Cowlitz Bancorporation Reports Financial Results for the Third Quarter of 2008

- Capital Position and Liquidity Remain Strong
LONGVIEW, Wash., Oct. 23 /PRNewswire-FirstCall/ --

Flash Results
Cowlitz Bancorporation (NASDAQ: CWLZ)
(Numbers in Thousands, Except Per Share Data)

Three Months Ending Nine Months Ending
September September September
30, June 30, 30, 30,
2008 2007 2008 2008 2007
Net Interest Income $5,584 $5,673 $5,735 $16,721 $16,965
Provision for Credit Losses $2,300 $725 $13,002 $15,895 $1,000
Net Income (Loss) ($1,596) $1,276 ($8,091) ($8,785) $3,227
Diluted EPS ($0.31) $0.25 ($1.60) ($1.74) $0.62
Total Period End Loans $436,684 $398,841
Total Period End Deposits $501,358 $441,787

Cowlitz Bancorporation (Nasdaq: CWLZ) announced today that the Company's
net loss for the quarter ended September 30, 2008 was $1.6 million, or ($0.31)
per diluted share, compared with net income of $1.3 million, or $0.25 per
diluted share, during the same period of 2007. Third quarter 2008 results were
reduced by a $1.4 million non-cash securities loss on Fannie Mae preferred
stock. On an after-tax basis, this charge increased the third quarter loss by
$910,000, or $0.18 per share. For the first nine months of 2008, the Company's
net loss was $8.8 million, compared with net income of $3.2 million in the
first nine months of 2007.
"Over the past few months we have seen unprecedented changes in our
industry as well as the overall economy. We believe recently approved economic
actions orchestrated by the U.S. Treasury will have a positive effect on the
country's community banks and the financial services industry as a whole,"
stated Richard J. Fitzpatrick, President and CEO of Cowlitz Bancorporation and
its wholly-owned subsidiary Cowlitz Bank.
Total loans increased 9.5% to $436.7 million, compared with $398.8 million
at September 30, 2007, with loans growing at an annualized rate of
approximately 8% in the third quarter of 2008. The Company's loan mix
continues to reflect a business banking focus. As land development and
construction loan maturities occur, the Company intends to shift its loan mix
to increase commercial and industrial loans. Total deposits increased 13.5% to
$501.4 million at September 30, 2008 from $441.8 million at September 30,
2007.
"Cowlitz Bank continues to have excellent liquidity with a solid deposit
base, approximately $100 million of borrowing capacity with the FHLB, access
to the Federal Reserve's primary credit program and capital ratios in excess
of regulatory levels required to be 'well-capitalized'. The Bank had $42.6
million of excess short-term assets at the end of the third quarter," Mr.
Fitzpatrick added. The table below illustrates the capital ratios for Cowlitz
Bancorporation consolidated and Cowlitz Bank.
Adequately To Be Well-
Actual Capitalized Capitalized
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
September 30, 2008
Total risk-based
capital:
Consolidated $57,638 11.63% $39,660 >/=8.00% N/A N/A
Bank $55,246 11.17% $42,784 >/=8.00% $49,472 >/=10.00%
Tier 1 risk-based
capital:
Consolidated $51,342 10.36% $19,830 >/=4.00% N/A N/A
Bank $48,962 9.90% $19,789 >/=4.00% $29,683 >/=6.00%
Tier 1 (leverage)
capital:
Consolidated $51,342 9.60% $21,392 >/=4.00% N/A N/A
Bank $48,962 9.14% $21,423 >/=4.00% $26,779 >/=5.00%

Net interest margin as a percentage was 4.62% for the third quarter of
2008, compared with 5.01% in the third quarter of 2007 and 4.87% in the second
quarter of 2008. Net interest income was $5.6 million in the third quarter of
2008, compared with $5.7 million in the same quarter last year and $5.7
million in the second quarter of 2008. The net interest margins in 2008
relative to the third quarter 2007 net interest margin were affected by
several factors, including rate cuts by the Federal Reserve of approximately
300 basis points between September 2007 and September 2008, continued
competitive market pricing on both sides of the balance sheet, the level of
nonperforming loans and a lower level of noninterest-bearing demand deposit
accounts year-over-year. In addition, interest reversals of $118,000 in the
third quarter of 2008 reduced the quarter's net interest margin by
approximately 10 basis points.
"Deposit rates are generally slow to fall relative to the rate of decline
in the Federal Reserve's target federal funds rate. The Bank has begun to see
the effect of declining rates on overall deposit costs as the average rate on
interest-bearing liabilities fell to 3.26% in the third quarter of 2008 from
3.36% in the second quarter and 4.31% in the third quarter a year ago.
However, overall market liquidity constraints and competition for core
deposits has kept both wholesale borrowing costs and retail deposit rates
relatively high," said Mr. Fitzpatrick. "The FMOC's 50 basis point rate cut on
October 8, 2008 will most likely compress the margin in the coming quarters,
as funding costs lag loan pricing. At the end of the third quarter, we had
$228 million of loans tied to prime, but we have interest rate contracts that
mitigate the impact of declines in the Bank's prime rate on $100 million of
variable rate loans."
The provision for credit losses was $2.3 million in the third quarter of
2008, compared with $13.0 million in the second quarter of 2008 and $725,000
in the third quarter of 2007. Net loan charge-offs were $2.3 million in the
third quarter of 2008, down substantially from $5.2 million in the second
quarter of 2008. Net charge-offs were not significant in the third quarter of
2007.
The allowance for loan losses was 3.17% of loans at September 30, 2008,
compared with 3.28% of loans at June 30, 2008 and 1.46% at September 30, 2007.
The increase in the Company's allowance for loan losses as a percentage of
loans since September 2007 to the historically high levels of 2008 was
primarily the result of an increasing risk profile in the Bank's land
acquisition and development portfolio, as builder/developers have been
experiencing reduced cash flows due to sluggish sales and underlying loan
collateral values have fallen sharply. The allowance for loan losses to non-
performing loans was 149% at September 30, 2008, compared with 48% in the same
quarter last year and 163% at June 30, 2008.
Total non-performing assets (defined as loans on non-accrual and
repossessed assets) were $11.8 million at September 30, 2008, compared with
$12.2 million at September 30, 2007 and $12.8 million at June 30, 2008. As a
percentage of total assets, non-performing assets decreased to 2.09% at
September 30, 2008, compared with 2.37% at September 30, 2007 and 2.42% at
June 30, 2008. At September 30, 2008, the Company had one loan totaling $3.7
million 90 days past due and accruing that was in the process of renewal with
additional collateral to be pledged.
"We believe maintaining a strong allowance for loan losses is appropriate
given the uncertainties about the continued weakening of the regional and
national economies," stated Ernie D. Ballou, Vice President and Chief Credit
Administrator. "We are aggressively working with our customers and our bank-
owned properties to resolve these issues as quickly as possible; however,
given the current state of the real estate markets, it is prudent to expect a
potentially lengthy time to resolution. Our single family residential
portfolio continues to have minimal delinquencies."
Non-accrual loans at September 30, 2008 totaled $9.3 million, an increase
of $651,000 from June 30, 2008, but down from $12.2 million at September 30,
2007. During the third quarter of 2008, non-accrual loans were reduced by
pay-offs of $3.0 million and charge-offs of $1.0 million. Loans placed on non-
accrual during the quarter totaled $4.6 million. Of the loans placed on non-
accrual in the current quarter, $3.4 million were real estate construction and
development related. Almost all of the Company's non-accrual loan portfolio at
September 30, 2008 related to land acquisition and development loans in Oregon
and Washington.
Other real estate owned (OREO) totaled $2.4 million at September 30, 2008,
down $1.5 million from June 30, 2008. The Company had no OREO at September
30, 2007. OREO at the end of the second and third quarters of 2008 consisted
primarily of one residential real estate development project and one parcel of
land in the Portland, Oregon area. In the third quarter of 2008, a portion of
the real estate development project was sold at a loss of $120,000.
Non-interest income in the third quarter of 2008 included a loss of $1.4
million due to the recognition of an other-than-temporary non-cash impairment
charge on 70,000 shares of Federal National Mortgage Association ("Fannie
Mae") preferred stock, reflecting the extraordinarily unsettled equity market
for government-sponsored enterprises. These shares were written down to
$126,000 as of September 30, 2008. Excluding securities losses, non-interest
income was $892,000 for the third quarter of 2008 compared with $910,000 in
the same quarter of last year.
Non-interest expenses in the third quarter of 2008 were $4.7 million,
compared with $4.2 million in the third quarter of 2007 and $6.9 million in
the second quarter of 2008. The most significant items affecting comparability
of the totals were costs related to foreclosed assets and amounts related to
interest rate contracts. Foreclosed asset expenses were $373,000 in the third
quarter of 2008, compared with none in the third quarter of 2007 and $2.0
million in the second quarter of 2008. The Company recorded non-cash credits
of $242,000 and $245,000 in the third quarters of 2008 and 2007, respectively,
related to the ineffective portion of the change in fair value of the
Company's cash flow hedges. The Company recorded a non-cash charge of $89,000
for hedge ineffectiveness in the second quarter of 2008.
On a year-to date basis, net occupancy and equipment expenses in the first
nine months of 2008 were higher than the same period of 2007 primarily due to
higher levels of depreciation related to branch remodeling and related asset
acquisitions in mid-2007. Professional services were down significantly in the
first nine months of 2008 compared with the first nine months of 2007. The
Company has experienced a higher level of legal costs related to nonperforming
loans in 2008, while costs associated with Sarbanes-Oxley compliance efforts
were significantly lower than in the same period of 2007. Included in other
expenses were deposit premium assessments of $281,000 in the first nine months
of 2008, compared with $35,000 in the first nine months of 2007.
The Company's effective tax benefit rate for the first nine months of 2008
was 40%, compared with an effective tax rate of 25% for the first nine months
of 2007. The Company's effective benefit rate for the first six months of 2008
was 43%. The change in the effective tax benefit rate at September 30, 2008
caused the third quarter 2008 tax benefit rate to be 19%. When the Company
incurs a pre-tax loss, its effective tax rate is higher than the Federal
statutory rate of 35% primarily due to tax-exempt income related to the
municipal securities portfolio and investments in bank-owned life insurance.
The Company's effective tax rate for interim periods is based on projections
of taxable income for the full year and is affected by the relative amounts of
taxable and non-taxable income and the amount of available tax credits.
Cowlitz Bancorporation is the holding company of Cowlitz Bank, which was
established in 1977. In addition to its four branches in Cowlitz County
Washington, Cowlitz Bank's divisions include Bay Bank located in Bellevue,
Seattle, and Vancouver, Washington; Portland and Wilsonville, Oregon; and Bay
Mortgage in southwest Washington. Cowlitz specializes in commercial and
international banking services for Northwest businesses, professionals, and
retail customers, and offers trust services in southwest Washington and
Portland, Oregon.
Forward-Looking Statements
This press release contains forward-looking statements within the meaning
of the "Safe-Harbor" provisions of the Private Securities Litigation Reform
Act of 1995, which management believes are a benefit to shareholders. You
should not place undue reliance on forward-looking statements and we undertake
no obligation to update any such statements. Statements that are not
historical or current facts, including statements about beliefs and
expectations, are forward-looking statements. Forward-looking statements are
subject to risks and uncertainties. Actual results could differ materially
from those discussed in this press release as a result of risk factors
identified in the Company's Form 10-K for the year ended December 31, 2007,
and other filings with the SEC. We make forward-looking statements in this
release related to the Company's ability to manage through the current
economic cycle, to change the overall mix of loans and the positive effect of
recent actions taken by the U.S. Treasury to stimulate the economy and assist
financial institutions.

INCOME STATEMENT
Quarter Ending Nine Months Ending
September September June September September
30, 2008 30, 2007 30, 2008 30, 2008 30, 2007

Interest
income $8,892 $9,364 $8,932 $26,971 $27,156
Interest
expense 3,308 3,691 3,197 10,250 10,191
Net interest
income 5,584 5,673 5,735 16,721 16,965
Provision for
credit losses 2,300 725 13,002 15,895 1,000
Net interest
income (loss)
after provision
for credit
losses 3,284 4,948 (7,267) 826 15,965
Non-interest
income
Service
charges on
deposit
accounts 221 171 179 564 508
Fiduciary
income 143 165 163 479 529
International
trade fees 126 146 135 461 425
Increase in
cash
surrender
value of
bank owned
life
insurance 154 142 154 460 415
Securities
losses (1,412) - (432) (1,844) -
Other income 248 286 248 769 848
Total non-
interest
income (520) 910 447 889 2,725
Non-interest
expense
Salaries and
employee
benefits 2,333 2,391 2,500 7,340 7,306
Net occupancy
and
equipment
expense 641 592 630 1,888 1,684
Data
processing
and
communication 264 248 231 710 718
Professional
services 390 454 208 861 1,225
Foreclosed
asset
expense, net 373 - 2,036 2,247 422
Equity in
limited
partnerships
losses
(gains) 50 (77) 61 142 9
Interest rate
contracts
valuation
adjustments (242) (245) 89 75 388
Other
expenses 918 829 1,169 2,998 2,626
Total non-
interest
expense 4,727 4,192 6,924 16,261 14,378
Income (loss)
before
provision for
income taxes (1,963) 1,666 (13,744) (14,546) 4,312
Provision
(benefit)
for income
taxes (367) 390 (5,653) (5,761) 1,085
Net income
(loss) $(1,596) $1,276 $(8,091) $(8,785) $3,227

Earnings
(loss) per
share:
Basic $(0.31) $0.26 $(1.60) $(1.74) $0.65
Diluted $(0.31) $0.25 $(1.60) $(1.74) $0.62
Weighted
average
shares
outstanding:
Basic 5,067,379 4,995,073 5,055,621 5,059,188 4,947,019
Diluted 5,067,379 5,161,696 5,055,621 5,059,188 5,172,078
Shares
outstanding
at period
end 5,067,379 5,047,325 5,067,379 5,067,379 5,047,325
Number of
full-time
equivalent
employees 130 137

Quarter Ending Nine Months Ending
September September June 30, September September
SELECTED AVERAGES 30, 2008 30, 2007 2008 30, 2008 30, 2007
Average loans $436,770 $393,133 $425,731 $425,177 $377,579
Average interest-earning
assets 496,690 459,347 485,389 487,229 440,855
Total average assets 539,965 502,056 534,410 533,712 483,164
Average deposits 474,562 428,724 457,367 461,551 410,762
Average interest-bearing
liabilities 403,849 340,080 382,367 387,025 323,873
Average equity 47,877 54,457 57,152 53,739 52,979

September September June
SELECTED BALANCE SHEET ACCOUNTS 30, 2008 30, 2007 30, 2008
Total assets $565,335 $517,026 $530,310
Securities available for sale 40,812 57,345 43,538
Loans (bank regulatory
classification):
Real estate secured:
One to four family residential 34,914 30,990 36,282
Multifamily 3,325 6,995 3,937
Construction 101,520 82,719 96,373
Commercial real estate 170,954 164,308 174,393
Total real estate 310,713 285,012 310,985
Commercial and industrial 123,582 110,924 113,987
Consumer and other 3,595 3,825 4,334
437,890 399,761 429,306
Deferred loan fees (1,206) (920) (1,119)
Loans, net of deferred loan fees 436,684 398,841 428,187
Goodwill and other intangibles 1,798 1,859 1,798
Deposits:
Non-interest-bearing demand 82,096 107,361 86,984
Savings and interest-bearing demand 31,768 34,172 30,783
Money market 75,574 87,818 78,839
Certificates of deposits 311,920 212,436 268,766
Total deposits 501,358 441,787 465,372
Borrowings 494 1,152 563
Junior subordinated debentures 12,372 12,372 12,372
Shareholders' equity 46,372 56,856 48,235

Book value per share $9.15 $11.26 $9.52
Tangible book value per share $8.80 $10.90 $9.16

Quarter Nine Months
Ending Ending
September September June September September
RATIOS ANNUALIZED 30, 2008 30, 2007 30, 2008 30, 2008 30, 2007
Return on average assets -1.18% 1.01% -6.09% -2.20% 0.89%
Return on average equity -13.26% 9.30% -56.94% -21.84% 8.14%
Return on average tangible
equity -13.78% 9.63% -58.79% -22.59% 8.44%
Average equity/average assets 8.87% 10.85% 10.69% 10.07% 10.97%
Yield on interest-earning
assets (TE) 7.27% 8.20% 7.52% 7.53% 8.35%
Rate on interest-bearing
liabilities 3.26% 4.31% 3.36% 3.54% 4.21%
Net interest spread (TE) 4.01% 3.89% 4.16% 3.99% 4.14%
Net interest margin (TE) 4.62% 5.01% 4.87% 4.71% 5.26%

TE - Tax exempt interest income has been adjusted to a taxable equivalent
basis using a 34% tax rate.

Quarter Nine Months
Ending Ending
September September September September
ALLOWANCE FOR CREDIT LOSSES 30, 2008 30, 2007 30, 2008 30, 2007
Balance at beginning of period $14,247 $5,185 $5,990 $4,825
Provision for credit losses 2,300 725 15,895 1,000
Recoveries 35 222 62 394
Charge-offs (2,314) (32) (7,679) (119)
Balance at end of period $14,268 $6,100 $14,268 $6,100
Components
Allowance for loan losses $13,859 $5,828
Liability for unfunded credit
commitments 409 272
Total allowance for credit losses $14,268 $6,100
Allowance for loan losses/total loans 3.17% 1.46%
Allowance for credit losses/total
loans 3.27% 1.53%
Allowance for loan losses/non-
performing loans 149% 48%
Allowance for credit losses/non-
performing loans 154% 50%

September September June 30,
NON-PERFORMING ASSETS 30, 2008 30, 2007 2008
Loans on non-accrual status $9,286 $12,220 $8,635
Other real estate owned 2,425 - 3,925
Other foreclosed assets 100 14 285
Total non-performing assets $11,811 $12,234 $12,845
Total non-performing loans to total
loans 2.13% 3.06% 2.02%
Total non-performing assets/total
assets 2.09% 2.37% 2.42%
Loans past due greater than 90 days
and accruing $3,733 $- $98

SOURCE Cowlitz Bancorporation

Richard J. Fitzpatrick, Chief Executive Officer, or Gerald L. Brickey, Chief
Financial Officer, both of Cowlitz Bancorporation, +1-360-423-9800