================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-23322
CASCADE BANCORP
(Name of registrant as specified in its charter)
Oregon 93-1034484
(State of Incorporation) (IRS Employer Identification #)
1100 NW Wall Street, Bend, Oregon 97701
(Address of principal executive offices) (Zip Code)
(541) 385-6205
(Registrant's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. $128,122,520 aggregate market value as of March 4, 2002, based on the
average bid and asked price.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. 8,295,787 shares of
no par value Common Stock on March 4, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Part III is incorporated by reference from the issuer's definitive proxy
statement for the annual meeting of shareholders to be held on April 22, 2002.
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CASCADE BANCORP FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
----
Item 1. BUSINESS ................................................. 3
Item 2. PROPERTIES ............................................... 16
Item 3. LEGAL PROCEEDINGS ........................................ 16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...... 16
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS .................................... 17
Item 6. SELECTED FINANCIAL DATA .................................. 18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .................... 20
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ............................................ 23
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .............. 26
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ...................... 26
PART III
Item 10 Part III, items 10 through 13 are incorporated by reference from
through 13 the Company's definitive proxy statement issued in conjunction
with the Company's Annual Meeting of Shareholders to be held on
April 22, 2002. (Executive Officers, Compensation arrangements,
Director and Management Ownership; Related Party Transactions)
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K ............................................ 27
SIGNATURES .............................................................. 28
2
PART I
ITEM 1. BUSINESS
Company
Cascade Bancorp (Bancorp) is an Oregon chartered Financial Holding Company
formed in 1990 and headquartered in Bend, Oregon. Bancorp's principal subsidiary
is Bank of the Cascades (the Bank). Bancorp also has an inactive subsidiary,
Cascade Bancorp Financial Services, Inc (collectively, these entities are
referred to as "the Company"). At December 31, 2001 the Company had total
consolidated assets of approximately $489 million, net loans of approximately
$415 million and deposits of approximately $425 million.
Bank of the Cascades
The Bank was chartered as an Oregon State bank in March 1976 and opened for
business in February 1977. The Bank is a community bank offering the full range
of financial services to its business and consumer clients, including trust and
investments. The Bank has a network of twelve branches, nine located in Central
Oregon, and three in the Salem, Oregon locale. In Deschutes County, its largest
market concentration, the Company is the market share leader in customer
deposits, holding over 32% market share. It also is the market share leader in
construction and commercial real estate lending as well as in residential
mortgage origination and home equity lending. Owing to in-migration and a solid
recreation industry, the population of Deschutes County has grown at a rate
among the fastest of all counties in the Northwest during the past decade. The
Bank's headquarters is located in Bend, Oregon.
With a relationship banking strategy, the Bank offers a broad range of
commercial and personal banking services to its customers. Lending activities
serve small to medium-sized business, professional and consumer accounts. The
Bank provides commercial real estate loans, real estate construction and
development loans, commercial and industrial loans as well as consumer
installment, line-of-credit, credit card, and home equity loans. The Bank
originates and services residential mortgage loans that are typically sold on
the secondary market. The Bank provides consumer and business deposit services
including checking, money market, and time deposit accounts and related payment
services such as cash management, lock box, internet banking and electronic bill
payment.
In mid-1999 the Company began offering Trust and Investment services. Trust
services focus on the personal trust needs of existing and prospective clients
by providing living and testamentary trust, asset and financial management, and
fiduciary services. Investment services are provided by a licensed on-site
broker through a broker/dealer agent relationship.
Employees
The Company views its employees as an integral resource in achieving its
strategies and long term goals, and considers its relationship with its
employees to be good. Bancorp has no employees other than its executive
officers, who are also employees of the Bank. The Company had 207 full-time
employees as of December 31, 2001, unchanged from the prior year. None of the
employees of the Company are subject to a collective bargaining agreement.
Business Strategy
o PROVIDE SHAREHOLDERS WITH EXCEPTIONAL VALUE BY DELIVERING THE BEST IN
COMMUNITY BANKING AND RELATED FINANCIAL SERVICES
For a quarter of a century, Cascade Bancorp has focused on delivering the
best in community banking services to the Oregon communities it serves. Its
strategy is to profitably grow its business by attracting and retaining high
value relationship customers. This is accomplished by providing the personal
touch
3
customer service while offering a broad array of products and financial
services. The Company is committed to providing customer choice in delivery
channels by implementing advanced technology and delivery systems. Such channels
include traditional branches, ATMs, Internet banking, and telephonic access.
The Company is the dominant market share bank in its main Deschutes County
market, growing to over 32% share of deposits and a leadership position in
commercial real estate, construction, consumer and residential mortgage lending.
Deschutes County is a fast growing market, with county population growth rate in
the 98th percentile in the U.S. during the past decade. The Company has
established the following key performance goals: 1) Consistently exceed 18%
return on equity, 2) Consistently exceed 10% growth in earnings per share, 3)
Identify and prudently manage credit and business risk and 4) Strive to
profitably diversify revenue and continuously seek efficiency improvements in
all its activities.
In a recent nationwide peer analysis, the Company was recognized by
American Banker magazine as the highest return on equity bank in the country
over the past five years. While the Company has achieved strong and profitable
growth in past years, there can be no assurance as to the ongoing achievement of
these goals due to the inherent uncertainty of future events, competitive
forces, the vitality of the local, regional and national economy and other
unforeseen circumstances.
In addition to targeting growth and increased market share in its existing
locations, the Company may also consider future expansion by de novo branching
when it identifies market opportunities. The Company initiated such a strategy
in Salem, Oregon in 1999 and opened its third office in the Salem area in the
third quarter of 2001. The Company may also consider strategic partnerships or
making selective business acquisitions to expand its market opportunities.
The Company's broad risk management objectives are to develop loan policies
and underwriting practices designed to prudently manage credit risk. Funding
policies are designed to maintain an appropriate volume and mix of core deposits
and time deposit balances to efficiently fund its loan and investment
activities. The Company may complement its deposit gathering strategies with
wholesale funding from reliable counterparties such as the Federal Home Loan
Bank. The Company monitors its sensitivity to changing interest rates primarily
by utilizing simulation analysis in addition to traditional interest rate gap
calculations.
Competition
Commercial and consumer banking in Central Oregon, as well as in the State
of Oregon and nation as a whole, is highly competitive. The Company competes
principally with other commercial banks, savings and loan associations, credit
unions, mortgage companies, brokers and other non-bank financial service
providers. In addition to price competition for deposits and loans, competition
exists with respect to the scope and type of services offered, customer service
levels, convenience as well as in fees and service charges. In addition,
improvements in technology, communications and the Internet have intensified
delivery channel competition. Certain competitors may have greater resources
than the Company resulting in heightened competition for banking and financial
services.
The Company competes for customers principally through its commitment to
customer service, the relative attractiveness of its products and services, and
by ensuring customer convenience and functionality in accessing those products
and services. The Company believes its community banking philosophy, technology
investments and focus on small and medium-sized business, professional and
consumer accounts, enables it to compete effectively with other financial
service providers. In addition, the Company's lending officers and senior
managers have significant experience in their respective marketplaces. This
enables them to maintain close working relationships with their customers. To
serve customers whose borrowing requirements exceed its lending limits, the Bank
may participate loans to other financial institutions.
4
Consolidated Statistical Information
The following tables present certain financial and statistical information
with respect to the Company for the periods indicated. Most of the information
is required by Guide 3, "Statistical Disclosure by Bank Holding Companies",
published by the Securities and Exchange Commission. At the beginning of each
table, information is presented as to the nature of data disclosed in the table.
For most financial institutions, including the Company, the primary
component of earnings is net interest income. Net interest income is the
difference between interest income earned, principally from loans and investment
securities portfolio, and interest paid, principally on customer deposits and
borrowings. Changes in net interest income result from changes in volume, spread
and margin. Volume refers to the dollar level of interest-earning assets and
interest-bearing liabilities. Spread refers to the difference between the yield
on interest-earning assets and the cost of interest-bearing liabilities. Margin
refers to net interest income divided by interest-earning assets and is
influenced by the level and relative mix of interest-earning assets and
interest-bearing liabilities.
Analysis of Changes in Interest Differential
The following table shows the dollar amount of the increase (decrease) in
the Company's consolidated interest income and expense, 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):
Year ended December 31,
-------------------------------------------------------------------------------
2001 over 2000 2000 over 1999
------------------------------------- -------------------------------------
Amount of Change Amount of Change
Total Attributed to Total Attributed to
Increase --------------------- Increase ---------------------
(Decrease) Volume Rate (Decrease) Volume Rate
---------- ------- ------- ---------- ------- -------
Interest income:
Interest and fees on loans ..... $ 3,388 $ 7,124 $(3,736) $ 7,935 $ 7,481 $ 454
Taxable securities ............. (517) (300) (217) (531) (595) 64
Non-taxable securities ......... 2 1 1 (12) (16) 4
Federal funds sold ............. (98) (55) (43) 55 34 21
------- ------- ------- ------- ------- -------
Total interest income ....... 2,775 6,770 (3,995) 7,447 6,904 543
Interest expense:
Interest on deposits:
Interest bearing demand ....... (1,056) 647 (1,703) 1,450 649 801
Savings ....................... (76) 33 (109) 7 7 --
Time .......................... 378 841 (463) 1,545 1,175 370
Other borrowings .............. (434) (32) (402) 620 449 171
------- ------- ------- ------- ------- -------
Total interest expense ...... (1,188) 1,489 (2,677) 3,622 2,280 1,342
------- ------- ------- ------- ------- -------
Net interest spread ............... $ 3,963 $ 5,281 (1,318) $ 3,825 $ 4,624 $ (799)
======= ======= ======= ======= ======= =======
5
Average Balances and Average Rates Earned and Paid
The following table sets forth for 2001, 2000, and 1999 information with
regard to average balances of assets and liabilities, as well as total dollar
amounts of interest income from interest-earning assets and interest expense on
interest-bearing liabilities, resultant average yields or rates, net interest
income, net interest spread, net interest margin and the ratio of average
interest-earning assets to average interest-bearing liabilities for the Company.
(Dollars in thousands):
Year ended Year ended
December 31, 2001 December 31, 2000
------------------------------- -------------------------------
Interest Average Interest Average
Average Income/ Yield or Average Income/ Yield or
Balance Expense Rates Balance Expense Rates
-------- -------- -------- -------- - -------- --------
Assets
Taxable securities ............... $ 24,317 $ 1,345 5.53% $ 29,380 $ 1,862 6.34%
Non-taxable securities (1) ....... 883 38 4.30% 834 36 4.32%
Federal funds sold ............... 1,259 52 4.13% 2,273 150 6.60%
Loans (2)(3) ..................... 394,432 36,863 9.35% 322,153 33,475 10.39%
-------- ------- -------- -------
Total earning assets ............ 420,891 38,298 9.10% 354,640 35,523 10.02%
Reserve for loan losses .......... (5,519) (4,181)
Cash and due from banks .......... 21,683 19,954
Premises and equipment, net ...... 9,087 8,181
Other Assets ..................... 15,527 15,221
-------- --------
Total assets .................... $461,669 $393,815
======== ========
Liabilities & Stockholders' Equity
Int. bearing demand deposits ..... $162,766 4,136 2.54% $142,012 5,192 3.66%
Savings deposits ................. 18,073 247 1.37% 16,124 323 2.00%
Time deposits .................... 72,125 3,502 4.86% 55,995 3,124 5.58%
Other borrowings ................. 19,655 886 4.51% 20,873 1,320 6.32%
-------- ------- -------- -------
Total interest bearing
liabilities .................... 272,619 8,771 3.22% 235,004 9,959 4.24%
Demand deposits .................. 144,994 124,144
Other liabilities ................ 6,179 3,215
-------- --------
Total liabilities ................ 423,792 362,363
Stockholders' equity ............. 37,877 31,452
-------- --------
Total liabilities & equity ...... $461,669 $393,815
======== ------- ======== -------
Net interest income .............. $29,527 $25,564
======= =======
Net interest spread .............. 5.88% 5.78%
==== =====
Net interest income to earning
assets .......................... 7.02% 7.21%
==== =====
Year ended
December 31, 1999
------------------------------
Interest Average
Average Income/ Yield or
Balance Expense Rates
-------- -------- -------
Assets
Taxable securities ............... $ 38,880 $ 2,393 6.15%
Non-taxable securities (1) ....... 1,209 48 3.87%
Federal funds sold ............... 1,716 95 5.54%
Loans (2)(3) ..................... 249,565 25,540 10.23%
-------- -------
Total earning assets ............ 291,370 28,076 9.64%
Reserve for loan losses .......... (3,133)
Cash and due from banks .......... 22,024
Premises and equipment, net ...... 7,261
Other Assets ..................... 13,761
--------
Total assets .................... $331,283
========
Liabilities & Stockholders' Equity
Int. bearing demand deposits ..... $122,519 3,742 3.05%
Savings deposits ................. 15,828 316 2.00%
Time deposits .................... 33,254 1,579 4.75%
Other borrowings ................. 13,160 700 5.32%
-------- -------
Total interest bearing
liabilities .................... 184,761 6,337 3.43%
Demand deposits .................. 115,038
Other liabilities ................ 3,465
--------
Total liabilities ................ 303,264
Stockholders' equity ............. 28,019
--------
Total liabilities & equity ...... $331,283
======== -------
Net interest income .............. $21,739
=======
Net interest spread .............. 6.21%
=====
Net interest income to earning
assets .......................... 7.46%
=====
- ----------
(1) Yields on tax-exempt securities have not been stated on a tax-equivalent
basis.
(2) Loan related fees included in the above yield calculations: $1,492,724 in
2001, $1,537,675 in 2000, and $1,552,000 in 1999.
(3) Includes mortgage loans held for sale.
Loan Portfolio Composition
Interest earned on the loan portfolio is the primary source of income for
the Company. Net loans represent 85% of total assets as of December 31, 2001.
The Company makes substantially all of its loans to customers located within the
Company's service area. Due to the rapid growth in population and the tourism
and service nature of the economy in its primary markets, the Bank loan
concentration has historically been in real estate construction and commercial
real estate. The Company has no loans defined as highly leveraged transactions
by the Federal Reserve Bank. The Company has no significant agricultural loans.
6
The following table presents the composition of the Company's loan
portfolio, at the dates indicated (dollars in thousands):
December 31,
----------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Commercial ................... $ 74,498 $ 56,707 $ 43,122 $ 31,280 $ 30,059
Real Estate:
Construction/lot .......... 97,430 72,241 49,276 44,875 30,863
Mortgage .................. 35,723 35,028 41,505 38,791 25,272
Commercial ................ 165,206 144,337 111,578 70,524 52,356
Consumer ..................... 50,315 50,361 34,622 22,693 18,901
-------- -------- -------- -------- --------
423,172 358,674 280,103 208,163 157,451
Less:
Reserve for loan losses ... 6,555 5,020 3,525 2,636 2,048
Deferred loan fees ........ 1,467 1,116 1,253 864 502
-------- -------- -------- -------- --------
8,022 6,136 4,778 3,500 2,550
-------- -------- -------- -------- --------
$415,150 $352,538 $275,325 $204,663 $154,901
======== ======== ======== ======== ========
At December 31, 2001, the contractual maturities of all loans by category
were as follows (dollars in thousands):
Due after
one, but
Due within within five Due after
Loan Category one year years five years Total
- ----------------------- ---------- ----------- ---------- --------
Commercial ............ $ 29,923 $ 37,113 $ 7,462 $ 74,498
Real Estate:
Construction/lot ... 59,865 35,004 2,561 97,430
Mortgage ........... 8,581 8,814 18,328 35,723
Commercial ......... 14,004 28,978 122,224 165,206
Consumer .............. 9,412 23,263 17,640 50,315
-------- -------- -------- --------
$121,785 $133,172 $168,215 $423,172
======== ======== ======== ========
Variable and adjustable rate loans contractually due after one year totaled
$212,940 at December 31, 2001 and loans with predetermined or fixed rates due
after one year totaled $88,447 at December 31, 2001.
Lending and Credit Management
The Company has a comprehensive risk management process to control,
underwrite, monitor and manage credit risk in lending. The underwriting process
relies principally on historical and prospective cash flow analysis augmented by
collateral assessment, credit bureau information, as well as business plan
assessment. Ongoing loan portfolio monitoring is performed by a centralized
credit administration function including review and testing of compliance to
loan policies and procedures. Internal and external auditors, and bank
regulatory examiners periodically sample and test certain credit files as well.
Risk of nonpayment exists with respect to all loans, which could result in
the classification of such loans as non-performing. Certain specific types of
risks are associated with different types of loans. Due to the nature of the
Company's customer base and the growth experienced in the Company's market area,
real estate is frequently a material component of collateral for the Company's
loans. Risks associated with real estate loans include fluctuating land values,
national, regional and local economic conditions, changes in tax policies, and a
concentration of loans within the Bank's market area. The Company's real estate
loan portfolio includes commercial real estate loans, as well as construction
loans for residential and commercial development, as well as construction and
permanent loans for owner occupied residential
7
housing. The expected source of repayment of these loans is generally the
operations of the borrower's business, or the obligor's personal income.
Management believes that real estate collateral provides an additional measure
of security. A majority of commercial real estate loans are made to
owner-occupied users of the property which mitigates, but does not eliminate,
commercial real estate risk. With respect to residential construction, the
Company generally lends funds to customers that have been pre-qualified for long
term financing and who are using experienced contractors acceptable to the
Company.
The following table presents information with respect to non-performing
assets (dollars in thousands):
December 31,
----------------------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Loans on non-accrual status .............. $2,430 $ 621 $ 582 $ 172 $ 43
Loans past due 90 days or more but not
on non-accrual status ................... 56 63 40 -- 45
Other real estate owned .................. -- -- 40 409 9
------ ------ ------ ------ ------
Total non-performing assets .............. $2,486 $ 684 $ 662 $ 581 $ 97
====== ====== ====== ====== ======
Percentage of non-performing assets to
total assets ............................ .51% .16% .19% .19% .04%
Non-performing assets increased to .51% percent of total assets at December
31, 2001 primarily due to a single term commercial real estate credit that
became non-performing in the first quarter of 2001. Management believes that the
net carrying value of this credit is adequately secured.
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. Interest
income that was reversed and charged against income for the year of 2001 was
approximately $456,000 (including $377,000 on the above mentioned single term
credit) and was insignificant for the years ended 2000 and 1999.
At December 31, 2001, except as discussed above, there were no potential
material problem loans, 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.
Reserve for Loan Losses
The reserve for loan losses represents management's recognition of the
assumed and present risks of extending credit and the possible inability or
failure of the obligors to make repayment. The reserve is maintained at a level
considered adequate to provide for loan losses based on management's assessment
of a variety of current factors affecting the loan portfolio. Such factors
include loss experience, review of problem loans, current economic conditions,
and an overall evaluation of the quality, risk characteristics and concentration
of loans in the portfolio. The reserve is increased by provisions charged to
operations and reduced by loans charged-off, net of recoveries. No assurance can
be given that in any particular period loan losses could be sustained that are
sizable in relation to the amount reserved, or that changing economic factors or
other environmental conditions could cause increases in the loan loss provision.
8
Allocation of Reserve for Loan Losses
The following table presents estimated allocation of the Reserve for Loan
Losses to major loan types. As a part of the methodology employed by the Company
to analyze the adequacy of the Reserve for Loan Losses, management may estimate
and allocate portions of the reserve for loan losses to specific loan
categories. In this process, the Company seeks to quantify, at a point in time,
its estimate of the inherent credit loss exposure within each loan type, given
relative and known credit quality circumstances, historical loss rates as well
as the impact of current and anticipated economic and business conditions. Such
an allocation process may not accurately predict future credit losses by loan
type or in aggregate. The total Reserve for Loan Losses is available to absorb
losses that may arise from any loan type or category.
December 31,
----------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------- ------------------- ------------------- ------------------- -------------------
% of loans % of loans % of loans % of loans % of loans
in each in each in each in each in each
category to category to category to category to category to
Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
Commercial ......... $1,046 18% $ 835 16% $ 793 15% $ 510 15% $ 490 20%
Real Estate:
Construction/lot .. 917 23 837 20 759 18 589 22 405 20
Mortgage .......... 532 8 305 10 374 15 344 18 224 15
Commercial ........ 1,238 39 986 40 675 40 458 34 340 33
Consumer ........... 2,499 12 1,608 14 899 12 589 11 454 12
Unallocated ........ 323 -- 449 -- 25 -- 146 -- 135 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$6,555 100% $5,020 100% $3,525 100% $2,636 100% $2,048 100%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
The following table summarizes the Company's reserve for loan losses and
charge-off and recovery activity for each of the last five years (dollars in
thousands):
Year ended December 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Loans outstanding at end of
period ......................... $423,172 $358,674 $280,103 $208,163 $157,451
======== ======== ======== ======== ========
Average loans outstanding
during the period .............. $394,432 $322,153 $249,565 $182,280 $149,698
======== ======== ======== ======== ========
Reserve balance, beginning of
period ......................... $ 5,020 $ 3,525 $ 2,636 $ 2,048 $ 1,691
Recoveries:
Commercial ..................... 91 12 9 2 16
Real Estate:
Construction ................. -- 1 -- -- --
Mortgage ..................... 30 -- 4 1 2
Commercial ................... -- -- -- -- --
Installment ..................... 212 201 166 39 42
-------- -------- -------- -------- --------
333 214 179 42 60
9
Year ended December 31,
-----------------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Loans charged off:
Commercial ........................ (518) (158) (518) (254) (80)
Real Estate:
Construction .................... -- -- (65) -- --
Mortgage ........................ (72) (15) (27) (91) (442)
Commercial ...................... (145) -- -- -- --
Consumer ........................... (1,753) (1,297) (790) (288) (256)
------- ------- ------- ------- -------
(2,488) (1,470) (1,399) (633) (778)
------- ------- ------- ------- -------
Net loans charged-off .............. (2,155) (1,256) (1,221) (591) (718)
Provision charged to operations .... 3,690 2,751 2,110 1,179 1,075
------- ------- ------- ------- -------
Reserve balance, end of period ..... $ 6,555 $ 5,020 $ 3,525 $ 2,636 $ 2,048
======= ======= ======= ======= =======
Ratio of net loans charged-off
to average loans outstanding ...... .55% .39% .49% .32% .48%
======= ======= ======= ======= =======
Ratio of reserve for loan losses
to loans at end of period ......... 1.55% 1.40% 1.26% 1.27% 1.30%
======= ======= ======= ======= =======
Investment Portfolio
The following table shows the carrying value of the Company's portfolio of
investments at December 31, 2001, 2000, and 1999 (dollars in thousands).
December 31,
-----------------------------
2001 2000 1999
------- ------- -------
Mortgage-backed securities ........................ $20,934 $ 9,212 $ 9,768
U.S. Treasury securities .......................... 2,021 2,030 2,016
Government and agency securities .................. -- 10,525 15,282
Obligations of state and political subdivisions ... 942 669 1,067
Mutual fund ....................................... 312 -- --
------- ------- -------
Total debt securities .......................... 23,897 22,436 28,133
Federal Home Loan Bank stock ...................... 2,045 1,788 1,676
Equity securities ................................. 1,676 1,857 2,003
------- ------- -------
Total investment securities .................... $27,930 $26,081 $31,812
======= ======= =======
10
The following is a summary of the contractual maturities and weighted
average yields of investment securities at December 31, 2001 (dollars in
thousands):
Weighted
Carrying Average
Type and maturity Value Yield (1)
----------------- -------- ---------
U.S. Treasury Securities
Due within 1 year ............................ $ 2,021 6.69%
----
Total U.S. Treasury Securities .......... 2,021 6.69%
State and Political Subdivisions
Due within 1 year ............................ 150 4.10%
Due after 1 but within 5 years ............... 259 4.30%
Due after 5 years ............................ 533 4.90%
----
Total State and Political Subdivisions .. 942 4.61%
Mortgage-Backed Securities ...................... 20,934 5.70%
Mutual Fund ..................................... 312 5.30%
----
Total Debt Securities ................... 24,209 5.70%
Federal Home Loan Bank stock .................... 2,045 6.89%
Equity Securities ............................... 1,676 1.97%
----
Total Securities ........................ $27,930 5.56%
======= ====
- ----------
(1) Yields on tax-exempt securities have not been stated on a tax equivalent
basis.
Deposit Liabilities and Time Deposit Maturities
The following table summarizes the average amount of, and the average rate
paid on, each of the deposit categories for the periods shown (dollars in
thousands):
Years ended December 31,
---------------------------------------------------------------------------
2001 2000 1999
Average Average Average
--------------------- --------------------- ---------------------
Rate Rate Rate
Deposit Liabilities Amount Paid Amount Paid Amount Paid
- ------------------- -------- ---- -------- ---- -------- ----
Demand .......................... $144,994 N/A $124,144 N/A $115,038 N/A
Interest-bearing demand ......... 162,766 2.54% 142,012 3.66% 122,519 3.05%
Savings ......................... 18,073 1.37% 16,124 2.00% 15,828 2.00%
Time ............................ 72,125 4.86% 55,995 5.58% 33,254 4.75%
-------- -------- --------
Total Deposits ................. $397,958 $338,275 $286,639
======== ======== ========
As of December 31, 2001 the Company's time deposit liabilities had the
following times remaining to maturity (dollars in thousands):
Time deposits of All other
$100,000 or more(1) Time deposits(2)
------------------- -------------------
Remaining time to maturity Amount Percent Amount Percent
-------------------------- ------- ------- ------- -------
3 months or less ......... $22,301 65.95% $13,798 39.28%
Over 3 months Through
6 months ............... 2,408 7.12 8,861 25.23
Over 6 months Through
12 months .............. 5,649 16.71 7,006 19.94
Over 12 months ........... 3,457 10.22 5,461 15.55
------- ------ ------- ------
Total ............... $33,815 100.00% $35,126 100.00%
======= ====== ======= ======
- ----------
(1) Time deposits of $100,000 or more represent 7.94% of total deposits as of
December 31, 2001.
(2) All other time deposits represent 8.25% of total deposits as of December
31, 2001.
11
Short-Term Borrowings
For the periods presented, short-term borrowings were primarily from FHLB
with no maturities (greater than) 90 days. See "Liquidity" in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The following table sets forth certain information with respect to the
Company's short-term borrowings at December 31 and during each of 2001, 2000 and
1999 (dollars in thousands):
December 31,
---------------------------------
Short-term borrowings 2001 2000 1999
- --------------------- ------- ------- -------
FHLB short-term advances (less than) 90 days ............ $15,000 $25,500 $13,000
FRB borrowings ........................................... 350 -- --
------- ------- -------
Total short-term borrowings outstanding at year-end .... $15,350 $25,500 $13,000
Weighted average interest rate at year-end ............... 1.88% 6.71% 5.79%
Maximum amount outstanding at any month-end during the
year ................................................... $26,000 $35,000 $19,400
Daily average amount outstanding during the year ......... $19,655 $20,050 $11,307
Weighted average interest rate during the year ........... 4.51% 6.34% 5.34%
SUPERVISION AND REGULATION
Bancorp and the Bank are extensively regulated under federal and Oregon
law. These laws and regulations are primarily intended to protect depositors and
the deposit insurance fund, not shareholders of the Company. To the extent that
the following information describes statutory or regulatory provisions, it is
qualified in its entirety by reference to the particular statutory or regulatory
provisions. Any change in applicable laws or regulations may have a material
effect on the business and prospects of the Company. The operations of the
Company may be affected by legislative changes and by the policies of various
regulatory authorities. Management is unable to predict the nature or the extent
of the effects on its business and earnings that fiscal or monetary policies,
economic control or new Federal or State legislation may have in the future.
Federal Bank Holding Company Regulation
The Company is a one-bank financial holding company within the meaning of
the Bank Holding Company Act (Act), and as such, it is subject to regulation,
supervision and examination by the Federal Reserve Bank (FRB). The Company has
been designated a Financial Holding Company as defined in the 1999
Gramm-Leach-Bliley Act (see description below). The Company is required to file
annual reports with the FRB and to provide the FRB such additional information
as the FRB may require.
The Act requires every bank holding company to obtain the prior approval of
the FRB before (1) acquiring, directly or indirectly, ownership or control of
any voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or (3)
merging or consolidating with another bank holding company. The FRB will not
approve any acquisition, merger or consolidation that would have a substantial
anticompetitive result, unless the anticompetitive effects of the proposed
transaction are clearly outweighed by a greater public interest in meeting the
convenience and needs of the community to be served. The FRB also considers
capital adequacy and other financial and managerial factors in reviewing
acquisitions or mergers.
With certain exceptions, the Act also prohibits a bank holding company from
acquiring or retaining direct or indirect ownership or control of more than 5%
of the voting shares of any company which is not a bank or bank holding company,
or from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities, which by statute or by FRB regulation or order,
12
have been identified as activities closely related to the business of banking or
of managing or controlling banks. In making this determination, the FRB
considers whether the performance of such activities by a bank holding company
can be expected to produce benefits to the public such as greater convenience,
increased competition or gains in efficiency in resources, which can be expected
to outweigh the risks of possible adverse effects such as decreased or unfair
competition, conflicts of interest or unsound banking practices.
USA Patriot Act
Under the USA Patriot Act of 2001, adopted by the U.S. Congress on October
26, 2001 to combat terrorism, FDIC insured banks and commercial banks will be
required to increase their due diligence efforts for correspondent accounts and
private banking customers. The USA Patriot Act requires the Bank to engage in
additional record keeping or reporting, requiring identification of owners of
accounts, or of the customers of foreign banks with accounts, and restricting or
prohibiting certain correspondent accounts.
Financial Modernization Act
On November 12, 1999 the Gramm-Leach-Bliley Act became law, repealing the
1933 Glass-Steagall Act's separation of the commercial and investment banking
industries. The Gramm-Leach-Bliley Act expands the range of nonbanking
activities a bank holding company may engage in, while reserving existing
authority for bank holding companies to engage in activities that are closely
related to banking. The new legislation creates a new category of holding
company called a "Financial Holding Company," a subset of bank holding companies
that satisfy the following criteria:
1. All of the depository institution subsidiaries must be well
capitalized and well managed;
2. The holding company must file with the Federal Reserve Board a
declaration that it elects to be a financial holding company to engage
in activities that would not have been permissible before the
Gramm-Leach-Bliley Act; and
3. All of the depository institution subsidiaries must have a Community
Reinvestment Act rating of "satisfactory" or better.
Financial holding companies may engage in any activity that (i) is
financial in nature or incidental to such financial activity (ii) is
complementary to a financial activity and does not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally. The Gramm-Leach-Bliley Act specifies certain activities that are
financial in nature. These activities include:
o acting as a principal, agent or broker for insurance;
o underwriting, dealing in or making a market in securities; and
o providing financial and investment advice.
The Federal Reserve Board and the Secretary of the Treasury have authority
to decide whether other activities are also financial in nature or incidental to
financial activity, taking into account changes in technology, changes in the
banking marketplace, competition for banking services and so on.
The Company became a designated "Financial Holding Company" during the
second quarter of 2000. It does not expect such designation to have a material
effect on its financial condition or results of operations.
Federal and State Bank Regulation
The Bank, as a Federal Deposit Insurance Corporation (FDIC) insured bank
which is not a member of the Federal Reserve System, is subject to the
supervision and regulation of the State of Oregon Department of Consumer and
Business Services, Division of Finance and Corporate Securities, and to the
supervision and regulation of the FDIC. These agencies may prohibit the Bank
from engaging in what they believe constitute unsafe or unsound banking
practices.
13
The Community Reinvestment Act (CRA) requires that, in connection with
examinations of financial institutions within their jurisdiction, the FRB or the
FDIC evaluate the record of the financial institutions in meeting the credit
needs of their local communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of those banks.
These factors are also considered in evaluating mergers, acquisitions and
applications to open a branch or facility. The Bank's current CRA rating is
"Satisfactory".
The Bank is also subject to certain restrictions imposed by the Federal
Reserve Act on extensions of credit to executive officers, directors, principal
shareholders or any related interest of such persons. Extensions of credit (i)
must be made on substantially the same terms, collateral and following credit
underwriting procedures that are not less stringent than those prevailing at the
time for comparable transactions with persons not described above, and (ii) must
not involve more than the normal risk of repayment or present other unfavorable
features. The Bank is also subject to certain lending limits and restrictions on
overdrafts to such persons. A violation of these restrictions may result in the
assessment of substantial civil monetary penalties on the Bank or any officer,
director, employee, agent or other person participating in the conduct of the
affairs of the Bank, the imposition of a cease and desist order, and other
regulatory sanctions.
Under the Federal Deposit Insurance Corporation Improvement Act (FDICIA),
each Federal banking agency is required to prescribe by regulation, non-capital
safety and soundness standards for institutions under its authority. These
standards are to cover internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, such other operational and managerial
standards as the agency determines to be appropriate, and standards for asset
quality, earnings and stock valuation. An institution, which fails to meet these
standards, must develop a plan acceptable to the agency, specifying the steps
that the institution will take to meet the standards. Failure to submit or
implement such a plan may subject the institution to regulatory sanctions. The
Company believes that the Bank already meets substantially all the standards
that are likely to be adopted, and therefore does not believe that the
implementation of these regulatory standards will materially affect the
Company's business operations.
Interstate Banking Legislation
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Interstate Act"), bank holding companies are permitted to acquire
banks located in any state regardless of the state law in effect at the time.
The Interstate Act also provides for the nationwide interstate branching of
banks. Under the Interstate Act, both national and state chartered banks,
including Oregon banks, are permitted to merge across state lines and thereby
create interstate branch networks.
Deposit Insurance
As a member institution of the FDIC, the deposits of the Bank are currently
insured to a maximum of $100,000 per depositor through the Bank Insurance Fund
("BIF"), and the Bank is required to pay semiannual deposit insurance premium
assessments to the FDIC.
The Deposit Insurance Funds Act of 1996 ("Funds Act") eliminated the
statutorily imposed minimum assessment amount, effective January 1, 1997. The
Funds Act also authorizes assessments on Bank Insurance Fund-assessable deposits
(such as, the Bank' deposits) and stipulates that the rate of assessment must
equal one-fifth the Financing Corporation assessment rate that is applied to
deposits assessable by the Savings Association Insurance Fund. The Financing
Corporation assessment rate for Bank Insurance Fund-assessable deposits is 1.296
cents per $100 of deposits per year. The Bank's FDIC insurance expense for 2001
was approximately $69,000.
Regulatory Dividend Restrictions
The principal source of Bancorp's cash revenues have been provided from
dividends received from the Bank. The Oregon banking laws impose the following
limitations on the payment of dividends by Oregon state chartered banks. The
amount of the dividend shall not be greater than its unreserved
14
retained earnings, deducting therefrom, to the extent not already charged
against earnings or reflected in a reserve, the following: (1) All bad debts,
which are debts on which interest is past due and unpaid for at least six
months, unless the debt is fully secured and in the process of collection. (2)
All other assets charged off as required by the Director of the Department of
Consumer and Business Services or a state or federal examiner. (3) All accrued
expenses, interest and taxes of the institution.
In addition, the appropriate regulatory authorities are authorized to
prohibit banks and bank holding companies from paying dividends, which would
constitute an unsafe or unsound banking practice. The Bank and Bancorp are not
currently subject to any regulatory restrictions on their dividends other than
those noted above.
Regulatory Capital
The Federal bank regulatory agencies use capital adequacy guidelines in
their examination and regulation of bank holding companies and banks. If the
capital falls below the minimum levels established by these guidelines, the bank
holding company or bank may be denied approval to acquire or establish
additional banks or non-bank businesses or to open facilities. At December 31,
2001 the Company is considered "well capitalized" according to these regulatory
capital guidelines. See footnote 17 to the Financial Statements in this report.
The FRB and FDIC promulgate risk-based capital guidelines for banks and
bank holding companies. Risk-based capital guidelines are designed to make
capital requirements sensitive to differences in risk profile among banks and
bank holding companies, to account for off-balance sheet exposure and to
minimize disincentives for holding liquid assets. Assets and off-balance sheet
items are assigned to broad risk categories, each with appropriate weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items. The guidelines are minimums,
and the FRB has noted that bank holding companies contemplating significant
expansion programs should not allow expansion to diminish their capital ratios
and should maintain ratios well in excess of the minimum. The current guidelines
require all bank holding companies and banks to maintain a minimum risk-based
total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital.
Tier 1 capital for bank holding companies includes common stockholders'
equity, qualifying perpetual preferred stock (up to 25% of total Tier 1 capital,
if cumulative; under a FRB rule, redeemable perpetual preferred stock may not be
counted as Tier 1 capital unless the redemption is subject to the prior approval
of the FRB) and minority interests in equity accounts of consolidated
subsidiaries, less intangibles. Tier 2 capital includes: (I) the allowance for
loan losses of up to 1.25% of risk-weighted assets; (ii) any qualifying
perpetual preferred stock which exceeds the amount which may be included in Tier
1 capital; (iii) hybrid capital instrument; (iv) perpetual debt; (v) mandatory
convertible securities and (vi) subordinated debt and intermediate term
preferred stock of up to 50% of Tier 1 capital. Total capital is the sum of Tier
1 and Tier 2 capital less reciprocal holdings of other banking organizations,
capital instruments and investments in unconsolidated subsidiaries.
Banks' and bank holding companies' assets are given risk-weights of 0%,
20%, 50% and 100%. In addition, certain off-balance sheet items are given credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets.
Loans are generally assigned to the 100% risk category, except for first
mortgage loans fully secured by residential property, which carry a 50% rating.
The Company's investment securities, mainly U.S. Government sponsored agency
obligations, are assigned to the 20% category, except for municipal or state
revenue bonds, which have a 50% risk-weight, and direct obligations of or
obligations fully guaranteed by the United States Treasury or United States
Government, which have 0% risk-weight. Off-balance sheet items, direct credit
substitutes, including general guarantees and standby letters of credit backing
financial obligations, are given a 100% conversion factor. Transaction related
contingencies such as bid bonds, other standby letters of credit and undrawn
commitments, including commercial credit lines with an initial maturity of more
than one year, have a 50% conversion factor. Short-term, self-liquidating trade
contingencies are converted at 20%, and short-term commitments have a 0% factor.
15
The FRB also has implemented a leverage ratio, which is Tier 1 capital as a
percentage of average total assets less intangibles, to be used as a supplement
to risk-based guidelines. The principal objective of the leverage ratio is to
place a constraint on the maximum degree to which a bank holding Company may
leverage its equity capital base. The FRB requires a minimum leverage ratio of
3%. However, for all but the most highly rated bank holding companies and for
bank holding companies seeking to expand, the FRB expects an additional cushion
of at least 1% to 2%.
At December 31, 2001, the Company's Tier 1, total risked-based capital and
leverage ratios were 9.66%, 10.92% and 8.58%, respectively.
The FDICIA also created a new statutory framework of supervisory actions
indexed to the capital level of the individual institution. Under regulations
adopted by the FDIC, an institution is assigned to one of five capital
categories depending on its total risk-based capital ratio, Tier 1 risk-based
capital ratio, and leverage ratio, together with certain subjective factors.
Institutions that are deemed "undercapitalized", depending on the category to
which they are assigned, are subject to certain mandatory supervisory corrective
actions. At December 31, 2001, the Company is considered "Well-capitalized".
Effects of Government Monetary Policy
The earnings and growth of the Company are affected not only by general
economic conditions, but also by the fiscal and monetary policies of the federal
government, particularly the Federal Reserve. The Federal Reserve can and does
implement national monetary policy for such purposes as curbing inflation and
combating recession, by its open market operations in U.S. Government
securities, control of the discount rate applicable to borrowings from the
Federal Reserve, and establishment of reserve requirements against certain
deposits. These activities influence growth of bank loans, investments and
deposits, and also affect interest rates charged on loans or paid on deposits.
The nature and impact of future changes in monetary policies and their impact on
the Company cannot be predicted with certainty.
ITEM 2. PROPERTIES
At December 31, 2001, the Company conducted banking services in twelve
locations. Nine located in Central Oregon and three in the Salem area of Oregon.
All offices are free standing buildings except one location, which is leased
space in a supermarket. The main office and five other branch buildings are
owned and are situated on leased land. The Bank owns land and building at two
branch locations. The Bank leases land and building at four branch locations. In
addition, the Bank leases space for its Information Systems/Operation Center,
located in Bend, Oregon. All leases include multiple renewal options. The Bank
owns property in the Old Mill district of Bend for a possible future branch, or
combination branch/operations facility.
The Bank's Main Office is located at 1100 NW Wall Street, Bend, Oregon, and
consists of approximately 15,000 square feet. The building is owned by the Bank
and is situated on leased land. The ground lease term is for 30 years and
commenced June 1, 1989. There are ten renewal options of five years each.
Monthly rental is $5,290 per month with adjustments every five years by mutual
agreement of landlord and tenant. The main bank branch occupies the ground
floor. Mortgage lending, trust & investments and credit functions occupy
approximately 8,400 square feet. A separate drive-up facility is also located on
site. In 1999 the Bank acquired a 3,000 square foot adjacent building and land
for future expansion of administrative functions for $295,000.
In the opinion of management all of the Bank's properties are adequately
insured.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time a party to various legal actions arising
in the normal course of business. Management believes that there is no
threatened or pending proceedings against the Company, which, if determined
adversely, would have a material effect on the business or financial position of
the Company
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
PART II
Item 5. MARKET FOR CASCADE BANCORP'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Cascade Bancorp common stock trades on The NASDAQ Small Cap Market tier of
The NASDAQ Stock Market under the symbol CACB. The primary market makers are:
RBC Dain Rauscher, Ragen MacKenzie, Inc., D.A. Davidson & Co., Hoefer & Arnett,
Pacific Crest Securities, Black & Company Inc., Herzog, Heine, Geduld, Inc., and
Keefe, Bruyette & Woods, Inc.
The high and low sales prices shown below are retroactively adjusted for
stock dividends and splits and are based on actual trade statistical information
provided by The NASDAQ Stock Market for the periods indicated.
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
2001
High ..... $13.44 $14.58 $16.82 $16.45
Low ...... $11.15 $11.33 $12.65 $12.97
2000
High ..... $10.32 $ 9.74 $11.46 $11.88
Low ...... $ 7.08 $ 7.29 $ 8.59 $ 9.95
The Company declared a 20% (6:5) stock split in May 2001. The Company
announced the establishment of regular quarterly cash dividends in 1997. The
dividends declared and paid listed below have been retroactively adjusted for
past stock dividends and stock splits.
Dividends Declared and Paid
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
2002 .... $.09 N/A N/A N/A
2001 .... $.07 $.08 $.08 $.08
2000 .... $.06 $.07 $.07 $.07
At March 4, 2002, the Company had 8,295,787 shares of common stock
outstanding held by approximately 3,300 shareholders of record.
17
Item 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's consolidated financial statements and the accompanying notes which
are included in this Annual Report on Form 10-K, (in thousands, except per share
data and ratios; unaudited):
Years ended December 31,
----------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Balance Sheet Data (at period end)
Investment securities ...................................... $27,930 $26,081 $31,812 $50,951 $44,400
Loans, gross ............................................... 423,172 358,674 280,103 208,163 157,451
Total assets ............................................... 488,753 423,293 347,904 300,774 242,611
Total deposits ............................................. 425,258 358,198 285,313 270,863 211,345
Non-interest bearing deposits ............................ 162,676 128,249 107,188 115,532 65,199
Core Deposits (1) ........................................ 356,317 294,270 246,326 240,054 189,751
Total shareholders' equity (2) ............................. 41,680 34,981 29,571 26,922 24,236
Income Statement Data
Interest income ............................................ $38,298 $35,523 $28,076 $22,453 $18,836
Interest expense ........................................... 8,771 9,959 6,337 5,182 4,787
Net interest income ........................................ 29,527 25,564 21,739 17,271 14,049
Loan loss provision ........................................ 3,690 2,751 2,110 1,179 1,075
Net interest income after loan loss provision .............. 25,837 22,813 19,629 16,092 12,974
Noninterest income ......................................... 7,603 5,767 5,409 5,611 4,310
Noninterest expense ........................................ 19,087 16,578 15,027 12,446 9,379
Income before income taxes ................................. 14,353 12,002 10,011 9,257 7,905
Provision for income taxes ................................. 5,671 4,683 3,773 3,491 2,864
Net income ................................................. $8,682 $7,319 $6,238 $5,766 $5,041
Share Data
Basic earnings per common share (2) ........................ $1.05 $0.89 $0.76 $0.70 $0.60
Diluted earnings per common share (2) ...................... $1.03 $0.87 $0.74 $0.68 $0.58
Book value per common share (2) ............................ $5.03 $4.23 $3.59 $3.27 $2.93
Cash dividends declared per common share (2) ............... $0.31 $0.27 $0.27 $0.26 $0.23
Ratio of dividends declared to net income .................. 30.48% 30.07% 35.19% 36.72% 37.99%
Basic Average shares outstanding (2)(3) .................... 8,269 8,252 8,231 8,220 8,426
Fully Diluted average shares outstanding (2)(3) ............ 8,450 8,384 8,425 8,477 8,668
Key Ratios
Return on average total shareholders' equity (2) ........... 22.92% 23.27% 22.26% 22.72% 20.73%
Return on average total assets ............................. 1.88% 1.86% 1.88% 2.18% 2.23%
Net interest spread ........................................ 5.88% 5.78% 6.21% 6.40% 6.23%
Net interest margin ........................................ 7.02% 7.21% 7.46% 7.40% 7.17%
Total revenue (net int inc + non int inc) .................. $37,130 $31,331 $27,148 $22,882 $18,359
Efficiency ratio (4) ....................................... 51.41% 52.91% 55.35% 54.39% 51.09%
Asset Quality Ratios
Loan loss reserve .......................................... $6,555 $5,020 $3,525 $2,636 $2,048
Reserve to ending total loans .............................. 1.55% 1.40% 1.26% 1.28% 1.32%
Non-performing assets (5) .................................. $2,486 $684 $662 $581 $97
Non-performing assets to total assets ...................... 0.51% 0.16% 0.19% 0.19% 0.04%
Delinquent (greater than) 30 days to total loans .......... 0.43% 0.57% 0.44% 0.38% --
Net Charge off's ........................................... $2,155 $1,256 $1,221 $592 $718
Net loan charge-offs (annualized) .......................... 0.55% 0.39% 0.49% 0.32% 0.48%
Mortgage Activity
Mortgage Originations ...................................... $164,436 $77,108 $97,935 $146,562 $85,447
Total Servicing Portfolio (sold loans) ..................... $372,755 $295,699 $268,792 $233,083 $174,294
Capitalized Mortgage Servicing Rights (MSR's) .............. $3,603 $3,019 $2,838 $2,291 n/a
Capital Ratios
Average shareholders' equity to average assets ............. 8.20% 7.99% 8.46% 9.61% 10.77%
Leverage ratio (6) ......................................... 8.58% 8.27% 8.37% 8.99% 9.63%
Total risk-based capital ratio (6) ......................... 10.92% 10.64% 11.09% 12.47% 14.29%
See notes on following page
18
Notes:
(1) Core deposits include checking, money market and savings accounts.
(2) Adjusted to reflect a two-for-one stock split in June 1997, a three-for-two
stock split in June 1998, a 10% stock dividend declared in June 1999 and a
20% (6:5) stock split declared in May 2001.
(3) During 1997 the Board adopted a stock repurchase plan to buyback
approximately 2.5% of common stock. In addition, the Board adopted a plan
to repurchase up to an additional 2.5% of common stock during 1998.
(4) Efficiency ratio is noninterest expense divided by (net interest income +
noninterest income -- non-recurring items).
(5) Nonperforming assets consist of loans contractually past due 90 days or
more, nonaccrual loans and other real estate owned.
(6) Computed in accordance with FRB and FDIC guidelines.
Selected Quarterly Financial Data
The following table sets forth the Company's unaudited data regarding
operations for each quarter of 2001 and 2000. This information, in the opinion
of management, includes all normal recurring adjustments necessary to state
fairly the information set forth therein (in thousands, except per share
amounts):
2001 Quarters Ended
-----------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31
-------- -------- -------- --------
Interest income ...................................................... $9,408 $9,815 $9,748 $9,327
Interest expense ..................................................... 1,490 2,038 2,492 2,752
-------- -------- -------- --------
Net interest income .................................................. 7,918 7,777 7,256 6,575
Loan loss provision .................................................. 875 1,100 1,000 715
-------- -------- -------- --------
Net interest income after loan loss provision ........................ 7,043 6,677 6,256 5,860
Noninterest income ................................................... 2,267 2,046 1,766 1,524
Noninterest expense .................................................. 5,225 4,959 4,603 4,300
-------- -------- -------- --------
Income before income taxes ........................................... 4,085 3,764 3,419 3,084
Provision for income taxes ........................................... 1,673 1,464 1,331 1,203
-------- -------- -------- --------
Net income ........................................................... $2,412 $2,300 $2,088 $1,881
======== ======== ======== ========
Weighted average number of shares outstanding (1) .................... 8,274 8,272 8,267 8,263
Basic earnings per share (1) ......................................... $0.29 $0.28 $0.25 $0.23
Fully diluted weighted average number of shares outstanding (1) ...... 8,477 8,467 8,437 8,354
Fully diluted earnings per share (1) ................................. $0.28 $0.27 $0.25 $0.23
2000 Quarters Ended
-----------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31
-------- -------- -------- --------
Interest income ...................................................... $9,559 $9,263 $8,738 $7,963
Interest expense ..................................................... 2,776 2,611 2,421 2,151
-------- -------- -------- --------
Net interest income .................................................. 6,783 6,652 6,317 5,812
Loan loss provision .................................................. 795 720 625 611
-------- -------- -------- --------
Net interest income after loan loss provision ........................ 5,988 5,932 5,692 5,201
Noninterest income ................................................... 1,510 1,522 1,397 1,338
Noninterest expense .................................................. 4,210 4,213 4,130 4,025
-------- -------- -------- --------
Income before income taxes ........................................... 3,288 3,241 2,959 2,514
Provision for income taxes ........................................... 1,282 1,222 1,183 996
-------- -------- -------- --------
Net income ........................................................... $2,006 $2,019 $1,776 $1,518
======== ======== ======== ========
Weighted average number of shares outstanding (1) .................... 8,256 8,256 8,254 8,243
Basic earnings per share (1) ......................................... $0.25 $0.24 $0.22 $0.18
Fully diluted weighted average number of shares outstanding (1) ...... 8,401 8,378 8,375 8,372
Fully diluted earnings per share (1) ................................. $0.24 $0.24 $0.21 $0.18
- ----------
(1) Adjusted to give retroactive effect to a 20% stock split declared in May
2001.
19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
audited consolidated financial statements and the notes thereto as of December
31, 2001 and 2000 and for each of the three years in the period ended December
31, 2001 included elsewhere 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's 2001 net income was $8.7 million, up 18.6% from the $7.3
million earned in 2000. Net income in 2000 represented a 17.3% increase from
1999's net income of $6.2 million. During the reported periods, progressively
higher earnings have led to improved earnings per share and strong return on
equity. Diluted earnings per share reached $1.03 in 2001 compared to $.87 in
2000 and $.74 in 1999, while return on equity was 22.9% in 2001 compared to
23.3% in 2000 and 22.3% in 1999. In a recent nationwide peer analysis, American
Banker magazine rated Cascade Bancorp as the highest return on equity bank in
the nation over the past five-years, averaging over 22% per year.
Increased earnings in 2001 were primarily due to a $72.3 million or 22.4%
increase in the average balance of the Company's loan portfolio with a resulting
increase in net interest income. This growth in loans was funded by a solid
increase in customer deposit balances. Revenue was further augmented by higher
non-interest income arising from strong mortgage banking results as well as
increased service fee income. Similarly, 2000 earnings improved due to growth in
both loan volumes outstanding coupled with expanded customer deposit balances.
Federal Home Loan Bank and other wholesale borrowings supported a portion of
this growth.
The Company opened a new branch banking office in South Salem, Oregon,
during the third quarter of 2001, bringing total branch locations to twelve. The
South Salem office is currently meeting internal projections as to financial
performance. Management generally targets new branches to achieve profitability
within two to three years, however there can be no assurance that future
profitability will be achieved.
Overall trends in both non-interest income and expense continue to be
affected by strong growth in customer relationships and related higher account
transaction volumes, as well as by results in the residential mortgage
origination business. In 2001, total non-interest income increased by 31.8% or
$1,836,000. This increase resulted from a $939,000 or 71.1% jump in mortgage
revenue because lower interest rates sparked strong mortgage refinance and
purchase activity. In addition, service charge income increased $860,000 or
32.5% in 2001. Total non-interest income for the year 2000 increased by 6.6% or
$358,000 primarily due to increased service charge income and merchant/visa
related income. With mortgage market rates generally higher in 2000 as compared
to 1999, mortgage-banking revenues fell modestly in 2000. Non-interest expense
increased 15.1% during 2001. Higher expenses resulted from the start-up costs
for a third branch in Salem, Oregon, as well as personnel related expenses
including variable commission and incentive pay based on the Company's strong
performance. The rate of growth in non-interest expense during 2000 was 10.3%,
down from a 19.8% increase in 1999. 1999 expense growth was higher due to
start-up branch locations in Salem and Redmond, Oregon. The year 2000 included
costs for a new branch location in Keizer, Oregon.
20
RESULTS OF OPERATIONS -- Years ended December 31, 2001, 2000, and 1999
Net Interest Income
Net interest income (gross interest income net of funding costs) was $29.5
million in 2001 compared to $25.6 and $21.7 million in 2000 and 1999,
respectively. In percentage terms, net interest income was up 15.5% in 2001, a
similar increase to 2000 when net interest income was 17.6% higher than in 1999.
The main factors affecting net interest income in 2001 were the continued
strength in loan and deposit growth as well as the dramatic decline in market
interest rates. Strong and consistent loan growth contributed to higher interest
income in both 2001 and 2000. Because only about one--third of earning assets
re-price immediately with short-term market rates, the yields on loans fell at a
pace slower than market rates in general. Also in response to lower market
interest rates, the Company's deposit and borrowing costs fell in-line with loan
yields during the year. Thus interest expense fell to $8.8 million in 2001
compared to nearly $10 million in 2000 despite an increase in deposits of $67.1
million at year-end 2001. For these reasons, the Company's net interest margin
fell only modestly in 2001 to a still strong 7.02% for the year. The net
interest margin was 7.21% in 2000 and 7.46% in 1999.
Declining rates in 2001 caused the yield on earning assets to decline to
9.10% compared to 10.02% in 2000 and 9.64% in 1999. Average rates paid on
interest bearing deposits and borrowings decreased in 2001 to 3.22%, down from
4.24% in 2000 and 3.43% in 1999. When non-interest-bearing deposits are included
in the calculation, the overall cost of funds for the Company was 2.21% for the
year 2001 compared to 2.77% and 2.11% in 2000 and 1999, respectively.
Loan Loss Provision
With a growing loan portfolio, the loan loss provision increased during the
periods presented to maintain the Loan Loss Reserve at a level that was adequate
to cover inherent losses in its loan portfolio. The Loan loss provision for 2001
was $3.7 million compared to $2.8 million in 2000 and $2.1 million in 1999. The
Bank's ratio of reserve for loan losses to total loans was 1.55% at December 31,
2001 compared to 1.40% at December 31, 2000. At this date, management believes
the reserve is adequate to absorb losses on identified problem loans as well as
losses inherent in the existing portfolio considering historical trends, current
economic conditions, obligor characteristics, loan type and concentration risks.
Estimates of the adequacy of the reserve are subject to change arising from
various factors, including changing conditions, trends, and factors discussed
above.
Non-interest Income
Non-interest income increased 31.8% to $7.6 million in 2001 compared to
2000. The increase was mainly due to higher service charges on deposit accounts
and increased mortgage related revenue due to strong refinance and purchase
activity in single family residential mortgage business. Service charge
increases were a function of growing relationship and transaction volumes as
well as improvements in pricing and processing of overdraft transactions.
With mortgage market rates at attractive levels for much of 2001, strong
home purchase and refinance activity improved the Company's mortgage banking
results. 2001 residential mortgage origination volumes totaled $164 million,
compared to $77 million in 2000, and $98 million in 1999. 2001 net mortgage
revenues increased to $2.2 million from $1.3 million the prior year. The general
level and direction of interest rates directly influence the volume and
profitability of mortgage banking. Therefore there can be no assurance as to the
future amounts of revenue that will be received in origination fees and gains on
sales of residential mortgage loans.
The Company generally sells the residential mortgage loans it originates to
FannieMae, a US Government sponsored enterprise. The Company services such loans
for FannieMae and is paid approximately .25% per annum on the outstanding
balance for providing this service. Mortgages serviced for FannieMae totaled
$373 million at December 31, 2001 and $296 million at December 31, 2000, upon
which it had recorded related Mortgage Servicing Rights (MSR) of $3.6 million
and $3.0 million, respectively. The Company capitalizes the estimated market
value of MSR into income upon origination
21
and sale of each mortgage loan. The Company amortizes MSR in proportion to the
servicing income it receives from FannieMae over the estimated life of the
underlying mortgages, considering prepayment expectations and refinancing
patterns. In addition, the Company amortizes, in full, any remaining MSR balance
that is specifically associated with a serviced loan that is refinanced or
paid-off. With declining interest rates and a record volume of refinancing
activity in 2001, the amortization of MSR exceeded loan-servicing fees by
$555,000. In contrast, in the higher mortgage rate climate during 2000 and 1999,
loan servicing fees exceeded the amortization of MSR by approximately $139,000
and $34,000, respectively.
MSR is also subject to impairment in the event the market value of MSR
falls below the capitalized amount. In such an event, an MSR impairment charge
would be made against income in that period and a valuation allowance would be
established to reflect the adjustment. The Company has engaged a qualified third
party to estimate the market value of MSR on a recurring basis. In its
accounting for MSR, management believes it applies conservative assumptions for
capitalization levels, MSR amortization amounts and expected lives of serviced
loans. However, because of possible unusual volatility in the market price of
MSR, there can be no assurance that risk management and conservative accounting
practices will result in the avoidance of possible impairment charges in future
periods. At year-end 2001, capitalized mortgage servicing rights totaled
approximately $3.6 million or 1.06% of related serviced loans, and the average
interest rate on serviced mortgages was approximately 6.92%. A year earlier,
capitalized MSR was $3.0 million or 1.19% of related serviced loans. At that
time, the serviced portfolio average interest rate was approximately 7.06%. MSR
was $2.8 million at year-end 1999.
Non-interest Expense
Total non-interest expense for 2001 was $19.1 million, an increase of $2.5
million or 15.1% from 2000. This compares to an increase of $1.6 million or
10.3% in 2000 over 1999. In the years presented, non-interest expense increased
in tandem with the growth of the business. Higher expenses funded new branch
locations, equipment, communication and information systems, marketing, postage,
donations, legal and professional services and as well as higher personnel
costs. Despite increased expenses, the efficiency ratio of the Company improved
over the periods, as the higher costs were leveraged against increased revenues
generated from the strong growth of the Company. Compensation expenses increased
with higher base salaries as well as variable commission and incentive pay tied
to specific volume, profitability and performance goals.
Income Taxes
The provision for income taxes increased during the periods presented
primarily as a result of higher pre-tax income.
Financial Condition
The Company continued to experience strong growth in 2001 despite a
national and state economic slowdown. This growth was achieved through a
continued increase in market share in its main Central Oregon service area,
along with growth in its newer branches in Salem, Oregon. Total assets increased
15.5% to $488.8 million at December 31, 2001 compared to $423.3 million at
December 31, 2000. Growth in total assets was primarily funded by a $67.1
million increase in deposits. The Company increased its share of deposits in its
main Deschutes County market to 32% from 30% a year earlier. Due to the growth
in deposits, the Company was able to reduce its overall borrowings by $10.2
million at year-end 2001.
The Company is a market share leader in lending within its service area,
and saw its loan portfolio grow 18.0% to $423.2 million at year-end 2001. This
is an increase of $64.5 million from a year earlier. Approximately one-third of
this growth was generated in the Salem market. Loan growth was concentrated in
the construction portfolio, up 34.9% or $25.2 million, and in commercial real
estate up 14.5% or $20.9 million. These increases are consistent with the nature
of economic growth in the markets served by the Company.
Total deposits at year end 2001 were $425.3 million, an increase of $67.1
million or 18.7% compared to year-end 2000. Deposits averaged $398.0 million for
the full year 2001, up 17.7% or $59.8 million from
22
the prior year average. A key competitive advantage of the Company is in its
expanding and retaining relationships with its loyal customers. This advantage
is evidenced in part by the Company's relatively high proportion of non-interest
bearing (checking account) deposits, which have grown to approximately 38% of
total deposits over the past two years. In 2001, non-interest-bearing demand was
up $34.4 million or 26.8%, interest bearing demand (including money market
deposits) up $26.1 million or 17.5%, and time deposits up $5.0 million or 7.8%.
The Company had no derivative financial instruments as of December 31, 2001
and 2000.
Capital Resources
The Company's total stockholders' equity at December 31, 2001 was $41.7
million, an increase of $6.7 million from December 31, 2000. 2001 equity was
increased by earnings of $8.7 million for the year less cash dividends paid to
shareholders of $2.6 million. At year-end 2001, net unrealized gains/(losses) on
investment securities available-for-sale increased to $.1 million from an
unrealized loss of $.4 a year earlier.
Liquidity
It is the Company's liquidity goal to have sufficient available 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
counter-parties. The Bank utilizes its available-for-sale investment securities
and certain loan portfolio types to provide collateral to support its borrowing
needs.
At December 31, 2001 the Bank maintained unsecured lines of credit totaling
$20.0 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 $73.1 million that may be accessed for short or long-term borrowings
given sufficient qualifying collateral. The Bank also had $13.4 million short
term borrowing availability from the Federal Reserve System that requires
specific qualifying collateral. At December 31, 2001 the Bank had outstanding
short-term borrowings totaling $15.4 million, with aggregate remaining available
borrowings of $91.1 million, given sufficient collateral availability.
At December 31, 2001 the Bank had approximately $139 million in outstanding
commitments to extend credit. Historically a significant portion of the
commitments will expire or terminate without funding. In addition, approximately
one-third of total commitments pertain to various construction projects. Under
the terms of such construction commitments, completion of specified project
benchmarks must be certified before funds may be drawn. Management believes that
the Bank's available resources will be sufficient to fund its commitments in the
normal course of business.
Inflation
The general rate of inflation over the past two years, as measured by the
Consumer Price Index, has not changed significantly, and management does not
consider the effects of inflation on the Company's financial position and
earnings to be material
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk and Asset and Liability Management
It is the Company's Asset and Liability management policy to manage
interest rate risk to maximize long term profitability under the range of likely
interest rate scenarios. The Board of Directors oversees implementation of
strategies to control interest rate risk. Management hires and engages a
qualified independent service provider to assist in modeling, monthly reporting
and assessing interest rate risk. The Company's methodology for analyzing
interest rate risk includes simulation modeling as well as traditional interest
rate gap analysis. While both methods provide an indication of risk for a given
change
23
in interest rates, it is management's opinion that simulation is the more
effective tool for asset and liability management. The Company may take steps to
alter its net sensitivity position by offering deposit and/or loan structures
that tend to mitigate its risk profile. In addition, the Company may acquire
investment securities, term borrowing structures, interest rate swaps or other
hedging instruments with re-pricing characteristics that tend to moderate
interest rate risk. There are no structured hedging instruments in use at this
time. Because of the volatility of market rates, event risk and uncertainties
described above there can be no assurance of the effectiveness of management
programs to achieve its risk management objectives.
The Company's profitability, like most financial institutions, depends to a
large extent upon its net interest income, which is the difference between the
interest earned on assets (loans and investments), versus the interest expense
paid on its liabilities (deposits and borrowings). The Company's loan portfolio
rate profile is approximately 32% variable rate loans, 37% loans with adjustable
rates between 3 and 5 years, and 31% fixed rate loans. Most of these loans are
subject to prepayment risk. The deposit and funding profile is approximately 1/3
non interest bearing, 40% money market deposits (which re-price with market
rates with a lag) while time and savings deposits represent about 20%. Any
borrowed funds tend to move directly with market rates. Maturity and re-pricing
differences between assets and liabilities create an interest rate risk profile
whereby the Company would tend to generate flat to modestly higher earnings
should market interest rates gradually rise and lower earnings should interest
rates fall.
To assess and estimate the degree of interest rate risk in the Company, the
Company utilizes a sophisticated simulation model that estimates the possible
volatility of Company earnings resulting from changes in interest rates.
Management first establishes a wide range of possible interest rate scenarios
over a two-year forecast period. Such scenarios include a "Stable" or unchanged
scenario and an "Estimated" or most likely scenario given current and forecast
economic conditions. In addition, scenarios titled "Rising Rate" and "Declining
Rate" are established to stress test the impact of more dramatic rates movements
that are perceived as less likely, but may still possibly occur. Next, net
interest income and earnings are simulated in each scenario. Simulated earnings
are compared over a two-year time horizon. The following table defines the
market interest rates used in the model for "Estimated" (most likely), "Rising"
and "Declining" interest rate scenarios. These market rates shown are reached
gradually over the 2-year simulation horizon.
Stable Rate
Scenario
(Actual Market Estimated Rate Declining Rate Rising Rate
Rates at Scenario at Scenario at Scenario at
December 2001) December 2003 December 2003 December 2003
-------------- ------------- ------------- -------------
Federal Funds Rate ............ 1.75% 3.75% 0.50% 7.75%
Prime Rate .................... 4.75% 7.00% 3.50% 10.25%
Treasury Yield Curve Spread
30-year to 3 month .......... 3.75% & 3.75% flattening 3.75% flattening 3.75% flattening
Unchanged Over to 2.00% to 2.35% to .50%
Horizon Period
The following table presents percentage change in simulated future earnings
under the above-described scenarios as compared to earnings under the "Stable"
or unchanged rate scenario calculated as of December 2001.
First twelve Month Second twelve Month Difference at 24th month
Stable Rate Scenario Compared to Average Difference Average Difference of Horizon Period
-------------------------------- ------------------ ------------------- ------------------------
Estimated Rate Scenario .......... 0.0% (.22%) (1.29%)
Rising Rate Scenario ............. (.80%) 2.16% 2.96%
Declining Rate Scenario .......... (2.00%) (7.49%) (11.09%)
Management's assessment of interest rate risk and scenario analysis must be
taken in the context of market interest rates and overall economic conditions.
2001 saw a dramatic decline in market interest rates, as the Federal Reserve
engineered an easing of credit in the face of an economic recession. At
24
year-end 2001, the national Fed Funds and Prime borrowing rates were 1.75% and
4.75%, respectively. In this environment, the Company maintained its net
interest margin because, as yields on its loan portfolio fell with market rates,
it was able to lower rates paid on deposits and borrowings at about the same
pace. The interest rate market currently prices in an expectation that future
market rates are likely to be biased upward. Given the present unusually low
rate environment, a reasonably likely scenario for the Company would be a period
of rising rates coupled with a flattening of the yield curve. In both the
"estimated" and "rising" rate scenarios depicted above, short-term funding and
deposit costs rise, while term loan spreads compress. For example, in the
"rising rate" scenario it is assumed that the Treasury yield curve flattens (3
month to thirty-year yield spread difference), falling from 3.75% at the
beginning of the horizon period to approximately .50% in the twenty-fourth month
of the simulation. In this scenario the model shows an adverse volatility of
2.16% to 2.96% compared to the outcome should rates remain stable. Because of
the current low rate climate, a less likely outcome is the "declining rate"
scenario. This scenario shows the highest adverse volatility, because loan rates
would presumably fall faster than Company's overall cost of funds as deposit and
funding rates compress against near zero levels. In management's judgement, the
interest rate risk profile of the Company is relatively well controlled at this
date.
The above results are only indicative of the Company's possible range of
interest rate risk exposure under various scenarios. The results do not
encompass all possible paths of future market rates, in terms of absolute change
or rate of change, or changes in the shape of the yield curve. Nor does the
simulation anticipate changes in credit conditions that could affect results.
The results do not include possible changes in volumes, pricing or portfolio
management tactics that may enable management to moderate the effect of such
interest rate changes.
Simulations are dependent on assumptions and estimations that management
believes are reasonable, although the actual results may vary substantially, and
there can be no assurance that simulation results are reliable indicators of
future earnings under such conditions. This is, in part, because of the nature
and uncertainties inherent in simulating future events including: 1) no
presumption of changes in asset and liability strategies in response to changing
circumstances; 2) model assumptions may differ from actual outcomes; 3)
uncertainties as to customer behavior in response to changing circumstance; 4)
unexpected absolute and relative loan and deposit volume changes; 5) unexpected
absolute and relative loan and deposit pricing levels; 6) unexpected behavior by
competitors; 7) other unanticipated credit conditions or other events impacting
volatility in market conditions and interest rates.
At year-end 2001, the Company's one-year cumulative interest rate gap
analysis indicates that rate sensitive liabilities maturing or available for
re-pricing within one-year exceeded rate sensitive assets by approximately $17.3
million compared to $54.4 million at year-end 2000.
25
Interest Rate Gap Table
Set forth below is a table showing the interest rate sensitivity Gap of the
Company's assets and liabilities over various re-pricing periods and maturities,
as of December 31, 2001. Maturities are based on contractual terms and repricing
amounts are based on actual historical experiences (dollars in thousands):
After After
90 days one year
Within within within After
90 days one Year five years five years Total
-------- -------- ---------- ---------- --------
INTEREST EARNING ASSETS:
Investments & fed funds sold ............... $ 2,021 $ 150 $ 25,226 $ 533 $ 27,930
Loans ...................................... 150,411 34,557 192,156 46,048 423,172
-------- -------- -------- --------- --------
Total interest earning assets ............ $152,432 $ 34,707 $217,382 $ 46,581 $451,102
======== ======== ======== ========= ========
INTEREST BEARING LIABILITIES:
Interest-bearing demand deposits ........... $ 63,999 $ 65,090 $ 10,394 $ 35,905 $175,388
Savings deposits ........................... -- -- 6,776 11,477 18,253
Time deposits .............................. 36,099 23,924 8,919 -- 68,942
-------- -------- -------- --------- --------
Total interest bearing deposits .......... 100,098 89,014 26,089 47,382 262,583
Other borrowings ........................... 15,350 -- -- -- 15,530
-------- -------- -------- --------- --------
Total interest bearing liabilities ....... $115,448 $ 89,014 $ 26,089 $ 47,382 $277,933
======== ======== ======== ========= ========
Interest rate sensitivity gap ................ $ 36,984 $(54,307) $191,293 $ (801) $173,169
Cumulative interest rate sensitivity gap ..... $ 36,984 $(17,323) $173,970 $ 173,169 $173,169
======== ======== ======== ========= ========
Interest rate gap as a percentage of total
interest earning assets .................... 8.20% (12,04%) 42.41% (0.18%) 38.39%
Cumulative interest rate gap as a
Percentage of total earning assets ......... 8.20% (3.84%) 38.57% 38.39% 38.39%
======== ======== ======== ========= ========
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For financial statements, see Index to Consolidated Financial Statements on
page 29.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Part III is incorporated by reference from the Company's definitive proxy
statement issued in conjunction with the Company's Annual Meeting of
Shareholders to be held April 22, 2002.
26
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The financial statements required in this Annual Report are
listed in the accompanying Index to Consolidated Financial
Statements on page 29.
(2) Financial Statement Schedules.
All financial statement schedules are omitted because they are
not applicable or not required, or because the required
information is included in the consolidated financial statements
or the notes thereto.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the last
quarter of the fiscal year ended December 31, 2001.
(c) Exhibits.
The list of exhibits has been intentionally omitted. Upon written
request, we will provide to you, without charge, a copy of the
list of exhibits as filed with the Securities and Exchange
Commission. Additionally, we will furnish you with a copy of any
exhibit upon written request. Written requests to obtain a list
of exhibits or any exhibit should be sent to Bank of the
Cascades, 1100 NW Wall Street, Bend, Oregon 97701, Attention:
Investor Relations.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 CASCADE BANCORP
/s/ Patricia L. Moss /s/ Gregory D. Newton
- --------------------------------- ----------------------------------------
Patricia L. Moss Gregory D. Newton
President/Chief Executive Officer Executive Vice President/Chief Financial
Date: March 4, 2002 Officer
Date: March 4, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Jerry E. Andres Director March 6, 2002
- --------------------
Jerry E. Andres
/s/ Gary L. Capps Director/Chairman March 5, 2002
- --------------------
Gary L. Capps
/s/ Gary L. Hoffman Director/Vice Chairman March 7, 2002
- --------------------
Gary L. Hoffman
/s/ Patricia L. Moss Director/President/CEO March 4, 2002
- --------------------
Patricia L. Moss
/s/ Ryan R. Patrick Director March 5, 2002
- --------------------
Ryan R. Patrick
/s/ James E. Petersen Director/Assistant Secretary March 8, 2002
- --------------------
James E. Petersen
/s/ L. A. Swarens Director March 5, 2002
- --------------------
L.A. Swarens
28
CASCADE BANCORP
Index to Consolidated Financial Statements
(Item 14(a))
Page
----
Report of Independent Auditors ....................................... 30
Consolidated Balance Sheets at December 31, 2001 and 2000 ............ 31
For the Years Ended December 31, 2001, 2000 and 1999:
Consolidated Statements of Income .................................. 32
Consolidated Statements of Changes in Stockholders' Equity ......... 33
Consolidated Statements of Cash Flows .............................. 36
Notes to Consolidated Financial Statements ........................... 37
29
REPORT OF SYMONDS, EVANS & COMPANY, P.C.,
INDEPENDENT AUDITORS
To the Board of Directors and
Stockholders of Cascade Bancorp
We have audited the accompanying consolidated balance sheets of Cascade Bancorp
and subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2001. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cascade Bancorp and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
/s/ Symonds, Evans & Company, P.C.
Portland, Oregon
January 11, 2002
30
CASCADE BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
------------- -------------
ASSETS
Cash and cash equivalents:
Cash and due from banks .......................................... $ 21,439,301 $ 20,999,520
Federal funds sold ............................................... -- 775,000
------------- -------------
Total cash and cash equivalents ............................... 21,439,301 21,774,520
Investment securities available-for-sale .......................... 24,942,532 23,623,499
Investment securities held-to-maturity, estimated fair value of
$3,017,519 ($2,455,478 in 2000)................................... 2,987,454 2,457,236
Loans, net ........................................................ 415,149,887 352,538,370
Premises and equipment, net ....................................... 9,289,825 8,665,939
Accrued interest and other assets ................................. 14,944,113 14,233,784
------------- -------------
Total assets .................................................. $ 488,753,112 $ 423,293,348
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand ......................................................... $ 162,675,615 $ 128,249,678
Interest bearing demand ........................................ 175,388,609 149,327,912
Savings ........................................................ 18,252,631 16,692,324
Time ........................................................... 68,940,774 63,927,847
------------- -------------
Total deposits ................................................ 425,257,629 358,197,761
Short-term borrowings ............................................ 15,350,000 25,500,000
Accrued interest and other liabilities ........................... 6,465,413 4,614,134
------------- -------------
Total liabilities ............................................. 447,073,042 388,311,895
Stockholders' equity:
Common stock, no par value; 10,000,000 shares authorized;
8,274,327 shares issued and outstanding (6,879,884 in 2000)..... 17,859,283 17,768,806
Retained earnings ................................................ 23,701,571 17,583,393
Accumulated other comprehensive income (loss) .................... 119,216 (370,746)
------------- -------------
Total stockholders' equity .................................... 41,680,070 34,981,453
------------- -------------
Total liabilities and stockholders' equity .................... $ 488,753,112 $ 423,293,348
============= =============
See accompanying notes.
31
CASCADE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ ------------
Interest and dividend income:
Interest and fees on loans ........................... $ 36,863,554 $ 33,475,140 $ 25,540,073
Taxable interest on investment securities ............ 1,213,818 1,750,855 2,246,594
Nontaxable interest on investment securities ......... 38,587 35,853 47,718
Interest on federal funds sold ....................... 51,645 149,551 94,577
Dividends on Federal Home Loan Bank
stock .............................................. 130,753 111,700 147,200
------------ ------------ ------------
Total interest and dividend income ................ 38,298,357 35,523,099 28,076,162
Interest expense:
Deposits:
Interest bearing demand .............................. 4,135,846 5,192,145 3,742,079
Savings .............................................. 247,686 322,606 315,848
Time ................................................. 3,502,272 3,124,446 1,579,061
Federal Home Loan Bank borrowings .................... 867,613 1,273,274 603,529
Federal funds purchased .............................. 18,153 46,393 96,432
------------ ------------ ------------
Total interest expense ............................ 8,771,570 9,958,864 6,336,949
------------ ------------ ------------
Net interest income ................................... 29,526,787 25,564,235 21,739,213
Loan loss provision ................................... 3,690,000 2,751,000 2,110,138
------------ ------------ ------------
Net interest income after loan loss provision ......... 25,836,787 22,813,235 19,629,075
Noninterest income:
Service charges on deposit accounts .................. 3,501,452 2,641,647 2,354,816
Mortgage loan origination and processing
fees ............................................... 2,264,747 993,298 1,269,191
Gains on sales of mortgage loans, net ................ 542,063 181,194 272,183
Mortgage loan servicing fees (amortization of
mortgage servicing rights), net .................... (555,089) 138,648 33,745
Losses on sales of investment securities
available-for-sale, net ............................ (12,554) (4,375) (10,619)
Merchant bankcard fees, net .......................... 403,641 451,192 300,502
VISA interchange ..................................... 418,717 361,446 276,095
Other ................................................ 1,039,583 1,003,563 912,618
------------ ------------ ------------
Total noninterest income .......................... 7,602,560 5,766,613 5,408,531
Noninterest expenses:
Salaries and employee benefits ....................... 11,190,550 9,646,300 8,560,000
Equipment ............................................ 803,932 903,393 1,044,435
Occupancy ............................................ 1,337,252 1,175,058 1,000,747
Supplies ............................................. 494,792 507,331 527,004
Third-party account services ......................... 519,860 611,373 488,281
Communications ....................................... 563,650 449,851 438,371
Advertising .......................................... 315,031 239,210 212,225
Other ................................................ 3,861,825 3,045,373 2,755,582
------------ ------------ ------------
Total noninterest expenses ........................ 19,086,892 16,577,889 15,026,645
------------ ------------ ------------
Income before income taxes ............................ 14,352,455 12,001,959 10,010,961
Provision for income taxes ............................ 5,670,700 4,683,200 3,772,500
------------ ------------ ------------
Net income ............................................ $ 8,681,755 $ 7,318,759 $ 6,238,461
============ ============ ============
Basic earnings per common share ....................... $ 1.05 $ .89 $ .76
============ ============ ============
Diluted earnings per common share ..................... $ 1.03 $ .87 $ .74
============ ============ ============
See accompanying notes.
32
CASCADE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Accumulated
Number other Total
of Comprehensive Common Retained comprehensive stockholders'
shares income (loss) stock earnings income (loss) equity
---------- ------------- ------------ ------------ ------------- ------------
Balances at December 31, 1998 .................. 6,226,082 $ 9,545,545 $ 17,218,415 $ 157,722 $ 26,921,682
Comprehensive income:
Net income .................................... -- $6,238,461 -- 6,238,461 -- 6,238,461
Other comprehensive loss --
unrealized losses on investment securities
available-for-sale of approximately
$787,000 (net of income taxes of
approximately $480,000), net of
reclassification adjustment for net losses
on sales of investment securities
available-for-sale included in net income
of approximately $7,000 (net of income
taxes of approximately $4,000) ............... -- (780,143) -- -- (780,143) (780,143)
----------
Comprehensive income ........................... -- $5,458,318 -- -- -- --
==========
Cash dividends paid (aggregating $.27 per
share) ........................................ -- -- (2,220,508) -- (2,220,508)
10% stock dividend ............................. 622,608 8,771,013 (8,771,013) -- --
Stock options exercised ........................ 75,534 317,738 -- -- 317,738
Repurchases of common stock .................... (61,990) (905,732) -- -- (905,732)
---------- ------------ ------------ --------- ------------
Balances at December 31, 1999 .................. 6,862,234 17,728,564 12,465,355 (622,421) 29,571,498
Comprehensive income:
Net income .................................... -- $7,318,759 $ -- $ 7,318,759 $ -- $ 7,318,759
Other comprehensive income --
unrealized gains on investment securities
available-for-sale of approximately $249,000
(net of income taxes of approximately
$152,000), net of reclassification adjustment
for net losses on sales of investment
securities available-for-sale included in net
income of approximately $3,000 (net of
income taxes of approximately $2,000) ......... -- 251,675 -- -- 251,675 251,675
----------
Comprehensive income ........................... -- $7,570,434 -- -- -- --
==========
Cash dividends paid (aggregating $.27 per
share) ........................................ -- -- (2,200,721) -- (2,200,721)
Stock options exercised ........................ 17,650 40,242 -- -- 40,242
---------- ------------ ------------ --------- ------------
Balances at December 31, 2000 .................. 6,879,884 17,768,806 17,583,393 (370,746) 34,981,453
See accompanying notes.
33
CASCADE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Accumulated
Number other Total
of Comprehensive Common Retained comprehensive stockholders'
shares income stock earnings income equity
--------- ------------- ------------- ------------ ------------- ------------
Comprehensive income:
Net income .................................... -- $8,681,755 $ -- $ 8,681,755 $ -- $ 8,681,755
Other comprehensive income --
unrealized gains on investment securities
available-for-sale of approximately $482,000
(net of income taxes of approximately
$296,000), net of reclassification adjustment
for net losses on sales of investment
securities available-for-sale included in net
income of approximately $8,000 (net of
income taxes of approximately $5,000) ......... -- 489,962 -- -- 489,962 489,962
----------
Comprehensive income ........................... -- $9,171,717 -- -- -- --
==========
Cash dividends paid (aggregating $.31 per
share) ........................................ -- -- (2,563,577) -- (2,563,577)
20% stock split ................................ 1,378,231 -- -- -- --
Stock options exercised ........................ 16,212 90,477 -- -- 90,477
--------- ------------- ------------ ---------- ------------
Balances at December 31, 2001 .................. 8,274,327 $ 17,859,283 $ 23,701,571 $ 119,216 $ 41,680,070
========= ============= ============ ========== ============
See accompanying notes.
34
CASCADE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------- ------------ ------------
Cash flows from operating activities:
Net income ..................................... $ 8,681,755 $ 7,318,759 $ 6,238,461
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ............... 2,342,132 1,506,351 1,624,955
Loan loss provision ......................... 3,690,000 2,751,000 2,110,138
Credit for deferred income taxes ............ (77,000) (103,000) (57,000)
Discounts on sales of mortgage loans,
net ....................................... 1,425,448 565,059 881,988
Losses on sales of investment securities
available-for-sale ........................ 12,554 4,375 10,619
Dividends on Federal Home Loan Bank
stock ..................................... (130,753) (111,700) (147,200)
Deferred benefit plan expenses .............. 503,000 420,000 418,000
Increase in accrued interest and other
assets .................................... (2,415,174) (1,294,233) (1,632,233)
Increase (decrease) in accrued interest
and other liabilities ..................... 1,348,279 1,274,150 (355,019)
Originations of mortgage loans .............. (164,436,349) (77,207,960) (97,715,204)
Proceeds from sales of mortgage loans ....... 157,173,266 73,238,112 94,927,939
------------- ------------ ------------
Net cash provided by operating activities ... 8,117,158 8,360,913 6,305,444
Cash flows from investing activities:
Purchases of investment securities
available-for-sale ........................... (17,349,909) (526,638) (2,079,833)
Proceeds from maturities and calls of
investment securities available-for-sale ..... 15,117,027 4,378,291 15,131,540
Proceeds from sales of investment securities
available-for-sale ........................... 1,022,446 1,995,625 4,624,315
Proceeds from maturities and calls of
investment securities held-to-maturity ....... 396,618 397,259 342,895
Other loan originations, net ................... (60,463,882) (76,559,350) (70,867,188)
Purchases of premises and equipment, net ....... (1,435,948) (1,734,486) (2,892,107)
Purchases of life insurance contracts .......... (226,900) (138,000) (103,000)
Surrender of life insurance contracts .......... 51,403 55,628 70,942
------------- ------------ ------------
Net cash used in investing activities ....... (62,889,145) (72,131,671) (55,772,436)
Cash flows from financing activities:
Net increase in deposits ....................... 67,059,868 72,885,220 14,449,810
Net increase (decrease) in short-term
borrowings ................................... (10,150,000) (4,600,000) 30,100,000
Cash dividends paid ............................ (2,563,577) (2,200,721) (2,220,508)
Stock options exercised ........................ 90,477 40,242 317,738
Repurchases of common stock .................... -- -- (905,732)
------------- ------------ ------------
Net cash provided by financing activities ... 54,436,768 66,124,741 41,741,308
------------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents .................................... (335,219) 2,353,983 (7,725,684)
Cash and cash equivalents at beginning of the
year ........................................... 21,774,520 19,420,537 27,146,221
------------- ------------ ------------
Cash and cash equivalents at end of the year .... $ 21,439,301 $ 21,774,520 $ 19,420,537
============= ============ ============
See accompanying notes.
35
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. Description of business and summary of significant accounting policies
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
Cascade Bancorp (Bancorp), a financial holding company, and its wholly owned
subsidiaries, Bank of the Cascades (the Bank) and Cascade Bancorp Financial
Services, Inc. (presently inactive) (collectively, "the Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Description of business
The Bank conducts a general banking business and primarily operates in one
business segment. Its activities include the usual lending and deposit functions
of a commercial bank: commercial, real estate, installment, credit card and
mortgage loans; checking, money market, time deposit and savings accounts;
internet banking and bill payment; automated teller machines (ATMs) and safe
deposit facilities. The Bank also originates and sells mortgage loans into the
secondary market.
Method of accounting
The Company prepares its consolidated financial statements in conformity with
accounting principles generally accepted in the United States and prevailing
practices within the banking industry. The Company utilizes the accrual method
of accounting which recognizes income when earned and expenses when incurred.
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements, and the reported amounts of
income and expenses during the reporting periods. Actual results could differ
from those estimates.
Cash and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and federal funds sold. Generally, federal funds
are sold for one-day periods.
The Bank maintains balances in correspondent bank accounts which, at times, may
exceed federally insured limits. Management believes that its risk of loss
associated with such balances is minimal due to the financial strength of the
correspondent banks. The Bank has not experienced any losses in such accounts.
Investment securities
Investment securities that management has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and reported at
cost, adjusted for premiums and discounts that are recognized in interest income
using the interest method over the period to maturity.
Investment securities that are purchased and held principally for the purpose of
selling them in the near term are classified as trading securities and are
reported at fair value, with unrealized gains and losses included in noninterest
income. The Company had no trading securities as of December 31, 2001 or 2000.
Investment securities that are not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale securities
and are reported at fair value, with unrealized gains and losses excluded from
earnings and reported as other comprehensive income or loss, net of income
taxes.
Gains or losses on the sale of available-for-sale securities are determined
using the specific-identification method. Premiums and discounts on
available-for-sale securities are recognized in interest income using the
interest method generally over the period to maturity.
36
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary would result in
write-downs of the individual securities to their fair value. The related
write-downs would be included in earnings as realized losses. Management
believes that all unrealized losses on investment securities as of December 31,
2001 and 2000 are temporary.
Federal Home Loan Bank stock
The Bank's investment in Federal Home Loan Bank (FHLB) stock is carried at par
value, which approximates fair value. As a member of the FHLB system, the Bank
is required to maintain a minimum level of investment in FHLB stock based on
specific percentages of its outstanding mortgages, total assets or FHLB
advances. At December 31, 2001, the Bank met its minimum required investment.
The Bank may request redemption at par value of any FHLB stock in excess of the
minimum required investment. Stock redemptions are at the discretion of FHLB.
Loans
Loans are stated at the amount of unpaid principal, reduced by the reserve for
loan losses and deferred loan fees. 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 established to absorb
known and inherent losses in the loan portfolio as of the balance sheet date.
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 historical loss experience; review
of problem loans; underlying collateral values and guaranties; current economic
conditions; and an overall evaluation of the quality, risk characteristics and
concentration of loans in the portfolio. The reserve is based on estimates, and
ultimate losses may vary from the current estimates. These estimates are
reviewed periodically, and, as adjustments become necessary, they are reported
in earnings in the periods in which they become known. The reserve is increased
by provisions charged to operations and reduced by loans charged-off, net of
recoveries.
The Bank considers loans to be impaired when management believes that it is
probable that all amounts due will not be collected according to the contractual
terms. Impairment is measured on a loan-by-loan basis by either the present
value of expected future cash flows discounted at the loan's effective interest
rate, the loan's obtainable market price or the fair value of the loan's
underlying collateral or related guaranty. Since a significant portion of the
Bank's loans are collateralized by real estate, the Bank primarily measures
impairment based on the fair value of the underlying collateral or related
guaranty. In certain other cases, impairment is measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate. Amounts deemed impaired are either specifically allocated for in the
reserve for loan losses or reflected as a partial charge-off of the loan
balance. Smaller balance homogeneous loans (typically installment loans) are
collectively evaluated for impairment. Accordingly, the Bank does not separately
identify individual installment loans for impairment disclosures. Generally, the
Bank evaluates a loan for impairment when it is placed on nonaccrual status. All
of the Bank's impaired loans at December 31, 2001 and 2000 were on nonaccrual
status.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to make payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received.
Loan origination and commitment fees, net of certain direct loan origination
costs, are generally recognized as an adjustment of the yield of the related
loan.
Interest income on all loans is accrued as earned on the simple interest method.
37
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's reserve for loan losses. Such agencies may
require the Bank to recognize additions to the reserve based on their judgment
of the information available to them at the time of their examinations.
Mortgage loans
Mortgage loans held for sale are carried at the lower of cost or estimated
market value. Market value is determined on an aggregate loan basis. At December
31, 2001 and 2000, mortgage loans held for sale were carried at cost, which
approximated estimated market value.
At December 31, 2001, 2000 and 1999, the Bank held servicing rights to
approximately $372,755,000, $295,699,000 and $268,792,000, respectively, in
mortgage loans which have been sold into the secondary market. Such mortgage
loans are not included in the accompanying consolidated balance sheets. The
sales of these mortgage loans are subject to technical underwriting exceptions
and related repurchase risks. However, as of December 31, 2001 and 2000,
management is not aware of any mortgage loans which will have to be repurchased.
During the years ended December 31, 2001, 2000 and 1999, the Bank capitalized
approximately $1,968,000, $746,000 and $1,154,000, respectively, in mortgage
servicing rights (MSRs). The capitalized MSRs are being amortized in proportion
to, and over the period of, estimated net servicing income. During the years
ended December 31, 2001, 2000 and 1999, the amortization of the capitalized MSRs
totaled approximately $1,384,000, $565,000 and $607,000, respectively. The net
amount of capitalized MSRs at December 31, 2001 and 2000 (approximately
$3,603,000 and $3,019,000, respectively) is included in accrued interest and
other assets in the accompanying consolidated balance sheets.
The fair value (which approximates the carrying amount) of the capitalized MSRs
at December 31, 2001 and 2000 was determined based on comparisons to current
market transactions involving MSRs with similar portfolio characteristics and
estimates of the net present value of expected future cash flows. Such estimates
of fair value are affected by point-in-time market assumptions relative to
interest rates, increasing or decreasing mortgage prepayment speeds, the
seasoning of the portfolio, discount rates, as well as portfolio coupon rates,
interest rate types (i.e., fixed or variable) and product maturities. Accounting
principles generally accepted in the United States require that, in the event
the estimated fair value of MSRs falls below the Company's carrying value, the
Company would record an impairment loss. To mitigate this risk, management
amortizes the MSRs over their expected life, and fully amortizes MSRs that are
specifically associated with any serviced mortgage loans that are paid off. The
Company does not employ specific hedges to mitigate fair value changes that may
occur due to market fluctuations. Therefore, there can be no assurance regarding
the possible impairment of MSRs in future periods.
Premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization on premises and equipment is
computed on straight-line and accelerated methods over the shorter of the
estimated useful lives of the assets or terms of the leases. Amortization of
leasehold improvements is included in depreciation and amortization expense in
the accompanying consolidated financial statements.
Other real estate
Other real estate, acquired through foreclosure or deeds in lieu of foreclosure,
is carried at the lower of cost or estimated net realizable value. When the
property is acquired, any excess of the loan balance over the estimated net
realizable value is charged to the reserve for loan losses. Holding costs,
subsequent write-downs to net realizable value, if any, or any disposition gains
or losses are included in noninterest income and expenses. Other real estate was
insignificant at December 31, 2001 and 2000.
38
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stockholders' equity
Basic and diluted earnings per common share (see Note 11), cash dividends per
share and the stock option plan information (see Note 14) have been adjusted to
give retroactive effect to stock dividends and splits.
Advertising
Advertising costs are generally charged to expense during the year in which they
are incurred.
Income taxes
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Recently issued accounting standards
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." These statements make
significant changes to the accounting for business combinations and goodwill.
SFAS No. 141 eliminates the pooling-of-interests method of accounting and
requires that the purchase method of accounting be used for business
combinations initiated after June 30, 2001. SFAS No. 142 discontinues the
practice of amortizing goodwill and requires that goodwill be continually
evaluated for impairment and be written-down when appropriate. SFAS No. 142 also
requires that other intangible assets that have been separately identified and
accounted for continue to be amortized over a determinable useful life. SFAS No.
142 is effective for fiscal years beginning after December 15, 2001. Management
does not expect that the adoption of SFAS No. 142 will have a material effect on
the Company's consolidated financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting
obligations associated with the retirement of long-lived assets and the
associated asset retirement costs. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. Management does not expect that the adoption of
SFAS No. 143 will have a material effect on the Company's consolidated financial
statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," and provides guidance on the
classification and accounting for such assets when held for sale or abandonment.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001.
Management does not expect that the adoption of SFAS No. 144 will have a
material effect on the Company's consolidated financial statements.
Reclassifications
Certain amounts in 2000 and 1999 have been reclassified to conform with the 2001
presentation.
2. Cash and due from banks
The Bank is required to maintain an average reserve balance (approximately
$3,431,000 and $3,097,000 at December 31, 2001 and 2000, respectively) with the
Federal Reserve Bank (FRB) or maintain such reserve balance in the form of cash.
This requirement was met by holding cash and maintaining an average reserve
balance with the FRB in excess of this amount.
39
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Investment securities
Investment securities at December 31, 2001 and 2000 consisted of the following:
Gross Gross Estimated
Amortized unrealized unrealized fair
2001 cost gains losses value
- ---- ----------- ---------- ---------- -----------
Available-for-sale
Mortgage-backed securities $20,934,965 $209,936 $211,070 $20,933,831
U.S. Treasury securities 1,999,753 21,647 -- 2,021,400
Equity securities 1,502,843 184,380 11,487 1,675,736
Mutual fund 312,262 -- 697 311,565
----------- -------- -------- -----------
$24,749,823 $415,963 $223,254 $24,942,532
=========== ======== ======== ===========
Held-to-maturity
Obligations of state and political subdivisions $ 942,354 $ 30,121 $ 56 $ 972,419
FHLB stock 2,045,100 -- -- 2,045,100
----------- -------- -------- -----------
$ 2,987,454 $ 30,121 $ 56 $ 3,017,519
=========== ======== ======== ===========
2000
- ----
Available-for-sale
U.S. Government and agency securities $10,527,299 $ 5,814 $ 8,725 $10,524,388
Mortgage-backed securities 9,167,586 126,810 82,138 9,212,258
U.S. Treasury securities 1,998,749 31,251 -- 2,030,000
Equity securities 2,527,843 -- 670,990 1,856,853
----------- -------- -------- -----------
$24,221,477 $163,875 $761,853 $23,623,499
=========== ======== ======== ===========
Held-to-maturity
Obligations of state and political subdivisions $ 669,436 $ 1,418 $ 3,176 $ 667,678
FHLB stock 1,787,800 -- -- 1,787,800
----------- -------- -------- -----------
$ 2,457,236 $ 1,418 $ 3,176 $ 2,455,478
=========== ======== ======== ===========
The amortized cost and estimated fair value of investment securities at December
31, 2001, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities, because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Estimated
Amortized fair
cost value
----------- -----------
Available-for-sale
Due in one year or less ........................ $ 1,999,753 $ 2,021,400
Mortgage-backed securities ..................... 20,934,965 20,933,831
Equity securities .............................. 1,502,843 1,675,736
Mutual fund .................................... 312,262 311,565
----------- -----------
$24,749,823 $24,942,532
=========== ===========
40
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Estimated
Amortized fair
cost value
---------- ----------
Held-to-maturity
Due in one year or less ........................ $ 149,934 $ 150,641
Due after one year through five years .......... 259,120 266,434
Due after five years through ten years ......... 423,300 440,924
Due after ten years ............................ 110,000 114,420
FHLB stock ..................................... 2,045,100 2,045,100
---------- ----------
$2,987,454 $3,017,519
========== ==========
Investment securities with a carrying value of approximately $21,534,000 and
$18,686,000 at December 31, 2001 and 2000, respectively, were pledged to secure
public deposits and for other purposes as required or permitted by law.
Gross realized gains and losses on sales of investment securities during the
years ended December 31, 2001, 2000 and 1999 were as follows:
Gross Gross
realized realized Net losses
gains losses on sales
-------- -------- ----------
2001 ................................. $27,532 $14,978 $12,554
2000 ................................. -- 4,375 4,375
1999 ................................. -- 10,619 10,619
4. Loans
Loans at December 31, 2001 and 2000 consisted of the following:
2001 2000
------------ ------------
Commercial .................................. $ 74,498,179 $ 56,707,366
Real estate:
Construction/lot ........................... 97,429,888 72,241,256
Mortgage ................................... 35,723,396 35,027,649
Commercial ................................. 165,205,878 144,337,388
Consumer .................................... 50,314,875 50,360,811
------------ ------------
423,172,216 358,674,470
Less:
Reserve for loan losses .................... 6,555,256 5,020,212
Deferred loan fees ......................... 1,467,073 1,115,888
------------ ------------
8,022,329 6,136,100
------------ ------------
Loans, net .................................. $415,149,887 $352,538,370
============ ============
Included in mortgage loans as of December 31, 2001 and 2000 were approximately
$4,319,000 and $1,326,000, respectively, in mortgage loans held for sale.
The Bank has nine branches located in Central Oregon and three branches located
in the Salem, Oregon area. The result of doing business in these geographic
areas has been growth in loan demand. A substantial portion of the Bank's loans
are collateralized by real estate in these geographic areas and, accordingly,
the ultimate collectibility of a substantial portion of the Bank's loan
portfolio is susceptible to changes in the local market conditions.
41
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In the normal course of business, the Bank participates portions of loans to
third parties in order to extend the Bank's lending capability or to mitigate
risk. At December 31, 2001 and 2000, the portion of these loans participated to
third parties (which are not included in the accompanying consolidated financial
statements) totaled approximately $1,860,000 and $1,745,000, respectively.
Also in the normal course of business, the Bank finances qualified construction
projects. The majority of residential construction loans are sold into the
secondary market subsequent to completion of the projects.
5. Reserve for loan losses
Transactions in the reserve for loan losses for the years ended December 31,
2001, 2000 and 1999 were as follows:
2001 2000 1999
------------ ------------ ------------
Balance at beginning of year ........................ $ 5,020,212 $ 3,525,185 $ 2,635,820
Loan loss provision ................................. 3,690,000 2,751,000 2,110,138
Loans charged-off ................................... (2,488,005) (1,469,977) (1,399,142)
Recoveries of loans previously charged-off .......... 333,049 214,004 178,369
------------ ------------ ------------
Balance at end of year .............................. $ 6,555,256 $ 5,020,212 $ 3,525,185
============ ============ ============
Loans on nonaccrual status at December 31, 2001 were approximately $2,430,000
($621,000 at December 31, 2000). Interest income, which would have been realized
on such nonaccrual loans outstanding at year-end, if they had remained current,
was approximately $456,000 during the year ended December 31, 2001 and
insignificant for the years ended December 31, 2000 and 1999. Loans
contractually past due 90 days or more on which the Company continued to accrue
interest at December 31, 2001 and 2000 were insignificant.
At December 31, 2001, the Company had approximately $1,186,000 in impaired loans
which are included in nonaccrual loans as disclosed above. Such impaired loans
relate to one borrower and the Company does not have any other loans outstanding
to this borrower. At December 31, 2000, impaired loans were insignificant. The
specific valuation allowance related to these impaired loans at December 31,
2001 was approximately $245,000. There was no specific valuation allowance
related to impaired loans at December 31, 2000. The average recorded investment
in impaired loans was approximately $2,050,000 for the year ended December 31,
2001 and insignificant for the year ended December 31, 2000. Interest income
recognized on impaired loans for the years ended December 31, 2001, 2000 and
1999 was insignificant.
6. Premises and equipment
Premises and equipment at December 31, 2001 and 2000 consisted of the following:
2001 2000
----------- -----------
Land ............................................... $ 1,098,715 $ 1,098,715
Buildings and leasehold improvements ............... 8,196,410 7,406,393
Furniture and equipment ............................ 5,738,331 5,534,083
----------- -----------
15,033,456 14,039,191
Less accumulated depreciation and amortization ..... 5,743,631 5,373,252
----------- -----------
Premises and equipment, net ........................ $ 9,289,825 $ 8,665,939
=========== ===========
42
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Time deposits
Time deposits in excess of $100,000 aggregated approximately $33,815,000 and
$25,048,000 at December 31, 2001 and 2000, respectively.
At December 31, 2001, the scheduled annual maturities of all time deposits were
approximately as follows:
2002 ......................... $60,023,000
2003 ......................... 5,213,000
2004 ......................... 955,000
2005 ......................... 2,639,000
2006 ......................... 70,000
Thereafter ................... 41,000
-----------
$68,941,000
===========
8. Short-term borrowings
Short-term borrowings at December 31, 2001 and 2000 consisted of the following:
2001 2000
---------------------- ----------------------
Interest Interest
Amount rate Amount rate
----------- -------- ----------- --------
FHLB cash management advance program ......... $12,500,000 1.83% $15,500,000 6.83%
FHLB borrowings under a promissory note
agreement ................................... 2,500,000 2.14 10,000,000 6.54
FRB borrowings ............................... 350,000 1.80 -- --
----------- -----------
$15,350,000 $25,500,000
=========== ===========
All of the Company's short-term borrowings mature in 2002. All outstanding
borrowings with the FHLB are collateralized by a blanket pledge agreement on the
Bank's FHLB stock, any funds on deposit with the FHLB, investment securities and
loans. The FRB borrowings are collateralized by approximately $22 million in
loans.
As of December 31, 2001, the Bank had remaining available borrowings from the
FHLB and FRB of approximately $58 million and $13 million, respectively. As an
additional source of liquidity, the Bank has federal fund borrowing agreements
with correspondent banks aggregating approximately $20 million at December 31,
2001.
9. Off-balance sheet financial instruments
In the normal course of business, the Bank is a party to financial instruments
with off-balance sheet risk to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, commitments under
credit card lines of credit and standby letters of credit. These instruments
involve, to varying degrees, elements of credit and interest-rate risk in excess
of amounts recognized in the accompanying consolidated balance sheets. The
contractual amounts of these instruments reflect the extent of the Bank's
involvement in these particular classes of financial instruments. As of December
31, 2001 and 2000, the Bank had no commitments to extend credit at below-market
interest rates and held no significant derivative financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit, commitments
under credit card lines of credit and standby
43
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The distribution of
commitments to extend credit approximates the distribution of loans outstanding.
A summary of the Bank's off-balance sheet financial instruments at December 31,
2001 and 2000 is approximately as follows:
2001 2000
------------ ------------
Commitments to extend credit ..................... $114,337,000 $100,822,000
Commitments under credit card lines of credit .... 22,480,000 19,267,000
Standby letters of credit ........................ 1,992,000 1,156,000
------------ ------------
Total off-balance sheet financial instruments .... $138,809,000 $121,245,000
============ ============
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of fees. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
it is deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counterparty. The Bank typically does not
obtain collateral related to credit card commitments. Collateral held for other
commitments varies but may include accounts receivable, inventory, property and
equipment, residential real estate and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third-party. These guaranties are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held, if
required, varies as specified above.
10. Income taxes
The provision (credit) for income taxes for the years ended December 31, 2001,
2000 and 1999 was approximately as follows:
2001 2000 1999
----------- ----------- -----------
Current:
Federal ....................... $ 4,796,000 $ 3,991,300 $ 3,166,000
State ......................... 951,700 794,900 663,500
----------- ----------- -----------
5,747,700 4,786,200 3,829,500
Deferred ....................... (77,000) (103,000) (57,000)
----------- ----------- -----------
Provision for income taxes ..... $ 5,670,700 $ 4,683,200 $ 3,772,500
=========== =========== ===========
44
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision for income taxes results in effective tax rates which are
different than the federal income tax statutory rate. The nature of the
differences for the years ended December 31, 2001, 2000 and 1999 were
approximately as follows:
2001 2000 1999
---------- ---------- ----------
Expected federal income tax provision at statutory rates .......... $4,923,400 $4,080,700 $3,403,700
State income taxes, net of federal effect ......................... 618,600 524,600 437,900
Effect of nontaxable interest income, net ......................... (47,800) (30,400) (24,600)
Other, net ........................................................ 176,500 108,300 (44,500)
---------- ---------- ----------
Provision for income taxes ........................................ $5,670,700 $4,683,200 $3,772,500
========== ========== ==========
The components of the net deferred tax assets (liabilities) at December 31, 2001
and 2000 were approximately as follows:
2001 2000
----------- ----------
Assets:
Reserve for loan losses ........................... $ 1,880,000 $1,536,000
Net unrealized losses on investment securities .... -- 227,000
Deferred benefit plan expense, net ................ 345,000 333,000
Other ............................................. 420,000 188,000
----------- ----------
Total deferred tax assets ....................... 2,645,000 2,284,000
Liabilities:
Deferred loan income .............................. 612,000 536,000
Mortgage servicing rights ......................... 1,383,000 1,159,000
FHLB stock dividends .............................. 368,000 317,000
Net unrealized gains on investment securities ..... 74,000 --
Other ............................................. 361,000 47,000
----------- ----------
Total deferred tax liabilities .................. 2,798,000 2,059,000
----------- ----------
Net deferred tax assets (liabilities) ........... $ (153,000) $ 225,000
=========== ==========
The Company made income tax payments of approximately $5,210,000, $4,330,000 and
$4,165,000 during 2001, 2000 and 1999, respectively.
11. Basic and diluted earnings per common share
The Company's basic earnings per common share is 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 is computed by dividing net
income by the weighted-average number of common shares outstanding plus dilutive
common shares related to stock options.
45
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The numerators and denominators used in computing basic and diluted earnings per
common share for the years ended December 31, 2001, 2000 and 1999 can be
reconciled as follows:
Net
income Shares Per-share
(numerator) (denominator) amount
----------- ------------- ---------
2001
Basic earnings per common share --
Income available to common stockholders ............. $8,681,755 8,269,178 $ 1.05
======
Effect of assumed conversion of stock options ......... -- 181,108
---------- ---------
Diluted earnings per common share ..................... $8,681,755 8,450,286 $ 1.03
========== ========= ======
2000
Basic earnings per common share --
Income available to common stockholders ............. $7,318,759 8,252,345 $ .89
======
Effect of assumed conversion of stock options ......... -- 132,349
---------- ---------
Diluted earnings per common share ..................... $7,318,759 8,384,694 $ .87
========== ========= ======
1999
Basic earnings per common share --
Income available to common stockholders ............. $6,238,461 8,230,417 $ .76
======
Effect of assumed conversion of stock options ......... -- 194,341
---------- ---------
Diluted earnings per common share ..................... $6,238,461 8,424,758 $ .74
========== ========= ======
12. Transactions with related parties
Some of the officers and directors (and the companies with which they are
associated) are customers of, and have had banking transactions with, the Bank
in the ordinary course of the Bank's business. In addition, the Bank expects to
continue to have such banking transactions in the future. All loans, and
commitments to loan, to such parties are generally made on the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons. In the opinion of management, these
transactions do not involve more than the normal risk of collectibility or
present any other unfavorable features.
An analysis of activity with respect to loans to directors and officers of the
Bank for the year ended December 31, 2001 was approximately as follows:
Balance at December 31, 2000 ................... $ 1,236,000
Additions ...................................... 1,711,000
Repayments ..................................... (1,719,000)
------------
Balance at December 31, 2001 ................... $ 1,228,000
============
13. Benefit plans
401(k) profit sharing plan
The Company maintains a 401(k) profit sharing plan (the Plan) that covers
substantially all full-time employees. Employees may make voluntary tax-deferred
contributions to the Plan, and the Company's contributions related to the Plan
are at the discretion of the Board of Directors (the Board), not to exceed the
amount deductible for federal income tax purposes.
46
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Employees have the option to receive a portion of the Company's contributions to
the Plan in cash. Employees vest in the Company's contributions to the Plan over
a period of five years. The total amounts charged to operations under the Plan
were approximately $1,235,000, $967,000 and $811,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
Other benefit plans
The Bank has deferred compensation plans for members of the Board and certain
key executives and managers, a salary continuation plan for certain key
executives and a fee continuation plan for the Board.
In accordance with the provisions of the deferred compensation plans,
participants can elect to defer portions of their annual compensation or fees.
The deferred amounts generally vest as deferred. The deferred compensation plus
interest is generally payable upon termination in either a lump sum or monthly
installments.
The salary continuation plan for certain key executives and the fee continuation
plan for the Board provide defined benefits to the participants upon
termination. The defined benefits for substantially all of the key executives
and the Board are for periods of fifteen years and ten years, respectively. The
benefits are subject to certain vesting requirements, and vested amounts are
generally payable upon termination in either a lump sum or monthly installments.
The Bank annually expenses amounts sufficient to accrue for the present value of
the benefits payable to the participants under these plans.
The plans also include death benefit provisions for certain participants. To
assist in the funding of the plans, the Bank has purchased life insurance
policies on the majority of participants. The cash surrender value of these
policies at December 31, 2001 and 2000 was approximately $7,184,000 and
$6,757,000, respectively, and is included in accrued interest and other assets
in the accompanying consolidated balance sheets. As of December 31, 2001 and
2000, the liabilities related to the deferred compensation plans included in
accrued interest and other liabilities in the accompanying consolidated balance
sheets totaled approximately $1,185,000 and $906,000, respectively. The amount
of expense charged to operations in 2001, 2000 and 1999 related to the deferred
compensation plans was approximately $288,000, $219,000 and $184,000,
respectively. As of December 31, 2001 and 2000, the liabilities related to the
salary continuation and fee continuation plans included in accrued interest and
other liabilities in the accompanying consolidated balance sheets totaled
approximately $1,082,000 and $928,000, respectively. The amount of expense
charged to operations in 2001, 2000 and 1999 for the salary continuation and fee
continuation plans was approximately $215,000, $201,000 and $234,000,
respectively. For financial reporting purposes, such expense amounts have not
been adjusted for income earned on the life insurance policies. The net amount
of income earned (net of related policy load charges, mortality costs and
surrender charges incurred) on the life insurance policies which was included in
other noninterest income in the accompanying consolidated statements of income
was approximately $320,000, $286,000 and $246,000 in 2001, 2000 and 1999,
respectively.
14. Stock Option Plan
Under the Company's Stock Option Plan, it may grant Incentive Stock Options
(ISOs) and Non-qualified Stock Options (NSOs) to key employees.
The option price of ISOs is the fair market value at the date of grant, and the
option price of NSOs is to be at a price not less than 85% of the fair market
value at the date of grant. Generally, options become exercisable in varying
amounts based on years of employee service, commencing one year from the date of
grant. All options expire after a period of ten years.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires companies,
such as the Company, that use the intrinsic value method to account for employee
stock options to provide pro forma disclosures
47
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of the net income and earnings per share effect of applying the fair value-based
method of accounting for stock options. The effect of applying the fair
value-based method to stock options granted in the years ended December 31,
2001, 2000 and 1999 resulted in an estimated weighted-average grant date fair
value of $3.59, $3.08 and $4.45, respectively.
Had compensation cost been determined based on the fair value of the options at
the date of grant, the Company's pro forma net income, pro forma basic earnings
per common share and pro forma diluted earnings per common share for the years
ended December 31, 2001, 2000 and 1999 would have been as follows:
2001 2000 1999
---------- ---------- ----------
Net income ............................................. As reported $8,681,755 $7,318,759 $6,238,461
Pro forma 8,442,596 7,124,066 6,072,449
Basic earnings per common share ........................ As reported $ 1.05 $ .89 $ .76
Pro forma 1.02 .86 .74
Diluted earnings per common share ...................... As reported $ 1.03 $ .87 $ .74
Pro forma 1.00 .85 .72
The Company used the Black-Scholes option-pricing model with the following
weighted-average assumptions to value options granted for the years ended
December 31, 2001, 2000 and 1999:
2001 2000 1999
------ ------ ------
Dividend yield ................................ 2.4% 2.8% 2.0%
Expected volatility ........................... 37.8% 35.4% 33.3%
Risk-free interest rate ....................... 4.5% 5.0% 6.3%
Expected option lives ......................... 5 years 5 years 5 years
At December 31, 2001, 96,529 shares reserved under the Stock Option Plan were
available for future grant. Activity related to the Stock Option Plan for the
years ended December 31, 2001, 2000 and 1999 was as follows:
2001 2000 1999
----------------------- ----------------------- ----------------------
Weighted- Weighted- Weighted-
average average average
Options exercise Options exercise Options exercise
outstanding price outstanding price outstanding price
----------- -------- ----------- -------- ----------- --------
Balance at beginning of year ..... 432,067 $ 8.16 379,280 $ 7.45 425,896 $ 5.88
Granted .......................... 89,730 11.25 89,100 10.42 77,880 13.45
Forfeited ........................ (7,062) 11.16 (15,133) 12.53 (33,855) 12.14
Exercised ........................ (18,467) 4.90 (21,180) 1.90 (90,641) 3.51
------- ------- -------
Balance at end of year ........... 496,268 $ 8.80 432,067 $ 8.16 379,280 $ 7.45
======= ====== ======= ====== ======= ======
48
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information regarding the number, weighted-average exercise price and
weighted-average remaining contractual life of options by range of exercise
price at December 31, 2001 is as follows:
Options outstanding Exercisable options
---------------------------------------- ----------------------
Weighted-
Weighted- average Weighted-
average remaining average
Number of exercise contractual Number of exercise
Exercise price range options price life (years) options price
- -------------------- --------- -------- ------------ --------- --------
$ 1.90................ 43,080 $ 1.90 2 43,080 $ 1.90
2.77 ............... 39,521 2.77 3 39,521 2.77
3.85 ............... 43,558 3.85 4 43,558 3.85
5.49 ............... 75,648 5.49 5 74,460 5.49
10.42 ............... 79,476 10.42 8 58,596 10.42
11.25 ............... 85,800 11.25 9 61,830 11.25
13.45 ............... 62,370 13.45 7 49,137 13.45
14.14 ............... 66,815 14.14 6 63,103 14.14
------- -------
496,268 $ 8.80 5.0 433,285 $ 8.37
======= ====== === ======= ======
Exercisable options as of December 31, 2000 and 1999 totaled 365,960 and
328,014, respectively.
15. Commitments and contingencies
The Bank leases certain land and facilities under operating leases, some of
which include renewal options and escalation clauses. At December 31, 2001, the
aggregate minimum rental commitments under operating leases that have initial or
remaining noncancelable lease terms in excess of one year were approximately as
follows:
2002 ..................................... $ 618,000
2003 ..................................... 624,000
2004 ..................................... 686,000
2005 ..................................... 640,000
2006 ..................................... 521,000
Thereafter ............................... 4,634,000
----------
Total minimum payments ................... $7,723,000
==========
Total rental expense was approximately $627,000, $554,000 and $426,000 in 2001,
2000 and 1999, respectively.
In the ordinary course of business, the Bank becomes involved in various
litigation arising from normal banking activities. In the opinion of management,
the ultimate disposition of these actions will not have a material adverse
effect on the Company's consolidated financial position or results of operations
at December 31, 2001.
16. Estimated fair values of financial instruments
The following disclosures are made in accordance with the provisions of SFAS No.
107, "Disclosures about Fair Value of Financial Instruments," which requires the
disclosure of fair value information about financial instruments where it is
practicable to estimate that value.
In cases where quoted market values are not available, the Company primarily
uses present value techniques to estimate the fair values of its financial
instruments. Valuation methods require considerable
49
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
judgment, and the resulting estimates of fair value can be significantly
affected by the assumptions made and methods used. Accordingly, the estimates
provided herein do not necessarily indicate amounts which could be realized in a
current market exchange.
In addition, as the Company normally intends to hold the majority of its
financial instruments until maturity, it does not expect to realize many of the
estimated amounts disclosed. The disclosures also do not include estimated fair
value amounts for items which are not defined as financial instruments but which
may have significant value. These include such off-balance sheet items as core
deposit intangibles. The Company does not believe that it would be practicable
to estimate a representational fair value for these types of items as of
December 31, 2001 and 2000.
Because SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements, any aggregation of the fair value
amounts presented would not represent the underlying value of the Company.
The Company uses the following methods and assumptions to estimate the fair
value of its financial instruments:
Cash and cash equivalents: The carrying amount approximates the estimated
fair value of these instruments.
Investment securities: The market value of investment securities, which is
based on quoted market values or the market values for comparable
securities, represents estimated fair value.
Loans: The estimated fair value of loans is calculated by discounting the
contractual cash flows of the loans using December 31, 2001 and 2000
origination rates. The resulting amounts are adjusted to estimate the
effect of changes in the credit quality of borrowers since the loans were
originated.
Deposits: The estimated fair value of demand deposits, consisting of
checking, savings and certain interest bearing demand deposit accounts, is
represented by the amounts payable on demand. The estimated fair value of
time deposits is calculated by discounting the scheduled cash flows using
the December 31, 2001 and 2000 rates offered on those instruments.
Short-term borrowings: The carrying amount approximates the estimated fair
value due to the short-term nature of these borrowings.
The estimated fair values of the Company's significant on-balance sheet
financial instruments at December 31, 2001 and 2000 were as follows:
2001 2000
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
------------ ------------ ------------ ------------
Financial assets:
Cash and cash equivalents ........ $ 21,439,301 $ 21,439,000 $ 21,774,520 $ 21,775,000
Investment securities:
Available-for-sale ............. 24,942,532 24,943,000 23,623,499 23,623,000
Held-to-maturity ............... 2,987,454 3,018,000 2,457,236 2,455,000
Loans, net ....................... 415,149,887 428,777,000 352,538,370 355,255,000
Financial liabilities:
Deposits ......................... 425,257,629 426,008,000 358,197,761 358,266,000
Short-term borrowings ............ 15,350,000 15,350,000 25,500,000 25,500,000
50
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Regulatory matters
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. The Company's
and the Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the tables below) of Tier 1 capital to average assets and Tier 1 and
total capital to risk-weighted assets (all as defined in the regulations).
Management believes that as of December 31, 2001 and 2000, the Company and the
Bank met or exceeded all relevant capital adequacy requirements.
As of December 31, 2001, the most recent notifications from the FRB and the
Federal Deposit Insurance Corporation categorized the Company and the Bank as
"well capitalized" under the regulatory framework for prompt correction action.
To be categorized as "well capitalized," the Company and the Bank must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set
forth in the table. There are no conditions or events since the notifications
from the regulators that management believes would change the Company's or the
Bank's regulatory capital categorization.
The Company's actual and required capital amounts and ratios are presented in
the following table (dollars in thousands):
Regulatory minimum
Regulatory to be "well
minimum capitalized"
to be under prompt
"adequately corrective
Actual capitalized" action provisions
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
December 31, 2001:
Tier 1 capital
(to average assets) .......... $41,401 8.6% $19,241 4.0% $24,140 5.0%
Tier 1 capital
(to risk-weighted assets)..... 41,401 9.7 17,138 4.0 25,707 6.0
Total capital
(to risk-weighted assets)..... 46,771 10.9 34,276 8.0 42,845 10.0
December 31, 2000:
Tier 1 capital
(to average assets) .......... $34,614 8.3% $16,746 4.0% $20,933 5.0%
Tier 1 capital
(to risk-weighted assets)..... 34,614 9.4 14,751 4.0 22,127 6.0
Total capital
(to risk-weighted assets)..... 39,229 10.6 29,503 8.0 36,878 10.0
51
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Bank's actual and required capital amounts and ratios are presented in the
following table (dollars in thousands):
Regulatory minimum
Regulatory to be "well
minimum capitalized"
to be under prompt
"adequately corrective
Actual capitalized" action provisions
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
December 31, 2001:
Tier 1 capital
(to average assets) .......... $39,631 8.2% $19,241 4.0% $24,052 5.0%
Tier 1 capital
(to risk-weighted assets)..... 39,631 9.3 17,065 4.0 25,598 6.0
Total capital
(to risk-weighted assets)..... 44,974 10.5 34,131 8.0 42,664 10.0
December 31, 2000:
Tier 1 capital
(to average assets) .......... 33,089 7.9 16,671 4.0 20,839 5.0
Tier 1 capital
(to risk-weighted assets)..... 33,089 9.0 14,646 4.0 21,969 6.0
Total capital
(to risk-weighted assets)..... 37,671 10.3 29,292 8.0 36,615 10.0
18. Parent company financial information
Condensed financial information for Bancorp (Parent company only) is presented
as follows:
CONDENSED BALANCE SHEETS
December 31,
--------------------------
2001 2000
----------- -----------
Assets:
Cash and cash equivalents ........................... $ 152,932 $ 42,891
Investment securities available-for-sale ............ 1,665,736 1,856,853
Investment in subsidiaries .......................... 39,802,209 33,457,071
Other assets ........................................ 124,891 374,638
----------- -----------
Total assets ...................................... $41,745,768 $35,731,453
=========== ===========
Liabilities and stockholders' equity:
Due to the Bank ..................................... $ -- $ 750,000
Other liabilities ................................... 65,698 --
Stockholders' equity ................................ 41,680,070 34,981,453
----------- -----------
Total liabilities and stockholders' equity ........ $41,745,768 $35,731,453
=========== ===========
52
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
Years ended December 31,
-------------------------------------------
2001 2000 1999
----------- ----------- -----------
Interest and other dividend income ..................... $ 43,461 $ 64,555 $ 135,053
Losses on sales of investment securities
available-for-sale, net .............................. (12,554) -- --
----------- ----------- -----------
Total income ....................................... 30,907 64,555 135,053
Expenses:
Administrative ....................................... 109,620 77,460 59,058
Interest ............................................. 53,476 80,566 102,488
Other ................................................ 120,440 111,090 96,022
----------- ----------- -----------
Total expenses ..................................... 283,536 269,116 257,568
----------- ----------- -----------
Loss before credit for income taxes, dividends from
the Bank and equity in undistributed net earnings
of subsidiaries ...................................... (252,629) (204,561) (122,515)
Credit for income taxes ................................ 96,000 79,000 46,500
----------- ----------- -----------
Loss before dividends from the Bank and equity in
undistributed net earnings of subsidiaries ........... (156,629) (125,561) (76,015)
Dividends from the Bank ................................ 2,925,000 2,175,000 1,950,000
Equity in undistributed net earnings of subsidiaries ... 5,913,384 5,269,320 4,364,476
----------- ----------- -----------
Net income ............................................. $ 8,681,755 $ 7,318,759 $ 6,238,461
=========== =========== ===========
53
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
-------------------------------------------
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities:
Net income ........................................... $ 8,681,755 $ 7,318,759 $ 6,238,461
Adjustments to reconcile net income to net cash
provided by operating activities:
Dividends from the Bank ............................ 2,925,000 2,175,000 1,950,000
Equity in undistributed net earnings of
subsidiaries ..................................... (8,838,384) (7,444,320) (6,314,476)
Decrease (increase) in other assets ................ 7,324 (4,094) (3,227)
Decrease in accrued liabilities .................... -- -- (103,669)
----------- ----------- -----------
Net cash provided by operating activities ........ 2,775,695 2,045,345 1,767,089
Cash flows from investing activities:
Proceeds from sales of investment securities
available-for-sale ................................. 1,022,446 -- --
Investment in the Bank ................................ (465,000) (125,000) --
----------- ----------- -----------
Net cash provided (used) by investing
activities ...................................... 557,446 (125,000) --
Cash flows from financing activities:
Cash dividends paid .................................. (2,563,577) (2,200,721) (2,220,508)
Stock options exercised .............................. 90,477 40,242 317,738
Decrease in due to the Bank .......................... (750,000) (375,000) (775,000)
Repurchases of common stock .......................... -- -- (905,732)
Decrease in due from Cascade Finance ................. -- 375,000 1,525,000
----------- ----------- -----------
Net cash used by financing activities ............. (3,223,100) (2,160,479) (2,058,502)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ... 110,041 (240,134) (291,413)
Cash and cash equivalents at beginning of the year ..... 42,891 283,025 574,438
----------- ----------- -----------
Cash and cash equivalents at end of the year ........... $ 152,932 $ 42,891 $ 283,025
=========== =========== ===========
These financial statements have not been reviewed for accuracy
or relevance by the Federal Deposit Insurance Corporation.
54
EXHIBITS INDEX
3.1 Articles of Incorporation. As amended, filed as exhibit 3.1 to
registrant's Form 10-Q report for the quarter ended June 30, 1997, and
incorporated herein by reference.
3.2 Bylaws. As amended and restated, filed as exhibit 3.2 to registrant's
Form 10-K Annual Report for the fiscal year ended December 31, 2000,
and is incorporated herein by reference.
10.1 Registrant's 1994 Incentive Stock Option Plan. Filed as an exhibit to
registrant's Registration Statement on Form 10-SB, filed in January
1994, and incorporated herein by reference.
10.2 Incentive Stock Option Plan Letter Agreement. Entered into between
registrant and certain employees pursuant to registrant's 1994
Incentive Stock Option Plan. Filed as an exhibit to registrant's
Registration Statement on Form 10-SB, filed in January, 1994, and
incorporated herein by reference.
10.3 Material Contract. Advances, Security and Deposit Agreement, dated
November 18, 1991, between Bank of the Cascades and the Federal Home
Loan Bank of Seattle. Filed as Exhibit 10.4 to registrant's Form
10-KSB filed December 31, 1994, and incorporated herein by reference.
10.4 Deferred Compensation Plans. Established for the Board, certain key
executives and managers during the fourth quarter ended December 31,
1995. Filed as exhibit 10.5 to registrant's Form 10-KSB filed December
31, 1995, and incorporated herein by reference.
11.1 Earnings per Share Computation. The information called for by this
item is located on pages 46 & 47 of this Form 10-K Annual Report, and
is incorporated herein by reference.
21.1 Subsidiaries of registrant.
23.1 Consent of Symonds, Evans & Company, P.C., Independent Accountants