<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(MARK ONE)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1998
------------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission file number: 0-23322
-----------
CASCADE BANCORP
(Exact name of Registrant as specified in its charter)
Oregon 93-1034484
(State of Incorporation) (I.R.S. Employer Identification No.)
1100 NW Wall Street
Bend, Oregon 97701
(Address of principal executive offices)
(Zip Code)
(541) 385-6205
(Registrant's telephone number, including area code)
----------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 6,227,882 shares of no par
value Common Stock on October 31, 1998. --------------------------
- - -------------------------------------
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
FORM 10-Q
QUARTERLY REPORT
SEPTEMBER 30, 1998
INDEX
PART I: FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Condensed Consolidated Balance Sheets
as of September 30, 1998 and December 31, 1997. . . . . . . . . . . . . .3
Condensed Consolidated Statements of Income
for the nine months and three months ended September 30, 1998 and 1997. .4
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 1998 and 1997. . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998 and 1997. . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . .11
PART II: OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 14
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2
<PAGE>
CASCADE BANCORP & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(Unaudited)
1998 1997
------------ ------------
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 18,058,928 $ 21,053,706
Federal funds sold 27,300,000 8,500,000
------------ ------------
Total cash and cash equivalents 45,358,928 29,553,706
Investment securities available-for-sale 33,037,792 41,953,637
Investment securities held-to-maturity 2,347,883 2,445,957
Loans, net 186,368,252 153,024,926
Mortgage loans held for sale 2,768,097 1,876,186
Premises and equipment, net 5,351,188 5,057,388
Accrued interest and other assets 11,040,047 8,699,681
------------ ------------
Total assets $286,272,187 $242,611,481
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $ 84,150,913 $ 65,199,160
Interest bearing demand 130,863,418 111,481,437
Savings 15,061,346 13,070,325
Time deposits 26,847,248 21,593,851
------------ ------------
Total deposits 256,922,925 211,344,773
Other borrowings - 5,000,000
Accrued interest and other liabilities 3,046,294 2,030,284
------------ ------------
Total liabilities 259,969,219 218,375,057
Stockholders'equity:
Common stock, no par value;
10,000,000 shares authorized;
6,230,962 issued and outstanding
(6,258,357-1997) 9,636,057 10,365,015
Retained earnings 16,265,896 13,568,644
Accumulated other comprehensive income 401,015 302,765
------------ ------------
Total stockholders' equity 26,302,968 24,236,424
------------ ------------
Total liabilities and stockholders'
equity $286,272,187 $242,611,481
============ ============
See accompanying notes.
3
<PAGE>
CASCADE BANCORP & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
----------- ----------- ---------- ----------
<S> <C> <C> <C <C>
Interest income:
Interest and fees on loans $13,915,575 $11,471,325 $5,030,957 $4,088,102
Taxable interest on investments 1,873,503 1,738,910 561,467 613,351
Nontaxable interest on investments 29,929 57,272 9,408 15,659
Interest on federal funds sold 415,280 338,598 289,839 197,273
---------- ---------- ---------- ----------
Total interest income 16,234,287 13,606,105 5,891,671 4,914,385
Interest expense:
Deposits:
Interest bearing demand 2,599,493 2,211,071 937,626 826,291
Savings 224,251 209,129 78,655 72,856
Time 929,416 731,263 335,445 252,070
Other borrowings 52,708 333,757 - 88,035
---------- ---------- --------- ----------
Total interest expense 3,805,868 3,485,220 1,351,726 1,239,252
---------- ---------- --------- ----------
Net interest income 12,428,419 10,120,885 4,539,945 3,675,133
Loan loss provision 676,573 607,177 308,254 231,316
---------- ---------- --------- ----------
Net interest income after loan loss provision 11,751,846 9,513,708 4,231,691 3,443,817
Noninterest income:
Service charges on deposit accounts 1,432,062 1,327,418 470,191 457,000
Mortgage loan origination and processing fees 1,332,073 773,321 389,333 285,071
Gains (losses) on sales of mortgage loans 187,595 296,597 114,995 156,216
Other income 1,257,362 857,999 526,095 345,245
---------- ---------- ---------- ----------
Total noninterest income 4,209,092 3,255,335 1,500,614 1,243,532
Noninterest expense:
Salaries and employee benefits 5,115,363 3,669,618 1,817,406 1,367,833
Net occupancy & equipment 1,318,597 1,121,612 477,682 386,378
Other expenses 2,666,653 1,997,239 935,778 670,537
---------- ---------- ---------- ----------
Total noninterest expense 9,100,613 6,788,469 3,230,866 2,424,748
---------- ---------- ---------- ----------
Income before income taxes 6,860,325 5,980,574 2,501,439 2,262,601
Provision for income taxes 2,607,314 2,246,107 966,773 801,388
---------- ---------- ---------- ----------
Net income $4,253,011 $3,734,467 $1,534,666 $1,461,213
========== ========== ========== ==========
Basic net income per common share $ 0.69 $ 0.59 $ 0.25 $ 0.23
========== ========== ========== ==========
Diluted net income per common share $ 0.66 $ 0.56 $ 0.24 $ 0.22
========== ========== ========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
CASCADE BANCORP & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE RETAINED COMPREHENSIVE COMMON STOCKHOLDERS'
INCOME EARNINGS INCOME STOCK EQUITY
------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ - $ 10,442,535 $ 71,097 $ 13,058,417 $ 23,572,049
Comprehensive Income:
Net Income 3,734,467 3,734,467 - - 3,734,467
Other comprehensive income, net of tax
Unrealized gains on securities
available-for-sale 142,974 - 142,974 - 142,974
-------------
Comprehensive income $ 3,877,441
=============
Cash dividend declared in January 1997 (1,066,485) - - (1,066,485)
($0.17 per common share)
Cash dividend declared in January 1997 (426,593) - - (426,593)
($0.07 per common share)
Stock Options exercised (37,404 shares) - - 100,000 100,000
------------ ------------ ----------- -------------
Balance at September 30, 1997 $ 12,683,924 $ 214,071 $ 13,158,417 $ 26,056,412
============ ============ =========== =============
Balance at December 31, 1997 $ - $ 13,568,644 $ 302,765 $ 10,365,015 $ 24,236,424
Comprehensive Income:
Net Income 4,253,011 4,253,011 - - 4,718,345
Other comprehensive income, net of tax
Unrealized gains on securities
available-for-sale 98,250 - 98,250 - 98,250
-------------
Comprehensive income $ 4,351,261
=============
Cash dividend declared in January 1998 (496,966) - - (496,966)
($0.08 per common share)
Cash dividend declared in May 1998 (498,061) - - (498,061)
($0.08 per common share)
Cash dividend declared in August 1998 (560,732) - - (560,732)
($0.09 per common share)
Repurchases of common stock - - (767,079) (767,079)
(41,464 shares)
Stock options exercised (14,069) - - 38,121 38,121
------------ ------------ ------------ ------------
Balance at September 30, 1998 $ 16,265,896 $ 401,015 $ 9,636,057 $ 26,302,968
============ ============ ============ ============
</TABLE>
See accompanying notes.
5
<PAGE>
CASCADE BANCORP & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net cash provided by operating activities $ 3,109,155 $ 3,382,637
Investing activities:
Purchases of investment securities
available-for-sale (4,881,645) (33,495,000)
Proceeds from maturities and calls of
investment securities available-for-sale 13,870,000 19,794,227
Purchases of investment securities
held-to-maturity (84,500) (80,800)
Proceeds from maturities and calls of
investment securities held-to-maturity 174,873 269,797
Net increase in loans (33,832,304) (19,794,227)
Purchases of premises and equipments, net (843,792) (1,118,002)
------------ ------------
Net cash used in investing activities (25,597,368) (35,211,513)
Financing activities:
Net increase in deposits 45,578,152 36,734,565
Cash dividends paid (1,555,759) (1,493,078)
Repurchases of stock (767,079) -
Proceeds from issuance of stock 38,121 100,000
Net increase (decrease) in other borrowings (5,000,000) -
------------ ------------
Net cash provided by financing activities 38,293,435 35,341,487
------------ ------------
Net increase in cash and cash equivalents 15,805,222 3,512,611
Cash and cash equivalents at beginning of period 29,553,706 28,892,608
------------ ------------
Cash and cash equivalents at end of period $ 45,358,928 $ 32,405,219
============ ============
</TABLE>
See accompanying notes.
6
<PAGE>
CASCADE BANCORP & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Unaudited)
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements include the
accounts of Cascade Bancorp (Bancorp), a bank holding company, and its
wholly-owned subsidiaries, Bank of the Cascades (the Bank) and Cascade
Finance, (collectively, "the Company"). The Bank is an Oregon state-chartered,
federally insured commercial bank and Cascade Finance is a consumer finance
company. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The interim condensed consolidated financial statements are unaudited,
but include all adjustments, consisting of only normal accruals, which the
Company considers necessary for a fair presentation of the results of
operations for such interim periods. In preparing the condensed consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the balance sheets and income and expenses for the periods. Actual results
could differ from those estimates.
The balance sheet data as of December 31, 1997 was derived from audited
financial statements, but does not include all disclosures contained in the
Company's 1997 Annual Report to Shareholders.
The interim condensed consolidated financial statements should be read in
conjunction with the December 31, 1997 consolidated financial statements,
including the notes thereto, included in the Company's 1997 Annual Report to
Shareholders.
Certain amounts for 1997 have been reclassified to conform with the 1998
presentation.
2. INVESTMENT SECURITIES
Investment securities at September 30, 1998 and December 31, 1997
consisted of the following:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
SEPTEMBER 30, 1998 COST GAINS LOSSES FAIR VALUE
- ------------------------------ ------------ --------- --------- ------------
<S> <C> <C> <C> <C>
Available-for-Sale
- ------------------
Obligations of U.S.
Government agencies........ $ 26,539,279 $ 521,542 $ 2,312 $ 27,058,509
U.S. Government agencies
Mortgage-backed securities. 2,326,420 - 39,092 2,287,328
U.S. Treasury securities...... 2,993,408 145,391 - 3,138,799
Equity securities............. 531,887 21,269 - 553,156
------------ --------- --------- ------------
$ 32,390,994 688,202 $ 41,404 $ 33,037,792
============ ========= ========= ============
Held-to-Maturity
- ----------------
Obligations of state and
Political subdivisions..... $ 847,219 $ 16,706 $ 800 $ 863,125
Other......................... 1,500,664 - - 1,500,664
------------ --------- --------- ------------
$ 2,347,883 $ 16,706 $ 800 $ 2,363,789
============ ========= ========= ============
7
<PAGE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
DECEMBER 31, 1997 COST GAINS LOSSES FAIR VALUE
- ------------------------------ ------------ --------- --------- ------------
<S> <C> <C> <C> <C>
Available-for-Sale
- ------------------
Obligations of U.S.
Government agencies........ $ 37,945,376 $ 393,249 $ - $ 38,338,625
U.S. Treasury securities...... 2,988,043 95,082 - 3,083,125
Equity securities............. 531,887 - - 531,887
------------ --------- --------- ------------
$ 41,465,306 488,331 $ - $ 41,953,637
============ ========= ========= ============
Held-to-Maturity
- ----------------
Obligations of state and
Political subdivisions..... $ 1,029,793 $ 7,018 $ - $ 1,036,811
Other......................... 1,416,164 - - 1,416,164
------------ --------- --------- ------------
$ 2,445,957 $ 7,018 $ - $ 2,452,975
============ ========= ========= ============
</TABLE>
3. LOANS AND RESERVE FOR LOAN LOSSES
The composition of the loan portfolio at September 30, 1998 and December
31, 1997 was as follows:
1998 1997
----------- ------------
Commercial.................... $ 30,705,064 $ 30,058,992
Real Estate:
Construction............... 46,186,587 30,862,916
Mortgage................... 31,180,986 23,395,618
Commercial................. 59,995,554 52,356,507
Installment................... 21,484,065 18,901,259
------------ ------------
189,552,256 155,575,292
Less:
Reserve for loan losses.... 2,450,030 2,048,561
Deferred loan fees......... 733,974 501,805
------------ ------------
3,184,004 2,550,366
------------ ------------
Loans, net ................... $186,368,252 $153,024,926
============ ============
Mortgage loans held for sale of $2,768,097 and $1,876,186 at September
30, 1998 and December 31, 1997, respectively, represent real estate mortgage
loans. These loans are recorded at cost which approximates market.
Transactions in the reserve for loan losses for the nine months ended
September 30, 1998 and 1997 were as follows:
1998 1997
----------- ------------
Balance at beginning of period... $ 2,048,561 $ 1,691,260
Provisions charged to operations. 676,573 607,177
Loans charged off................ (346,770) (350,015)
Recoveries of loans previously
charged off.................... 71,666 49,826
------------ ------------
Balance at end of period......... $ 2,450,030 $ 1,998,248
============ ============
The reserve for loan losses represents management's recognition of the
assumed risks of extending credit and the quality of the existing loan
portfolio. The reserve is maintained at a level considered adequate to
provide for potential loan losses based on management's assessment of various
factors affecting the portfolio. Such factors include loss experience, review
of problem loans, current economic conditions, and an overall evaluation of
the quality,
8
<PAGE>
risk characteristics and concentration of loans in the portfolio. The reserve
is increased by provisions charged to operations and reduced by loans
charged-off, net of recoveries.
The Bank manages the general risks inherent in the loan portfolio by
following loan policies and underwriting practices designed to result in
prudent lending activities.
Although a risk of nonpayment exists with respect to all loans, certain
specific types of risks are associated with different types of loans. Due to
the nature of the Bank's customer base and the growth experienced in the
Bank's market area, real estate is frequently a material component of
collateral for the Bank's loans. The expected source of repayment of these
loans is generally the operations of the borrower's business or personal
income; however, real estate provides an additional measure of security.
Risks associated with real estate loans include fluctuating land values, local
economic conditions, changes in tax policies, and a concentration of loans
within the Bank's market area.
The Bank mitigates risks on construction loans by generally lending funds
to customers that have been prequalified for long term financing and who are
using experienced contractors approved by the Bank. The commercial real
estate risk is further mitigated by making the majority of commercial real
estate loans to owner-occupied users of the property.
The following table presents information with respect to non-performing
assets at September 30, 1998 and December 31, 1997 (dollars in thousands):
1998 1997
------ ------
Loans on non-accrual status........... $ 724 $ 43
Loans past due 90 days or more
but non on non-accrual status...... 67 45
Other real estate owned............... 9 9
------ ------
Total non-performing assets........... $ 800 $ 97
====== ======
Percentage of non-performing assets
to total assets.................... .28% .04%
The accrual of interest on a loan is discontinued when, in management's
judgment, the future collectibility of principal or interest is in doubt.
Loans placed on nonaccrual status may or may not be contractually past due at
the time of such determination, and may or may not be secured. When a loan is
placed on nonaccrual status, it is the Bank's policy to reverse, and charge
against current income, interest previously accrued but uncollected. Interest
subsequently collected on such loans is credited to loan principal if, in the
opinion of management, full collectibility of principal is doubtful. If
interest on nonaccrual loans had been accrued, such income would have been
insignificant for the nine months ended September 30, 1998 and 1997.
At September 30, 1998, except as discussed above, there were no potential
problem loans, except as discussed above, where known information about
possible credit problems of the borrower caused management to have serious
doubts as to the ability of such borrower to comply with the present loan
repayment terms and which may result in such loans being placed on a
non-accrual basis.
4. MORTGAGE SERVICING RIGHTS
At September 30, 1998 and December 31, 1997, the Bank held servicing
rights to approximately $205,368,000 and $174,294,000, respectively, in
mortgage loans which have been sold to the Federal National Mortgage
Association. Effective March, 1998 these mortgage loans are being serviced by
the Bank. The sale of these mortgage loans are subject to technical
underwritingexceptions and related repurchase risks. Such risks are
considered in the determination of the reserve for loan losses. Beginning
effective January 1, 1996 the Bank began prospectively recognizing as separate
assets the rights to service mortgage loans which are acquired through loan
origination activities. Other assets in the accompanying condensed
consolidated balance sheets as of September 30, 1998 and December 31, 1997
include approximately $1,996,000 and approximately $1,270,000, respectively,
for the capitalized mortgage servicing rights.
9
<PAGE>
The fair value of the capitalized mortgage servicing rights was
determined based on estimates of the present value of expected future cash
flows and comparisons to current market transactions involving mortgage
servicing rights with similar portfolio characteristics. The predominant risk
characteristics of the underlying loans used to stratify the capitalized
mortgage servicing rights for purposes of measuring impairment are note rates,
terms and interest methods (i.e., fixed and variable).
5. OTHER BORROWINGS
At December 31, 1997 the Bank had $5 million in borrowings from the
Federal Home Loan Bank of Seattle (FHLB). In January 1998, the Bank paid-off
its borrowings with the FHLB.
6. NET INCOME PER COMMON SHARE
The Company's basic net income 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 net income per common share is calculated
by dividing net income by the weighted-average number of common shares
outstanding plus dilutive common shares related to stock options. The
weighted average number of common shares outstanding used to compute basic net
income per common share, was approximately 6,208,000 for the nine-months and
6,230,000 for the three-months ended September 30, 1998. The weighted average
number of common shares outstanding used to compute diluted net income per
common share, was approximately 6,433,000 for the nine-months and 6,427,000
for the three-months ended September 30, 1998. All share and per share
amounts in the accompanying financial statements have been adjusted to
retroactively reflect a three-for-two stock split declared in June 1998 and a
two-for-one stock split declared in June 1997.
7. ADOPTION OF NEW ACCOUNTING STANDARDS
In June 1997, Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income" was issued. This statement established
requirements for disclosure of comprehensive income and its components
(revenues, expenses, gains, and losses) and became effective for financial
statements beginning in 1998. Accordingly, unrealized gains and losses on
investment securities available-for-sale are included in other comprehensive
income as disclosed in the accompanying statements of changes in stockholders'
equity.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" was issued. SFAS No. 131 requires publicly-held
companies to report financial and other information about key revenue-
producing segments of the entity for which such information is available and
is utilized by the chief operating decision maker. Specific information to be
reported for individual segments includes profit or loss, certain revenue and
expense items and total assets. A reconciliation of segment financial
information to amounts reported in the financial statements will be required.
SFAS No. 131 becomes retroactively effective for financial statements for
annual periods beginning after December 15, 1997 and it has not yet been
determined whether the Company will be required to make any additional
disclosure.
In February 1998, SFAS No. 132, "Employers' Disclosure about Pensions
and Other Postretirement Benefit - an amendment to SFAS No. 87, 88 and 106,"
which revises and standardizes employers' disclosures about pension and other
postretirement benefit plans. SFAS No. 132 is effective for the Company in
1998. Management does not anticipate significant disclosure changes as a
result of adoption of SFAS No. 132.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS No. 133 established accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. As of
September 30, 1998 the Company has no significant derivative instruments or
hedging activities.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's unaudited condensed consolidated financial statements and the notes
thereto for the nine-month and three-month periods ended September 30, 1998
and 1997 included in this report.
When used in the following discussion, the word "expects,""believes,"
"anticipates" and other similar expressions are intended to identify forward-
looking statements, which are made pursuant to the safe harbor provisions of
the private securities litigation reform act of 1995. Such forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Specific risks and
uncertainties include, but are not limited to, general business and economic
conditions, and other factors listed from time to time in the Company's SEC
reports. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof. The Company under-
takes no obligation to publish revised forward-looking statements to reflect
the occurrence of unanticipated events or circumstances after the date hereof.
RESULTS OF OPERATIONS - Nine months and three months ended September 30, 1998
OVERVIEW
The Company reported net income of approximately $4,253,000, or $.69 basic
net income per common share, for the nine months ended September 30, 1998,
compared to net income of approximately $3,734,000, or $.59 basic net income
per common share, for the same period in 1997. This represents an increase in
net income of 13.9 percent. Net income for the quarter ended September 30, 1998
was approximately $1,535,000, or $.25 basic net income per common share,
compared to net income of approximately $1,461,000, or $.23 basic net income
per common share, for the same period in 1997, up 5.1 percent. The increases
in earnings during the periods presented were primarily due to the expansion of
the Company's interest-earning assets and increased net interest income. At
September 30, 1998, interest earning assets increased 23.4 percent as compared
to September 30, 1997.
NET INTEREST INCOME
Net interest income increased 22.8 percent for the nine months and 23.5
percent for the three months ended September 30, 1998 as compared to the same
periods in 1997. These net increases resulted from higher earning asset
volumes generating increased interest income which exceeded the increase in
interest expense.
Total interest income increased approximately $2,628,200 (or 19.3%) for
the nine months and $977,300 (or 19.9%) for the three months ended September
30, 1998 as compared to the same periods in 1997. The increase for the nine
months ended September 30, 1998 was primarily the result of an increase in the
volume of loans and investment securities available-for-sale. The increase
during the third quarter ended September 30, 1998 was primarily due to an
increased volume of loans.
Total interest expense increased approximately $320,600 (or 9.2%) for
the nine months and $112,500 (or 9.1%) for the three month ended September 30,
1998 as compared to the same periods in 1997. These increases for both the
nine-month and three-month periods were primarily due to increased volume in
interest bearing demand deposits, savings and time deposits partially offset
by a decrease in other borrowings.
LOAN LOSS PROVISION
The loan loss provision increased $69,396 for the nine months and
$76,938 for the three months ended September 30, 1998 as compared to the same
periods in 1997. Management believes the current loan loss provision
maintains the reserve for loan losses at an appropriate level. The Bank's
ratio of reserve for loan losses to total loans was 1.29 percent at September
30, 1998 compared to 1.32 percent at December 31, 1997.
11
<PAGE>
NONINTEREST INCOME
Total noninterest income increased 29.3 percent for the nine months and
20.7 percent for the three months ended September 30, 1998 as compared to the
same periods in 1997. The increase for both periods presented were primarily
due to increases in service income, mortgage loan origination and processing
fees and other income, which were partially offset by a decrease in gains on
sales of mortgage loans.
The increase in service charge income for both periods was primarily due
to an increase in the volume of deposit activity during the periods presented.
Increases in mortgage loan origination and processing fees were primarily due
to increased mortgage loan originations in conjunction with a favorable
interest rate environment. The slight decrease in net gains on sales of
mortgage loans for the nine months and three months ended September 30, 1998
was primarily attributable to an acceleration of mortgage servicing rights
amortization expense, related to recent higher refinance activity within the
Bank's portfolio of serviced mortgage loans.
NONINTEREST EXPENSE
Total noninterest expense increased 34.1 percent for the nine months and
33.2 percent for the three months ended September 30, 1998 as compared to the
same periods in 1997. These increases were primarily the result of increased
personnel and operating expenses due to continued growth of the Company.
INCOME TAXES
Income tax expense increased between the periods presented primarily as
a result of higher pre-tax income.
FINANCIAL CONDITION
The Company's total assets increased 18.0 percent to $286.3 million at
September 30, 1998 compared to $242.6 million at December 31, 1997, primarily
due to increases in net loans, which were offset in part by a decrease in
investment securities available-for-sale. The higher total assets were funded
primarily by an increase in deposits, which also compensated for the payoff of
a $5 million FHLB term borrowing. Loan demand was strong with total loans
increasing 21.9 percent to $189.6 million at September 30, 1998 compared to
$155.6 million at December 31, 1997. Deposits increased 21.6 percent to
$256.9 million at September 30, 1998 compared to $211.3 million at December
31, 1997. Because deposit growth has continued to exceed loan demand, the
Company increased its investments in available-for-sale securities by
approximately $14.0 million early in the fourth quarter, 1998. All categories
of deposits increased in the period. One of the contributing factors to the
Company's increased deposits is that the Bank emphasizes the development of
core deposit relationships. Such deposits provide a stable source of funds
for operations at a relatively low cost. Also, core deposit customers are
more likely to purchase other banking services. Core deposits include demand,
interest bearing demand and savings deposits. The Bank's core deposits
aggregated approximately $230.1 million at September 30, 1998.
YEAR 2000 DISCLOSURE
The year 2000 may pose unique chalenges to all businesses due to the
inability of some computers and computer software programs to accurately
recognize, for years after 1999, dates which often expressed as a two digit
number. This inability to recognize date information accurately could
potentially affect computer operations and calculations, or could cause
computer systems to not operate at all.
The federal banking regulators have issued several statements providing
guidance to financial institutionson the steps the regulators expect financial
institutions to take to become Year 2000 compliant. Each of the federal banking
regulators is also examining the financial institutions under its jurisdiction
to assess each institution's compliance with the outstanding guidance. If an
institution's progress in addressing the Year 2000 problem is deemed by its
primary federal regulator to be less than satisfactory, the institution will be
required to enter into a memorandum of understanding with the regulator which
will, among other things, require the institution to promptly develop and
submit an acceptable plan for becoming Year 2000 compliant and to provide
periodic reports describing the institution's progress in implementing the
plan. Failure to satisfactorily address the Year 2000 problem may also expose
a financial institution to other forms of enforcement action that its primary
federal regulator deems appropriate to address the deficiencies in the
institution's Year 2000 remediation program.
12
<PAGE>
The Company has completed an assessment of the Year 2000 issue,
considering the risk that date fields in existing computer applications might
fail to recognize the year 2000 and therefore create erroneous results. Based
upon the results of our assessment, management believes that the Company is
well prepared to respond to the issue and run successfully in the year 2000
and beyond.
The Company currently has formalized plans in place to address all
potential issues that may arise as a result of the date change. We are
currently testing and obtaining certifications on all hardware, software, and
environmental systems. We have also required certifications from all major
vendors to ensure that their systems are Year 2000 compliant. Prior to
January 1, 1999, all of the Company's systems will be formally tested for the
ability to process information with dates beyond December 31, 1999.
A Year 2000 Contingency Plan is in development which addresses critical
and non-critical applications. For each non-critical software package it
details how the job can be accomplished if the software is not operational.
Critical applications will rely on the above described testing program to
ensure they are Year 2000 compatible. The Contingency Plan will prescribe
alternate processes should critical applications fail; such processes will be
augmented by the Company's existing Recovery Plan which enables it to function
under unusual circumstances.
The Company has established a plan to detect and modify effected system
applications and anticipates that the cost of addressing the issue will not be
material to its future operating results or financial condition. Expenditures
related to Year 2000 totals approximately $43,500 to date.
Although management believes that it has addressed the major areas with
respect to Year 2000 compliance, there can be no assurances that the Company
will not be impacted by Year 2000 complications.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk in
its lending, deposit and borrowing activities. Management actively monitors
and manages its interest rate risk exposure. Although the Company manages
other risks, as in credit quality and liquidity risk, in the normal course of
business, management considers interest rate risk to be a significant market
risk which could have the largest material effect on the Company's financial
condition and results of operations. Other types of market risks, such as
foreign currency exchange rate risk and commodity price risk, do not arise in
the normal course of the Company's business activities.
The Company did not experience a material change in market risk at
September 30, 1998 as compared to December 31, 1997.
LIQUIDITY
The Company analyzes and manages its liquidity to ensure the
availability of sufficient funds to meet depositor withdrawals as well as to
fund borrowing needs of its loan customers. The Bank's stable deposit base is
the foundation of it's 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. In addition, the Bank
has substantial available-for-sale investment securities which could be
liquidated to provide a tertiary source of liquidity. The Bank is also a
member of the Federal Home Loan Bank, Seattle, Washington, which provides
secured borrowings and other funding opportunities for liquidity purposes.
Management believes that the Bank's existing sources of liquidity will
enable the Bank to fund its requirements in the normal course of business.
CAPITAL RESOURCES
During the nine months ended September 30, 1998, the Company's total
capital increased to $26.3 million, or 9.2 percent of total assets. The
increase was primarily due to the Company's net income of $4,253,011 for the
nine months ended September 30, 1998, and stock options exercised (14,069
shares) totaling $38,121. These increases to capital were offset by the
payment of cash dividends declared in 1998, totaling $1,555,759, the payment
of $767,079 for shares repurchased under the stock repurchase plan (41,464
shares), and the net change in unrealized
13
<PAGE>
gains on investment securities available-for-sale of $98,250.
In September 1997, the Company announced the establishment of a stock
repurchase plan. The plan authorized management to repurchase up to 2.5
percent of the Company's shares of common stock through the open market or in
privately negotiated transactions in accordance with all applicable State and
Federal laws and regulations. Repurchase was completed in November, 1997. In
December 1997, the Board of Directors approved a program to repurchase an
additional 2.5 percent of the Company's common stock outstanding during 1998.
As of September 30, 1998, 100,532 shares remain authorized for possible
repurchase.
At September 30, 1998, the Company's Tier 1 and total risked-based
capital ratios under the Federal Reserve Board's ("FRB") risk-based capital
guidelines were approximately 11.7% and 12.9%, respectively. The FRB's
minimum risk-based capital ratio guidelines for Tier 1 and total capital are
4% and 8%, respectively.
PART II - OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits were required to be filed for the quarter ended
September 30, 1998.
(b) REPORTS ON FORM 8-K. The Company did not file any reports
on Form 8-K during the third quarter ended September 30,
1998.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CASCADE BANCORP
-----------------------------------------
(Registrant)
Date 11/9/98 By /s/ Patricia L. Moss
----------------- ----------------------------------------------
Patricia L. Moss, President & CEO
Date 11/10/98 By /s/ Gregory D. Newton
----------------- ----------------------------------------------
Gregory D. Newton, SVP/Chief Financial Officer
Form 10-Q, September 30, 1998
15
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<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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