1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ___________________
Commission file number 0-16356
CENTRAL BANCORPORATION
(Exact name of small business issuer as specified in its charter)
WASHINGTON 91-1203145
- --------------------------------- --------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NUMBER
301 NORTH CHELAN AVENUE
WENATCHEE, WASHINGTON 98801
- --------------------------------- --------------------------------
(ADDRESS OF PRINC. EXEC. OFFICES) (ZIP CODE)
(509) 663-0733
(ISSUER'S TELEPHONE NUMBER)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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
------- -------
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
999,243 shares outstanding at March 31, 1995
Transitional Small Business Disclosure Format (check one):
Yes No X
------- --------
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CENTRAL BANCORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following Consolidated Financial Statements are presented for
Registrant, Central Bancorporation, its wholly owned subsidiaries, Central
Washington Bank, North Central Washington Bank, and Central Financial Services,
Inc., the wholly owned subsidiary of Central Washington Bank.
1. Consolidated balance sheets for December 31, 1994 and March 31, 1995.
2. Consolidated statements of operations for the first three months ended
March 31, 1995 and 1994.
3. Consolidated statements of cash flows for the three months ended March
31, 1995 and 1994.
4. Notes to consolidated financial statements.
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CENTRAL BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
MARCH 31, DECEMBER 31,
1995 1994
--------- -------------
ASSETS
Cash and due from banks $ 9,386 $ 14,636
Interest bearing deposits in other banks 1,616 4,670
-------- --------
Cash and cash equivalents 11,002 19,306
Securities held to maturity (market value
of $20,022 in 1995 and $19,677 in 1994) 20,256 20,216
Securities available for sale, at market 26,744 27,142
Loans 127,179 122,150
Less allowance for loan losses 1,668 1,667
-------- --------
Loans, net 125,511 120,483
Premises and equipment, net 6,336 6,437
Accrued interest receivable 1,443 1,407
Other assets, net 882 669
-------- --------
Total assets $192,174 $195,660
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing demand $ 23,472 $ 27,245
Interest-bearing 147,517 147,945
-------- --------
Total deposits 170,989 175,190
Short-term borrowings 2,488 2,200
Notes payable 3,194 3,194
Accrued interest and other liabilities 1,619 1,678
-------- --------
Total liabilities 178,290 182,262
Stockholders' equity:
Common stock, $1.67 par value. Authorized
3,000,000 shares; issued and outstanding
999,243 in 1995 and 1994. 1,665 1,665
Surplus 2,616 2,616
Retained earnings 9,786 9,507
Unrealized loss on securities available
for sale (183) (390)
-------- --------
Total stockholders' equity 13,884 13,398
-------- --------
Total liabilities and stockholders' equity $192,174 $195,660
======== ========
See accompanying notes to consolidated financial statements.
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CENTRAL BANCORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1994
------ ------
INTEREST INCOME:
Interest and fees on loans $2,999 $1,824
Interest on securities:
Taxable 576 397
Exempt from federal income tax 52 64
Other interest income 78 52
------ ------
Total interest income 3,705 2,337
INTEREST EXPENSE:
Interest on deposits 1,274 755
Interest on borrowings 102 21
------ ------
Total interest expense 1,376 776
------ ------
Net interest income 2,329 1,561
Provision for loan losses - -
------ ------
Net interest income after the
provision for loan 2,329 1,561
OTHER INCOME:
Mortgage loan servicing fees 49 50
Service charges on deposit accounts 249 145
Gain on sales of loans, net 38 16
Loss on securities available for sale - (100)
Other service charges and fees 133 181
------ ------
Total other income 469 292
OTHER EXPENSES:
Salaries and employee benefits 1,025 752
Occupancy expense of premises 116 100
Printing, stationery and supplies 89 40
Equipment and data processing 168 163
Legal and professional 102 32
Business and occupation taxes 45 30
Deposit insurance assessment 98 66
Other 260 185
------ ------
Total other expenses 1,903 1,368
------ ------
Income before income tax expense 895 485
Income tax expense 266 114
------ ------
Net income $ 629 $ 371
====== ======
Net income per share $ 0.61 $ 0.36
====== ======
See accompanying notes to consolidated financial statements.
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CENTRAL BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1995 1994
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 629 $ 371
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 123 125
Decrease in loans held for sale (279) 1,034
Net amortization of premiums (43) 5
Loss on securities available for sale - 100
Loan fees deferred, net of amortization 100 (22)
Dividends on FHLB stock (12) (14)
Other (414) (200)
------- -------
Total adjustments (525) 1,028
------- -------
Net cash provided by operating activities 104 1,399
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturing securities held to maturity 72 1,081
Purchase of securities held to maturity (102) -
Proceeds from sales of securities available for sale - 3,916
Proceeds from maturing securities available for sale 1,765 6,328
Purchase of securities available for sale (1,009) (5,988)
Cash used for acquisition costs - (136)
Loans originations, net of principal repayments (4,849) (1,090)
Acquisition of premise and equipment (22) (48)
------- -------
Net cash used in investing activities (4,145) 4,063
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (4,201) 589
Net increase (decrease) in short-term borrowings 288 (199)
Principal payments on notes payable - (3,000)
Cash dividends (350) (345)
------- -------
Net cash provided by (used in) financing activities (4,263) (2,955)
Net increase in cash and cash equivalents (8,304) 2,507
Cash and cash equivalents at beginning of year 19,306 11,758
------- -------
Cash and cash equivalents at end of period $11,002 $14,265
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for: Interest $ 1,217 $ 712
Income tax 259 -
See accompanying notes to consolidated financial statements.
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CENTRAL BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 1995 are not necessarily
indicative of the results anticipated for the year ending December 31, 1995.
For additional information refer to the consolidated financial statements and
footnotes thereto included in Central Bancorporation's annual report on Form
10-KSB for the year ended December 31, 1994.
2. NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common stock outstanding, including shares issuable under stock options plans,
when dilutive, during the periods presented.
The weighted average number of shares outstanding used to compute net
income per share was 1,039,095 in 1995 and 1,030,707 in 1994.
3. STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks, interest bearing deposits, and federal funds sold.
4. CONSOLIDATION
The consolidated financial statements include the accounts of Central
Bancorporation, Central Washington Bank, North Central Washington Bank, and
Central Financial Services, Inc. All significant inter-company balances and
transactions have been eliminated in consolidation.
The 1994 consolidated statements of operations and the consolidated
statements of cash flows do not reflect the activity of North Central
Washington Bank because the purchase did not occur until April 30, 1994.
5. PRO-FORMA STATEMENTS
Bancorp purchased North Central Washington Bank on April 30, 1994. Therefore
the Statements of Operation are not comparable. For purposes of comparability,
below is a condensed pro-forma income statement that assumes the acquisition
had occurred on January 1, 1993 and reflects pro-forma adjustments carried
forward through the periods presented. The pro-forma statements may not be
indicative of the results that would have occurred if the acquisition had been
effective on the dates indicated or of the results that may be obtained in the
future.
THREE MONTHS ENDED
CONDENSED PRO-FORMA MARCH 31,
STATEMENTS OF OPERATIONS --------------------
(DOLLARS IN THOUSANDS) 1995 1994
------ ------
Interest income $3,705 $3,124
Interest expense 1,376 1,117
------ ------
Net interest income 2,329 2,007
Other income 469 432
Other expense 1,903 1,821
Income tax expense 266 159
------ ------
Net income $ 629 $ 458
====== ======
Net income per share $ 0.61 $ 0.44
====== ======
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CENTRAL BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. IMPAIRED LOANS
Effective January 1, 1995, Bancorp adopted Statement 114, "Accounting by
Creditors for Impairment of a Loan" and Statement 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosure - an Amendment of
FASB Statement No. 114" which was issued by the Financial Accounting Standards
Board in 1994. These Statements require that impaired loans that are within
their scope be measured 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 loans observable market price, or the fair value of the
collateral if the loan is collateral dependent.
As of March 31, 1995 and during the first quarter of 1995, Bancorp's
investment in impaired loans was not material.
Generally, when a loan becomes impaired Bancorp discontinues the accrual
of interest income. Future interest income is recognized using the cash basis
of accounting until the loan is no longer impaired.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
GENERAL
This discussion is provided for Central Bancorporation ("Bancorp") and
wholly owned subsidiaries Central Washington Bank ("Central") and North Central
Washington Bank ("North Central"). Central and North Central operate in ten
locations, located in North Central Washington, and provide families and
businesses with a wide variety of financial services, primarily loans and
deposits. Central Washington Bank's wholly owned subsidiary, Central Financial
Services, Inc. provides banking customers with financial products, such as
annuities and mutual funds.
On April 30, 1994, Bancorp completed the cash purchase of 100 percent
of the stock of First Bank Washington, the wholly owned subsidiary of FBS
Washington Bancorporation and First Bank System, Inc. Because of the
acquisition, the statements of operations presented in this quarterly report
are not comparable. For a pro-forma presentation of the statements of
operations please see Note 5 to the Consolidated Financial Statements. The
pro-forma statements assume the acquisition occurred on January 1, 1994. It
should be noted that the pro-forma statements may not be indicative of the
results that would have occurred if the acquisition had been effective on the
dates indicated or of the results that may be obtained in the future.
RESULTS OF OPERATIONS
Net income
Net income for the first quarter of 1995 increased 70 percent to
$629,000 or $.61 per share compared to $371,000 or $.36 per share during the
same period a year ago. The annualized return on average assets during the
first three months of 1995 was 1.32 percent compared to 1.13 percent during the
same period last year.
The first quarter improvement in earnings was the result of an
increase in net interest income and reduction in security losses, partially
offset by higher expenses, which were related to the operations of North
Central. The impact on earnings related to the purchase of North Central were
an addition of approximately $214,000 during the first quarter of 1995, or
$.21 per share.
The 1994 loss related to the sale of securities was attributable to
managements decision to sell lower yielding securities resulting from
significant increases in both short term and long term interest rates during
the first three months of 1994. The increase in net interest income and the
increase in expenses was primarily related to the operation of Bancorp's
acquired Bank subsidiary, North Central Washington Bank, beginning May 1, 1994.
Net interest income
Net interest income during the first three months of 1995 totaled
$2,329,000 a $768,000 (49.2 percent) increase over 1994 ($580,000 from North
Central). The increase resulted from an increase in net earning assets and from
a higher interest rate spread. The table below (in thousands) is illustrative:
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1995 1994
---------------------- ----------------------
Balance Yield* Balance Yield*
-------- ------ -------- ------
Average earning assets:
Loans $123,360 9.86% $ 76,870 9.62%
Investments 47,894 5.52 38,599 5.22
Other 5,471 5.78 6,704 3.15
-------- ---- -------- ----
Total 176,725 8.56 122,173 7.88
Average interest-bearing
liabilities:
Deposits 147,487 3.50 98,490 3.11
Other 5,935 6.97 2,548 3.34
-------- ---- -------- ----
Total 153,422 3.64 101,038 3.11
-------- ---- -------- ----
Net earning assets $ 23,303 5.40% $ 21,135 5.30%
======== ==== ======== ====
*Annualized with a 34 percent tax equivalent adjustment.
Net interest income is influenced by changes in both interest rates
(rate) and changes in interest-bearing assets and liabilities (volume). The
table presented below (adjusted for tax equivalency and in thousands) is an
analysis of these changes for the first three months of 1995 compared to the
same period a year ago.
YEAR-TO-DATE
------------------------------------------
Interest Interest Net Int.
Income Expense Income
-------- -------- --------
Rate $ 144 $ 98 $ 46
Volume 1,212 460 752
------ ---- ----
$1,356 $558 $798
====== ==== ====
Bancorp's average earning assets for the first three months of 1995
increased $54,552,000 ($53,347,000 from North Central) over the first three
months of 1995 while Bancorp's average interest-bearing liabilities increased
$52,384,000 ($48,473,000 from North Central). The increase in both earning
assets and interest bearing liabilities resulted primarily from the North
Central acquisition. Excluding the volume from the acquisition, Bancorp's
average earning assets and average interest bearing liabilities remained
relatively stable during the periods presented, except for the increase in
borrowing associated with the North Central acquisition which averaged
$2,694,000. The difference between the interest earned and the interest paid on
this increased volume resulted in approximately $752,000 in additional net
interest during the first three months of 1995, respectively.
The yield on earning assets increased 68 basis points during the first
three months of 1995 to 8.56 percent as compared to 7.88 percent during the
same period last year. An increase in yield was experienced in loans and
investments securities. This increase is a reflection of the higher interest
rate experienced in 1994. Bancorp's cost of funds also increased 52 basis
points during the first three months of 1995 to 3.64 percent as compared to
3.11 percent last year. Because the increase in the yield on earning assets was
higher than the increase in cost of funds, Bancorp's net interest margin
increased from 5.30 percent during 1994 to 5.40 percent during 1995.
The 1994 increase in interest rates has not impacted Bancorp's net
interest margin significantly. However, because Bancorp is liability sensitive,
ie liabilities are subject to repricing faster than assets, to interest rates
any future rate increases may have a negative impact on Bancorp's net interest
margin. The impact on Bancorp's net interest margin is dependent on the
magnitude and direction of future interest rates, deposit customer
alternatives, and Bancorp's need for liquidity.
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Bancorp has approximately $87.8 million in savings and checking
accounts and an additional $59.8 million in other interest bearing deposits
whose interest rates may increase along with other market interest rates.
Historically, the interest rates paid on savings and checking accounts lag and
do not increase as far as the rates earned on loans and investments. However,
these rates have been relatively stable over the past year and Bancorp
anticipates competitive pressure to raise these rates in the future. Bancorp
has approximately $65.8 million in earning assets repricing or maturing within
the next year to partially offset the effect of increasing deposits interest
rates. In addition, Bancorp has a significant portion of its securities
available for sale to further protect Bancorp's margin in the event of
significant rate increases. These securities have maturities within one to
three years and may result in losses in the event they need to be sold prior to
maturity in a rising interest rate environment.
Provision and Allowance for Loan Losses
Bancorp did not provide for any loan losses during the first three
months of 1995 and 1994. Bancorp had net loan recoveries of $1,000 and $23,000
during the first three months of 1995 and 1994, respectively. The effect of the
net recoveries, was an increase in the allowance for loan losses without making
any provisions. Bancorp anticipates loan recoveries to slow in the future which
may necessitate the resumption of loan loss provisions as Bancorp's loan
portfolio increases.
The allowance for loan losses totaled $1,668,000 (1.31 percent of
loans) at March 31, 1995, compared to $1,167,000 (1.36 percent of loans) at
December 31, 1994. Based upon management's continuing evaluation of inherent
risks in the loan portfolio, current levels of classified assets, and economic
factors, management believes the allowance is adequate to absorb potential
losses in the current portfolio.
Other Income and Expense
Other income, excluding security losses, increased $77,000 or 20
percent during the three months of 1995 when compared to the same period a
year ago. An increase in service charges on deposits of $104,000 ($77,000 from
North Central) was primarily responsible for the three month increase.
The losses realized on securities available for sale during 1994 were
the result of the sale of Bancorp's longer term available for sale debt
securities. Consistent with Bancorp's internal policies these assets were sold
because of the increase in interest rates and the resulting negative impact on
capital which occurs as a result of the accounting provisions of SFAS No. 115
as well as the adverse impact on net interest margin.
Other expenses increased $535,000 ($435,000 from North Central) or 39
percent during the first three months of 1995 compared to the same period last
year. Excluding the North Central impact, the increases occurred primarily in
Bancorp's salaries and employee benefits, legal and professional fees, and
equipment and data processing. Other expenses as a percent of average assets
(annualized) was 3.9 percent in 1995 and 4.1 percent in 1994. Bancorp
anticipates this ratio to continue improving as its Leavenworth and Cashmere
branch facilities, which were started de novo during the past five year, gain
profitability as loan and deposit volume increase. Bancorp's ratio should also
improve as efficiencies associated with the acquisition of First Bank
Washington materialize.
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FINANCIAL CONDITION
Bancorp as a financial intermediary attracts deposits and invests
those funds in earning assets, primarily loans and investment securities,
hopefully for profit. As of March 31, 1995, Bancorp's total loans increased
$5.0 million while Bancorp's total assets decreased $3.5 million since December
31, 1994. Bancorp's total deposits also decreased $4.2 million during the
period. The increase in loans and decrease in deposits was funded with a
decrease in cash and cash equivalents and securities. The decrease in deposits
was in non-interest bearing demand account associated with North Central and is
considered seasonal. For more information on the change in cash and cash
equivalents, see the Consolidated Statements of Cash Flows on page 5 of this
report.
Loans and Deposits
Below are summaries of outstanding loans and deposits at March 31,
1995 compared to December 31, 1994 (in thousands):
1995 1994
-------- --------
Loans
- -----
Commercial $ 19,416 $ 18,255
Real Estate
Construction 6,960 5,649
Commercial 26,221 25,736
1-4 Single family 40,419 38,801
Installment 19,338 18,727
Agricultural 12,237 12,750
Other 2,588 2,232
-------- --------
Total loans $127,179 $122,150
======== ========
Deposits
- --------
Non-interest bearing $ 23,472 $ 27,245
Interest bearing demand 39,844 39,626
Money market accounts and
other savings accounts 47,913 50,948
Time deposits, $100,000 or more 12,186 12,155
Other time deposits 47,574 45,216
-------- --------
Total deposits $170,989 $175,190
======== ========
Non-accrual and Past Due Loans
Certain information regarding non-accrual, past due, and restructured
loans is set forth in the following table (in thousands):
March 31, December 31,
------------------- ------------
1995 1994 1994
------ ---- ------
Past due 30+ days and
still accruing $1,253 $633 $1,675
Non-accrual loans 184 123 388
Past due and non-accrual
loans as a percentage
of loans 1.1% 1.0% 1.7%
The total of past due loans and non-accrual loans decreased $626,000
to $1,437,000 at March 31, 1995 compared to $2,063,000 at December 31, 1994.
The decrease was primarily in commercial, 1-4 single family, and agricultural
loans. Bancorp does not anticipate any significant losses with respect to these
loans or any other assets not reported above.
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Stockholders' Equity and Liquidity
Bancorp's stockholders' equity at March 31, 1995 was $13,884,000
compared to $13,398,000 at December 31, 1994. On a per share basis,
stockholders' equity totaled $13.89 compared to $13.41 on the same dates,
respectively. Bancorp's annualized return on average equity during the first
three months of 1995 totaled 18.7 percent compared to 11.9 percent during the
same period a year ago. The increase in stockholders' equity was the result of
the retention of earnings after payment of $350,000 in cash dividends and by a
$207,000 decrease in the unrealized loss on securities available for sale as
mandated by SFAS No. 115.
Current regulatory capital adequacy guidelines require bank holding
companies and banks to maintain a minimum "leverage" ratio of core capital
(which excludes unrealized gain and losses on securities available for sale) to
total assets of at least 4 percent.
In addition to the leverage ratio requirements, the Bancorp is subject
to risked-based capital guidelines, under which risk percentages are assigned
to various categories of assets and off balance sheet items to calculate a
risk-adjusted capital ratio. They require, Tier I capital of 4 percent and
Total capital of 8 percent.
Below is a summary of the various capital ratios of Bancorp and
subsidiaries at March 31, 1995 compared to December 31, 1994.
North Regulatory
Ratio Bancorp Central Central Minimum
- ----- ------- ------- ------- ----------
Leverage 3/31/95 7.25% 8.52% 8.77% 4.0%
12/31/94 7.03% 8.58% 8.06%
Tier I capital 3/31/95 11.35% 12.70% 15.76% 4.0%
12/31/94 11.16% 13.02% 14.43%
Total capital 3/31/95 11.60% 13.95% 17.01% 8.0%
12/31/94 12.41% 14.28% 15.69%
The above ratios do not include unrealized gains and losses on
securities available for sale which are excluded from the ratios by the federal
regulatory agencies.
Bancorp's liquidity position decreased during the first quarter of
1995 as a result of increased loan demand and lower deposits. However, Bancorp
believes its liquidity to be more than adequate to meet future funding needs.
Liquidity indicators include the loan to deposit ratio, which totaled 74
percent and 70 percent on March 31, 1995 and December 31, 1994, respectively,
and the amount of interest bearing deposits and investment securities maturing
in one year, which totaled $26,887,000 and $21,129,000 on the same dates,
respectively. Deposits in excess of $100,000 and short-term borrowing,
considered by Bancorp as volatile liabilities, increased from $14,355,000 at
December 31, 1994 to $14,673,000 at March 31, 1995.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No reports on Form 8-K were Filed during the quarter ended
March 31, 1995.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTRAL BANCORPORATION
(Registrant)
Date April 28, 1995 By /S/ GARY M. BOLYARD
----------------------------- --------------------------
Gary M. Bolyard
President and Chief Executive Officer
Date April 28, 1995 By /S/ JOSEPH E. RIORDAN
----------------------------- --------------------------
Joseph E. Riordan
Treasurer and Assistant Secretary
(Principal Financial Officer)
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