SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(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, 1999
--------------
/ / 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
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CASCADE BANCORP
(Exact name of Registrant as specified in its charter)
Oregon 93-1034484
(State of Incorporation) (I.R.S. Employer Identification No.)
1100 NW 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
--- ---
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. 6,865,999 shares
----------------
of no par value Common Stock on August 5, 1999.
- -----------------------------------------------
CASCADE BANCORP AND SUBSIDIARIES
FORM 10-Q
QUARTERLY REPORT
JUNE 30, 1999
INDEX
PART I: FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Condensed Consolidated Balance Sheets
as of June 30, 1999 and December 31, 1998. . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income
for the six months and three months ended June 30, 1999 and 1998. . . . .4
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the six months ended June 30, 1999 and 1998. . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and 1998. . . . . . . . . . . . .6
Notes to Condensed Consolidated Financial Statements. . . . . . . . . . . .7
Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . .11
PART II: OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . .15
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 15
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2
CASCADE BANCORP & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(Unaudited)
1999 1998
------------ ------------
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 25,555,767 $ 18,388,900
Federal funds sold 9,900,000 8,450,000
------------ ------------
Total cash and cash equivalents 35,455,767 26,838,900
Investment securities available-for-sale 37,478,150 48,012,491
Investment securities held-to-maturity 2,688,544 2,938,489
Loans, net 253,050,076 202,543,262
Mortgage loans held for sale 1,622,843 2,119,642
Premises and equipment, net 7,393,868 5,984,501
Accrued interest and other assets 12,867,853 12,337,131
------------ ------------
Total assets $350,557,101 $300,774,416
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $129,935,254 $115,532,163
Interest bearing demand 122,279,407 109,580,561
Savings 15,824,467 14,940,897
Time deposits 33,500,147 30,809,110
------------ ------------
Total deposits 301,539,275 270,862,731
Borrowings from Federal Home Loan Bank 19,000,000 -
Accrued interest and other liabilities 2,378,229 2,990,003
------------ ------------
Total liabilities 322,917,504 273,852,734
Stockholders'equity:
Common stock, no par value;
10,000,000 shares authorized;
6,847,491 issued and outstanding
(6,226,082-1998) 17,712,746 9,545,545
Retained earnings 10,248,425 17,218,415
Accumulated other comprehensive income (321,574) 157,722
------------ ------------
Total stockholders' equity 27,639,597 26,921,682
------------ ------------
Total liabilities and stockholders'
equity $350,557,101 $300,774,416
============ ============
See accompanying notes.
3
CASCADE BANCORP & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS AND THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
SIX MONTHS ENDED
THREE MONTHS ENDED
1999 1998 1999 1998
----------- ---------- ---------- ----------
Interest income:
Interest and fees on loans $11,808,679 $8,884,618 $6,283,247 $4,660,307
Taxable interest on investments 1,398,468 1,312,036 676,643 619,876
Nontaxable interest on investments 27,067 20,521 12,658 8,804
Interest on federal funds sold 37,214 125,441 18,446 64,530
----------- ---------- ---------- ----------
Total interest income 13,271,428 10,342,616 6,990,994 5,353,517
Interest expense:
Deposits:
Interest bearing demand 1,728,272 1,661,867 881,294 839,430
Savings 151,456 145,596 77,820 73,848
Time 775,674 593,971 388,412 313,011
Other borrowings 341,614 52,708 214,663 12,280
---------- ---------- --------- ----------
Total interest expense 2,997,016 2,454,142 1,562,189 1,238,569
---------- ---------- --------- ----------
Net interest income 10,274,412 7,888,474 5,428,805 4,114,948
Loan loss provision 1,105,947 368,319 734,385 284,458
---------- ---------- --------- ----------
Net interest income after loan loss provision 9,168,465 7,520,155 4,694,420 3,830,490
Noninterest income:
Service charges on deposit accounts 1,170,474 961,871 603,592 493,010
Mortgage loan origination and processing fees 707,657 942,740 342,873 517,418
Gains (losses) on sales of mortgage loans (166,741) 72,600 (113,867) 90,687
Losses on sale of investment securities
available-for-sale (2,494) - (2,494) -
Other income 1,039,797 731,267 539,581 390,613
----------- ---------- ---------- ----------
Total noninterest income 2,748,693 2,708,478 1,369,685 1,491,728
Noninterest expense:
Salaries and employee benefits 4,173,280 3,297,957 2,112,801 1,700,027
Net occupancy & equipment 1,098,074 840,915 552,879 451,177
Other expenses 1,943,421 1,730,875 955,398 895,230
----------- ---------- ---------- ----------
Total noninterest expense 7,214,775 5,869,747 3,621,078 3,046,434
----------- ---------- ---------- ----------
Income before income taxes 4,702,383 4,358,886 2,443,027 2,275,784
Provision for income taxes 1,779,522 1,640,541 936,507 836,660
----------- ---------- ---------- ----------
Net income $2,922,861 $2,718,345 $1,506,520 $1,439,124
=========== ========== ========== ==========
Basic net income per common share $ 0.43 $ 0.40 $ 0.22 $ 0.21
=========== ========== ========== ==========
Diluted net income per common share $ 0.42 $ 0.38 $ 0.22 $ 0.20
=========== ========== ========== ==========
See accompanying notes.
4
CASCADE BANCORP & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE RETAINED COMPREHENSIVE COMMON STOCKHOLDERS'
INCOME EARNINGS INCOME (LOSS) STOCK EQUITY
------------- ------------ ------------ ------------ -------------
Balance at December 31, 1997 $ 13,568,644 $ 302,765 $ 10,365,015 $ 24,236,424
Comprehensive Income:
Net Income $ 2,718,345 2,718,345 - - 2,718,345
Other comprehensive income, net of tax
Unrealized gains on securities
available-for-sale (62,798) - (62,798) - (62,798)
-------------
Comprehensive income $ 2,655,547
=============
Cash dividend declared in January 1998 (496,966) - - (496,966)
($0.07 per common share)
Cash dividend declared in May 1998 (498,061) - - (498,061)
($0.07 per common share)
Repurchases of common stock - - (759,879) (759,879)
(45,170 shares)
Stock options exercised (13,275 shares) - - 33,101 33,101
------------ ----------- ------------ -------------
Balance at June 30, 1998 $ 15,291,962 $ 239,967 $9,638,237 $ 24,296,166
============ =========== ============ =============
Balance at December 31, 1998 $ 17,218,415 $ 157,722 $9,545,545 $ 26,921,682
Comprehensive Income:
Net Income $2,922,861 2,922,861 - - 2,922,861
Other comprehensive income, net of tax
Unrealized gains on securities
available-for-sale (479,296) - (479,296) - (479,296)
----------
Comprehensive income $2,443,565
==========
Cash dividend declared in January 1999 (561,459) - - (561,459)
($0.08 per common share)
Cash dividend declared in March 1999 (560,382) - - (560,382)
($0.08 per common share)
10% Stock dividend declared in June 1999 (8,771,010) - 8,771,010 -
Repurchases of common stock - - (834,583) (834,583)
(55,990 shares)
Stock options exercised (54,791) - - 230,774 230,774
------------ ----------- ------------ ------------
Balance at June 30, 1999 $ 10,248,425 $ (321,571) $ 17,712,746 $ 27,639,597
============ ============ ============ ============
See accompanying notes.
5
CASCADE BANCORP & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
1999 1998
------------- -------------
Net cash provided by operating activities $ 4,130,208 $ 1,450,153
Investing activities:
Proceeds from maturities and calls of
investment securities available-for-sale 9,099,554 7,985,000
Proceeds from sales of investment securities
available for sale 633,265 -
Purchases of investment securities
held-to-maturity (88,136) (56,100)
Proceeds from maturities and calls of
Investment scurities held-to-maturity 334,802 174,873
Net increase in loans (51,779,502) (23,504,996)
Purchases of premises and equipment, net (1,664,218) (487,280)
------------- ------------
Net cash used in investing activities (43,464,235) (15,888,503)
Financing activities:
Net increase in deposits 30,676,544 23,630,340
Cash dividends (1,121,841) (995,027)
Repurchases of stock (834,583) (759,879)
Proceeds from issuance of stock 230,774 33,101
Net increase (decrease) in other borrowings 19,000,000 (5,000,000)
------------- ------------
Net cash provided by financing activities 47,950,894 16,908,535
------------- ------------
Net decrease in cash and cash equivalents 8,616,867 2,470,185
Cash and cash equivalents at beginning of period 26,838,900 29,553,706
------------- ------------
Cash and cash equivalents at end of period $ 35,455,767 $ 32,023,891
============= =============
See accompanying notes.
6
CASCADE BANCORP & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements include the
accounts of Cascade Bancorp (Bancorp), a bank holding company, and its
wholly-owned subsidiaries, Bank of the Cascades (the Bank) and Cascade
Finance, (collectively, "the Company"). The Bank is an Oregon state-chartered,
federally insured commercial bank and Cascade Finance is a consumer finance
company. All significant intercompany accounts and transactions
have been eliminated in consolidation.
The interim condensed consolidated financial statements are
unaudited, but include all adjustments, consisting of only normal accruals,
which the Company considers necessary for a fair presentation of the
results of operations for such interim periods. 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 balance sheet data as of December 31, 1998 was derived
from audited financial statements, but does not include all disclosures
contained in the Company's 1998 Annual Report to Shareholders.
The interim condensed consolidated financial statements
should be read in conjunction with the December 31, 1998 consolidated financial
statements, including the notes thereto, included in the Company's 1998
Annual Report to Shareholders.
Certain amounts for 1998 have been reclassified to conform
with the 1999 presentation.
2. INVESTMENT SECURITIES
Investment securities at June 30, 1999 and December 31, 1998
consisted of the following:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
JUNE 30, 1999 COST GAINS LOSSES FAIR VALUE
- ------------------------------ ------------ --------- --------- ------------
Available-for-Sale
- ------------------
U.S. Government and
Agency securitiess......... $ 23,536,676 $ 29,928 $ 134,284 $ 23,432,320
Mortgage-backed securities.... 9,935,063 3,494 192,896 9,745,661
U.S. Treasury securities...... 1,997,236 42,764 - 2,040,000
Equity securities............. 2,527,843 - 267,674 2,260,169
------------ --------- --------- ------------
$ 37,996,818 76,186 $ 594,854 $ 37,478,150
============ ========= ========= ============
Held-to-Maturity
- ----------------
Obligations of state and
political subdivisions..... $ 1,071,444 $ 20,587 $ 3,692 $ 1,088,339
Other......................... 1,617,100 - - 1,617,100
------------ --------- --------- ------------
$ 2,688,544 $ 20,587 $ 3,692 $ 2,705,439
============ ========= ========= ============
7
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
DECEMBER 31, 1998 COST GAINS LOSSES FAIR VALUE
- ------------------------------ ------------ --------- --------- ------------
Available-for-Sale
- ------------------
U.S. Government and
Agency securitiess......... $ 26,538,402 $ 318,438 $ 7,350 $ 26,849,490
Mortgage-backed securities.... 15,064,132 29,777 202,794 14,891,115
U.S. Treasury securities...... 2,995,217 113,783 - 3,109,000
Equity securities............. 2,529,512 2,724 - 2,532,236
Corporate debt securities.. 632,505 - 1,855 630,650
------------ --------- --------- ------------
$ 47,759,768 464,722 $ 211,999 $ 48,012,491
============ ========= ========= ============
Held-to-Maturity
- ----------------
Obligations of state and
political subdivisions..... $ 1,409,525 $ 17,393 $ 3,555 $ 1,423,363
Other......................... 1,528,964 - - 1,528,964
------------ --------- --------- ------------
$ 2,938,489 $ 17,393 $ 3,555 $ 2,952,327
============ ========= ========= ============
3. LOANS AND RESERVE FOR LOAN LOSSES
The composition of the loan portfolio at June 30, 1999 and
December 31, 1998 was as follows:
1999 1998
----------- ------------
Commercial.................... $ 37,681,841 $ 31,279,762
Real Estate:
Construction............... 51,855,403 44,874,991
Mortgage................... 44,710,913 36,670,954
Commercial................. 92,638,943 70,524,183
Installment................... 30,729,966 22,693,633
------------ ------------
257,617,066 206,043,523
Less:
Reserve for loan losses.... 3,391,373 2,635,820
Deferred loan fees......... 1,175,617 864,441
------------ ------------
4,566,990 3,500,261
------------ ------------
Loans, net ................... $253,050,076 $202,543,262
============ ============
Mortgage loans held for sale of $1,622,843 and $2,119,642 at
June 30, 1999 and December 31, 1998, respectively, represent real
estate mortgage loans. These loans are recorded at cost which approximates
market.
Transactions in the reserve for loan losses for the three
months ended June 30, 1999 and 1998 were as follows:
1999 1998
------------ ------------
Balance at beginning of period... $ 2,635,820 $ 2,048,561
Provisions charged to operations. 1,105,947 368,319
Recoveries of loans previously
charged off.................... 77,756 56,036
Loans charged off................ (428,150) (139,725)
------------ ------------
Balance at end of period......... $ 3,391,373 $ 2,333,191
============ ============
8
The reserve for loan losses represents management's
recognition of the assumed risks of extending credit and the quality of the
existing loan portfolio. The reserve is maintained at a level considered
adequate to provide for potential loan losses based on management's
assessment of various factors affecting the 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 reserve is increased by provisions charged to
operations and reduced by loans charged-off, net of recoveries.
The Bank manages the general risks inherent in the loan
portfolio by following loan policies and underwriting practices
designed to result in prudent lending activities.
Although a risk of nonpayment exists with respect to all
loans, certain specific types of risks are associated with different types of
loans. Due to the nature of the Bank's customer base and the growth experienced
in the Bank's market area, real estate is frequently a material
component of collateral for the Bank's loans. The expected source of
repayment of these loans is generally the operations of the borrower's
business or personal income; however, real estate provides an additional
measure of security. Risks associated with real estate loans include fluctuating
land values, local economic conditions, changes in tax policies, and a
concentration of loans within the Bank's market area.
The Bank mitigates risks on construction loans by generally
lending funds to customers that have been prequalified for long term financing
and who are using experienced contractors approved by the Bank. The
commercial real estate risk is further mitigated by making the majority of
commercial real estate loans to owner-occupied users of the property.
The following table presents information with respect to
non-performing assets at June 30, 1999 and December 31, 1998 (dollars in
thousands):
1999 1998
------ ------
Loans on non-accrual status........... $ 159 $ 172
Loans past due 90 days or more
but non on non-accrual status...... 56 -
Other real estate owned............... - 409
------ ------
Total non-performing assets........... $ 215 $ 581
====== ======
Percentage of non-performing assets
to total assets.................... .06% .19%
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 nonaccrual 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 nonaccrual 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. If interest on nonaccrual loans had been accrued, such income would
have been insignificant for the six months ended June 30, 1999 and 1998.
At June 30, 1999, except as discussed above, there were no
potential problem loans, except as discussed above, where known
information about possible credit problems of the borrower caused
management to have serious doubts as to the ability of such
borrower to comply with the present loan repayment terms and
which may result in such loans being placed on a non-accrual
basis.
4. MORTGAGE SERVICING RIGHTS
At June 30, 1999 and December 31, 1998, the Bank held
servicing rights to approximately $254,997,000 and $232,916,000,
respectively, in mortgage loans which have been sold to the
Federal National Mortgage Association. The sale of these mortgage
loans are subject to technical underwriting exceptions and
related repurchase risks. Such risks are considered in the
determination of the reserve for loan losses. Beginning
effective January 1, 1996 the Bank began prospectively
recognizing as separate assets the rights to service mortgage
loans which are acquired through loan origination activities.
Other assets in the accompanying condensed consolidated
9
balance sheets as of June 30, 1999 and December 31, 1998 include
approximately $2,654,000 and approximately $2,291,000,
respectively, for the capitalized mortgage servicing rights.
The fair value of the capitalized mortgage servicing rights
was determined based on estimates of the present value of
expected future cash flows and comparisons to current market
transactions involving mortgage servicing rights with similar
portfolio characteristics. The predominant risk characteristics
of the underlying loans used to stratify the capitalized mortgage
servicing rights for purposes of measuring impairment are note
rates, terms and interest methods (i.e., fixed and variable).
5. OTHER BORROWINGS
The Bank is a member of the Federal Home Loan Bank (FHLB)
which provides a secured line of credit of $35.0 million that may
be assessed for short or long-term borrowings. As of June 30,
1999, the Bank had $19,000,000 in short-term borrowings
outstanding from the FHLB with an average weighted interest rate
of 5.642%. As of June 30, 1998, there were no borrowings
outstanding from the FHLB.
6. EARNINGS PER COMMON SHARE
The Company's basic earnings per common share are computed
by dividing net income by the weighted-average number of common
shares outstanding during the period. The Company's diluted
earnings per common share are computed by dividing net income by
the diluted weighted-average number of shares outstanding during
the period. A reconciliation of the weighted average shares used
to compute basic and diluted earnings per share is as follows:
Six months ended Threemonths ended
June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
Weighted average shares
Outstanding - basic 6,852,850 6,848,256 6,847,420 6,845,742
Incremental shares from
Stock options 152,086 231,117 138,182 228,487
Weighted average shares
Outstanding - diluted 7,004,936 7,079,373 6,985,602 7,074,229
========= ========= ========= =========
All weighted average shares, repurchased shares and per
share amounts in the accompanying financial statements have been
adjusted to retroactively reflect a 10% stock dividend declared
in June, 1999 and a three-for-two stock split declared in June
1998.
As of June 30, 1999, approximately 48,600 shares remain
authorized for possible repurchase under the Company's stock
repurchase plan.
7. ADOPTION OF NEW ACCOUNTING STANDARDS
In June 1998, Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. The Financial Accounting
Standards Board (FASB) recently proposed to defer the effective
date of SFAS No. 133 for one year. SFAS No. 133 would be
effective for all fiscal quarters of fiscal years beginning after
June 15, 2000, and establishes accounting and reporting standards
for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging
activities. As of June 30, 1999 the Company had no derivative
instruments or hedging activities.
In October 1998, SFAS No. 134, "Accounting for Mortgage-
Backed Securities Retained After the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise," (SFAS 134)
was issued. SFAS 134 was effective beginning the first fiscal
quarter after December 15, 1998. As of June 30, 1999, the
Company had not entered into any transaction for which SFAS 134
would apply.
10
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 for the six month and three-
month periods ended June 30, 1999 and 1998, included in this
report.
When used in the following discussion, the word "expects,"
"believes," "anticipates" and other similar expressions are
intended to identify forward-looking statements, which are made
pursuant to the safe harbor provisions of the private securities
litigation reform act of 1995. Such forward-looking statements
are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected.
Specific risks and uncertainties include, but are not limited to,
general business and economic conditions, and 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.
HIGHLIGHTS
The Company reported net income of approximately $2,923,000,
or $.43 basic net income per common share, for the six months
ended June 30, 1999, compared to net income of approximately
$2,718,000, or $.40 basic net income per common share, for the
same period in 1998. This represents an increase in net income
of 7.5 percent. Net income for the quarter ended June 30, 1999
was approximately $1,507,000, or $.22 basic net income per common
share, compared to net income of approximately $1,439,000, or
$.21 basic net income per common share, for the same period in
1998, up 4.7 percent. The increases in earnings during the
periods presented were primarily due to strong growth in the
Company's loan portfolio with a resulting increase in net
interest income.
The Company opened two new branch banking offices in the
first quarter of 1999, bringing total branch locations to ten.
The Bank entered the Salem, Oregon market with a full service
branch office and opened a second branch in Redmond, Oregon. The
new branch offices are meeting or exceeding internal projections
as to loan and deposit growth for the six months ended June 30,
1999. In addition, the Company has opened a Loan Production
Office (LPO)in suburban Portland, targeting small to medium-
sized businesses and commercial real estate lending in that
rapidly growing market. These activities are not expected to be
material to the financial results of the Company in 1999.
Management anticipates break-even financial results for these
activities within one to three years, however there can be no
assurance that future profitability will be achieved.
Other highlights include the opening of a Bank Trust
Department on July 1, 1999. Trust services will focus on the
personal trust needs of existing and prospective clients by
providing living and testamentary trust, asset and financial
management, and fiduciary services. At the same time an on-site
office of Raymond James Financial Services opened to provide
convenient stock brokerage & investment services to Bank
customers. These activities are not expected to be material to
the financial results of the Company in 1999.
RESULTS OF OPERATIONS - Six months and Three months ended June
30, 1999 and 1998
NET INTEREST INCOME
Net interest income increased 30.2 percent for the six
months and 31.9 percent for the three months ended June 30, 1999
as compared to the same periods in 1998. These net increases
resulted from higher earning asset volumes generating increased
interest income which exceeded the increase in interest expense
necessary to fund this growth.
Total interest income increased approximately $2,928,800(or
28.3%) for the six months and $1,637,500 (or 30.6%)for the three
months ended June 30, 1999 as compared to the same periods in
1998. These increases for both the six-month and three-month
periods were primarily theresult of an increase in the volume of
loans.
Total interest expense increased approximately $542,900 (or
22.1%) for the six months and $323,600 (or 26.1%) for the three
months ended June 30, 1999 as compared to the same periods in
1998. Although there were increases in all categories of
interest expense, these increases for both the six-month and
three-month periods were
11
primarily due to an increase in the volume of money market
accounts, time deposits and other borrowings.
LOAN LOSS PROVISION
The loan loss provision increased approximately $737,600 for
the six months and $449,900for the three months ended June 30,
1999 as compared to the same periods in 1998. Management
believes the current loan loss provision maintains the reserve
for loan losses at an appropriate level. The Bank's ratio of
reserve for loan losses to total loans was 1.32 percent at June
30, 1999 compared to 1.28 percent at December 31, 1998.
NONINTEREST INCOME
Total noninterest income increased 1.5 percent for the six
months and decreased 8.2 percent for the three months ended June
30, 1999 as compared to the same periods in 1998. During both
the six-month and three-month periods, service charge income and
other income increased. However these increases were offset by
decreases in mortgage loan origination and processing fees, gains
(losses) on sales of mortgage loans, and losses on sale of
investment securities available-for-sale.
The increase in service charge income for both periods was
primarily due to an increase in the volume of deposit activity
during the periods presented. Decreases in mortgage loan
origination and processing fees for the six months and three
months ended June 30, 1999 was primarily due to a reduction in
refinance activity due to higher mortgage market rates.
NONINTEREST EXPENSE
Total noninterest expense increased 22.9 percent for the six
months and 18.9 percent for the three months ended June 30, 1999
as compared to the same periods in 1998. All areas of
noninterest expense increased as a result of increased personnel
and operating expenses due to continued growth in the Company,
including start up costs and staffing of new branches.
INCOME TAXES
Income tax expense increased between the periods presented
primarily as a result of higher pre-tax income.
FINANCIAL CONDITION
The Company continued to experience growth in the first half
of 1999 with total assets increasing 16.6% to $350.6 million at
June 30, 1999 compared to $300.8 million at December 31, 1998.
This increase is primarily due to strong loan growth. Total loans
outstanding increased 25.0 percent to $257.6 million at June 30,
1999 as compared to $206.0 million at December 31, 1998. The
growth was concentrated in the commercial real estate loan
portfolio, up $22.1 million consistent with the nature of
economic growth in Central Oregon. In addition, consumer
installment loans expanded by $8.0 million with growing
penetration of indirect auto dealer lending by Cascade Finance.
A decline of $10.8 million occurred in the investment
portfolio, largely due to prepayments on mortgage-backed
securities and agency issuers exercising their option to call
several agency securities. Modest increases occurred in cash
equivalents, premises and equipment, and other assets.
Increased assets were funded primarily by growth in
deposits and other borrowings. Deposits increased 11.3 percent to
$301.5 million at June 30, 1999 compared to $270.9 million at
December 31, 1998. Because loan demand exceeded deposit growth,
the Company increased its borrowings from the Federal Home Loan
Bank by $19.0 million.
The Company had no off balance sheet derivative financial
instruments as of June 30, 1999 and December 31, 1998.
12
CAPITAL RESOURCES
The Company's total stockholders equity at June 30, 1999 was
$27.6 million, an increase of $.7 million from December 31, 1998.
The increase was the net result of earnings of $2.9 million for
the six months ended June 30, 1999, less cash dividends to
shareholders of $1.1 million during the first quarter of 1999.
In addition, during the six months ended June 30, 1999, the
Company repurchased 55,990 shares of its common stock outstanding
pursuant to a Board of Directors authorized program. This had
the effect of reducing equity by $.8 million during the first six
months of 1999. During the six months ended June 30, 1999, higher
market interest rates resulted in a $.5 million swing in the net
unrealized gain/(loss) on investment securities available-for-
sale to an unrealized loss position at June 30, 1999 of
approximately $.3 million.
At June 30, 1999, the Company's Tier 1 and total risked-
based capital ratios under the Federal Reserve Board's ("FRB")
risk-based capital guidelines were approximately 9.9% and 11.1%,
respectively. The FRB's minimum risk-based capital ratio
guidelines for Tier 1 and total capital are 4% and 8%, respectively.
LIQUIDITY
The Company analyzes and manages its liquidity to ensure the
availability of sufficient funds to meet depositor withdrawals as
well as to fund borrowing needs of its loan customers. The
Bank's stable deposit base is the foundation of its long-term
liquidity since these funds are not subject to significant
volatility as a result of changing interest rates and other
economic factors. A further source of liquidity is the Bank's
ability to borrow funds from a variety of reliable
counterparties. In addition, the Bank has substantial available-
for-sale investment securities that could be liquidated to
provide an additional source of liquidity.
At June 30, 1999 the Bank maintained unsecured lines of
credit totaling $18.0 million for the purchase of funds on a
short-term basis. The Bank is also a member of the Federal Home
Loan Bank (FHLB) which provides a secured line of credit of $35.0
million that may be accessed for short or long-term borrowings.
Owing to rapid loan growth in the first half of 1999, the Bank
had short-term borrowings from the FHLB of $19.0 million and no
long-term borrowings at June 30, 1999. The Company continues to
have ample available funding sources.
At June 30, 1999, the Bank had approximately $91 million in
outstanding commitments to extend credit. Approximately one-third
of the commitments pertains to various construction projects.
Under the terms of such commitments, completion of specified
project benchmarks must be certified before funds may be drawn.
In addition, it is anticipated that a portion of other
commitments will expire or terminate without funding. Management
believes that the Bank's available resources will be sufficient
to fund its commitments in the normal course of business.
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. Although the Company manages
other risks, as in credit quality and liquidity risk, in the
normal course of business, 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. Other types of market risks, such as foreign
currency exchange rate risk and commodity price risk, do not
arise in the normal course of the Company's business activities.
The Company did not experience a material change in market
risk at June 30, 1999 as compared to December 31, 1998.
YEAR 2000 DISCLOSURE
The Year 2000 (Y2K)issue may pose unique challenges to all
businesses due to the inability of some computers and computer
software programs to accurately recognize, for years after 1999,
dates which are often expressed as a two digit number. This
inability to recognize date information accurately could
potentially affect computer operations and calculations, or could
cause computer systems to not operate at all. Accordingly, Y2K
may precipitate related consequences that are not possible to
foresee.
13
Major business risks associated with the Y2K issue may
include, but are not limited to, infrastructure failures,
disruptions to the economy in general, disruption of private and
government activities, excessive cash withdrawal activity and/or
reduced financial liquidity. In addition, increased problem
loans and credit losses may impact the Company in the event
borrowers fail to prepare for Y2K. The above risks could expose
the Company to loss of revenues, litigation and asset quality
deterioration.
The federal banking regulators have issued several
statements providing guidance to financial institutions on the
steps the regulators expect financial institutions to take to
become Y2K compliant. Each of the federal banking regulators is
also examining the financial institutions under its jurisdiction
to assess each institution's compliance with the outstanding
guidance. If an institution's progress in addressing the Y2K
problem is deemed by its primary federal regulator to be less
than satisfactory, the institution will be required to enter into
a memorandum of understanding with the regulator which will,
among other things, require the institution to promptly develop
and submit an acceptable plan for becoming Y2K compliant and to
provide periodic reports describing the institution's progress in
implementing the plan.
Failure to satisfactorily address the Y2K problem may also expose
a financial institution to other forms of enforcement action that
its primary federal regulator deems appropriate to address the
deficiencies in the institution's Y2K remediation program. In
this regard, the Bank's Y2K program was audited by FDIC in
February 1999 and assigned a satisfactory rating.
The Company has completed an assessment of the Y2K issue,
considering the risk that date fields in existing computer
applications might fail to recognize the year 2000 and therefore
create erroneous results. Based upon the results of our
assessment, testing, certification and remediation activities to
date, management believes that the Company is well prepared to
respond to the issue and run successfully in the year 2000 and
beyond.
The Company has identified mission critical computer
applications and related processes and has formalized plans to
address potential issues that may arise as a result of the date
change. An application, system or process is mission critical if
it is deemed vital to the successful continuance of a core
business activity. For substantially all mission critical
applications the Company has performed tests and has obtained
performance certifications on hardware, software, and
environmental systems except for the applications noted below.
The Company has also required and received certifications from
substantially all major software application vendors to ensure
that their systems are Y2K compliant, except for the applications
noted below. The Company has confirmed that substantially all
mission critical systems have the capacity to process information
with dates beyond December 31, 1999 except for the applications
noted below.
The Company has made ongoing revision and updates to its Y2K
Contingency Plan. The Plan addresses mission critical as well as
non-critical applications. For each non-critical application, the
contingency plan details how tasks can be accomplished if the
application is not operational. Under FFIEC bank regulatory
guidelines, a financial institution is not required to have a
contingency plan for mission-critical systems and applications if
the system or application has been remediated, tested, and
implemented as Y2K compliant. Mission critical applications will
rely on the above-described testing, certification and
remediation program to ensure all such systems and applications
are Y2K compliant. If the Company experiences system failures
due to unforeseen Y2K events, the Company's current Business
Contingency Plan will be implemented. This plan is designed to
enable the Company to function in the event of a short-term
business interruption owing to unexpected and/or emergency
circumstances. Operating under this plan and depending on the
nature of the interruption, the Company may provide only limited
services, may revert to manual recording of customer and counter-
party transactions and/or may revert to manual updating of
financial records. The encoding and processing of checks and
drafts may be performed at a contingency site. Alternate check
presentment, delivery and settlement methods may be implemented.
Transactions previously executed via wire transfer and/or Federal
Reserve Account maintenance activity may revert to telephonic
methodology. The Business Contingency Plan is tested annually
but there can be no assurance as to its effectiveness under Y2K
contingent circumstances.
The Company has identified and formally contacted its
significant customers, suppliers and counterparties regarding
Y2K. In so doing the Company has encouraged their Y2K testing
and remediation and has requested Y2K compliance certifications
from these parties. Management believes these significant
parties will test and take steps necessary to achieve Y2K
compliance, however, no assurance can be made that their response
to the Y2K situation will not precipitate adverse consequences
for the Company. In addition, the Company has acknowledged that
increased problem loans and credit losses could ensue due to Y2K,
and has considered this contingent risk
14
in the determination of its allowance for loan losses. Although
management believes the allowance for loan losses is adequate at
June 30, 1999, there can be no assurance as to the future
adequacy of the allowance for loan losses in respect to the yet
unknown affect of Y2K.
The Company anticipates that the costs of testing and
remediating applications and systems for Y2K will not be material
to future operating results or financial condition. Apart from
internal staff hours allocated to Y2K testing and assurance,
expenditures related to Y2K issues for 1998 and 1999 to date
total approximately $58,000.
Although management believes that it has tested, analyzed
and certified mission critical applications with respect to Y2K
compliance, there can be no assurance that the Company will not
be impacted by unanticipated Y2K contingent circumstances.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) April 26, 1999, Annual Meeting
(b) Need not be completed
(c) The following matters were voted on at the Annual Meeting of
Shareholders held on April 26, 1999:
1. The re-election of three directors:
Number Number Total
of Votes(1) of Votes(1) Number of
Director "FOR" "WITHHELD" Votes(1)
-------- --------- --------- ---------
Gary L. Capps 5,557,209 3,027 5,560,237
James E. Petersen 5,557,209 3,027 5,560,237
Ryan R. Patrick 5,557,209 3,027 5,560,237
(1) Retroactively restated for the 10% stock dividend declared
in June 1999.
(d) None
ITEM 6. Exhibits and Reports on Form 8-K
(a) No exhibits were required to be filed for the quarter ended
June 30, 1999.
(b) Reports on Form 8-K. The Company did not file any reports
on Form 8-K during the first quarter ended June 30, 1999.
15
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 7/29/99 By /s/ Patricia L. Moss
----------------- ----------------------------------------------
Patricia L. Moss, President & CEO
Date 8/05/99 By /s/ Gregory D. Newton
----------------- ----------------------------------------------
Gregory D. Newton, SVP/Chief Financial Officer
16