The following table shows the dollar amount of increase (decrease) in the Company’s consolidated interest income and expense for the quarter ended September 30, 2005, 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):
At September 30, 2005, the reserve for losses on loans and loan commitments was 1.45% of outstanding loans, as compared to 1.48% for the year ago period. The loan loss provision was $1,150,000 in the third quarter of 2005 compared to $1,200,000 for the year earlier period. Provision expense is determined by the Company’s ongoing analytical and evaluative assessment of the adequacy of the loan loss reserve. This assessment reflects a continued sound credit quality profile, with low delinquent loans, modest net loan charge-offs and stable non-performing assets. At this date, management believes the reserve is at an appropriate level under current circumstances and prevailing economic conditions.
Non-interest income decreased 0.2% for the nine months and increased 11.1% for the quarter ended September 30, 2005 as compared to the same periods in 2004. Service charge income decreased in both periods primarily due to proportionately lower customer utilization of overdraft protection products than in the year ago periods. The decrease for the nine-month periods was primarily due to a gain on sale of investment securities recorded in the year ago period as well as lower year-over-year net mortgage revenue, partially offset by a gain on sale of other real estate owned recorded in the third quarter of 2005.
The Company originated $47.9 million in residential mortgages during the quarter ended September 30, 2005, compared to $33.3 million for the year ago quarter and $39.2 million for the immediately preceding quarter. As expected, declining volumes and narrower margins have caused mortgage revenue to fall as a percent of total revenue. In the event of further interest rate increases, mortgage origination volumes and revenues could continue to soften.
Generally accepted accounting principles call for MSRs to be carried at the lower of origination value less accumulated amortization (book value) or fair value. At September 30, 2005, the Company serviced $501.3 million in mortgage loans on behalf of its customers, representing approximately 3,900 mortgage loans. The Company’s MSRs had a book value of $4.5 million compared to a fair value of approximately $5.2 million. Thus, there was no MSR valuation adjustment for the current quarter. At September 30, 2005, expressed as a percentage of loans serviced, the book value of MSR was .90% of serviced mortgage loans, while fair value was approximately 1.04% of serviced mortgages. Fair value as a percentage of loans serviced was estimated at 1.04% at December 31, 2004, and 1.03% a year ago.
Non-interest expense increased 15.1% for the nine months and 15.4% for the quarter ended September 30, 2005, compared to the same periods in 2004. Expense increases were primarily due to increased staffing, salaries and incentive compensation related to the strong growth in business volumes.
Income Taxes
Income tax expense increased between the periods presented primarily as a result of higher pre-tax income. The Company recorded a year-to-date corporate state tax credit in the third quarter of 2005 reducing the effective tax rate to 33.8% and anticipates a reduced rate in the fourth quarter of 2005, before returning to a normal rate beginning January 1, 2006.
FINANCIAL CONDITION
Assets continued to increase in the third quarter of 2005 with total assets increasing 34.6% to $1.4 billion at September 30, 2005 compared to $1.0 billion at December 31, 2004. The majority of the increase is attributable to net loans, which increased 18.8% to $1.0 billion at September 30, 2005 and a $100 million short-term deposit. Loan growth during the nine-month period was primarily funded by increased deposits, which increased $302.1 million to $1.2 billion. Total deposits at September 30, 2005, included the $100 million attributable to a large overnight deposit that had been disbursed subsequent to quarter-end. The investment portfolio increased 21.4% to $57.2 million from $47.1 at year-end 2004.
The Company had no material off balance sheet derivative financial instruments as of September 30, 2005 and December 31, 2004.
LIQUIDITY AND SOURCES OF FUNDS
The objective of 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. The Bank has no brokered deposits at this time. The Bank’s present funding mix is diverse, with approximately 73% of its checking account balances arising from business and public accounts and 27% from consumers. The composition of money market and interest-bearing demand accounts was 43% business and 57% consumer. During the periods presented, deposit growth has generally been sufficient to fund increases in loans. Management invests excess funds in short-term and overnight money market instruments.
A further source of funds and liquidity is the Company’s capability to borrow from reliable counterparties. The Bank utilizes its investment securities, certain loans, FHLB Stock and certain deposits to provide collateral to support its borrowing needs.
Policy requires the analysis and testing of liquidity 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 including relative returns available in stock or bond markets or other unforeseen circumstances, which could have liquidity implications that may require different strategic or operational actions.
The Bank’s primary counterparty for borrowing purposes is the Federal Home Loan Bank (FHLB). At September 30, 2005, the FHLB had extended the Bank a secured line of credit of $203.2 million that may be accessed for short or long-term borrowings given sufficient qualifying collateral. The Bank also had $30.6 million in short-term borrowing availability from the Federal Reserve Bank that requires specific qualifying collateral. In addition, the Bank maintained unsecured lines of credit totaling $31.5 million for the purchase of funds on a short-term basis from several commercial bank counterparties. At September 30, 2005, the Bank had aggregate remaining available borrowing sources totaling $196.0 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 30% 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 September 30, 2005 the Bank had approximately $437.8 million in outstanding commitments to extend credit, compared to approximately $324.8 million at year-end 2004. Management believes that the Bank’s available resources will be sufficient to fund its commitments in the normal course of business.
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Junior Subordinated Debentures and Other Borrowings
In December 2004, the Company established a subsidiary grantor trust (Cascade Bancorp Trust I) (the Trust), which issued $20 million of trust preferred securities (the TPS). The TPS are subordinated to any other borrowings of the Company and are due and payable on March 15, 2035. The TPS pay quarterly interest at the 3-month London Inter-Bank Offered Rate (LIBOR) plus 1.80%. The Trust used the proceeds received from the issuance of the TPS to purchase $20 million of junior subordinated debentures (the Debentures) of the Company. The Debentures were issued with substantially the same terms as the TPS and are the sole assets of the Trust. The Company’s obligations under the Debentures and related agreements, taken together, constitute a full and irrevocable guarantee by the Company of the obligations of the Trust. The TPS are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the Indenture related to the Debentures. The TPS may be called by the Company at par at any time subsequent to March 15, 2010, and may be redeemed earlier upon the occurrence of certain events that impact the income tax or the regulatory capital treatment of the TPS. Upon establishment of the Trust, the Company also purchased a 3% minority interest in the Trust totaling $619,000. In accordance with industry practice, as of September 30, 2005, such amount has been included with the Debentures in the Company’s condensed consolidated balance sheet. The Company’s December 31, 2004, consolidated balance has been retroactively restated to conform with this presentation. Management believes that as of December 31, 2004, the TPS meet applicable regulatory guidelines to qualify as Tier 1 capital.
At September 30, 2005 the Bank had a total of approximately $66.3 million in long-term borrowings from FHLB with maturities from 2005 to 2025, bearing a weighted-average interest rate of 3.95%. In addition, at September 30, 2005, the Bank had approximately $3.0 million in short-term borrowings with FRB. At year-end 2004, the Bank had a total of $29.7 million in long-term borrowings from FHLB bearing a weighted-average interest rate of 3.31%, and short-term borrowings with FRB of approximately $6.9 million. See “Liquidity and Sources of Funds” section on page 18 for further discussion.
CAPITAL RESOURCES
The Company’s total stockholders’ equity at September 30, 2005 was $98.9 million, an increase of $12.5 million from December 31, 2004. The increase resulted from net income for the nine months ended September 30, 2005 of $15.6 million, less cash dividends paid to shareholders of $4.0 million during the same period. In addition, at September 30, 2005 the Company had accumulated other comprehensive income of approximately $.7 million.
At September 30, 2005, the Company’s Tier 1 and total risked-based capital ratios under the Federal Reserve Board’s (“FRB”) risk-based capital guidelines were 9.54% and 10.83%, respectively. The FRB’s minimum risk-based capital ratio guidelines for Tier 1 and total capital are 4% and 8%, respectively.
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises principally from interest rate risk in its lending, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Management considers interest rate risk to be a significant market risk, which could have the largest material effect on the Company’s financial condition and results of operations.
There has not been any material change in the market risk disclosure contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
Item 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company required to be included in our reports filed or submitted under the Securities Exchange Act of 1934, as amended.
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Changes in Internal Controls
Since the Evaluation Date, there have not been any significant changes in our internal controls or in other factors that could significantly affect such controls.
PART II - OTHER INFORMATION
Item 6. | Exhibits and Reports on Form 8-K |
| (a) | Exhibits |
| | |
| | 31.1 Certification of Chief Executive Officer |
| | 31.2 Certification of Chief Financial Officer |
| | 32 Certification Pursuant to Section 906 |
| | |
| (b) | Reports on Form 8-K |
| | |
| | The Company filed a report on Form 8-K on October 11, 2005 in regards to release of the Company’s third quarter earnings. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CASCADE BANCORP |
| (Registrant) |
| | |
Date 11/4/2005 | By | /s/ Patricia L. Moss |
| |
|
| | Patricia L. Moss,
President & CEO |
| | |
| | |
Date 11/4/2005 | By | /s/ Gregory D. Newton |
| |
|
| | Gregory D. Newton,
EVP/Chief Financial Officer |
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