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, 2001
[_] 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, 2001: 3,692,150 shares
TABLE OF CONTENTS
Page
Part I
Financial Statements
Consolidated Statements of Condition -
June 30, 2001 and December 31, 2000 3
Consolidated Statements of Income -
Three and six months ended June 30, 2001 and June 30, 2000 4
Consolidated Statements of Changes in Shareholders' Equity
Year ended December 31, 2000 and six months ended June 30, 2001 5
Consolidated Statements of Cash Flows
Six months ended June 30, 2001 and June 30, 2000 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
And Results of Operations 13
Part II
Other
Other information 25
Exhibits and Reports on Form 8-K 25
Signatures 26
2
COWLITZ BANCORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(in thousand of dollars, except number of shares)
June 30, December 31,
2000 2001
(unaudited)
ASSETS
Cash and due from banks .................................................... $ 60,857 $ 25,589
Investment securities:
Investments available-for-sale (at fair value, cost of $12,270 and
$7,441 at June 30, 2001 and December 31, 2000, respectively) .......... 12,252 7,499
Investments held-to-maturity (at amortized cost, fair value of
$1,642 and $4,569 at June 30, 2001 and December 31, 2000,
respectively) ......................................................... 1,608 4,572
--------- ---------
Total investment securities ........................................... 13,860 12,071
--------- ---------
Federal Home Loan Bank stock ............................................... 3,410 3,302
Loans held for sale ........................................................ 54,732 10,013
Loans ...................................................................... 239,473 233,639
Allowance for loan losses .................................................. (3,377) (4,561)
--------- ---------
Loans, net .............................................................. 236,096 229,078
--------- ---------
Premises and equipment, net of accumulated depreciation of $3,638
and $3,238 at June 30, 2001 and December 31, 2000,
respectively ............................................................ 5,390 5,625
Other real estate owned .................................................... 2,085 1,247
Intangible assets, net of accumulated amortization of $1,731 and
$1,435 at June 30, 2001 and December 31, 2000, respectively ............. 5,056 5,352
Other assets ............................................................... 4,873 4,621
--------- ---------
Total assets .......................................................... $ 386,359 $ 296,898
========= =========
LIABILITIES
Deposits:
Demand .................................................................. $ 43,643 $ 40,201
Savings and interest-bearing demand ..................................... 107,814 73,770
Certificates of deposit ................................................. 178,824 127,245
--------- ---------
Total deposits ........................................................ 330,281 241,216
Short-term borrowings ...................................................... 2,325 1,275
Long-term borrowings ....................................................... 19,256 21,348
Accrued interest payable and other liabilities ............................. 3,390 2,650
--------- ---------
Total liabilities ..................................................... $ 355,252 $ 266,489
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 and no shares authorized
as of June 30, 2001 and December 31, 2000, respectively; no
shares issued and outstanding at June 30, 2001 and
December 31, 2000, respectively ......................................... $ -- $ --
Common stock, no par value; 25,000,000 authorized as of
June 30, 2001 and December 31, 2000, respectively; 3,692,001
and 3,689,327 shares issued and outstanding at June 30, 2001
and December 31, 2000, respectively .................................... 16,799 16,785
Additional paid in capital ................................................. 1,538 1,538
Retained earnings .......................................................... 12,788 12,048
Accumulated other comprehensive income(loss) ............................... (18) 38
--------- ---------
Total shareholders' equity ............................................ 31,107 30,409
--------- ---------
Total liabilities and shareholders' equity ............................ $ 386,359 $ 296,898
========= =========
The accompanying notes are an integral part of these statements.
3
COWLITZ BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousand of dollars, except number of shares and per share amounts)
Three months ended Six months Ended
June 30, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
(unaudited)
INTEREST INCOME
Interest and fees on loans ............................... $ 8,361 $ 5,429 $ 15,853 $ 10,269
Interest on taxable investment securities ................ 261 181 460 398
Interest on non-taxable investment securities ............ 2 2 4 4
Interest from other banks ................................ 299 115 505 201
-------- -------- -------- --------
Total interest income .................................. 8,923 5,727 16,822 10,872
-------- -------- -------- --------
INTEREST EXPENSE
Savings and interest-bearing demand ...................... 771 465 1,376 914
Certificates of deposit .................................. 2,484 1,181 4,702 2,018
Short-term borrowings .................................... 30 25 63 62
Long-term borrowings ..................................... 337 463 701 811
-------- -------- -------- --------
Total interest expense ................................. 3,622 2,134 6,842 3,805
-------- -------- -------- --------
Net interest income before provision for loan losses ... 5,301 3,593 9,980 7,067
PROVISION FOR LOAN LOSSES ................................... (355) (371) (607) (741)
-------- -------- -------- --------
Net interest income after provision for loan losses ...... 4,946 3,222 9,373 6,326
-------- -------- -------- --------
NON-INTEREST INCOME
Service charges on deposit accounts ...................... 183 173 373 344
Gains on loans sold ...................................... 937 201 1,576 303
Underwriting and escrow fees ............................. 442 142 813 231
Fiduciary income ......................................... 59 72 120 145
Credit card income ....................................... 135 94 278 190
Other income ............................................. 41 42 82 100
Net gains on sales of available-for-sale securities ...... 19 -- 37 6
-------- -------- -------- --------
Total non-interest income .............................. 1,816 724 3,279 1,319
-------- -------- -------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits ........................... 3,651 2,072 6,788 4,653
Net occupancy and equipment expense ...................... 607 474 1,222 935
Business tax expense ..................................... 156 96 284 187
Amortization of intangibles .............................. 148 131 295 263
Other operating expense .................................. 1,447 816 2,567 1,540
-------- -------- -------- --------
Total non-interest expense ............................. 6,009 3,589 11,156 7,578
-------- -------- -------- --------
Income before income tax expense ....................... 753 357 1,496 67
INCOME TAX EXPENSE .......................................... 337 119 623 39
-------- -------- -------- --------
Net income ............................................. $ 416 $ 238 $ 873 $ 28
======== ======== ======== ========
BASIC EARNINGS PER SHARE .................................... $ 0.11 $ 0.06 $ 0.24 $ 0.01
DILUTED EARNINGS PER SHARE .................................. $ 0.11 $ 0.06 $ 0.23 $ 0.01
The accompanying notes are an integral part of these statements.
4
COWLITZ BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of dollars, except number of shares)
Accumulated Comprehen-
Common Stock Additional Other Total sive
------------ Paid-in Retained Comprehensive Shareholders' Income
Shares Amount Capital Earnings Income(loss) Equity (loss)
------ ------ ------- -------- ------------ ------ ----------
BALANCE AT DECEMBER 31, 1999 .......... 4,022,052 $ 18,530 $ 1,538 $ 11,460 $ (38) $ 31,490
Comprehensive Income:
Net income .......................... -- -- -- 869 -- 869 $ 869
Net change in unrealized gains on
investments available-for-sale,
net of deferred taxes of $38 ..... -- -- -- -- 76 76 76
--------
Comprehensive Income ................ -- -- -- -- -- -- $ 945
Issuance of common stock for cash ... 8,207 39 -- -- -- 39 ========
Purchase of treasury stock .......... (340,932) (1,784) -- -- -- (1,784)
Cash dividends paid ($.07 per share) -- -- -- (281) -- (281)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 2000 .......... 3,689,327 16,785 1,538 12,048 38 30,409
Comprehensive Income:
Net income .......................... -- -- -- 873 -- 873 $ 873
Net change in unrealized gains on
investments available-for-sale,
net of deferred taxes ............ -- -- -- -- (56) (56) (56)
--------
Comprehensive Income/(Loss) ......... -- -- -- -- -- -- $ 817
Issuance of common stock for cash ... 2,674 14 -- -- -- 14 ========
Cash dividends paid ($.036 per share) -- -- -- (133) -- (133)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT JUNE 30, 2001 .............. 3,692,001 $ 16,799 $ 1,538 $ 12,788 $ (18) $ 31,107
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
5
COWLTIZ BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Six months ended
June 30,
2001 2000
--------- ---------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ........................................................ $ 873 $ 28
Adjustments to reconcile net income (loss) to net cash provided by
Operating activities:
Depreciation and amortization .......................................... 710 610
Provision for loan losses .............................................. 607 741
Net losses (gains) on sales of investments available-for-sale .......... (37) (6)
Net amortization of investment security premiums and accretion
of discounts ......................................................... (5) (1)
Net losses (gains) on sales of foreclosed assets ....................... 13 (17)
(Gains) on loans sold .................................................. (1,576) (303)
Origination of loans held for sale ..................................... (227,678) (49,791)
Proceeds of loans sales ................................................ 184,535 44,746
(Increase) in other assets ............................................. (1,416) (955)
Increase (decrease) in other liabilities ............................... 740 747
Federal Home Loan Bank stock dividends ................................. (108) (107)
--------- ---------
Net cash provided by (used in) operating activities ................ (43,342) (4,308)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities
held-to-maturity ....................................................... 8,568 990
Proceeds from sales and maturities of investment securities
available-for-sale ..................................................... 6,711 4,000
Proceeds from sales of foreclosed assets ................................. 345 388
Purchases of investment securities:
Held-to-maturity ....................................................... (5,599) (990)
Available-for-sale ..................................................... (11,514) --
Net (increase) decrease in loans ......................................... (7,625) (44,925)
Purchases of premises and equipment ...................................... (180) 2
--------- ---------
Net cash (used in) provided by investment activities ................. (9,294) (40,535)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, savings, and interest bearing
demand deposits ........................................................ 37,486 13,199
Net increase (decrease) in certificates of deposit ....................... 51,579 42,898
Dividends paid ........................................................... (133) (144)
Net increase (decrease) in short-term borrowings ......................... 1,050 (2,950)
Proceeds of long-term borrowings ......................................... -- 11,000
Repayment of long-term borrowings ........................................ (2,092) (12,341)
Repurchase of common stock ............................................... -- (1,102)
Issuance of common stock for cash, net of amount paid for
fractional shares .................................................... 14 35
--------- ---------
Net cash provided by financing activities ............................ 87,904 50,595
--------- ---------
Net increase (decrease) in cash and due from banks ................... 35,268 5,752
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR ................................ 25,589 19,054
--------- ---------
CASH AND DUE FROM BANKS AT END OF PERIOD .................................... $ 60,857 $ 24,806
========= =========
The accompanying notes are an integral part of these statements.
6
COWLITZ BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except number of shares and per share amounts)
1. Nature of Operations
Cowlitz Bancorporation (the Company) is a holding company located in
southwest Washington. The Company's principal subsidiary, Cowlitz Bank (the
Bank), a Washington state-chartered commercial bank, is the largest community
bank headquartered in Cowlitz County and offers commercial banking services
primarily to small and medium-sized businesses, professionals, and retail
customers. The Company acquired Business Finance Corporation (BFC) of Bellevue,
Washington during the third quarter of 1998. BFC provides asset based financing
to companies throughout the Western United States. During 1999 and 2000, the
Company acquired or opened several mortgage and escrow branches. Bay Mortgage
and Bay Escrow of Bellevue, Washington, Bay Mortgage and Bay Escrow of Seattle,
Washington, Bay Mortgage of Silverdale, Washington, and Bay Mortgage of
Vancouver, Washington (collectively "Bay Mortgage") have joined together as a
division of Cowlitz Bank. Bay Mortgage serves customers throughout the greater
Bellevue/Seattle market area, and through the Vancouver office, the greater
Portland, Oregon market. The Bank also expanded its commercial banking
activities in the Seattle/Bellevue area with the September 1999 opening of a
branch in Bellevue, Washington, which is doing business as Bay Bank. In
mid-2000, the Company acquired Northern Bank of Commerce (NBOC) of Portland,
Oregon, which operates as a branch of the Bank doing business as Northern Bank
of Commerce. NBOC operates its main office in downtown Portland, and has twelve
limited service branches located within retirement centers in the Portland
metropolitan area.
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 six months
ended June 30, 2001 are not necessarily indicative of results to be anticipated
for the year ending December 31, 2001.
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
COWLITZ BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except number of shares and per share amounts)
5. Earnings Per Share
The following table reconciles the numerator and denominator of the basic
and diluted earnings per share computations:
Weighted Per Share
Net Income Avg. Shares Amount
For the three months ended June 30, 2001
Basic earnings per share $ 416 3,691,865 $ .11
Stock Options 32,958
Diluted earnings per share $ 416 3,724,823 $ .11
For the three months ended June 30, 2000
Basic earnings per share $ 238 3,904,766 $ .06
Stock Options --
Diluted earnings per share $ 238 3,904,766 $ .06
For the six months ended June 30, 2001
Basic earnings per share $ 873 3,691,115 $ .24
Stock Options 33,010
Diluted earnings per share $ 873 3,724,125 $ .23
For the six months ended June 30, 2000
Basic earnings per share $ 28 3,956,808 $ .01
Stock Options --
Diluted earnings per share $ 28 3,956,808 $ .01
Options to purchase 539,466 shares of common stock at an average price of
$8.55 were outstanding at June 30, 2001 but were not included in the computation
of diluted earnings per share because the options' exercise price was greater
than the average market price of the common shares. These options expire from
2007-2009.
8
COWLITZ BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except number of shares and per share amounts)
6. Recently Issued Accounting Standards
SFAS No. 133 and SFAS No. 137
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" is now effective for the Company, beginning in the quarter ended
March 31, 2001. The Statement establishes accounting and reporting standards
requiring that derivative instruments (including certain derivative instruments
embedded in other contracts) be recorded in the statement of condition 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.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," an amendment of SFAS No.
133. This statement amends a limited number of issues causing implementation
difficulties, and is effective for all fiscal quarters and all fiscal years
beginning after June 15, 2001.
During 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities - a replacement
of FASB Statement No. 125," effective for transfers and extinguishments
occurring after March 31, 2001.
The implementation of these Statements is not expected to have a material
impact on the Company's financial position or results of operation.
SFAS No. 141 and SFAS No. 142
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of the Statement is expected to result in an
increase in net income of $325,000 ($.09 per share) per year. During 2002, the
Company will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002 and has not yet
determined what the effect of these tests will be on the earnings and financial
position of the Company.
9
COWLITZ BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except number of shares and per share amounts)
7. Comprehensive Income
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/(loss) for the periods ended June
30, 2001 and 2000 are as follows:
Three months ended Six Months Ended
June 30 June 30
2001 2000 2001 2000
---- ---- ---- ----
Unrealized gain (loss) arising during
the period, net of tax ................... $(47) $ 4 $(13) $ 8
Reclassification adjustment for net
realized gains (losses) on
securities available-for-sale
included in net income during the
year, net of tax ......................... 25 -- 43 4
---- ---- ---- ----
Comprehensive income(loss) ................. $(72) $ 4 $(56) $ 4
==== ==== ==== ====
8. Segments of an Enterprise and Related Information:
The Company is principally engaged in community banking activities through
its 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. The Company
provides asset based financing to companies throughout the western United States
through its BFC subsidiary. Bay Mortgage specializes in all facets of
residential lending including FHA and VA loans, construction loans and bridge
loans.
The community banking, asset based financing activity, and mortgage-banking
activities are monitored and reported by Company management as separate
operating segments. The seven separate banking offices and twelve retirement
center branches have been aggregated into a single reportable segment, Community
Banking and Bay Mortgage is included as a segment. The asset based financing
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 2000 annual
report, except that some operating expenses are not allocated to segments.
10
Summarized financial information for the periods ended June 30, 2001 and 2000
concerning the Company's reportable segments is shown in the following tables.
Three months ended June 30, 2001
Mortgage Holding
Banking Banking Company Other Intersegment Consolidated
------- ------- ------- ------- ------- -------
Interest income ...................... $ 6,496 $ 3,013 $ 20 $ 306 $ (912) $ 8,923
Interest expense ..................... 3,611 800 60 63 (912) 3,622
------- ------- ------- ------- ------- -------
Net interest income ............... 2,885 2,213 (40) 243 -- 5,301
Provision for loan loss .............. 211 106 -- 38 -- 355
Non-interest income .................. 470 1,417 -- -- (71) 1,816
Non-interest expense ................. 2,642 2,914 319 205 (71) 6,009
------- ------- ------- ------- ------- -------
Income/(loss) before
tax ............................... 502 610 (359) -- -- 753
Provision/(benefit) for
income taxes ..................... 179 207 (58) 9 -- 337
------- ------- ------- ------- ------- -------
Net income/(loss) .................... $ 323 $ 403 $ (301) $ (9) $ -- $ 416
======= ======= ======= ======= ======= =======
Three months ended June 30, 2000
Mortgage Holding
Banking Banking Company Other Intersegment Consolidated
------- ------- ------- ------- ------- -------
Interest income ...................... $ 4,554 $ 830 $ 124 $ 405 $ (186) $ 5,727
Interest expense ..................... 2,194 -- -- 126 (186) 2,134
------- ------- ------- ------- ------- -------
Net interest income ............... 2,360 830 124 279 -- 3,593
Provision for loan loss .............. 341 -- (8) 38 -- 371
Non-interest income .................. 539 198 -- -- (13) 724
Non-interest expense ................. 2,117 1,122 202 161 (13) 3,589
------- ------- ------- ------- ------- -------
Income/(loss) before
tax ............................... 441 (94) (70) 80 -- 357
Provision/(benefit) for
income taxes ..................... 150 (32) (22) 23 -- 119
------- ------- ------- ------- ------- -------
Net income/(loss) .................... $ 291 $ (62) $ (48) $ 57 $ -- $ 238
======= ======= ======= ======= ======= =======
Six months ended June 30, 2001
Mortgage Holding
Banking Banking Company Other Intersegment Consolidated
------- ------- ------- ------- ------- -------
Interest income ...................... $12,473 $ 5,078 $ 64 $ 643 $(1,436) $16,822
Interest expense ..................... 6,783 1,237 123 135 (1,436) 6,842
------- ------- ------- ------- ------- -------
Net interest income ............... 5,690 3,841 (59) 508 -- 9,980
Provision for loan loss .............. 421 106 -- 80 -- 607
Non-interest income .................. 996 2,427 -- -- (144) 3,279
Non-interest expense ................. 5,217 5,199 488 396 (144) 11,156
------- ------- ------- ------- ------- -------
Income/(loss) before
tax ............................... 1,048 963 (547) 32 -- 1,496
Provision/(benefit) for
income taxes ..................... 373 327 (105) 28 -- 623
------- ------- ------- ------- ------- -------
Net income/(loss) .................... $ 675 $ 636 $ (442) $ 4 $ -- $ 873
======= ======= ======= ======= ======= =======
11
Six months ended June 30, 2000
Mortgage Holding
Banking Banking Company Other Intersegment Consolidated
------- ------- ------- ------- ------- -------
Interest income ...................... $ 8,757 $ 1,422 $ 258 $ 787 $ (352) $10,872
Interest expense ..................... 3,933 -- -- 224 (352) 3,805
------- ------- ------- ------- ------- -------
Net interest income ............... 4,824 1,422 258 563 -- 7,067
Provision for loan loss .............. 689 -- (8) 60 -- 741
Non-interest income .................. 995 389 -- -- (65) 1,319
Non-interest expense ................. 4,656 2,209 403 375 (65) 7,578
------- ------- ------- ------- ------- -------
Income/(loss) before
tax ............................... 474 (398) (137) 128 -- 67
Provision/(benefit) for
income taxes ..................... 161 (135) (42) 55 -- 39
------- ------- ------- ------- ------- -------
Net income/(loss) .................... $ 313 $ (263) $ (95) $ 73 $ -- $ 28
======= ======= ======= ======= ======= =======
9. Subsequent Events: None
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULT OF OPERATIONS
The following Management's Discussion and Analysis of Financial Conditions and
Results of Operations includes a discussion of certain significant business
trends and uncertainties, as well as certain forward-looking statements, and is
intended to be read in conjunction with, and is qualified in its entirety by,
reference to the consolidated financial statements of the Company and
accompanying notes included elsewhere herein.
Results of Operations
Three months ended June 30, 2001 and 2000
During the second quarter of 2001 the Company had net income of $416,000,
or $0.11 per diluted share, compared to net income of $238,000, or $.06 per
diluted share, in the second quarter of 2000. Increased activity in residential
mortgage lending is the primary reason for the increase in net income from last
year to this year. Bay Mortgage had a net loss of $62,000 for the quarter ended
June 30, 2000 and net income of $403,000 for the same period of 2001. For the
second quarter of 2001, the Company's revenues (net interest income before
provision for loan losses plus non-interest income) were $7.1 million, an
increase of 67.1% above the revenues of $4.3 million during the same period in
2000. Non interest expenses have increased by 70.2% under the same comparison,
from $3.5 to $6.0 million, primarily due to the acquisition of NBOC and the
increase in commissions at Bay Mortgage.
Six months ended June 30, 2001 and 2000
For the six months ended June 30, 2001, the Company had net income of
$873,000 or $0.23 per diluted share, compared to net income for the same period
of 2000 of $28,000 or $0.01 per diluted share. Contributing to the $845,000
increase in net income were Bay Mortgage, which had net income of $636,000 for
the six months ended June 30, 2001 compared to a loss of $263,000 for the same
period of 2000, and the one time severance charge of $540,000 which reduced net
income for 2000. For the first six months of 2001, the Company's revenues (net
interest income before provision for loan losses plus non-interest income) were
$13.3 million, an increase of 60.3% above the revenues of $8.3 million during
the same period in 2000. Non interest expenses have increased by 49.4% under the
same comparison, from $7.5 to $11.2 million, primarily due to the acquisition of
NBOC and the increase in commissions at Bay Mortgage.
At June 30, 2001, total assets were $386.4 million and total liabilities
were $355.3 million. Assets increased 30.1% from $296.9 million at December 31,
2000 and liabilities increased 33.3% from $266.5 million at December 31, 2000.
The asset growth is explained by a significant increase in the volume of
mortgage loans booked by Bay Mortgage in the first six months of 2001 and the
continued growth of Bay Bank in early 2001. Loans held for sale, which account
for 50.0% of the asset growth, increased $44.7 million during the first six
months of 2001 and assets at Bay Bank are $15.1 million higher than at December
31, 2000. With the reductions in interest rates by the Federal Reserve during
2001, Bay Mortgage has experienced increased volumes of mortgage, re-financing,
construction, and bridge loans as consumers take advantage of the relatively low
current interest rates. The increased mortgage activity has resulted in
additional non-interest income in the form of underwriting fees, escrow fees,
and premiums on mortgage loans sold. The number of staff (both commissioned loan
officers, and salaried processors) at Bay Mortgage has increased to 86 employees
at June 30, 2001 compared to 64 at December 31, 2000 in order to close and
process the increased number of loans that are being generated in the current
market environment. Cash and due from banks has also increased significantly
since December 31, 2000 from $25.6 million to $60.9 million at June 30, 2001.
The cash is available to fund potential additional increases in mortgage loans
held for sale, as discussed below, and to provide for the Company's liquidity
needs.
The increase in liabilities from the year ended December 31, 2000 comes
from the need to fund the mortgage loans held for sale generated at Bay
Mortgage, and to provide increased liquidity for the Company. The Company has
raised an additional $89.1 million in deposit liabilities in the first six
months of 2001 for these purposes. The deposits are necessary to fund the loans
for the short time they are on Bay Mortgage's books before they are sold to the
secondary market. The holding period on these loans held for sale is typically
15 to 45 days.
13
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 the investment securities portfolio, and interest
expense, principally on customer deposits and borrowings. 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.
Three months ended June 30, 2001 and 2000
Net interest income for the quarter ended June 30, 2001 was $5.3 million,
which was an increase of 47.5% from $3.6 million for the same period of 2000.
The overall tax-equivalent earning asset yield was 10.79% for the quarter ended
June 30, 2001 compared to 11.08% for the quarter ended June 30, 2000. Earning
assets averaged $330.8 million for the three months ended June 30, 2001 compared
to $206.8 million for the same period of 2000. The increase in interest income
was a result of the acquisition of interest earning assets from the purchase of
NBOC in the third quarter of 2000, and asset growth at Bay Bank. Also, Bay
Mortgage's loans held for sale generate interest income for the 15-45 day
holding period from the time the loans are funded, until they are delivered to
the secondary market. Loans held for sale averaged approximately $47.5 million
and $6.7 million for the second quarters of 2001 and 2000, respectively.
The average cost of interest bearing liabilities decreased to 5.15% for the
quarter ended June 30, 2001 from 5.24% for the same period of 2000. Average
interest bearing liabilities increased $118.3 million from $163.1 million for
the three months ended June 30, 2000 to $281.4 million for the three months
ended June 30, 2001. Deposit growth is primarily due to the acquisition of NBOC,
rapid growth at Bay Bank, and increased CD's to increase liquidity and to fund
the short-term loans held for sale generated by Bay Mortgage. These loans are
booked with a commitment to be sold into the secondary market, but there is
typically a 15-45 day holding period before the sale is finalized.
Decreases in national interest rates during 2001 have been the major
contributors toward the decline in both the average yields earned on interest
earning assets, and the average cost of interest bearing liabilities from the
second quarter 2000 to the second quarter of 2001. These rate decreases have
also contributed to the smaller interest rate spread of 5.64% for the three
months ended June 30, 2001 when compared to 5.84% for the same period of 2000.
Prime based loans re-price immediately when the prime rate is adjusted, but
fixed rate liabilities, particularly CD's, do not immediately adjust to prime,
so do not re-price until the CD matures and is replaced at the lower rates. The
Company's current mix of loans includes approximately 60% fixed rate loans, and
40% that re-price to prime. The falling rate environment experienced in the
first six months of 2001 causes yields on assets to decline more rapidly than
the liability costs, narrowing the interest spread. A factor offsetting the
decline in interest rates is the increased volume of residential mortgage loans.
Although these loans typically carry a lower interest rate than the majority of
the loan portfolio, the initial loan fees associated with closing these loans
are treated as interest income and are recognized when the loans are sold. Loan
fees on mortgage loans held for sale totaled $1.9 million for the three months
ended June 30, 2001.
14
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.
Three Months Ended
(unaudited) June 30, Increase
(in thousands of dollars) 2001 2000 (Decrease) Change
--------- --------- --------- ---------
Interest income (1) ..................... $ 8,924 $ 5,728 $ 3,196 55.8%
Interest expense ........................ 3,622 2,134 1,488 69.7%
--------- --------- ---------
Net interest income ..................... $ 5,302 $ 3,594 $ 1,708 47.5%
========= ========= =========
Average interest earning assets ......... $ 330,839 $ 206,811 124,028 60.0%
Average interest bearing liabilities .... $ 281,357 $ 163,054 118,303 72.6%
Average yields earned (2) ............... 10.79% 11.08% (.29)
Average rates paid (2) .................. 5.15% 5.24% (.09)
Net interest spread (2) ................. 5.64% 5.84% (.20)
Net interest margin (2) ................. 6.41% 6.95% (.54)
(1) Interest earned on nontaxable securities has been computed on a 34% tax
equivalent basis.
(2) Ratios for the three months ended June 30, 2001 and 2000 have been
annualized.
Six months ended June 30, 2001 and 2000
Net interest income for the six months ended June 30, 2001 was $10.0
million, which was an increase of 41.2% from $7.1 million for the same period of
2000. The overall tax-equivalent earning asset yield was 10.92% for the first
six months of 2001 compared to 11.14% for the same period of 2000. Earning
assets averaged $308.0 million for the six months ended June 30, 2001 compared
to and average of $195.1 million for the six months ended June 30, 2000. The
increase in interest income was a result of the acquisition of interest earning
assets from the purchase of NBOC in the third quarter of 2000, and asset growth
at Bay Bank. Also, Bay Mortgage's loans held for sale generate interest income
for the 15-45 day holding period from the time the loans are funded, until they
are delivered to the secondary market. Loans held for sale averaged
approximately $39.6 million and $5.2 million for the six months ended June 30,
2001 and 2000, respectively.
The average cost of interest bearing liabilities was 5.30% for the first
six months of 2001 compared to 5.01% for the same period of 2000. Average
interest bearing liabilities increased $106.3 million from an average of $151.9
million for the six months ended June 30, 2000 to an average of $258.3 million
for the six months ended June 30, 2001. Deposit growth is primarily due to the
acquisition of NBOC, rapid growth at Bay Bank, and increased CD's to increase
liquidity and to fund the short-term loans held for sale generated by Bay
Mortgage. These loans are booked with a commitment to be sold into the secondary
market, but there is typically a 15-45 day holding period before the sale is
finalized.
Decreases in national interest rates during 2001 have been the major
contributors toward the decline in both the average yields earned on interest
earning assets, and the average cost of interest bearing liabilities from the
second quarter 2000 to the second quarter of 2001. These rate decreases have
also contributed to the smaller interest rate spread of 5.63% for the six months
ended June 30, 2001 when compared to 6.13% for the same period of 2000. Prime
based loans re-price immediately when the prime rate is adjusted, but fixed rate
liabilities, particularly CD's, do not immediately adjust to prime, so do not
re-price until the CD matures and is replaced at the lower rates. The Company's
current mix of loans includes approximately 60% fixed rate loans, and 40% that
re-price to prime. The falling rate environment experienced in the first six
months of 2001 causes yields on assets to decline more rapidly than the
liability costs, narrowing the interest spread. A factor offsetting the decline
in the prime interest rate is the increased volume of residential mortgage
loans. Although these loans typically carry a lower interest rate than the
majority of the loan portfolio, the initial loan fees associated with closing
these loans are treated as interest income and are recognized when the loans are
sold. Loan fees on mortgage loans held for sale totaled $3.2 million for the six
months ended June 30, 2001.
15
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.
Six Months Ended
(unaudited) June 30, Increase
(in thousands of dollars) 2001 2000 (Decrease) Change
--------- --------- --------- ---------
Interest income (1) ...................... $ 16,823 $ 10,873 $ 5,950 54.7%
Interest expense ......................... 6,842 3,805 3,037 79.8%
--------- --------- ---------
Net interest income ...................... $ 9,981 $ 7,068 $ 2,913 41.2%
========= ========= =========
Average interest earning assets .......... $ 307,986 $ 195,128 112,858 57.8%
Average interest bearing liabilities ..... $ 258,259 $ 151,911 106,348 70.0%
Average yields earned (2) ................ 10.92% 11.14% (.22)
Average rates paid (2) ................... 5.30% 5.01% .29
Net interest spread (2) .................. 5.63% 6.13% (.50)
Net interest margin (2) .................. 6.48% 7.24% (.76)
(1) Interest earned on nontaxable securities has been computed on a 34% tax
equivalent basis.
(2) Ratios for the six months ended June 30, 2001 and 2000 have been
annualized.
Market Risk
Interest rate risk and credit risk 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. Since December 31, 2000, the
national prime rate has decreased 2.75%, which caused the immediate re-pricing
of approximately 40% of the Company's loans, reducing interest income.
Conversely, the decrease in national interest rates has caused the residential
real estate lending, specifically loans held for sale, to increase significantly
from $10.0 million at December 31, 2001 to $54.7 million at June 30, 2001. The
increase in loan fees and interest earned on these loans has more than offset
the interest income lost on prime based loans. In order to help fund the growth
of the residential real estate lending, and to strengthen its liquidity
position, the Company has increased deposit liabilities, particularly money
market accounts and broker and out of market certificates of deposits. While
these types of deposits may be more sensitive to fluctuations in interest rates,
they are a primary source of funding the increases in loans held for sale. In
the future, when the current interest rate trends reverse, the Company expects
loans held for sale volumes to decrease, reducing the need to carry the excess
out of market and broker deposits.
16
Non-Interest Income
Three months ended June 30, 2001 and 2000
Non-interest income consists of the following components:
Three months ended
June 30,
---------------
2001 2000
------ ------
Service charge on deposit accounts ........... $ 183 $ 173
Gains on loans sold .......................... 937 201
Fiduciary income ............................. 59 72
Escrow fees .................................. 206 88
Credit Card income ........................... 135 94
Loan underwriting fees ....................... 236 53
ATM income ................................... 22 18
Safe deposit box fees ........................ 3 3
Gains on sale of available-for-sale securities 19 --
Other miscellaneous fees and income .......... 16 22
------ ------
Total non-interest income .................... $1,816 $ 724
====== ======
Non-interest income increased to $1.8 million for the quarter ended June
30, 2001 from $666,000 in the corresponding period of 2000. This increase is due
to non-interest income generated by mortgage lending activities including gains
on loans sold, escrow fees and loan underwriting fees. These fees were generated
by Bay Mortgage as volumes of mortgage, construction, re-finance and bridge
loans have increased to coincide with the reductions in interest rates during
the first half of 2001
Six months ended June 30, 2001 and 2000
Non-interest income consists of the following components:
Six months ended
June 30,
---------------
2001 2000
------ ------
Service charge on deposit accounts ........... $ 373 $ 344
Gains on loans sold .......................... 1,576 303
Fiduciary income ............................. 120 145
Escrow fees .................................. 390 145
Credit Card income ........................... 278 190
Loan underwriting fees ....................... 423 86
ATM income ................................... 36 34
Safe deposit box fees ........................ 31 31
Gains on sale of available-for-sale securities 37 6
Other miscellaneous fees and income .......... 15 35
------ ------
Total non-interest income .................... $3,279 $1,319
====== ======
Non-interest income increased to $3.3 million for the six months ended June
30, 2001 from $1.2 million in the corresponding period of 2000. This increase is
due to non-interest income generated by mortgage lending activities including
gains on loans sold, escrow fees and loan underwriting fees. These fees were
generated by Bay Mortgage as volumes of mortgage, construction, re-finance and
bridge loans have increased to coincide with the first quarter 2001 reductions
in interest rates.
17
Non-Interest Expense
Three months ended June 30, 2001 and 2000
Non-interest expense consists of the following components:
Three months ended
June 30,
------------------
2001 2000
------ ------
Salaries and employee benefits ......... $2,158 $1,583
Mortgage division commission expense ... 1,493 489
Net occupancy and equipment ............ 607 472
Amortization of intangible assets ...... 148 132
Business taxes ......................... 156 96
Data processing and communications ..... 165 77
Stationary and supplies ................ 72 52
Credit card expense .................... 106 79
Parking, travel and education .......... 78 42
Loan expense ........................... 164 59
Advertising ............................ 68 50
Professional fees ...................... 134 146
Postage and freight .................... 125 57
FDIC insurance ......................... 69 7
Other miscellaneous expenses ........... 466 248
------ ------
Total non-interest expense ............. $6,009 $3,589
====== ======
Non-interest expenses increased 70.2% to $6.0 million for the quarter ended
June 30, 2001 compared to $3.5 million for the quarter ended June 30, 2000,
primarily due to the acquisition of NBOC and the increase in number of
commissioned staff at Bay Mortgage. Also contributing was an increase in FDIC
insurance, and expenses attributed to increased mortgage loan volumes
Salary expenses have increased from $1.6 million to $2.2 million from the
second quarter 2000 to the second quarter of 2001. This increase is a result of
the addition of employees from the acquisition of NBOC, as well as ordinary
salary increases for existing employees generally ranging from three to six
percent a year. NBOC salary expense for the second quarter of 2001 was $288,000.
At June 30, 2001, the Company had 211 full-time equivalent employees compared to
155 at June 30, 2000. Commission expense at Bay Mortgage has increased because
of the increased volume of mortgage lending.
Net occupancy expenses consist of depreciation on premises, lease costs,
equipment, maintenance and repair expenses, utilities and related expenses. The
Company's net occupancy expense for the quarter ended June 30, 2001 was $607,000
or 28.6% higher than $472,000 for the same period of 2000. The increase in
occupancy expense in the second quarter 2001 was due primarily to the
acquisition of NBOC, which added a lease expense of approximately $65,000 per
quarter as well as related occupancy costs.
Beginning in January 2002, with the adoption of SFAS No. 141 and No. 142,
non interest expenses will be reduced by the amortization expense on
unidentifiable intangible assets. See note 6 for additional discussion of SFAS
No. 141 and No. 142.
The FDIC insurance has increased because in the second quarter 2000, the
Bank was not required to pay the assessment charge, but during the second
quarter of 2001, was required to pay $.10 per $100.00 of domestic deposits. Loan
expenses have increased in part due to the increased loan activity at Bay
Mortgage, and also due to expenses related to other real estate owned, and
repossession of assets on defaulted loans.
Included in other miscellaneous expenses in the second quarter of 2001, is
a write down of $137,000 relating to the cash surrender value of a key man life
insurance policy held on the Company's Chairman and CEO, Benjamin Namatinia. The
cash surrender value is based on the estimated fair market value of an
underlying securities fund. During the first six months of 2001, the underlying
securities fund lost value as a result of the overall reductions in values
within the general stock market. Because the cash surrender value of the policy
decreased during this time,
18
the Company wrote down the asset. The underlying investments supporting the cash
surrender value of the key man life insurance policy have since been transferred
to a guaranteed fixed income portfolio in order to retain, and potentially grow,
the cash surrender value of the policy in the future.
Six months ended June 30, 2001 and 2000
Non-interest expense consists of the following components:
Six months ended
June 30,
-------------------
2001 2000
------- -------
Salaries and employee benefits ......... $ 4,197 $ 3,825
Mortgage division commission expense ... 2,591 828
Net occupancy and equipment ............ 1,222 935
Amortization of intangible assets ...... 295 263
Business taxes ......................... 284 187
Data processing and communications ..... 291 151
Stationary and supplies ................ 132 103
Credit card expense .................... 213 155
Parking, travel and education .......... 160 98
Loan expense ........................... 253 75
Advertising ............................ 118 98
Professional fees ...................... 280 270
Postage and freight .................... 234 112
FDIC insurance ......................... 141 14
Other miscellaneous expenses ........... 745 464
------- -------
Total non-interest expense ............. $11,156 $ 7,578
======= =======
Non-interest expenses increased 49.4% to $11.2 million for the six months
ended June 30, 2001 compared to $7.5 million for the six months ended June 30,
2000, primarily due to the acquisition of NBOC and the increase in number of
commissioned staff at Bay Mortgage. Also contributing was an increase in FDIC
insurance and expenses attributed to increased mortgage loan volumes.
Salary expenses have increased from $3.8 million to $4.2 million from the
first six months of 2000 to the first six months of 2001. This increase is a
result of the addition of employees from the acquisition of NBOC as well as
ordinary salary increases for existing employees generally ranging from three to
six percent a year. The salary expense at NBOC for the first six months of 2001
is $547,000. At June 30, 2001, the Company had 211 full-time equivalent
employees compared to 155 at June 30, 2000. Commission expense at Bay Mortgage
has increased because of the increased volume of mortgage lending.
Net occupancy expenses consist of depreciation on premises, lease costs,
equipment, maintenance and repair expenses, utilities and related expenses. The
Company's net occupancy expense for the six months ended June 30, 2001 was $1.2
million or 30.7% higher than $935,000 for the same period of 2000. The increase
in occupancy expense in 2001 was due primarily to the acquisition of NBOC, which
added a lease expense of approximately $65,000 per quarter as well as related
occupancy costs.
Beginning in January 2002, with the adoption of SFAS No. 141 and No. 142,
non interest expenses will be reduced by the amortization expense on
unidentifiable intangible assets. See note 6 for additional discussion of SFAS
No. 141 and No. 142.
The FDIC insurance has increased because in the first six months of 2000,
the Bank was not required to pay the assessment charge, but during the same
period of 2001, was required to pay $.10 per $100.00 of domestic deposits. Loan
expenses have increased in part due to the increased loan activity at Bay
Mortgage, and also due to expenses related to other real estate owned, and
repossession of assets on defaulted loans.
Included in other miscellaneous expenses in the first six months of 2001,
is a write down of $162,000 relating to the cash surrender value of a key man
life insurance policy held on the Company's Chairman and CEO,
19
Benjamin Namatinia. The cash surrender value is based on the estimated fair
market value of an underlying securities fund. During the first six months of
2001, the underlying securities fund lost value as a result of the overall
reductions in values within the general stock market. Because the cash surrender
value of the policy decreased during this time, the Company wrote down the
asset. The underlying investments supporting the cash surrender value of the key
man life insurance policy have since been transferred to a guaranteed fixed
income portfolio in order to retain, and potentially grow, the cash surrender
value of the policy in the future.
Income Taxes
Three months ended June 30, 2001 and 2000
The provision for income taxes was $337,000 and $119,000 for the quarters
ended June 30, 2001 and 2000, respectively. These provisions resulted in an
effective tax rate of 44.8% for the three months ended June 30, 2001 and 33.3%
for the three months ended June 30 2000. The effective tax rate for the second
quarter of 2001 is higher due to the non-tax deductible expense associated with
the write down of the key man insurance policy. See the discussion of
non-interest expenses for further details.
Six months ended June 30, 2001 and 2000
The provision for income taxes was $623,000 and $39,000 for the six months
ended June 30, 2001 and 2000, respectively. These provisions resulted in an
effective tax rate of 41.6% and 58.2% for the same periods of 2000 and 2001,
respectively.
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 non-performing and impaired loans,
evaluation of future economic trends in the Company's market area, and other
factors relevant to the loan portfolio. The allowance for loan losses is based
upon estimates of probable losses inherent in the loan portfolio. The amount
actually realized for these loans can vary significantly from the estimated
amounts. See Allowance for Loan Losses disclosure for a more detailed
discussion.
Three months ended June 30, 2001 and 2000
The Company's provision for loan losses was $355,000 and $371,000 for the
quarters ended June 30, 2001 and 2000, respectively. Net charge-offs were
$126,000 for the three months ended June 30, 2001 compared to net charge-offs of
$91,000 for the three months ended June 30, 2000 and $863,000 for the year ended
December 31, 2000. Total charge-offs were $175,000 and $197,000 for the second
quarter ended June 30, 2001 and 2000 respectively and $2.1 million for the year
ended December 31, 2000. Management continuously monitors existing loans for
signs of impairment, and strives to reduce the level of loans previously
classified as impaired. For additional discussion, please see Allowance for Loan
Losses.
Six months ended June 30, 2001 and 2000
The Company's provision for loan losses was $607,000 and $741,000 for the
quarters ended June 30, 2001 and 2000, respectively. Net charge-offs were $1.8
million for the six months ended June 30, 2001 compared to net charge-offs of
$157,000 for the six months ended June 30, 2000 and $863,000 for the year ended
December 31, 2000. Total charge-offs were $1.9 million and $284,000 for the
second quarter ended June 30, 2001 and 2000 respectively and $2.1 million for
the year ended December 31, 2000. Many of the Company's non-performing loans are
real estate backed or have some other type of collateral with sufficient value
so that management expects little or no loss associated with those loans.
However, some non-performing loans did not have sufficient collateral backing,
and management decided to write off these loans in the first quarter of 2001.
The loan loss reserves to total loans were 1.95% at December 31, 2000 and 1.41%
at June 30, 2001. Management continuously monitors existing loans for signs of
impairment, and strives to reduce the level of loans previously classified as
impaired.
20
The following table shows the Company's loan loss performance for the
periods indicated:
Six months Six months
(unaudited) Ended Ended Year ended
June 30, June 30, December 31,
(in thousands of dollars) 2001 2000 2000
-------- -------- --------
Loans outstanding at end of period ............................ $239,473 $194,154 $233,639
Average loans outstanding during the period ................... $240,388 $171,631 $201,978
Allowance for loan losses, beginning of period ................ $ 4,561 $ 2,281 $ 2,281
Loans charged off:
Commercial ................................................. 674 242 1,983
Real Estate ................................................ 1,130 -- --
Consumer ................................................... 12 19 36
Credit Cards ............................................... 39 23 51
-------- -------- --------
Total loans charged-off .................................. 1,855 284 2,070
-------- -------- --------
Recoveries:
Commercial ................................................. 19 119 1,183
Real Estate ................................................ 30 -- --
Consumer ................................................... 14 8 9
Credit Cards ............................................... 1 -- 15
-------- -------- --------
Total recoveries ......................................... 64 127 1,207
-------- -------- --------
Provision for loan losses ..................................... 607 741 1,155
Adjustment incident to acquisition ............................ -- -- 1,988
-------- -------- --------
Allowance for loan losses, end of period ...................... $ 3,377 $ 2,865 $ 4,561
======== ======== ========
Net loans charged off during the period ....................... $ 1,791 $ 157 $ 863
Ratio of net loans charged-off to average loans outstanding ... .75% .09% .43%
Ratio of allowance for loan losses to loans at end of period... 1.41% 1.48% 1.95%
Loans
Total loans outstanding were $239.5 million and $233.6 million at June 30,
2001 and December 31, 2000, respectively. Loan commitments were $53.9 million at
June 30, 2001 and $54.4 million at December 31, 2000. In addition, the Company
had $54.7 million of loans held for sale at June 30, 2001 compared to $10.0
million at December 31, 2000. During the first six months of 2001, the Company
funded $227.7 million of loans to be sold into the secondary market, and
delivered $184.5 million to the market. This compares to $49.8 million funded
and $44.7 million delivered during the first six months of 2000.
The following table presents the composition of the Company's loan
portfolio at the dates indicated:
(unaudited) June 30, 2001 December 31, 2000
(in thousands of dollars) Amount Percentage Amount Percentage
------------------------------ -----------------------------
Commercial ...................... $ 50,562 21.04% $ 46,738 19.94%
Real estate construction ........ 28,579 11.89 10,744 4.58
Real estate commercial .......... 108,743 45.26 130,272 55.58
Real estate mortgage ............ 42,527 17.70 34,402 14.68
Consumer and other .............. 9,863 4.10 12,247 5.22
----------- ----------- ----------- -----------
240,274 100.00% 234,403 100.00%
=========== ===========
Deferred loan fees .............. (801) (764)
----------- -----------
Total loans ................ 239,473 233,639
Allowance for loan losses ....... (3,377) (4,561)
----------- -----------
Total loans, net ........... $ 236,096 $ 229,078
=========== ===========
21
Allowance for Loan Losses
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 periodically or when indicators
show that a credit may have weakened, from factors such as operating losses,
collateral impairment or delinquency problems.
The result is an allowance with two components:
Specific Reserves: The amount of specific reserves are established when
there are significant conditions or circumstances related to a loan that would
indicate that a loss would be incurred. Management considers in its analysis
expected future cash flows, the value of collateral and other factors that may
impact the borrower's ability to pay.
General Allowance: The amount of the general allowance is based on loss
factors assigned to the Company's loan exposures based on internal credit
ratings. These loss factors are determined on the basis of historical charge-off
experience and suggested regulatory guidelines. 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" in the
Company's Watch List. Suggested regulatory loss reserve factors are then applied
to each of these categories of classified loan balances. 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 highest years' actual net charge-offs
within the past 5 years 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 non-performing 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 that is charged to income is the amount necessary to
adjust the allowance to the level determined through the above process.
22
In accordance with the Company's methodology for assessing the appropriate
allowance for loan losses, the general portion of the allowance was $3.1 million
at June 30, 2001 and $3.1 million at December 31, 2000.
At June 30, 2001, approximately $326,000 of the allowance for loan losses
was allocated based on an estimate of the amount that was necessary to provide
for inherent losses related to specific loans, compared to $1.3 million at
December 31, 2000. Specific reserves declined as those loans requiring specific
reserves have been reduced by either principal payments, reclassification
assessments, or have been charged off.
Management's evaluation of the factors above resulted in allowances for
loan losses of $3.4 million and $4.6 million at June 30, 2001 and December 31,
2000, respectively. The allowance as a percentage of total loans was 1.41% at
June 30, 2001 and 1.95% at December 31, 2000.
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.
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
non-performing assets:
(unaudited) June 30, December 31,
(in thousands of dollars) 2001 2000
----- -----
Loans on non-accrual status 4,901 5,110
Loans past due greater than 90 days but not on non-accrual status 284 1,170
Other real estate owned 2,085 1,247
Other Assets 404 312
----- -----
Total non-performing assets 7,674 7,839
===== =====
Percentage of non-performing assets to total assets 1.99% 2.64%
===== =====
At June 30,2001 non-performing assets were $7.7 million or 1.99% of total
assets compared to $7.8 million or 2.64% of total assets at December 31, 2000.
This is down from $8.9 million or 2.59% of total assets at March 31, 2001. Loans
on non-accrual status are down to $4.9 million at June 30, 2001 from $6.6
million at March 31, 2001. The reduction from the first quarter reflects
management's commitment to reducing non-performing assets. BFC accounted for
approximately $893,000 and $661,000 of non-accrual loans at June 30, 2001 and at
December 31, 2000 respectively, 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
non-accrual status, although management does not necessarily believe that losses
are probable on these loans. Approximately $3.7 million and $4.0 million of the
non-accrual loans at June 30, 2001 and December 31, 2000 reflect loans primarily
secured by real estate and the remainder consists of commercial and consumer
loans with varying collateral.
Other real estate owned increased from $1.2 million at December 31, 2000 to
$2.1 at June 30, 2001 as non-accrual loans are foreclosed and the underlying
collateral is taken in as OREO. The Company is actively marketing these assets.
23
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. At June 30, 2001, $396,000 of the
securities portfolio matures within one year.
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 15% of the Bank's assets, subject to
collateral limitations. Advances from the FHLB have terms ranging from 4 through
15 years and at June 30, 2001 bear interest at rates from 4.00% to 8.80%. At
June 30, 2001, $16.2 million in advances were outstanding from the FHLB. The
Company has also significantly increased deposit liabilities and cash/due from
banks in order to help fund the growth in loans held for sale experienced at Bay
Mortgage during 2001 and to better the Company's liquidity position. At June 30,
2001 total cash and due from banks was $60.9 million compared to $25.6 million
at December 31, 2001. Total deposits, particularly money market and broker
certificates of deposit, have increased from $241.2 million to $330.3 million at
December 31, 2000 and June 30, 2001, respectively. Although deposits and cash
have increased in order to help fund the loans held for sale, the loans
themselves are fairly liquid. The loans are held on the balance sheet for a
short period of time, typically 15 to 45 days before they are sold to the
secondary market.
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,
2001, the Company's ratios were 9.21% and 10.43%, respectively. At December 31,
2000, the company's ratios were 9.74% and 10.99%, respectively. The ratio of
shareholders' equity to average assets was 9.37% and 11.93% at June 30, 2001 and
December 31, 2000, respectively.
24
Part II. Other Information
Item 4
Submission of Matters to a Vote of Security Holders
(a) Cowlitz Bancorporation Annual Shareholders' Meeting was held on May
10, 2001.
(b) Not Applicable.
(c) A brief description of each matter voted upon at the Annual
Shareholders' meeting held on May 10, 2001 and number of votes cast
for, against, or withheld, including a separate tabulation with
respect to each nominee for office is presented below:
(1) Election of (5) directors for the terms expiring in 2002.
Directors:
Mark F. Andrews, Jr.
Votes cast for:...................... 2,564,413
Votes cast against................... --
Votes withheld....................... 596,043
Bruce P. Buchberger
Votes cast for:...................... 2,780,234
Votes cast against................... --
Votes withheld....................... 380,222
John S. Maring
Votes cast for:...................... 2,780,234
Votes cast against................... --
Votes withheld....................... 380,222
Benjamin Namatinia
Votes cast for:...................... 2,771,279
Votes cast against................... --
Votes withheld....................... 389,177
E Chris Searing
Votes cast for:...................... 2,564,913
Votes cast against................... --
Votes withheld....................... 595,543
(2) Proposal to approve the increase of the number of shares of
Common Stock available for the 1997 Stock Option Plan by an
additional 100,000 shares to an aggregate of 625,000 shares
received the following votes:
Votes cast for........................... 2,401,976
Votes cast against....................... 719,200
Votes withheld........................... 39,280
(d) None
Item 5
Other Information
None
Item 6
(a) Exhibits. The list of exhibits is set forth on the Exhibit Index attached
hereto.
(b) None.
25
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: August 13, 2001 /s/
----------------------------
Harve E. Menkens
President
Dated: August 13, 2001 /s/
----------------------------
Don P. Kiser
Vice-President/CFO/Secretary
26
Exhibit Index
Exhibit No.
3.1* Restated and Amended Articles of Incorporation of the Company
3.2* Bylaws of the Company
* Incorporated by reference to the Company's Registration Statement
on Form S-1, File No. 333-44355
27