............................... $ 2,098 $ 2,497 $ 2,124
Average assets........................... $110,274 $142,639 $165,990
Return on average assets................. 1.90% 1.75% 1.28%
Net income............................... $ 2,098 $ 2,497 $ 2,124
Average equity........................... $ 8,050 $ 10,433 $ 12,757
Return on average equity................. 26.06% 23.93% 16.65%
Cash dividends paid per share............ $ 0.03 $ 0.04 $ 0.05
Diluted earnings per share............... $ 0.77 $ 0.90 $ 0.76
Dividend payout ratio.................... 3.90% 4.44% 6.58%
Average equity........................... $ 8,050 $ 10,433 $ 12,757
Average assets........................... $110,274 $142,639 $165,990
Average equity to asset ratio............ 7.30% 7.31% 7.69%
</TABLE>
LIQUIDITY
Liquidity represents the ability to meet deposit withdrawals to fund loan
demand, while retaining the flexibility to take advantage of business
opportunities. The Company's primary sources of funds are customer deposits,
loan payments, sales of assets, advances from the FHLB and the use of the
federal funds market. As of December 31, 1997, approximately $2.5 million or
29.3% of the securities portfolio matures within one year.
Historically, unlike many commercial banking institutions, the Company has
utilized borrowings from the FHLB as an important source of funding for its
growth. The Company has borrowing lines established with the FHLB that permit it
to borrow up to 25% of qualified assets. Loans from the FHLB have terms ranging
from 1 through 15 years and at December 31, 1997 bear interest at rates from
4.48% to 8.62%. At December 31, 1997, $20.5 million in advances were outstanding
from the FHLB and the Company had additional borrowing capacity for cash
advances of $22.8 million. One effect of the Branch Acquisition in July 1997 is
that the Company was able to reduce its borrowings from the FHLB as a percentage
of total liabilities. The Company may increase its percentage of borrowings from
the FHLB in the future if circumstances warrant.
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<PAGE> 27
CAPITAL
The primary source of the Company's capital has historically been from the
retention of net profits. The Company's profitability has allowed it to enjoy a
strong capital position and to continue to grow its asset base.
In 1989, banking regulators adopted risk-based capital guidelines under
which one of four risk weights is applied to balance sheet assets, each with
different capital requirements based on the credit risk of the asset. The
Company is required to maintain minimum amounts of capital to "risk weighted"
assets, as defined by banking regulators. The Company is required to have Tier 1
and Total Capital ratios of 4.0% and 8.0%, respectively. At December 31, 1997,
the Company's ratios were 9.61% and 11.34%, respectively.
Management seeks to attain a level of capital consistent with appropriate
business risk and an ongoing need for financial flexibility. Adequacy of capital
depends on the assessment of a number of factors such as stability of earnings,
asset quality, liquidity and economic conditions. The ratio of average
shareholders' equity to average assets was 7.69% at December 31, 1997. With a
strong equity-to-assets ratio, the Company enjoys greater flexibility and less
dependence upon its deposit base to support loan and investment activities.
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<PAGE> 28
BUSINESS
INTRODUCTION
With its five full-service offices, the Company has the largest market
share of deposits among commercial banks in Cowlitz County, Washington, and The
Cowlitz Bank is the only community bank headquartered in the county. The Company
has grown from one branch with assets of $39.4 million, deposits of $31.0
million and shareholders' equity of $2.5 million at January 1, 1992 to five
branches with assets of $173.3 million, deposits of $136.2 million and
shareholders' equity of $13.9 million at December 31, 1997. The Company
emphasizes personal service and customer relationships and believes that such
emphasis is the primary reason for its rapid growth. The Bank was formed in 1977
and became a wholly-owned subsidiary of the Company in 1992. The Company was
formed in 1991 to act as a holding company for the Bank.
The Company offers or makes available a broad range of financial services
to its customers, primarily small and medium-sized businesses, professionals and
retail customers. In addition to its normal commercial and personal banking
services, which include commercial and real estate lending, consumer lending,
mortgage origination and trust services, the Company has developed relationships
with a securities brokerage firm and an insurance agency with an estate planner
to provide its customers access to a variety of financial services which are
generally not available in community banks. In 1997, the Company established a
trust department to offer trust services to individuals, corporations and
institutions. It is the only such trust department located in Cowlitz County. By
combining its array of traditional commercial banking products with these
enhanced customer services, the Company is able to provide its customers with
similar banking services offered by its larger competitors while retaining the
character of a community bank and the level of personal service which larger
banks generally no longer provide.
Based on reports of the FHLB, at June 30, 1996, the Company held
approximately 25% of the deposits in commercial banks in Cowlitz County, which
was the largest share of deposits of any commercial bank. Since June 30, 1996,
the Company has taken several steps to increase its market share in Cowlitz
County. Historically, the Company operated from one location in Longview. In
November 1996, the Company opened a de novo branch in neighboring Kelso,
Washington. Two recent acquisitions of competitors in Cowlitz County presented
the Company with additional opportunities for in-market growth. In 1996, Wells
Fargo Bank acquired First Interstate Bank, which was a principal competitor of
the Company. The Company successfully bid for three Wells Fargo branches in
Cowlitz County and acquired those branches in July 1997. In the second half of
1997, U.S. Bank was acquired by First Bank, which has recently announced its
intention to close the U.S. Bank branch in Kelso, Washington, creating
additional opportunities for the Company. The Company is aggressively marketing
to its new customers from the former Wells Fargo branches as well as the
customers of U.S. Bank in Kelso. The Company is introducing its full array of
financial products to these new customers while emphasizing personal service as
a way of increasing its market share within its existing market area. Management
believes that the Company's historical growth and recent successful expansion
activities strongly position the Company to continue to increase its market
share in Cowlitz County and to expand into other similar markets.
INDUSTRY OVERVIEW
The commercial banking industry continues to experience increased
competition, consolidation and change. Non-insured financial service companies
such as mutual funds, brokerage firms, insurance companies, mortgage companies
and leasing companies are offering alternative investment opportunities for
customers' funds and, in many cases, alternative sources from which to borrow to
meet their needs. Banks have been granted extended powers to better compete,
including the limited right to sell annuities and securities products. Despite
the expanded products and services offered by banks, the percentage of financial
transactions handled by commercial banks has dropped steadily. In addition,
although the dollar amount of bank deposits has remained steady, such deposits
represent less than 20% of household financial assets compared to over 35% 25
years ago. This trend represents a continuing shift to investments in stocks,
bonds, mutual funds and retirement accounts. To improve competitiveness,
commercial banks are reducing costs through operating efficiencies gained by
consolidation and implementation of alternative ways of providing bank products.
Although new banks continue to be organized, bank mergers substantially
outnumber new
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<PAGE> 29
bank formations. In the last dozen years, the number of commercial banks
nationwide has dropped from 14,000 to 9,500. However, in recent years,
relatively stable interest rates and a growing economy have permitted the
remaining segments of the banking industry to improve net interest margins and
returns on assets, resulting in stronger balance sheets and earnings.
To deliver more effectively and efficiently their products, banks are
opening branches located inside retail stores, installing more ATMs, and
investing in technology to facilitate telephone, personal computer and Internet
banking. While all banks are experiencing the effects of the changing
environment, the manner in which banks choose to compete is increasing the
differences between larger super-regional banks and community banks. The
super-regional banks are striving to become regional "brands" providing a broad
selection of products at low cost with advanced technology. Community banks
provide most of the same products, but with a greater commitment to personal
service and to maintaining local ties to the communities they serve.
BUSINESS STRATEGY
The Company's goal is to maintain its position as the leading community
based provider of financial services in Cowlitz County and to become one of the
leading community based providers of financial services in other selected areas
of Washington and Oregon. The Company's growth strategy is based on providing
both exceptional personal service and a wide range of financial services to its
customers. The Company's strategy consists of the following:
- Emphasize personal service and develop strong community ties. Based on
its experience, the Company believes that providing a high level of
personal service and customer attention attracts and retains customers.
The Company's employees work with specific customers on an individual,
personalized basis. As a result of this level of customer attention, the
Company believes that it can make business decisions regarding its
customers more quickly and efficiently than its competitors. The
Company's philosophy is that of a true community bank -- to provide the
highest level of service to its communities. The Company's "outstanding"
Community Reinvestment Act ("CRA") rating is evidence of its commitment
to serve all the citizens in its communities. The Company believes that
its intense focus on customer service coupled with its deep community
relationships serve to differentiate the Company from its competitors.
- Provide a broad range of financial products and services. The Company
believes that offering a wide range of financial products and services is
an important competitive factor. In addition to deposit and loan products
typically offered by commercial banks, the Company has developed a real
estate loan division to originate mortgage loans and has established a
trust department. To execute this strategy, the Company has hired
experienced personnel to market and deliver these services. The Company
leases space in its main financial center to a securities brokerage firm
and an insurance agency in order to provide its customers with access to
a wider range of financial services. This combination of products and
services is designed to both increase its customer base and to enhance
cross-selling opportunities to its customer base.
- Increase business volume in existing market. The Company believes there
is an opportunity to increase its business volume in its existing market
area by promoting its complete array of financial products as well as
emphasizing personal service, especially in relationships with new
customers obtained in the acquisition of the Wells Fargo branches and by
establishing new customer relationships as a result of the announced
closure of a U.S. Bank branch in Kelso. The Company believes that
additional opportunities for growth exist in Cowlitz County as a result
of new business entrants such as BHP Coated Steel, Prudential Steel and
Foster Farms. The Company presently has the largest share of deposits
held by commercial banks in Cowlitz County and believes that its
reputation for a high level of personal service will help it attract new
customers as the larger banks continue their consolidation and reduction
of personal service to their customers.
- Explore opportunities for regional expansion through acquisition. The
Company intends to explore the acquisition of other community banks and
branches of larger banks in non-metropolitan communities in Washington
and Oregon. The Company intends to retain the local character of
institutions
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<PAGE> 30
which it acquires and to promote deposit and asset growth in the acquired
institutions through implementation of its customer service policies and
product offerings. Although the Company is not presently engaged in any
acquisition discussions, it believes that such opportunities are
available and that its ability to consummate such acquisitions will be
enhanced by completion of this Offering and the creation of a public
market for the Company's Common Stock.
ACQUISITION OF WELLS FARGO BRANCHES
On July 18, 1997, the Company completed the Branch Acquisition, which
included branches located in Castle Rock, Kalama and Longview, Washington. In
the acquisition, the Company purchased certain assets of the branches, including
cash on hand, owned real property, personal property, branch and tenant leases,
safe deposit agreements and records, assumed $25.2 million of deposit
liabilities and recorded a core deposit premium of $2.0 million. The Company did
not purchase any credit card relationships, loans or other revenue producing
assets. Management believes that it has successfully integrated these branches
into its operations and has begun an aggressive marketing campaign of its
products and services to the new customers obtained as a result of the Branch
Acquisition. Based on this success, the Company believes it is well positioned
to compete effectively for other branch acquisitions should the opportunity
arise.
PRODUCTS AND SERVICES
The Company offers a broad portfolio of products and services tailored to
meet the banking requirements of targeted customers in its market area. It
believes this portfolio is generally competitive with the products and services
of its competitors, including major regional and national banks. These include:
Deposit Products. The Company provides an array of deposit products for
customers, including non-interest-bearing checking accounts, interest-bearing
checking and savings accounts, money market accounts and certificates of
deposit. These accounts generally earn interest at rates established by
management based on competitive market factors and management's desire to
increase certain types or maturities of deposit liabilities. The Company does
not pay brokerage commissions to attract deposits. It strives to establish
customer relations to attract core deposits in non-interest-bearing
transactional accounts and thus to reduce its cost of funds.
Loan Products. The Company offers a broad array of loan products to its
small to medium size business customers. The Company maintains sound loan
underwriting standards with written loan policies, conservative individual and
branch limits and reviews by the Loan Committee. Further, in the case of
particularly large loan commitments or loan participations, loans are reviewed
by the Board of Directors. Underwriting standards are designed to achieve a
high-quality loan portfolio, compliance with lending regulations and the desired
mix of loan maturities and industry concentrations. Management seeks to minimize
credit losses by closely monitoring the financial condition of its borrowers and
the value of collateral.
Commercial Loans. The Company offers specialized loans for its business and
commercial customers, including equipment and inventory financing operating
lines of credit, and accounts receivable financing. Commercial lending is the
primary focus of the Company's lending activities, and a significant portion of
its loan portfolio consists of commercial loans. For regulatory reporting
purposes, a substantial portion of the Company's commercial loans are designated
as real estate loans, as the loans are secured by mortgages and trust deeds on
real property, although the loans may be made for purposes of financing
commercial activities, such as accounts receivable, equipment purchases and
inventory or other working capital needs. Lending decisions are based on careful
evaluation of the financial strength, management and credit history of the
borrower, and the quality of the collateral securing the loan. Commercial loans
secured by real property are limited to 70% of the value of the collateral. In
some cases, the Company may require personal guarantees and secondary sources of
repayment.
Real Estate Loans. Real estate loans are available for construction,
purchasing and refinancing residential owner-occupied and rental properties.
Borrowers can choose from a variety of fixed and adjustable rate options and
terms. Real estate loans reflected in the loan portfolio also include loans made
to commercial customers that are secured by real property. The Company provides
customers access to long-term conventional real estate loans through its
mortgage loan department which makes FNMA-conforming loans
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<PAGE> 31
and sells them in the secondary market. The Company has been either the first or
second largest mortgage originator in Cowlitz County for each of the last four
years.
Payments on loans are often dependent on the successful operation and
management of the properties securing the loans, and are therefore strongly
affected by the conditions of the local real estate market. Fluctuating land
values and local economic conditions make loans secured by real property
difficult to evaluate and monitor.
Consumer Loans. The Company provides loans to individual borrowers for a
variety of purposes, including secured and unsecured personal loans, home equity
and personal lines of credit and motor vehicle loans. Consumer loans can carry
significantly greater risks than other loan products, even if secured, if the
collateral consists of rapidly depreciating assets such as automobiles and
equipment. Repossessed collateral securing a defaulted consumer loan may not
provide an adequate source of repayment of the loan. Consumer loan collections
are dependent on borrowers' continuing financial stability, and are sensitive to
job loss, illness and other personal factors. The Company attempts to manage the
risks inherent in consumer lending by following strict credit guidelines and
conservative underwriting practices. The Company also offers Visa and Mastercard
credit cards to its customers.
The following table sets forth certain information about the Company's loan
portfolio at December 31, 1997, classified by distribution among type of
borrowers:
<TABLE>
<CAPTION>
TOTAL PERCENT OF
BORROWER CLASSIFICATION NUMBER OF LOANS LOAN BALANCE PORTFOLIO
------------------------------------- --------------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Real Estate.......................... 313 $ 34,021 25.7
Consumer............................. 2,136 31,457 23.7
Services............................. 99 11,869 8.9
Construction......................... 138 12,208 9.2
Retail Trade......................... 90 7,243 5.5
Transportation & Trucking............ 70 6,753 5.1
Forest and Timber.................... 65 5,266 4.0
Restaurants.......................... 44 5,002 3.8
Health Services...................... 35 4,311 3.2
Manufacturing........................ 42 3,985 3.0
Wholesale Trades..................... 45 2,461 1.9
Education, Social Service, & Business
Organization....................... 29 1,737 1.3
Other................................ 98 6,305 4.7
----- -------- ------
Total...................... 3,204 $132,618 100.00%
===== ======== ======
</TABLE>
Other Banking Products and Services. In support of its focus on
personalized service, the Company offers additional products and services for
the convenience of its customers. These include a recently introduced debit card
program, automated teller machines located at each of the Company's offices, and
an automated telephone banking service with 24-hour access to accounts that also
allows customers to speak directly with a customer service representative during
normal banking hours or leave a message after normal banking hours. The Company
does not currently charge fees for any of these services. The Company provides
drive-through facilities at three of its branches.
Trust Services. The Company has recently established a trust department,
which is the only one located in Cowlitz County. The trust department provides
trust services to individuals, partnerships, corporations and institutions and
acts as fiduciary of estates and conservatorships and as a trustee under various
wills, trusts and other plans. The Company believes this service will attract
additional customers to the Bank.
Other Financial Services. The Company believes that providing its customers
a full range of financial services is an important element of its strategy to
attract and retain customers. To this end, the Company has entered into lease
arrangements with Robert Thomas Securities, a securities broker affiliated with
Raymond James Securities, and Commerce Business & Estate Planning Services,
Inc., an insurance agency. Each of
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<PAGE> 32
these organizations maintains an office on the main floor of the Cowlitz
Financial Center where the main office of the Company is located and has access
to space in the Company's other branches. Representatives of these companies
meet with clients at each of the Bank's branches, thereby making these services
available to all of the Company's customers. The Company has no financial
interest in either of these companies. The Company believes that by making
available through these relationships brokerage and insurance services, it can
increase foot traffic through its branches and market more extensively its full
line of core banking products and services.
MARKET AREA
The Company's primary market area from which it accepts deposits and makes
loans is Cowlitz County, Washington, and the surrounding counties in Washington
and Oregon, including the greater Portland area. As a community bank, the
Company has certain competitive advantages due to its local focus, but is also
more closely tied to the local economy than many of its competitors which serve
a number of geographic markets.
Cowlitz County has a population of approximately 92,000 people. The
population is centered in the adjoining cities of Longview and Kelso, which
combined contain approximately one-half of the county's population. The rural
areas of Cowlitz County are growing at a somewhat faster rate than the urban
areas of the county as a result of the migration of people into the area from
urban areas in adjacent counties.
Over the past 10 years, the employment base of Cowlitz County has undergone
significant change. The forest products industry has historically been the
dominant employer in the county and remains so. Weyerhauser Company and Longview
Fiber Co. have major facilities in Cowlitz County. Cowlitz County has three port
facilities along the Columbia River, which specialize in moving dry bulk,
agricultural and forest products. The ports have also acted as centers for
attracting new industry to the county. In recent years, Cowlitz County has
attracted diverse industries, including Sonoco Products, BHP Coated Steel, and
Prudential Steel. Foster Farms is currently constructing a processing plant in
Kelso which is expected to create in excess of 500 new jobs when it opens in
1998.
MANAGEMENT INFORMATION SYSTEMS
The Company maintains an in-house system for processing all core banking
applications, including loan servicing and deposit accounts. The system utilizes
Information Technology Systems, Inc. ("ITI") software and Unisys hardware. In
addition, ITI software is utilized for 24-hour telephone banking, shareholder
information, accounts payable and optical disk storage. The Company also
maintains a Novell network in all branches. The Company maintains a Disaster
Recovery Plan and has a contract with Sungard Services to provide on-site
processing after a disaster.
Management is presently evaluating its systems and software as well as
contacting software vendors and others with which it conducts business for
potential Year 2000 problems. This issue affects computer systems that have
time-sensitive programs that may not properly recognize the year 2000, which
could result in major system failures or miscalculations for companies that have
not successfully adapted their systems or applications. The Company's evaluation
is not complete and no final cost estimate for compliance is available at the
date hereof. The Company expects to incur internal staff costs as well as
consulting and other expenses during its evaluation and system testing. The
Company does not believe that it will incur any material expense in addressing
Year 2000 compliance issues.
COMPETITION
Competition in the banking industry has intensified for deposits and loans
with decreased interest rates over the last one to two years. Furthermore,
competition from outside the traditional banking system from credit unions,
investment banking firms, insurance companies and related industries offering
bank-like products has widened the competition for deposits and loans. Based on
published reports, it is estimated that credit unions held approximately 51% of
deposits in the Company's market area as of June 30, 1996.
The banking industry in the market area is generally characterized by well
established branches of large banks with headquarters located out of the market
area and in many cases, out of the state. These large multi-bank holding company
branches located in the Longview-Kelso area have transferred a number of their
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<PAGE> 33
banking functions outside the local area. There are also thrift institutions,
including a branch of the country's largest thrift institution, and credit
unions within the market area that are very competitive in the deposit and
consumer lending areas.
The major competition for commercial banking services in Cowlitz County
comes from U.S. Bank, Key Bank, Bank of America (which does business in
Washington as Seafirst Bank) and Columbia State Bank. None of these competitors
are headquartered in Cowlitz County and many have relocated key functions (e.g.,
loan decisions) into regional offices outside of the area. Its local decision
making and strong community ties have allowed the Company to provide a level of
personal service and direct customer contact that management believes is
superior to that provided by other banks.
The offices of the major financial institutions have competitive advantages
over the Company in that they have high public visibility, may offer a wider
variety of products and are able to maintain advertising and marketing
activities on a much larger scale than the Company can economically maintain.
Since single borrower lending limits imposed by law are dependent on the capital
of the institution, the branches of larger institutions with substantial capital
bases also have an advantage with respect to loan applications which are in
excess of the Company's legal lending limits.
In competing for deposits, the Company is subject to certain limitations
not applicable to nonbank financial institution competitors. Previous laws
limiting the deposit instruments and lending activities of savings and loan
associations have been substantially eliminated, thus increasing the competition
from these institutions. See "Risk Factors -- Competition."
REGULATION AND SUPERVISION
The Company and the Bank are subject to extensive regulation under federal
and state laws. These laws, together with the regulations promulgated under
them, significantly affect respective activities of the Company and the Bank and
the competitive environment in which they operate. The laws and regulations are
primarily intended to protect depositors and the deposit insurance fund, rather
than shareholders.
The description of the laws and regulations applicable to the Company and
the Bank set forth in this prospectus does not purport to be a complete
description of the laws and regulations mentioned herein or of all such laws and
regulations. Any change in applicable laws or regulations may have a material
effect on the business and prospects of the Company and the Bank. The operations
of the Company and the Bank may be affected by legislative and regulatory
changes as well as by changes in the policies of various regulatory authorities.
The Company cannot accurately predict the nature or the extent of the effects
that such changes may have in the future on its business and earnings.
Bank Holding Company Regulation. The Company is a bank holding company
within the meaning of the Bank Holding Company Act of 1956, as amended ("BHCA")
and, as such, is subject to the regulations of the Federal Reserve. Bank holding
companies are required to file periodic reports with and are subject to periodic
examination by the Federal Reserve. The Federal Reserve has issued regulations
under the BHCA requiring a bank holding company to serve as a source of
financial and managerial strength to its subsidiary banks. It is the policy of
the Federal Reserve that, pursuant to this requirement, a bank holding company
should stand ready to use its resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity. Additionally,
under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), a bank holding company is required to guarantee the compliance of
any insured depository institution subsidiary that may become "undercapitalized"
(as defined in the statute) with the terms of any capital restoration plan filed
by such subsidiary with its appropriate federal banking agency up to the lesser
of (i) an amount equal to 5% of the institution's total assets at the time the
institution became undercapitalized, or (ii) the amount that is necessary (or
would have been necessary) to bring the institution into compliance with all
applicable capital standards as of the time the institution fails to comply with
such capital restoration plan. Under the BHCA, the Federal Reserve has the
authority to require a bank holding company to terminate any activity or
relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a
bank) upon the Federal Reserve's determination that such activity or control
constitutes a serious risk to the financial soundness and stability of any bank
subsidiary of the bank holding company.
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<PAGE> 34
The Company is prohibited by the BHCA from acquiring direct or indirect
control of more than 5% of the outstanding shares of any class of voting stock
or substantially all of the assets of any bank or merging or consolidating with
another bank holding company without prior approval of the Federal Reserve.
Additionally, the Company is prohibited by the BHCA from engaging in or from
acquiring ownership or control of more than 5% of the outstanding shares of any
class of voting stock of any company engaged in a non-banking business unless
such business is determined by the Federal Reserve to be so closely related to
banking as to be a proper incident thereto. The BHCA does not place territorial
restrictions on the activities of such non-banking related activities.
Capital Adequacy Guidelines for Bank Holding Companies. The Federal Reserve
is the federal regulatory and examining authority for bank holding companies.
The Federal Reserve has adopted capital adequacy guidelines for bank holding
companies. These guidelines are similar to, although not identical with, the
guidelines applicable to banks. See "-- Bank Capital Requirements." At December
31, 1997, the Company's Tier 1 leverage capital ratio was 6.86%, its Tier 1
risk-based capital ratio was 9.61% and its total risk-based capital ratio was
11.34%.
Bank Regulation. The Bank is organized under the laws of the State of
Washington and is subject to the supervision of the Department of Financial
Institutions ("DFI"), whose examiners conduct periodic examinations of state
banks. The Bank is not a member of the Federal Reserve System, so its principal
federal regulator is the FDIC, which also conducts periodic examinations of the
Bank. The Bank's deposits are insured, to the maximum extent permitted by law,
by the Bank Insurance Fund ("BIF") administered by the FDIC and are subject to
the FDIC's rules and regulations respecting the insurance of deposits. See
"-- Deposit Insurance."
Both federal and state laws extensively regulate various aspects of the
banking business such as reserve requirements, truth-in-lending and
truth-in-savings disclosures, equal credit opportunity, fair credit reporting,
trading in securities and other aspects of banking operations. Current federal
law also requires banks, among other things, to make deposited funds available
within specified time periods.
Insured state-chartered banks are prohibited under FDICIA from engaging as
principal in activities that are not permitted for national banks, unless (i)
the FDIC determines that the activity would pose no significant risk to the
appropriate deposit insurance fund, and (ii) the bank is, and continues to be,
in compliance with all applicable capital standards. The Company does not
believe that these restrictions will have a material adverse effect on its
current operations.
Bank Capital Requirements. The FDIC has adopted risk-based capital ratio
guidelines to which the Bank is subject. The guidelines establish a systematic
analytical framework that makes regulatory capital requirements more sensitive
to differences in risk profiles among banking organizations. Risk-based capital
ratios are determined by allocating assets and specified off-balance sheet
commitments to four risk weighted categories, with higher levels of capital
being required for the categories perceived as representing greater risk.
These guidelines divide a bank's capital into two tiers. Tier 1 includes
common equity, certain noncumulative perpetual preferred stock (excluding
auction rate issues) and minority interest in equity accounts of consolidated
subsidiaries, less goodwill and certain other intangible assets (except mortgage
servicing rights and purchased credit card relationships, subject to certain
limitations). Supplementary (Tier 2) capital includes, among other items,
cumulative perpetual and long-term, limited-life, preferred stock, mandatory
convertible securities, certain hybrid capital instruments, term-subordinated
debt and the allowance for loan and lease losses, subject to certain
limitations, less required deductions. Banks are required to maintain a total
risk-based capital ratio of 8%, of which 4% must be Tier 1 capital. The FDIC
may, however, set higher capital requirements when a bank's particular
circumstances warrant. Banks experiencing or anticipating significant growth are
expected to maintain capital ratios, including tangible capital positions, well
above the minimum levels.
In addition, the FDIC has established guidelines prescribing a minimum Tier
1 leverage ratio (Tier 1 capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of 3%
for banks that meet certain specified criteria, including that they have the
highest
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<PAGE> 35
regulatory rating and are not experiencing or anticipating significant growth.
All other banks are required to maintain a Tier 1 leverage ratio of 3% plus an
additional cushion of at least 100 to 200 basis points.
Certain regulatory capital ratios for the Company and the Bank at
December 31, 1997 are set forth below:
<TABLE>
<CAPTION>
COMPANY BANK
------- -----
<S> <C> <C>
Tier 1 Capital to Risk-Weighted Assets..................... 9.61% 9.83%
Total-Risk Based Capital to Risk-Weighted Assets........... 11.34% 11.09%
Tier 1 Leverage Ratio...................................... 6.86% 7.12%
</TABLE>
Dividends. The principal source of the Company's cash revenues is dividends
from the Bank. Under Washington law, the Bank may not pay dividends in an amount
greater than its retained earnings as determined by generally accepted
accounting principles. In addition, the DFI has the authority to require a
state-chartered bank to suspend payment of dividends. The FDIC has the authority
to prohibit a bank from paying dividends if, in its opinion, the payment of
dividends would constitute an unsafe or unsound practice in light of the
financial condition of the bank or if it would cause a bank to become
undercapitalized.
Lending Limits. Under Washington law, the total loans and extensions of
credit by a Washington-chartered bank to a borrower outstanding at one time may
not exceed 20% of such bank's capital and surplus. However, this limitation does
not apply to loans or extensions of credit which are fully secured by readily
marketable collateral having market value of at least 115% of the amount of the
loan or the extension of credit at all times.
Branches and Affiliates. Establishment of bank branches is subject to
approval of the DFI and FDIC and geographic limits established by state laws.
Washington's branch banking law permits a bank having its principal place of
business in the State of Washington to establish branch offices in any county in
Washington without geographic restrictions. A bank may also merge with any
national or state chartered bank located anywhere in the State of Washington
without geographic restrictions.
Under Oregon law, an out-of-state bank or bank holding company may merge
with or acquire an Oregon state chartered bank or bank holding company if the
Oregon bank, or in the case of a bank holding company, the subsidiary bank, has
been in existence for a minimum of three years, and the law of the state in
which the acquiring bank in located permits such merger. Branches may not be
acquired or opened separately, but once an out-of-state bank has acquired
branches in Oregon, either through a merger with or acquisition of substantially
all of the assets of an Oregon bank, the bank may open additional branches.
The Bank is subject to Sections 22(h), 23A and 23B of the Federal Reserve
Act, which restrict financial transactions between banks and affiliated
companies. The statute limits credit transactions between a bank and its
executive officers and its affiliates, prescribes terms and conditions for bank
affiliate transactions deemed to be consistent with safe and sound banking
practices, and restricts the types of collateral security permitted in
connection with a bank's extension of credit to an affiliate.
FDICIA. FDICIA required, among other things, federal bank regulatory
authorities to take "prompt corrective action" with respect to banks which do
not meet minimum capital requirements. For these purposes, FDICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
The FDIC has adopted regulations to implement the prompt corrective action
provisions of FDICIA. Among other things, the regulations define the relevant
capital measures for the five capital categories. An institution is deemed to be
"well capitalized" if it has a total, risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage
ratio of 5% or greater, and is not subject to a regulatory order, agreement or
directive to meet and maintain a specific capital level for any capital measure.
The Bank currently exceeds all of the ratios.
34
<PAGE> 36
FDICIA further directs that each federal banking agency prescribe standards
for depository institutions and depository institutions holding companies
relating to internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
management compensation, a maximum ratio of classified assets to capital,
minimum earnings sufficient to absorb losses, a minimum ratio of market value to
book value of publicly traded shares and such other standards as the agency
deems appropriate.
Deposit Insurance. The Bank's deposits are insured up to $100,000 per
insured account by the BIF. As an institution whose deposits are insured by BIF,
the Bank is required to pay deposit insurance premiums to BIF.
FDICIA required the FDIC to issue regulations establishing a system for
setting deposit insurance premiums based upon the risks a particular bank or
savings association poses to the deposit insurance funds. This system bases an
institution's risk category partly upon whether the institution is well
capitalized, adequately capitalized or less than adequately capitalized. Each
insured depository institution is also assigned to one of three "supervisory"
categories based on reviews by regulators, statistical analysis of financial
statements and other relevant information. An institution's assessment rate
depends upon the capital category and supervisory category to which it is
assigned. Annual assessment rates currently range from zero for the highest
rated institution to $0.27 per $100 of domestic deposits for an institution in
the lowest category. The Bank is currently in the class of the highest rated
institutions and, accordingly, pays no assessment for deposit insurance. Under
legislation enacted in 1996 to recapitalize the Savings Association Insurance
Fund, the FDIC is authorized to collect assessments against insured deposits to
be paid to the Financing Corporation ("FICO") to service FICO debt incurred in
the 1980's. The current FICO assessment rate for BIF insured deposits is 1.256
cents per $100 of deposits per year. Any increase in deposit insurance or FICO
assessments could have an adverse effect on the Bank's earnings.
Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires
financial institutions regulated by the federal financial supervisory agencies
to ascertain and help meet the credit needs of their delineated communities,
including low-income and moderate-income neighborhoods within those communities,
while maintaining safe and sound banking practices. The regulatory agency
assigns one of four possible ratings to an institution's CRA performance and is
required to make public an institution's rating and written evaluation. The four
possible ratings are "outstanding," "satisfactory," "needs to improve" and
"substantial noncompliance."
Under new regulations that apply to CRA performance ratings after July 1,
1997, many factors play a role in assessing a financial institution's CRA
performance. The institution's regulator must consider its financial capacity
and size, legal impediments, local economic conditions and demographics and the
competitive environment in which it operates. The evaluation does not rely on
absolute standards and financial institutions are not required to perform
specific activities or to provide specific amounts or types of credit.
The Company's most recent rating under CRA (using the regulations
applicable prior to July 1, 1997) is "outstanding." This rating reflects the
Company's commitment to meeting the credit needs of the communities it serves.
No assurance can be given, however, that the Company will be able to maintain an
"outstanding" rating under the new regulations in the future.
Additional Matters. In addition to the matters discussed above, the Company
and the Bank are subject to additional regulation of their activities, including
a variety of consumer protection regulations affecting their lending, deposit
and collection activities and regulations affecting secondary mortgage market
activities.
The earnings of financial institutions, including the Company and the Bank,
are also affected by general economic conditions and prevailing interest rates,
both domestic and foreign and by the monetary and fiscal policies of the U.S.
Government and its various agencies, particularly the Federal Reserve.
Additional legislation and administrative actions affecting the banking
industry may be considered by the United States Congress, the Washington
Legislature and various regulatory agencies, including those referred to above.
It cannot be predicted with certainty whether such legislation or administrative
action will be enacted or the extent to which the banking industry in general or
the Company and the Bank in particular would be affected thereby.
35
<PAGE> 37
PROPERTIES
The Company owns its main office space at the Cowlitz Financial Center, 927
Commerce Avenue, Longview, Washington 98632. The Bank occupies approximately
27,500 square feet of this facility. The Company leases space in the Cowlitz
Financial Center to Robert Thomas Securities and to Commerce Business & Estate
Services, Inc., both of which provide services to the Bank's customers. The
Company also owns branches in Kelso, Kalama and Castle Rock, and leases
facilities for a branch in the Triangle Mall in Longview. The Company intends to
sell its Castle Rock facility and move the existing branch to a leased new
building which is under construction. Each branch has automated teller machines
and each branch except Kalama and Castle Rock has a drive-up facility. The new
building at Castle Rock will have a drive-up facility.
EMPLOYEES
At December 31, 1997, the Company employed 99 full-time equivalent
employees. None of the employees are parties to a collective bargaining
agreement. Management considers its relations with its employees to be good.
LEGAL PROCEEDINGS
The Company may occasionally have pending routine litigation resulting from
the collection of the secured and unsecured indebtedness as part of its business
of providing financial services. In some cases, such litigation will involve
counterclaims or other claims against the Company. Such proceedings against
financial institutions sometimes also involve claims for punitive damages in
addition to other specific relief. Currently, the Company is not a party to any
litigation other than in the ordinary course of business. In the opinion of
management, the ultimate outcome of all pending legal proceedings will not
individually or in the aggregate have a material adverse effect on the financial
condition or the operations of the Bank.
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<PAGE> 38
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and the Bank, their
respective ages and their respective positions with the Company and the Bank are
listed below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ------------------------------------------------------
<S> <C> <C>
Benjamin Namatinia 54 Chairman & Chief Executive Officer, Cowlitz
Bancorporation; Director, Cowlitz Bank
Charles W. Jarrett 56 President & Chief Operating Officer & Director,
Cowlitz Bancorporation; President & Chief Executive
Officer & Director, Cowlitz Bank
Larry M. Larson(1)(2)(3) 58 Director, Cowlitz Bancorporation; Chairman, Cowlitz
Bank
Mark F. Andrews, Jr.(1)(2)(3) 65 Director, Cowlitz Bancorporation and Cowlitz Bank
E. Chris Searing(1)(2) 44 Director, Cowlitz Bancorporation & Cowlitz Bank
Donna P. Gardner 49 Vice President & Secretary/Treasurer, Cowlitz
Bancorporation; Executive Vice President & Chief
Financial Officer, Cowlitz Bank
James A. Wills 56 Vice President, Cowlitz Bancorporation; Executive Vice
President & Chief Operating Officer, Cowlitz Bank
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Board Development Committee.
Benjamin Namatinia has served as Chairman of Cowlitz Bancorporation since
its incorporation in 1991 and was appointed Chief Executive Officer effective
November 1994. He has served as a director of Cowlitz Bank since 1991. Since
1990, Mr. Namatinia has been the President as well as bond trader for BMN, INC.,
a brokerage firm owned by Mr. Namatinia. Mr. Namatinia also owns a securities
brokerage franchise of Robert Thomas Securities, which leases space from the
Company in the Cowlitz Financial Center. From 1984 to 1989, he was Senior Vice
President and trader for Prudential Securities. From 1989 to 1990, he was Senior
Vice President and head of the investment department for Shearson Lehman.
Charles W. Jarrett has served as a director of Cowlitz Bancorporation since
its incorporation in 1991. He held the position of President and Chief Executive
Officer of Cowlitz Bancorporation from 1992 until November 1994, at which time
he became President and Chief Operating Officer. Mr. Jarrett joined Cowlitz Bank
in 1986 and has served as President and Chief Executive Officer and as a
director since 1989.
Larry M. Larson has served as a director of Cowlitz Bancorporation since
its incorporation in 1991. Mr. Larson has served as a director of Cowlitz Bank
since 1984. He served as Secretary of the Board from 1987 to 1988, Vice Chairman
from 1988 to 1990, and has served as Chairman since 1990. Mr. Larson's principal
occupation is his position as longshoreman for the Port of Longview. He also
serves in an elected position on the Port Commission for the Port of Longview.
He owns the Bridgeview Tobacco Shop located in Rainier, Oregon.
Mark F. Andrews, Jr. has served as a director of Cowlitz Bancorporation
since its incorporation in 1991. He has served as a director of Cowlitz Bank
since 1988 and as Secretary of Cowlitz Bank since 1990. Mr. Andrews' principal
occupation is the management and operation of his tree farms. In addition, Mr.
Andrews serves as a court commissioner for Cowlitz County and he is also a
retired attorney.
E. Chris Searing has served as a director of Cowlitz Bancorporation since
its incorporation in 1991. Mr. Searing has served as a Director of Cowlitz Bank
since 1986. He served as Secretary of the Board from 1988 to 1990 and has served
as Vice Chairman since 1990. Mr. Searing owns Searing Electric & Plumbing, Inc.
located in Longview, Washington.
Donna P. Gardner has served as an executive officer for Cowlitz
Bancorporation since its incorporation in 1991 and currently holds the position
of Vice President and Secretary/Treasurer. Mrs. Gardner joined Cowlitz
37
<PAGE> 39
Bank in 1981 and served as Cashier from 1989 to 1993, Vice President from 1993
to 1997 and is currently serving as Executive Vice President and Chief Financial
Officer.
James A. Wills has served as Vice President of Cowlitz Bancorporation since
its incorporation in 1991. Mr. Wills joined Cowlitz Bank in 1988. He has served
as an executive officer of the Bank since 1989 and currently holds the position
of Executive Vice President and Chief Operating Officer.
Each of the Company's directors is elected annually by the Company's
shareholders. All Directors hold office until the expiration of their terms and
the election and qualification of their successors.
COMMITTEES OF THE BOARD
The Board has established an Audit Committee, a Compensation Committee and
a Board Development Committee. The Audit Committee recommends the selection of
the Company's independent auditors and consults with the independent auditors on
the Company's internal accounting controls. The Compensation Committee
recommends to the Board salaries and bonuses for the Company's executive
officers and administers the Company's Stock Option Plan and Employee Stock
Purchase Plan. The Board Development Committee identifies and recommends
potential candidates for both the Company's and the Bank's Boards of Directors.
DIRECTOR FEES
Effective January 1, 1998, directors of the Company will receive a fee of
$900 per month except that Mr. Namatinia as Chairman of the Board will receive a
fee of $1,000 per month. Directors of the Bank receive a fee of $600 per month
and the Chairman, Mr. Larry Larson, receives a fee of $1,800 per month.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation provide that the liability of the
directors of the Company for monetary damages will be eliminated in an action
brought by or in the right of the Company for breach of a director's duties to
the Company or its shareholders except for liability in circumstances involving
(i) any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) any unlawful
distribution to stockholders, or (iv) any transaction from which the director
derived an improper personal benefit. This provision does not limit or eliminate
the rights of the Company or any shareholder to seek non-monetary relief, such
as an injunction or rescission, in the event of a breach of a director's duty of
care. This provision also does not affect the director's responsibilities under
any other laws, such as the federal or state securities or environmental laws.
The Articles of Incorporation also provide that the Company shall
indemnify, to the fullest extent permitted under Washington law, any person who
has been made, or is threatened to be made, a party to an action, suit or legal
proceeding by reason of the fact that the person is or was a director of the
Corporation. The Company may provide similar indemnification to officers,
employees and agents at the discretion of the Board. The Company intends to
enter into separate indemnification agreements with each of its directors. These
agreements will require the Company to indemnify its directors to the fullest
extent permitted by law, including circumstances in which indemnification would
otherwise be discretionary. Among other things, the agreements require the
Company to indemnify directors against certain liabilities that may arise by
reason of their status or service as a director and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified. The Company also has insurance on behalf of it executive officers
and directors for certain liabilities arising out of their actions in such
capacities. The Company believes that these contractual arrangements, the
provisions in its Articles of Incorporation and Bylaws and insurance coverage
are necessary to attract and retain qualified persons as directors and officers.
38
<PAGE> 40
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the annual compensation earned during 1997
for the Company's chief executive officer and each of the Company's other
executive officers who earned in excess of $100,000 in salary and bonus during
the last fiscal year (the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION(1)
- ------------------------------------------ -------- ------- ------------- ---------------
<S> <C> <C> <C> <C>
Benjamin Namatinia........................ $178,224 $20,000 -- $14,258
Chairman and Chief Executive Officer
Charles W. Jarrett........................ $161,532 $40,975 -- $12,923
President and Chief Operating Officer
James A. Wills............................ $ 98,556 $24,585 -- $ 7,884
Vice President
</TABLE>
- ---------------
(1) Company contribution to 401(k) Plan
STOCK OPTIONS
The following table sets forth information concerning the award of stock
options to the Named Executive Officers during fiscal 1997:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(1)
OPTIONS/SARS EMPLOYEES EXERCISE OR BASE EXPIRATION -----------------------
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) DATE 5%($) 10%($)
- --------------------- ------------ ---------------- ---------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Benjamin Namatinia... 192,500 50% $ 5.71 9/30/07 $2,663,570 $4,892,370
Charles W. Jarrett... 192,500 50% $ 5.71 9/30/07 $2,663,570 $4,892,370
James A. Wills....... -- -- n/a n/a n/a n/a
</TABLE>
- ---------------
(1) Initial value of Common Stock equal to $12.00 per share, the assumed initial
offering price of the Common Stock.
The table below provides information on exercises of options during 1997 by
the Named Executive Officers and information with respect to unexercised options
held by the Named Executive Officers at December 31, 1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS/SARS AT
OPTIONS/SARS AT FISCAL YEAR-END
FISCAL YEAR-END (#) ($)
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) VALUE REALIZED($) UNEXERCISABLE UNEXERCISABLE(1)
- ---------------------------- ---------------- ----------------- -------------------- ------------------
<S> <C> <C> <C> <C>
Benjamin Namatinia.......... -- -- 52,500/140,000 $330,225/$880,600
Charles W. Jarrett.......... -- -- 52,500/140,000 $330,225/$880,600
James A. Wills.............. -- -- -- --
</TABLE>
- ---------------
(1) Fair market value of Common Stock equal to $12.00 per share, the assumed
initial offering price of the Common Stock.
39
<PAGE> 41
EMPLOYMENT AGREEMENTS
Messrs. Namatinia and Jarrett will enter into employment agreements with
the Company prior to the Offering. Under the employment agreements, both Mr.
Namatinia and Mr. Jarrett will receive a base annual salary of $200,000. Mr.
Jarrett will also receive an annual cash bonus equal to the sum of five percent
(5%) of the Company's net profits in excess of a one percent (1%) Return on
Assets of the Bank ("ROA") for the calendar year and seven and one-half percent
(7.5%) of the Bank's net profits in excess of one and one-half percent (1.5%)
ROA for the calendar year. This formula was used by the Board of Directors to
determine Mr. Jarrett's bonus in 1996 and 1997. Mr. Namatinia's annual cash
bonus will be determined by the Company's Board of Directors based on the
growth, profitability and performance of the Company, the expansion of services
provided by the Company and the market value of the Company's Common Stock.
The agreements will contain a covenant not to compete for a period of
eighteen months in the event of termination of employment for any reason. If
employment is terminated by the Company without cause or by death or disability,
the employee will receive a lump sum equal to three times the employee's annual
base salary for the calendar year in which such employment terminates plus the
amount of cash bonus earned prior to termination. Upon termination without
cause, the employee will receive such benefits to which he has become entitled
under the terms of the Company's 1997 Stock Option Plan and any other benefit
plan or program.
Upon a change in control of the Company, if employment is terminated by the
Company without cause or by the employee for good reason within three years
after such change in control, the employee will be entitled to his full base
salary through the date of termination and a lump sum payment equal to three
times the employee's annual base salary in effect immediately prior to the
termination date. The employee will also receive such benefits to which he has
become entitled under the terms of the Company's 1997 Stock Option Plan and any
other benefit plan or program.
1997 STOCK OPTION PLAN
The Board of Directors and the Company's shareholders have adopted the 1997
Stock Option Plan (the "1997 Plan") which authorizes up to 525,000 shares of
Common Stock for issuance thereunder. The 1997 Plan is administered by the
Compensation Committee. Under the 1997 Plan, options may be granted to the
Company's employees, directors and consultants. Only employees may receive
"incentive stock options," which are intended to qualify for certain tax
treatment; both employees and nonemployees, including nonemployee directors, may
receive "nonstatutory stock options," which do not qualify for such treatment.
The exercise price of incentive stock options under the 1997 Plan must at least
equal the fair market value of the Common Stock on the date of grant. The
exercise price of the nonstatutory options may be greater than or less than the
fair market value of the Common Stock on the date of grant at the discretion of
the Compensation Committee. All incentive stock options granted under the 1997
Plan will expire ten years from the date of grant unless terminated sooner
pursuant to the provisions of the 1997 Plan. The number of shares of Common
Stock authorized under the 1997 Plan may be adjusted upon subdivision or
consolidation of the Company including reclassification, stock split or reverse
stock split of the Company's Common Stock. In the event of a change of control
of the Company, including a merger or sale of substantially all of the Company's
assets, outstanding options and stock purchase rights must be assumed by any
successor corporation, or equivalent options or rights must be substituted, or
they will become fully vested and exercisable.
At the date hereof, options to purchase 192,500 shares have been granted
under the 1997 Plan to each of Mr. Namatinia and Mr. Jarrett. Under the terms of
each grant, options to purchase 52,500 shares vested at the date of grant and
the remaining options vest ratably over a five year period.
EMPLOYEE STOCK PURCHASE PLAN
The Board of Directors has adopted the Cowlitz Bancorporation Employee
Stock Purchase Plan (the "ESPP"). Commencing on July 10, 1996 and every three
months thereafter, all eligible employees are granted options to purchase shares
of the Company's Common Stock that, in the aggregate, have an exercise price
that does not exceed 15% of the employee's compensation during each Exercise
Period (a three month period that begins on the date the option is granted and
ends on the ninth day of the succeeding calendar quarter) or
40
<PAGE> 42
$10,000 in each calendar year. The exercise price is determined by the
Compensation Committee of the Company's Board of Directors, but may not be less
than 100% of the fair market value of the Common Stock at the date of grant.
Each option not exercised during the Exercise Period expires and may not be
subsequently exercised. The maximum aggregate number of shares of Stock that may
be issued under the ESPP is 175,000 shares, subject to increases and adjustment
by the Board of Directors. At the date hereof, 33,565 shares of Common Stock
have been purchased under the ESPP.
CERTAIN TRANSACTIONS
At December 31, 1997, the Company had outstanding loans to officers,
directors, their spouses, associates and related organizations in the principal
amount of $1,077,000. All such loans were made in the ordinary course of
business, have been made on substantially the same terms and conditions,
including collateral required, as comparable transactions with unaffiliated
parties and did not involve more than the normal risk of collectibility or
present other unfavorable features. Directors and executive officers are charged
the same rates of interest and loan fees as are charged to employees of the
Company, which interest rates and fees are slightly lower than charged to
non-employee borrowers. All such loans are presently in good standing and are
being paid in accordance with their terms.
41
<PAGE> 43
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Common Stock of the Company and as adjusted to reflect the sale
of shares offered hereby, with respect to (i) each person known by the Company
to beneficially own more than 5% of the outstanding shares of Common Stock, (ii)
each person who is a director or Named Executive Officer of the Company and
(iii) all directors and executive officers of the Company as a group. Each
beneficial owner has the sole power to vote and to dispose of all shares of
Common Stock owned by such beneficial owner.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING SHARES TO BE SOLD AFTER THE OFFERING
---------------------- IN THE ----------------------
NAME OF BENEFICIAL OWNER SHARES PERCENTAGE OFFERING(2) SHARES PERCENTAGE
- --------------------------------------- --------- ---------- ----------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Benjamin Namatinia(1).................. 580,282 21.7% -- 580,282 15.8%
Charles W. Jarrett(1).................. 264,127 9.9 -- 264,127 7.2
Mark F. Andrews, Jr.................... 37,065 1.4 -- 37,065 1.0
Larry M. Larson........................ 250,214 9.6 -- 250,215 6.9
E. Chris Searing....................... 16,467 * -- 16,467 *
Donna P. Gardner....................... 44,268 1.7 -- 44,268 1.2
James A. Wills......................... 99,630 3.8 -- 99,631 2.8
All directors and executive officers as
a group (7 persons).................. 1,292,053 47.4 -- 1,292,053 34.7
Michael Namatinia...................... 131,250 5.0% 131,250 3.6%
Harry R. Calbom, Jr.................... 122,500 4.7 8,500 114,000 3.1
Wallace C. Trotter..................... 126,105 4.8 8,500 117,605 3.2
</TABLE>
- ---------------
* Less than 1%.
(1) Includes presently exercisable options to purchase 52,500 shares each of
Common Stock. Does not include options to purchase 140,000 shares each of
Common Stock which vest ratably over a five year period commencing December
31, 1998.
(2) The Selling Shareholders have granted the Underwriters a 30-day option to
purchase these shares to cover over-allotments following the closing of the
Offering.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 3,619,796 shares of
Common Stock outstanding. The 1,000,000 shares sold in the Offering (1,150,000
shares if the Underwriters' over-allotment option is exercised in full) will be
freely tradable on the public market without restriction or further registration
under the Securities Act, except to the extent that such shares are held by an
affiliate of the Company. Of the remaining 2,619,796 outstanding shares of
Common Stock, 1,757,997 shares were issued and sold by the Company in private
transactions, and public sale thereof will be restricted except to the extent
such shares are registered under the Securities Act or sold in accordance with
an exemption from such registration. The 1,757,997 restricted shares of Common
Stock will be eligible for public sale pursuant to Rule 144 under the Securities
Act commencing 90 days after the date of this Prospectus. The holders of
1,681,605 shares have entered into agreements (the "Lock-Up Agreements") with
the Underwriters not to offer, sell or otherwise dispose of any equity
securities of the Company for 180 days after the date of this Prospectus (the
"lock-up period") without the prior written consent of Black & Company. Black &
Company may, in its sole discretion, at any time without notice, release all or
any part of the shares subject to the Lock-Up Agreements during the lock-up
period.
In general, Rule 144, as currently in effect, provides that any person who
has beneficially owned shares for at least one year, including an "affiliate"
(as defined in Rule 144), is entitled to sell, within any three-month period, a
number of shares that does not exceed the greater of (i) the average weekly
trading volume during the four calendar weeks preceding the sale or (ii) 1% of
the shares of Common Stock then outstanding. Sales under Rule 144 are subject to
certain manner of sale restrictions, notice requirements and availability of
current public information concerning the Company. A person who is not an
affiliate of the Company, and
42
<PAGE> 44
who has not been an affiliate within three months prior to the sale, generally
may sell shares without regard to the limitations of Rule 144 provided that the
person has held such shares for a period of at least two years.
Any employee, director or officer of the Company holding shares purchased
pursuant to a written compensatory plan or contract (including options) entered
into prior to the Offering is entitled to rely on the resale provisions of Rule
701, which permit nonaffiliates to sell such shares without having to comply
with the public information, holding period, volume limitations or notice
requirements of Rule 144 and permit affiliates to sell their Rule 701 shares
without having to comply with the holding period restrictions of Rule 144, in
each case commencing 90 days after the date of this Prospectus.
Prior to the Offering, there has been no public market for the Common Stock
and no prediction can be made of the effect, if any, that the sale or
availability for sale of shares of Common Stock will have on the market price of
the Common Stock. Nevertheless, sales of substantial amounts of such shares in
the public market could adversely affect the market price of the Common Stock.
DESCRIPTION OF CAPITAL STOCK
The following summary description of the Company's capital stock and of
certain provisions of the Articles and Bylaws are summaries and do not purport
to be complete and are subject to and qualified in their entirety by reference
to the Articles and Bylaws, copies of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part. Reference is made to
such exhibit for a detailed description of the provisions summarized below.
The Company's authorized capital stock consists of 25,000,000 shares of
Common Stock, no par value per share, 5,000,000 shares of preferred stock, no
par value per share (the "Preferred Stock").
On the date of this Prospectus, there were 2,619,796 shares of Common Stock
outstanding. Upon the closing of the Offering, there will be 3,619,796 shares of
Common Stock outstanding and no shares of Preferred Stock outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
to be voted on by the shareholders. There are no cumulative voting rights.
Accordingly, the holders of a majority of the shares of Common Stock voting for
the election of directors can elect all the directors if they choose to do so.
Holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of funds
legally available therefor. See "Dividend Policy." In the event of the
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of the
Company's liabilities. Holders of Common Stock have no preemptive rights and the
Common Stock is neither redeemable nor convertible into any other securities. As
of December 31, 1997, there were 289 record holders of the Common Stock.
PREFERRED STOCK
The Company is authorized to issue "blank check" Preferred Stock, which may
be issued from time to time in one or more series upon authorization by the
Company's Board of Directors. The Board of Directors, without further approval
of the shareholders, will be authorized to fix the dividend rights and terms,
conversion rights, voting rights, redemption rights and terms, liquidation
preferences, and any other rights, preferences, privileges and restrictions and
applicable to each series of the Preferred Stock. The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, among other things, could adversely affect the voting
power of the holders of Common Stock and, under certain circumstances, make it
more difficult for a third party to gain control of the Company, discourage bids
for the Company's Common Stock at a premium to the prevailing market price or
otherwise adversely affect the market price of the Common Stock.
43
<PAGE> 45
ANTITAKEOVER RESTRICTIONS
STATUTORY PROVISIONS
Washington law contains certain provisions that may have the effect of
delaying, deterring or preventing a change in control of the Company. Chapter
23B.19 of the WBCA prohibits the Company, with certain exceptions, from engaging
in certain significant business transactions with an "acquiring person" (defined
as a person who acquires 10% or more of the Company's voting securities without
the prior approval of the Company's Board of Directors) for a period of five
years after such acquisition. The prohibited transactions include, among others,
a merger with, disposition of assets to, or issuance or redemption of stock to
or from, the acquiring person, or otherwise allowing the acquiring person to
receive any disproportionate benefit as a shareholder. The Company may not
exempt itself from coverage of this statute. These statutory provisions may have
the effect of delaying, deterring or preventing a change in control of the
Company.
ARTICLE PROVISIONS
The Board of Directors has the authority to issue up to 5,000,000 shares of
Preferred Stock with such rights and preferences as the Board of Directors may
determine. The issuance of such shares may have the effect of delaying,
deterring or preventing a change in control of the Company. See "-- Preferred
Stock."
The Articles do not provide for cumulative voting in the election of
directors. The Articles provide that a director may only be removed "for cause"
and only with the approval of holders of at least 75% of the Company's voting
stock. The Articles prohibit shareholders from calling a special meeting of
shareholders. A special meeting of shareholders may be called only by a majority
of the Board of Directors, the Chairman of the Board or the President.
These provisions in the Articles described above make it more difficult for
shareholders, including those holding a majority of the outstanding shares to
effect an immediate change in a majority of the members of the Board of
Directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Article VII of the Articles limits the personal liability of directors to
the Company or its shareholders for monetary damages for conduct as a director
in circumstances involving (i) any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) any
unlawful distribution to stockholders, or (iv) any transaction from which the
director derived an improper personal benefit. Article X of the Articles
provides that the Company shall to the full extent permitted by Washington law,
indemnify and advance or reimburse the reasonable expenses incurred by any
person made a party to a proceeding because that person is or was a director of
the Company. In addition, permits the Company's Board of Directors to indemnify
the Company's officers, employees and agents to the full extent permitted by
Washington law.
The Company plans to enter indemnification agreements with its directors.
The Company has insurance on behalf of its executive officers and directors for
certain liabilities arising out of their actions in such capacities.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services LLC.
44
<PAGE> 46
UNDERWRITING
The underwriters named below (the "Underwriters"), for which Black &
Company, Inc. and Pacific Crest Securities Inc. are acting as representatives
(the "Representatives"), have severally agreed, subject to the terms and
conditions set forth in the Underwriting Agreement, to purchase from the Company
the number of shares of Common Stock indicated below opposite their respective
names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
------------------------------------------------------------------ ---------
<S> <C>
Black & Company, Inc..............................................
Pacific Crest Securities Inc......................................
------
Total........................................................
======
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the shares of Common Stock listed above are subject to
the approval of certain legal matters by counsel and various other conditions.
The Underwriting Agreement also provides that the Underwriters are committed to
purchase all of the shares of Common Stock offered hereby, if any are purchased
(except for any shares that may be purchased through exercise of the
Underwriters' over-allotment option which may be exercised by the Underwriters
in whole or in part).
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the public offering price
set forth on the cover of this Prospectus and to certain dealers at such price
less a concession not in excess of $ per share. After the Offering, the
public offering price and other selling terms may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters, and to certain other conditions, including the right to
reject orders in whole or in part.
Prior to this Offering, there has been only a limited public market for the
Common Stock. Accordingly, the public offering price has been determined by
negotiation between the Company and the Representatives. Among the factors
considered in determining the public offering price were the recent bid prices
quoted by market makers in the Common Stock, the Company present and historical
results of operations, the Company's current financial condition, estimates of
the business potential and prospects of the Company, economic conditions in the
Company's market area, the experience of the Company's management, the economics
of the industry in general, the general condition of the equity markets at the
time of the Offering and other relevant factors. There can be no assurance that
an active trading market will develop for the Common Stock, that purchasers in
the Offering will be able to sell their shares at or above the Offering price,
or as to the price at which the Common Stock may trade in the public market from
time to time subsequent to the Offering.
The Company and the Selling Shareholders have granted the Underwriters an
option, exercisable during the 30-day period after the date of this Prospectus,
to purchase up to 133,000 and 17,000 additional shares of Common Stock,
respectively, at the public offering price set forth on the cover page of this
Prospectus, less underwriting discounts and commissions. To the extent the
Underwriters exercise the option, each Underwriter will have a firm commitment,
subject to certain conditions, to purchase such number of additional shares of
Common Stock as is proportionate to such Underwriter's initial commitment to
purchase shares from the Company. The Underwriters may exercise such option
solely to cover over-allotments, if any, incurred in connection with the sale of
shares of Common Stock offered hereby.
The Underwriting Agreement provides that the Company (and the Selling
Shareholders to the extent the Underwriters exercise the overallotment option)
has agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities Act"),
or to contribute to payments that the Underwriters may be required to make in
respect thereof.
45
<PAGE> 47
All of the executive officers and directors of the Company and the Bank
have agreed, that, for a period of 180 days after the day on which the
Registration Statement becomes effective by order of the Commission, they will
not, without the prior written consent of Black & Company, Inc. directly or
indirectly, offer for sale, sell, contract to sell, or grant any option to sell
(including, without limitation, any short sale), pledge, establish an open
"put-equivalent position" within the meaning of Rule 16a-1(h) under the Exchange
Act, transfer, assign or otherwise dispose of any shares of the Common Stock or
securities exchangeable for or convertible into shares of the Common Stock, or
any option, warrant or other right to acquire such shares, or publicly announce
the intention to do any of the foregoing.
During and after the offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Common Stock; and syndicate share positions involve
the sale of the Underwriters of a greater number of shares of Common Stock than
they are required to purchase from the Company in the offering. The Underwriters
also may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the Common Stock sold in the
offering for their account may be reclaimed by the syndicate if such securities
are repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock which may be higher than the price that might otherwise prevail in
the open market, and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
Mr. Benjamin Namatinia, Chairman of the Board and Chief Executive Officer
of the Company, is the sole shareholder of Robert Thomas Securities, which is a
member of the selling group for this Offering.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales of Common Stock offered by this Prospectus to any
accounts over which they exercise discretionary authority.
The Company's Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "CWLZ."
The foregoing is a brief summary of the provisions of the Underwriting
Agreement and does not purport to be a complete statement of its terms and
conditions. A copy of the form of Underwriting Agreement has been filed as an
exhibit to the Registration Statement.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1997 and 1996, and for each of the years in the three year period ended December
31, 1997, included in this Prospectus and in the Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said report.
LEGAL MATTERS
The validity of the Company's Common Stock being offered hereby will be
passed upon for the Company to Foster Pepper & Shefelman PLLC, Seattle,
Washington. Certain legal matters will be passed upon for the Underwriters by
Graham & Dunn PC, Seattle, Washington.
46
<PAGE> 48
ADDITIONAL INFORMATION
The Company has filed a registration statement on Form S-1 (together with
all amendments and exhibits thereto, the "Registration Statement") with the
Commission under the Securities Act with respect to the Common Stock being
offered hereby. This Prospectus is part of the Registration Statement. As
permitted by the rules and regulations of the Commission, this Prospectus does
not contain all of the information set forth in the Registration Statement. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement. A copy of the
Registration Statement may be examined without charge at the Commission's
principal offices at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at 7 World Trade Center, Suite 1300,
New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of all or any part thereof may be obtained from the
Public Reference Section of the Commission upon payment of certain fees
prescribed by the Commission. Copies of such materials may also be obtained from
the website that the Commission maintains at http://www.sec.gov. Although the
Prospectus contains a discussion of the material aspects of the documents filed
as exhibits to the Registration Statement, statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete and, in such instance, reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by an independent public accounting
firm.
47
<PAGE> 49
INDEX TO FINANCIAL STATEMENTS
COWLITZ BANCORPORATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Income..................................................... F-4
Consolidated Statements of Shareholders' Equity....................................... F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of Cowlitz Bancorporation:
We have audited the accompanying consolidated balance sheets of Cowlitz
Bancorporation (a Washington corporation) and Subsidiary as of December 31, 1997
and 1996, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cowlitz Bancorporation and
Subsidiary as of December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
January 15, 1998
F-2
<PAGE> 51
COWLITZ BANCORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
ASSETS
ASSETS:
Cash and due from banks.............................................. $ 20,905 $ 23,109
Investment securities:
Investments available-for-sale (at fair value, cost of $2,001 and
$3,993 at December 31, 1996 and 1997, respectively).............. 2,011 4,017
Investments held-to-maturity (at amortized cost, fair value of
$3,388 and $4,486 at December 31, 1996 and 1997, respectively)... 3,380 4,464
-------- --------
Total investment securities.................................. 5,391 8,481
-------- --------
Loans................................................................ 126,551 131,963
Allowance for loan losses............................................ (1,894) (1,970)
-------- --------
Loans, net................................................... 124,657 129,993
-------- --------
Premises and equipment, net of accumulated depreciation of $1,189 and
$1,354 at December 31, 1996 and 1997, respectively................ 4,437 5,653
Federal Home Loan Bank stock......................................... 2,463 2,658
Intangible asset, net of accumulated amortization of $0 and $123 at
December 31, 1996 and 1997, respectively.......................... -- 1,847
Other assets......................................................... 1,304 1,552
-------- --------
Total assets................................................. $159,157 $173,293
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand............................................................ $ 16,821 $ 27,141
Savings and interest-bearing demand............................... 30,768 46,454
Certificates of deposit........................................... 75,708 62,614
-------- --------
Total deposits............................................... 123,297 136,209
Short-term borrowings................................................ 550 725
Other liabilities.................................................... 655 572
Long-term borrowings................................................. 22,842 21,900
-------- --------
Total liabilities............................................ 147,344 159,406
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, no par value; 3,937,500 authorized; 2,590,403 and
2,604,543 shares issued and outstanding at December 31, 1996 and
1997, respectively................................................ 3,195 3,262
Additional paid-in capital........................................... 1,538 1,538
Retained earnings.................................................... 7,073 9,071
Net unrealized gains on investments available-for-sale............... 7 16
-------- --------
Total shareholders' equity................................... 11,813 13,887
-------- --------
Total liabilities and shareholders' equity................... $159,157 $173,293
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 52
COWLITZ BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS OF DOLLARS, EXCEPT
NUMBER OF SHARES AND PER SHARE
AMOUNTS)
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans.............................. $ 9,954 $ 12,721 $ 13,700
Interest on taxable investment securities............... 269 386 577
Interest on nontaxable investment securities............ 3 2 --
Trading account interest................................ 129 34 --
Interest from other banks............................... 289 490 809
--------- --------- ---------
Total interest income........................... 10,644 13,633 15,086
--------- --------- ---------
INTEREST EXPENSE:
Savings and interest-bearing demand..................... 1,061 1,031 1,253
Certificates of deposit................................. 2,657 3,960 4,246
Short-term borrowings................................... 177 110 43
Long-term borrowings.................................... 653 1,073 1,401
--------- --------- ---------
Total interest expense.......................... 4,548 6,174 6,943
--------- --------- ---------
Net interest income before provision for loan
losses........................................ 6,096 7,459 8,143
PROVISION FOR LOAN LOSSES................................. (694) (281) (375)
--------- --------- ---------
Net interest income after provision for loan
losses........................................ 5,402 7,178 7,768
--------- --------- ---------
NONINTEREST INCOME:
Service charges on deposit accounts..................... 367 387 563
Other income............................................ 252 218 186
Net gains (losses) on sales of securities............... 258 (309) --
--------- --------- ---------
Total noninterest income........................ 877 296 749
--------- --------- ---------
NONINTEREST EXPENSE:
Salaries and employee benefits.......................... 1,709 2,137 2,778
Net occupancy and equipment expense..................... 310 393 724
Other operating expense................................. 1,074 1,152 1,782
--------- --------- ---------
Total noninterest expense....................... 3,093 3,682 5,284
--------- --------- ---------
Income before income tax expense................ 3,186 3,792 3,233
INCOME TAX EXPENSE........................................ 1,088 1,295 1,109
--------- --------- ---------
Net income...................................... $ 2,098 $ 2,497 $ 2,124
========= ========= =========
BASIC EARNINGS PER SHARE.................................. $ 0.77 $ 0.90 $ 0.76
DILUTED EARNINGS PER SHARE................................ $ 0.77 $ 0.90 $ 0.76
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............. 2,714,074 2,788,365 2,796,906
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 53
COWLITZ BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
UNREALIZED
GAINS ON
COMMON STOCK ADDITIONAL INVESTMENTS TOTAL
------------------ PAID-IN RETAINED AVAILABLE- SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS FOR-SALE EQUITY
--------- ------ ---------- -------- ----------- -------------
(IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994........ 1,723,733 $ 985 $1,538 $2,659 $-- $ 5,182
Issuance of common stock for
cash........................... 861,875 2,191 -- -- -- 2,191
Net income........................ -- -- -- 2,098 -- 2,098
Cash dividends paid ($.03 per
share)......................... -- -- -- (80) -- (80)
--------- ------ ------ ------ --- -------
BALANCE AT DECEMBER 31, 1995........ 2,585,608 3,176 1,538 4,677 -- 9,391
Issuance of common stock for
cash........................... 4,795 19 -- -- -- 19
Net income........................ -- -- -- 2,497 -- 2,497
Cash dividends paid ($.04 per
share)......................... -- -- -- (101) -- (101)
Net changes in unrealized gains on
investments available-for-sale,
net of deferred taxes of $3.... -- -- -- -- 7 7
--------- ------ ------ ------ --- -------
BALANCE AT DECEMBER 31, 1996........ 2,590,403 3,195 1,538 7,073 7 11,813
Issuance of common stock for
cash........................... 14,140 67 -- -- -- 67
Net income........................ -- -- -- 2,124 -- 2,124
Cash dividends paid ($.05 per
share)......................... -- -- -- (126) -- (126)
Net changes in unrealized gains on
investments available-for-sale,
net of deferred taxes of $5.... -- -- -- -- 9 9
--------- ------ ------ ------ --- -------
BALANCE AT DECEMBER 31, 1997........ 2,604,543 $3,262 $1,538 $9,071 $16 $13,887
========= ====== ====== ====== === =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 54
COWLITZ BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $ 2,098 $ 2,497 $ 2,124
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 152 191 557
Provision for loan losses........................... 694 281 375
Net losses (gains) on sales of trading securities (258) 309 --
Net amortization of investment security premiums and
accretion of discounts ........................... (4) (3) (2)
(Increase) decrease in other assets................. (446) 49 (248)
Increase (decrease) in other liabilities............ 266 87 (83)
Federal Home Loan Bank stock dividends.............. (138) (180) (195)
Purchases of trading securities..................... (40,305) (64,500) --
Sales of trading securities......................... 41,328 66,204 --
------ ------ ------
Net cash provided by operating activities...... 3,387 4,935 2,528
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities
held-to-maturity ................................... 1,970 2,860 3,784
Purchases of investment securities:
Available-for-sale.................................. -- (2,006) (1,994)
Held-to-maturity.................................... (1,663) (2,969) (4,857)
Proceeds from assumption of deposit liabilities........ -- -- 22,885
Net increase in loans.................................. (31,030) (19,038) (5,711)
Purchases of premises and equipment.................... (291) (2,797) (1,300)
------ ------ ------
Net cash (used in) provided by investing
activities................................... (31,014) (23,950) 12,807
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand, savings and
interest-bearing demand deposits ................... 114 (1,207) 5,536
Net increase (decrease) in certificates of deposit..... 25,174 18,133 (17,841)
Dividends paid......................................... (80) (101) (126)
Net increase (decrease) in short-term borrowings....... 1,275 (2,075) 175
Net proceeds (repayment) of long-term borrowings....... 5,582 10,449 (942)
Issuance of common stock for cash...................... 2,191 19 67
------ ------ ------
Net cash provided by (used in) financing
activities................................... 34,256 25,218 (13,131)
------ ------ ------
Net increase in cash and due from banks........ 6,629 6,203 2,204
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR............. 8,073 14,702 20,905
------ ------ ------
CASH AND DUE FROM BANKS AT END OF YEAR................... $ 14,702 $ 20,905 $ 23,109
====== ====== ======
CASH PAID FOR INTEREST................................... $ 4,533 $ 6,143 $ 6,990
====== ====== ======
CASH PAID FOR INCOME TAXES............................... $ 1,138 $ 1,245 $ 1,068
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 55
COWLITZ BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS
Cowlitz Bancorporation (the Company) is a single bank holding company
located in southwest Washington. The Company's wholly owned subsidiary, Cowlitz
Bank (the Bank), a Washington state-chartered commercial bank, is the only
locally owned community bank in Cowlitz County and offers commercial banking
services primarily to small and medium-sized businesses, professionals and
retail customers.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiary, the Bank. All significant intercompany
transactions and balances have been eliminated.
INVESTMENT SECURITIES
Investment securities are classified as either trading, available-for-sale
or held-to-maturity. Securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold those securities to
maturity. Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities. Securities
not classified as either held-to-maturity or trading are classified as
available-for sale. Trading securities are carried at fair value. Net unrealized
gains and losses on trading securities are included in the consolidated
statements of income. Available-for-sale securities are carried at fair value
with unrealized gains and losses, net of any tax effect, added to or deducted
from shareholders' equity. Held-to-maturity securities are carried at amortized
cost.
LOANS
Interest income on simple interest loans is accrued daily on the principal
balance outstanding. Generally, no interest is accrued on loans when factors
indicate that collection of interest is doubtful or when principal or interest
payments become 90 days past due, unless collection of principal and interest is
anticipated within a reasonable period of time and the loans are well secured.
For such loans, previously accrued but uncollected interest is charged against
current earnings, and income is only recognized to the extent that payments are
subsequently received and collection of the remaining recorded investment is
probable. Loan fees are offset against operating expense to the extent that
these fees cover the direct expense of originating loans. Fees in excess of
origination costs are deferred and amortized to income over the related loan
period.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," requires disclosures about stock-based compensation
arrangements regardless of the method used to account for them. As permitted by
SFAS No. 123, the Company has opted to continue to apply the accounting
provisions of Accounting Principles Board (APB) Opinion No. 25, and therefore
discloses the difference between compensation cost included in net income and
the related cost measured by the fair-value-based method defined by SFAS No.
123, including tax effects, that would have been recognized in the income
statement if the fair-value method had been used.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on management's estimates.
Management determines the adequacy of the allowance based upon reviews of
individual loans, recent loss experience, current economic conditions, the risk
characteristics of the various categories of loans and other pertinent factors.
Actual losses may vary from the current estimates. These estimates are reviewed
periodically and are adjusted as deemed
F-7
<PAGE> 56
COWLITZ BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
necessary. Loans deemed uncollectible are charged to the allowance. Provisions
for loan losses and recoveries on loans previously charged off are added to the
allowance.
A loan is impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. The Company's policy is to disclose
as impaired loans all loans that are past due 90 days or more as to either
principal or interest, except for loans that are currently measured at fair
value or at the lower of cost or fair value, and residential mortgage and credit
card receivables, which are considered large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment. The Company
measures impairment based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
impairment may be measured based on the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. Impaired loans
are charged to the allowance when management believes, after considering
economic and business conditions, collection efforts, and collateral position,
that the borrowers' financial condition is such that collection of principal is
not probable.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
The provision for depreciation is computed on the straight-line method over the
estimated useful lives for the majority of the assets, which range from 3 to
39.5 years.
Improvements are capitalized and depreciated over the lesser of their
estimated useful lives or the life of the lease. When property is replaced or
otherwise disposed of, the cost of such assets and the related accumulated
depreciation are removed from their respective accounts.
INTANGIBLE ASSET
The intangible asset is a deposit premium that is being amortized using an
accelerated method over a ten-year life.
OTHER BORROWINGS
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to four days from the transaction date. Other
short-term borrowed funds mature within one year from the transaction date.
Other long-term borrowed funds extend beyond one year.
INCOME TAXES
Income taxes are accounted for using the asset and liability method. Under
this method, a deferred tax asset or liability is determined based on the
enacted tax rates, which will be in effect when the differences between the
financial statement carrying amounts and tax bases of existing assets and
liabilities are expected to be reported in the Company's income tax returns. The
deferred tax provision for the year is equal to the net change in the deferred
tax asset or liability from the beginning to the end of the year, less amounts
applicable to the change in value related to investments available-for-sale. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
EARNINGS PER SHARE
Earnings per share computations are computed using the weighted average
number of common and dilutive common equivalent shares (stock options) assumed
to be outstanding during the period using the treasury stock method. Stock
options granted under the Company's 1997 Stock Option Plan have been
F-8
<PAGE> 57
COWLITZ BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
considered outstanding for all periods presented for purposes of calculating
both basic and diluted earnings per share.
SUPPLEMENTAL CASH FLOW INFORMATION
For the purpose of presentation in the statements of cash flows, cash and
cash equivalents are defined as those amounts in the balance sheet caption "Cash
and due from banks" and include cash on hand, amounts due from banks and federal
funds sold. Federal funds sold generally mature the day following purchase.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements and standby letters of
credit. Such financial instruments are recorded in the financial statements when
they become payable.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which the Company is required to adopt for years beginning after
December 15, 1997. This statement establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. When adopted,
the unrealized gain or loss on available-for-sale securities will be recognized
as a component of comprehensive income.
PRIOR YEAR RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
F-9
<PAGE> 58
COWLITZ BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
2. INVESTMENT SECURITIES:
The amortized cost and estimated fair values of investment securities at
December 31 are shown below:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
-----------------------------------------------------
GROSS ESTIMATED
AMORTIZED UNREALIZED FAIR
DECEMBER 31, 1997 COST LOSSES VALUE
--------- ---------- ---------
GROSS
UNREALIZED
GAINS
----------
<S> <C> <C> <C> <C>
U.S. government and agency securities.... $ 3,993 $ 24 $ -- $ 4,017
------ ---- ---- ------
Total.......................... $ 3,993 $ 24 $ -- $ 4,017
====== ==== ==== ======
</TABLE>
<TABLE>
<CAPTION>
HELD-TO-MATURITY
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. government and agency securities.... $ 2,978 $ 22 $ -- $ 3,000
Certificates of deposit.................. 1,486 -- -- 1,486
------ ---- ---- ------
Total.......................... $ 4,464 $ 22 $ -- $ 4,486
====== ==== ==== ======
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
-----------------------------------------------------
GROSS ESTIMATED
AMORTIZED UNREALIZED FAIR
DECEMBER 31, 1996 COST LOSSES VALUE
--------- ---------- ---------
GROSS
UNREALIZED
GAINS
----------
<S> <C> <C> <C> <C>
U.S. government and agency securities.... $ 2,001 $ 10 $ -- $ 2,011
--------- --- --- ---------
Total.......................... $ 2,001 $ 10 $ -- $ 2,011
======= ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
HELD-TO-MATURITY
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. government and agency securities.... $ 1,998 $ 8 $ -- $ 2,006
Certificates of deposit.................. 1,382 -- -- 1,382
------ ---- ---- ------
Total.......................... $ 3,380 $ 8 $ -- $ 3,388
====== ==== ==== ======
</TABLE>
Gross gains of $0, $379 and $397 and gross losses of $0, $688 and $139 were
realized on sales of trading securities in 1997, 1996 and 1995, respectively.
There were no sales of available-for-sale or held-to-maturity securities.
MATURITIES OF INVESTMENTS
The carrying amount and estimated fair value of debt securities by
contractual maturity at December 31, 1997, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
---------------------- ----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Due in one year or less...................... $ 999 $1,001 $ 1,486 $1,486
Due after one year through five years........ 2,994 3,016 2,978 3,000
------ ------ ------ ------
Total.............................. $ 3,993 $4,017 $ 4,464 $4,486
====== ====== ====== ======
</TABLE>
At December 31, 1997 and 1996, a security with a par value of $1 million
was pledged to secure the treasury, tax and loan account with the Federal
Reserve.
F-10
<PAGE> 59
COWLITZ BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES:
The loan portfolio as of December 31 consists of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Commercial loans............................................. $ 86,161 $ 93,829
Real estate:
Construction............................................... 3,584 3,495
Mortgage................................................... 28,766 24,167
Commercial................................................. 2,721 5,475
Installment and other consumer............................... 6,016 5,571
Contracts purchased.......................................... 116 81
-------- --------
127,364 132,618
Less:
Deferred loan fees......................................... (813) (655)
Allowance for loan losses.................................. (1,894) (1,970)
-------- --------
Total loans, net................................... $124,657 $129,993
======== ========
</TABLE>
An analysis of the change in the allowance for loan losses for the years
ended December 31 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Balance, beginning of year............................... $1,152 $1,763 $1,894
Provision for loan losses.............................. 694 281 375
Loans charged to the allowance......................... (114) (158) (324)
Recoveries credited to the allowance................... 31 8 25
------ ------ ------
Balance, end of year..................................... $1,763 $1,894 $1,970
====== ====== ======
</TABLE>
Loans on which the accrual of interest has been discontinued amounted to
approximately $1,897, $407 and $237 at December 31, 1997, 1996 and 1995,
respectively. Interest income forgone on nonaccrual loans was approximately
$177, $41 and $1 in 1997, 1996 and 1995, respectively.
At December 31, 1997 and 1996, the Company's recorded investment in certain
loans that were considered to be impaired was $2,270 and $446, respectively. Of
these impaired loans, $302 and $232 have related valuation allowances of $199
and $122, while $1,968 and $214 did not require a valuation allowance. The
balance of the allowance for loan losses in excess of these specific reserves is
available to absorb losses from all loans. The average recorded investment in
impaired loans for the years ended December 31, 1997, 1996 and 1995, was
approximately $1,300, $342, and $261, respectively. The Company's policy is to
disclose as impaired loans all loans that are past due 90 days or more as to
either principal or interest, except for loans that are currently measured at
fair value or at lower of cost or fair value, and residential mortgage and
credit card receivables, which are considered large groups of smaller
homogeneous loans and are collectively evaluated for impairment. Interest
payments received on impaired loans are recorded as interest income, unless
collection of the remaining recorded investment is not probable, in which case
payments received are recorded as a reduction of principal. For the years ended
December 31, 1997, 1996, and 1995 interest income recognized on impaired loans
totaled $36, $14, and $9, respectively, all of which was recognized on a cash
basis.
F-11
<PAGE> 60
COWLITZ BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
4. PREMISES AND EQUIPMENT:
Premises and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Land..................................................... $ 583 $ 633
Buildings and improvements............................... 3,445 4,208
Furniture and equipment.................................. 1,417 2,157
Construction in process.................................. 181 9
------ ------
5,626 7,007
Accumulated depreciation................................. (1,189) (1,354)
------ ------
Total.......................................... $ 4,437 $ 5,653
====== ======
</TABLE>
Depreciation included in net occupancy and equipment expense amounted to
$432, $191 and $152 for the years ended December 31, 1997, 1996 and 1995,
respectively.
5. BORROWINGS:
Short-term borrowings consist of Federal Funds purchased of $725 and $550
at December 31, 1997 and 1996, respectively.
Long-term borrowings consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Notes payable of the Bank to Federal Home Loan Bank; interest
from 4.48 percent to 8.62 percent at December 31, 1997, payable
in monthly installments plus interest, due 1998 to 2009,
secured by certain investment securities and mortgage loans.... $21,297 $20,517
Note payable to a bank, due January 1999; interest at prime plus
1 percent; interest not to fall below 8.5 percent or to exceed
14 percent (9.25 percent at December 31, 1997); principal
payable in annual installments from $146 to $173; interest
payable in quarterly installments, secured by bank stock....... 478 319
Subordinated promissory notes of the Company, due February 2000;
interest at 8.5 percent; interest payable semiannually on June
30 and December 31............................................. 1,000 1,000
Contract payable of the Bank to private party; interest at 9.0
percent, payable in monthly installments plus interest through
October 2010................................................... 67 64
------- -------
$22,842 $21,900
======= =======
</TABLE>
The aggregate maturities of notes payable subsequent to December 31, 1997,
are as follows:
<TABLE>
<S> <C>
1998....................................... $ 3,956
1999....................................... 2,663
2000....................................... 6,933
2001....................................... 7,283
2002....................................... 183
Thereafter................................. 882
-------
$21,900
=======
</TABLE>
Provisions of the note payable to a bank require maintenance of certain
operating ratios such as Tier 2 risk-based capital of not less than 2 percent
above the minimum set by the banking regulators and allowance
F-12
<PAGE> 61
COWLITZ BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
for loan losses of at least 1.1 percent of total loans. The note agreement also
places limitations on the Company's indebtedness and capital expenditures. The
Company was in compliance with these covenants as of December 31, 1997.
The Company in whole or in part under certain circumstances may prepay the
subordinated promissory notes at any time after December 15, 1997.
6. INCOME TAXES:
The components of the provision for income taxes for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Current........................................ $1,158 $1,274 $1,044
Deferred....................................... (70) 21 65
------ ------ ------
Total provision for income taxes..... $1,088 $1,295 $1,109
====== ====== ======
</TABLE>
The statutory federal income tax rate and effective tax rate of the
provision do not vary substantially.
The tax effect of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 was as follows:
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses................................. $ 607 $ 596
Amortization of intangible assets......................... -- 23
Loan origination fees..................................... 56 31
Other..................................................... 2 --
----- -----
665 650
----- -----
Deferred tax liabilities:
Cash-basis adjustments.................................... (58) (29)
Accumulated depreciation.................................. (53) (67)
Federal Home Loan Bank stock dividends.................... (330) (396)
Unrealized gains on available-for-sale securities......... (3) (8)
Other..................................................... (2) (1)
----- -----
(446) (501)
----- -----
Net deferred tax asset............................ $ 219 $ 149
===== =====
</TABLE>
7. CERTIFICATES OF DEPOSIT:
Included in certificates of deposit are certificates in denominations of
$100 or greater totaling $18,633 and $26,003 at December 31, 1997 and 1996,
respectively. Interest expense relating to certificates of deposit in
denominations of $100 or greater was $1,297, $1,360 and $719 for the years ended
December 31, 1997, 1996 and 1995, respectively.
8. SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL:
Dividends are paid by the Company from its retained earnings, which are
principally provided through dividends and income from its subsidiary. However,
state agencies restrict the amount of funds the Company's subsidiary may
transfer to the Company in the form of cash dividends, loans or advances.
Transfers are limited by the subsidiary's retained earnings, which were $7,879
at December 31, 1997.
F-13
<PAGE> 62
COWLITZ BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
The Company and the Bank are subject to various regulatory capital
requirements as established by the applicable federal or state banking
regulatory authorities. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and certain off-balance-sheet items. The quantitative
measures for capital adequacy require the Company and the Bank to maintain
minimum amounts and ratios of total and Tier 1 capital to risk weighted assets
and of Tier 1 capital to average assets (leverage). The Company's capital
components, classification, risk weightings and other factors are also subject
to qualitative judgments by regulators. Failure to meet minimum capital
requirements can initiate certain actions by regulators that, if undertaken,
could have a material effect on the Company's financial statements. Management
believes that as of December 31, 1997, the Company and the Bank meet all minimum
capital adequacy requirements to which they are subject. The most recent
notification from the Federal Deposit Insurance Corporation categorized the Bank
as well-capitalized under the regulatory framework for prompt corrective action.
Management believes that no events or changes in conditions have occurred
subsequent to such notification to change the Bank's category.
The following table presents selected capital information for the Company
(consolidated) and the Bank as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER
PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
--------------- --------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total risk-based capital:
Consolidated.......................... $14,194 11.34% $10,007 8.00% $12,503 10.00%
Bank.................................. 13,852 11.09 9,994 8.00 12,993 10.00
Tier 1 risk-based capital:
Consolidated.......................... 12,025 9.61 5,003 4.00 7,505 6.00
Bank.................................. 12,285 9.83 4,997 4.00 7,496 6.00
Tier 1 (leverage) capital:
Consolidated.......................... 12,025 6.86 7,002 4.00 8,752 5.00
Bank.................................. 12,285 7.12 6,898 4.00 8,623 5.00
As of December 31, 1996:
Total risk-based capital:
Consolidated.......................... 13,872 11.88 9,345 8.00 11,682 10.00
Bank.................................. 13,693 11.72 9,345 8.00 11,681 10.00
Tier 1 risk-based capital:
Consolidated.......................... 11,806 10.11 4,673 4.00 7,009 6.00
Bank.................................. 12,228 10.47 4,672 4.00 7,008 6.00
Tier 1 (leverage) capital:
Consolidated.......................... 11,806 7.75 6,097 4.00 7,621 5.00
Bank.................................. 12,228 8.05 6,075 4.00 7,593 5.00
</TABLE>
9. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS:
During 1997, the Company adopted the 1997 Stock Option Plan (the 1997
Plan), which authorized up to 525,000 shares of common stock for issuance
thereunder. Under the 1997 Plan, options may be granted to the Company's
employees, directors and consultants. The exercise price of incentive stock
options under the 1997
F-14
<PAGE> 63
COWLITZ BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
Plan must be at least equal to the fair value of the common stock on the date of
grant. Options granted under the 1997 Plan will generally vest over a five-year
period, at the discretion of the compensation committee. All incentive stock
options granted under the 1997 Plan will expire ten years from the date of grant
unless terminated sooner pursuant to the provisions of the 1997 Plan. At
December 31, 1997, options to purchase a total of 385,000 shares have been
granted under the 1997 Plan to two executives of the Company and the Bank.
The Company adopted an employee stock purchase plan during 1996. The
Company may sell up to 175,000 shares of common stock to its eligible employees
under the plan. During 1997, the Company sold 13,441 shares of stock under the
plan. The employee is granted the right to purchase the stock at a price equal
to fair value at the date of grant, as determined by the Board of Directors.
These grants are made to qualified employees each quarter and expire after 90
days, and they are therefore treated as stock options.
A summary of option activity for the years ended December 31, 1997 and
1996, is as follows:
<TABLE>
<CAPTION>
1996 1996 1997 1997
COMMON WEIGHTED COMMON WEIGHTED
SHARES AVERAGE PRICE SHARES AVERAGE PRICE
------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of
year................. -- $ -- 13,945 $4.29
Granted.............. 29,594 4.16 428,732 5.63
Exercised............ (4,795) 4.06 (13,441) 4.43
Forfeited............ (10,854) 4.06 (29,028) 4.67
Balance, end of year... 13,945 4.29 400,208 5.69
Exercisable, end of
year................. 13,945 4.29 111,458 5.64
Fair value of options
granted.............. $0.06 $1.49
</TABLE>
The Company accounts for both the 1997 Plan and the Employee Stock Purchase
Plan under APB Opinion No. 25, under which no compensation cost has been
recognized. Had compensation cost for these plans been determined consistently
with FASB Statement No. 123 and recognized over the vesting period, the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Net income:
As reported.............................................. $2,497 $2,124
Pro forma................................................ $2,496 $2,024
Basic earnings per share:
As reported.............................................. $ 0.90 $ 0.76
Pro forma................................................ $ 0.90 $ 0.72
Diluted earnings per share:
As reported.............................................. $ 0.90 $ 0.76
Pro forma................................................ $ 0.90 $ 0.72
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model, with the following weighted-average
assumptions used for grants in 1997 and 1996: risk-free interest rate of 7.0
percent; expected dividend yield of .93 percent; and an expected volatility of
2.24 percent. Expected lives for options granted in 1997 and 1996 were 6 years
and .25 years, respectively. Due to the discretionary nature of stock option
grants, the compensation cost included in the 1997 pro forma net income per SFAS
No. 123 may not be representative of that expected in future years.
F-15
<PAGE> 64
COWLITZ BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
10. CONTINGENT LIABILITIES AND COMMITMENTS WITH OFF-BALANCE-SHEET RISK:
The Company's consolidated financial statements do not reflect various
commitments and contingent liabilities of the Bank that arise in the normal
course of business and that involve elements of credit risk, interest rate risk
and liquidity risk. These commitments and contingent liabilities are commitments
to extend credit, credit card arrangements and standby letters of credit. A
summary of the Bank's undisbursed commitments and contingent liabilities at
December 31, 1997, is as follows:
<TABLE>
<S> <C>
Commitments to extend credit....................................... $13,362
Credit card commitments............................................ 2,748
Standby letters of credit.......................................... 479
-------
Total.................................................... $16,589
=======
</TABLE>
Commitments to extend credit, credit card arrangements and standby letters
of credit all include exposure to some credit loss in the event of
nonperformance of the customer. The Bank's credit policies and procedures for
credit commitments and financial guarantees are the same as those for extension
of credit that are recorded on the consolidated balance sheets. Because these
instruments have fixed maturity dates and many of them expire without being
drawn upon, they do not generally present any significant liquidity risk to the
Bank.
Most of the Bank's lending activity is with customers located in Cowlitz
County, Washington. An economic downturn in Cowlitz County would likely have a
negative impact on the Bank's results of operations, depending on the severity
of the downturn. The Bank maintains a diversified portfolio and does not have
significant on- or off-balance-sheet concentrations of credit risk in any one
industry.
11. BALANCES WITH THE FEDERAL RESERVE BANK:
The Bank is required to maintain reserves in cash or with the Federal
Reserve Bank equal to a percentage of its reservable deposits. Required reserves
were approximately $929, $580 and $581 as of December 31, 1997, 1996 and 1995,
respectively.
12. RELATED-PARTY TRANSACTIONS:
Certain directors, executive officers and their spouses, associates and
related organizations, had banking transactions with the Bank in the ordinary
course of business. All loans and commitments to loan were made on substantially
the same terms and conditions, including collateral required, as comparable
transactions with unaffiliated parties. Directors and executive officers are
charged the same rates of interest and loan fees as are charged to employees of
the Company, which interest rates and fees are slightly lower than charged to
nonemployee borrowers. The amounts of loans outstanding to directors, executive
officers, principal shareholders, and companies with which they are associated
was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------ ------
<S> <C> <C>
Beginning balance.......................................... $1,393 $1,318
Loans made................................................. 656 704
Loan repayments made....................................... (731) (698)
Other...................................................... -- (247)
------ ------
Ending balance............................................. $1,318 $1,077
====== ======
</TABLE>
Certain directors at December 31, 1996 were no longer directors at December
31, 1997. Balances outstanding to such persons are reflected in the Other
category above.
F-16
<PAGE> 65
COWLITZ BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
The chairman of the Company owns a securities brokerage franchise of Robert
Thomas Securities, which leases space from the Company.
13. EMPLOYEE BENEFIT PLAN:
The Bank has a contributory retirement savings plan covering substantially
all full-time and part-time employees. The amount of the Bank's annual
contribution is at the discretion of the Board of Directors. The Bank
contributed $115 and $97 for the years ended December 31, 1997 and 1996,
respectively.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires the disclosure of the fair value of financial instruments. A financial
instrument is defined as cash, evidence of an ownership interest in an entity,
or a contract that conveys or imposes the contractual right or obligation to
either receive or deliver cash or another financial instrument. Examples of
financial instruments included in the Company's balance sheets are cash, federal
funds sold or purchased; debt and equity securities; loans; demand, savings and
other interest-bearing deposits; notes and debentures. Examples of financial
instruments, which are not included in the Company's balance sheets, are
commitments to extend credit and standby letters of credit.
Fair value is defined as the amount at which a financial instrument could
be exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation, and is best evidenced by a quoted market price if
one exists.
The statement requires the fair value of deposit liabilities with no stated
maturity, such as demand deposits, NOW and money market accounts, to equal the
carrying value of these financial instruments and does not allow for the
recognition of the inherent value of core deposit relationships when determining
fair value. While the statement does not require disclosure of the fair value of
nonfinancial instruments, such as the Company's premises and equipment, its
banking and trust franchises and its core deposit relationships, the Company
believes that these nonfinancial instruments have significant fair value.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to estimate
that value:
- Cash and due from banks -- For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
- Investment securities -- For securities held for investment purposes,
fair values are based on quoted market prices or dealer quotes. For other
securities, fair value equals quoted market price, if available. If a
quoted market price is not available, fair value is estimated using
quoted market prices for similar securities.
- Loans -- For certain variable rate loans, fair value is estimated at
carrying value, as these loans reprice to market frequently. The fair
value of other types of loans is estimated by discounting the future cash
flows, using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
- Deposit liabilities -- The fair value of demand deposits, savings
accounts and certain money market deposits is the amount payable on
demand at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated by discounting the future cash
flows, using the rates currently offered for deposits of similar
remaining maturities.
- Short-term borrowings -- The carrying amounts of borrowings under
repurchase agreements and short-term borrowings approximate their fair
values.
F-17
<PAGE> 66
COWLITZ BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
- Long-term borrowings -- Rates currently available to the Bank for debt
with similar terms and remaining maturities are used to estimate the fair
value of existing debt.
- Commitments to extend credit, credit card commitments and standby letters
of credit -- The fair values of commitments to extend credit, credit card
commitments and standby letters of credit were not material as of
December 31, 1997 and 1996.
The estimated fair values of the Bank's financial instruments at December
31 were as follows:
<TABLE>
<CAPTION>
1996 1997
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 20,905 $20,905.. $ 23,109 $ 23,109
Investment securities 5,391 5,399... 8,481 8,503
Loans, net of allowance for loan losses 124,657 124,202.. 129,993 130,093
Federal Home Loan Bank stock 2,463 2,463... 2,658 2,658
Financial liabilities:
Demand 16,821 16,821.. 27,141 27,141
Savings and interest-bearing deposits 30,768 30,768.. 46,454 46,454
Certificates of deposit 75,708 76,032.. 62,614 62,524
Short-term borrowings 550 550..... 725 725
Long-term borrowings 22,842 22,544.. 21,900 21,824
</TABLE>
15. PARENT-COMPANY-ONLY FINANCIAL DATA:
The following sets forth the condensed financial information of the Company
on a stand-alone basis:
STATEMENT OF CONDITION
(UNCONSOLIDATED)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1996 1997
------- -------
<S> <C> <C>
Assets:
Cash and due from depository institutions...................... $ 1,061 $ 937
Investment in bank subsidiary.................................. 12,234 14,147
Other assets................................................... 7 156
------- -------
Total assets........................................... $13,302 $15,240
======= =======
Liabilities and shareholders' equity:
Liabilities:
Long-term borrowings........................................ $ 1,478 $ 1,319
Other liabilities........................................... 11 34
------- -------
Total liabilities...................................... 1,489 1,353
Shareholders' equity........................................... 11,813 13,887
------- -------
Total liabilities and shareholders' equity............. $13,302 $15,240
======= =======
</TABLE>
F-18
<PAGE> 67
COWLITZ BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
STATEMENT OF INCOME
(UNCONSOLIDATED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Income:
Income from subsidiaries............................... $ 238 $ 56 $ 54
------ ------ ------
Total income................................... 238 56 54
------ ------ ------
Expenses:
Interest expense....................................... 148 130 116
Other expense.......................................... 245 334 353
------ ------ ------
Total expenses................................. 393 464 469
------ ------ ------
Loss before income tax benefit and equity in
undistributed earnings of bank............... (155) (408) (415)
Income tax benefit....................................... 108 138 135
------ ------ ------
Net loss before equity in undistributed
earnings of bank............................. (47) (270) (280)
Equity in undistributed earnings of bank................. 2,145 2,767 2,404
------ ------ ------
Net income..................................... $2,098 $2,497 $2,124
====== ====== ======
</TABLE>
STATEMENT OF CASH FLOWS
(UNCONSOLIDATED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 2,098 $ 2,497 $ 2,124
Adjustments to reconcile net income to net cash provided by
operating activities:
Undistributed earnings of the bank..................... (2,145) (2,767) (2,404)
Decrease (increase) in other assets.................... 29 39 (149)
Increase (decrease) in other liabilities............... 13 (5) 23
------- ------- -------
Net cash used by operating activities............... (5) (236) (406)
------- ------- -------
Cash flows from investing activities:
Capital contributions to bank............................... (500) -- --
Capital payments from bank.................................. -- -- 500
------- ------- -------
Net cash (used for) provided by investing
activities........................................ (500) -- 500
------- ------- -------
Cash flows from financing activities:
Net payments from long-term borrowings...................... (134) (146) (159)
Proceeds from issuance of common stock...................... 2,191 19 67
Dividends paid.............................................. (80) (101) (126)
------- ------- -------
Net cash provided by (used for) financing
activities........................................ 1,977 (228) (218)
------- ------- -------
Net increase (decrease) in cash and cash equivalents.......... 1,472 (464) (124)
Cash and cash equivalents at beginning of year................ 53 1,525 1,061
------- ------- -------
Cash and cash equivalents at end of year...................... $ 1,525 $ 1,061 $ 937
======= ======= =======
</TABLE>
F-19
<PAGE> 68
COWLITZ BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1997
Interest income...................................... $3,594 $ 3,622 $3,919 $ 3,951
Interest expense..................................... 1,761 1,676 1,796 1,709
------ ------ ------ ------
Net interest income........................ 1,833 1,946 2,123 2,242
Provision for loan losses............................ (91) (98) (111) (75)
Noninterest income................................... 154 161 219 215
Noninterest expense.................................. 1,116 1,214 1,509 1,446
------ ------ ------ ------
Income before income taxes................. 780 795 722 936
Provision for income taxes........................... 265 271 245 328
------ ------ ------ ------
Net income................................. $ 515 $ 524 $ 477 $ 608
====== ====== ====== ======
Basic earnings per share............................. $ .18 $ .19 $ .17 $ .22
====== ====== ====== ======
Diluted earnings per share........................... $ .18 $ .19 $ .17 $ .22
====== ====== ====== ======
1996
Interest income...................................... $3,219 $ 3,342 $3,491 $ 3,581
Interest expense..................................... 1,425 1,465 1,613 1,671
------ ------ ------ ------
Net interest income........................ 1,794 1,877 1,878 1,910
Provision for loan losses............................ (16) (77) (82) (106)
Noninterest income................................... (138) 133 141 160
Noninterest expense.................................. 907 917 931 927
------ ------ ------ ------
Income before income taxes................. 733 1,016 1,006 1,037
Provision for income taxes........................... 249 346 342 358
------ ------ ------ ------
Net income................................. $ 484 $ 670 $ 664 $ 679
====== ====== ====== ======
Basic earnings per share............................. $ .17 $ .25 $ .24 $ .24
====== ====== ====== ======
Diluted earnings per share........................... $ .17 $ .25 $ .24 $ .24
====== ====== ====== ======
</TABLE>
17. SUBSEQUENT EVENTS:
On January 12, 1998, the Company had a 3.5-for-1 stock split. All share and
per share amounts have been restated to retroactively reflect the stock split as
well as all previous stock splits.
F-20
<PAGE> 69
IN ADDITION TO THE COWLITZ FINANCIAL CENTER LOCATED IN LONGVIEW,
WASHINGTON, COWLITZ BANK HAS FOUR FULL-SERVICE BRANCHES CONVENIENTLY LOCATED
THROUGHOUT COWLITZ COUNTY.
MAP OF WASHINGTON WITH COWLITZ COUNTY HIGHLIGHTED SHOWING THE LOCATION OF THE
COMPANY'S BRANCHES
LIST OF COWLITZ BANK LOCATIONS: LONGVIEW (2) KELSO, KALAMA, CASTLE ROCK
<PAGE> 70
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATING THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary............................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 9
Dividend Policy....................... 9
Capitalization........................ 10
Dilution.............................. 11
Selected Historical Financial
Information and Other Data.......... 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 13
Business.............................. 27
Management............................ 37
Certain Transactions.................. 41
Principal and Selling Shareholders.... 42
Shares Eligible for Future Sale....... 42
Description of Capital Stock.......... 43
Underwriting.......................... 45
Experts............................... 46
Legal Matters......................... 46
Additional Information................ 47
Index to Financial Statements......... F-1
</TABLE>
------------------------
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
1,000,000 SHARES
LOGO
COWLITZ
BANCORPORATION
COMMON STOCK
------------------------
PROSPECTUS
------------------------
BLACK & COMPANY, INC.
PACIFIC CREST SECURITIES INC.
, 1998
======================================================
<PAGE> 71
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the Common Stock offered hereby.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............... $ 4,531
NASD Filing Fee................................................... 1,995
Nasdaq National Market Listing Fee................................ 27,500
*Printing and Engraving Expenses.................................. 40,000
*Legal Fees and Expenses.......................................... 100,000
*Accounting Fees and Expenses..................................... 100,000
Blue Sky Fees and Expenses (including fees of counsel)............ 5,000
Transfer Agent and Registrar Fee.................................. 5,000
Miscellaneous Expenses............................................ 15,974
--------
Total................................................... $300,000
========
</TABLE>
- ---------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act authorize a court to award, or a corporation's board of
directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article X of the Registrant's Amended and Restated Articles
of Incorporation (Exhibit 3.1 hereto) provides for indemnification of the
Registrant's directors to the maximum extent permitted by Washington law, and
also permits the Registrant's board of directors to indemnify the Registrant's
officers, employees and agents. The directors and officers of the Registrant
also may be indemnified against liability they may incur for serving in such
capacity pursuant to a liability insurance policy maintained by the Company for
such purpose.
Section 23B.08.320 of the Washington Business Corporation Act authorizes a
corporation to limit a director's liability to the corporation or its
Shareholders for monetary damages for acts or omissions as a director. Article
VII of the Registrant's Amended and Restated Articles of Incorporation contains
provisions implementing such limitations on a director's liability to the
Registrant and its Shareholders, except in certain circumstances involving (i)
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) any unlawful distribution to stockholders,
or (iv) any transaction from which the director derived an improper personal
benefit.
The proposed form of Underwriting Agreement (Exhibit 1.1 hereto) contains
certain provisions regarding the indemnification of officers and directors of
the Registrant by the Underwriters.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referenced in Item 14 of this Registration
Statement, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion
II-1
<PAGE> 72
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On January 31, 1995, the Registrant sold 49,250 shares of its Common Stock
(861,875 shares post-split) to 47 individuals that were then shareholders of the
Registrant. The Registrant received $2,229,547 in the offering. These sales were
exempt under Regulation A of the Securities Act.
Between October 9, 1996 and the date hereof, the Registrant has sold 33,565
shares post-split to 50 employees of the Registrant pursuant to the Cowlitz
Bancorporation Employee Stock Purchase Plan. The Registrant has received
$157,814 in this offering. The sales are exempt under Section 4(2) and Section
3(a)(11) of the Securities Act.
On September 30, 1997, the Company granted to each of Benjamin Namatinia
and Charles Jarrett, executive officers of the Company, options to acquire
192,500 shares of common stock of the Company at a price of $5.71 per share. The
grant was exempt under Section 4(2) of the Securities Act.
In December 1997, the Company sold 350 shares (post-split) each to two
directors of the Bank at a price of $5.71 per share. The sales were exempt under
Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement among the Registrant, the Selling Shareholders and
the Underwriters.
3.1* Form of Restated and Amended Articles of Incorporation of Registrant.
3.2* Bylaws of Registrant.
5.1* Opinion of Foster Pepper & Shefelman PLLC.
10.1* Advances Security and Deposit Agreement dated March 29, 1991 between Federal Home
Loan Bank of Seattle and Cowlitz Bank.
10.2* Federal Home Loan Bank of Seattle Form of Promissory Note (Credit Line Fixed Rate
Advance).
10.3* Federal Home Loan Bank of Seattle Promissory Note No. 75494 dated May 7, 1997
(Cash Management Advance Credit Line).
10.4* Promissory Note dated January 15, 1992 between Key Bank of Washington and Cowlitz
Bancorporation.
10.5* Form of 8 1/2% Subordinated Promissory Note due February 15, 2000.
10.6* Purchase and Assumption Agreement dated as of March 5, 1997 between Wells Fargo
Bank, N.A. and Cowlitz Bank.
10.7* Lease Agreement dated October 7, 1963 between Twin City Development Co. and Bank
of Cowlitz County.
10.8* Assignment of Lease dated March 4, 1976 between Bank of the West and Old National
Bank of Washington.
10.9* Assignment of Lease dated March 30, 1979 between Old National Bank of Washington
and Pacific National Bank of Washington.
10.10* Extension of Lease dated April 1, 1989 between Triangle Development Company and
First Interstate Bank of Washington, N.A.
10.11* Employment Agreement dated January 1, 1998 between Cowlitz Bancorporation and
Charles W. Jarrett.
</TABLE>
II-2
<PAGE> 73
<TABLE>
<C> <S>
10.12* Employment Agreement dated January 1, 1998 between Cowlitz Bancorporation and Ben
Namatinia.
10.13* (Deleted)
10.14* Cowlitz Bancorporation 1997 Stock Option Plan.
10.15* Form of Stock Option Agreement.
10.16* Cowlitz Bancorporation Employee Stock Purchase Plan.
11.1 Computation of Per Share Earnings.
21.1* List of all Subsidiaries of the Registrant.
23.1 Consent of Foster Pepper & Shefelman PLLC (contained in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
24.1* Power of Attorney from officers and directors (contained on signature page).
27 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 74
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Longview, State of
Washington, on February 24, 1998.
COWLITZ BANCORPORATION
By /s/ CHARLES W. JARRETT
------------------------------------
Charles W. Jarrett, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- -------------------------------- ------------------
<S> <C> <C>
/s/ BENJAMIN NAMATINIA* Chairman, Chief Executive February 24, 1998
- --------------------------------------------- Officer and Director
Benjamin Namatinia
/s/ CHARLES W. JARRETT President, Chief Operating February 24, 1998
- --------------------------------------------- Officer and Director
Charles W. Jarrett
/s/ DONNA P. GARDNER* Vice President -- February 24, 1998
- --------------------------------------------- Secretary/Treasurer (Chief
Donna P. Gardner Financial Officer and Principal
Accounting Officer,
/s/ MARK F. ANDREWS, JR.* Director February 24, 1998
- ---------------------------------------------
Mark F. Andrews, Jr.
/s/ LARRY M. LARSON* Director February 24, 1998
- ---------------------------------------------
Larry M. Larson
/s/ E. CHRIS SEARING* Director February 24, 1998
- ---------------------------------------------
E. Chris Searing
*By /s/ CHARLES W. JARRETT
- ---------------------------------------------
Charles W. Jarrett
Attorney-in-fact
</TABLE>
II-4
<PAGE> 75
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ -------------------------------------------------------------------------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement among the Registrant, the Selling
Shareholders and the Underwriters.
3.1* Form of Restated and Amended Articles of Incorporation of Registrant.
3.2* Bylaws of Registrant.
5.1* Opinion of Foster Pepper & Shefelman PLLC.
10.1* Advances Security and Deposit Agreement dated March 29, 1991 between
Federal Home Loan Bank of Seattle and Cowlitz Bank.
10.2* Federal Home Loan Bank of Seattle Form of Promissory Note (Credit Line
Fixed Rate Advance).
10.3* Federal Home Loan Bank of Seattle Promissory Note No. 75494 dated May 7,
1997 (Cash Management Advance Credit Line).
10.4* Promissory Note dated January 15, 1992 between Key Bank of Washington and
Cowlitz Bancorporation.
10.5* Form of 8 1/2% Subordinated Promissory Note due February 15, 2000.
10.6* Purchase and Assumption Agreement dated as of March 5, 1997 between Wells
Fargo Bank, N.A. and Cowlitz Bank.
10.7* Lease Agreement dated October 7, 1963 between Twin City Development Co.
and Bank of Cowlitz County.
10.8* Assignment of Lease dated March 4, 1976 between Bank of the West and Old
National Bank of Washington.
10.9* Assignment of Lease dated March 30, 1979 between Old National Bank of
Washington and Pacific National Bank of Washington.
10.10* Extension of Lease dated April 1, 1989 between Triangle Development
Company and First Interstate Bank of Washington, N.A.
10.11* Employment Agreement dated January 1, 1998 between Cowlitz Bancorporation
and Charles W. Jarrett.
10.12* Employment Agreement dated January 1, 1998 between Cowlitz Bancorporation
and Ben Namatinia.
10.13* (Deleted)
10.14* Cowlitz Bancorporation 1997 Stock Option Plan.
10.15* Form of Stock Option Agreement.
10.16* Cowlitz Bancorporation Employee Stock Purchase Plan.
11.1 Computation of Per Share Earnings.
21.1* List of all Subsidiaries of the Registrant.
23.1* Consent of Foster Pepper & Shefelman PLLC (contained in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
24.1* Power of Attorney from officers and directors (contained on signature
page).
27 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed
<PAGE> 1
DRAFT 02/24/98
1,000,000 SHARES*
COWLITZ BANCORPORATION
COMMON STOCK
(WITHOUT PAR VALUE)
FORM OF
UNDERWRITING AGREEMENT
_______________, 1998
Black & Company, Inc.
As Representative of the several Underwriters
One S.W. Columbia, Suite 1200
Portland, Oregon 97258
Ladies and Gentlemen:
Cowlitz Bancorporation, a Washington corporation (the "Company"),
proposes to sell an aggregate of 1,000,000 shares (the "Firm Shares") of the
Company's common stock, no par value per share (the "Common Stock"), to you and
to the several other underwriters named in Schedule I hereto (collectively, the
"Underwriters"), for whom you are acting as representative (the
"Representative"). The Company, along with shareholders, Harry R. Calbom, Jr.
and Wallace C. Trotter (Messrs. Calbom and Wallace, are collectively referred to
herein as the "Selling Shareholders" and individually as the "Selling
Shareholder"), also propose to sell at the Underwriters' option (the "Option")
an aggregate of up to 150,000 additional shares of Common Stock (the "Option
Shares") on the terms and for the purposes set forth in Section 1(c). The Firm
Shares and the Option Shares are referred to collectively herein as the
"Shares."
Each of the Company and the Selling Shareholders confirms as follows its
agreement with the Representative and the several other Underwriters.
- ---------------
* Plus an option to purchase up to an additional 150,000 shares to cover
overallotments.
<PAGE> 2
1. AGREEMENT TO SELL AND PURCHASE.
(a) On the basis of the representations, warranties and agreements of
the parties herein contained and subject to all of the terms and conditions of
this Agreement, (i) the Company agrees to sell an aggregate of 1,000,000 shares
of Common Stock to the several Underwriters and (ii) each of the Underwriters,
severally and not jointly, agrees to purchase from the Company the respective
number of Firm Shares set forth opposite that Underwriter's name in Schedule I
hereto, at the purchase price of $________ for each Firm Share, subject to
adjustments in accordance with Section 8 hereof.
(b) The Underwriters propose to make a public offering of their
respective portions of the Shares as soon after the registration statement on
Form S-1 (File No. ___________), as amended, has become effective as in the
Representative's judgment is advisable.
(c) Subject to all the terms and conditions of this Agreement, each of
the Company and the Selling Shareholders grants the Option to the Underwriters
to purchase, severally and not jointly, Option Shares at the same price per
share as the Underwriters shall pay for the Firm Shares as follows: (i) the
Company grants the Option to purchase up to a maximum of 133,000 Option Shares
and (ii) each of the Selling Shareholders grants the Option to purchase up to a
maximum of 8,500 Option Shares. The Option may be exercised only to cover
overallotments in the sale of the Firm Shares by the Underwriters and may be
exercised in whole or in part at any time (but not more than once) on or before
the 30th day after the date of this Agreement upon written or facsimile notice
(the "Option Shares Notice") by the Representative to the Company no later than
12:00 noon, New York City time, at least two and no more than five business days
before the date specified for the closing in the Option Shares Notice (the
"Option Closing Date") setting forth the aggregate number of Option Shares to be
purchased and the time and date for such purchase. If the Underwriters exercise
the Option in part, the amount of the Option Shares to be purchased by the
Underwriters will be first satisfied out of the amount of the Company's 133,000
Option Shares with the balance, if any, out of the Selling Shareholders'
aggregate 17,000 Option Shares, in an equal proportion between the two Selling
Shareholders. The number of Option Shares to be purchased by each Underwriter
shall be in the same proportion to the total number of Option Shares being
purchased as the number of Firm Shares being purchased by such Underwriter bears
to the total number of Firm Shares, adjusted by you in such manner as to avoid
fractional shares.
2. DELIVERY AND PAYMENT.
(a) Payment for the Firm Shares to be sold hereunder is to be made in
New York Clearing House funds by wire transfer to an account designated in
writing by the Company for the Shares to be sold by it against delivery of
certificates therefor to the Representatives for the several accounts of the
Underwriters at such location in New York, New York as may be specified by the
Representatives. Such payment and delivery are to be authorized at a closing to
take place at the offices of _______________________________________________
at _______ a.m., Portland time, on the fourth business day after the date of
this Agreement or at such other time and date not later than four business days
thereafter as you and the Company shall agree upon, such time and date being
herein referred to as the "Closing Date." (As used herein, "business day" means
a day on which the New York Stock Exchange is open for trading and on which
banks in New York are open for business and not permitted by law or executive
order to be closed.)
(b) To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above except that
payment to each Selling Shareholder will be by wire transfer to an account
designated in writing by such Selling Shareholder) will take place at the
2
<PAGE> 3
offices specified above at the time and date (which may be the Closing Date)
specified in the Option Shares Notice.
(c) Certificates evidencing the Shares shall be in definitive form and
shall be registered in such names and such denominations as the Representative
shall request at least two business days prior to the Closing Date or the Option
Closing Date, as the case may be, by written notice to the Company. For the
purpose of expediting the checking and packaging of certificates for the Shares,
the Company agrees to make such certificates available for inspection at 10:00
a.m. on the business day preceding the Closing Date or the Option Closing Date,
as the case may be.
(d) The cost of any original issue tax stamps and any transfer or other
taxes in connection with the issuance and delivery of the Firm Shares by the
Company and Option Shares by the Company and the Selling Shareholders to the
respective Underwriters shall be borne by the Company. The Company will hold
each Underwriter and any subsequent holder of the Shares harmless from any and
all liabilities with respect to, or resulting from any failure or delay by the
Company in paying, federal and state stamp and other transfer taxes, if any,
that may be payable or determined to be payable in connection with the original
issuance, transfer or sale to such Underwriter of the Firm Shares and Option
Shares.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING SHAREHOLDERS.
The Company and the Selling Shareholders, jointly and severally,
represent, warrant and covenant to each Underwriter that:
(a) A registration statement on Form S-1 (File No. _________) with
respect to the Shares has been carefully prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"), and
the Rules and Regulations (the "Rules and Regulations") of the United States
Securities and Exchange Commission (the "Commission") thereunder and has been
filed with the Commission. Copies of such registration statement, including any
amendments thereto, the preliminary prospectuses (meeting the requirements of
the Rules and Regulations) contained therein and the exhibits, financial
statements and schedules, as finally amended and revised, have heretofore been
delivered by the Company to you. Such registration statement, as amended,
together with any registration statement filed by the Company pursuant to Rule
462(b) of the Act, herein referred to collectively as the "Registration
Statement," which shall be deemed to include all information omitted therefrom
in reliance upon Rule 430A and contained in the Prospectus referred to below,
has been declared effective by the Commission under the Act and no
post-effective amendment to the Registration Statement has been filed as of the
date of this Agreement. "Prospectus" means (i) the form of prospectus first
filed with the Commission pursuant to Rule 424(b), or (ii) the last preliminary
prospectus included in the Registration Statement filed prior to the time it
becomes effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers of the
Shares, together with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus
included in the Registration Statement prior to the time it becomes effective is
herein referred to as a "Preliminary Prospectus."
(b) The Company has been duly organized and is an active corporation
under the laws of the State of Washington, with corporate power and authority to
own or lease its properties and conduct its business as described in the
Registration Statement, and has only one subsidiary, The Cowlitz Bank (the
"Bank"), a Washington state chartered bank. The Bank has been duly organized and
is validly existing as a state bank under the laws of the State of Washington.
The Bank continues to hold a valid certificate
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<PAGE> 4
or license to do business as a state bank in Washington and has full power and
authority to conduct its business as such and as described in the Registration
Statement.
(c) The outstanding shares of Common Stock of the Company have been duly
authorized and validly issued, are fully paid and nonassessable, and were not
issued in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities. The Shares have been duly authorized by
all necessary corporate action of the Company and when issued and paid for as
contemplated by this Agreement will be validly issued, fully paid and
nonassessable, and no preemptive rights of shareholders exist under any statute
or otherwise with respect to any of the Shares or the issue and sale thereof.
All of the issued shares of capital stock of the Bank have been duly and validly
authorized and issued, are fully paid and non-assessable, and are owned directly
by the Company, free and clear of all liens, encumbrances, equities or claims.
No holder of any securities of the Company or any other person has the right,
contractual or otherwise, which has not been satisfied or effectively waived, to
cause the Company to sell or otherwise issue to them, or to permit them to
underwrite the sale of, any of the Shares or the right to have any shares of
Common Stock or other securities of the Company included in the Registration
Statement or the right, as a result of the filing of the Registration Statement,
to require registration under the Act of any shares of Common Stock or other
securities of the Company. Except as described in the Prospectus, there are no
(i) outstanding securities or obligations of the Company or the Bank convertible
into or exchangeable for or evidencing the right to purchase or subscribe for
any capital stock of the Company or the Bank, (ii) warrants, rights or options
to subscribe for or purchase from the Company or the Bank any such capital stock
or any such convertible or exchangeable securities or obligations, or (iii)
obligations of the Company or the Bank to issue any shares of capital stock, any
such convertible or exchangeable securities or obligations, or any such
warrants, rights or options.
(d) The information set forth under "Capitalization" in the Prospectus
is true and correct. All of the Shares conform to the description set forth
under "Description of Capital Stock" in the Registration Statement.
(e) The Commission has not issued an order preventing or suspending the
use of any Preliminary Prospectus relating to the proposed offering of the
Shares or instituted proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any amendments or supplements thereto will
contain, all statements that are required to be stated therein by, and will
conform to, the requirements of the Act and the Rules and Regulations. There are
no contracts or documents that would be required by the Act or by the Rules and
Regulations to be filed as exhibits to the Registration Statement or described
in the Registration Statement that have not been so filed or described. The
Registration Statement and any amendment thereto do not contain, and through the
Closing Date will not contain, any untrue statement of a material fact and do
not omit, and through the Closing Date will not omit, to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading. The Prospectus and any amendments or supplements thereto do not
contain and will not contain, any untrue statement of material fact and do not
omit, and will not omit, to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that the Company makes no representations or warranties as to information
contained in or omitted from the Registration Statement or the Prospectus, or
any such amendment or supplement, in reliance upon, and in conformity with,
written information furnished to the Company by or on behalf of any Underwriter
through the Representative specifically for use in the preparation thereof.
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<PAGE> 5
(f) The consolidated financial statements of the Company, together with
related notes and schedules as set forth in the Registration Statement, present
fairly the financial position and the results of operations and cash flows of
the Company at the indicated dates and for the indicated periods. Such
consolidated financial statements and related schedules have been prepared in
accordance with generally accepted accounting principles, consistently applied
throughout the periods involved, except as disclosed therein, and all
adjustments necessary for a fair presentation of results for such periods have
been made. The summary consolidated financial and statistical data included in
the Registration Statement present fairly the information shown therein, and
such data have been compiled on a basis consistent with the financial statements
of the Company presented therein.
(g) The Company and the Bank are in compliance in all material respects
with all applicable laws administered by and regulations of the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation and the Washington Department of Financial Institutions, as the case
may be (the "Bank Regulatory Authorities"), the failure to comply with which
would have a material adverse effect upon the assets or properties, business
prospects, results of operations or financial condition of the Company and the
Bank, taken as a whole. Other than the Bank Regulatory Authorities, neither the
Company nor the Bank is subject to regulation as a bank holding company or a
bank, respectively, by any other governmental authority. Neither the Company nor
the Bank is a party to any written agreement or memorandum of understanding
with, or a party to any commitment letter or similar undertaking to, or is
subject to an order or directive by, or is a recipient of any extraordinary
supervisory letter from any Bank Regulatory Authority, specifically directed at
the Company or the Bank, which restricts materially the conduct of its business,
or in any manner relates to its capital adequacy, its credit policies or its
management, nor have the Company and the Bank, been advised in writing by any
Bank Regulatory Authority that it is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any such order,
decree, agreement, memorandum of understanding, extraordinary supervisory
letter, commitment letter or similar submission, specifically directed at the
Company or the Bank. The Company and the Bank, and their respective operations,
comply in all material respects with all applicable laws and regulations,
including, without limitation, those relating to the practice of banking.
(h) Arthur Andersen (the "Accountants"), who have certified certain of
the consolidated financial statements filed with the Commission as part of the
Registration Statement, are independent public accountants as required by the
Act and the Rules and Regulations.
(i) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company or the Selling Shareholders, threatened against the
Company or the Bank, before any court or administrative agency or otherwise that
if determined adversely to the Company or the Bank would (i) result in a
material adverse change in the condition (financial or other), business
prospects, net worth, or (ii) prevent the consummation of the transactions
contemplated hereby.
(j) The Company and the Bank have good and marketable title in fee
simple to all items of real property and marketable title to all personal
property owned by them, in each case free and clear of any security interests,
liens, encumbrances, equities, claims and other defects, except such as do not
materially and adversely affect the value of such property and do not interfere
with the use made or proposed to be made of such property by the Company or the
Bank, and any real property and buildings held under lease by the Company or the
Bank are held under valid, subsisting and enforceable leases, with such
exceptions as are not material and do not interfere with the use made or
proposed to be made of such property and buildings by the Company and the Bank.
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<PAGE> 6
(k) The Company, have filed all federal, state and local income tax
returns that have been required to be filed and has paid all taxes indicated by
said returns and all assessments received by it to the extent that such taxes
have become due and are not being contested in good faith. All tax liabilities
have been adequately provided for in the financial statements of the Company.
(l) Since the respective dates as of which information is given in the
Registration Statement, as it may be amended or supplemented, (i) there has not
been a material adverse change in or, to the knowledge of the Company, any
development involving a prospective change in or affecting, the condition
(financial or other), business prospects, net worth or results of operations of
the Company, whether or not occurring in the ordinary course of business; (ii)
the Company and the Bank, have not incurred any material liability or
obligation, direct or contingent, nor entered into any material transaction not
in the ordinary course of business; (iii) the Company has not purchased any of
its outstanding capital stock, nor declared, paid or otherwise made any dividend
or distribution of any kind on its capital stock; (iv) there has not been any
material change in the capital stock, short-term debt or long-term debt of the
Company and (v) there is no transaction that is probable of being entered into
by the Company that is material to the Company, except in each case as set forth
in the Registration Statement. The Company has no material contingent
obligations that are not disclosed in the Company's consolidated financial
statements, that are included in the Registration Statement, as it may be
amended or supplemented.
(m) The Company and the Bank are not, and with the giving of notice or
lapse of time or both will not be, in violation of or in default under their
respective Articles of Incorporation or bylaws. Neither the Company nor the Bank
is, or with the giving of notice or lapse of time or both will be, in violation
of or in default under any agreement, lease, contract, indenture or other
instrument or obligation to which the Company or the Bank is a party or by which
they, or any of their properties, are bound and which default is of material
significance in respect of the condition (financial or other), business
prospects, net worth or results of operations of the Company. The execution and
delivery of this Agreement and the consummation of the transactions herein
contemplated and the fulfillment of the terms hereof will not conflict with or
result in a breach of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, lease or other agreement or
instrument to which the Company or the Bank is a party or by which the Company,
the Bank or any of their respective properties are bound, or of the Articles of
Incorporation or bylaws of the Company or the Bank or any order, rule or
regulation applicable to the Company or the Bank of any court or of any
regulatory body or administrative agency or other governmental body having
jurisdiction.
(n) The Company has full legal right, power and authority to enter into
this Agreement and to perform the transactions contemplated hereby and thereby
and to file the Registration Statement, and each has been duly authorized,
executed and delivered by the Company, and this Agreement, each constitutes a
valid and binding obligation of the Company enforceable in accordance with its
terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting the
rights of creditors' generally, and except to the extent that rights of
indemnity or contribution under this Agreement may be limited by federal or
state securities laws or the public policies underlying such laws or by general
equitable principles. Each approval, consent, order, authorization designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by the
Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the Commission,
the National Association of Securities Dealers, Inc. (the "NASD") or such
additional steps as may be necessary to qualify the Shares for public offering
by the
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<PAGE> 7
Underwriters under state securities or Blue Sky laws) has been obtained or made
and is in full force and effect.
(o) The Company and the Bank each owns or possesses all material
trademarks, service marks, trade names, licenses, copyrights and proprietary or
other confidential information currently employed by it in connection with its
businesses, and neither the Company, the Bank nor any Selling Shareholder has
received any notice of infringement of or conflict with asserted rights of any
third party with respect to any of the foregoing.
(p) There are no material labor disputes with the employees of the
Company or the Bank other than as set forth in the Registration Statement.
(q) Neither the Company nor the Bank is in violation of any federal or
state law or regulation relating to occupational safety and health or to the
storage, handling or transportation of hazardous or toxic material; and the
Company and the Bank, have received all permits, licenses or other approvals
required of them under applicable federal and state occupational safety and
health and environmental laws and regulations to conduct their respective
businesses, and each of the Company and the Bank, are in compliance with all
terms and conditions of any such permit, license or approval.
(r) The Company and the Bank are insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
are prudent and customary in the businesses in which they are engaged; neither
the Company nor the Bank has been refused any insurance coverage sought or
applied for; and neither the Company nor the Bank has any reason to believe that
it will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition (financial or otherwise), business prospects, net
worth, or results of operations of the Company and the Bank taken as a whole.
(s) Other than the Company's interest in the Bank and the Bank's
interest in the Federal Home Loan Bank of Seattle, neither the Company nor the
Bank owns any shares of stock or any other equity securities of any corporation
or has any equity interest in any firm, partnership, association or other
entity.
(t) All offers and sales of the Company's capital stock prior to the
date hereof were at all relevant times exempt from the registration requirements
of the Act, and were the subject of an available exemption from the registration
requirements of all applicable state securities or Blue Sky laws; and all
offering materials prepared in connection therewith, if any, did not include any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(u) The Company and the Bank have not taken, directly or indirectly, any
action designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the shares of its capital stock to facilitate the sale or resale of the
Shares.
(v) The Company is not an investment company within the meaning of such
term under the Investment Company Act of 1940, as amended (the "1940 Act") and
the rules and regulations of the Commission thereunder, and this transaction
will not cause the Company to become an investment company subject to
registration under the 1940 Act.
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<PAGE> 8
(w) The Company and the Bank maintain a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(x) The Company and the Bank are in compliance in all material respects
with all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for
which the Company or the Bank would have any liability; neither the Company nor
the Bank has incurred, or expects to incur, liability under (i) Title IV of
ERISA with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the "Code");
and each "pension plan" for which the Company or the Bank would have any
liability that is intended to be qualified under Section 401(a) of the Code is
so qualified in all material respects and nothing has occurred, whether by
action or by failure to act, that would cause the loss of such qualification.
(y) Neither the Company nor the Bank has at any time during the last
five years (i) made any unlawful contribution to any candidate for public
office, or failed to disclose fully any contribution in violation of law, or
(ii) made any payment to any federal or state governmental officer or official,
or other person charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States or any
jurisdiction thereof.
(z) Neither the Company, the Bank nor any of their respective officers,
directors or affiliates have caused any person, other than the Underwriters, to
be entitled to reimbursement or compensation of any kind, including, without
limitation, any compensation that would be includable as underwriter
compensation under the NASD's Corporate Financing Rule with respect to the
offering of the Shares, as a result of the consummation of such offering based
on any activity of such person as a finder, agent, broker, investment adviser or
other financial service provider.
4. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS.
Each Selling Shareholder, severally and not jointly, represents and
warrants and covenants to each Underwriter that:
(a) The execution and delivery of this Agreement and the consummation of
the transactions herein contemplated and the fulfillment of the terms hereof
will not conflict with or result in a breach of any of the terms or provisions
of, or constitute a default under, any indenture, mortgage, deed of trust, lease
or other agreement or instrument to which such Selling Shareholder is a party or
by which such Selling Shareholder is bound, or any order, rule or regulation
applicable to such Selling Shareholder of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction.
(b) Such Selling Shareholder has the legal capacity to enter into this
Agreement and has the full right, power and authority to perform the
transactions contemplated hereby and thereby, and has duly executed and
delivered this Agreement. This Agreement constitutes a valid and binding
obligation of
8
<PAGE> 9
such Selling Shareholder enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, or other similar laws
relating to or affecting the rights of creditors' generally, and except to the
extent that rights of indemnity or contribution under this Agreement may be
limited by federal or state securities laws or the public policies underlying
such laws or by general equitable principles. Each approval, consent, order,
authorization designation, declaration or filing by or with any regulatory,
administrative or other governmental body necessary in connection with the
execution and delivery by such Selling Shareholder of this Agreement and the
consummation of the transactions herein contemplated (except such additional
steps as may be required by the Commission, the National Association of
Securities Dealers, Inc. (the "NASD") or such additional steps as may be
necessary to qualify the Shares for public offering by the Underwriters under
state securities or Blue Sky laws) has been obtained or made and is in full
force and effect.
(c) Such Selling Shareholder has and will have at Option Closing Date
referred good and marketable title to the Option Shares to be sold by such
Selling Shareholder hereunder, free and clear of any pledge, lien, security
interest, encumbrance, claim or equity other than pursuant to this Agreement;
such Selling Shareholder has full right, power and authority to sell, transfer
and deliver the Option Shares to be sold by such Selling Shareholder hereunder;
and upon delivery of the Option Shares to be sold by such Selling Shareholder
hereunder and payment of the purchase price therefor as herein contemplated,
each of the Underwriters will receive good and marketable title to its ratable
share of the Option Shares purchased by it from such Selling Shareholder, free
and clear of any pledge, lien, security interest, encumbrance, claim or equity.
(d) For a period of 180 days from the date hereof, such Selling
Shareholder will not, without the prior written consent of the Representative,
directly or indirectly, offer to sell, sell, grant any option for the sale of,
or otherwise dispose of, any Common Stock of the Company or any securities
convertible into or exercisable for Common Stock of the Company owned by such
Selling Shareholder or with respect to which such Selling Shareholder has the
power of disposition, other than to the Underwriters pursuant to this Agreement.
(e) Such Selling Shareholder has received and is familiar with the
Registration Statement as originally filed with the Commission and the
Preliminary Prospectus contained therein and has no knowledge of any material
fact, condition or information not disclosed in such Preliminary Prospectus
which has adversely affected or could adversely affect the condition, financial
or otherwise, or the earnings, business affairs, or business prospects of the
Company and the Bank considered as one enterprise; such Selling Shareholder is
not prompted to sell the Option Shares to be sold hereunder by any information
concerning the Company or the Bank which is not set forth in such Preliminary
Prospectus; to the best knowledge of such Selling Shareholder, the
representations and warranties of the Company contained in Section 3 hereof are
true and correct.
(f) Such Selling Shareholder has not taken, and will not take, directly
or indirectly, any action which is designed to or which has constituted or which
might reasonably be expected to cause or result in stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Shares.
(g) Certificates in negotiable form for all Option Shares to be sold by
the Selling Shareholder have been placed in custody with the Company for the
purpose of effecting delivery hereunder.
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<PAGE> 10
(h) The information furnished by or on behalf of the Selling Shareholder
for use in the Registration Statement and the Prospectus does not contain any
untrue statement of a material fact or omit to state any material fact necessary
to make such information not misleading.
(i) Such Selling Shareholder has duly executed and delivered in the form
heretofore furnished to the Underwriters a Power of Attorney with Bruce
Alexander and Laura Black of Black & Company, as attorneys-in-fact (each, an
"Attorney-in Fact"). The Power of Attorney is a valid and binding agreement of
the Selling Shareholder. The Attorneys-in-Fact, or either of them, are
authorized to execute and deliver this Agreement on behalf of the Selling
Shareholder, to determine the Purchase Price to be paid by the Underwriters to
the Selling Shareholder, as provided in Section 1 hereof, to authorize the
delivery of the Option Shares to be sold by the Selling Shareholder hereunder,
to accept payment therefor, and otherwise to act on behalf of the Selling
Shareholder in connection with this Agreement. All authorizations, approvals and
consents necessary for the execution and delivery by the Selling Shareholder of
the Power of Attorney have been obtained and are in full force and effect and
the Selling Shareholder has the full right, power and authority to enter into
such Power of Attorney. The performance of the Power of Attorney will not result
in a breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement, trust,
will or other material agreement or instrument to which the Selling Shareholder
is a party or by which the Selling Shareholder is bound, or assuming compliance
with the securities regulation or qualification requirements under applicable
state securities or Blue Sky laws, any statute, order, rule or regulation of any
court or governmental agency or body having jurisdiction over the Selling
Shareholder or the property of the Selling Shareholder.
5. AGREEMENTS OF THE COMPANY.
The Company agrees with the several Underwriters, and the Selling
Shareholders agree, jointly and severally, to use their best effort to cause the
Company to perform, as follows:
(a) The Company will not, either prior to the date on which the
Registration Statement is declared effective (the "Effective Date") or
thereafter during such period as the Prospectus is required by law to be
delivered in connection with sale of the Shares by an Underwriter or dealer,
file any amendment or supplement to the Registration Statement or the
Prospectus, unless a copy thereof shall first have been submitted to the
Representative within a reasonable period of time prior to the filing and the
Representative shall not have objected thereto in good faith.
(b) The Company will use its best efforts to cause the Registration
Statement to become effective and will notify the Representative and its counsel
promptly, and will confirm such advice in writing, (i) when the Registration
Statement has become effective and when any post-effective amendment thereto
becomes effective, (ii) of any request by the Commission for amendments or
supplements to the Registration Statement or the Prospectus or for additional
information, (iii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose or the threat thereof, (iv) of the happening of
any event during the period mentioned in the second sentence of Section 5(e)
that in the judgment of the Company makes any statement made in the Registration
Statement or the Prospectus untrue or that requires the making of any changes in
the Registration Statement or the Prospectus in order to make the statements
therein, in light of the circumstances in which they are made, not misleading,
and (v) of receipt by the Company or any representative or attorney of the
Company of any other communication from the Commission relating to the Company,
the Registration Statement, any Preliminary Prospectus, or the Prospectus. If at
any time the Commission issues any stop order suspending the effectiveness of
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<PAGE> 11
the Registration Statement, the Company will make every reasonable effort to
obtain the withdrawal of such order at the earliest possible moment. If the
Company has omitted any information from the Registration Statement pursuant to
Rule 430A of the Rules and Regulations, the Company will use its best efforts to
comply with the provisions of and make all requisite filings with the Commission
pursuant to said Rule 430A and to notify the Representative promptly of all such
filings.
(c) The Company will furnish to the Representative or its counsel,
without charge, two signed copies of the Registration Statement and any
post-effective amendment thereto, including financial statements and schedules,
and all exhibits thereto and will furnish to the Representative, without charge,
for transmittal to each of the other Underwriters, a copy of the Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules but without exhibits.
(d) The Company will comply with all the provisions of any undertakings
contained in the Registration Statement.
(e) As soon as practicable after the Effective Date, and thereafter from
time to time, the Company will deliver to each of the Underwriters, without
charge, as many copies of the Prospectus or any amendment or supplement thereto
as the Representative may reasonably request. The Company consents to the use of
the Prospectus or any amendment or supplement thereto by the several
Underwriters and by all dealers to whom the Shares may be sold, both in
connection with the offering or sale of the Shares and for any period of time
thereafter during which the Prospectus is required by law to be delivered in
connection therewith. If during such period of time any event shall occur that,
in the judgment of the Company or counsel to the Underwriters, should be set
forth in the Prospectus in order to make any statement therein, in the light of
the circumstances under which it was made, not misleading, or if it is necessary
to supplement or amend the Prospectus to comply with law, the Company will
forthwith prepare and duly file with the Commission an appropriate supplement or
amendment thereto and will deliver to each of the Underwriters, without charge,
such number of copies of such supplement or amendment to the Prospectus as the
Representative may reasonably request.
(f) Prior to any public offering of the Shares, the Company will
cooperate with the Representative and counsel to the Underwriters in connection
with the registration or qualification of the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as the Representative may
reasonably request; provided, however, that in no event shall the Company be
obligated to qualify to do business in any jurisdiction where it is not now so
qualified or to take any action that would subject it to general service of
process in any jurisdiction where it is not now so subject.
(g) During the period of five years commencing on the Effective Date,
the Company will furnish to the Representative and each other Underwriter who
may so request copies of such financial statements and other periodic and
special reports as the Company may from time to time distribute generally to the
holders of any class of its capital stock and will furnish to the Representative
and each other Underwriter who may so request a copy of each annual or other
report it shall be required to file with the Commission.
(h) The Company will make generally available to holders of its
securities as soon as may be practicable but in no event later than the last day
of the 15th full calendar month following the calendar quarter in which the
Effective Date falls, an earnings statement (which need not be audited but shall
be in reasonable detail) for a period of 12 months commencing after the
Effective Date and satisfying the provisions of Section 11(a) of the Act
(including Rule 158 of the Rules and Regulations).
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<PAGE> 12
(i) Whether or not the transactions contemplated by this Agreement are
consummated or this Agreement is terminated, the Company will pay, or reimburse
if paid by the Representative, all costs and expenses incident to the
performance of the obligations of the Company under this Agreement, including
but not limited to costs and expenses of or relating to (i) the preparation,
printing and filing of the Registration Statement and the exhibits thereto, each
Preliminary Prospectus, Prospectus and any amendment or supplement to the
Registration Statement or Prospectus, (ii) the preparation and delivery of
certificates representing the Shares, (iii) the photocopying of this Agreement,
the Agreement among Underwriters, any Dealer Agreements and any Underwriters'
Questionnaires, (iv) printing and furnishing to the Underwriters (including
costs of shipping and mailing) such copies of the Registration Statement, the
Prospectus and any Preliminary Prospectus, and all amendments and supplements
thereto, as may be requested for use in connection with the offering and sale of
the Shares by the Underwriters or by dealers to whom Shares may be sold, (v) the
quotation of the Shares on the Nasdaq National Market, (vi) the fees payable to
the NASD relating to any filings required to be made by the Underwriters with
the NASD, (vii) the registration or qualification of the Shares for offer and
sale under the securities or Blue Sky laws of such jurisdictions designated
pursuant to Section 5(f), including the fees, disbursements and other charges of
counsel to the Underwriters in connection therewith, and the preparation and
photocopying of preliminary, supplemental and final Blue Sky memoranda, (viii)
fees, disbursements and other charges of counsel to the Company (but not those
of counsel for the Underwriters, except as otherwise provided herein), (ix) the
transfer agent for the Shares, and (x) the Company's meal and travel expenses
related to "road show" meetings.
(j) If this Agreement is terminated by the Company pursuant to any of
the provisions hereof (other than pursuant to Section 10 hereof) or if for any
reason the Company is unable to perform its obligations hereunder, the Company
will reimburse the several Underwriters for all out-of-pocket expenses
(including the fees, disbursements and other charges of counsel to the
Underwriters) reasonably incurred by them in connection herewith.
(k) The Company will not at any time, directly or indirectly, take any
action designed, or that might reasonably be expected, to cause or result in, or
that will constitute, stabilization of the price of the shares of Common Stock
to facilitate the sale or resale of any of the Shares.
(l) The Company will apply the net proceeds from the offering and sale
of the Shares to be sold by the Company in the manner set forth in the
Prospectus under "Use of Proceeds."
(m) The Company will not, and will cause each of its officers, directors
and certain shareholders designated by the Representative to enter into
agreements with the Representative to the effect that such officer, director or
shareholder, as the case may be, will not, without the prior written consent of
the Representative, sell, contract to sell, sell short or otherwise dispose of
any shares of Common Stock or other capital stock of the Company or any other
securities exchangeable for or convertible into Common Stock for a period of one
hundred eighty (180) days after the Effective Date, except (i) directors,
officers and shareholders may make bona fide gifts to donees who agree to be
bound by such restrictions and (ii) the Company may issue Common Stock or
options to purchase Common Stock under the Company's stock option plan and
employee stock purchase plan described in the Prospectus.
6. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS.
The obligations of each Underwriter hereunder are subject to the
following conditions:
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(a) Notification that the Registration Statement has become effective
shall be received by the Representative not later than 5:00 p.m., New York City
time, on the date of this Agreement or at such later date and time as shall be
consented to in writing by the Representative and all filings required by Rule
424 and Rule 430A of the Rules and Regulations shall have been made, and the
Shares shall be qualified or registered for sale in such jurisdictions as the
Representative shall request, except where the failure to qualify or register
Shares would not, in the reasonable judgment of the Representative, have a
material adverse effect on its ability to market the Shares.
(b) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall be
pending or threatened by the Commission, (ii) no order suspending the
effectiveness of the Registration Statement or the qualification or registration
of the Shares under the securities or Blue Sky laws of any jurisdiction shall be
in effect, and no proceeding for such purpose shall be pending before or
threatened or contemplated by the authorities of any such jurisdiction, except
where the failure to qualify or register Shares in such jurisdiction would not,
in the reasonable judgment of the Representative, have a material adverse effect
on its ability to market the Shares, (iii) any request for additional
information on the part of the staff of the Commission or any such authorities
shall have been complied with to the satisfaction of the staff of the Commission
or such authorities and (iv) after the date hereof no amendment or supplement to
the Registration Statement or the Prospectus shall have been filed unless a copy
thereof was first submitted to the Representative and the Representative does
not object thereto in good faith, and the Representative shall have received
certificates, dated the Closing Date and the Option Closing Date and signed by
the Chief Executive Officer of the Company and the Chief Financial Officer of
the Company (who may, as to proceedings threatened, rely upon the best of their
information and belief) to the effect of clauses (i), (ii) and (iii).
(c) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) there shall not have been a
material adverse change in the general affairs, business, business prospects,
properties, management, condition (financial or other) or results of operations
of the Company, whether or not arising from transactions in the ordinary course
of business, in each case other than as set forth in the Registration Statement
and the Prospectus and (ii) the Company shall not have sustained any material
loss or interference with its business or properties from fire, explosion, flood
or other casualty, whether or not covered by insurance, or from any labor
dispute or any court or legislative or other governmental order or decree, that
is not set forth in the Registration Statement and the Prospectus, if in the
reasonable judgment of the Representative any such development makes it
impracticable or inadvisable to consummate the sale and delivery of the Shares
by the Underwriters at the public offering price.
(d) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no litigation
or other proceeding instituted against the Company or any of its officers or
directors in their capacities as such, before or by any federal, state or local
court, commission, regulatory body, administrative agency or other governmental
body, domestic or foreign, in which litigation or proceeding an unfavorable
ruling, decision or finding would materially and adversely affect the business,
business prospects, properties, management, condition (financial or other) or
results of operations of the Company.
(e) Each of the representations and warranties of the Company contained
herein shall be true and correct in all material respects at the Closing Date
and, with respect to the Option Shares, at the Option Closing Date, and all
covenants and agreements contained herein to be performed on the part of the
Company and all conditions contained herein to be fulfilled or complied with by
the Company at or
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<PAGE> 14
prior to the Closing Date and, with respect to the Option Shares, at or prior to
the Option Closing Date, shall have been duly performed, fulfilled or complied
with.
(f) The Representative shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Foster Pepper &
Shefelman PLLC, counsel for the Company, dated the Closing Date, or the Option
Closing Date, as the case may be, addressed to the Underwriters (and stating
that it may be relied upon by counsel to the Underwriters) to the effect that:
(i) The Company has been duly organized and is an active
corporation under the laws of the State of Washington; and the Bank, a
Washington state chartered bank, has been duly organized and is validly
existing as a state bank under the laws of the State of Washington and
continues to hold a valid certificate or license to do business as a
state bank in Washington and has full power and authority to conduct its
business as such and as described in the Registration Statement.
(ii) Each of the Company and the Bank has corporate power and
authority to own or lease its properties and the Company and the Bank
have the corporate power to conduct their respective businesses as
described in the Registration Statement and the Prospectus, and the
Company has corporate power to enter into this Agreement and to carry
out all the terms and provisions hereof to be carried out by it.
(iii) The Company has authorized, issued and outstanding capital
stock as set forth under the caption "Description of Capital Stock" in
the Prospectus; the issued and outstanding shares of the Company's
Common Stock have been duly authorized and validly issued, are fully
paid and non-assessable, and were not issued in violation of or subject
to any preemptive rights or other rights to subscribe for or purchase
securities; all offers and sales of the issued and outstanding shares of
the Company's Common Stock were at all relevant times exempt from the
registration requirements of the Act, and were the subject of an
available exemption from the registration requirements of all applicable
state securities or Blue Sky laws.
(iv) All of the issued shares of capital stock of the Bank have
been duly and validly authorized and issued, are fully paid and
non-assessable and are owned directly by the Company, free and clear of
all liens, encumbrances, equities or claims.
(v) The Shares have been duly authorized by all necessary
corporate action of the Company and when issued and paid for as
contemplated by this Agreement will be validly issued, fully paid and
non-assessable; no preemptive rights of shareholders exist under any
statute or otherwise with respect to any of the Shares or the issue or
sale thereof; the Shares conform to the description thereof contained in
the Registration Statement; and the certificates for the Shares comply
as to form with the requirements of Washington law.
(vi) Except as described in the Prospectus, to the knowledge of
such counsel there are no (A) outstanding securities or obligations of
the Company or the Bank convertible or exchangeable into or evidencing
the right to purchase or subscribe for, any shares of capital stock of
the Company or the Bank or (B) outstanding or authorized options,
warrants or rights of any character obligating the Company or the Bank
to issue any shares of its capital stock or any securities convertible
into or exchangeable for or evidencing the right to purchase or
subscribe for any capital stock of the Company or the Bank, and, except
as described in the Prospectus, no holder of any securities of the
Company or any other person has the right, contractual or
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<PAGE> 15
otherwise, which has not been satisfied or effectively waived, to cause
the Company to sell or otherwise issue to them, or to permit them to
underwrite the sale of, any of the Shares or the right to have any
shares of Common Stock or other securities of the Company included in
the Registration Statement or the right, as a result of the filing of
the Registration Statement, to require registration under the Act of any
shares of Common Stock or other securities of the Company.
(vii) The Registration Statement is effective under the Act and
no stop order proceedings with respect thereto have been instituted or
are pending or, to the knowledge of such counsel, threatened under the
Act.
(viii) The Registration Statement, the Prospectus and each
amendment or supplement thereto comply as to form in all material
respects with the requirements of the Act and the Rules and Regulations
(except that such counsel need not express an opinion as to the
financial statements and related schedules thereto).
(ix) There are no contracts or documents known to such counsel
which are required to be filed as exhibits to the Registration Statement
or described in the Registration Statement or the Prospectus that are
not so filed or described as required, and such contracts and documents
as are summarized in the Registration Statement or the Prospectus are
fairly summarized in all material respects.
(x) The statements under the captions "Risk Factors--Regulation,"
"Supervision and Regulation" and "Description of Capital Stock" in the
Prospectus and in Item _______ of the Registration Statement, insofar as
such statements constitute a summary of documents referred to therein or
matters of law, fairly summarize in all material respects the
information called for with respect to such documents and matters.
(xi) To the knowledge of such counsel, no legal or governmental
proceedings are pending to which the Company or the Bank is a party or
to which the property of the Company or the Bank is subject that are
required to be described in the Registration Statement or the Prospectus
and are not described therein, and, to the knowledge of such counsel, no
such proceedings have been threatened against the Company or the Bank or
with respect to any of their respective properties.
(xii) The Company and the Bank possess all certificates,
authorizations, licenses and permits issued by the appropriate federal
or state regulatory authorities necessary to conduct their respective
businesses and, to the knowledge of such counsel, neither the Company
nor any Bank has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization,
license or permit.
(xiii) This Agreement has been duly and validly authorized by all
necessary corporate action of the Company, and this Agreement has been
duly and validly executed and delivered by and on behalf of the Company,
and are valid, binding and enforceable agreements of the Company,
enforceable in accordance with their respective terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights of
creditors' generally, and except to the extent that rights of indemnity
or
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<PAGE> 16
contribution under this Agreement may be limited by federal or state
securities laws or the public policies underlying such laws or by
general equitable principles.
(xiv) The issuance, offering and sale of the Shares to the
Underwriters by the Company pursuant to this Agreement, the compliance
by the Company with the other provisions of this Agreement and the
consummation of the other transactions herein contemplated do not (A)
require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as have
been obtained and such as may be required under state securities or Blue
Sky laws, or (B) conflict with or result in a breach or violation of any
of the terms and provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, lease or other agreement or
instrument known to such counsel to which the Company or the Bank is a
party or by which the Company, the Bank or any of their respective
properties are bound, or the Articles of Incorporation or bylaws of the
Company or the Bank, or any statute or any judgment, decree, order, rule
or regulation of any court or other governmental authority or any
arbitrator known to such counsel and applicable to the Company or the
Bank.
(xv) The Company is not, nor will become, as a result of the
consummation of the transactions contemplated by this Agreement and
application of the net proceeds therefrom as described in the
Prospectus, required to register as an investment company under the 1940
Act.
In rendering such opinion, counsel for the Company may rely as to
matters governed by the laws of states other than Washington or federal laws on
local counsel in such jurisdictions, provided, however, that in each case
counsel for the Company shall state that they believe that they and the
Underwriters are justified in relying on such other counsel. In addition to the
matters set forth above, such opinion shall also include a statement to the
effect that nothing has come to the attention of such counsel which leads it to
believe that (i) the Registration Statement, at the time it became effective
under the Act (but after giving effect to any modifications incorporated therein
pursuant to Rule 430A of the Rules and Regulations) and as of the Closing Date
or the Option Closing Date, as the case may be, contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading (except that
such counsel need express no view as to financial statements, financial data and
statistical information therein), and (ii) the Prospectus, or any supplement
thereto, on the date it was filed pursuant to the Rules and Regulations and as
of Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements, in the light of the circumstances
under which they are made, not misleading (except that such counsel need express
no view as to financial statements, financial data and statistical information
therein).
(g) The Representative shall have received on the Option Closing Date
the opinion of __________, counsel for each of Selling Shareholders, dated the
Option Closing Date, addressed to the Underwriters (and stating that it may be
relied upon by counsel to the Underwriters) to the effect that:
(i) This Agreement and the Power of Attorney have been duly
authorized, executed and delivered by the Selling Shareholder.
(ii) This Agreement and the Power of Attorney are valid and
binding agreements, enforceable in accordance with their respective
terms, except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to
or affecting the rights of creditors' generally, and except to the
extent that rights of indemnity
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<PAGE> 17
or contribution under this Agreement may be limited by federal or state
securities laws or the public policies underlying such laws or by
general equitable principles.
(iii) To the best of their knowledge, the Selling Shareholder has
good and marketable title to the Option Shares to be sold by such
Selling Shareholder hereunder and full power, right and authority to
sell such Shares, and upon the delivery of and payment for the Shares as
herein contemplated, each of the Underwriters will receive good and
marketable title to the Shares purchased by it from the Selling
Shareholder, free and clear of any mortgage, pledge, lien, security
interest, encumbrance, claim or equity. In rendering such opinion,
counsel may assume that the Underwriters are without notice of any
defect in the title of the Selling Shareholder to the Shares being
purchased from the Selling Shareholder.
(iv) To the best of their knowledge, there are no actions,
claims, suits, proceedings, orders or investigations pending or,
threatened against the Selling Shareholder, or to which the business or
any of the properties of the Selling Shareholder is subject, or before
or by any governmental department, commission, board, bureau, agency or
instrumentality, which seek to restrain, enjoin, prevent consummation of
or otherwise challenge this Agreement or any of the transactions
contemplated hereby (including, without limitation, the sale and
delivery of the Option Shares).
(v) As of such date that such counsel have no reason to believe
that the written information provided by such Selling Shareholder for
use in the Prospectus contained any untrue statement of a material fact
or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that, at such
Option Closing Date, the information contained under the caption
"Principal and Selling Shareholders" in the Prospectus or any amendment
or supplement thereto with respect to such Selling Shareholder contains
any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(h) The Representative shall have received from Graham & Dunn PC,
counsel for the Underwriters, an opinion dated the Closing Date or the Option
Closing Date, as the case may be, substantially to the effect specified in
subparagraphs (vii) and (viii) of Paragraph (f) of this Section 6 and that the
Company is a duly organized and validly existing corporation under the laws of
the State of Washington. In rendering such opinion, counsel for the Underwriters
may rely as to all matters governed by the laws of states other than the State
of Washington or federal laws on the opinion of counsel referred to in Paragraph
(f) of this Section 6. In addition to the matters set forth above, such opinion
shall also include a statement to the effect that nothing has come to the
attention of such counsel that leads them to believe that (i) the Registration
Statement, or any amendment thereto, as of the time it became effective under
the Act (but after giving effect to any modifications incorporated therein
pursuant to Rule 430A of the Rules and Regulations) as of the Closing Date or
the Option Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant to the
Rules and Regulations and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements, in the light of
the circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial statements, schedules and
statistical information therein).
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(i) The Representative shall have received at or prior to the Closing
Date from counsel for the Underwriters a memorandum or summary, in form and
substance satisfactory to the Representative, with respect to the qualification
for offering and sale by the Underwriters of the Shares under the state
securities or Blue Sky laws of such jurisdictions as the Representative may
reasonably have designated to the Company.
(j) Concurrently with the execution and delivery of this Agreement, the
Accountants shall have furnished to the Representative a letter or letters,
dated the date of its or their delivery, addressed to the Representative and in
form and substance satisfactory to the Representative, confirming that they are
independent accountants with respect to the Company as required by the Act and
the Rules and Regulations and with respect to certain financial and other
statistical and numerical information contained in the Registration Statement.
At the Closing Date and, as to the Option Shares, the Option Closing Date, the
Accountants shall have furnished to the Representative a letter or letters,
dated the date of its or their delivery, that shall confirm, on the basis of a
review in accordance with the procedures set forth in the letter or letters from
the Accountants, that nothing has come to their attention during the period from
the date of the letter referred to in the prior sentence to a date (specified in
the letter) not more than five days prior to the Closing Date and the Option
Closing Date, as the case may be, that would require any change in their letter
dated the date hereof if it were required to be dated and delivered at the
Closing Date and the Option Closing Date.
(k) On the Closing Date and, as to the Option Shares, the Option Closing
Date, there shall be furnished to the Representative an accurate certificate of
the Company, dated the date of its delivery, signed by each of the Chief
Executive officer, the Chief Financial officer and the Chief Operating Officer
of the Company on behalf of the Company, in form and substance satisfactory to
the Representative, to the effect that:
(i) Each signer of such certificate has carefully examined the
Registration Statement and the Prospectus on behalf of the Company. As
of the date of such certificate, such documents are true and correct in
all material respects and do not omit to state a material fact required
to be stated therein or necessary in order to make the statements
therein not untrue or misleading. In the case of the certificate
delivered at the Closing Date and the Option Closing Date, since the
Effective Date no event has occurred as a result of which it is
necessary to amend or supplement the Prospectus in order to make the
statements therein not untrue or misleading in any material respect.
(ii) Each of the representations and warranties of the Company
contained in this Agreement was, when originally made, and is, at the
time such certificate is delivered, true and correct in all material
respects.
(iii) Each of the covenants required to be performed by the
Company herein on or prior to the date of such certificate has been
duly, timely and fully performed, and each condition herein required to
be satisfied or fulfilled on or prior to the date of such certificate
has been duly, timely and fully satisfied or fulfilled.
(l) At the Option Closing Date, the Representative shall have received a
certificate of the Selling Shareholder or the Attorney-in-Fact for the Selling
Shareholder, dated as of the Option Closing Date, to the effect that (i) the
representations and warranties of each Selling Shareholder contained in Section
4 are true and correct with the same force and effect as though expressly made
at
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and as of the Option Closing Date and (ii) each Selling Shareholder has complied
with all agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to the Option Closing Date.
(m) On or prior to the Closing Date, and, as to the Option Shares, the
Option Closing Date, the Representative shall have received the executed
agreements referred to in Section 5(m).
(n) Prior to the Closing Date, the Shares shall have been duly
authorized for quotation on the Nasdaq National Market upon notice of issuance.
(o) The Company and each Selling Shareholder shall have furnished to the
Representative such certificates, in addition to those specifically mentioned
herein, as the Representative may have reasonably requested as to the accuracy
and completeness at the Closing Date and the Option Closing Date of any
statement in the Registration Statement or the Prospectus, as to the accuracy at
the Closing Date and the Option Closing Date of the representations and
warranties of the Company and each Selling Shareholder herein, as to the
performance by the Company and each Selling Shareholder of its obligations
hereunder, or as to the fulfillment of the conditions concurrent and precedent
to the obligations hereunder of the Representative.
7. INDEMNIFICATION.
(a) The Company, and each Selling Shareholder if such Selling
Shareholder has sold any Option Shares pursuant to this Agreement, will
indemnify and hold harmless each Underwriter, the directors, officers, employees
and agents of each Underwriter and each person, if any, who controls each
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") from and
against any and all losses, claims, liabilities, expenses and damages (including
any and all investigative, legal and other expenses reasonably incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claim asserted) to which they, or any of them, may become
subject under the Act, the Exchange Act or other federal or state statutory law
or regulation, at common law or otherwise, insofar as such losses, claims,
liabilities, expenses or damages arise out of or are based on any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any
amendment or supplement to the Registration Statement or the Prospectus, or the
omission or alleged omission to state in such document a material fact required
to be stated in it or necessary to make the statements in it not misleading in
light of the circumstances in which they were made, provided, however, that
neither the Company nor any Selling Shareholder will be liable to the extent
that such loss, claim, liability, expense or damage arises from the sale of the
Shares in the public offering to any person by an Underwriter and is based on an
untrue statement or omission or alleged untrue statement or omission made in
reliance on and in conformity with information relating to any Underwriter
furnished in writing to the Company by the Representative on behalf of any
Underwriter expressly for inclusion in the Registration Statement, the
Preliminary Prospectus or the Prospectus, and provided further, however, that
the Company will not be liable to any Underwriter, the directors, officers,
employees or agents of such Underwriter or any person controlling such
Underwriter with respect to any loss, claim, liability, expense, charge or
damage arising out of or based on any untrue statement or omission or alleged
untrue statement or omission or alleged omission to state a material fact in the
Preliminary Prospectus that is corrected in the Prospectus if the person
asserting any such loss, claim, liability, charge or damage purchased Shares
from such Underwriter but was not sent or given a copy of the Prospectus at or
prior to the written confirmation of the sale of such Shares to such person.
This indemnity agreement will be in addition to any liability that the Company
might otherwise have.
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(b) Each Underwriter will indemnify and hold harmless the Company, each
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act, each director of the Company and each
officer of the Company who signs the Registration Statement to the same extent
as the foregoing indemnity from the Company to each Underwriter, but only
insofar as losses, claims, liabilities, expenses or damages arise out of or are
based on any untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with information relating to any
Underwriter furnished in writing to the Company by the Representative on behalf
of such Underwriter expressly for use in the Registration Statement, the
Preliminary Prospectus or the Prospectus. The Company acknowledges that the
statements set forth in the last paragraph of the outside front cover page of
the Prospectus and under the heading "Underwriting" in the Preliminary
Prospectus and the Prospectus constitute the only information relating to any
Underwriter furnished in writing to the Company by the Representative on behalf
of the Underwriters expressly for inclusion in the Registration Statement, the
Preliminary Prospectus or the Prospectus. This indemnity will be in addition to
any liability that each Underwriter might otherwise have.
(c) Any party that proposes to assert the right to be indemnified under
this Section 6 will, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim is to be made against an
indemnifying party or under this Section 6, notify each such indemnifying party
of the commencement of such action, enclosing a copy of all papers served, but
the omission so to notify any such indemnifying party will not relieve it from
any liability that it may have to any indemnified party under the foregoing
provisions of this Section unless, and only to the extent that, such omission
results in the loss of substantive rights or defenses by the indemnifying party.
If such action is brought against any indemnified party and it notifies the
indemnifying party of its commencement, the indemnifying party will be entitled
to participate in and, to the extent that it elects by delivering written notice
to the indemnified party promptly after notice of the commencement of the action
from the indemnified party, jointly with any other indemnifying party similarly
notified, to assume the defense of the action, with counsel reasonably
satisfactory to the indemnified party, and after notice from the indemnifying
party to the indemnified party of its election to assume the defense, the
indemnifying party will not be liable to the indemnified party for any legal or
other expenses except as provided below and except for the reasonable costs of
investigation subsequently incurred by the indemnified party in connection with
the defense. The indemnified party will have the right to employ its own counsel
in any such action, but the expenses and other charges of such counsel will be
at the expense of such indemnified party unless (i) the employment of counsel by
the indemnified party has been authorized in writing by the indemnifying party,
(ii) the indemnified party has reasonably concluded (based on advice of counsel)
that there may be legal defenses available to it or other indemnified parties
that are different from or in addition to those available to the indemnifying
party, (iii) a conflict or potential conflict exists (based on advice of counsel
to the indemnified party) between the indemnified party and the indemnifying
party (in which case the indemnifying party will not have the right to direct
the defense of such action on behalf of the indemnified party) or (iv) the
indemnifying party has not in fact employed counsel to assume the defense of
such action within a reasonable time after receiving notice of the commencement
of the action, in each of which cases the reasonable fees, disbursements and
other charges of counsel will be at the expense of the indemnifying party or
parties. It is understood that the indemnifying party or parties shall not, in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the reasonable fees, disbursements and other charges of more than
one separate firm admitted to practice in such jurisdiction at any one time. All
such fees, disbursements and other charges will be reimbursed by the
indemnifying party promptly as they are incurred. Any indemnifying party will
not be liable for any settlement of any action or claim effected without its
written consent (which consent will not be unreasonably withheld).
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(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 7 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company, or the Underwriters, the
Company, the Selling Shareholders and the Underwriters, will contribute to the
total losses, claims, liabilities, expenses and damages (including any
investigative, legal and other expenses reasonably incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding or any
claim asserted, but after deducting any contribution received by the Company
from persons other than the Underwriters, such as persons who control the
Company within the meaning of the Act, officers of the Company who signed the
Registration Statement and directors of the Company, who also may be liable for
contribution) to which the Company or one or more of the Underwriters may be
subject in such proportion as shall be appropriate to reflect the relative
benefits received by the Company, the Selling Shareholders and the Underwriters.
The relative benefits received by the Company, the Selling Shareholders and the
Underwriters shall be deemed to be in the same proportion as the total net
proceeds from the Offering (before deducting expenses) received by the Company
and the Selling Shareholders bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the outside front cover page of the Prospectus. If, but only if, the
allocation provided by the foregoing sentence is not permitted by applicable
law, the allocation of contribution shall be made in such proportion as is
appropriate to reflect not only the relative benefits referred to in the
foregoing sentence but also the relative fault of the Company, the Selling
Shareholders and the Underwriters, with respect to the statements or omissions
that resulted in such loss, claim, liability, expenses or damage, or action in
respect thereof, as well as any other relevant equitable considerations with
respect to such Offering. Such relative fault shall be determined by reference
to whether the untrue or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact relates to information supplied by
the Company, the Selling Shareholders or the Representative on behalf of the
Underwriters, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholders and the Underwriters agree that it would
not be just and equitable if contributions pursuant to this Section 7(d) were to
be determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation that does not
take into account the equitable considerations referred to herein. The amount
paid or payable by an indemnified party as a result of the loss, claim,
liability, expense or damage, or action in respect thereof, referred to above in
this Section 7(d) shall be deemed to include, for purposes of this Section 7(d),
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7(d), (i) no Underwriter shall be
required to contribute any amount in excess of the underwriting discounts
received by it and (ii) no person found guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) will be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute as provided in
this Section 7(d) are several in proportion to their respective underwriting
obligations and not joint. For purposes of this Section 7(d), any person who
controls a party to this Agreement within the meaning of the Act will have the
same rights to contribution as that party, and each director and officer of the
Company who signed the Registration Statement will have the same rights to
contribution as the Company, subject in each case to the provisions hereof. Any
party entitled to contribution, promptly after receipt of notice of commencement
of any action against any such party in respect of which a claim for
contribution may be made under this Section 7(d), will notify any such party or
parties from whom contribution may be sought, but the omission to so notify will
not relieve the party or parties from whom contribution may be sought from any
other obligation it or they may have under this Section 7(d). No party will be
liable for contribution with respect to any action or claim settled without its
consent (which consent will not be unreasonably withheld).
21
<PAGE> 22
(e) The indemnity and contribution agreements contained in this Section
7 and the representations and warranties of the Company and the Selling
Shareholders contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any investigation made by or on behalf of the
Underwriters or the Company, (ii) acceptance of any of the Shares and payment
therefor or (iii) any termination of this Agreement.
8. TERMINATION.
The obligations of the several Underwriters under this Agreement may be
terminated at any time on or prior to the Closing Date (or, with respect to the
Option Shares, on or prior to the Option Closing Date) by notice to the Company
from the Representative, without liability on the part of any Underwriter to the
Company if, prior to delivery and payment for the Shares, as the case may be,
(a) trading in any of the equity securities of the Company shall have been
suspended by the Commission or by the Nasdaq National Market (b) trading in
securities generally on the New York Stock Exchange shall have been suspended or
limited or minimum or maximum prices shall have been generally established on
such exchange, or additional material governmental restrictions, not in force on
the date of this Agreement, shall have been imposed upon trading in securities
generally by such exchange or by order of the Commission or any court or other
governmental authority, (c) a general banking moratorium shall have been
declared by either federal or New York State authorities or (d) in the
reasonable opinion of the Representative, there is any material adverse change
in the financial or securities markets in the United States or in political,
financial or economic conditions in the United States or any outbreak or
material escalation of hostilities or other calamity or crisis shall have
occurred, the effect of which is such as to make it, in the reasonable judgment
of the Representative, impracticable to market the Shares.
9. SUBSTITUTION OF UNDERWRITERS.
If any one or more of the Underwriters shall fail or refuse to purchase
any of the Firm Shares that it or they have agreed to purchase hereunder, and
the aggregate number of Firm Shares that such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than one-tenth
of the aggregate number of Firm Shares, the other Underwriters shall be
obligated, severally, to purchase the Firm Shares that such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase in the
proportions that the number of Firm Shares that they have respectively agreed to
purchase pursuant to Section 1 bears to the aggregate number of Firm Shares that
all such nondefaulting Underwriters have so agreed to purchase, or in such other
proportions as the Representative may specify; provided, however, that in no
event shall the maximum number of Firm Shares that any Underwriter has become
obligated to purchase pursuant to Section 1 be increased pursuant to this
Section 9 by more than one-ninth of such number of Firm Shares without the prior
written consent of such Underwriter. If any Underwriter or Underwriters shall
fail or refuse to purchase any Firm Shares and the aggregate number of Firm
Shares that such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase exceeds one-tenth of the aggregate number of the Firm Shares
and arrangements satisfactory to the Representative and the Company for the
purchase of such Firm Shares are not made within 48 hours after such default,
this Agreement will terminate without liability on the part of any nondefaulting
Underwriter or the Company for the purchase or sale of any Shares under this
Agreement. In any such case either the Representative or the Company shall have
the right to postpone the Closing but in no event for longer than seven days, in
order that the required changes, if any, in the Registration Statement and the
Prospectus or in any other documents or arrangements may be effected. Any action
taken pursuant to this Section 8 shall not relieve any defaulting Underwriter
from liability in respect of any default of such Underwriter under this
Agreement.
22
<PAGE> 23
10. MISCELLANEOUS.
(a) Notice given pursuant to any of the provisions of this Agreement
shall be in writing and, unless otherwise specified, shall be mailed or
delivered as follows: (i) if to the Company, at the office of the Company, 927
Commerce, Longview, Washington 98632, Attention: Chief Executive Officer, with a
copy to Bernard L. Russell, Foster, Pepper & Shefelman PLLC, 1111 Third Avenue,
#3400, Seattle, Washington 98101; (ii) if to the Selling Shareholders
___________________________; or (iii) if to the Underwriters, to the
Representative at the offices of Black & Company, Inc., One S.W. Columbia, Suite
1200, Portland, Oregon 97258, Attention: Corporate Finance Department, with a
copy to Stephen M. Klein, Graham & Dunn PC, 1420 Fifth Avenue, 33rd Floor,
Seattle, Washington 98101-2390. Any such notice shall be effective only upon
receipt. Any notice may be made by telex, telephone or facsimile, but if so made
shall be subsequently confirmed in writing.
(b) This Agreement has been and is made solely for the benefit of the
several Underwriters, the Company and of the controlling persons, directors and
officers referred to in Section 8, and their respective successors and assigns,
and no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" as used in this Agreement shall not
include a purchaser, as such purchaser, of Shares from any of the several
Underwriters.
(c) This Agreement shall be governed by and construed in accordance with
the laws of the State of Washington applicable to contracts made and to be
performed entirely within such state.
(d) This Agreement may be signed in two or more counterparts with the
same effect as if the signatures thereto and hereto were upon the same
instrument.
(e) In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
(f) The Company, the Selling Shareholders and the Underwriters each
hereby waive any right they may have to a trial by jury in respect of any claim
based upon or arising out of this Agreement or the transactions contemplated
hereby.
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Shareholders and the several Underwriters.
Very truly yours,
COWLITZ BANCORP
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
Harry R. Calbom, Jr.
-------------------------------------
23
<PAGE> 24
-------------------------------------
Wallace C. Trotter
Confirmed as of the date first above mentioned:
BLACK & COMPANY, INC.
Acting on behalf of itself and as the Representative of the other several
Underwriters named in Schedule I hereto.
By: BLACK & COMPANY, INC.
By:
-------------------------------------
24
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
(all amounts in thousands, except for share and per share amounts)
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Dilutive common stock equivalents 2,595,239 2,586,698 2,512,407
Dilutive common equivalent shares 201,667 201,667 201,667
--------- --------- ---------
Total Common Stock 2,796,906 2,788,365 2,714,074
========= ========= =========
Net Income $2,124 $2,497 $2,098
========= ========= =========
Basic Earnings Per Share $0.76 $0.90 $0.77
========= ========= =========
DILUTED EARNINGS PER SHARE:
Dilutive common stock equivalents 2,595,239 2,586,698 2,512,407
Dilutive common equivalent shares 201,667 201,667 201,667
--------- --------- ---------
Total Common Stock 2,796,906 2,788,365 2,714,074
========= ========= =========
Net Income $2,124 $2,497 $2,098
========= ========= =========
Diluted Earnings Per Share $0.76 $0.90 $0.77
========= ========= =========
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Portland, Oregon
February 24, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED BALANCE SHEETS OF COWLITZ BANCORPORATION AND SUBSIDIARY AS OF
DECEMBER 31, 1997 AND 1996 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME,
CHANGES IN SHAREHOLDERS' EQUITY AND CASH FLOWS FOR EACH OF THE THREE YEARS IN
THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 23,109
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,017
<INVESTMENTS-CARRYING> 4,464
<INVESTMENTS-MARKET> 4,486
<LOANS> 131,963
<ALLOWANCE> 1,970
<TOTAL-ASSETS> 173,293
<DEPOSITS> 136,209
<SHORT-TERM> 725
<LIABILITIES-OTHER> 572
<LONG-TERM> 21,900
0
0
<COMMON> 3,262
<OTHER-SE> 10,625
<TOTAL-LIABILITIES-AND-EQUITY> 173,293
<INTEREST-LOAN> 13,700
<INTEREST-INVEST> 577
<INTEREST-OTHER> 809
<INTEREST-TOTAL> 15,086
<INTEREST-DEPOSIT> 5,499
<INTEREST-EXPENSE> 6,943
<INTEREST-INCOME-NET> 8,143
<LOAN-LOSSES> 375
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,284
<INCOME-PRETAX> 3,233
<INCOME-PRE-EXTRAORDINARY> 3,233
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,124
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.76
<YIELD-ACTUAL> 9.87
<LOANS-NON> 1,897
<LOANS-PAST> 432
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,894
<CHARGE-OFFS> 324
<RECOVERIES> 25
<ALLOWANCE-CLOSE> 1,970
<ALLOWANCE-DOMESTIC> 1,970
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
