U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q
|X| Quarterly report Pursuant to section 13 or 15(d) of the
Securities and Exchange act of 1934
For the quarter ended March 31, 2002
| | Transition report pursuant to section 13 or 15(d) of the
Securities and Exchange act of 1934
For the transition period from ________ to ________
Commission file number
0-23881
COWLITZ BANCORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-152984
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
927 Commerce Ave., Longview, Washington 98632
(Address of principal executive offices) (Zip Code)
(360) 423-9800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, no par value on April 30, 2002: 3,732,172 shares
TABLE OF CONTENTS
Page
Part I
Financial Statements
Consolidated Statements of Condition -
March 31, 2002 and December 31, 2001 3
Consolidated Statements of Operations -
Three months ended March 31, 2002 and March 31, 2001
and year ended December 31, 2001 4
Consolidated Statements of Changes in Shareholders' Equity
Year ended December 31, 2001 and three months ended March 31, 2002 5
Consolidated Statements of Cash Flows
Three months ended March 31, 2002 and March 31, 2001 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
And Results of Operations 12
Part II
Other
Other information 22
Exhibits and Reports on Form 8-K 22
Signatures 23
2
COWLITZ BANCORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(in thousand of dollars, except number of shares)
March 31, December 31,
2002 2001
(unaudited)
ASSETS
Cash and due from banks........................................... $ 58,961 $ 50,177
Investment securities:
Investments available-for-sale (at fair value, cost of $41,795
and $30,172 at March 31, 2002 and December 31, 2001,
respectively)................................................ 41,638 30,188
Investments held-to-maturity (at amortized cost, fair value of
$1,852 and $4,157 at March 31, 2002 and December 31, 2001,
respectively)................................................ 1,819 4,115
-------- --------
Total investment securities.................................. 43,457 34,303
-------- --------
Federal Home Loan Bank stock, at cost............................. 3,593 3,531
Loans held for sale............................................... 18,898 37,322
Loans, net of deferred loan fees.................................. 226,101 235,212
Allowance for loan losses......................................... (5,617) (5,997)
-------- --------
Loans, net..................................................... 220,484 229,215
-------- --------
Premises and equipment, net of accumulated depreciation of $4,164
and $4,029 at March 31, 2002 and December 31, 2001,
respectively................................................... 5,052 5,235
Goodwill.......................................................... 2,352 3,560
Intangible assets, net of accumulated amortization of $1,269 and
$1,203 at March 31, 2002 and December 31, 2001, respectively... 700 767
Accrued interest receivable and other assets...................... 6,649 6,550
-------- --------
Total assets................................................. $360,146 $370,660
======== ========
LIABILITIES
Deposits:
Non-interest-bearing demand.................................... $ 43,243 $ 43,225
Savings and interest-bearing demand............................ 97,259 96,587
Certificates of deposit........................................ 165,648 175,678
-------- --------
Total deposits............................................... 306,150 315,490
Short-term borrowings............................................. 3,325 2,750
Long-term borrowings.............................................. 18,933 19,009
Accrued interest payable and other liabilities.................... 3,029 4,663
-------- --------
Total liabilities............................................ 331,437 341,912
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 shares authorized as of
March 31, 2002 and December 31, 2001, no shares issued and
outstanding.................................................... - -
Common stock, no par value; 25,000,000 authorized as of
March 31, 2002 and December 31, 2001; 3,732,172 and 3,692,560
shares issued and outstanding at March 31, 2002 and December
31, 2001, respectively........................................ 17,019 16,802
Additional paid-in capital........................................ 1,538 1,538
Retained earnings................................................. 10,270 10,398
Accumulated other comprehensive income (loss), net of taxes....... (118) 10
-------- --------
Total shareholders' equity................................... 28,709 28,748
-------- --------
Total liabilities and shareholders' equity................... $360,146 $370,660
======== ========
The accompanying notes are an integral part of these statements.
3
COWLITZ BANCORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousand of dollars, except per share amounts)
Three months ended Year Ended
March 31, December 31,
2002 2001 2001
--------- --------- --------
(unaudited)
INTEREST INCOME
Interest and fees on loans........................................ $ 5,060 $ 6,186 $ 25,088
Interest on taxable investment securities......................... 367 184 848
Interest on non-taxable investment securities..................... 2 2 8
Other interest and dividend income................................ 260 221 1,283
--------- --------- --------
Total interest income.......................................... 5,689 6,593 27,227
--------- --------- --------
INTEREST EXPENSE
Savings and interest-bearing demand............................... 396 605 2,600
Certificates of deposit........................................... 1,892 2,218 9,382
Short-term borrowings............................................. 10 33 115
Long-term borrowings.............................................. 237 364 1,285
--------- --------- --------
Total interest expense......................................... 2,535 3,220 13,382
--------- --------- --------
Net interest income before provision for loan losses........... 3,154 3,373 13,845
PROVISION FOR LOAN LOSSES......................................... (300) (252) (5,262)
--------- --------- --------
Net interest income after provision for loan losses............ 2,854 3,121 8,583
--------- --------- --------
NON-INTEREST INCOME
Service charges on deposit accounts............................ 178 190 737
Gains on loans sold............................................ 1,174 757 4,872
Escrow fees.................................................... 222 184 895
Fiduciary income............................................... 71 61 238
Credit card income............................................. 125 143 507
Brokerage fees................................................. 605 403 2,450
Gain on sale of subsidiary..................................... 423 - -
Net gains (losses) on sale of repossessed assets............... 2 (15) (429)
Other income................................................... 61 56 232
Net gains on maturities and sales of available-for-sale
securities ................................................... - 18 89
--------- --------- --------
Total non-interest income.................................... 2,861 1,797 9,591
--------- --------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits................................. 2,446 2,165 9,365
Net occupancy and equipment expense............................ 555 615 2,440
Impairment of goodwill......................................... - - 1,215
Business taxes................................................. 163 128 613
Amortization of intangibles.................................... 66 147 582
Net cost of operation of other real estate..................... 84 15 144
Data processing and communications............................. 103 126 543
Professional fees.............................................. 301 146 641
Postage and freight............................................ 125 109 478
Credit card expense............................................ 116 107 408
FDIC insurance................................................. 147 72 214
Other operating expense........................................ 568 545 2,831
--------- --------- --------
Total non-interest expense................................... 4,674 4,175 19,474
--------- --------- --------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE........................... 1,041 743 (1,300)
Income tax expense............................................. 378 286 150
--------- --------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE........................................ 663 457 (1,450)
CUMULATIVE EFFECT ON PRIOR YEARS OF ACCOUNTING
CHANGE (Less applicable income taxes of $417,000)............ 791 - -
--------- --------- --------
NET INCOME (LOSS)................................................. $ (128) $ 457 $ (1,450)
========= ========= ========
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK................... $ (0.03) $ 0.12 $ (0.39)
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK................. $ (0.03) $ 0.12 $ (0.39)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX
PER SHARE OF COMMON STOCK...................................... $ (0.21) $ - $ -
The accompanying notes are an integral part of these statements.
4
COWLITZ BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of dollars, except number of shares)
Accumulated
Common Stock Additional Other Total
------------ Paid-in Retained Comprehensive Shareholders' Comprehensive
Shares Amount Capital Earnings Income (loss) Equity Income (loss)
------ ------ ------- -------- ------------- ------ -------------
BALANCE AT DECEMBER 31, 2000 3,689,327 $ 16,785 $ 1,538 $ 12,048 $ 38 $ 30,409
Comprehensive Income:
Net loss................................ - - - (1,450) - (1,450) $ (1,450)
Net change in unrealized gains on
investments available-for-sale, net
of deferred taxes of $8.............. - - - - (28) (28) (28)
--------
Comprehensive loss...................... - - - - - - $ (1,478)
========
Issuance of common stock for cash....... 3,233 17 - - - 17
Cash dividends paid ($.05 per share).... - - - (200) - (200)
--------- -------- -------- -------- ----- --------
BALANCE AT DECEMBER 31, 2001 3,692,560 16,802 1,538 10,398 10 28,748
Comprehensive Income:
Net loss................................ - - - (128) - (128) $ (128)
Net change in unrealized gains on
investments available-for-sale, net
of deferred taxes of $27............. - - - - (128) (128) (128)
--------
Comprehensive loss...................... - - - - - - $ (256)
========
Issuance of common stock for cash....... 39,612 217 - - - 217
--------- -------- -------- -------- ----- --------
BALANCE AT MARCH 31, 2002 3,732,172 $ 17,019 $ 1,538 $ 10,270 $(118) $ 28,709
(unaudited) ========= ======== ======== ======== ===== ========
The accompanying notes are an integral part of these statements.
5
COWLITZ BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Three months ended
March 31,
2002 2001
-------- ---------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................. $ (128) $ 457
Adjustments to reconcile net income (loss) to net cash provided by
Operating activities:
Deferred tax benefit............................................ 27 8
Depreciation and amortization................................... 248 354
Change in accounting principles................................. 1,208 -
Provision for loan losses....................................... 300 252
Net gain on sale of subsidiary.................................. (423) -
Net gains on sales of investments available-for-sale............ - (18)
Net amortization of investment security premiums and accretion
of discounts.................................................. 36 (2)
Net gains on sales of foreclosed assets......................... (2) (15)
Gains on loans sold............................................. (1,174) (639)
Origination of loans held for sale.............................. (92,936) (101,880)
Proceeds of loans sales......................................... 112,534 62,549
(Increase) in accrued interest receivable and other assets...... (123) (347)
Increase (decrease) accrued interest payable and other
liabilities .................................................. (1,421) 242
Federal Home Loan Bank stock dividends.......................... (62) (54)
-------- ---------
Net cash from operating activities.......................... 18,084 (39,093)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities
held-to-maturity................................................ 2,598 990
Proceeds from sales and maturities of investment securities
available-for-sale.............................................. 5,387 2,156
Proceeds from sales of foreclosed assets.......................... 83 240
Purchases of investment securities:
Held-to-maturity................................................ (300) (99)
Available-for-sale.............................................. (17,048) (2,250)
Net (increase) decrease in loans.................................. 8,720 (10,395)
Net cash paid from sale of subsidiary............................. (104) -
Purchases of premises and equipment............................... (12) (98)
-------- ---------
Net cash from investment activities........................... (676) (9,456)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand, savings, and interest bearing
demand deposits................................................. 690 19,026
Net increase (decrease) in certificates of deposit................ (10,030) 24,980
Dividends paid.................................................... - (67)
Net increase in short-term borrowings............................. 575 2,050
Repayment of long-term borrowings............................... (76) (46)
Issuance of common stock for cash, net of amount paid for ......
fractional shares and offering costs.......................... 217 6
-------- ---------
Net cash from financing activities............................ (8,624) 45,949
-------- ---------
Net increase (decrease) in cash and cash equivalents.......... 8,784 (2,600)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....................... 50,177 25,589
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................... $ 58,961 $ 22,989
======== =========
The accompanying notes are an integral part of these statements.
6
COWLITZ BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except number of shares and per share amounts)
1. Nature of Operations
Cowlitz Bancorporation (the "Company") was organized in 1991 under Washington
law to become the holding company for Cowlitz Bank (also the "Company" or the
"Bank"), a Washington state chartered bank that commenced operations in 1978.
The principal executive offices of the Company are located in Longview,
Washington.
The Company offers or makes available a broad range of financial services to
its customers, primarily small and medium-sized businesses, professionals and
retail customers. The Bank's commercial and personal banking services include
commercial and real estate lending, consumer lending, mortgage origination and
trust services. From 1998 through 2001, the Company also provided asset-based
lending services to companies throughout the Western United States through its
subsidiary, Business Finance Corporation ("BFC"), which was sold in the first
quarter of 2002.
The Company's goal is to expand its position as a community-based provider of
financial services. The Company's growth strategy is based on providing both
exceptional personal service and a wide range of financial services to its
customers. This is done by emphasizing personal service and developing strong
community ties, offering financial products and services that are focused on
small and medium-sized businesses, and increasing business volume in existing
markets. In accordance with this strategy, 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 with
the Longview mortgage operations as a division of Cowlitz Bank. Bay Mortgage
serves customers throughout the greater Bellevue/Seattle market area, Cowlitz
County, 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 12 limited service branches located within retirement
centers in the Portland metropolitan area.
Certain reclassifications have been made to prior periods in order to conform
with the current period presentation. These reclassifications have no effect on
the Company's previously reported financial position, results of operations, or
earnings per share.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany transactions and
balances have been eliminated.
The interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments, including normal recurring accruals
necessary for fair presentation of results of operations for the interim periods
included herein have been made. The results of operations for the three months
ended March 31, 2002 are not necessarily indicative of results to be anticipated
for the year ending December 31, 2002.
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.
7
COWLITZ BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except number of shares and per share amounts)
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. Significant estimates include the allowance for loan losses. Actual
results could differ from those estimates.
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/(Loss) Avg. Shares Amount
For the quarter ended March 31, 2002
Basic earnings (loss) per share $(128) 3,699,519 $(.03)
Stock Options 46,564
Diluted earnings (loss) per share $(128) 3,746,083 $(.03)
For the quarter ended March 31, 2001
Basic earnings per share $ 457 3,690,457 $ .12
Stock Options 32,470
Diluted earnings per share $ 457 3,722,827 $ .12
Options to purchase 538,106 shares of common stock with exercise prices
ranging from $5.71 to $12.00, with an average price of $8.56, were outstanding
at March 31, 2002 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 2007-2010.
6. Recently Issued Accounting Standards
SFAS Nos. 141, 142, 143, and 144
Statement of Financial Accounting Standard (SFAS) No. 141 - "Business
Combinations" addresses financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, "Business Combinations," and
FASB Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises." All business combinations in the scope of this Statement are to be
accounted for using the purchase method. The provisions of this Statement apply
to all business combinations initiated after June 30, 2001.
Statement of Financial Accounting Standard (SFAS) No. 142 - "Goodwill and Other
Intangible Assets," addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. This Statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. The provisions of this Statement are required to be
applied starting with 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 Statement. Other intangible assets will continue to be
amortized over their useful lives.
8
COWLITZ BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except number of shares and per share amounts)
The Company has applied the new rules on accounting for goodwill and other
intangible assets during 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 per year. Amortization expense on intangible
assets was $66,000 for the three months ended March 31, 2002 compared to
$147,000 for the same period of 2001. During the first quarter of 2002, upon
adoption of SFAS 142, the Company performed a transitional impairment test of
goodwill and indefinite lived intangible assets. The effect of changing to this
new accounting principle is a one-time charge of $791,000 net of tax.
Statement of Financial Accounting Standard (SFAS) No. 143 - "Accounting for
Asset Retirement Obligations," addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to all entities. It
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development, and/or the normal
operation of a long-lived asset, except for certain obligations of lessees. As
used in this Statement, a legal obligation is an obligation that a party is
required to settle as a result of an existing or enacted law, statute,
ordinance, or written or oral contract or by legal construction of a contract
under the doctrine of promissory estoppel. This Statement amends FASB Statement
No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies."
This Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002.
Statement of Financial Accounting Standard (SFAS) No. 144 - "Accounting for the
Impairment or Disposal of Long-Lived Assets" addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
supersedes FASB Statement No. 122, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30.
The Company does not anticipate that the issuance of Statement Nos. 143 and 144
will have a material effect on its operations.
7. Comprehensive Income
For the Company, comprehensive income includes net income reported on the
statements of operations 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 three month periods
ended March 31, 2002 and 2001 and the twelve month period ended December 31,
2001, are as follows:
Three months ended Twelve months ended
March 31, December 31,
2002 2001 2001
------ ----- -----
Unrealized gain (loss) arising during (dollars in thousands)
the period, net of tax........... $ (128) $ 34 $ 31
Reclassification adjustment for net
realized gains (losses) on
securities available-for-sale
included in net income during the
year, net of tax................. - 18 (59)
------ ----- -----
Comprehensive income (loss)........ $ (128) $ 16 $ (28)
====== ===== =====
9
COWLITZ BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except number of shares and per share amounts)
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
provided asset based financing to companies throughout the western United States
through its BFC subsidiary, until its sale in the first quarter of 2002. 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 12 retirement center
branches have been aggregated into a single reportable segment, "Banking," and
Bay Mortgage is included as a segment, "Mortgage Banking." 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. This
segment, BFC, was sold during the first quarter of 2002.
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 2001 annual report,
except that some operating expenses are not allocated to segments.
Summarized financial information for the period ended March 31, 2002 and 2001
concerning the Company's reportable segments is shown in the following tables.
Three months ended March 31, 2002
Mortgage Holding
Banking Banking Company Other Intersegment Consolidated
---------- --------- ---------- --------- ------------ -------------
Interest income............ $ 5,264 $ 744 $ 3 $ 130 $ (452) $ 5,689
Interest expense........... 2,479 425 59 24 (452) 2,535
---------- --------- ---------- --------- ------------ -------------
Net interest income..... 2,785 319 (56) 106 - 3,154
Provision for loan loss.... 300 - - - - 300
Non-interest income........ 401 2,037 423 - - 2,861
Non-interest expense....... 2,634 1,722 185 133 - 4,674
---------- --------- ---------- --------- ------------ -------------
Income (loss) before tax... 252 634 182 (27) - 1,041
Income tax exp. (benefit).. 98 219 70 (9) - 378
---------- --------- ---------- ---------- ------------ -------------
Income (loss) before change
in accounting principle. 154 415 112 (18) - 663
Change in accounting
principle net of tax.... - 791 - - - 791
---------- --------- ---------- --------- ------------ -------------
Net income(loss)........... $ 154 $ (376) $ 112 $ (18) $ - $ (128)
========== ========= ========== ========= ============ =============
Depreciation/amortization.. 217 29 - 2 - 248
========== ========= ========== ========= ============ =============
Total assets............... 356,446 37,936 31,718 - (65,954) 360,146
========== ========= ========== ========= ============ =============
10
COWLITZ BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except number of shares and per share amounts)
Three months ended March 31, 2001
Mortgage Holding
Banking Banking Company Other Intersegment Consolidated
---------- --------- ---------- --------- ------------ -------------
Interest income....... $ 5,977 $ 759 $ 44 $ 337 $ (524) $ 6,593
Interest expense...... 3,172 437 63 72 (524) 3,220
---------- --------- ---------- --------- ------------ -------------
Net interest income 2,805 322 (19) 265 - 3,373
Provision for loan
loss ............... 210 - - 42 - 252
Non-interest income... 453 1,344 - - - 1,797
Non-interest expense.. 2,502 1,313 169 191 - 4,175
---------- --------- ---------- --------- ------------ -------------
Income (loss) before
tax................ 546 353 (188) 32 - 743
Provision(benefit) for
income taxes...... 194 120 (47) 19 - 286
---------- --------- ---------- --------- ------------ -------------
Net income(loss)...... $ 352 $ 233 $ (141) $ 13 $ - $ 457
========== ========= ========== ========= ============ =============
Depreciation/amtz..... 257 68 - 29 - 354
========== ========= ========== ========= ============ =============
Total assets.......... 337,041 67,786 33,807 5,599 (100,671) 343,562
========== ========= ========== ========= ============ =============
9. Subsequent Events: NONE
11
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 in this report.
For the first quarter of 2001, the Company has reclassified certain income
and expense items relating to the loans funded or processed by Bay Mortgage in
order to conform with changes in the current period presentation. Fees collected
on loans brokered, but not funded, by Bay Mortgage to outside lenders had been
recorded as interest income but are now properly classified as non-interest
income. Similarly, loan origination fees related to loans held-for-sale
previously reported as interest income have been reclassified as non-interest
income. Loan origination fees on loans held-for-sale, net of certain direct
origination costs, are deferred and amortized as an adjustment of the yield on
the related loan using the interest method. Such net deferred loan origination
fees are recognized when the related loans are subsequently sold or repaid.
These reclassifications have no effect on the Company's previously reported
financial position, results of operations, or earnings per share.
Critical Accounting Policies
Cowlitz Bancorporation (the "Company") and its wholly owned subsidiary,
Cowlitz Bank (also the "Company" or the "Bank") have identified their most
critical accounting policy to be that related to the allowance for loan losses.
The Company utilizes both quantitative and qualitative considerations in
establishing an allowance for loan losses believed to be appropriate as of each
reporting date. Quantitative factors include historical loss experience, recent
delinquency and charge-off experience, changes in the levels of non-performing
loans, portfolio size, and other known factors with specific loans. Qualitative
factors include assessments of the types and quality of the loans within the
loan portfolio as well as current local, regional, and national economic
considerations. Changes in the above factors could have a significant affect on
the determination of the allowance for loan losses. Therefore, a full analysis
is performed by management on a quarterly basis to ensure that changes in
estimated loan loss levels are adjusted on a timely basis. For further
discussion of this significant management estimate, see "Allowance for Loan
Losses."
Results of Operations
During the first quarter of 2002, the Company has taken a one-time impairment
charge to the carrying amount of its goodwill from the adoption of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS No. 142). The impairment charge is recognized as a result of a
transitional goodwill impairment test required by SFAS No. 142. The effect of
this new accounting principle is a charge of $791,000 or $.21 per diluted share,
net of tax of $417,000. The Company reported a net loss of $128,000 or $.03 per
diluted share for the first quarter of 2002 after adopting the provisions of
SFAS No. 142, compared to net income of $457,000 or $0.12 per share for the
first quarter of 2001. The following pro forma table restates prior period net
income and earnings per share as if SFAS No. 142 had been in effect.
(Pro forma)
(unaudited) March 31,
--------------------------- December 31,
(in thousands of dollars, except per share amounts) 2002 2001 2001
--------- --------- ---------
Reported net income $ (128) $ 457 $ (1,450)
Add back: Goodwill amortization, net of tax - 53 208
--------- --------- ---------
Restated net income $ (128) $ 510 $ (1,242)
========= ========= =========
BASIC EARNINGS PER SHARE OF COMMON STOCK
Reported net income per share $ (0.03) $ 0.12 $ (0.39)
Add back: Goodwill amortization per share, net of tax - 0.01 0.06
--------- --------- ---------
Restated net income per share $ (0.03) $ 0.13 $ (0.33)
========= ========= =========
DILUTED EARNINGS PER SHARE OF COMMON STOCK
Reported net income per share $ (0.03) $ 0.12 $ (0.39)
Add back: Goodwill amortization per share, net of tax - 0.01 0.06
--------- --------- ---------
Restated net income per share $ (0.03) $ 0.13 $ (0.33)
========= ========= =========
12
The current quarter net income also includes a gain on the sale of the
Company's finance subsidiary, Business Finance Corp (BFC), of $284,000 after tax
or $.08 per diluted share. The following table summarizes the sale and
calculation of the pre-tax gain of $423,000.
(dollars in thousands)
Net finance receivables sold................................ $2,511
Other assets sold........................................... 120
-------
Total assets sold........................................ 2,631
-------
Loans assumed............................................... 2,800
Other liabilities assumed................................... 213
Due from purchaser.......................................... 41
-------
Total liabilities assumed and due from purchaser......... 3,054
-------
Pre-tax gain on sale..................................... $ 423
=======
The Company's revenues (net interest income before provision for loan losses
plus non-interest income) have increased 16.3% in the first quarter of 2002
compared to the same period in 2001 and non-interest expenses have also
increased by 12.0% under the same comparison. Assets have declined 2.8% and
liabilities 3.1% during the first quarter of 2002, compared to the levels at
December 31, 2001.
Total assets have decreased $10.5 million primarily due to a $18.4 million
decrease in loans held-for-sale, and a decline of $8.7 million in net loans.
Approximately $9.2 million of the cash made available from the decreases in
loans and loans held-for-sale has been used to increase the Company's investment
securities portfolio, while another $8.8 million is on deposit with the Federal
Home Loan Bank.
The decrease of $10.5 million in total liabilities is due to a drop in
deposits of $9.3 million, primarily in the broker certificates of deposit. The
Company has streamlined its process to sell mortgage loans into the secondary
market, therefore the Company does not anticipate the volume of loans funded but
not yet sold to reach the levels experienced in 2001. This allows the Company to
reduce the volume of broker certificates of deposit as they mature, because the
excess liquidity is no longer needed to fund the high volumes of loans
originated, but not yet sold into the secondary market.
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.
Net interest income for the quarter ended March 31, 2002 was $3.2 million,
which was a decrease of 6.5% from $3.4 million for the same period of 2001. The
overall tax-equivalent earning asset yield was 6.75% for the quarter ended March
31, 2002 compared to 9.26% for the quarter ended March 31, 2001. This
significant decline is primarily due to eleven cuts in the national fed funds
rate, and the Company's prime rate during 2001. The volume of average earning
assets increased to $337.3 million at March 31, 2002 compared to $284.9 million
at March 31, 2001. The increase in earning assets volume is the result of the
growth of the mortgage division during 2001. Although the mortgage loans
held-for-sale volumes have declined from the levels of 2001, much of the broker
CD volume is still with the Bank until the CD's mature. Instead of funding the
loans held-for-sale, the cash from the CD's has been invested in the
available-for-sale investment portfolio or is on deposit at the Federal Home
Loan Bank. The Company anticipates a reduction in cash and due from banks as the
broker certificates mature unless the funds are needed to support another
dramatic increase in mortgage loan volume as experienced in 2001.
The average cost of interest bearing liabilities decreased to 3.57% at March
31, 2002 compared to 5.48% at March 31, 2001. This decrease in rates paid is
also primarily due to the overall decline in interest rates in 2001. Average
rates paid on interest-bearing liabilities did not decrease as far as the
average yields earned on interest-earning assets because some longer term
certificates of deposit are still on the books at relatively high interest
rates. These certificates will re-price at the current lower interest rates as
they mature. Average interest bearing liabilities
13
increased $49.3 million from $234.9 million for the three months ended March 31,
2001 to $284.3 million for the three months ended March 31, 2002. The majority
of this increase is in deposits, particularly broker certificates of deposit
purchased to fund the mortgage loan volume growth in 2001.
The decline in interest rates during 2001 has contributed to the narrowing
interest spread during the first quarter of 2002 when compared to the first
quarter of 2001. Prime based loans re-priced downward immediately when the prime
rate was adjusted, but fixed rate liabilities, particularly CD's, did not
immediately adjust to prime, so don't re-price as quickly. In the falling rate
environment experienced in 2001, yields on assets declined more rapidly than the
liability rates, narrowing the interest spread. With the expectation of a static
interest rate environment for the majority of 2002, the Company anticipates a
widening of the interest rate spread as higher rate certificates continue to
mature and re-price at the current lower interest rates, while the overall loan
interest rates remain relatively stable. The Company also anticipates a decline
in broker certificate of deposit volumes during 2002, as discussed above, which
will further widen the interest rate spread. Excess cash on deposit with the
Federal Home Loan Bank earning the federal funds rate will be used to pay-off
some broker certificates as they mature. The interest rate the Company is paying
on these deposits is higher than the fed funds rate that is currently being
earned, creating a negative interest rate spread. This imbalance will be
corrected as the broker certificates mature, helping to widen the overall
interest rate spread.
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) March 31, Increase
(in thousands of dollars) 2002 2001 (Decrease) Change
-------- -------- --------- ------
Interest income (1)................ $ 5,690 $ 6,594 $ (904) (13.7)%
Interest expense................... 2,535 3,220 (685) (21.3)%
-------- -------- ---------
Net interest income................ $ 3,155 $ 3,374 $ (219) (6.5)%
======== ======== =========
Average interest earning assets.... $337,315 $284,898 52,417 18.4%
Average interest bearing
liabilities ..................... $284,273 $234,949 49,324 21.0%
Average yields earned (2).......... 6.75% 9.26% (2.51)%
Average rates paid (2)............. 3.57% 5.48% (1.91)%
Net interest spread (2)............ 3.18% 3.78% (.60)%
Net interest margin (2)............ 3.74% 4.74% (1.00)%
(1) Interest earned on non-taxable securities has been computed on a 34% tax
equivalent basis.
(2) Ratios for the three months ended March 31, 2002 and 2001 have been
annualized.
Market Risks
Exposure to Regional Economy
Historically, the Company has been extremely dependent upon the economy of
Cowlitz County. That risk has been mitigated somewhat by the Company's expansion
into the Seattle, Washington and Portland, Oregon markets. The Company continues
to be dependent upon the economy of the Pacific Northwest region.
Credit Risk
The Company, like other lenders, is subject to credit risk, which is the risk
of losing principal and interest due to customers' failure to repay loans in
accordance with their terms. Although the Company has established lending
criteria and an adequate allowance for loan losses to help mitigate credit risk,
a downturn in the economy or the real estate market or a rapid increase in
interest rates could have a negative effect on collateral values and borrowers'
ability to repay. The Company's targeted customers are small to medium-size
businesses, professionals and retail customers that may have limited capital
resources to repay loans during an economic downturn.
14
Interest Rate Risk
The Company's earnings are largely derived from net interest income, which is
interest income and fees earned on loans and investment income, less interest
expense paid on deposits and other borrowings. Interest rates are highly
sensitive to many factors which are beyond the control of the Company's
management, including general economic conditions, and the policies of various
governmental and regulatory authorities. As interest rates change, net interest
income is affected. With fixed rate assets (such as fixed rate loans) and
liabilities (such as certificates of deposit), the effect on net interest income
depends on the maturity of the asset and liability. 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. 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.
In a falling rate environment, as experienced in 2001, the spread between
interest yields earned and interest rates paid, may narrow, depending on the
relative level of fixed and variable rate assets and liabilities. In a stable or
increase rate environment, as anticipated in 2002, the company's variable rate
loans will remain steady or increase immediately with changes in interest rates,
while fixed rate liabilities, particularly certificates of deposit will only
re-price as the liability matures.
Non-Interest Income
Non-interest income consists of the following components:
March 31,
-----------------------------
2002 2001
---- ----
Service charge on deposit accounts............ $ 178 $ 190
Gains on loans sold........................... 1,174 757
Brokerage fees................................ 605 403
Fiduciary income.............................. 71 61
Escrow fees................................... 222 184
Credit Card income............................ 125 143
ATM income.................................... 28 14
Safe deposit box fees......................... 24 28
Gain on sale of subsidiary.................... 423 -
Gain (loss) on sale of repossessed assets..... 2 (15)
Gain on sale of available-for-sale securities. - 18
Other miscellaneous fees and income........... 9 14
------ ------
Total non-interest income..................... $2,861 $1,797
====== ======
Non-interest income increased to $2.9 million for the three months ended
March 31, 2002 from $1.8 million in the corresponding period of 2001. During the
first quarter of 2002, the Company sold BFC resulting in a $423 gain. The
remaining increase from quarter to quarter is due to additional non-interest
income generated by mortgage lending activities including gains on loans sold,
escrow fees and brokerage fees. The increase in mortgage income was due to the
significant increase in mortgage loan volumes after February of 2001 and into
the first quarter of 2002 to correspond with the decline in interest rates
during 2001.
15
Non-Interest Expense
Non-interest expense consists of the following components:
March 31,
-----------------------------
2002 2001
---- ----
Salaries and employee benefits................ $2,446 $2,165
Net occupancy and equipment................... 555 615
Amortization of intangible assets............. 66 147
Net cost of operation of other real estate.... 84 15
Business taxes................................ 163 128
Data processing and communications............ 103 126
Stationary and supplies....................... 72 60
Credit card expense........................... 116 107
Parking, travel and education................. 83 82
Loan expense.................................. 78 74
Advertising................................... 45 50
Professional fees............................. 301 146
Postage and freight........................... 125 109
FDIC insurance................................ 147 72
Other miscellaneous expenses.................. 290 279
------ ------
Total non-interest expense.................... $4,674 $4,175
====== ======
Non-interest expenses increased 11.9% to $4.7 million for the quarter ended
March 31, 2002 compared to $4.2 million for the quarter ended March 31, 2001.
Contributing to the increase was salary and other costs related to the growth of
the mortgage division during 2001, a rise in FDIC insurance premiums, and higher
professional fees primarily associated with the sale of BFC in the first quarter
of 2002.
Salary expense has increased from $2.2 million for the first quarter of 2001
to $2.4 million during the same period of 2002. At March 31, 2002 the Company
had 195 full-time equivalent employees compared to 203 at March 31, 2001.
Although the number of employees has declined, commission expenses at Bay
Mortgage have increased because there was a larger volume of mortgage loans
originated in the first quarter of 2002 compared to the first quarter of 2001.
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 three months ended March 31, 2002 was
$555,000 compared to $615,000 for the three months ended March 31, 2001. The
decrease in occupancy expense in the first quarter of 2002 was due primarily to
a reduction in depreciation expense of $21,000 on assets that became fully
depreciated during 2001. Lease payments decreased by $10,000 and service and
repair charges are $18,000 lower than last year.
The FDIC insurance has increased because in the first quarter 2001, the Bank
was required to pay $.10 per $100 of domestic deposits, which has increased to
$.17 per $100. These assessment charges are imposed based on FDIC analysis of
the Bank's capital position, rating, and other factors. As these factors improve
or deteriorate, the assessment rates change.
Professional fees include exam and audit expenses, consulting and legal fees,
and other professional fees. The increase in these expenses during the first
three months of 2002 compared to the same period of 2001 is the result of higher
legal fees relating to the repossession of assets on defaulted loans, and a
broker commission related to the sale of BFC.
Income Taxes
The provision for income taxes was $378,000 and $286,000 for the three months
ended March 31, 2002 and 2001, respectively. The provision resulted in an
effective tax rate of 36.3% and 38.5% for the first quarters of 2002 and 2001,
respectively.
16
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. See the "Allowance for Loan Losses"
disclosure for a more detailed discussion.
The Company's provision for loan losses was $300,000 and $252,000 for the
quarters ended March 31, 2002 and 2001, respectively. Charge-offs, net of
recoveries, were $391,000 for the three months ended March 31, 2002 compared to
net charge-offs of $1.7 million for the three months ended March 31, 2001 and
$3.8 million for the year ended December 31, 2001. The Company recognized an
adjustment to the allowance for loan losses of $289,000 related to the sale of
BFC during the first quarter of 2002. At March 31, 2002, the allowance for loan
losses as a percentage of total loans was 2.48%, down slightly from the level of
2.55% at December 31, 2001 and up from 1.30% at March 31, 2001.
Net charge-offs during the first quarter of 2002 are significantly lower than
during the first quarter of 2001, and for the year of 2001. Management made the
commitment during 2001 to identify and charge-off loans deemed non-collectable,
to bolster loan loss reserves to help absorb potential future losses on loans as
the Cowlitz county and national economies recover, and to strengthen internal
controls in identifying loan problems prior to the need to charge-off. The lower
charge-off experience during the first quarter of 2002 is evidence of the
Company's progress of these goals, and with continued attention, the Company
anticipates additional improvements going forward.
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.
The following table shows the Company's loan loss performance for the periods
indicated:
Quarter Ended Quarter Ended Year Ended
(unaudited) March 31, March 31, December 31,
(in thousands of dollars) 2002 2001 2001
-------- -------- --------
Loans outstanding at end of period................................ $226,101 $242,369 $235,212
Average loans outstanding during the period....................... $230,080 $238,394 $239,678
Allowance for loan losses, beginning of period.................... $ 5,997 $ 4,561 $ 4,561
Loans charged off:
Commercial..................................................... 391 648 2,729
Real Estate.................................................... 30 1,020 1,743
Consumer....................................................... 1 5 53
Credit Cards................................................... 36 7 86
-------- -------- --------
Total loans charged-off...................................... 458 1,680 4,611
-------- -------- --------
Recoveries:
Commercial..................................................... 32 - 115
Real Estate.................................................... 25 13 652
Consumer....................................................... 1 1 15
Credit Cards................................................... 9 1 3
-------- -------- --------
Total recoveries............................................. 67 15 785
-------- -------- --------
Provision for loan losses......................................... 300 252 5,262
Adjustment incident to sale of subsidiary......................... (289) - -
--------- -------- --------
Allowance for loan losses, end of period.......................... $ 5,617 $ 3,148 $ 5,997
======== ======== ========
Ratio of net loans charged-off to average loans outstanding....... .17% .70% 1.60%
Ratio of allowance for loan losses to loans at end of period...... 2.48% 1.30% 2.55%
17
Loans
Total loans outstanding were $226.1 million and $235.2 million at March 31,
2002 and December 31, 2001, respectively. Loan commitments such as home equity
and other lines of credit, unused available credit on credit cards, and letters
of credit, were $50.2 million at March 31, 2002 and $53.7 million at December
31, 2001. In addition, the Company had $18.9 million of loans held for sale at
March 31, 2002 compared to $37.3 million at December 31, 2001. During the first
quarter of 2002, the Company funded $92.9 million of loans to be sold into the
secondary market, and delivered $112.5 million to the market. This compares to
$101.9 million funded and $62.5 million delivered during the first quarter of
2001.
The following table presents the composition of the Company's loan portfolio
at the dates indicated:
(unaudited) March 31, 2002 December 31, 2001
(in thousands of dollars) Amount Percentage Amount Percentage
-------------------------- ----------------------
Commercial ................................. $ 48,799 21.51% $ 50,152 21.25%
Real estate construction.................... 36,258 15.98 26,520 11.24
Real estate commercial...................... 100,949 44.51 111,437 47.23
Real estate mortgage........................ 34,922 15.39 36,190 15.34
Consumer and other.......................... 5,922 2.61 11,650 4.94
-------- ------ -------- ------
226,850 100.00% 235,949 100.00%
====== ======
Deferred loan fees.......................... (749) (737)
-------- --------
Total loans............................ 226,101 235,212
Allowance for loan losses................... (5,617) (5,997)
-------- --------
Total loans, net....................... $220,484 $229,215
======== ========
Allowance for Loan Losses
The allowance for loan losses represents management's estimate of probable
losses which have occurred 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 amount necessary for specific non-performing loans and estimates losses
inherent in other loans. 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, and all
loans rated 6-10 are collectively the Company's watch list. The specific
gradings from 6-10 are "management attention", "special mention", "substandard",
"doubtful", or "loss". When indicators such as operating losses, collateral
impairment or delinquency problems show that a credit may have weakened, the
credits will be downgraded as appropriate. Similarly, as borrowers bring loans
current, show improved cash flows, or improve the collateral position of the
loan, the credits may be upgraded. Management reviews all credits periodically
for changes in such factors.
The result is an allowance with two components:
Specific Reserves: Loans on the Company's watch list, as described above, are
specifically reserved for by applying a separate reserve factor to the volume of
loans within each risk grade. The reserve factors are determined on the basis of
suggested regulatory guidelines. Management assesses each loan on the watch list
to assure the reserve factor applied to each risk grade is sufficient for each
individual loan within the pool. When significant conditions or circumstances
exist on an individual loan indicating greater risk, additional specific
reserves may be required. 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: Any loan that does not require a specific reserve is
subject to a general reserve loss factor. Management determines this factor by
analyzing 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
18
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 any changes in lending policies, lending management, or the
loan review system. 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 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. In accordance with
the Company's methodology for assessing the appropriate allowance for loan
losses, the general portion of the allowance was $2.7 million at March 31, 2002
compared to $3.2 million at December 31, 2001.
At March 31, 2002, approximately $2.9 million of the allowance for loan
losses was allocated based on an estimate of the amount that was necessary to
provide for potential losses related to the watch list and other specific loans,
compared to $2.8 million at December 31, 2001. Specific reserves decline as
those loans requiring specific reserves are reduced by either principal
payments, reclassification assessments, or have been charged off, and increase
as additional loans requiring specific reserves are identified.
Management's evaluation of the factors above resulted in allowances for loan
losses of $5.6 million and $6.0 million at March 31, 2002 and December 31, 2001,
respectively. The sale of BFC accounted for $289,000 of the reduction in the
allowance from December 31, 2001 to March 31, 2002. The allowance as a
percentage of total loans was 2.48% at March 31, 2002 and 2.55% at December 31,
2001.
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.
The Company, during its normal loan review procedures, 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) unless available information strongly suggests impairment. 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
when management believes, after considering economic and business conditions,
collection efforts, and collateral position, that the borrower's financial
condition is such that collection of principal is not probable.
Generally, no interest is accrued on loans when factors indicate collection
of interest is doubtful or when the principal or interest payments become 90
days past due, unless collection of 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 collection of the remaining recorded principal balance is
considered probable.
19
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) March 31, December 31,
(in thousands of dollars) 2002 2001
--------- ---------
Loans on non-accrual status $ 4,403 $ 4,807
Loans past due greater than 90 days but not on non-accrual status 379 1,178
Other real estate owned 1,417 1,498
Other Assets 5 5
--------- ---------
Total non-performing assets $ 6,204 $ 7,488
========= =========
Percentage of non-performing assets to total assets 1.72% 2.02%
At March 31, 2002 non-performing assets were $6.2 million or 1.72% of total
assets compared to $7.5 million or 2.02% of total assets at December 31, 2001.
Approximately $4.0 million of the non-accrual loans are primarily secured by
real estate and the remainder consists of commercial and consumer loans with
varying collateral. Any losses on non-accrual loans that are considered probable
have been estimated by management in its regular quarterly assessment of the
allowance for loan losses as discussed above. The increase in the provision for
loan losses each year is largely reflective of the increases in the average
non-accrual loans and the level of net charge-offs during the periods, as well
as total asset growth.
Some of the decline in non-performing assets from December 31, 2001 to March
31, 2002 is the result of the sale of BFC. At December 31, 2001, non-performing
assets associated with BFC were $217,000. The Company is actively working on
identifying and reducing the level of non-performing assets, and has undertaken
a more aggressive approach relating to the collection and ultimate reduction of
non-performing assets. As these impaired loans are identified and brought
current, charged-off, or the repossessed collateral sold, the level of
non-performing assets is expected to decrease.
Other real estate owned declined from $1.5 million at December 31, 2001 to
$1.4 million at March 31, 2002 as properties classified as other real estate
have been sold.
Liquidity
Liquidity represents the ability to meet deposit withdrawals and fund loan
demand, while retaining the flexibility to take advantage of business
opportunities. The Company's primary sources of funds are customers deposits,
loan payments, sales of assets, advances from the FHLB (Federal Home Loan Bank)
and the use of the federal funds market.
As of March 31, 2002, approximately $8.4 million of the securities portfolio
matures within one year, and another $8.0 million is callable within one year.
The maturities of mortgage-backed securities, which are not due at a single
maturity date, have been allocated over maturity groupings based on the expected
maturity of the underlying collateral. Mortgage-backed securities may mature
earlier than their stated contractual maturities because of accelerated
principal repayments of the underlying loans.
Historically the Company has utilized borrowings from the FHLB as an
important source of funding for its growth. The Company has an established
borrowing line with the FHLB that permits it to borrow up to 15% of the Bank's
assets, subject to collateral limitations. Advances from the FHLB have maturity
periods ranging from 1 through 15 years and at March 31, 2002, bear interest at
rates ranging from 2.00% to 8.62%. At March 31, 2002, $16.0 million in advances
were outstanding from the FHLB.
During 2001, the Company experienced extremely rapid growth in its
residential lending segment as consumers took advantage of relatively low
housing market interest rates to refinance, build, or purchase homes. Although
these residential mortgage loans are typically sold within 15-45 days after
funding, the volume funded but unsold grew from $10.0 million at December 31,
2000 to over $55.0 million during the first quarter of 2001, and to over $68.0
million at the peak during the fourth quarter of 2001. In order to take
advantage of the income generated by the increase in mortgage loan volume, the
Company utilized the broker CD market to fund the growth. As origination volumes
of loans held-for-sale began to taper off toward the end of 2001 and into the
first quarter of
20
2002, the excess funds were deposited in the Company's cash account with the
FHLB. Efficiencies developed late in 2001 in the process of loan origination and
sale into the secondary market, combined with a decrease in demand in the
mortgage lending market, make it unlikely the Company will experience a dramatic
increase in loan volume as experienced during 2001. If this assumption holds
true during 2002, the Company anticipates a reduction in broker CD's as they
mature, helping to reduce any excess liquidity. During the second quarter of
2002, $28.2 million of broker and out-of-market certificates of deposit mature.
Capital
The Company and the Bank are required to maintain minimum amounts of capital
to "risk weighted" assets, as defined by banking regulators. The Company and the
Bank are required to have total capital and tier 1capital ratios of 8.0% and
4.0%, respectively. In addition, the Bank is required to maintain a tier 1
leverage capital ratio of not less than 4%. At March 31, 2002, the Company's
total capital and tier 1 capital ratios were 11.05% and 9.79%, respectively; and
at December 31, 2001, the company's ratios were 10.10% and 8.84%, respectively.
At March 31, 2002, the Bank's total capital, tier 1 capital, and tier 1 leverage
capital ratios were 11.58%, 10.32%, and 7.54%, respectively, and at December 31,
2001 were 10.72%, 9.46%, and 6.99%, respectively. The Company's ratio of
shareholders' equity to average assets was 7.96%, and 8.14% at March 31, 2002
and December 31, 2001, respectively.
21
Part II. Other Information
Item 5
Other Information
None
Item 6
(a) Exhibits. The list of exhibits is set forth on the Exhibit Index attached
hereto.
(b) Reports of Form 8-K
1. On March 29, 2002 the Company filed an 8-K containing item 5. This report
announced changes in the Company's executive management and board of
directors.
22
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: May 14, 2002 /s/
----------------------------
Paul S. Campbell
President
Dated: May 14, 2002 /s/
----------------------------
Don P. Kiser
Vice-President/CFO/Secretary
23
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