<PAGE>
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 March 31, 1999
[ ] 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 April 30, 1999: 4,004,052
<PAGE>
TABLE OF CONTENTS
Page
Part I
Financial Statements
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Income -
Three months ended March 31, 1999 and March 31, 1998 4
Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and March 31, 1998 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
Exhibits and Reports on Form 8-K 20
Signatures 21
2
<PAGE>
COWLITZ BANCORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(in thousand of dollars)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks ............................................................... $ 24,688 $ 22,705
Investment securities:
Investments available-for-sale (at fair value, cost of $5,998 and $6,994 at
March 31, 1999 and December 31, 1998,
respectively) .................................................................... 6,031 7,065
Investments held-to-maturity (at amortized cost, fair value of
$4,479 and $4,487 at March 31, 1999 and December 31, 1998,
respectively) .................................................................... 4,465 4,465
-------- --------
Total investment securities ...................................................... 10,496 11,530
-------- --------
Loans ................................................................................. 128,193 132,046
Allowance for loan losses ............................................................. (1,988) (1,814)
-------- --------
Loans, net ......................................................................... 126,205 130,232
-------- --------
Premises and equipment, net of accumulated depreciation of $1,980
and $1,837 at March 31, 1999 and December 31, 1998,
respectively ....................................................................... 5,926 5,859
Federal Home Loan Bank stock .......................................................... 2,925 2,869
Intangible assets, net of accumulated amortization of $516 and $432
at March 31, 1999 and December 31, 1998, respectively .............................. 2,966 3,110
Other assets .......................................................................... 2,312 2,040
-------- --------
Total assets ..................................................................... $175,518 $178,345
-------- --------
-------- --------
LIABILITIES
Deposits:
Demand ............................................................................. $ 30,319 $ 33,062
Savings and interest-bearing demand ................................................ 50,560 47,367
Certificates of deposit ............................................................ 38,742 41,932
-------- --------
Total deposits ................................................................... 119,621 122,361
Short-term borrowings ................................................................. 2,475 2,275
Long-term borrowings .................................................................. 21,603 21,799
Other liabilities ..................................................................... 876 990
-------- --------
Total liabilities ................................................................ $144,575 $147,425
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 and no shares authorized as of March
31, 1999 and December 31, 1998, respectively; no shares issued and
outstanding at March 31, 1999 and
December 31, 1998, respectively .................................................... $ - $ -
Common stock, no par value; 25,000,000 and 3,937,500 authorized
as of March 31, 1999 and December 31, 1998, respectively;
4,002,377 and 4,001,999 shares issued and outstanding at
March 31, 1999 and December 31, 1998, respectively ................................. 18,254 18,251
Additional paid in capital ............................................................ 1,538 1,538
Retained earnings ..................................................................... 11,127 11,085
Net unrealized gains on investments available-for-sale ................................ 24 46
-------- --------
Total shareholders' equity ....................................................... 30,943 30,920
-------- --------
Total liabilities and shareholders' equity ....................................... $175,518 $178,345
-------- --------
-------- --------
</TABLE>
3
<PAGE>
The accompanying notes are an integral part of these statements.
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
March 31,
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans........................................ $ 3,585 $ 3,344
Interest on taxable investment securities......................... 215 195
Interest on non-taxable investment securities..................... 2 -
Interest from other banks......................................... 251 242
--------- ---------
Total interest income.......................................... 4,053 3,781
--------- ---------
INTEREST EXPENSE
Savings and interest-bearing demand............................... 477 402
Certificates of deposit........................................... 543 899
Short-term borrowings............................................. 31 17
Long-term borrowings.............................................. 408 343
--------- ---------
Total interest expense......................................... 1,459 1,661
--------- ---------
Net interest income before provision for loan losses........... 2,594 2,120
PROVISION FOR LOAN LOSSES......................................... (634) (106)
--------- ---------
Net interest income after provision for loan losses............ 1,960 2,014
--------- ---------
NONINTEREST INCOME
Service charges on deposit accounts............................ 157 164
Other income................................................... 114 95
Net gains on sales of available-for-sale securities............ - 5
--------- ---------
Total noninterest income..................................... 271 264
--------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits................................. 1,166 938
Net occupancy and equipment expense............................ 252 195
Business tax expense........................................... 65 58
Amortization of intangibles.................................... 84 69
Other operating expense........................................ 509 359
--------- ---------
Total noninterest expense.................................... 2,076 1,619
--------- ---------
Income before income tax expense............................. 155 659
INCOME TAX EXPENSE................................................ 53 224
--------- ---------
Net income................................................... $ 102 $ 435
--------- ---------
--------- ---------
BASIC EARNINGS PER SHARE.......................................... $ 0.03 $ 0.15
DILUTED EARNINGS PER SHARE........................................ $ 0.02 $ 0.14
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
COWLTIZ BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<TABLE>
<CAPTION>
Three months ended
March 31,
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................... $ 102 $ 435
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization................................ 227 125
Provisions for loan losses................................... 634 106
Net amortization of investment security premiums and accretion
of discounts............................................... (1) (1)
(Increase) in other assets................................... (95) (293)
Increase (decrease) in other liabilities..................... (114) 254
Federal Home Loan Bank stock dividends....................... (56) (53)
------- -------
Net cash provided by operating activities................ 697 573
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities
held-to-maturity............................................. 991 694
Proceeds from sales and maturities of investment securities
available-for-sale........................................... 1,000 1,000
Purchases of investment securities:
Held-to-maturity............................................. (990) (1,190)
Available-for-sale........................................... - (3,996)
Net (increase) decrease in loans............................... 3,288 (223)
Purchases of premises and equipment............................ (210) (126)
------- -------
Net cash (used in) provided by investment activities....... 4,079 (3,841)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, savings, and interest-bearing
demand deposits.............................................. 450 5,580
Net increase (decrease) in certificates of deposit............. (3,190) (2,031)
Dividends paid................................................. (60) (32)
Net increase in short-term borrowings.......................... 200 450
Repayment of long-term borrowings.............................. (196) (514)
Issuance of common stock for cash, net of amount paid for
fractional shares.......................................... 3 14,997
------- -------
Net cash provided by shares financing activities........... (2,793) 18,450
------- -------
Net increase (decrease) in cash and due from banks......... 1,983 15,182
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR...................... 22,705 23,109
------- -------
CASH AND DUE FROM BANKS AT END OF PERIOD.......................... $24,688 $38,291
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of dollars, except number of shares)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Stock Paid-in Retained Comprehensive Shareholders' Comprehensive
Shares Amount Capital Earnings Income Equity Income
--------- ------- --------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 2,604,543 3,262 1,538 9,071 16 13,887
Comprehensive Income:
Net income ................................. - - - 2,226 - 2,226 $2,226
Net change in unrealized gains on
investments available-for-sale, net
of deferred taxes of $16 ................ - - - - 30 30 30
------
Other comprehensive income, net of tax ..... - - - - - - 30
------
Comprehensive Income ....................... - - - - - - $2,256
------
------
Issuance of common stock for cash .......... 1,396,251 15,019 - - - 15,019
Purchase of treasury stock ................. (50,000) (494) - - - (494)
Issuance of common stock for
acquisition ................................ 51,282 465 - - - 465
Cash dividends paid ($.06 per share) ....... - - - (212) - (212)
Cash paid for fractional shares .............. (77) (1) - - - (1)
--------- ------- --------- -------- -------- -------------
BALANCE AT DECEMBER 31, 1998 4,001,999 $18,251 $1,538 $11,085 $ 46 $30,920
Comprehensive Income:
Net income ................................. - - - 102 - 102 $ 102
Net change in unrealized gains on
investments available-for-sale, net
of deferred taxes of $12 ................ - - - - (22) (22) (22)
------
Other comprehensive income, net of tax ..... - - - - - - (22)
------
Comprehensive Income ....................... - - - - - - $ 80
------
------
Issuance of common stock for cash .......... 378 3 - - - 3
Cash dividends paid ($.015 per share) ...... - - - (60) - (60)
--------- ------- --------- -------- -------- -------------
BALANCE AT MARCH 31, 1999 4,002,377 $18,254 $1,538 $11,127 $ 24 $30,943
--------- ------- --------- -------- -------- -------------
--------- ------- --------- -------- -------- -------------
</TABLE>
The accompanying notes are an integral part of these statements
6
<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 ended March 31, 1999 are not necessarily
indicative of results to be anticipated for the year ending December 31, 1999.
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 include 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.
7
<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 quarter ended March 31, 1999
<S> <C> <C> <C>
Basic earnings per share $ 102 4,002,343 $ .03
Stock Options 93,828
Diluted earnings per share $ 102 4,096,171 $ .02
For the quarter ended March 31, 1998
Basic earnings per share $ 435 2,844,440 $ .15
Stock Options 198,041
Diluted earnings per share $ 435 3,042,481 $ .14
</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
SFAS No. 133
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement establishes accounting and reporting standards requiring that
derivative instruments (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.
SFAS No. 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). SFAS No. 133 cannot be applied retroactively. SFAS No. 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.
8
<PAGE>
7. Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No.
130 "Reporting Comprehensive Income," effective January 1, 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 its available-for-sale investments
reported as a component of shareholders' equity.
The components of comprehensive income for the periods ended March 31,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three months ended
March 31
1999 1998
----- -----
<S> <C> <C>
Net income......................... $ 102 $ 435
Net change in unrealized gain/loss
on available for sale securities. (22) (6)
----- -----
Comprehensive income............... $ 80 $ 429
----- -----
----- -----
</TABLE>
8. Segments of an Enterprise and Related Information:
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information" as of
January 1, 1998. This statement establishes standards for the reporting and
display of information about operating segments in financial statements and
related disclosures.
The Company is principally engaged in community banking activities through
its five Bank branches and corporate offices. The community banking
activities include accepting deposits, providing loans and lines of credit to
local individuals, businesses and governmental entities, investing in
investment securities and money market instruments, and holding or managing
assets in a fiduciary agency capacity on behalf of its customers and their
beneficiaries. In addition, beginning in 1998 with the acquisition of
Business Finance Corporation, the Company provides asset based financing to
companies throughout the western United States.
The community banking and asset based financing activities are monitored
and reported by Company management as separate operating segments. As
permitted under the Statement, the five separate banking offices have been
aggregated into a single reportable segment, Community Banking. The asset
based financing operating segment does not meet the prescribed aggregation or
materiality criteria and therefore is reported as Other in the following
table below.
The accounting policies for the Company's segment information provided
below are the same as those described for the Company in the summary of
significant accounting policies footnote included in the Company's 1998
annual report, except that some operating expenses are not allocated to
segments.
9
<PAGE>
Summarized financial information for the period ending March 31, 1999
concerning the Company's reportable segments is shown in the following table.
Prior to September 1998, the Company had only one operating segment,
Community Banking.
<TABLE>
<CAPTION>
Banking Other Intersegment Consolidated
---------- -------- ------------ -------------
<S> <C> <C> <C> <C>
Interest income $ 3,796 $ 298 $ (41) $ 4,053
Interest expense 1,459 41 (41) 1,459
---------- -------- ------------ -------------
Net interest income 2,337 257 - 2,594
Provision for loan loss 286 348 - 634
Noninterest income 271 - - 271
Noninterest expense 1,867 209 - 2,076
---------- -------- ------------ -------------
Income before taxes 455 (300) - 155
Provision for income taxes 155 (102) - 53
---------- -------- ------------ -------------
Net income $ 300 $ (198) $ - $ 102
---------- -------- ------------ -------------
---------- -------- ------------ -------------
</TABLE>
9. Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
10
<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
The Company's net income of $102,000 or $.02 per diluted share at March
31, 1999, reflects a decrease compared to net income of $435,000 or $.14 per
diluted share at March 31, 1998. This decrease is primarily a result of
provisions to the allowance for loan losses in the first quarter of 1999.
During the quarter, the Company determined that approximately $348,000 in
receivables purchased by it Business Finance Corporation subsidiary may not
be collectible. These receivables have been charged off and the Company has
increased its provision for loan losses accordingly. Also contributing to the
decrease was an increase in non-interest expense of $457,000 or 28.2% during
the first quarter of 1999. The increase in non-interest expense is primarily
due to an increase in salaries and benefits expense and expenses arising from
the opening of a loan office in Vancouver, Washington. Earnings per share
also reflect an increase in average shares outstanding after the Company's
March 12, 1998 initial public offering.
Net Interest Income
For financial institutions, the primary component of earnings is net
interest income. Net interest income is the difference between interest
income, principally from loans and investment securities portfolios, and
interest expense, principally on customer deposits. Changes in net interest
income result from changes in "volume," "spread," and "margin." Volume refers
to the dollar level of interest-earning assets and interest-bearing
liabilities. Spread refers to the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities. Net
interest margin is the ratio of net interest income to total interest-earning
assets and is influenced by the level and relative mix of interest-earning
assets and interest-bearing liabilities.
Net interest income for the quarter ended March 31, 1999 was $2.6 million,
which was an increase of 22.4% from $2.1 million at March 31, 1998. The
overall tax-equivalent earning asset yield of 10.41% at March 31, 1999
compares to 9.51% at March 31, 1998. The increase in interest income is
primarily due to the addition of loans from Business Finance Corporation
(BFC) in the third quarter of 1998. These loans typically yield a higher rate
of interest than those loans generated at Cowlitz Bank (the Bank). Average
yields earned at the Bank were approximately 9.39% during the first quarter
of 1999 and approximately 9.42% during the corresponding quarter in 1998. The
Bank's average yields earned have declined slightly due to lower interest
rates on loans, as well as a decline in these assets due to market conditions
and increased competition in its market area.
<TABLE>
<CAPTION>
Cowlitz Bank
Three months ended
1999 1998
------- -------
<S> <C> <C>
Interest earned...................... 3,617 3,747
Average interest earning assets...... 154,098 159,046
Average yields earned................ 9.39% 9.42%
</TABLE>
11
<PAGE>
The average cost of interest bearing liabilities increased slightly to
5.16% at March 31, 1999 compared to 5.06% at March 31, 1998. Average interest
bearing liabilities decreased $18.3 million from March 31, 1998 to March 31,
1999. During the past twelve months the Company has not aggressively priced
certain higher interest rate certificates of deposit, as a result
certificates have decreased. While certificates have decreased, there has
been an increase in Money Market and Savings deposits, as well as a slight
increase in long and short-term borrowings that have contributed to the
increase in the interest rate paid on interest bearing liabilities from
quarter to quarter.
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) March 31, Increase
(in thousands of dollars) 1999 1998 (Decrease) Change
-------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Interest income(1)................. $ 4,054 $ 3,781 $ 273 7.2 %
Interest expense................... 1,459 1,661 (202) (12.2)%
-------- --------- ----------
Net interest income................ $ 2,595 $ 2,120 $ 475 22.4 %
-------- --------- ----------
Average interest earning assets.... $155,737 $ 159,046 (3,309) 2.1 %
Average interest bearing liabilities $113,034 $ 131,359 (18,325) (14.0)%
Average yields earned (2).......... 10.41% 9.51% .90
Average rates paid (2)............. 5.16% 5.06% .10
Net interest spread (2)............ 5.25% 4.45% .80
Net interest margin (2)............ 6.67% 5.33% 1.34
</TABLE>
(1) Interest earned on nontaxable securities has been computed on a 34% tax
equivalent basis.
(2) Ratios for the three months ended March 31, 1999 and 1998 have been
annualized.
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 changes since
December 31, 1998.
Provision for Loan Losses
The amount of the allowance for loan losses is analyzed by management on a
regular basis to ensure that it is adequate to absorb losses inherent in the
loan portfolio as of the reporting date. When a provision for loan losses is
recorded, the amount is based on past charge-off experience, a careful
analysis of the current loan portfolio, the level of nonperforming and
impaired loans, evaluation of future economic trends in the Company's market
area, and other factors relevant to the loan portfolio. See Allowance for
Loan Losses disclosure for a more detailed discussion.
12
<PAGE>
The Company's provision for loan losses was $634,000 and $106,000 for the
quarters ended March 31, 1999 and 1998, respectively. The provision increased
between quarters due to the determination that approximately $348,000 in
receivables purchased by BFC may not be collectible. These receivables have
been charged off during the first quarter of 1999. As a result, net
charge-offs increased to $460,000 at March 31, 1999 compared to net
charge-offs of $118,000 at March 31, 1998. Total charge-offs were $496,000 at
March 31, 1999 and $131,000 at March 31, 1998. Management continues to
closely monitor the loan quality and existing relationships.
Nonaccrual loans were $3.0 million at March 31, 1999 and $1.5 million at
March 31, 1998. From year to year, nonaccrual loans increased primarily in
commercial loans secured by real estate. BFC accounted for approximately
$300,000 of the increase, reflecting the more aggressive lending mix of its
portfolio. It is not unusual in the normal course of business for BFC to have
loans that become more than 90 days past due and are therefore placed on
nonaccrual status, although management does not necessarily believe that
losses are probable on these loans. Approximately $2.0 million of the
remaining non-accrual loans reflect well-collateralized loans primarily
secured by real estate. Any losses on nonaccrual loans which are considered
probable, have been estimated by management in its regular quarterly
assessment of the allowance for loan losses as discussed in the Allowance for
Loan Losses disclosure. The increase in the provision for loan losses each
year is largely reflective of the increases in nonaccrual loans during the
period and the higher level of charge-offs discussed previously. For a more
detailed discussion see Allowance for Loan Losses disclosure.
Other real estate owned increased $357,000 from March 31, 1998 to March
31, 1999, as a result of the reclassification of loans from nonacrual to
other real estate owned.
Non-Interest Income
Non-interest income consists of the following components:
<TABLE>
<CAPTION>
March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Service charge on deposit accounts............$ 157 $ 164
Net gains on sales of securities.............. - 5
Credit Card income............................ 30 27
Fiduciary income.............................. 23 8
ATM income.................................... 11 9
Safe deposit box fees......................... 29 26
Other miscellaneous fees and income........... 21 25
------- -------
Total non-interest income.....................$ 271 $ 264
------- -------
------- -------
</TABLE>
Non-interest income increased to $271,000 at March 31, 1999 from $264,000
in the corresponding period in 1998, largely as a result of the increase in
fiduciary income. Fiduciary income increased to $23,000 at March 31, 1999
from $8,000 at March 31, 1998. The Company's trust services opened in April
1997 and this service continues to expand.
13
<PAGE>
Non-Interest Expense
Non-interest expense consists principally of employees' salaries and
benefits, occupancy costs, data processing and communication expenses, FDIC
(Federal Deposit Insurance Corporation) insurance premiums, professional
fees, and other non-interest expenses. Non-interest expenses increased 28.2%
to $2.1 million for the quarter ended March 31, 1999 compared to $1.6 million
for the quarter ended March 31, 1998, primarily due to increased staffing
costs, occupancy expense and amortization of goodwill from the acquisition of
BFC in the third quarter of 1998.
Salaries and benefits expense of $1.2 million at March 31, 1999 represents
an increase of $228,000 from $938,000 at March 31, 1998. At March 31, 1999,
the Company had 110 full-time equivalent employees compared to 100 at March
31, 1998. The increase from quarter to quarter was due to the additional
employees as well as ordinary salary increases for existing employees
generally ranging from three to six percent a year.
Net occupancy expenses consist of depreciation on premises, lease costs
and equipment, maintenance and repair expenses, utilities and related
expenses. The Company's net occupancy expense at March 31, 1999 was $252,000
or 29.2% higher than $195,000 at March 31, 1998. The increase in occupancy
expense in 1999 was due primarily to leasehold improvements completed at
branch locations after the first quarter of 1998 and at the new Vancouver
loan office opened early in the first quarter of 1999.
Other operating expense such as insurance, legal and accounting expenses,
service charges, postage and other business expenses were $359,000 at March
31, 1998 and $509,000 at March 31, 1999. The increase from quarter to quarter
was due to the Company's continued growth and expansion.
Income Taxes
The provision for income taxes amounts to $53,000 and $224,000 at March
31, 1999 and 1998, respectively. The provision resulted in an effective tax
rate of 34.2% and 34% for March 31, 1999 and 1998, respectively.
Loan Losses and Recoveries
The allowance for loan losses represents management's estimate of probable
losses, which exist as of the date of the financial statements. The loan
portfolio is regularly reviewed to evaluate the adequacy of the allowance for
loan losses. In determining the level of the allowance, the Company evaluates
the allowance necessary for specific non-performing loans and estimates
losses inherent in other loan exposures. An important element in determining
the adequacy of an allowance for loan losses is an analysis of loans by loan
rating categories. The risk of a credit is evaluated by the Company's
management at inception of the loan using an established grading system. This
grading system currently includes ten levels of risk. Risk gradings range
from "1" for the strongest credits to "10" for the weakest; a "10" rated loan
would normally represent a loss. These gradings are reviewed annually or when
indicators show that a credit may have weakened, such as operating losses,
collateral impairment or delinquency problems.
The result is an allowance with two components:
Specific Reserves: The amount of specific reserves is determined through a
loan-by-loan analysis of classified and nonperforming loans that considers
expected future cash flows, the value of collateral and other factors that
may impact the borrower's ability to pay.
14
<PAGE>
General Allowance: The amount of the general allowance is based on loss
factors assigned to the Company's loan exposures based on the internal credit
ratings. These loss factors are determined on the basis of historical
charge-off experience. The general allowance is composed of two categories.
The first component is calculated based upon the loan balances classified in
the five higher risk loan categories of "management attention", "special
mention", "substandard", "doubtful" and "loss" on the Company's Watch List.
Suggested regulatory loss reserve factors are then applied to each of these
categories of classified loan balances, net of the balances of the loans
already considered in management's determination of its specific reserves.
The second component is calculated by applying historical loss factors to the
outstanding loan balance less any loans that are included in the Company's
specific or higher risk allowances discussed above. Three levels of charge
off history are considered by management in arriving at this component of the
general allowance. They are average five-year net charge-offs, the previous
year's actual net charge-offs and an estimated maximum charge-off factor.
Each of these amounts is combined with the first component of the general
allowance yielding a range for the total general allowance. Management
selects a general allowance somewhere within this calculated range. Factors
considered by management in making this decision include the volume and mix
of the existing loan portfolio, including the volume and severity of
nonperforming loans and adversely classified credits; analysis of net
charge-offs experienced on previously classified loans; the nature and value
of collateral securing the loans; the trend in loan growth, including any
rapid increase in loan volume within a relatively short period of time;
management's subjective evaluation of general and local economic and business
conditions affecting the collectibility of the Company's loans; the
relationship and trend over the past several years of recoveries in relation
to charge-offs; and available outside information of a comparable nature
regarding the loan portfolios of other banks, including peer group banks.
This decision also reflects management's attempt to ensure that the overall
allowance appropriately reflects a margin for the imprecision necessarily
inherent in estimates of expected loan losses.
The quarterly analysis of specific and general loss components of the
allowance is the principal method relied upon by management to ensure that
changes in estimated loan loss levels are adjusted on a timely basis. The
inclusion of historical loss factors in the process of determining the
general component of the allowance also acts as a self-correcting mechanism
of management's estimation process, as loss experience more remote in time is
replaced by more recent experience. In its analysis of the specific and the
general components of the allowance, management also considers the experience
of peer institutions and regulatory guidance in addition to the Company's own
experience.
Loans and other extensions of credit deemed uncollectable are charged to the
allowance. Subsequent recoveries, if any, are credited to the allowance.
Actual losses may vary from current estimates and the amount of the provision
may be either greater than or less than actual net charge-offs. The related
provision for loan losses, which is charged to income, is the amount
necessary to adjust the allowance to the level determined through the above
process.
Approximately $900,000 and $700,000 of the allownace for loan losses at March
31, 1999 and December 31, 1998, respectively was allocated based on an
estimate of the amount that was necessary to provide for potential losses
related to specific classified and nonperforming loans (including impaired
loans) only. Approximately $1.1 million comprised the general portion of the
allowance at both March 31, 1999 and December 31, 1998.
Management's evaluation of the factors above resulted in allowances for loan
losses of $2.0 million and $1.8 million at March 31, 1999 and December 31,
1998, respectively. The allowance as a percentage of year-end total loans
increased to 1.55% at March 31, 1999 from 1.37% at year-end 1998. The
increase in the allowance reflects the increased level of nonaccruals and
other specifically reserved loans.
The allowance for loan losses is based upon estimates of probable losses
inherent in the loan portfolio. The amount actually observed for these losses
can vary significantly from the estimated amounts.
15
<PAGE>
The following table shows the Company's loan loss performance for the periods
indicated:
<TABLE>
<CAPTION>
Quarter Ended Year Ended
(unaudited) March 31, December 31,
(in thousands of dollars) 1999 1998
------------- ------------
<S> <C> <C>
Loans outstanding at end of period................................ $ 128,193 $ 132,046
Average loans outstanding during the period....................... $ 130,322 $ 131,495
Allowance for loan losses, beginning of period.................... $ 1,814 $ 1,970
Loans charged off:
Commercial..................................................... 444 618
Real Estate.................................................... 29 -
Consumer....................................................... 16 22
Credit Cards................................................... 7 87
--------- ---------
Total loans charged-off...................................... 496 727
--------- ---------
Recoveries:
Commercial..................................................... 36 3
Real Estate.................................................... - -
Consumer....................................................... - 4
Credit Cards................................................... - 10
--------- ---------
Total recoveries............................................. 36 17
--------- ---------
Provision for loan losses......................................... 634 509
Adjustment incident to acquisition................................ - 45
--------- ---------
Allowance for loan losses, end of period.......................... $ 1,988 $ 1,814
--------- ---------
--------- ---------
Ratio of net loans charged-off to average loans outstanding....... .35% .54%
Ratio of allowance for loan losses to loans at end of period...... 1.55% 1.37%
</TABLE>
Loans
Total loans outstanding were $128.2 million and $132.0 million at March
31, 1999 and December 31, 1998, respectively. Loan commitments were $17.1
million at March 31, 1999 and $24.7 million at December 31, 1998.
The following table presents the composition of the Company's loan
portfolio at the dates indicated:
<TABLE>
<CAPTION>
(unaudited) March 31, 1999 December 31, 1998
(in thousands of dollars) Amount Percentage Amount Percentage
--------------------- ----------------------
<S> <C> <C> <C> <C>
Commercial ................................. $101,170 78.61% $ 103,473 78.04%
Real estate construction.................... 3,506 2.72 3,206 2.42
Real estate commercial...................... 7,065 5.49 7,026 5.30
Real estate mortgage........................ 12,084 9.39 13,774 10.39
Consumer and other.......................... 4,875 3.79 5,063 3.82
Contracts purchased......................... - - 45 .03
-------- ------ --------- ------
128,700 100.00% 132,587 100.00%
------ ------
------ ------
Deferred loan fees.......................... (507) (541)
-------- ---------
Total loans............................ 128,193 132,046
Allowance for loan losses................... (1,988) (1,814)
-------- ---------
Total loans, net....................... $126,205 $ 130,232
-------- ---------
-------- ---------
</TABLE>
16
<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>
(unadited) March 31, December 31,
(in thousands of dollars) 1999 1998
--------- ------------
<S> <C> <C>
Loans on nonaccrual status 2,974 2,737
Loans past due greater than 90 days but not on nonaccrual status 16 9
Other real estate owned 678 573
Troubled debt restructuring - -
----- -----
Total nonperforming assets 3,668 3,319
----- -----
----- -----
Percentage of nonperforming assets to total assets 2.09% 1.86%
</TABLE>
At March 31,1999 nonperforming assets were $3.7 million or 2.1% of total
assets. BFC accounted for approximately $300,000, reflecting the more
aggressive lending mix of its portfolio. It is not unusual in the normal
course of business for BFC to have loans that become more than 90 days past
due and are therefore placed on nonaccrual status, although management does
not necessarily believe that losses are probable on these loans.
Approximately $2.0 million of the remaining non-accrual loans reflect
well-collateralized loans primarily secured by real estate. Other real estate
increased $357,000 from March 31, 1998 to March 31, 1999, as a result of the
reclassification of loans from nonaccrual to other real estate owned.
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 March 31, 1999,
approximately $1.0 million of the securities portfolio matures within one
year.
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
March 31, 1999 bear interest at rates from 5.17% to 8.80%. At March 31, 1999,
$21.5 million in advances were outstanding from the FHLB and the Company had
additional borrowing capacity for cash advances of $21.5 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.
17
<PAGE>
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
March 31, 1999, the Company's ratios were 22.50% and 23.76%, respectively. At
December 31, 1998, the company's ratios were 22.21% and 23.46%, respectively.
The ratio of average shareholders' equity to average assets was 16.33% and
15.81% at March 31, 1999 and December 31, 1998, respectively.
Year 2000
This section constitutes a Year 2000 readiness statement and 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 is 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 affected 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 have been validated for Y2K compliance
and minor systems will be completed by the end of the second quarter of 1999.
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
$235,000. The Year 2000 related costs incurred by the Company to date are
approximately $196,000.
18
<PAGE>
CONTINGENCY PLAN
A contingency plan has been established that would be carried out in the
event that the preventative measures put in place do not prove successful.
Each area of the Company has completed a mission critical operating plan that
would be initiated using manual processing. In the event that this plan would
need to be implemented there would be a substantial increase in staffing and
related expenses. This plan addresses business operations to be carried out
assuming the telephone and electrical systems are in working order. The
contingency plan will continue to be updated throughout 1999.
RISKS
The Company has attempted to assess the Year 2000 readiness of its loan
and deposit customers. If these customers were adversely affected by the Year
2000, no assurance can be given that their ability to repay debt would not be
affected.
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 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.
19
<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, $1.8 million was
used to acquire BFC as described below and the remainder is being used for
working capital. The managing underwriters were Black & Company, Inc. and
Pacific Crest Securities, Inc.
Effective August 31, 1998, the Company acquired Business Finance
Corporation (BFC) of Bellevue, Washington. 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 $1.8 million, with an adjustment to be made
based on final determination of BFC's shareholders 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.
Item 6
(a) Exhibits. The list of exhibits is set forth on the Exhibit Index attached
hereto.
(b) On March 30, 1999, the Company filed form 8-K containing item 7
(Exhibits).
20
<PAGE>
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: /s/ Charles W. Jarrett
-------------------------------------
Charles W. Jarrett
President and Chief Operating Officer
Dated: /s/ Donna P. Gardner
-------------------------------------
Donna P. Gardner
Vice-President/Secretary-Treasurer
21
<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
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS OF COWLITZ BANCORPORATION AND SUBSIDIARY AS OF MARCH 31, 1999 ADN
DECEMBER 31, 1998 ADN RELATED CONSOLIDATED STATEMENTS OF INCOME, CHANGES IN
SHAREHOLDERS' EQUITY AND CASH FLOWS FOR EACH OF THE PERIOD ENDED MARCH 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 24,688
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,031
<INVESTMENTS-CARRYING> 4,465
<INVESTMENTS-MARKET> 4,479
<LOANS> 128,193
<ALLOWANCE> 1,988
<TOTAL-ASSETS> 175,518
<DEPOSITS> 119,621
<SHORT-TERM> 2,475
<LIABILITIES-OTHER> 876
<LONG-TERM> 21,603
0
0
<COMMON> 18,254
<OTHER-SE> 12,689
<TOTAL-LIABILITIES-AND-EQUITY> 175,518
<INTEREST-LOAN> 3,585
<INTEREST-INVEST> 217
<INTEREST-OTHER> 251
<INTEREST-TOTAL> 4,053
<INTEREST-DEPOSIT> 1,020
<INTEREST-EXPENSE> 439
<INTEREST-INCOME-NET> 2,594
<LOAN-LOSSES> 634
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,076
<INCOME-PRETAX> 155
<INCOME-PRE-EXTRAORDINARY> 155
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 102
<EPS-PRIMARY> .03
<EPS-DILUTED> .02
<YIELD-ACTUAL> 10.41
<LOANS-NON> 2,974
<LOANS-PAST> 16
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,814
<CHARGE-OFFS> 496
<RECOVERIES> 36
<ALLOWANCE-CLOSE> 1,988
<ALLOWANCE-DOMESTIC> 1,988
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
