U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q
[X] Quarterly report Pursuant to section 13 or 15(d) of the
Securities and Exchange act of 1934
For the quarter ended September 30, 1998
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities and Exchange act of 1934
For the transition period from ________ to ________
Commission file number
0-23881
COWLITZ BANCORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-152984
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
927 Commerce Ave., Longview, Washington 98632
(Address of principal executive offices) (Zip Code)
(360) 423-9800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes__X___ No____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, no par value on October 31, 1998: 4,001,999
<PAGE>
TABLE OF CONTENTS
Page
Part I
Financial Statements
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income -
Three and Nine months ended September 30, 1998 and September 30, 1997 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and September 30, 1997 5
Consolidated Statements of Changes in Shareholders' Equity 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
And Results of Operations 11
Part II
Other
Changes in Securities and Use of Proceeds 20
Signatures 21
<PAGE>
COWLITZ BANCORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(in thousand of dollars, except number of shares)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks........................................... $ 14,442 $ 23,109
Investment securities:
Investments available-for-sale (at fair value, cost of $6,994
and $3,993 at September 30, 1998 and December 31, 1997,
respectively)................................................ 7,090 4,017
Investments held-to-maturity (at amortized cost, fair value of
$6,699 and $4,486 at September 30, 1998 and December 31, 1997,
respectively)................................................ 6,646 4,464
--------- ---------
Total investment securities.................................. 13,736 8,481
--------- ---------
Loans............................................................. 134,227 131,963
Allowance for loan losses......................................... (1,975) (1,970)
--------- ---------
Loans, net..................................................... 132,252 129,993
--------- ---------
Premises and equipment, net of accumulated depreciation of $1,739
and $1,354 at September 30, 1998 and December 31, 1997,
respectively................................................... 5,879 5,653
Federal Home Loan Bank stock...................................... 2,816 2,658
Intangible assets, net of accumulated amortization of $339 and $123 at September
30, 1998 and December 31, 1997,
respectively................................................... 3,020 1,847
Other assets...................................................... 2,190 1,552
--------- ---------
Total assets................................................. $ 174,335 $ 173,293
========= =========
LIABILITIES
Deposits:
Demand......................................................... $ 28,040 $ 27,141
Savings and interest-bearing demand............................ 45,784 46,454
Certificates of deposit........................................ 44,895 62,614
--------- ---------
Total deposits............................................... 118,719 136,209
Short-term borrowings............................................. 1,950 725
Long-term borrowings.............................................. 21,994 21,900
Other liabilities................................................. 1,201 572
--------- ---------
Total liabilities............................................ $ 143,864 $159,406
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 and no shares
authorized as of September 30, 1998 and December 31, 1997,
respectively; no shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively......... $ - $ -
Common stock, no par value; 25,000,000 and 3,937,500 authorized
as of September 30, 1998 and December 31, 1997, respectively;
4,001,964 and 2,604,543 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively......... 18,251 3,262
Additional paid in capital........................................ 1,538 1,538
Retained earnings................................................. 10,619 9,071
Net unrealized gains on investments available-for-sale............ 63 16
--------- ---------
Total shareholders' equity................................... 30,471 13,887
--------- ---------
Total liabilities and shareholders' equity................... $ 174,335 $ 173,293
========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
COWLITZ BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousand of dollars, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans............................. $ 3,504 $ 3,481 $ 10,292 $ 10,131
Interest on taxable investment securities.............. 243 180 695 484
Interest on non-taxable investments securities......... 1 - 2 -
Interest from other banks.............................. 356 258 1,085 520
-------- -------- --------- ---------
Total interest income............................... 4,104 3,919 12,074 11,135
-------- -------- --------- ---------
INTEREST EXPENSE
Savings and interest-bearing demand.................... 504 351 1,422 867
Certificates of deposit................................ 675 1,073 2,433 3,288
Short-term borrowings.................................. 27 11 64 33
Long-term borrowings................................... 365 361 1,035 1,045
-------- -------- --------- ---------
Total interest expense.............................. 1,571 1,796 4,954 5,233
-------- -------- --------- ---------
Net interest income before provision for loan losses 2,533 2,123 7,120 5,902
PROVISION FOR LOAN LOSSES.............................. (111) (111) (243) (300)
-------- -------- --------- ---------
Net interest income after provision for loan losses. 2,422 2,012 6,877 5,602
-------- -------- --------- ---------
NONINTEREST INCOME
Service charges on deposit accounts................. 168 173 487 397
Other income........................................ 71 46 242 137
Net gains on sales of available-for-sale securities. - - 5 -
-------- -------- --------- ---------
Total noninterest income.......................... 239 219 734 534
-------- -------- --------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits...................... 922 763 2,772 2,060
Net occupancy and equipment expense................. 231 224 655 521
Other operating expense............................. 581 522 1,607 1,258
-------- -------- --------- ---------
Total noninterest expense......................... 1,734 1,509 5,034 3,839
-------- -------- --------- ---------
Income before income tax expense.................. 927 722 2,577 2,297
INCOME TAX EXPENSE..................................... 315 245 876 781
-------- -------- --------- ---------
Net income........................................ $ 612 $ 477 $ 1,701 $ 1,516
======== ======== ========= =========
BASIC EARNINGS PER SHARE............................... $ 0.15 $ 0.18 $ .47 $ .58
DILUTED EARNINGS PER SHARE............................. $ 0.15 $ 0.18 $ .44 $ .58
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
COWLTIZ BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998 1997
--------- ---------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................... $ 1,701 $ 1,516
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization................................ 601 316
Provision for loan losses.................................... 243 300
Net amortization of investment security premiums and accretion
of discounts............................................... (4) (2)
(Increase) in other assets................................... (582) (125)
Increase in other liabilities................................ 168 50
Federal Home Loan Bank stock dividends....................... (158) (142)
--------- ---------
Net cash provided by operating activities................ 1,969 1,913
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities
held-to-maturity............................................. 1,387 3,487
Proceeds from sales of investment securities
available-for-sale........................................... 1,000 -
Purchases of investment securities:
Held-to-maturity............................................. (3,565) (4,461)
Available-for-sale........................................... (3,996) (1,994)
Net (increase) in loans........................................ (145) (6,346)
Purchases of premises and equipment............................ (636) (1,288)
Proceeds from assumption of deposit liabilities................ - 22,885
Acquisition of business, net of cash acquired.................. (1,575) -
--------- ---------
Net cash (used in) provided by investment activities....... (7,530) 12,283
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand, savings, and interest-bearing
demand deposits.............................................. 229 (938)
Net (decrease) in certificates of deposit...................... (17,719) (8,491)
Dividends paid................................................. (153) (93)
Net increase (decrease) in short-term borrowings............... 1,225 (75)
Net proceeds (repayment) of long-term borrowings............... (1,213) (746)
Purchase of treasury stock..................................... (494) -
Issuance of common stock for cash, net of amount paid for
fractional shares.......................................... 15,019 52
--------- ---------
Net cash provided by (used in) financing activities........ (3,106) (10,291)
--------- ---------
Net increase (decrease) in cash and due from banks......... (8,667) 3,905
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR...................... 23,109 20,905
--------- ---------
CASH AND DUE FROM BANKS AT END OF PERIOD.......................... $ 14,442 $ 24,810
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of dollars, except number of shares)
(unaudited)
<TABLE>
<CAPTION>
Unrealized
Gains/losses
Additional on invest. Total
Common Stock Paid-in Retained available- Shareholders'
Shares Amount Capital Earnings for-sale Equity
------- ------- --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
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 dividend paid ($.0143 per share) - - - (126) - (126)
Net changes in unrealized gains on
investments available-for-sale, net
of deferred taxes of $5........... - - - - 9 9
---------- -------- -------- -------- ------ ---------
BALANCE AT DECEMBER 31, 1997........... 2,604,543 3,262 1,538 9,071 16 13,887
Issuance of common stock for cash.... 1,396,216 15,019 - - - 15,019
Purchase of Treasury Stock........... (50,000) (494) - - - (494)
Issuance of Common Stock for
acquisition.......................... 51,282 465 - - - 465
Net income........................... - - - 1,701 - 1,701
Cash dividends paid ($.0125 per share) - - - (153) - (153)
Net changes in unrealized gains on
investments available-for-sale, net
of deferred taxes of $24.......... - - - - 47 47
Cash paid for fractional shares........ (77) (1) - - - (1)
----------- --------- -------- -------- ------ ---------
BALANCE AT SEPTEMBER 30, 1998 4,001,964 $ 18,251 $ 1,538 $ 10,619 $ 63 $ 30,471
=========== ======== ========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations
Cowlitz Bancorporation (the Company) is a one-bank holding company located
in Southwest Washington. The Company's principal subsidiary, Cowlitz Bank (the
Bank), a Washington state-chartered commercial bank, is the only community bank
headquartered in Cowlitz County and offers commercial banking services primarily
to small and medium-sized businesses, professionals, and retail customers.
During the third quarter of 1998 the Company acquired Business Finance
Corporation (BFC) of Bellevue, Washington. Business Finance Corporation provides
asset based financing to companies throughout the Western United States.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany transactions and
balances have been eliminated.
The interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments, including normal recurring accruals
necessary for fair presentation of results of operations for the interim periods
included herein have been made. The results of operations for the three months
and nine months ended September 30, 1998 are not necessarily indicative of
results to be anticipated for the year ending December 31, 1998.
3. Supplemental Cash Flow Information
For purposes 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 included cash on hand, amounts due from banks and federal
funds sold. Federal funds sold generally mature the day following purchase.
4. 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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
<PAGE>
5. Earnings Per Share
The following table reconciles the numerator and denominator of the basic
and diluted earnings per share computations:
<TABLE>
<CAPTION>
Weighted Per Share
Net Income Avg Shares Amount
For the three months ended September 30, 1998
<S> <C> <C> <C>
Basic earnings per share $ 612 4,001,066 $ .15
Stock Options 176,139
Diluted earnings per share $ 612 4,177,205 $ .15
For the three months ended September 30, 1997
Basic earnings per share $ 477 2,602,157 $ .18
Stock Options 0
Diluted earnings per share $ 477 2,602,157 $ .18
For the nine months ended September 30, 1998
Basic earnings per share $ 1,701 3,619,488 $ .47
Stock Options 203,119
Diluted earnings per share $1,701 3,822,607 $ .44
For the nine months ended September 30, 1997
Basic earnings per share $ 1,516 2,600,751 $ .58
Stock Options 0
Diluted earnings per share $ 1,516 2,600,751 $ .58
</TABLE>
For the periods reported the Company had no reconciling items between net
income and income available to common shareholders.
6. Recently Issued Accounting Standards
SAB No. 98
In February 1998, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 98 on computations of earnings per share. SAB No.
98, which was effective upon issuance, revised the SEC's guidance on the
treatment of stock options issued shortly before an Initial Public Offering
(IPO) in earnings per share calculations. Prior to the issuance of SAB No. 98,
the SEC required that stock options issued within one year of an IPO with
exercise prices below the IPO price be treated as outstanding for all reporting
periods for purposes of calculating earnings per share. The Company followed
this guidance for the stock options granted September 30, 1997 and, accordingly
treated the options as outstanding for all periods in computing both basic and
diluted earnings per share. SAB No. 98 now requires that only "nominal
issuances" of stock or stock options be reflected in all earnings per share
calculations for all periods presented. The Company's September 30, 1997, stock
options do not meet the SEC's definition of a nominal issuance. As required by
SAB No. 98, these stock options are now included in the calculation of diluted
earnings per share only for periods subsequent to their issuance on September
30, 1997, and are not included in the basic earnings per share calculation.
<PAGE>
As required by SAB No. 98, the Company has restated its historical basic and
diluted earnings per share to conform with this new guidance. The following is a
summary of the historical and restated earnings per share amounts:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1997 September 30, 1997
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C>
Previously reported EPS........ $ .17 $ .17 $ .54 $ .54
Restated EPS................... $ .18 $ .18 $ .58 $ .58
</TABLE>
FAS No. 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or a liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gain and losses to offset
related results on the hedged item in the income statement, and requires that a
company must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999.
A company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). Statement 133 cannot be applied retroactively. Statement 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998).
The implementation of this statement is not expected to have a material
impact on the Company's financial position or results of operation.
7. Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income," for the period ending September 30, 1998. This
statement establishes standards for the reporting and display of comprehensive
income and it's components in the financial statements. For the Company,
comprehensive income includes net income reported on the statements of income
and changes in the fair value of it's available-for-sale investments reported as
a component of shareholders' equity. The following table presents net income
adjusted by the unrealized gains or losses on available-for-sale securities as a
component of comprehensive income:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income................................ $ 612 $ 477 $ 1,701 $ 1,516
Net change in unrealized gain/loss on
available for sale securities, net of tax 55 12 47 7
------ -------- ------ ------
Comprehensive income...................... $ 667 $ 489 $ 1,748 $ 1,523
======= ======= ======= =======
</TABLE>
<PAGE>
8. Business Acquisition
On August 31, 1998 the Company acquired Business Finance Corporation of
Bellevue, Washington. The acquisition was accounted for using the purchase
method, including issuance of common stock with a value of $465,000. A cash
payment was made in the amount of $1.7 million with an adjustment to be made
based on final determination of BFC's shareholder's equity. A future contingent
issuance of common stock valued at approximately $500,000 will be issued if BFC
achieves earning targets for the twelve month period following the acquisition.
As part of the transaction, goodwill was recorded in the amount of $1.4 million
to be amortized on a straight-line basis over a fifteen year period.
Fair market value of assets acquired,
including goodwill of $1,389.......$ 3,932
Less liabilities assumed............. 1,768
Less stock issued.................... 465
---------
Cash paid for acquisition............ 1,699
Less cash acquired................... 124
---------
Net cash paid for acquisition........$ 1,575
=========
9. Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULT OF OPERATIONS
The following Management's discussion and Analysis of Financial Conditions
and Results of Operations includes a discussion of certain significant business
trends and uncertainties as well as certain 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 herein.
Results of Operations
Net Income
Three months ended September 30, 1998 and 1997
The Company's net income of $612,000 at September 30, 1998, reflects an
increase of 28.3% compared to net income of $477,000 at September 30, 1997. The
increase is primarily a result of a 19.3% increase in net interest income for
the quarter ended September 30, 1998 as compared to the quarter ended September
30, 1997. Earnings per diluted share were $.15 for the three months ended
September 30, 1998 compared to $.18 per diluted share for the same period in
1997. This decrease was a result of the issuance of 1,380,000 additional shares
in the Company's IPO in March 1998. As discussed in footnote 6 to the interim
financial statements, the Company has restated earnings per share for the
quarter ended September 30, 1997, as required by the SEC's recently issued SAB
No.98.
Nine months ended September 30, 1998 and 1997
Net income for the first nine months of 1998 was $1.7 million compared to
$1.5 million for the comparable period in 1997. Net income for 1998 has
increased as the Company has replaced certain higher interest rate certificates
of deposit with lower cost core deposits as a result of the branch acquisition
in July 1997. The increase is primarily a result of a 20.6% increase in net
interest income for the quarter ended September 30, 1998 as compared to the
quarter ended September 30, 1997. Net income for the nine months ended September
30, 1998 also reflects the increase in interest income from the investment of
funds from the Company's IPO in the first quarter of 1998.
Net Interest Income
Three Months ended September 30, 1998 and 1997
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
<PAGE>
Net interest income for the quarter ended September 30, 1998 was $2.5
million, which was an increase of 19.3% from $2.1 million at September 30, 1997.
One component that contributed to this increase was the decrease in interest
expense in the third quarter of 1998. Interest expense was $1.6 million for the
three months ended September 30, 1998 down 12.5% when compared to $1.8 million
for the three months ended September 30, 1997. The primary reason was a decline
of $398,000 in the interest paid on certificates of deposit. Interest on
certificates for the quarter ending September 30, 1998 was $675,000 compared to
$1.1 million for the comparable period in 1997. The Company reduced pricing on
certain of its higher yielding certificates after the acquisition of deposits
from three bank branches in the third quarter of 1997, intending to eliminate
these higher cost certificates of deposit at maturity. In accordance with this
pricing strategy, average interest bearing liabilities decreased to $118.3
million at September 30, 1998 from $137.9 million at September 30, 1997. In the
third quarter of 1998, average rates paid on these interest-bearing liabilities
increased slightly, as management matched FHLB borrowings to longer term loans.
Also during the third quarter of 1998, a FHLB note matured, which ultimately is
expected to result in an offset to this increase in average rates paid on these
borrowings.
Average interest earning assets for the quarter ending September 30, 1998
and September 30, 1997 were $161.3 million. Although the average earning assets
were the same for both periods, the average yield earned on these average assets
for September 30, 1998 and September 30, 1997 was 10.18% and 9.72%,
respectively. This was a result of increased earnings on Federal Home Loan Bank
Stock in the quarter ending September 30, 1998 in the amount of $55,000 over the
quarter ending September 30, 1997. Loan fees, which are treated as additional
interest income, increased during the quarter ending September 30, 1998 by
$73,000 over the quarter ending September 30, 1997. During the quarter certain
interest earning assets were replaced with higher yielding assets.
Analysis of Net Interest Income
The following table presents information regarding yields and interest
earning assets, expense on interest bearing liabilities, and net yields on
interest earning assets for periods indicated on a tax equivalent basis.
<TABLE>
<CAPTION>
Three Months Ended
(unaudited) September 30, Increase
(in thousands of dollars) 1998 1997 (Decrease) Change
------- ------- --------- ------
<S> <C> <C> <C> <C>
Interest income(1)................ $ 4,104 $ 3,919 $ 185 4.7 %
Interest expense................... 1,571 1,796 (225) (12.5)%
-------- --------- ----------
Net interest income................ $ 2,533 $ 2,123 $ 410 19.3 %
======== ========= ==========
Average interest earning assets.... $161,337 $ 161,333 4 *
Average interest bearing
liabilities $ 118,265 $ 137,886 (19,621) (14.2)%
Average yields earned (2).......... 10.18% 9.72% .46
Average rates paid (2)............. 5.31% 5.21% .10
Net interest spread (2)............ 4.87% 4.51% .36
Net interest margin (2)............ 6.28% 5.26% 1.02
(1) Interest earned on nontaxable securities has been computed on a 34% tax
equivalent basis.
(2) Ratios for the three months ended September 30, 1998 and 1997 have been
annualized.
*less than one percent
</TABLE>
<PAGE>
Nine Months Ended September 30,1998 and 1997
Total interest earnings assets averaged $163.6 million for the nine months
ended September 30, 1998, compared to $150.9 million for the corresponding
period in 1997. The increase in average earning assets was attributable to an
increase in cash due from banks after the company's IPO in March of 1998. The
average yield on interest earning assets remained stable at 9.84% for the first
nine months of 1998 and for the corresponding period in 1997.
Interest bearing liabilities averaged $125.6 million and $130.2 million
during the first nine months of 1998 and 1997, respectively. The average cost of
these liabilities decreased in the first nine months of 1998 to 5.26% from 5.36%
in the first nine months of 1997. The Company has replaced certain higher
interest rate certificates of deposit with lower cost core deposits as a result
of the branch acquisitions in July 1997.
Analysis of Net Interest Income
The following table presents information regarding yields and interest
earning assets, expense on interest bearing liabilities, and net yields on
interest earning assets for periods indicated on a tax equivalent basis.
<TABLE>
<CAPTION>
Nine Months Ended
(unaudited) September 30, Increase
(in thousands of dollars) 1998 1997 (Decrease) Change
------- ------- --------- ------
<S> <C> <C> <C> <C>
Interest income(1)................ $ 12,075 $ 11,135 $ 940 8.4 %
Interest expense................... 4,954 5,233 (279) (5.3)%
-------- --------- ----------
Net interest income................ $ 7,121 $ 5,902 $ 1,219 20.6 %
======== ========= ==========
Average interest earning assets.... $163,630 $ 150,940 12,690 8.4 %
Average interest bearing
liabilities........................ $ 125,623 $ 130,229 (4,606) (3.5) %
Average yields earned (2).......... 9.84% 9.84% -
Average rates paid (2)............. 5.26% 5.36% (.10)
Net interest spread (2)............ 4.58% 4.48% .10
Net interest margin (2)............ 5.80% 5.21% .59
(1) Interest earned on nontaxable securities has been computed on a 34% tax
equivalent basis.
(2) Ratios for the nine months ended September 30, 1998 and 1997 have been
annualized.
</TABLE>
Market Risk
Interest rate risk and credit risks are the most significant market risks
impacting the Company's performance. The Company relies on loan reviews, prudent
loan underwriting standards and an adequate allowance for loan losses to
mitigate credit risk. Interest rate risk is managed through the monitoring of
the Company's gap position 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. Management has assessed these risks
and feels that there has been no material change since December 31, 1997.
<PAGE>
Provision for Loan Losses
Three months ended September 30, 1998 and 1997
The amount of the allowance for loan losses is analyzed by management on a
regular basis to ensure that it is sufficient to cover potential and future
losses. When a provision for loan losses is recorded, the amount is based on
past charge-off experience, a careful analysis of the current portfolio, the
level of nonperforming and impaired loans, evaluation of future economic trends
in the Company's market area, and other relevant factors related to the loan
portfolio.
The Company's provision for loan losses was $111,000 for each of the three
month periods ended September 30, 1998 and 1997, respectively. Net charge-offs
for the three months ended September 30, 1998 were $104,000, compared to net
charge-offs of $78,000 for the same period in 1997. Nonaccrual loans were $2.7
million at September 30, 1998 and $1.4 million at September 30, 1997. In the
third quarter of 1998 nonaccrual loans increased $1.2 million. This increase
reflects six borrowers with an aggregate balance of $950,000. Management
currently anticipates no loss on five of these borrowers and is currently in the
process of evaluating the remaining relationships. While loans on non-accrual
status have increased, management feels that the allowance for loan losses is
adequate to absorb any exposure. Management continues to closely monitor the
loan quality and existing relationships. For a more detailed disclosure please
see Loans.
Nine months ended September 30, 1998 and 1997
Provisions for loan losses recorded for the nine months ended September 30,
1998 were $243,000 as compared to $300,000 at September 30, 1997. Net
charge-offs were $283,000 and $210,000 at September 30, 1998 and 1997,
respectively. At September 30, 1998 the loan loss reserve was 1.47% of total
loans outstanding.
Non-Interest Income
Three months ended September 30, 1998 and 1997
Non-interest income, primarily consisting of service charges and related
fees, was $239,000 for the three months ended September 30, 1998 and $219,000 in
the corresponding period in 1997. Other income increased 54.3% from $46,000 at
September 30, 1997 to $71,000 at September 30, 1998, as a result of the addition
of trust services to the bank in the second quarter of 1997.
Nine months ended September 30, 1998 and 1997
Total non-interest income increased to $734,000 for the first nine months
of 1998 compared to $534,000 during the same period in 1997. The increase in
non-interest income of $200,000 is mainly a result of a 22.7% increase in
service charge income after the addition of three branches in July 1997. Another
component of this increase was the addition of trust services provided to the
Cowlitz County area.
<PAGE>
Non-Interest Expense
Three months ended September 30, 1998 and 1997
Non-interest expense consists principally of employees' salaries and
benefits, occupancy costs, data processing and communication expenses, FDIC
(Federal Deposit Insurance Corporation) insurance premium, professional fees,
and other non-interest expenses. Non-interest expenses increased 14.9% to $1.7
million for the quarter ended September 30, 1998 compared to $1.5 million for
the quarter ended September 30, 1997, primarily due to increased staffing costs.
Nine months ended September 30, 1998 and 1997
For the nine months ended September 30, 1998 non-interest expense was $5.0
million as compared to $3.8 million for the nine months ended September 30,
1997. Salaries and benefits expense of $2.8 for the first nine months of 1998
represents an increase of $712,000 from $2.1 million for the comparable period
in 1997. At September 30, 1998 the Company had 104 full-time equivalent
employees compared to 86 at September 30, 1997. Other operating expenses of $1.6
million for the quarter ending September 30, 1998 was 27.7% higher than $1.3
million for the same period in 1997. This increase was due to amortization of
the intangible asset related to the branch acquisition in July of 1997.
Net occupancy expenses consist of depreciation on premises, lease costs of
buildings and equipment, maintenance and repair expenses, utilities and related
expenses. The Company's net occupancy expense at September 30, 1998 was $655,000
or 25.7% higher than $521,000 at September 30, 1997. The increase in occupancy
expense in 1998 was due principally to the addition of three branches purchased
in the third quarter of 1997.
Income Taxes
The provision for income taxes amounts to $876,000 and $781,000 at
September 30, 1998 and 1997, respectively. The provision resulted in an
effective tax rate of 34% for both periods reported.
Loan Losses and Recoveries
At September 30, 1998 management considered the allowance for loan losses
of $2.0 million sufficient to absorb 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 probable losses. Specific reserves are assigned for
sub-standard assets from the classified asset report and watch list 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: the volume and mix of the
existing loan portfolio, including volume and severity of nonperforming loans
and adversely classified credits, as well as analysis of net charge-offs
experienced on previously classified loans; 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; the nature and value of the collateral securing
the loan; the trend in loan growth, including any rapid increase in loan volume
within a relatively short period of time; general and local economic conditions
affecting the collectibility of the Company's loans; the relationship and trend
over the past several years of recoveries as a percentage of previous years'
charge-offs; and available outside information of a comparable nature regarding
the loan portfolios of other banks, including peer group banks.
<PAGE>
The following table shows the Company's loan loss performance for the
periods indicated:
<TABLE>
<CAPTION>
Nine months Year
Ending Ended
(unaudited) September 30, December 31,
(in thousands of dollars) 1998 1997
--------- ----------
<S> <C> <C>
Loans outstanding at end of period................................ $ 134,227 $ 131,963
Average loans outstanding during the period....................... $ 130,614 $ 130,362
Allowance for loan losses, beginning of period.................... $ 1,970 $ 1,894
Loans charged off:
Commercial..................................................... 254 186
Real Estate.................................................... - 3
Consumer....................................................... 11 23
Credit Cards................................................... 40 112
--------- ---------
Total loans charged-off...................................... 305 324
--------- ---------
Recoveries:
Commercial..................................................... 9 5
Real Estate.................................................... - -
Consumer....................................................... 3 20
Credit Cards................................................... 10 -
--------- ---------
Total recoveries............................................. 22 25
--------- ---------
Provision for loan losses......................................... 243 375
Adjustment incident to acquisition................................ 45 -
--------- ---------
Allowance for loan losses, end of period.......................... $ 1,975 $ 1,970
========= =========
Ratio of net loans charged-off to average loans outstanding....... .22% .23%
Ratio of allowance for loan losses to loans at end of period...... 1.47% 1.49%
</TABLE>
Loans
Total loans outstanding were $134.2 million and $132.0 at September 30, 1998
and December 31, 1997, respectively. Loan commitments were $18.8 million at
September 30, 1998 and $16.6 million at December 31, 1997.
The following table presents the composition of the Company's loan portfolio at
the dates indicated:
<TABLE>
<CAPTION>
(unaudited) September 30, 1998 December 31, 1997
(in thousands of dollars) Amount Percentage Amount Percentage
------------------------- ----------------------
<S> <C> <C> <C> <C>
Commercial ................................. $ 105,095 78.0% $ 93,829 70.8%
Real estate construction.................... 2,841 2.1 3,495 2.6
Real estate commercial...................... 5,916 4.4 5,475 4.1
Real estate mortgage........................ 15,294 11.3 24,167 18.2
Consumer and other.......................... 5,488 4.1 5,571 4.2
Contracts purchased......................... 197 .1 81 .1
---------- ----------- ----- ---------
134,831 100.0% 132,618 100.0%
=========== =========
Deferred loan fees.......................... (604) (655)
---------- ---------
Total loans............................ 134,227 131,963
Allowance for loan losses................... (1,975) (1,970)
---------- ---------
Total loans, net....................... $132,252 $ 129,993
========== =========
</TABLE>
<PAGE>
During its normal loan review procedures, the Company 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 for loan losses when management believes
after considering economic and business conditions, collection efforts, and
collateral position, that the borrowers' financial condition is such that
collection of the principal is not probable.
Generally, no interest is accrued on loans when factors indicate collection
of the interest is doubtful or when the principal or interest payment becomes 90
days past due, unless collection of the 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 the 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>
(unaudited) September 30, December 31,
(in thousands of dollars) 1998 1997
--------- ---------
<S> <C> <C>
Loans on nonaccrual status 2,692 1,897
Loans past due greater than 90 days but not on nonaccrual status 16 432
Other real estate owned 600 88
Troubled debt restructuring - -
--------- ---------
Total nonperforming assets 3,308 2,417
========= =========
Percentage of nonperforming assets to total assets 1.90% 1.39%
</TABLE>
At September 30, 1998 nonperforming assets were $3.3 million or 1.9% of total
assets. Non-accrual loans were $2.7 million at September 30, 1998. Management
estimates exposure of $294,000 on non-accrual loans at September 30, 1998. This
estimated exposure has been considered in management's analysis of the adequacy
for loan losses.
Liquidity
Liquidity represents the ability to meet deposit withdrawals and fund loan
demand, while retaining the flexibility to take advantage of business
opportunities. The Company's primary sources of funds are customers deposits,
loan payments, sales of assets, advances from the FHLB (Federal Home Loan Bank)
and the use of the federal funds market. As of September 30, 1998, approximately
$2.0 million of the securities portfolio matures within one year.
On March 12, 1998, the Company completed an initial public offering issuing a
total of 1,380,000 shares of common stock at $12.00 per share. After
underwriting discounts of $1.2 million and other offering expenses of $472,000
net proceeds were $14.9 million. Of these proceeds $1.1 million has been used to
repay long-term debt and a subordinated note. On August 31, 1998 the Company
acquired Business Finance Corporation of Bellevue, Washington. The acquisition
was accounted for using the purchase method, including issuance of common stock
with a value of $465,000. A cash payment was made totaling $1.7 million with an
adjustment to be made based on final determination of BFC's shareholder's
equity. A future contingent issuance of common stock valued at approximately
$500,000 will be issued if BFC achieves earnings targets for the twelve month
period following the acquisition. As part of the acquisition transaction
goodwill was recorded in the amount of $1.4 million to be amortized on a
straight line basis over a 15 year period.
<PAGE>
Historically the Company has utilized borrowings from the FHLB as an
important source of funding for its growth. The Company has an established
borrowing line with the FHLB that permits it to borrow up to 25% of assets.
Advances from the FHLB have terms ranging from 1 through 15 years and at
September 30, 1998 bear interest at rates from 4.48% to 8.62%. At September 30,
1998, $21.9 million in advances were outstanding from the FHLB and the Company
had additional borrowing capacity for cash advances of $20.8 million. The
Company may increase its percentage of borrowings from the FHLB in the future if
circumstances warrant.
Capital
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
September 30, 1998, the Company's ratios were 21.74% and 22.99%, respectively.
At December 31, 1997, the company's ratios were 9.6% and 11.34%, respectively.
The ratio of shareholders' equity to average assets was 15.56% and 6.94% at
September 30, 1998 and December 31, 1997, respectively. September 30, 1998
ratios are significantly higher than those at December 31,1997 due to the
initial public offering on March 12, 1998 in which $14.9 million was raised in
additional capital.
Year 2000
This section contains forward-looking statements that have been prepared on
the basis of the Company's best judgments and currently available information.
These forward-looking statements are inherently subject to significant business,
third-party and regulatory uncertainties and contingencies, many of which are
beyond the control of the Company. In addition, these forward-looking statements
are based on the Company's current assessments and remediation plans, which are
based on certain representations of third party service providers and are
subject to change. Accordingly, there can be no assurance that the Company's
results of operations will not be adversely affected by difficulties or delays
in the Company's or third parties' Year 2000 readiness efforts. See "Risks"
below for a discussion of factors that may cause such forward-looking statements
to differ from actual results.
The Company has an active Y2K plan and committee addressing all systems
affected by the millennium issue. The plan includes five phases Awareness,
Assessment, Renovation, Validation, and Implementation.
Awareness
The company's senior management participates on the committee as well as a
representative from each critical area of the bank. The board of directors is
updated on the progress of the plan on a monthly basis. The awareness phase has
been completed but will continue to be an on going effort in regards to
educating customers and keeping abreast of all new Y2K issues. The bank has
implemented several awareness programs for customers and will be sponsoring Year
2000 seminars for its larger business customers.
Assessment
Assessment of the Company's systems has been completed and all
hardware/software as well as non-hardware/software systems have been identified.
The committee has developed a list of products and systems that could be
effected by the Year 2000 date change. All vendors and suppliers have been
contacted and have been individually assessed for both their criticality to the
operation of the company and if they are satisfactory in their Year 2000
efforts.
Renovation and Validation
The Company is currently in the renovation and validation phases of the
project. All mission critical systems will be validated for Y2K compliance by
December 31, 1998 with minor systems completed by the end of the second quarter
of 1999.
<PAGE>
Implementation
Any system found to be not in compliance with the Year 2000 date change has
been brought to the attention of senior management and is being upgraded or
replaced. The systems that have been identified are included in the Company's
Year 2000 budget. A budget has been approved and the additional costs to address
the Year 2000 issues at this time are estimated to be $114,000.
Contingency plan
A contingency plan is being established that would be carried out in the
event that the preventative measures put in place do not prove successful. This
plan addresses business operations to be carried out assuming the telephone and
electrical systems are in working order. The contingency plan will be completed
by December 31, 1998 and will be updated throughout 1999.
Risks
Based on its current assessments and remediation plans, the Company does not
expect that it will suffer any material disruption of its business as a result
of Year 2000 issues. Although the Company has no reason to believe that a
material disruption will occur, the most likely worst case scenario would result
from a Y2K failure in the power supply, voice and data transmission systems or
the federal government. If such a failure were to occur, the Company would
implement its contingency plan. In such event, it is likely that there would be
temporary disruption of customer service and customer inconvenience and
additional costs from the implementation of the contingency plan. It is not
possible to quantify those costs at the present time. Although the Company
believes its contingency plan when completed will satisfactorily address these
issues, there can be no assurance that the Company's contingency plan will
function as anticipated or that the results of operations of the Company will
not be adversely affected in the event of a prolonged disruption of service.
<PAGE>
Part II. Other Information
Item 2
Changes in Securities and Use of Proceeds
On March 12, 1998, the Company completed an initial public offering issuing a
total of 1,380,000 shares of common stock at $12.00 per share. After
underwriting discounts of $1.2 million and other offering expenses of $472,000
net proceeds were $14.9 million. Of these proceeds $1.1 million has been used to
repay long-term debt and a subordinated note. The remainder of the proceeds has
been invested in an interest bearing account at FHLB, Seattle. The managing
underwriters were Black & Company, Inc. and Pacific Crest Securities, Inc.
Effective August 31, 1998, as a result of the purchase, Business Finance
Corporation (BFC) of Bellevue, Washington became a wholly owned subsidiary of
the Company. BFC provides factoring, leasing, and inventory financing services
in Washington, Oregon, California, and Nevada. The acquisition was accounted for
using the purchase method and included an initial issuance of common stock with
a value of $465,000. A cash payment was made in the amount of $1.7 million with
an adjustment to be made based on final determination of BFC's shareholder's
equity. A future contingent issuance of common stock valued at approximately
$500,000 will be issued if BFC achieves earnings targets for the twelve-month
period following the acquisition.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cowlitz Bancorporation
(Registrant)
Dated: November 12, 1998 /s/ Charles W. Jarrett
Charles W. Jarrett
President and Chief Operating Officer
Dated: November 12, 1998 /s/ Donna P. Gardner
Donna P. Gardner
Vice-President/Secretary-Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from Consolidated
Balance Sheets of Cowlitz Bancorporation and subsidiary as of September 30, 1998
and December 31, 1997 and related Consolidated Statements of Income, Changes in
Shareholders' Equity and Cash Flows for each of the period ended June 30, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 14,442
<INT-BEARING-DEPOSITS> 90,679
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,090
<INVESTMENTS-CARRYING> 6,646
<INVESTMENTS-MARKET> 6,699
<LOANS> 134,227
<ALLOWANCE> 1,975
<TOTAL-ASSETS> 174,335
<DEPOSITS> 118,719
<SHORT-TERM> 1,950
<LIABILITIES-OTHER> 1,201
<LONG-TERM> 21,994
0
0
<COMMON> 18,251
<OTHER-SE> 12,220
<TOTAL-LIABILITIES-AND-EQUITY> 174,335
<INTEREST-LOAN> 10,292
<INTEREST-INVEST> 697
<INTEREST-OTHER> 1,085
<INTEREST-TOTAL> 12,074
<INTEREST-DEPOSIT> 3,855
<INTEREST-EXPENSE> 1,099
<INTEREST-INCOME-NET> 4,954
<LOAN-LOSSES> 243
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 5,763
<INCOME-PRETAX> 2,577
<INCOME-PRE-EXTRAORDINARY> 2,577
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,701
<EPS-PRIMARY> .47
<EPS-DILUTED> .44
<YIELD-ACTUAL> 9.84
<LOANS-NON> 2,692
<LOANS-PAST> 16
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,970
<CHARGE-OFFS> 305
<RECOVERIES> 22
<ALLOWANCE-CLOSE> 1,975
<ALLOWANCE-DOMESTIC> 1,975
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
