SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(MARK ONE)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: June 30, 2008
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-23322
CASCADE BANCORP
(Exact name of Registrant as specified in its charter)
Oregon | | 93-1034484 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1100 N.W. Wall Street
Bend, Oregon 97701
(Address of principal executive offices)
(Zip Code)
(541) 385-6205
(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 by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | | Accelerated filer x |
Non-accelerated file ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 28,075,524 shares of no par value Common Stock as of July 31, 2008.
CASCADE BANCORP & SUBSIDIARY
FORM 10-Q
QUARTERLY REPORT
JUNE 30, 2008
INDEX
| | | Page |
PART I: FINANCIAL INFORMATION | | |
| | | |
Item 1. | Financial Statements (Unaudited) | | |
| | | |
| Condensed Consolidated Balance Sheets: | | |
| June 30, 2008 and December 31, 2007 | | 4 |
| | | |
| Condensed Consolidated Statements of Operations: | | |
| Six months and three months ended June 30, 2008 and 2007 | | 5 |
| | | |
| Condensed Consolidated Statements of Changes in Stockholders’ Equity: | | |
| Six months ended June 30, 2008 and 2007 | | 6 |
| | | |
| Condensed Consolidated Statements of Cash Flows: | | |
| Six months ended June 30, 2008 and 2007 | | 7 |
| | | |
| Notes to Condensed Consolidated Financial Statements | | 8 |
| | | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 20 |
| | | |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk. | | 27 |
| | | |
Item 4. | Controls and Procedures. | | 27 |
| | | |
PART II: OTHER INFORMATION | | |
| | | |
Item 1A. | Risk Factors | | 28 |
| | | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | | 28 |
| | | |
Item 6. | Exhibits | | 28 |
| | | |
SIGNATURES | | 29 |
EXPLANATORY NOTE
Cascade Bancorp (the “Company”) is filing this amendment No. 1 (the “Amended Report”) to its Quarterly Report on Form 10-Q for its quarterly period ended June 30, 2008, originally filed with the U.S. Securities and Exchange Commission, (SEC) on August 6, 2008. The Company hereby amends Item 1 Financial Statements and Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations to reflect a restatement of the interim period financial statements in connection with an increase in the balance for the reserve for loan osses, and a corresponding increase in loan loss provision that were deemed to have existed as of June 30, 2008 in the amount of approximately $5.8 million (pretax).
The restatement relates to managements’ discovery of a miscalculation within its loan data extract software program specifically with respect to the treatment of classified loans that have been partially participated to other financial institutions. This Amended Report includes currently-dated certifications as to the efficacy of the Company’s system of internal controls by its Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.
Correction of the miscalculation resulted in an understated balance with respect to the estimated reserve for loan losses as of June 30, 2008 and September 30, 2008. Accordingly the Company’s Form 10-Q’s for both June 30, 2008 and September 30, 2008 have been amended. See Footnote’s 3, 4, 8 and 14 of the restated financial statements for the specific line items restated.
The additional provision of $5.8 million resulted in a decrease in net income of $3.6 million for both the three months and six months ended June 30, 2008. The Company’s second quarter 2008 earnings on an after-tax basis declined from $0.2 million in earnings to a net loss of $3.4 million. The Company’s earnings for the six months ended June 30, 2008 declined from $6.2 million in earnings to $2.6 million in earnings. After these adjustments, the Company continued to exceed all regulatory benchmarks to be designated “well-capitalized”.
The Company has not modified or updated disclosures presented in the Original Filing, except as required to reflect the effects of the restatement in this Amended Report. Accordingly, this Amended Report does not reflect events occurring after the Original Filing nor does it modify or update those disclosures affected by subsequent events. Information not affected by the restatement is unchanged and reflects the disclosures made at the time of the Original Filing.
For the convenience of the reader, this Amended Report sets forth the Original Filing in its entirety, although the Company is only restating the portions affected by corrected financial information.
ITEM 1. FINANCIAL STATEMENTS
Cascade Bancorp & Subsidiary
Condensed Consolidated Balance Sheets
June 30, 2008 and December 31, 2007
(Dollars in thousands)
(unaudited)
| | June 30, | | | December 31, | |
| | 2008 | | | 2007 | |
| | (Restated) | | | | |
ASSETS | | | | | | |
Cash and cash equivalents: | | | | | | |
Cash and due from banks | | $ | 63,903 | | | $ | 62,470 | |
Interest bearing deposits with Federal Home Loan Bank | | | 39 | | | | 3 | |
Federal funds sold | | | - | | | | 668 | |
Total cash and cash equivalents | | | 63,942 | | | | 63,141 | |
Investment securities available-for-sale | | | 88,279 | | | | 83,835 | |
Investment securities held-to-maturity | | | 2,212 | | | | 3,180 | |
Federal Home Loan Bank stock | | | 12,087 | | | | 6,991 | |
Loans, net | | | 2,023,454 | | | | 2,007,603 | |
Premises and equipment, net | | | 36,312 | | | | 38,062 | |
Goodwill | | | 105,047 | | | | 105,047 | |
Core deposit intangibles | | | 8,711 | | | | 9,502 | |
Bank-owned life insurance | | | 33,857 | | | | 33,304 | |
Other real estate owned | | | 33,943 | | | | 9,765 | |
Accrued interest and other assets | | | 30,280 | | | | 34,062 | |
Total assets | | $ | 2,438,124 | | | $ | 2,394,492 | |
| | | | | | | | |
LIABILITIES & STOCKHOLDERS' EQUITY | | | | | | | | |
Liabilities: | | | | | | | | |
Deposits: | | | | | | | | |
Demand | | $ | 417,076 | | | $ | 435,503 | |
Interest bearing demand | | | 832,840 | | | | 936,848 | |
Savings | | | 37,204 | | | | 37,720 | |
Time | | | 299,546 | | | | 257,067 | |
Total deposits | | | 1,586,666 | | | | 1,667,138 | |
Junior subordinated debentures | | | 68,558 | | | | 68,558 | |
Federal funds purchased | | | 87,481 | | | | 14,802 | |
Other borrowings | | | 395,986 | | | | 327,867 | |
Customer repurchase agreements | | | 11,864 | | | | 18,614 | |
Accrued interest and other liabilities | | | 15,110 | | | | 22,227 | |
Total liabilities | | | 2,165,665 | | | | 2,119,206 | |
| | | | | | | | |
Stockholders' equity: | | | | | | | | |
Common stock, no par value; 35,000,000 shares authorized; 28,075,524 issued and outstanding (28,034,172 in 2007) | | | 157,706 | | | | 157,153 | |
Retained earnings | | | 114,650 | | | | 117,600 | |
Accumulated other comprehensive income | | | 103 | | | | 533 | |
Total stockholders' equity | | | 272,459 | | | | 275,286 | |
Total liabilities and stockholders' equity | | $ | 2,438,124 | | | $ | 2,394,492 | |
See accompanying notes.
Cascade Bancorp & Subsidiary
Condensed Consolidated Statements of Operations
Six Months and Three Months ended June 30, 2008 and 2007
(Dollars in thousands, except per share amounts)
(unaudited)
| | Six months ended | | | Three months ended | |
| | June 30, | | | June 30, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | (Restated) | | | | | | (Restated) | | | | |
Interest income: | | | | | | | | | | | | |
Interest and fees on loans | | $ | 70,077 | | | $ | 81,568 | | | $ | 33,080 | | | $ | 41,731 | |
Taxable interest on investments | | | 2,120 | | | | 2,656 | | | | 1,068 | | | | 1,340 | |
Nontaxable interest on investments | | | 114 | | | | 156 | | | | 53 | | | | 76 | |
Interest on federal funds sold | | | 23 | | | | 107 | | | | 10 | | | | 51 | |
Interest on interest bearing balances from FHLB | | | 2 | | | | 192 | | | | 1 | | | | 111 | |
Dividends on Federal Home Loan Bank stock | | | 65 | | | | 17 | | | | 49 | | | | 10 | |
Total interest income | | | 72,401 | | | | 84,696 | | | | 34,260 | | | | 43,319 | |
| | | | | | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | | |
Interest bearing demand | | | 9,654 | | | | 14,213 | | | | 3,934 | | | | 7,338 | |
Savings | | | 74 | | | | 108 | | | | 35 | | | | 51 | |
Time | | | 5,583 | | | | 7,972 | | | | 2,469 | | | | 4,374 | |
FFP & Other borrowings | | | 7,784 | | | | 8,313 | | | | 3,576 | | | | 4,012 | |
Total interest expense | | | 23,095 | | | | 30,606 | | | | 10,014 | | | | 15,775 | |
| | | | | | | | | | | | | | | | |
Net interest income | | | 49,306 | | | | 54,090 | | | | 24,246 | | | | 27,544 | |
Loan loss provision | | | 22,864 | | | | 2,050 | | | | 18,364 | | | | 1,000 | |
Net interest income after loan loss provision | | | 26,442 | | | | 52,040 | | | | 5,882 | | | | 26,544 | |
| | | | | | | | | | | | | | | | |
Noninterest income: | | | | | | | | | | | | | | | | |
Service charges on deposit accounts | | | 4,939 | | | | 4,698 | | | | 2,537 | | | | 2,491 | |
Mortgage loan origination and processing fees | | | 859 | | | | 939 | | | | 406 | | | | 504 | |
Gains on sales of mortgage loans, net | | | 430 | | | | 498 | | | | 194 | | | | 257 | |
Net mortgage loan servicing fees | | | 20 | | | | 9 | | | | 0 | | | | - | |
Losses on sales of other real estate owned | | | (26 | ) | | | (9 | ) | | | (8 | ) | | | - | |
Card issuer and merchant services fees, net | | | 1,897 | | | | 1,950 | | | | 1,005 | | | | 1,063 | |
Earnings on bank-owned life insurance | | | 553 | | | | 843 | | | | 287 | | | | 385 | |
Other income | | | 1,838 | | | | 1,891 | | | | 588 | | | | 572 | |
Total noninterest income | | | 10,510 | | | | 10,819 | | | | 5,008 | | | | 5,272 | |
| | | | | | | | | | | | | | | | |
Noninterest expense: | | | | | | | | | | | | | | | | |
Salaries and employee benefits | | | 18,252 | | | | 18,336 | | | | 9,093 | | | | 9,122 | |
Occupancy & Equipment | | | 3,538 | | | | 3,227 | | | | 1,713 | | | | 1,652 | |
Communications | | | 1,047 | | | | 1,020 | | | | 491 | | | | 472 | |
Advertising | | | 673 | | | | 630 | | | | 348 | | | | 313 | |
Legal | | | 657 | | | | 208 | | | | 307 | | | | 128 | |
OREO expenses | | | 1,958 | | | | 137 | | | | 1,186 | | | | 113 | |
Other expenses | | | 8,013 | | | | 7,792 | | | | 3,626 | | | | 3,748 | |
Total noninterest expense | | | 34,138 | | | | 31,350 | | | | 16,763 | | | | 15,548 | |
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | 2,814 | | | | 31,509 | | | | (5,873 | ) | | | 16,268 | |
Provision (credit) for income taxes | | | 167 | | | | 11,807 | | | | (2,480 | ) | | | 6,087 | |
Net income (loss) | | $ | 2,647 | | | $ | 19,702 | | | $ | (3,393 | ) | | $ | 10,181 | |
| | | | | | | | | | | | | | | | |
Basic net income (loss) per common share | | $ | 0.09 | | | $ | 0.70 | | | $ | (0.12 | ) | | $ | 0.36 | |
Diluted net income (loss) per common share | | $ | 0.09 | | | $ | 0.69 | | | $ | (0.12 | ) | | $ | 0.36 | |
See accompanying notes.
Cascade Bancorp & Subsidiary
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Six Months Ended June 30, 2008 (Restated) and 2007
(Dollars in thousands)
(unaudited)
| | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | | | other | | | Total | |
| | Comprehensive | | | Common | | | Retained | | | comprehensive | | | stockholders' | |
| | income | | | stock | | | earnings | | | income (loss) | | | equity | |
Balance at December 31, 2006 | | | | | $ | 162,199 | | | $ | 98,112 | | | $ | 765 | | | $ | 261,076 | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 19,702 | | | | - | | | | 19,702 | | | | - | | | | 19,702 | |
Other comprehensive loss, net of tax: | | | | | | | | | | | | | | | | | | | | |
Unrealized losses on securities available-for-sale | | | (605 | ) | | | - | | | | - | | | | (605 | ) | | | (605 | ) |
Comprehensive income | | $ | 19,097 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Cash dividends paid | | | | | | | - | | | | (5,119 | ) | | | - | | | | (5,119 | ) |
Stock-based compensation expense | | | | | | | 841 | | | | - | | | | - | | | | 841 | |
Stock options exercised (116,155) | | | | | | | 859 | | | | - | | | | - | | | | 859 | |
Tax benefit from non-qualified stock options exercised | | | | | | | 147 | | | | - | | | | - | | | | 147 | |
Balance at June 30, 2007 | | | | | | $ | 164,046 | | | $ | 112,695 | | | $ | 160 | | | $ | 276,901 | |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2007 | | | | | | $ | 157,153 | | | $ | 117,600 | | | $ | 533 | | | $ | 275,286 | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 2,647 | | | | - | | | | 2,647 | | | | - | | | | 2,647 | |
Other comprehensive loss, net of tax: | | | | | | | | | | | | | | | | | | | | |
Unrealized losses on securities available-for-sale | | | (430 | ) | | | - | | | | - | | | | (430 | ) | | | (430 | ) |
Comprehensive income | | $ | 2,217 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Cash dividends paid | | | | | | | - | | | | (5,597 | ) | | | - | | | | (5,597 | ) |
Stock options exercised | | | | | | | 19 | | | | - | | | | - | | | | 19 | |
Stock-based compensation expense | | | | | | | 769 | | | | - | | | | - | | | | 769 | |
Cancellation of shares for tax withholding | | | | | | | (235 | ) | | | - | | | | - | | | | (235 | ) |
Balance at June 30, 2008 | | | | | | $ | 157,706 | | | $ | 114,650 | | | $ | 103 | | | $ | 272,459 | |
See accompanying notes.
Cascade Bancorp & Subsidiary
Condensed Consolidated Statements of Cash Flows
Six Months ended June 30, 2008 and 2007
(Dollars in thousands)
(unaudited)
| | Six months ended June 30, | |
| | 2008 | | | 2007 | |
| | | | | | |
Net cash provided (used) by operating activities | | $ | (511 | ) | | $ | 16,465 | |
| | | | | | | | |
Investing activities: | | | | | | | | |
Proceeds from maturities, calls and prepayments of investment securities available-for-sale | | | 14,936 | | | | 15,325 | |
Proceeds from maturities and calls of investment securities held-to-maturity | | | - | | | | 505 | |
Purchases of investment securities available-for-sale | | | (18,959 | ) | | | (14,847 | ) |
Purchase of Federal Home Loan Bank stock | | | (5,096 | ) | | | - | |
Net increase in loans | | | (38,285 | ) | | | (71,370 | ) |
Purchases of premises and equipment | | | (1,858 | ) | | | (2,282 | ) |
Proceeds from sales of premises and equipment | | | 2,593 | | | | 5,059 | |
Net cash used in investing activities | | | (46,669 | ) | | | (67,610 | ) |
| | | | | | | | |
Financing activities: | | | | | | | | |
Net increase (decrease) in deposits | | | (80,472 | ) | | | 124,033 | |
Cash dividends paid | | | (5,597 | ) | | | (5,118 | ) |
Stock options exercised | | | 2 | | | | 858 | |
Tax benefit from non-qualified stock options exercised | | | - | | | | 147 | |
Net increase (decrease) in federal funds purchased | | | 72,679 | | | | (10,272 | ) |
Net increase (decrease) in other borrowings | | | 61,369 | | | | (54,819 | ) |
Net cash provided by financing activities | | | 47,981 | | | | 54,829 | |
Net increase in cash and cash equivalents | | | 801 | | | | 3,684 | |
Cash and cash equivalents at beginning of period | | | 63,141 | | | | 55,659 | |
Cash and cash equivalents at end of period | | $ | 63,942 | | | $ | 59,343 | |
See accompanying notes.
Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
June 30, 2008
(unaudited)
The accompanying interim condensed consolidated financial statements include the accounts of Cascade Bancorp (Bancorp), a one bank holding company, and its wholly-owned subsidiary, Bank of the Cascades (the “Bank”) (collectively, “the Company” or “Cascade”). All significant inter-company accounts and transactions have been eliminated in consolidation.
The interim condensed consolidated financial statements have been prepared by the Company without audit and in conformity with accounting principles generally accepted in the United States (GAAP) for interim financial information. Accordingly, certain financial information and footnotes have been omitted or condensed. In the opinion of management, the condensed consolidated financial statements include all necessary adjustments (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. In preparing the condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheets and income and expenses for the periods. Actual results could differ from those estimates.
The condensed consolidated balance sheet data as of December 31, 2007 was derived from audited financial statements, but does not include all disclosures contained in the Company’s 2007 Annual Report to Shareholders. The interim condensed consolidated financial statements should be read in conjunction with the December 31, 2007 consolidated financial statements, including the notes thereto, included in the Company’s 2007 Annual Report to Shareholders.
Certain amounts for 2007 have been reclassified to conform with the 2008 presentation.
Investment securities at June 30, 2008 and December 31, 2007 consisted of the following (dollars in thousands):
| | Amortized cost | | | Gross unrealized gains | | | Gross unrealized losses | | | Estimated fair value | |
6/30/2008 | | | | | | | | | | | | |
Available-for-sale | | | | | | | | | | | | |
U.S. Agency mortgage-backed securities | | $ | 73,211 | | | $ | 533 | | | $ | 639 | | | $ | 73,105 | |
U.S. Government and agency securities | | | 8,240 | | | | 251 | | | | - | | | | 8,491 | |
Obligations of state and political subdivisions | | | 2,616 | | | | 37 | | | | - | | | | 2,653 | |
U.S. Agency asset-backed securities | | | 3,322 | | | | 36 | | | | - | | | | 3,358 | |
Equity securities | | | 310 | | | | - | | | | 53 | | | | 257 | |
Mutual fund | | | 414 | | | | 1 | | | | - | | | | 415 | |
| | $ | 88,113 | | | $ | 858 | | | $ | 692 | | | $ | 88,279 | |
Held-to-maturity | | | | | | | | | | | | | | | | |
Obligations of state and political subdivisions | | $ | 2,212 | | | $ | 36 | | | $ | - | | | $ | 2,248 | |
| | | | | | | | | | | | | | | | |
12/31/2007 | | | | | | | | | | | | | | | | |
Available-for-sale | | | | | | | | | | | | | | | | |
U.S. Agency mortgage-backed securities | | $ | 64,874 | | | $ | 452 | | | $ | 124 | | | $ | 65,202 | |
U.S. Government and agency securities | | | 10,187 | | | | 310 | | | | - | | | | 10,497 | |
Obligations of state and political subdivisions | | | 3,710 | | | | 30 | | | | 3 | | | | 3,737 | |
U.S. Agency asset-backed securities | | | 3,490 | | | | 48 | | | | - | | | | 3,538 | |
Equity securities | | | 310 | | | | 139 | | | | - | | | | 449 | |
Mutual fund | | | 405 | | | | 7 | | | | - | | | | 412 | |
| | $ | 82,976 | | | $ | 986 | | | $ | 127 | | | $ | 83,835 | |
Held-to-maturity | | | | | | | | | | | | | | | | |
Obligations of state and political subdivisions | | $ | 3,180 | | | $ | 24 | | | $ | 11 | | | $ | 3,193 | |
The following table presents the fair value and gross unrealized losses of the Bank’s investment securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2008:
| | Less than 12 months | | | 12 months or more | | | Total | |
| | Estimated fair value | | | Unrealized losses | | | Estimated fair value | | | Unrealized losses | | | Estimated fair value | | | Unrealized losses | |
U.S. Agency mortgage-backed securities | | $ | 21,321 | | | $ | 637 | | | $ | 155 | | | $ | 2 | | | $ | 21,476 | | | $ | 639 | |
Equity securities | | | 310 | | | | 53 | | | | - | | | | - | | | | 310 | | | | 53 | |
| | $ | 21,631 | | | $ | 690 | | | $ | 155 | | | $ | 2 | | | $ | 21,786 | | | $ | 692 | |
The unrealized losses on the above investment securities are primarily due to increases in market interest rates or widening of interest rate spreads on security types as compared to yields/spread relationships prevailing at the time the specific investment securities were purchased. Management of the Company expects the fair value of these investment securities to recover as the investment securities approach their maturity dates or repricing dates, or if market yields for such investment securities decline. The unrealized loss on equity securities is primarily due to the recent downturn in the stock market. Management of the Company does not believe that any of the investment securities are impaired due to reasons of credit quality. Accordingly, management of the Company does not believe that any of the above gross unrealized losses on investment securities are other-than-temporary and, accordingly, no impairment adjustments have been recorded.
3. | Loans and Reserve for Credit Losses |
The composition of the loan portfolio at June 30, 2008 and December 31, 2007 was as follows (dollars in thousands):
Loan portfolio | | June 30, 2008 | | | % of gross loans | | | December 31, 2007 | | | % of gross loans | |
| | (Restated) | | | | | | | | | | |
Commercial | | $ | 616,121 | | | | 30 | % | | $ | 606,408 | | | | 30 | % |
Real Estate: | | | | | | | | | | | | | | | | |
Construction/lot | | | 649,846 | | | | 31 | % | | | 686,829 | | | | 34 | % |
Mortgage | | | 89,540 | | | | 4 | % | | | 88,509 | | | | 4 | % |
Commercial | | | 660,202 | | | | 32 | % | | | 612,694 | | | | 30 | % |
Consumer | | | 50,382 | | | | 2 | % | | | 47,038 | | | | 2 | % |
Total loans | | | 2,066,091 | | | | 100 | % | | | 2,041,478 | | | | 100 | % |
Less reserve for loan losses | | | 42,637 | | | | | | | | 33,875 | | | | | |
Total loans, net | | $ | 2,023,454 | | | | | | | $ | 2,007,603 | | | | | |
Mortgage real estate loans include mortgage loans held for sale of approximately $0.9 million at June 30, 2008 and approximately $4.3 million at December 31, 2007. In addition, the above loans are net of deferred loan fees of approximately $5.0 million at June 30, 2008 and $5.7 million at December 31, 2007.
At June 30, 2008 the Bank had approximately $656.8 million in outstanding commitments to extend credit, compared to approximately $727.4 million at year-end 2007. Reserves for unfunded commitments (which are classified as other liabilities) totaled approximately $3.2 million and $2.4 million at June 30, 2008 and December 31, 2007, respectively.
The table below presents the breakdown of the construction/lot category and geographic distribution at June 30, 2008 and December 31, 2007. Certain balances at December 31, 2007, have been reclassified to conform to the June 30, 2008, presentation (dollars in thousands):
| | June 30, 2008 | | | % of category | | | % of Constr / lot portfolio | | | % of gross loans | | | December 31, 2007 | |
Residential Land Development: | | | | | | | | | | | | | | | |
Raw Land | | $ | 105,926 | | | | 36 | % | | | 16 | % | | | 5 | % | | $ | 107,160 | |
Land Development | | | 170,889 | | | | 57 | % | | | 26 | % | | | 8 | % | | | 183,809 | |
Speculative Lots | | | 21,240 | | | | 7 | % | | | 3 | % | | | 1 | % | | | 20,916 | |
| | $ | 298,055 | | | | 100 | % | | | 46 | % | | | 14 | % | | $ | 311,885 | |
Geographic distribution by region: | | | | | | | | | | | | | | | | | | | | |
Central Oregon | | $ | 102,029 | | | | 34 | % | | | 16 | % | | | 5 | % | | $ | 107,150 | |
Northwest Oregon | | | 5,525 | | | | 2 | % | | | 1 | % | | | 0 | % | | | 5,328 | |
Southwest Oregon | | | 25,461 | | | | 9 | % | | | 4 | % | | | 1 | % | | | 32,541 | |
Total Oregon | | | 133,015 | | | | 45 | % | | | 20 | % | | | 6 | % | | | 145,019 | |
Idaho | | | 165,040 | | | | 55 | % | | | 25 | % | | | 8 | % | | | 166,866 | |
Grand total | | $ | 298,055 | | | | 100 | % | | | 46 | % | | | 14 | % | | $ | 311,885 | |
Residential Construction: | | | | | | | | | | | | | | | | | | | | |
Pre sold | | $ | 64,569 | | | | 50 | % | | | 10 | % | | | 3 | % | | $ | 64,714 | |
Lots | | | 18,820 | | | | 15 | % | | | 3 | % | | | 1 | % | | | 20,575 | |
Speculative Construction | | | 44,755 | | | | 35 | % | | | 7 | % | | | 2 | % | | | 58,048 | |
| | $ | 128,144 | | | | 100 | % | | | 20 | % | | | 6 | % | | $ | 143,337 | |
Geographic distribution by region: | | | | | | | | | | | | | | | | | | | | |
Central Oregon | | $ | 51,682 | | | | 40 | % | | | 8 | % | | | 3 | % | | $ | 52,785 | |
Northwest Oregon | | | 30,771 | | | | 24 | % | | | 5 | % | | | 1 | % | | | 31,652 | |
Southwest Oregon | | | 9,696 | | | | 8 | % | | | 1 | % | | | 0 | % | | | 14,252 | |
Total Oregon | | | 92,149 | | | | 72 | % | | | 14 | % | | | 4 | % | | | 98,689 | |
Idaho | | | 35,995 | | | | 28 | % | | | 6 | % | | | 2 | % | | | 44,648 | |
Grand total | | $ | 128,144 | | | | 100 | % | | | 20 | % | | | 6 | % | | $ | 143,337 | |
Commercial Construction: | | | | | | | | | | | | | | | | | | | | |
Pre sold | | $ | 47,440 | | | | 21 | % | | | 7 | % | | | 2 | % | | $ | 61,298 | |
Lots | | | 12,792 | | | | 6 | % | | | 2 | % | | | 1 | % | | | 17,525 | |
Speculative | | | 135,230 | | | | 60 | % | | | 21 | % | | | 7 | % | | | 125,271 | |
Speculative Lots | | | 31,750 | | | | 14 | % | | | 5 | % | | | 2 | % | | | 30,815 | |
| | $ | 227,212 | | | | 100 | % | | | 35 | % | | | 11 | % | | $ | 234,909 | |
Geographic distribution by region: | | | | | | | | | | | | | | | | | | | | |
Central Oregon | | $ | 67,129 | | | | 30 | % | | | 10 | % | | | 3 | % | | $ | 68,411 | |
Northwest Oregon | | | 73,606 | | | | 32 | % | | | 11 | % | | | 4 | % | | | 81,683 | |
Southwest Oregon | | | 40,632 | | | | 18 | % | | | 6 | % | | | 2 | % | | | 39,235 | |
Total Oregon | | | 181,367 | | | | 80 | % | | | 28 | % | | | 9 | % | | | 189,329 | |
Idaho | | | 45,845 | | | | 20 | % | | | 7 | % | | | 2 | % | | | 45,580 | |
Grand total | | $ | 227,212 | | | | 100 | % | | | 35 | % | | | 11 | % | | $ | 234,909 | |
Transactions in the reserve for loan losses and unfunded commitments for the six months ended June 30, 2008 and 2007 were as follows (dollars in thousands):
| | Six months ended | |
| | June 30, | |
| | 2008 | | | 2007 | |
| | (Restated) | | | | |
Reserve for loan losses | | | | | | |
Balance at beginning of period | | $ | 33,875 | | | $ | 23,585 | |
Loan loss provision | | | 22,864 | | | | 2,050 | |
Recoveries | | | 705 | | | | 724 | |
Loans charged off | | | (14,807 | ) | | | (1,762 | ) |
Balance at end of period | | $ | 42,637 | | | $ | 24,597 | |
| | | | | | | | |
Reserve for unfunded commitments | | | | | | | | |
Balance at beginning of period | | $ | 3,163 | | | $ | 3,213 | |
Provision for unfunded commitments | | | - | | | | 200 | |
Balance at end of period | | $ | 3,163 | | | $ | 3,413 | |
| | | | | | | | |
Reserve for credit losses | | | | | | | | |
Reserve for loan losses | | $ | 42,637 | | | $ | 24,597 | |
Reserve for unfunded commitments | | | 3,163 | | | | 3,413 | |
Total reserve for credit losses | | $ | 45,800 | | | $ | 28,010 | |
4. Non-Performing Assets
Risk of nonpayment exists with respect to all loans, which could result in the classification of such loans as non-performing. The following table presents information with respect to non-performing assets at June 30, 2008 and December 31, 2007 (dollars in thousands):
| | June 30, | | | December 31, | |
| | 2008 | | | 2007 | |
| | (Restated) | | | | |
Loans on non-accrual status | | $ | 93,111 | | | $ | 45,865 | |
Loans past due 90 days or more but not on non-accrual status | | | 51 | | | | 51 | |
Other real estate owned | | | 33,943 | | | | 9,765 | |
Total non-performing assets | | $ | 127,105 | | | $ | 55,681 | |
| | | | | | | | |
Percentage of non-performing assets to total assets | | | 5.21 | % | | | 2.33 | % |
The increase in NPAs is primarily due to the real estate downturn which has impacted the Company’s residential real estate development portfolio that is approximately 14% of total loans. See “Real Estate Concentration” section of MD&A for further information. The following table presents non-performing assets as of June 30, 2008 by region (dollars in thousands):
Region | | June 30, 2008 | | | % of total NPA's | | | December 31, 2007 | | | % of total NPA's | |
Central Oregon | | $ | 27,603 | | | | 22 | % | | $ | 5,793 | | | | 10 | % |
Northwest Oregon | | | 17,513 | | | | 14 | % | | | 1,615 | | | | 3 | % |
Southern Oregon | | | 26,190 | | | | 21 | % | | | 22,876 | | | | 41 | % |
Total Oregon | | | 71,306 | | | | 56 | % | | | 30,284 | | | | 54 | % |
Idaho | | | 55,799 | | | | 44 | % | | | 25,397 | | | | 46 | % |
Grand total | | $ | 127,105 | | | | 100 | % | | $ | 55,681 | | | | 100 | % |
The composition of loans on non-accrual status at June 30, 2008 and December 31, 2007 was as follows (dollars in thousands):
| | June 30, 2008 | | | % of total | | | December 31, 2007 | | | % of total | |
Commercial | | $ | 4,034 | | | | 4 | % | | $ | 5,145 | | | | 11 | % |
Real Estate: | | | | | | | | | | | | | | | | |
Construction/lot | | | 76,987 | | | | 83 | % | | | 35,620 | | | | 78 | % |
Mortgage | | | 311 | | | | 0 | % | | | 944 | | | | 2 | % |
Commercial | | | 11,557 | | | | 12 | % | | | 4,135 | | | | 9 | % |
Consumer | | | 222 | | | | 0 | % | | | 21 | | | | 0 | % |
Total non-accrual loans | | $ | 93,111 | | | | 100 | % | | $ | 45,865 | | | | 100 | % |
The accrual of interest on a loan is discontinued when, in management’s judgment, the future collectibility of principal or interest is in doubt. Loans placed on non-accrual status may or may not be contractually past due at the time of such determination, and may or may not be secured. When a loan is placed on non-accrual status, it is the Bank’s policy to reverse, and charge against current income, interest previously accrued but uncollected. Interest subsequently collected on such loans is credited to loan principal if, in the opinion of management, full collectibility of principal is doubtful. Interest income that was reversed and charged against income for the six months ended June 30, 2008, was $0.7 million and was insignificant for the comparable 2007 period.
A loan is considered to be impaired when it is determined probable that the principal and/or interest amounts due will not be collected according to the contractual terms of the loan agreement. Impaired loans are measured on a loan by loan basis by either 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 currently measured at lower of cost or fair value. Certain large groups of smaller balance homogeneous loans, collectively measured for impairment, are excluded. Impaired loans are charged to the reserve 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.
At June 30, 2008, impaired loans were approximately $93.1 million and related specific valuation allowances were $7.4 million. At December 31, 2007, impaired loans were approximately $45.9 million and related specific valuation allowances were $3.9 million. Interest income recognized for cash payments received on impaired loans for the periods presented was insignificant.
5. Mortgage Servicing Rights
At June 30, 2008 and December 31, 2007, the Bank retained servicing rights to mortgage loans with principal balances of approximately $510.7 million and $494.0 million, respectively. Generally, loans sold servicing-retained are sold to Fannie Mae, a U.S. government sponsored enterprise. The Company also sells mortgage originations servicing-released in the normal course of business to other mortgage companies. Sold loans are not included in loan balances in the accompanying condensed consolidated balance sheets. The sales of these mortgage loans are subject to specific underwriting documentation standards and requirements, which may result in repurchase risk.
Mortgage servicing rights (MSRs) included in other assets in the accompanying condensed consolidated balance sheets are accounted for at the lower of origination value less accumulated amortization, or current fair value. The carrying value of MSRs was $3.8 million at both June 30, 2008 and December 31, 2007. The fair value of MSRs was approximately $5.6 million at June 30, 2008 and $5.3 million at December 31, 2007. Activity in MSRs for the six months ended June 30, 2008 and 2007 was as follows (dollars in thousands): (See MD&A – Non-Interest income).
| | Six months ended | |
| | June 30, | |
| | 2008 | | | 2007 | |
Balance at beginning of period | | $ | 3,756 | | | $ | 4,096 | |
Additions | | | 664 | | | | 486 | |
Amortization | | | (611 | ) | | | (643 | ) |
Balance at end of period | | $ | 3,809 | | | $ | 3,939 | |
6. | Junior Subordinated Debentures |
At June 30, 2008, the Company had established four subsidiary grantor trusts for the purpose of issuing trust preferred securities (“TPS”) and common securities. The common securities were purchased by the Company, and the Company’s investment in the common securities of $2.1 million is included in accrued interest and other assets in the accompanying condensed consolidated balance sheets. The weighted average interest rate of all TPS at June 30, 2008 was 4.81% compared to 6.58% at December 31, 2007 because the TPS are largely indexed to 3 month Libor which has declined since year end.
In accordance with industry practice, the Company’s liability for the common securities has been included with the Debentures in the accompanying condensed consolidated balance sheets. Management believes that at June 30, 2008 and December 31, 2007, the TPS meet applicable regulatory guidelines to qualify as Tier I capital.
7. Other Borrowings
At June 30, 2008 the Bank had a total of $136.0 million in long-term borrowings from Federal Home Loan Bank (FHLB) with maturities from 2008 to 2025, bearing a weighted-average interest rate of 3.50%. In addition, at June 30, 2008, the Bank had short-term borrowings with FHLB and Federal Reserve Bank (FRB) of approximately $159.0 million and $101.0 million, respectively. At year-end 2007, the Bank had a total of $117.4 million in long-term borrowings from FHLB with maturities from 2008 to 2025. Approximately $77.3 million of this amount bears a fixed or adjustable weighted average rate of 3.94% while the remaining $40.0 million float with LIBOR. In addition, at December 31, 2007, the Bank had short-term borrowings with FHLB and FRB of approximately $175.8 million and $34.7 million, respectively. See “Liquidity and Sources of Funds” below for further discussion.
8. Basic and Diluted Net Income (Loss) per Common Share
The Company’s basic net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. The Company’s diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding plus the incremental shares arising from the dilutive effect of stock-based compensation. The computation of the diluted net income (loss) per share for the three months ended June 30, 2008, excludes dilutive incremental shares arising from stock-based compensation because the effect of their exercise would be anti-dilutive.
The numerators and denominators used in computing basic and diluted net income (loss) per common share for the six months and three months ended June 30, 2008 and 2007 can be reconciled as follows (dollars in thousands, except per share data):
| | Six months ended | | | Three months ended | |
| | June 30, | | | June 30, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | (Restated) | | | | | | (Restated) | | | | |
| | | | | | | | | | | | |
Net income (loss) | | $ | 2,647 | | | $ | 19,702 | | | $ | (3,393 | ) | | $ | 10,181 | |
| | | | | | | | | | | | | | | | |
Weighted-average shares outstanding - basic | | | 27,920,072 | | | | 28,302,315 | | | | 27,928,937 | | | | 28,335,368 | |
Basic net income (loss) per common share | | $ | 0.09 | | | $ | 0.70 | | | $ | (0.12 | ) | | $ | 0.36 | |
| | | | | | | | | | | | | | | | |
Incremental shares arising from stock-based compensation | | | 145,609 | | | | 387,783 | | | | - | | | | 315,841 | |
Weighted-average shares outstanding - diluted | | | 28,065,682 | | | | 28,690,098 | | | | 27,928,937 | | | | 28,651,209 | |
Diluted net income (loss) per common share | | $ | 0.09 | | | $ | 0.69 | | | $ | (0.12 | ) | | $ | 0.36 | |
9. Stock-Based Compensation
The Company has historically maintained certain stock-based compensation plans, approved by the Company’s shareholders, that are administered by the Company’s Board of Directors (the Board), or the Compensation Committee of the Board (the Compensation Committee). In addition, on April 28, 2008, the shareholders of the Company approved the 2008 Cascade Bancorp Performance Incentive Plan (the 2008 Plan). The 2008 Plan authorized the Board to issue up to an additional one million shares of common stock related to the grant or settlement of stock-based compensation awards, expanded the types of stock-based compensation awards that may be granted, and expanded the parties eligible to receive such awards. Under the Company’s stock-based compensation plans, the Board (or the Compensation Committee) may grant stock options (including incentive stock options (ISOs) as defined in Section 422 of the Internal Revenue Code and non-qualified stock options (NSOs), restricted stock, restricted stock units, stock appreciation rights and other similar types of equity awards intended to qualify as “performance-based” compensation under applicable tax rules. The stock-based compensation plans were established to allow for the granting of compensation awards to attract, motivate and retain employees, executive officers, non-employee directors and other service providers who contribute to the success and profitability of the Company and to give such persons a proprietary interest in the Company, thereby enhancing their personal interest in the Company’s continued success.
The Board or Compensation Committee may establish and prescribe grant guidelines including various terms and conditions for the granting of stock-based compensation and the total number of shares authorized for this purpose. Under the 2008 Plan, for ISOs and NSOs, the option strike price must be no less than 100% of the stock price at the grant date. (Prior to the approval of the 2008 Plan, the option strike price for NSOs could be no less than 85% of the stock price at the grant date). Generally, options become exercisable in varying amounts based on years of employee service and vesting schedules. All options expire after a period of ten years from the date of grant. Other permissible stock awards include restricted stock grants, restricted stock units, stock appreciation rights or other similar stock awards (including awards that do not require the grantee to pay any amount in connection with receiving the shares or that have a purchase price that is less than the grant date fair market value of the Company’s stock.) |
The Company has historically granted the majority of its annual stock-based compensation awards during the first quarter of each year. During the six months ended June 30, 2008 and 2007, the Company granted 390,130 and 133,462 stock options respectively. The fair value of stock options granted during the six months ended June 30, 2008 and 2007 was $2.35 and $9.19 per option, respectively.
The Company used the Black-Scholes option-pricing model with the following weighted-average assumptions to value options granted for the six and three months ended June 30, 2008 and 2007:
| | Six months ended June 30, | | | Three months ended June 30, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
Dividend yield | | | 4.0 | % | | | 1.3 | % | | | 4.0 | % | | | 1.3 | % |
Expected volatility | | | 32.0 | % | | | 29.9 | % | | | 32.0 | % | | | 29.9 | % |
Risk-free interest rate | | | 3.0 | % | | | 4.8 | % | | | 3.0 | % | | | 4.8 | % |
Expected option lives | | 7.2 years | | | 6 years | | | 7.2 years | | | 6 years | |
The dividend yield is based on historical dividend information. The expected volatility is based on historical volatility of the Company’s common stock price. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for periods corresponding with the expected lives of the options granted. The expected option lives represent the period of time that options are expected to be outstanding giving consideration to vesting schedules and historical exercise and forfeiture patterns.
The Black-Scholes option-pricing model was developed for use in estimating the fair value of publicly-traded options that have no vesting restrictions and are fully transferable. Additionally, the model requires the input of highly subjective assumptions. Because the Company’s stock options have characteristics significantly different from those of publicly-traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in the opinion of the Company’s management, the Black-Scholes option-pricing model does not necessarily provide a reliable single measure of the fair value of the Company’s stock options.
The following table presents the activity related to stock options under all plans for the six months ended June 30, 2008:
| | Options | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (Years) | | | Aggregate Intrinsic Value (000) | |
Options outstanding at December 31, 2007 | | | 751,088 | | | $ | 13.34 | | | | N/A | | | | N/A | |
Granted | | | 390,130 | | | | 10.13 | | | | N/A | | | | N/A | |
Exercised | | | (3,093 | ) | | | 5.74 | | | | N/A | | | | N/A | |
Cancelled | | | (29,768 | ) | | | 16.66 | | | | N/A | | | | N/A | |
Options outstanding at June 30, 2008 | | | 1,108,357 | | | $ | 12.14 | | | | 4.67 | | | $ | 507 | |
Options exercisable at June 30, 2008 | | | 529,531 | | | $ | 8.79 | | | | 8.46 | | | $ | 1,008 | |
Stock-based compensation expense related to stock options for the six months ended June 30, 2008 and 2007 was approximately $.2 million and $.4 million, respectively. As of June 30, 2008, there was approximately $1.6 million of unrecognized compensation expense related to nonvested stock options, which will be recognized over the remaining vesting periods of the underlying stock options.
During the six months ended June 30, 2008, the Company granted 17,970 shares of immediately vested restricted stock and 44,211 shares of nonvested restricted stock at a weighted average grant date fair value of $10.13 per share (approximately $630,000). In addition, during the three months ended June 30, 2008, the Company granted 2,971 shares of deferred restricted stock at a fair value of $8.75 (approximately $26,000). The nonvested restricted stock is scheduled to vest over periods of three to four years from the grant date. Restricted stock is reported as an increase to common stock in the accompanying condensed consolidated financial statements. The unearned compensation on restricted stock is being amortized to expense on a straight-line basis over the applicable vesting periods.
The following table presents the activity for nonvested and deferred restricted stock for the six months ended June 30, 2008.
| | Number of Shares | | | Weighted- Average Grant Date Fair Value Per Share | | | Weighted- Average Remaining Vesting Term (years) | |
Nonvested as of December 31, 2007 | | | 114,939 | | | $ | 20.09 | | | | N/A | |
Granted | | | 65,152 | | | | 10.07 | | | | N/A | |
Vested | | | (45,486 | ) | | | 11.64 | | | | N/A | |
Nonvested as of June 30, 2008 | | | 134,605 | | | $ | 23.15 | | | | 2.14 | |
Total expense recognized by the Company for nonvested restricted stock for both the six month periods ended June 30, 2008 and 2007 was approximately $.5 million. As of June 30, 2008, unrecognized compensation cost related to nonvested restricted stock totaled approximately $1.5 million.
10. Stock Repurchase Plan
On August 13, 2007, the Company announced that the Board authorized the Company to acquire, from time to time, up to 5% of the Company's issued and outstanding common shares over a two-year period. Management’s discretion will determine the timing of the stock repurchase transactions and the number of shares repurchased. Consideration will be given to factors including market price of the stock, growth expectations, capital levels, risk factors, general economic conditions, established and special trading blackout periods, and other investment opportunities. As of June 30, 2008, the Company has repurchased a total of 400,700 shares at an average price of $19.57, unchanged from year-end 2007.
11. Subsequent Event
On July 24, 2008, the Company announced a quarterly cash dividend of $0.01 per share, down from $0.10 paid in the prior quarter. The Board determined that reducing the dividend was a prudent action which underscores the Company’s commitment to preserving capital during this period of economic uncertainty. The quarterly dividend of $.01 per share will be payable on August 11, 2008, to shareholders of record as of August 4, 2008.
12. Fair Value Measurements
As discussed in Note 13, on January 1, 2008 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, and SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of Financial Accounting Standards Board (FASB) Statement No. 115. The adoption of SFAS No. 157 and 159 had no effect on the Company’s condensed consolidated financial statements.
SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value. SFAS No. 159 permits an entity to choose to measure many financial instruments and certain other items at fair value and contains financial statement presentation and disclosure requirements for assets and liabilities for which the fair value option under this pronouncement is elected. Upon adoption of SFAS No. 159, none of the Company’s assets or liabilities were valued using the fair value option allowed under this pronouncement.
SFAS No. 157 also establishes a hierarchy for determining fair value measurement. The hierarchy includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follow:
| · | Quoted prices in active markets for identical assets (Level 1): Inputs that are quoted unadjusted prices in active markets for identical assets that the Company has the ability to access at the measurement date. An active market for the asset is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
| · | Other observable inputs (Level 2): Inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity including quoted prices for similar assets, quoted prices for securities in inactive markets and inputs derived principally from or corroborated by observable market data by correlation or other means. |
| · | Significant unobservable inputs (Level 3): Inputs that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. |
The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to valuation methodology.
Securities. Where quoted prices are available in an active market, investment securities are classified within level 1 of the hierarchy. Level 1 includes securities that have quoted prices in an active market for identical assets. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. The Company has categorized its securities as level 2.
Impaired loans. SFAS No. 157 applies to loans measured for impairment using the practical expedients permitted by SFAS No. 114, Accounting by Creditors for Impairment of a Loan, including impaired loans measured at an observable market price (if available) or at the fair value of the loan’s collateral (if collateral dependent). Fair value of the loan’s collateral is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral. Management’s ongoing review of appraisal information may result in additional discounts or adjustments to valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. The Company has categorized its impaired loans as level 2.
OREO. The Company’s OREO is measured at fair value less cost to sell. Fair value was generally determined based on 3rd party appraisals of fair value in an orderly sale. Cost to sell OREO was based on standard market factors. The Company has categorized its OREO as level 2.
The table below presents assets and liabilities measured at fair value on a recurring basis at June 30, 2008 (dollars in thousands):
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Assets | | | | | | | | | |
Investment securities available - for - sale | | $ | - | | | $ | 88,279 | | | $ | - | |
Other real estate owned | | | | | | | 33,943 | | | | | |
Total recurring assets measured at fair value | | $ | - | | | $ | 122,222 | | | $ | - | |
Other assets, including goodwill, intangible assets and other assets acquired in business combinations, are also subject to periodic impairment assessments under GAAP. These assets are not considered financial instruments. Effective February 12, 2008, the FASB issued a staff position, FSP FAS 157-2, which delayed the applicability of FAS 157 to non-financial instruments. Accordingly, these assets have been omitted from the above disclosures.
13. Recently Issued Accounting Standards
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. SFAS No. 157 does not require any new fair value measurements; rather, it provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. The Company’s adoption of SFAS No. 157 on January 1, 2008 did not have a material impact on the condensed consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115”. SFAS No. 159 provides entities with an option to report certain financial assets and liabilities at fair value – with changes in fair value reported in earnings – and requires additional disclosures related to an entity’s election to use fair value reporting. It also requires entities to display the fair value of those assets and liabilities for which the entity has elected to use fair value on the face of the balance sheet. SFAS No. 159 was effective for fiscal years beginning after November 15, 2007. The Company’s adoption of SFAS No. 159 on January 1, 2008 did not have an impact on the condensed consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007) (SFAS No. 141R), “Business Combinations”. SFAS No. 141R replaces SFAS No. 141, “Business Combinations” and applies to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS No. 141R retains the fundamental requirements of SFAS No. 141 that the acquisition method of accounting be used for all business combinations and for the acquirer to be identified for each business combination. SFAS No. 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of the acquisition date. SFAS No. 141R also requires an acquirer to recognize assets acquired and liabilities assumed arising from contractual contingencies as of the acquisition date, measured at their acquisition-date fair values. This changes the requirements of SFAS No. 141 which permitted deferred recognition of preacquisition contingencies, until the recognition criteria for SFAS No. 5, “Accounting for Contingencies” were met. SFAS No. 141R will also require acquirers to expense acquisition-related costs as incurred rather than require allocation of such costs to the assets acquired and liabilities assumed. SFAS No. 141R is effective for business combination reporting for fiscal years beginning after December 15, 2008. The Company expects SFAS No. 141R to have a material impact on the accounting for any business combination occurring on or after January 1, 2009.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51.” SFAS No. 160 amends Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. Prior to SFAS No. 160, net income attributable to the noncontrolling interest generally was reported as an expense or other deduction in arriving at consolidated net income. Additional disclosures are required as a result of SFAS No. 160 to clearly identify and distinguish between the interests of the parent’s owners and the interests of the noncontrolling owners of a subsidiary. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact that SFAS No. 160 may have on its future consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities - an Amendment of FASB Statement No. 133.” SFAS No. 161 expands disclosure requirements regarding an entity’s derivative instruments and hedging activities. Expanded qualitative disclosures that will be required under SFAS No. 161 include: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and related interpretations; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 also requires several added quantitative disclosures in financial statements. SFAS No. 161 will be effective for the Company on January 1, 2009. Management is currently evaluating the effect that the provisions of SFAS No. 161 will have on the Company’s consolidated financial statements. In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" (SFAS No. 162). This standard identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. The provisions of SFAS No. 162 did not have a material impact on the Company’s condensed consolidated financial statements.
14. Restatement of Previously Issued Financial Statements
Subsequent to the original filing of the Company’s June 30, 2008 Form 10-Q, management concluded that an additional reserve for loan losses and corresponding loan loss provision of $5.8 million were deemed to have existed as of June 30, 2008. As a result of the restatement, the following financial statement line items were adjusted:
(in thousands, except per share data) | | As Previously | | | As | | | Effect of | |
| | Reported | | | Corrected | | | Change | |
As of June 30, 2008 | | | | | | | | | |
| | | | | | | | | |
Consolidated Balance Sheets | | | | | | | | | |
Loans, net | | $ | 2,029,218 | | | $ | 2,023,454 | | | $ | (5,764 | ) |
Total assets | | | 2,443,888 | | | | 2,438,124 | | | | (5,764 | ) |
Accrued interest and other liabilities | | | 17,300 | | | | 15,110 | | | | (2,190 | ) |
Total liabilities | | | 2,167,855 | | | | 2,165,665 | | | | (2,190 | ) |
Retained earnings | | | 118,224 | | | | 114,650 | | | | (3,574 | ) |
Total stockholders' equity | | | 276,033 | | | | 272,459 | | | | (3,574 | ) |
Total liabilities and stockholders' equity | | | 2,443,888 | | | | 2,438,124 | | | | (5,764 | ) |
(in thousands, except per share data) | | As Previously | | | As | | | Effect of | |
| | Reported | | | Corrected | | | Change | |
| | | | | | | | | |
For the Three Months ended June 30, 2008 | | | | | | | | | |
| | | | | | | | | |
Consolidated Statements of Income | | | | | | | | | |
Loan loss provision | | $ | 12,600 | | | $ | 18,364 | | | $ | 5,764 | |
Net interest income after loan loss provision | | | 11,646 | | | | 5,882 | | | | (5,764 | ) |
Loss before income taxes | | | (109 | ) | | | (5,873 | ) | | | (5,764 | ) |
Credit for income taxes | | | (290 | ) | | | (2,480 | ) | | | (2,190 | ) |
Net Income (loss) | | | 181 | | | | (3,393 | ) | | | (3,574 | ) |
Basic net income (loss) per common share | | | 0.01 | | | | (0.12 | ) | | | (0.13 | ) |
Diluted net income (loss) per common share | | | 0.01 | | | | (0.12 | ) | | | (0.13 | ) |
| | | | | | | | | | | | |
For the Six Months ended June 30, 2008 | | | | | | | | | | | | |
| | | | | | | | | | | | |
Consolidated Statements of Operations | | | | | | | | | | | | |
Loan loss provision | | | 17,100 | | | | 22,864 | | | | 5,764 | |
Net interest income after loan loss provision | | | 32,206 | | | | 26,442 | | | | (5,764 | ) |
Income before income taxes | | | 8,578 | | | | 2,814 | | | | (5,764 | ) |
Provision for income taxes | | | 2,357 | | | | 167 | | | | (2,190 | ) |
Net Income | | | 6,221 | | | | 2,647 | | | | (3,574 | ) |
Basic net income per common share | | | 0.22 | | | | 0.09 | | | | (0.13 | ) |
Diluted net income per common share | | | 0.22 | | | | 0.09 | | | | (0.13 | ) |
| | | | | | | | | | | | |
For the Six Months ended June 30, 2008 | | | | | | | | | | | | |
| | | | | | | | | | | | |
Consolidated Statements of Changes in Stockholders' Equity | | | | | | | | | | | | |
Net income | | | 6,221 | | | | 2,647 | | | | (3,574 | ) |
Retained earnings | | | 118,224 | | | | 114,650 | | | | (3,574 | ) |
Total stockholders' equity | | | 276,033 | | | | 272,459 | | | | (3,574 | ) |
Comprehensive income | | | 5,791 | | | | 2,217 | | | | (3,574 | ) |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and the notes thereto as of June 30, 2008 and the operating results for the six months and three months then ended, included elsewhere in this report.
Cautionary Information Concerning Forward-Looking Statements
The following section contains forward-looking statements, which are not historical facts and pertain to our future operating results. These statements include, but are not limited to, our plans, objectives, expectations and intentions and are not statements of historical fact. When used in this report, the word "expects," "believes," "anticipates,” “could,” “may,” “will,” “should,” “plan,” “predicts,” “projections,” “continue” and other similar expressions constitute forward-looking statements, as do any other statements that expressly or implicitly predict future events, results or performance, and such statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain risks and uncertainties cause actual results to differ materially from those projected, including among others, the risk factors described in this report as well as general business and economic conditions, including the residential and commercial real estate markets; changes in interest rates including timing or relative degree of change and the interest rate policies of the FRB; competition in the industry, including our ability to attract deposits, changes in the demand for loans and changes in consumer spending, borrowing and savings habits; changes in regulatory conditions or requirements or new legislation; and changes in accounting policies. In addition, these forward-looking statements are subject to assumptions with respect to future business conditions, strategies and decisions, and such assumptions are subject to change.
Results may differ materially from the results discussed due to changes in business and economic conditions that negatively affect credit quality, which may be exacerbated by our concentration of operations in the States of Oregon and Idaho generally, including the Oregon communities of Central Oregon, Northwest Oregon, Southern Oregon, and the greater Boise area, specifically. Likewise, competition or changes in interest rates could negatively affect the net interest margin, as could other factors listed from time to time in the Company’s SEC reports. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof. Readers should carefully review all disclosures filed by the Company from time to time with the SEC.
Critical Accounting Policies
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that our most critical accounting policies upon which our financial condition depends, and which involve the most complex or subjective decisions or assessments are as follows:
Reserve for Credit Losses: The Company’s reserve for credit losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio. Arriving at an estimate of the appropriate level of reserve for credit losses (reserve for loan losses and loan commitments) involves a high degree of judgment and assessment of multiple variables that result in a methodology with relatively complex calculations and analysis. Management uses historical information to assess the adequacy of the reserve for loan losses as well as consideration of the prevailing business environment. On an ongoing basis the Company seeks to refine its methodology such that the reserve is responsive to the effect that qualitative and environmental factors have upon the loan portfolio. However, external factors and changing economic conditions may impact the portfolio and the level of reserves in ways currently unforeseen. The reserve is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. For a full discussion of the Company’s methodology of assessing the adequacy of the reserve for credit losses, see "Reserve for Credit Losses" in Management’s Discussion and Analysis of Financial Condition and Results of Operation in the Company’s Annual Report on Form 10K.
Mortgage Servicing Rights (MSRs): Determination of the fair value of MSRs requires the estimation of multiple interdependent variables, the most impactful of which is mortgage prepayment speeds. Prepayment speeds are estimates of the pace and magnitude of future mortgage payoff or refinance behavior of customers whose loans are serviced by the Company. Errors in estimation of prepayment speeds or other key servicing variables could subject MSRs to impairment risk. On a quarterly basis, the Company engages a qualified third party to provide an estimate of the fair value of MSRs using a discounted cash flow model with assumptions and estimates based upon observable market-based data and methodology common to the mortgage servicing market. Management believes it applies reasonable assumptions under the circumstances, however, because of possible volatility in the market price of MSRs, and the vagaries of any relatively illiquid market, there can be no assurance that risk management and existing accounting practices will result in the avoidance of possible impairment charges in future periods. See also “Non-Interest Income” below and footnote 5 of the Condensed Consolidated Financial Statements.
Goodwill and other intangibles: Net assets of entities acquired in purchase transactions are recorded at fair value at the date of acquisition. Identified intangibles are amortized on a straight-line basis over the period benefited. Goodwill is not amortized, although it is reviewed for impairment on an annual basis or if events or circumstances indicate a potential impairment. The impairment test is performed in two phases. The first step is to estimate the fair value of the reporting unit assuming it is sold in an orderly transaction between knowledgeable market participants. If the estimated fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its estimated fair value, an additional procedure must be performed. That additional procedure compares the implied fair value of the reporting unit’s goodwill (as defined in SFAS No. 142, Goodwill and Other Intangible Assets) with the carrying amount of that goodwill. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. Management continues to monitor the Company’s goodwill for potential impairment on an ongoing basis. The Company will perform its annual impairment test effective September 30, 2008. In management’s opinion, no events have occurred that would trigger interim impairment testing.
Highlights and Summary of Performance - Second Quarter of 2008
| · | Second Quarter Loss Per Share: at ($0.12) with net loss of $3.4 million. |
| · | Loan Growth: up 5.5% year-over-year and up slightly from immediately preceding (linked) quarter. |
| · | Customer Relationship Deposits 1: 5.7% lower year-over-year, and 5.1% on a linked-quarter basis. |
| · | Net Interest Margin: decreased to 4.52% vs. 4.68% on a linked-quarter basis. |
| · | Credit Quality: Reserve for Credit Losses increases to a solid 2.22% with provision for credit losses of $18.4 million and net charge-offs of $9.9 million; non-performing assets at $127.1 million or approximately 5.2% of total assets. |
| · | Board of Directors Announces Quarterly Cash Dividend: at $.01 per share to preserve strong capital base. |
The Company reported second quarter 2008 diluted loss per share (EPS-diluted) at $0.12 per share compared to earnings of $0.36 for the year-ago quarter and $0.22 for the linked-quarter. Net loss for the second quarter 2008 was $3.4 million versus net income of $10.2 million a year-ago and $6.0 million for the linked-quarter. Year to date net income is $2.6 million or $0.09 per share. Second quarter 2008 loss includes a $18.4 million (pre-tax) provision for credit losses with net loan charge-offs of $9.9 million (pre-tax). Accordingly, the reserve for credit losses increased to a solid 2.22% of total loans at June 30, 2008, up from 1.83% and 1.43% for the linked and year-ago quarters, respectively. The heightened provision and charge-offs are mainly a result of collateral valuation declines in the residential development loan portfolio and compares to the linked-quarter provision and charge-off levels of $4.5 million and $4.2 million, respectively.
Cascade’s core earnings are presently sufficient to set aside ample reserves while maintaining strong capital levels. In addition, credit quality issues remain manageable and continue to be largely confined within the residential acquisition and development loan portfolio. Our elevated provision for credit losses and charge-offs reflect proactive recognition and valuation adjustments of challenged credits. We remain committed to our strategy of prudently preserving capital and focusing on maintaining strong reserves against possible loan losses. In addition to a $45.8 million reserve for credit losses - which is the primary protection against anticipated loan losses - - the Company’s $163.3 million in tangible capital is a safeguard against future unexpected challenges. Cascade is designated a “well-capitalized” bank according to regulatory guidelines with total risk based capital at 11.13% as of June 30, 2008, exceeding the 10% benchmark by a tax-effected margin of approximately $41.5 million.
1 Customer relationship deposits include core deposit transaction accounts such as checking, money market and savings, while excluding all wholesale or brokered deposits and time deposits greater than $100,000.
Loan growth and credit quality
At June 30, 2008, Cascade’s loan portfolio was $2.07 billion, up 5.5% compared to a year-ago but up only slightly on a linked-quarter basis. Continuing to grow credit-worthy loans to relationship customers remains a key objective in supporting the economy of Cascade’s markets. However, management believes that overall loan growth will likely remain slow until such time as the real estate market runs its course. Because of the nature of its markets, real estate has historically represented a significant portion of the Company’s overall loan portfolio and is frequently a material component of collateral for the Company’s loans.
Cascade’s provision for credit losses was $18.4 million for the second quarter of 2008 bringing the reserve for credit losses to $45.8 million or 2.22% of total loans at period-end, up from 1.83% at year-end 2007 and 1.43% for the year-ago quarter. For the quarter ended June 30, 2008, net loan charge-offs were approximately $9.9 million or 1.93% (annualized) compared to $4.2 million or 0.81% (annualized) for the linked-quarter. Both the heightened provision and higher levels of net charge-offs were in recognition of declining valuations of collateral dependent non-performing and adversely risk rated loans mainly in the residential land acquisition and development portfolio.
Improvement was evident in loans delinquent >30 days which fell to 0.19% of total loans at June 30, 2008, or just $4.1 million compared to 0.43% for the linked-quarter and 0.47% at year-end 2007. Credit risk metrics with respect to the commercial real estate (CRE) and commercial (C&I) portfolios continue to be stable at this time.
Non-performing assets (NPA’s - including non performing loans and other real estate owned) were higher at $127.1 million, or 5.2% of total assets compared to $96.0 million or 4.0% of total assets for the linked-quarter primarily due to ongoing challenges in the Company’s residential land acquisition and development loan portfolio. The increase in NPA’s included residential development projects in Boise, Southern Oregon, and Central Oregon. See accompanying table for distribution of loans and NPA’s by region.
Other real estate owned (OREO) was $33.9 million at June 30, 2008, up from $26.6 million in the prior quarter. During the quarter the Company sold 15 OREO lots, while approximately $9.1 million in residential land development assets were added to OREO at estimated liquidation value. Nearly half of the OREO balance is an occupied Portland commercial building. The existing tenant lease payments largely replace interest income previously received on the underlying loan. The Company carries NPA’s at estimated net realizable value upon liquidation; however, because of the uncertain real estate market, no assurance can be given that the ultimate disposition of such assets will be at or above such value. Interest income reversed on non-performing loans during the quarter ended June 30, 2008, was approximately $0.7 million. The orderly resolution of non-performing loans as well as expedient disposition of OREO properties is a priority for management.
The reserve for credit losses (reserve for loan losses and reserve for unfunded commitments) represents management's recognition of the assumed and present risks of extending credit and the possible inability or failure of the obligors to make repayment. The reserve is maintained at a level considered adequate to provide for losses on loans and unfunded commitments based on management's current assessment of a variety of current factors affecting the loan portfolio. Such factors include loss experience, review of problem loans, current economic conditions, and an overall evaluation of the quality, risk characteristics and concentration of loans in the portfolio. The Company believes its reserve is appropriate as of June 30, 2008, but going forward the reserve may change given the economic and credit situation.
As economic and related credit conditions change, the Company continues to refine its methodology to estimate the appropriate level of reserve for credit losses. In arriving at its estimate as of June 30, 2008, the Company incorporated probability of deterioration (PD) ranges for adversely risk-rated loans within the allocated portion of its reserve. The adopted PD ranges are directionally consistent and correlate with relative loan risk ratings. Accordingly, the metric more responsively affects the level of reserves based upon management’s judgment as to current qualitative and environmental factors within the portfolio. As the Company continues to refine its methodology management expects that the unallocated portion of the reserve will likely decline over time.
Deposit growth
Customer relationship deposits totaled $1.5 billion at June 30, 2008, down 5.7% compared to a year-ago and down 5.1% on a linked-quarter basis. This easing of customer relationship deposits reflects the ongoing economic impact of the slowing real estate activity in the communities served by Cascade. Since the peak in the real estate market, deposits in real estate related business accounts show consistent reduction in average and end of period balances while the number of customers has remained stable. Total deposits (which include jumbo CDs and brokered deposit balances) were $1.6 billion at June 30, 2008, down 11.1% compared to a year-ago and down 4.5% on a linked-quarter basis.
RESULTS OF OPERATIONS – Six Months and Three Months ended June 30, 2008 and 2007
Income Statement
Net Income
Net income decreased $17.1 million (or 86.6%) for the six months and decreased $13.6 million (or 133.3%) for the three months ended June 30, 2008 as compared to the same periods in 2007. These decreases were primarily due to an elevated level of loan loss provisioning for each period presented. Net interest income decreased $4.8 million for the six months and decreased $3.3 million for the quarter ended June 30, 2008, non-interest income was down slightly for both periods, meanwhile non-interest expense increased $2.8 million for the six months and increased $1.2 million for the quarter, primarily due to expenses related to other real estate owned and legal related costs.
Net Interest Income / Net Interest Margin
Second quarter 2008 net interest margin (NIM) was 4.52% compared to 4.68% for the linked-quarter, and 5.34% for the year ago quarter. Approximately one-half of the decline in NIM is a result of interest reversed on non-performing loans during the quarter, while the remaining compression was caused by the effects of sharply lower market interest rates driven by Federal Reserve Bank actions.
Yields on earning assets during the second quarter of 2008 were lower at 6.38% compared to 7.12% in the linked-quarter and down from 8.39% in the year ago quarter. Lower yields were a result of declining short term market rates as well as the effect of interest forgone and reversed on non-performing loans. Lower market rates also advantageously reduced the average cost of funds paid on interest bearing liabilities which fell to 2.37% for the current quarter as compared to 3.13% for the linked-quarter and 4.09% for the year ago quarter. The overall cost of funds (including interest bearing and non-interest bearing deposits) also improved for the second quarter of 2008 to 1.90% as compared to 2.50% in the linked-quarter and 3.13% for the year ago period.
Because one of Cascade’s strengths is its relatively high proportion of non-interest bearing deposits, lower interest rates may modestly compress the Company’s NIM as yields decline against an already low cost of funds. See cautionary “Forward Looking Statements” above and in Cascade’s Form 10-K report for further information on risk factors including interest rate risk.
Components of Net Interest Margin
The following table sets forth for the quarter ended June 30, 2008 and 2007 information with regard to average balances of assets and liabilities, as well as total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant average yields or rates, net interest income, net interest spread, net interest margin and the ratio of average interest-earning assets to average interest-bearing liabilities for the Company (dollars in thousands):
| | Quarter ended June 30, 2008 | | | Quarter ended June 30, 2007 | |
| | | | | Interest | | | Average | | | | | | Interest | | | Average | |
| | Average | | | Income/ | | | Yield or | | | Average | | | Income/ | | | Yield or | |
| | Balance | | | Expense | | | Rates | | | Balance | | | Expense | | | Rates | |
Assets | | | | | | | | | | | | | | | | | | |
Taxable securities | | $ | 81,869 | | | $ | 1,068 | | | | 5.23 | % | | $ | 99,234 | | | $ | 1,367 | | | | 5.53 | % |
Non-taxable securities (1) | | | 5,975 | | | | 71 | | | | 4.77 | % | | | 8,587 | | | | 76 | | | | 3.55 | % |
Interest bearing balances due from FHLB | | | - | | | | - | | | | 0.00 | % | | | 8,502 | | | | 111 | | | | 5.24 | % |
Federal funds sold | | | 1,719 | | | | 10 | | | | 2.33 | % | | | 3,670 | | | | 50 | | | | 5.46 | % |
Federal Home Loan Bank stock | | | 10,961 | | | | 49 | | | | 1.79 | % | | | 6,991 | | | | 10 | | | | 0.57 | % |
Loans (1)(2)(3)(4) | | | 2,058,327 | | | | 33,168 | | | | 6.46 | % | | | 1,949,480 | | | | 41,811 | | | | 8.60 | % |
Total earning assets/interest income | | | 2,158,851 | | | | 34,366 | | | | 6.38 | % | | | 2,076,464 | | | | 43,425 | | | | 8.39 | % |
Reserve for loan losses | | | (35,880 | ) | | | | | | | | | | | (24,394 | ) | | | | | | | | |
Cash and due from banks | | | 18,687 | | | | | | | | | | | | 37,615 | | | | | | | | | |
Premises and equipment, net | | | 37,571 | | | | | | | | | | | | 36,816 | | | | | | | | | |
Bank-owned life insurance | | | 33,674 | | | | | | | | | | | | 32,334 | | | | | | | | | |
Accrued interest and other assets | | | 199,605 | | | | | | | | | | | | 165,138 | | | | | | | | | |
Total assets | | $ | 2,412,508 | | | | | | | | | | | $ | 2,323,973 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | | | | | | | | | | | | | | | | | |
Interest bearing demand deposits | | $ | 888,895 | | | | 3,934 | | | | 1.78 | % | | $ | 842,043 | | | | 7,339 | | | | 3.50 | % |
Savings deposits | | | 37,016 | | | | 35 | | | | 0.38 | % | | | 41,683 | | | | 51 | | | | 0.49 | % |
Time deposits | | | 302,359 | | | | 2,469 | | | | 3.28 | % | | | 371,100 | | | | 4,374 | | | | 4.73 | % |
Other borrowings and F&M Holdback | | | 466,901 | | | | 3,576 | | | | 3.07 | % | | | 293,579 | | | | 4,012 | | | | 5.48 | % |
Total interest bearing liabilities/interest expense | | | 1,695,171 | | | | 10,014 | | | | 2.37 | % | | | 1,548,405 | | | | 15,776 | | | | 4.09 | % |
Demand deposits | | | 414,130 | | | | | | | | | | | | 474,598 | | | | | | | | | |
Other liabilities | | | 21,123 | | | | | | | | | | | | 29,533 | | | | | | | | | |
Total liabilities | | | 2,130,424 | | | | | | | | | | | | 2,052,536 | | | | | | | | | |
Stockholders' equity | | | 282,084 | | | | | | | | | | | | 271,437 | | | | | | | | | |
Total liabilities and stockholders' equity | | $ | 2,412,508 | | | | | | | | | | | $ | 2,323,973 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income | | | | | | $ | 24,352 | | | | | | | | | | | $ | 27,649 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net interest spread | | | | | | | | | | | 4.02 | % | | | | | | | | | | | 4.30 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income to earning assets | | | | | | | | | | | 4.52 | % | | | | | | | | | | | 5.34 | % |
(1) | Yields on tax-exempt municipal loans and securities have been stated on a tax-equivalent basis. |
(2) | Average non-accrual loans included in the computation of average loans was approximately $81,000 for 2008 and $6,736 for 2007. |
(3) | Loan related fees recognized during the period and included in the yield calculation totalled approximately $900 in 2008 and $1,471 in 2007. |
(4) | Includes mortgage loans held for sale. |
Analysis of Changes in Interest Income and Expense
The following table shows the dollar amount of increase (decrease) in the Company’s consolidated interest income and expense for the quarter ended June 30, 2008, and attributes such variance to “volume” or “rate” changes. Variances that were immaterial have been allocated equally between rate and volume categories (dollars in thousands):
| | 2008 compared to 2007 | |
| | Total | | | Amount of Change | |
| | Increase | | | Attributed to | |
| | (Decrease) | | | Volume | | | Rate | |
Interest income: | | | | | | | | | |
Interest and fees on loans | | $ | (8,643 | ) | | $ | 2,334 | | | $ | (10,977 | ) |
Investments and other | | | (416 | ) | | | (394 | ) | | | (22 | ) |
Total interest income | | | (9,059 | ) | | | 1,940 | | | | (10,999 | ) |
Interest expense: | | | | | | | | | | | | |
Interest on deposits: | | | | | | | | | | | | |
Interest bearing demand | | | (3,405 | ) | | | 408 | | | | (3,813 | ) |
Savings | | | (16 | ) | | | (6 | ) | | | (10 | ) |
Time deposits | | | (1,905 | ) | | | (810 | ) | | | (1,095 | ) |
Other borrowings | | | (436 | ) | | | 2,369 | | | | (2,806 | ) |
Total interest expense | | | (5,762 | ) | | | 1,961 | | | | (7,724 | ) |
Net interest income | | $ | (3,297 | ) | | $ | (21 | ) | | $ | (3,275 | ) |
Loan Loss Provision
At June 30, 2008, the reserve for credit losses (reserve for loan losses and loan commitments) was 2.22% of outstanding loans, as compared to 1.43% for the year ago period. The loan loss provision was $22.9 million for the six months and $18.4 million for the three months ended June 30, 2008. At this date, management believes that its reserve for credit losses is at an appropriate level under current circumstances and prevailing economic conditions. For further discussion, see “Critical Accounting Policies - - Reserve for Credit Losses” above. There can be no assurance that the reserve for credit losses will be sufficient to cover actual loan related losses. See “Highlights – Loan Growth and Credit Quality” above for further discussion.
Non-Interest Income
Non-interest income decreased 2.8% for the six months and decreased 5.0% for the quarter ended June 30, 2008 compared to the year ago periods. Although service charges increased slightly in both periods presented, most all other categories experienced decreases. Residential mortgage originations totaled $36.3 million for the current quarter, down 17.5% from $44.0 million from the linked-quarter and down 29.5% from the year-ago period. Related net mortgage revenue was $0.6 million in the second quarter of 2008, relatively flat from the linked-quarter and year-ago periods. Note that the Company has focused on originating conventional mortgage products throughout its history while purposefully avoiding sub-prime / option-ARM type products. As a result, the delinquency rate within Cascade’s $511 million portfolio of serviced residential mortgage loans is only 0.47%, notably below the national mortgage delinquency rate of 6.35% at June 30, 2008.
Non-Interest Expense
Non-interest expense for the six months was up 8.9% year-over-year but down 3.5% on a linked quarter basis. The 2008 increase was mainly due to higher OREO and related legal costs. Management anticipates that aside from possible OREO related charges, non interest expense growth should be very modest for the balance of 2008. The Company has seen a reduction in FTE headcount in tandem with slowing volumes. FTE was 511 at June 30, 2008, compared to 525 at March 31, 2008, and 559 at year-end 2007.
Income Taxes
Income tax expense decreased 98.6% for the six months and decreased 140.7% for the three months ended June 30, 2008 compared to the year ago periods, primarily as a result of lower pre-tax income. The Company’s effective income tax rate of 5.9% for the six months ended June 30, 2008, is primarily related to the effects of nontaxable interest income and tax credits in proportion to the Company’s income before income taxes.
Financial Condition
Balance Sheet Overview
At June 30, 2008 total assets increased 1.8% to $2.4 billion compared to $2.3 billion at December 31, 2007, primarily due to an increase in loans and OREO. This growth was funded primarily by an increase in federal funds purchased and other borrowings. The increase in borrowings was also a result of lower deposit balances (primarily interest bearing demand) related to the slowing of the real estate economy.
The Company had no material off balance sheet derivative financial instruments as of June 30, 2008 and December 31, 2007.
Capital Resources
The Company’s total stockholders’ equity at June 30, 2008 was $272.5 million, a decrease of $2.8 million from December 31, 2007. The decrease primarily resulted from net income for the six months ended June 30, 2008 of $2.6 million, less cash dividends paid to shareholders of $5.6 million during the same period. In addition, at June 30, 2008 the Company had accumulated other comprehensive income of approximately $.1 million.
The Company and Bank continue to exceed the regulatory benchmarks for ‘well capitalized’ institutions. At June 30, 2008, the Company’s Tier 1 and total risked-based capital ratios were 9.88% and 11.13%, respectively. The FRB’s minimum risk-based capital ratio guidelines for Tier 1 and total capital are 4% and 8%, respectively.
From time to time the Company may determine that it is appropriate to raise additional capital to maintain an appropriate level of capital, improve its financial condition, or to take advantage of possible future opportunities. The ability to raise capital may depend upon market and economic circumstances. Accordingly no assurance can be given that possible capital transactions will be available or will be available on terms that are favorable to the Company. In the case of equity financings, dilution to the Company’s shareholders could result while debt financing could also negatively affect future earnings due to interest charges.
Off-Balance Sheet Arrangements
A summary of the Bank’s off-balance sheet commitments at June 30, 2008 and December 31, 2007 is included in the following table (dollars in thousands):
| | June 30, 2008 | | | December 31, 2007 | |
| | | | | | |
Commitments to extend credit | | $ | 609,824 | | | $ | 669,336 | |
Commitments under credit card lines of credit | | | 29,986 | | | | 30,490 | |
Standby letters of credit | | | 16,975 | | | | 27,602 | |
| | | | | | | | |
Total off-balance sheet financial instruments | | $ | 656,785 | | | $ | 727,428 | |
Liquidity and Sources of Funds
Bancorp is a holding company and its primary sources of liquidity are the dividends received from the Bank. Banking regulations may limit the amount of the dividend that the Bank may pay to the Bancorp. In addition, Bancorp receives cash from the exercise of incentive stock options and the issuance of trust preferred securities. As of June 30, 2008, Bancorp did not have any borrowing arrangements of its own. If the Company desires to raise funds in the future management may consider engaging in further offerings of trust preferred securities, debentures or other borrowings as well as issuance of capital stock.
The objective of the Bank’s liquidity management is to maintain ample cash flows to meet obligations for depositor withdrawals, fund the borrowing needs of loan customers, and to fund ongoing operations. Core relationship deposits are the primary source of the Bank’s liquidity. As such, the Bank focuses on deposit relationships with local business and consumer clients who maintain multiple accounts and services at the Bank. Management views such deposits as the foundation of its long-term liquidity because it believes such core deposits are more stable and less sensitive to changing interest rates and other economic factors compared to large time deposits or wholesale purchased funds. The Bank’s customer relationship strategy has resulted in a relatively higher percentage of its deposits being held in checking and money market accounts, and a lesser percentage in time deposits. Over the past several quarters customer relationship deposits have declined in tandem with the slowing economy. Accordingly the Bank has increased its overall use of wholesale funding sources and anticipates that such will be the case until the economy rebounds.
A further source of funds and liquidity is the Bank’s capability to borrow from reliable counterparties. Borrowings may be used on a long or short-term basis to compensate for reduction in other sources of funds or on a long term basis to support lending activities. The Bank utilizes its investment securities, certain loans and FHLB Stock to provide collateral to support its borrowing needs. Diversified and reliable sources of wholesale funds are utilized to augment core deposit funding. Policy requires the analysis and testing of such sources to ensure ample cash flow is available under a range of circumstances. Management believes that its focus on core relationship deposits coupled with access to borrowing through reliable counterparties provides reasonable and prudent assurance that ample liquidity is available. However, depositor or counterparty behavior could change in response to competition, economic or market situations or other unforeseen circumstances, which could have liquidity implications that may require different strategic or operational actions. One source of wholesale funding is brokered deposits. At June 30, 2008, such deposits totaled approximately $39.1 million compared to $24.7 million at December 31, 2007.
The Bank’s primary counterparty for borrowing purposes is the FHLB. At June 30, 2008, the FHLB had extended the Bank a secured line of credit of $841.3 million that may be accessed for short or long-term borrowings given sufficient qualifying collateral. As of June 30, 2008, the Bank had qualifying collateral pledged for FHLB borrowings totaling $334.4 million. The Bank also had $102.0 million in borrowing availability from the FRB that requires specific qualifying collateral. In addition, the Bank maintained unsecured lines of credit totaling $105.0 million for the purchase of funds on a short-term basis from several commercial bank counterparties. Borrowing capacity may fluctuate based upon collateral and other factors. At June 30, 2008, the Bank had remaining available borrowing capacity on its aggregate lines of credit totaling $576.2 million given sufficient collateral.
Liquidity may be affected by the Bank’s routine commitments to extend credit. Historically a significant portion of such commitments (such as lines of credit) have expired or terminated without funding. In addition, more than one-third of total commitments pertain to various construction projects. Under the terms of such construction commitments, completion of specified project benchmarks must be certified before funds may be drawn. At June 30, 2008, the Bank had approximately $656.8 million in outstanding commitments to extend credit, compared to approximately $727.4 million at year-end 2007. At this time, management believes that the Bank’s available resources will be sufficient to fund its commitments in the normal course of business.
Inflation
The effect of changing prices on financial institutions is typically different than on non-banking companies since virtually all of a bank's assets and liabilities are monetary in nature. In particular, interest rates are significantly affected by inflation, but neither the timing nor magnitude of the changes are directly related to price level indices; therefore, the Company can best counter inflation over the long term by managing net interest income and controlling net increases in noninterest income and expenses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosures in this item are qualified by the Risk Factors set forth in Item 1A and the Section entitled “Cautionary Information Concerning Forward-Looking Statements” included in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report and any other cautionary statements contained herein.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedure
As required by Rule 13a-15 under the Exchange Act of 1934, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. This evaluation was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer. Based upon that evaluation at the time of the original filing, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
As discussed in the Explanatory Note to this Amended Report we have restated the interim period financial statements in connection with an increase in the balance for the reserve for loan losses, and a corresponding increase in loan loss provision that were deemed to have existed as of June 30, 2008 in the amount of approximately $5.8 million (pretax). The restatement relates to managements’ discovery of a material miscalculation within its loan data extract software program specifically with respect to the treatment of classified loans that have been partially participated to other financial institutions. As a result, management concluded subsequent to the original filing that the Company’s disclosure controls and procedures related to the reserve for loan losses were not effective at June 30, 2008.
In connection with the restatement described above, on December 31, 2008, the Audit Committee of the Board of Directors met to discuss the facts and circumstances related to the identification and correction of the miscalculation. The Committee reviewed an assessment and related information from management and from the internal risk manager. The Committee examined and evaluated the system of controls taken as a whole with respect to the miscalculation related to the reserve for loan losses and determined that it was an isolated incident within the software program. The Company has now fixed the error and in addition, in its normal year end validation of the software program and related processes for calculating the reserve for loan losses the Company will consider, assess and implement such additional software assurance tests or analytic procedures deemed necessary to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements effective December 31, 2008 and for each period thereafter.
Changes in Internal Controls
Other than as discussed above, during the second quarter of 2008 the Company had no changes to identified internal controls that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1A. RISK FACTORS
Please see “Item 1A. Risk Factors” of our 2007 Annual Report on Form 10-K for discussion of risks that may affect our business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 2008, the Company did not repurchase any shares under its currently authorized repurchase plan and does not expect to engage in repurchase for the foreseeable future. As of June 30, 2008, the Company could repurchase up to an additional 1,423,526 shares under this repurchase plan.
ITEM 6. EXHIBITS
(a) | Exhibits | |
| 31.1 | Certification of Chief Executive Officer |
| 31.2 | Certification of Chief Financial Officer |
| 32 | Certification Pursuant to Section 906 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report on Form 10-Q/A to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | CASCADE BANCORP |
| | | | (Registrant) |
| | | | |
Date | 1/2/2009 | | By | /s/ Patricia L. Moss |
| | | | Patricia L. Moss, President & CEO |
| | | | |
Date | | | By | /s/ Gregory D. Newton |
| | | | Gregory D. Newton, EVP/Chief Financial Officer |