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 June 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 July 31, 1998: 4,000,682
<PAGE>
TABLE OF CONTENTS
Page
Part I
Financial Statements
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Income -
Three and Six months ended June 30, 1998 and June 30, 1997 4
Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and June 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 18
Other Information 18
Exhibits and Reports on Form 8-K 18
Signatures 19
<PAGE>
COWLITZ BANCORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(in thousand of dollars)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks........................................... $ 26,274 $ 23,109
Investment securities:
Investments available-for-sale (at fair value, cost of $6,994
and $3,993 at June 30, 1998 and December 31, 1997,
respectively)................................................ 7,007 4,017
Investments held-to-maturity (at amortized cost, fair value of
$6,869 and $4,486 at June 30, 1998 and December 31, 1997,
respectively)................................................ 6,843 4,464
--------- ---------
Total investment securities.................................. 13,850 8,481
--------- ---------
Loans............................................................. 129,262 131,963
Allowance for loan losses......................................... (1,923) (1,970)
--------- ---------
Loans, net..................................................... 127,339 129,993
--------- ---------
Premises and equipment, net of accumulated depreciation of $1,607
and $1,354 at June 30, 1998 and December 31, 1997,
respectively................................................... 5,937 5,653
Federal Home Loan Bank stock...................................... 2,763 2,658
Intangible asset, net of accumulated amortization of $252 and $123
at June 30, 1998 and December 31, 1997, respectively........... 1,708 1,847
Other assets...................................................... 2,311 1,552
--------- ---------
Total assets................................................. $ 180,182 $ 173,293
========= =========
LIABILITIES
Deposits:
Demand......................................................... $ 30,880 $ 27,141
Savings and interest-bearing demand............................ 46,092 46,454
Certificates of deposit........................................ 50,813 62,614
--------- ---------
Total deposits............................................... 127,785 136,209
Short-term borrowings............................................. 1,825 725
Long-term borrowings.............................................. 20,190 21,900
Other liabilities................................................. 493 572
--------- ---------
Total liabilities............................................ $ 150,293 $159,406
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 and no shares authorized
as of June 30, 1998 and December 31, 1997, respectively;
no shares issued and outstanding at June 30, 1998 and
December 31, 1997, respectively................................ $ - $ -
Common stock, no par value; 25,000,000 and 3,937,500 authorized
as of June 30, 1998 and December 31, 1997, respectively;
4,000,291 and 2,604,543 shares issued and outstanding at
June 30, 1998 and December 31, 1997, respectively.............. 18,275 3,262
Additional paid in capital........................................ 1,538 1,538
Retained earnings................................................. 10,068 9,071
Net unrealized gains on investments available-for-sale............ 8 16
--------- ---------
Total shareholders' equity................................... 29,889 13,887
--------- ---------
Total liabilities and shareholders' equity................... $ 180,182 $ 173,293
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(in thousand of dollars, except number of shares and per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
-------- -------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans............................. $ 3,444 $ 3,386 $ 6,788 $ 6,650
Interest on taxable investment securities.............. 257 159 452 304
Interest on non-taxable investments securities......... 1 0 1 0
Interest from other banks.............................. 487 77 729 262
-------- -------- --------- ---------
Total interest income............................... 4,189 3,622 7,970 7,216
-------- -------- --------- ---------
INTEREST EXPENSE
Savings and interest-bearing demand.................... 516 250 918 516
Certificates of deposit................................ 859 1,080 1,758 2,215
Short-term borrowings.................................. 20 11 37 22
Long-term borrowings................................... 327 335 670 684
-------- -------- --------- ---------
Total interest expense.............................. 1,722 1,676 3,383 3,437
-------- -------- --------- ---------
Net interest income before provision for loan losses 2,467 1,946 4,587 3,779
PROVISION FOR LOAN LOSSES.............................. (26) (98) (132) (189)
-------- -------- --------- ---------
Net interest income after provision for loan losses. 2,441 1,848 4,455 3,590
-------- -------- --------- ---------
NONINTEREST INCOME
Service charges on deposit accounts................. 155 119 319 224
Other income........................................ 76 42 171 91
Net gains on sales of available-for-sale securities. - - 5 -
-------- -------- --------- ---------
Total noninterest income.......................... 231 161 495 315
-------- -------- --------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits...................... 912 676 1,850 1,297
Net occupancy and equipment expense................. 229 161 424 297
Other operating expense............................. 540 377 1,026 736
-------- -------- --------- ---------
Total noninterest expense......................... 1,681 1,214 3,300 2,330
-------- -------- --------- ---------
Income before income tax expense.................. 991 795 1,650 1,575
INCOME TAX EXPENSE..................................... 337 271 561 536
-------- -------- --------- ---------
Net income........................................ $ 654 $ 524 $ 1,089 $ 1,039
======== ======== ========= =========
BASIC EARNINGS PER SHARE............................... $ 0.16 $ 0.20 $ .32 $ .40
DILUTED EARNINGS PER SHARE............................. $ 0.15 $ 0.20 $ .30 $ .40
</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>
Six months ended
June 30,
1998 1997
--------- ---------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................... $ 1,089 $ 1,039
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization................................ 391 166
Provisions for loan losses................................... 132 189
Net amortization of investment security premiums and accretion
of discounts............................................... (3) (2)
(Increase) in other assets................................... (759) (413)
(Decrease) in other liabilities.............................. (79) (142)
Federal Home Loan Bank stock dividends....................... (105) (94)
--------- ---------
Net cash provided by operating activities................ 666 743
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities
held-to-maturity............................................. 892 788
Proceeds from sales of investment securities
available-for-sale........................................... 1,000 -
Purchases of investment securities:
Held-to-maturity............................................. (3,268) (987)
Available-for-sale........................................... (3,996) (1,993)
Net (increase) decrease in loans............................... 2,522 (4,384)
Purchases of premises and equipment............................ (539) (1,048)
--------- ---------
Net cash (used in) provided by investment activities....... (3,389) (7,624)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, savings, and interest-bearing
demand deposits.............................................. 3,377 3,461
Net increase (decrease) in certificates of deposit............. (11,801) (3,672)
Dividends paid................................................. (92) (60)
Net increase (decrease) in short-term borrowings............... 1100 (25)
Net proceeds (repayment) of long-term borrowings............... (1710) (550)
Issuance of common stock for cash, net of amount paid for
fractional shares.......................................... 15,014 49
--------- ---------
Net cash provided by shares financing activities........... 5,888 (797)
--------- ----------
Net increase (decrease) in cash and due from banks......... 3,165 (7,678)
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR...................... 23,109 20,905
--------- ---------
CASH AND DUE FROM BANKS AT END OF PERIOD.......................... $ 26,274 $ 13,227
========= =========
</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)
(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 $5........... - - - - 9 9
---------- -------- -------- -------- ------ ---------
BALANCE AT DECEMBER 31, 1997........... 2,604,543 3,262 1,538 9,071 16 13,887
Issuance of common stock for cash.... 1,395,825 15,014 - - - 15,014
Net income........................... - - - 1,089 - 1,089
Cash dividends paid ($.0125 per share) - - - (92) - (92)
Net changes in unrealized gains on
investments available-for-sale, net
of deferred taxes of $4........... - - - - (8) (8)
Cash paid for fractional shares........ (77) (1) - - - (1)
----------- --------- -------- -------- ------ ---------
BALANCE AT JUNE 30, 1998 4,000,291 $ 18,275 $1,538 $ 10,068 $ 8 $ 29,889
========= ======== ====== ========== ======= =========
</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 wholly owned 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.
2. 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.
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 six months ended June 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 June 30, 1998
<S> <C> <C> <C>
Basic earnings per share $ 654 4,000,247 $ .16
Stock Options 221,037
Diluted earnings per share $ 654 4,221,284 $ .15
For the three months ended June 30, 1997
Basic earnings per share $ 524 2,601,428 $ .20
Stock Options 0
Diluted earnings per share $ 524 2,601,428 $ .20
For the six months ended June 30, 1998
Basic earnings per share $ 1,089 3,425,537 $ .32
Stock Options 209,930
Diluted earnings per share $1,089 3,635,467 $ .30
For the six months ended June 30, 1997
Basic earnings per share $ 1,039 2,600,037 $ .40
Stock Options 0
Diluted earnings per share $ 1,039 2,600,037 $ .40
</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 Six months ended
June 30, 1997 June 30, 1997
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C>
Previously reported EPS........ $ .19 $ .19 $ .37 $ .37
Restated EPS................... $ .20 $ .20 $ .40 $ .40
</TABLE>
SFAS 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 substatively
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 June 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 Six months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income................................ $ 654 $ 524 $ 1,089 $ 1,039
Net change in unrealized gain/loss on
available for sale securities, net of tax (2) 19 (8) (4)
------- ------- ------- ------
Comprehensive income...................... $ 652 $ 543 $ 1,081 $ 1,035
======= ======= ======= =======
</TABLE>
<PAGE>
8. Subsequent Event
On August 11, 1998, the Company entered into a stock purchase agreement
with Business Finance Corporation (BFC), of Bellevue, Washington. Under the
agreement, BFC will become a wholly-owned subsidiary of Cowlitz Bancorporation.
BFC provides factoring, leasing, and inventory financing services in Washington,
Oregon, California, and Nevada. The acquisition, to be accounted for under the
purchase method, will include the initial issuance of common stock with a value
of $500,000, cash payments totaling approximately $1.8 million (subject to
adjustments based on final determination of BFC's shareholder's equity) and a
future contingent issuance of common stock valued at $500,000 if BFC achieves
certain earnings targets for the twelve month period following the acquisition.
The acquisition, which is expected to close during the third quarter of 1998, is
subject to approval by the applicable regulatory agencies.
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 include elsewhere herein.
Results of Operations
Net Income
Three months ended June 30, 1998 and 1997
The Company's net income of $654,000 at June 30, 1998, reflects an increase
of 24.8% compared to net income of $524,000 at June 30, 1997. The increase in
second quarter earnings is primarily a result of a 26.8% increase in net
interest income for the quarter ended June 30, 1998 as compared to the quarter
ended June 30, 1997. The increase is a result of the investment of funds
received in the Company's March 1998 Initial Public Offering and from the growth
of non-interest bearing deposits. Earnings per diluted share were $.15 for the
three months ended June 30, 1998 compared to $.20 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 June 30, 1997, as required by the SEC's recently issued
SAB No.98.
Six months ended June 30, 1998 and 1997
Net income for the first six months of 1998 was $1.1 million compared to
$1.0 million for the comparable period in 1997. Net income for 1998 has
increased as the Company has expanded its mortgage and trust services and
benefited from its branch acquisitions in the second half of 1997. Net income
for the six months ended June 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 June 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.
Net interest income for the quarter ended June 30, 1998 was $2.5 million,
which was an increase of 26.8% from $1.9 million at June 30, 1997. One component
that contributed to this increase was the increase in average earning assets,
the largest element of which was an increase in the interest bearing due from
banks resulting from the investment of the Company's Initial Public Offering
proceeds. The overall tax-equivalent earning asset yield of 9.87% at June 30,
1998 compared to 10.01% at June 30, 1997. 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.
<PAGE>
The average cost of interest-bearing liabilities was 5.41% at June 30, 1998
compared to 5.38% at June 30, 1997. Average interest-bearing liabilities
increased to $127.4 million at June 30, 1998 as compared to $124.6 million for
the corresponding period in 1997. Interest paid on savings and interest-bearing
demands increased to $516,000 for the quarter ended June 30, 1998 from $250,000
for the quarter ended June 30, 1997. This increase is mainly due to
interest-bearing deposits added in connection with the July 1997 branch
acquisition. Interest paid on certificates of deposit decreased to $859,000 for
the quarter ended June 30, 1998 from $1.1 million for the like 1997 period. The
Company has not aggressively priced certain of its higher yielding certificates
of deposits after acquisition of three branch deposits, resulting in these
certificates of deposit generally not renewing at maturity. In accordance with
this strategy, approximately $7.1 million of higher rate certificates of deposit
matured and were not renewed during June 1998.
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) June 30, Increase
(in thousands of dollars) 1998 1997 (Decrease) Change
------- ------- --------- ------
<S> <C> <C> <C> <C>
Interest income(1)................ $ 4,189 $ 3,622 $ 567 15.7 %
Interest expense................... 1,722 1,676 46 2.7 %
-------- --------- ----------
Net interest income................ $ 2,467 $ 1,946 $ 521 26.8 %
======== ========= ==========
Average interest earning assets.... $169,684 $ 144,734 24,950 17.2 %
Average interest bearing
liabilities....................... $127,390 $ 124,612 2,778 2.2 %
Average yields earned (2).......... 9.87% 10.01% (.14)
Average rates paid (2)............. 5.41% 5.38% .03
Net interest spread (2)............ 4.46% 4.63% (.17)
Net interest margin (2)............ 5.82% 5.38% .44
(1) Interest earned on nontaxable securities has been computed on a 34% tax
equivalent basis.
(2) Ratios for the three months ended June 30, 1998 and 1997 have been
annualized.
</TABLE>
Six Months Ended June 30,1998 and 1997
Total interest earnings assets averaged $164.4 million for the six months
ended June 30, 1998, compared to $145.7 million for the corresponding period in
1997. The average yield on interest earning assets decreased to 9.70% during the
first six months of 1998 compared to 9.91% for the corresponding period in 1997,
as a result of lower yields on loans and investment securities.
Interest bearing liabilities averaged $128.6 million and $126.9 million
during the first six months of 1998 and 1997, respectively. The average cost of
these liabilities decreased in the first six months of 1998 to 5.26% from 5.42%
in the first six 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.
<PAGE>
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>
Six Months Ended
(unaudited) June 30, Increase
(in thousands of dollars) 1998 1997 (Decrease) Change
------- ------- --------- ------
<S> <C> <C> <C> <C>
Interest income(1)................ $ 7,970 $ 7,216 $ 754 10.4 %
Interest expense................... 3,383 3,437 (54) (1.6)%
-------- --------- ----------
Net interest income................ $ 4,587 $ 3,779 $ 808 21.4 %
======== ========= ==========
Average interest earning assets.... $164,394 $ 145,658 18,736 12.9 %
Average interest bearing
liabilities...................... $128,617 $ 126,942 1,675 1.3 %
Average yields earned (2).......... 9.70% 9.91% (.21)
Average rates paid (2)............. 5.26% 5.42% (.16)
Net interest spread (2)............ 4.44% 4.49% (.05)
Net interest margin (2)............ 5.58% 5.19% .39
(1) Interest earned on nontaxable securities has been computed on a 34% tax
equivalent basis.
(2) Ratios for the three months ended June 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.
Provision for Loan Losses
Three months ended June 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.
<PAGE>
The Company's provision for loan losses was $26,000 and $98,000 for the
three months ended June 30, 1998 and 1997, respectively. Net charge-offs for the
three months ended June 30, 1998 were $61,000, compared to net charge-offs of
$39,000 for the same period in 1997. Nonaccrual loans were $1.5 million at June
30, 1998 and $592,000 at June 30, 1997. 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.
Six months ended June 30, 1998 and 1997
Provisions for loan losses recorded for the six months ended June 30, 1998
were $132,000 as compared to $189,000 at June 30, 1997. Net charge-offs were
$179,000 and $132,000 at June 30, 1998 and 1997, respectively. At June 30, 1998
the loan loss reserve was 1.49% of total loans outstanding.
Non-Interest Income
Three months ended June 30, 1998 and 1997
Non-interest income, primarily consisting of service charges and related
fees, was $231,000 for the three months ended June 30, 1998 and $161,000 in the
corresponding period in 1997. As a result of an increase in the number of
accounts, service charges have increased to $155,000 from $119,000 for the three
months ended June 30, 1998 compared to the three months ended June 30, 1997.
Other income has also increased to $76,000 from $42,000 in the second quarter of
1998 compared to the second quarter of 1997 due to an increase in office rental
income.
Six months ended June 30, 1998 and 1997
Total non-interest income increased to $495,000 for the first six months of
1998 compared to $315,000 during the same period in 1997. The increase in
non-interest income of $180,000 is a result of a 42.4% increase in service
charge income after the addition of three branches in July 1997. Another
component of this increase was the expansion of mortgage and trust services
provided to the Cowlitz County area.
Non-Interest Expense
Three months ended June 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 38.5% to $1.7
million for the quarter ended June 30, 1998 compared to $1.2 million for the
quarter ended June 30, 1997, primarily due to increased staffing costs,
occupancy expense and amortization of the deposit premium from the acquisition
of three branches in July 1997.
Six months ended June 30, 1998 and 1997
For the six months ended June 30, 1998 non-interest expense was $3.3
million as compared to $2.3 million for the six months ended June 30, 1997.
Salaries and benefits expense of $1.9 for the first six months of 1998
represents an increase of $553,000 from $1.3 million for the comparable period
in 1997. At June 30, 1998 the Company had 96 full-time equivalent employees
compared to 75 at June 30, 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 June 30, 1998 was $424,000 or
42.8% higher than $297,000 at June 30, 1997. The increase in occupancy expense
in 1998 was due primarily to the addition of three branches purchased in the
third quarter of 1997.
<PAGE>
Income Taxes
The provision for income taxes amounts to $561,000 and $536,000 at June 30,
1998 and 1997, respectively. The provision resulted in an effective tax rate of
34% for both periods reported.
Loan Losses and Recoveries
At June 30, 1998 management considered the allowance for loan losses of
$1.9 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 potential 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.
The following table shows the Company's loan loss performance for the
periods indicated:
<TABLE>
<CAPTION>
Six months
ending
(unaudited) June 30, December 31,
(in thousands of dollars) 1998 1997
--------- -----------
<S> <C> <C>
Loans outstanding at end of period................................ $ 129,262 $ 131,963
Average loans outstanding during the period....................... $ 130,670 $ 130,362
Allowance for loan losses, beginning of period.................... $ 1,970 $ 1,894
Loans charged off:
Commercial..................................................... 164 186
Real Estate.................................................... - 3
Consumer....................................................... 2 23
Credit Cards................................................... 26 112
--------- ---------
Total loans charged-off...................................... 192 324
--------- ---------
Recoveries:
Commercial..................................................... 3 5
Real Estate.................................................... - -
Consumer....................................................... - 20
Credit Cards................................................... 10 -
--------- ---------
Total recoveries............................................. 13 25
--------- ---------
Provision for loan losses......................................... 132 375
--------- ---------
Allowance for loan losses, end of period.......................... $ 1,923 $ 1,970
========= =========
Ratio of net loans charged-off to average loans outstanding....... .14% .23%
Ratio of allowance for loan losses to loans at end of period...... 1.49% 1.49%
</TABLE>
<PAGE>
Loans
Total loans outstanding were $129.3 million and $132.0 at June 30, 1998 and
December 31, 1997, respectively. Loan commitments were $19.1 million at June 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) June 30, 1998 December 31, 1997
(in thousands of dollars) Amount Percentage Amount Percentage
------------------------- ----------------------
<S> <C> <C> <C> <C>
Commercial ................................. $ 97,677 75.2% $ 93,829 70.8%
Real estate construction.................... 2,053 1.6 3,495 2.6
Real estate commercial...................... 4,913 3.8 5,475 4.1
Real estate mortgage........................ 19,814 15.3 24,167 18.2
Consumer and other.......................... 5,379 4.1 5,571 4.2
Contracts purchased......................... 46 * 81 .1
---------- -------- --------- ----------
129,882 100.0% 132,618 100.0%
======== ==========
Deferred loan fees.......................... (620) (655)
---------- ---------
Total loans............................ 129,262 131,963
Allowance for loan losses................... (1,923) (1,970)
---------- ---------
Total loans, net....................... $127,339 $ 129,993
========== =========
*Less than .1%
</TABLE>
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) June 30, December 31,
(in thousands of dollars) 1998 1997
--------- ----------
<S> <C> <C>
Loans on nonaccrual status 1,509 1,897
Loans past due greater than 90 days but not on nonaccrual status 851 432
Other real estate owned 600 88
Troubled debt restructuring - -
--------- ---------
Total nonperforming assets 2,960 2,417
========= =========
Percentage of nonperforming assets to total assets 1.64% 1.39%
</TABLE>
At June 30, 1998 nonperforming assets were $3.0 million or 1.6% of total
assets. Non-accruals of $1.5 million reflect a concentration of $1.3 million in
5 borrowers. Management has estimated the exposure on these 5 loans at $235,000.
This estimated exposure has been considered in management's analysis of the
adequacy of the allowance for loan losses.
<PAGE>
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 June 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. The remainder of the proceeds will
be used for acquisitions and other business opportunities.
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 June
30, 1998 bear interest at rates from 4.48% to 8.62%. At June 30, 1998, $20.1
million in advances were outstanding from the FHLB and the Company had
additional borrowing capacity for cash advances of $24.9 million. Due to the
acquisition of three branches and the cash on deposit with the bank from the
initial public offering in March 1998 the need for FHLB borrowings has
decreased. 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 June 30,
1998, the Company's ratios were 22.94% and 24.20%, 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 15.25% and 6.94% at June 30, 1998 and
December 31, 1997, respectively. June 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
The Company has an active Y2K plan and committee addressing all systems
affected by the millennium issue. Assessment of the Company's systems has been
completed and all hardware/software as well as non-hardware/software systems
have been identified. The Company is currently in the validation phase of the
project. All mission critical systems will be completed by December 31, 1998
with minor systems completed by the end of the second quarter of 1999. A budget
has been approved and the additional costs to address the Year 2000 issues are
estimated to be $86,000. The Company's primary Y2K risk is associated with the
reliance upon outside vendors such as utility companies, communications
companies, and the federal government. A contingency plan is being established
that would be carried out in the event that the preventative measures put in
place have not been successful.
<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. The managing underwriters were Black & Company,
Inc. and Pacific Crest Securities, Inc. 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.
Item 5
Other Information
On August 11, 1998 the Company announced its plans to acquire Business
Finance Corporation (BFC), of Bellevue, Washington. BFC provides factoring,
leasing, and inventory financing services in Washington, Oregon, California, and
Nevada. The Company will issue common stock with a value of $500,000, cash
payments totaling approximately $1.8 million and a future contingent issuance of
common stock valued at $500,000 if BFC achieves certain earnings targets for the
twelve month period following the acquisition. The acquisition is expected to
close during the third quarter of 1998, and is subject to approval by the
applicable regulatory agencies.
A shareholder who intends to present a proposal at the Company's next
annual meeting, other than pursuant to Rule 14a-8 under the Securities Exchange
Act of 1934, must provide the Company notice of such intention by at least
December 29, 1998 or management of the Company will have discretionary voting
authority at the 1999 annual meeting with respect to such proposal without any
discussion of the matter in the Company's proxy statement.
Item 6
(a) Exhibits. The list of exhibits is set forth on the Exhibit Index
attached hereto.
(b) On June 1, 1998, the Company filed form 8-K announcing an agreement in
principle to merge with United Bancorp of Roseburg, Oregon.
On June 8, 1998, the Company filed form 8-K announcing it had terminated
discussions with respect to a proposed merger of United Bancorp of Roseburg,
Oregon.
<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)
/s/ Charles W. Jarrett
Dated: 8/14/98 __________________________
Charles W. Jarrett
President and Chief Operating Officer
/s/ Donna P. Gardner
Dated: 8/14/98 __________________________
Donna P. Gardner
Vice-President/Secretary-Treasurer
<PAGE>
EXHIBIT INDEX
Exhibit No.
3.1* Restated and Amended Articles of Incorporation of the Company.
3.2* Bylaws of the Company.
27 Financial Data Schedule
*Incorporated by reference to the Company's Registration Statement on Form
S-1, File No. 333-44355.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from Consolidated
Balance Sheets of Cowlitz Bancorporation and subsidiary as of June 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 26,274
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,007
<INVESTMENTS-CARRYING> 6,843
<INVESTMENTS-MARKET> 6,869
<LOANS> 129,262
<ALLOWANCE> 1,923
<TOTAL-ASSETS> 180,182
<DEPOSITS> 127,785
<SHORT-TERM> 1,825
<LIABILITIES-OTHER> 493
<LONG-TERM> 20,190
0
0
<COMMON> 18,275
<OTHER-SE> 11,614
<TOTAL-LIABILITIES-AND-EQUITY> 180,182
<INTEREST-LOAN> 6,788
<INTEREST-INVEST> 453
<INTEREST-OTHER> 729
<INTEREST-TOTAL> 7,970
<INTEREST-DEPOSIT> 2,676
<INTEREST-EXPENSE> 707
<INTEREST-INCOME-NET> 4,587
<LOAN-LOSSES> 132
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 3,300
<INCOME-PRETAX> 1,650
<INCOME-PRE-EXTRAORDINARY> 1,650
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,089
<EPS-PRIMARY> .32
<EPS-DILUTED> .30
<YIELD-ACTUAL> 9.70
<LOANS-NON> 1,509
<LOANS-PAST> 851
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,970
<CHARGE-OFFS> 192
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 1,923
<ALLOWANCE-DOMESTIC> 1,923
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
