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: September 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. 6,867,319 shares of no par
value Common Stock on October 31, 1999. --------------------------
- ---------------------------------------
CASCADE BANCORP AND SUBSIDIARIES
FORM 10-Q
QUARTERLY REPORT
SEPTEMBER 30, 1999
INDEX
PART I: FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Condensed Consolidated Balance Sheets
as of September 30, 1999 and December 31, 1998. . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income
for the nine months and three months ended September 30, 1999 and 1998. . 4
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 1999 and 1998 . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 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 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 15
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2
CASCADE BANCORP & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(Unaudited)
1999 1998
------------ ------------
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 25,030,846 $ 18,388,900
Federal funds sold 5,400,000 8,450,000
------------ ------------
Total cash and cash equivalents 30,430,846 26,838,900
Investment securities available-for-sale 28,203,228 48,012,491
Investment securities held-to-maturity 2,714,876 2,938,489
Loans, net 263,300,899 202,543,262
Mortgage loans held for sale 566,399 2,119,642
Premises and equipment, net 7,438,500 5,984,501
Accrued interest and other assets 12,833,238 12,337,131
------------ ------------
Total assets $345,487,986 $300,774,416
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $129,762,614 $115,532,163
Interest bearing demand 128,884,525 109,580,561
Savings 16,585,107 14,940,897
Time deposits 33,096,302 30,809,110
------------ ------------
Total deposits 308,328,548 270,862,731
Other Borrowings 5,500,000 -
Accrued interest and other liabilities 2,775,680 2,990,003
------------ ------------
Total liabilities 316,604,228 273,852,734
Stockholders'equity:
Common stock, no par value;
10,000,000 shares authorized;
6,867,319 issued and outstanding
(6,226,082-1998) 17,797,627 9,545,545
Retained earnings 11,347,036 17,218,415
Accumulated other comprehensive income (260,905) 157,722
------------ ------------
Total stockholders' equity 28,883,758 26,921,682
------------ ------------
Total liabilities and stockholders'
equity $345,487,986 $300,774,416
============ ============
See accompanying notes.
3
CASCADE BANCORP & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
NINE MONTHS ENDED THREE MONTHS ENDED
1999 1998 1999 1998
----------- ----------- ---------- ----------
Interest income:
Interest and fees on loans $18,571,839 $13,915,575 $6,763,160 $5,030,957
Taxable interest on investments 1,915,506 1,873,503 517,038 561,467
Nontaxable interest on investments 37,858 29,929 10,791 9,408
Interest on federal funds sold 74,243 415,280 37,029 289,839
----------- ----------- ---------- ----------
Total interest income 20,599,446 16,234,287 7,328,018 5,891,671
Interest expense:
Deposits:
Interest bearing demand 2,721,118 2,599,493 992,846 937,626
Savings 234,633 224,251 83,177 78,655
Time 1,163,043 929,416 387,369 335,445
Other borrowings 450,784 52,708 109,170 -
---------- ----------- --------- ----------
Total interest expense 4,569,578 3,805,868 1,572,562 1,351,726
---------- ----------- --------- ----------
Net interest income 16,029,868 12,428,419 5,755,456 4,539,945
Loan loss provision 1,655,138 676,573 549,191 308,254
---------- ----------- --------- ----------
Net interest income after loan loss provision 14,374,730 11,751,846 5,206,265 4,231,691
Noninterest income:
Service charges on deposit accounts 1,763,274 1,432,062 592,800 470,191
Mortgage loan origination and processing fees 975,641 1,332,073 267,984 389,333
Gains (losses) on sales of mortgage loans (271,805) 187,595 (105,064) 114,995
Losses on sale of investment securities
available-for-sale (10,619) - (8,125) -
Other income 1,574,105 1,257,362 534,308 526,095
----------- ----------- ---------- ----------
Total noninterest income 4,030,596 4,209,092 1,281,903 1,500,614
Noninterest expense:
Salaries and employee benefits 6,415,782 5,115,363 2,242,502 1,817,406
Net occupancy & equipment 1,640,505 1,318,597 542,431 477,682
Other expenses 3,022,641 2,666,653 1,079,220 935,778
----------- ----------- ---------- ----------
Total noninterest expense 11,078,928 9,100,613 3,864,153 3,230,866
----------- ----------- ---------- ----------
Income before income taxes 7,326,398 6,860,325 2,624,015 2,501,439
Provision for income taxes 2,755,642 2,607,314 976,120 966,773
----------- ----------- ---------- ----------
Net income $4,570,756 $4,253,011 $1,647,895 $1,534,666
=========== =========== ========== ==========
Basic net income per common share $ 0.67 $ 0.62 $ 0.24 $ 0.22
=========== ========== ========== ==========
Diluted net income per common share $ 0.66 $ 0.60 $ 0.24 $ 0.22
=========== ========== ========== ==========
See accompanying notes.
4
CASCADE BANCORP & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 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 $ 4,253,011 4,253,011 - - 4,253,011
Other comprehensive income, net of tax
Unrealized gains on securities
available-for-sale 98,250 - 98,250 - 98,250
-------------
Comprehensive income $ 4,351,261
=============
Cash dividends paid (1,555,759) - - (1,555,759)
Repurchases of common stock (45,610) - - (767,079) (767,079)
Stock options exercised (15,476 shares) - - 38,121 38,121
------------ ------------ ----------- -------------
Balance at September 30, 1998 $ 16,265,896 $ 401,015 $ 9,636,057 $ 26,302,968
============ ============ =========== =============
Balance at December 31, 1998 $ 17,218,415 $ 157,722 $ 9,545,545 $ 26,921,682
Comprehensive Income:
Net Income $4,570,756 4,570,756 - - 4,570,756
Other comprehensive income (losses),
net of tax, Unrealized gains on
securities available-for-sale (418,627) - (418,627) - (418,627)
----------
Comprehensive income $4,152,129
==========
Cash dividends paid (1,671,125) - - (1,671,125)
10% Stock dividend declared in June 1999 (8,771,010) - 8,771,010 -
Repurchases of common stock (55,990 shares) - - (834,583) (834,583)
Stock options exercised (74,619) - - 315,655 315,655
------------ ----------- ------------ ------------
Balance at September 30, 1999 $ 11,347,036 $ (260,905) $17,797,627 $ 28,883,758
============ =========== ============ ============
See accompanying notes.
5
CASCADE BANCORP & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
1999 1998
------------- -------------
Net cash provided by operating activities $ 8,099,791 $ 3,109,155
Investing activities:
Purchases of investment securities
available-for-sale - (4,881,645)
Proceeds from maturities and calls of
investment securities available-for-sale 18,334,586 13,870,000
Proceeds from sales of investment securities
available for sale 633,265 -
Purchases of investment securities
held-to-maturity (117,636) (84,500)
Proceeds from maturities and calls of
Investment securities held-to-maturity 334,802 174,873
Net increase in loans (62,684,580) (33,832,304)
Purchases of premises and equipment, net (1,784,046) (843,792)
------------- ------------
Net cash used in investing activities (45,283,609) (25,597,368)
Financing activities:
Net increase in deposits 37,465,817 45,578,152
Cash dividends (1,671,125) (1,555,759)
Repurchases of stock (834,583) (767,079)
Proceeds from issuance of stock 315,655 38,121
Net increase (decrease) in other borrowings 5,500,000 (5,000,000)
------------- ------------
Net cash provided by financing activities 40,775,764 38,293,435
------------- ------------
Net increase in cash and cash equivalents 3,591,946 15,805,222
Cash and cash equivalents at beginning of period 26,838,900 29,553,706
------------- ------------
Cash and cash equivalents at end of period $ 30,430,846 $ 45,358,928
============= =============
See accompanying notes.
6
CASCADE BANCORP & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 1999 and December 31, 1998 consisted
of the following:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
SEPTEMBER 30, 1999 COST GAINS LOSSES FAIR VALUE
- ------------------------------ ------------ --------- --------- ------------
Available-for-Sale
- ------------------
U.S. Government and
Agency securities.......... $ 15,540,802 $ 13,770 $ 123,684 $ 15,430,888
Mortgage-backed securities.... 8,557,909 1,765 75,098 8,484,576
U.S. Treasury securities...... 1,997,489 46,271 - 2,043,760
Equity securities............. 2,527,843 - 283,839 2,244,004
------------ --------- --------- ------------
$ 28,624,043 $ 61,806 $ 482,621 $ 28,203,228
============ ========= ========= ============
Held-to-Maturity
- ----------------
Obligations of state and
political subdivisions..... $ 1,068,276 $ 6,436 $ 7,356 $ 1,067,356
Other......................... 1,646,600 - - 1,646,600
------------ --------- --------- ------------
$ 2,714,876 $ 6,436 $ 7,356 $ 2,713,956
============ ========= ========= ============
7
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
DECEMBER 31, 1998 COST GAINS LOSSES FAIR VALUE
- ------------------------------ ------------ --------- --------- ------------
Available-for-Sale
- ------------------
U.S. Government and
Agency securities.......... $ 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 September 30, 1999 and
December 31, 1998 was as follows:
1999 1998
----------- ------------
Commercial.................... $ 37,126,870 $ 31,279,762
Real Estate:
Construction............... 50,232,981 44,874,991
Mortgage................... 47,933,472 36,670,954
Commercial................. 99,502,545 70,524,183
Installment................... 33,056,312 22,693,633
------------ ------------
267,852,180 206,043,523
Less:
Reserve for loan losses.... 3,361,265 2,635,820
Deferred loan fees......... 1,190,016 864,441
------------ ------------
4,551,281 3,500,261
------------ ------------
Loans, net ................... $263,300,899 $202,543,262
============ ============
Mortgage loans held for sale of $566,399 and $2,119,642 at September 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 nine months ended
September 30, 1999 and 1998 were as follows:
1999 1998
----------- ------------
Balance at beginning of period... $ 2,635,820 $ 2,048,561
Provisions charged to operations. 1,655,138 676,573
Recoveries of loans previously
charged off.................... 131,547 71,666
Loans charged off................ (1,061,240) (346,770)
------------ ------------
Balance at end of period......... $ 3,361,265 $ 2,450,030
============ ============
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 September 30, 1999 and December 31, 1998 (dollars in thousands):
1999 1998
------ ------
Loans on non-accrual status........... $ 174 $ 172
Loans past due 90 days or more
but non on non-accrual status...... 154 -
Other real estate owned............... 65 409
------ ------
Total non-performing assets........... $ 393 $ 581
====== ======
Percentage of non-performing assets
to total assets.................... .11% .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 nine months ended September 30, 1999 and 1998.
At September 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 September 30, 1999 and December 31, 1998, the Bank held servicing
rights to approximately $258,662,000 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 standards and requirements which may result in repurchase risk.
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
9
accompanying condensed balance sheets as of September 30, 1999 and December 31,
1998 include approximately $2,720,000 and approximately $2,291,000,
respectively, for the estimated fair value of 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 maintains five unsecured lines of credit totaling $18 million for
the purchase of funds on a short-term basis. As of September 30, 1999 the
Bank had federal funds purchased totaling $5,500,000 with an average weighted
interest rate of 6.057%. The Bank had no federal funds purchased at
September 30, 1998. The Bank is also a member of the Federal Home Loan Bank
(FHLB) which provides a secured line of credit of $33 million that may be
accessed for short or long-term borrowings. As of September 30, 1999 and
1998, the Bank had no short-term borrowings 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:
Nine months ended Three months ended
September 30, September 30,
1999 1998 1999 1998
--------- --------- --------- ---------
Weighted average shares
Outstanding - basic 6,855,758 6,849,917 6,861,573 6,853,241
Incremental shares from
Stock options 146,810 226,356 136,259 216,835
Weighted average shares --------- --------- --------- ---------
Outstanding - diluted 7,002,568 7,076,273 6,997,832 7,070,076
========= ========= ========= =========
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 September 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 September 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 September
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 nine month and three-month periods ended September 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 $4,571,000, or $.67
basic net income per common share, for the nine months ended September 30, 1999,
compared to net income of approximately $4,253,000, or $.62 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 September 30,
1999 was approximately $1,648,000, or $.24 basic net income per common share,
compared to net income of approximately $1,535,000, or $.22 basic net income
per common share, for the same period in 1998, up 7.4 percent. The increases
in earnings during the periods presented were primarily due to strong growth
in the expansion of the Company's loan portfolio with a interest-earning
assets and 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 financial performance for the nine months ended September
30, 1999. 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 and 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 - Nine months and Three months ended September 30,
1999 and 1998
NET INTEREST INCOME
Net interest income increased 29.0 percent for the nine months and 26.8
percent for the three months ended September 30, 1999 as compared to the same
periods in 1998. These net increases primarily resulted from higher loan
volumes generating increased interest income which exceeded the increase in
interest expense necessary to fund this growth.
Total interest income increased approximately $4,365,200 (or 26.9%) for
the nine months and $1,436,300 (or 24.4%) for the three months ended September
30, 1999 as compared to the same periods in 1998. These increases for both
the nine-month and three-month periods were primarily the result of an
increase in the volume of loans.
Total interest expense increased approximately $763,700 (or 20.1%) for the
nine months and $220,800 (or 16.3%) for the three months ended September 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 nine-
month and three-month
11
periods were 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 $978,600 for the nine
months and $240,900 for the three months ended September 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
consistent with growth in loan balances. Approximately $1,061,000 in loans
were charged off compared to $347,000 in the prior period as a few isolated
credits were specifically recognized as loss. The Bank's ratio of reserve
for loan losses to total loans was 1.26 percent at September 30, 1999
compared to 1.28 percent at December 31, 1998.
NONINTEREST INCOME
Total noninterest income decreased 4.2 percent for the nine months and 14.6
percent for the three months ended September 30, 1999 as compared to the same
periods in 1998. During both the nine-month and three-month periods, service
charge income and other income increased. However these increases were
partially offset by decreases in mortgage loan origination and processing
fees and gains (losses) on sales of mortgage loans.
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 nine
months and three months ended September 30, 1999 was primarily due to a
reduction in refinance activity due to higher mortgage market interest rates.
NONINTEREST EXPENSE
Total noninterest expense increased 21.7 percent for the nine months and
19.6 percent for the three months ended September 30, 1999 as compared to the
same periods in 1998. Noninterest expense increased as a result of increased
personnel and operating expenses due to continued growth in business volumes.
Start up costs and staffing of new branches also contributed to generally
higher noninterest expense.
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 steady growth in 1999 with total assets
increasing 14.9% to $345.5 million at September 30, 1999 compared to $300.8
million at December 31, 1998. This increase is primarily due to strong loan
growth. Total loans outstanding increased 30.0 percent to $267.9 million at
September 30, 1999 as compared to $206.0 million at December 31, 1998. The
growth was concentrated in the commercial real estate loan portfolio, up
$29.0 million, consistent with the nature of economic growth in the markets
served by the Company. In addition, consumer installment loans expanded by
$10.4 million with growing penetration of indirect auto dealer lending by
Cascade Finance.
A decline of $20.0 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 and cash equivalents, premises and equipment, and other
assets.
Increased assets were funded primarily by growth in deposits and other
borrowings. Deposits increased 13.8 percent to $308.3 million at September
30, 1999 compared to $270.9 million at December 31, 1998. Because loan
demand exceeded deposit growth, the Company purchased federal funds totaling
$5.5 million at September 30, 1999.
The Company had no off balance sheet derivative financial instruments as
of September 30, 1999 and December 31, 1998.
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CAPITAL RESOURCES
The Company's total stockholders equity at September 30, 1999 was $28.9
million, an increase of $2.0 million from December 31, 1998. The increase
was the net result of earnings of $4.6 million for the nine months ended
September 30, 1999, less cash dividends to shareholders of $1.7 million
during the first three quarters of 1999. In addition, during the nine months
ended September 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 nine months
of 1999. During the nine months ended September 30, 1999, higher market
interest rates resulted in a $.4 million change in the net unrealized
gain/(loss) on investment securities available-for-sale to an unrealized loss
position at September 30, 1999 of approximately $.3 million.
At September 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 10.10% and 11.27%, 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 September 30, 1999 the Bank maintained unsecured lines of credit
totaling $18.0 million for the purchase of funds on a shortterm basis. The
Bank is also a member of the Federal Home Loan Bank (FHLB) which provides a
secured line of credit of $33.0 million that may be accessed for short or
long-term borrowings. The Company continues to have ample available funding
sources.
At September 30, 1999, the Bank had approximately $106.9 million in
outstanding commitments to extend credit. Approximately 40 percent of the
commitments pertain 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 the commitments will expire or terminate without funding.
Management believes that the Bank's available resources will be sufficient
to fund its committments 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
September 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.
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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, FDIC audited the Bank's
Y2K program in February and September 1999.
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 Companyis 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.
The Company has made ongoing revision and updates to its a Y2K Contingency
Plan. The Plan in place that addresses mission critical as well as non-
critical applications. For each noncritical 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 interuption, 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
to Y2K, and has considered this contingent risk
14
in the determination of its reserve for loan losses. Although management
believes the reserve for loan losses is adequate at September 30, 1999, there
can be no assurance as to the future adequacy of the reserve 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits were required to be filed for the quarter ended
September 30, 1999.
(b) Reports on Form 8-K. The Company did not file any reports on
Form 8-K during the third quarter ended September 30, 1999.
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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 11/09/99 By /s/ Patricia L. Moss
----------------- ----------------------------------------------
Patricia L. Moss, President & CEO
Date 11/09/99 By /s/ Gregory D. Newton
----------------- ----------------------------------------------
Gregory D. Newton, SVP/Chief Financial Officer
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