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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1997
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-23322
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CASCADE BANCORP
(Name of registrant as specified in its charter)
Oregon 93-1034484
(State of Incorporation) (I.R.S. 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained, 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. [ X ]
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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. $112,455,302 AGGREGATE MARKET VALUE AS OF MARCH 10, 1998, 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. 4,144,862 SHARES OF NO
PAR VALUE COMMON STOCK MARCH 10, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Part II incorporates information by reference from the issuer's Annual Report
to Shareholders for the fiscal year ended December 31, 1997. Part III is
incorporated by reference from the issuer's definitive proxy statement for the
annual meeting of shareholders to be held on April 27, 1998.
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CASCADE BANCORP
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
PART I Page
Item 1. DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . . . . . . . . .3
Item 2. DESCRIPTION OF PROPERTY . . . . . . . . . . . . . . . . . . . . . 21
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . 22
PART II
(Items 5, 7, and 8 are incorporated by reference from
Cascade Bancorp's 1997 Annual Report to Shareholders)
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . 22
Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . 22
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION .. . . . . . . . . . . . . . 22
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK. . . . . . . . . .. . . . . . . . . . . . . . . . . 22
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . 22
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . 22
PART III
(Items 10 through 13 are incorporated by reference from
Cascade Bancorp's definitive proxy statement for the
annual meeting of shareholders to be held on April 27,
1998.)
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . 23
Item 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . 23
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . 23
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . 23
Index to Consolidated Financial Statements . . . . . . . . . . 25
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY
Cascade Bancorp (Bancorp) is a bank holding company formed in 1990 and
is headquartered in Bend, Oregon. Bancorp's wholly-owned subsidiaries are
Bank of the Cascades,(the " Bank"), a state chartered, federally- insured
commercial bank and Cascade Finance which is a consumer finance company,
(collectively, "the Company"). At December 31, 1997 the Company had total
consolidated assets of $243 million, net loans of $153 million, and deposits
of $211 million.
BANK
The Bank was chartered as a state bank in March 1976 and opened for
business in February 1977. The Bank serves individuals, small and
medium-sized businesses, and professionals located in and adjacent to the
communities of Bend, Redmond, Sunriver, Sisters and Prineville, in Deschutes
and Crook County, Oregon. Through its eight branches, the Bank offers a broad
range of commercial and personal banking services to its customers. The Bank
focuses its lending activities primarily on small to medium-sized businesses
in diversified industries. In addition, the Bank provides real estate
construction and development loans, municipal and industrial loans, consumer
loans, and originates and sells residential mortgage loans. The Bank's
headquarters is located in downtown Bend, Oregon. The headquarters includes
administrative offices, a mortgage lending office, and a separate data
processing and drive-up facility.
CASCADE FINANCE
Cascade Finance opened in January 1997 and is based in Bend, Oregon.
Cascade Finance offers consumer loans and retail lending programs which
provides the Company with the opportunity to broaden its market with
complimentary services.
BUSINESS STRATEGY
The Company's business strategy is to continue to grow while maintaining
high asset quality, and includes the following components:
/X/ Emphasizing customer service
/X/ Attracting and retaining core deposits
/X/ Targeting its lending programs to the local market
/X/ Originating and selling mortgage loans
/X/ Prudently managing credit quality and interest rate risk
/X/ Effectively cross selling products and services
/X/ Expanding the branch system as opportunities arise
EMPHASIZING CUSTOMER SERVICE. The Company differentiates itself in its
market by a culture in which customers are the highest priority in all aspects
of the Company's operations. Ongoing employee training focuses on customer
needs, responsiveness and courtesy to customers. Community and customer
feedback helps the Company monitor its service and products.
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ATTRACTING AND RETAINING CORE DEPOSITS. The Company emphasizes the
development of core deposit relationships because such deposits provide a
stable source of funds for operations at a relatively low cost, and because
core deposit customers are more likely to purchase other banking services.
Core deposits include interest-bearing and non-interest bearing checking and
savings accounts. The Company's core deposits are approximately $190 million
at December 31, 1997.
TARGETING ITS LENDING PROGRAMS TO THE LOCAL MARKET. In addition to
commercial and consumer loans, the Company offers real estate construction and
development loans, municipal and industrial loans, and commercial
owner-occupied real estate loans. Through discussions with current and
prospective customers, the Bank designs specific loan products to serve small
and medium-sized businesses and professionals in its local market area. For
example, the Company has developed a construction/ permanent loan program
which management believes has generated significant additional lending
opportunities among local developers and contractors.
ORIGINATING AND SELLING MORTGAGE LOANS. The Bank actively markets its
mortgage loan origination services to real estate brokers, builders and
directly to borrowers. Management emphasizes the Bank's loan application
turnaround time and efficient loan processing. The Bank offers mortgage loans
which include construction loans, 15 year and 30 year fixed rate mortgage
loans and certain types of adjustable rate mortgages. Substantially all
mortgage loans which are originated are sold into the secondary market.
Management evaluates on an ongoing basis whether to sell originated mortgage
loans on a servicing released or servicing retained basis. At December 31,
1997, the Bank held servicing rights to approximately $174 million in mortgage
loans which have been sold into the secondary market. In March, 1998 the Bank
began direct servicing of these loans which were previously serviced by
another financial institution under contract with the Bank.
PRUDENTLY MANAGING CREDIT QUALITY AND INTEREST RATE RISK. The Bank has
implemented loan policies and underwriting practices which allows the Bank to
prudently manage credit risk. The Bank's risk management objectives are to
maintain an appropriate mix among core deposits and time deposits and to
provide adequate funding for the Bank's loan and investment activities. The
Bank does not use brokered deposits as a source of funds. The Bank retains,
for its loan portfolio, interim construction loans, selected fixed and
variable rate real estate loans, business and commercial credits, and consumer
loans. Fixed rate conventional mortgages are sold to lessen exposure to
interest rate risk. There can be no assurance, however, that the Bank's
strategies will continue to be successful.
EFFECTIVELY CROSS-SELLING PRODUCTS AND SERVICES. The Bank emphasizes
the development of long-term and mutually beneficial relationships with its
customers. The sale of more than one product or service to a customer is an
essential element of this strategy. In addition to a variety of loan
products, the Bank offers a broad range of deposit services, including
checking, savings, and money market accounts, time deposits and individual
retirement accounts. The Bank also provides credit cards, credit-related
insurance, cash management services, automatic teller machines, and safe
deposit boxes. Management intends to continue responding to market and
product opportunities as they occur.
EXPANDING THE BRANCH SYSTEM AS OPPORTUNITIES ARISE. Banks are permitted
to conduct business through branches after application to and approval of the
FDIC and the Director of the State of Oregon Department of Consumer and
Business Services, Division of Finance Corporate Securities, if they make
certain findings regarding the financial history and condition of the bank and
the appropriateness of the branch in the community to be served. The Bank's
management intends to continue to expand its branch system as appropriate
opportunities are identified.
EMPLOYEES
Bancorp has no employees other than its executive officers, who are also
employees of the Bank. As of December 31, 1997, the Bank had 153 full-time
equivalent employees and Cascade Finance had 3 full-time equivalent employees.
None of the employees of the Company are subject to a collective bargaining
agreement. The Company considers its relationships with its employees to be
good.
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COMPETITION
Commercial banking in Central Oregon is highly competitive with respect
to both loans and deposits. The Company competes principally with other
commercial banks, savings and loan associations, credit unions, mortgage
companies, and other financial institutions with respect to the scope and type
of services offered, interest rates paid on deposits and pricing of loans,
among other factors. Many of these competitors have greater resources than the
Company and therefore have larger lending capabilities and may provide other
services that the Company does not offer.
The Company competes for customers principally through the range and
quality of the services it provides. The Company believes its "Home-Town"
banking philosophy and its focus on small and medium-sized businesses and on
professionals enables it to compete effectively with other financial
institutions for the loans and deposits it seeks. To serve customers whose
borrowing requirements exceed its lending limits, the Company arranges
participations with other financial institutions.
Management believes the Company is able to compete effectively in its
market due to several factors. The Company's lending officers and senior
managers have significant experience in the Central Oregon area which enables
them to maintain close working relationships with their customers. In
addition, the Company emphasizes customer service in all aspects of its
operations, and management believes the Company is able to respond more
quickly to customer requests and market opportunities than its larger
competitors.
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, are permitted to merge across state lines and thereby create
interstate branch networks.
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 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 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
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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,
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.
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.
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
"Outstanding".
The Bank is also subject to certain restrictions imposed by the Federal
Reserve Act on extensions of credit to executive officers, directors,
principal stockholders 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
covered 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 which 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.
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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 FDICIA included provisions to reform the Federal deposit insurance
system, including the implementation of risk-based deposit insurance premiums.
The FDICIA also permits the FDIC to make special assessments on insured
depository institutions in amounts determined by the FDIC to be necessary to
give it adequate assessment income to repay amounts borrowed from the U.S.
Treasury and other sources or for any other purpose the FDIC deems necessary.
Pursuant to the FDICIA, the FDIC implemented a transitional risk-based
insurance premium system on January 1, 1993. Generally, banks are assessed
insurance premiums according to how much risk they are deemed to present to
the BIF. Banks with higher levels of capital and involving a low degree of
supervisory concern are assessed lower premiums than banks with lower levels
of capital or involving a higher degree of supervisory concern.
On November 14, 1995, the FDIC Board of Directors voted to further
reduce the insurance premiums paid on deposits covered by BIF and to maintain
existing assessment rates for deposits covered by the Savings Association
Insurance Fund (SAIF). Effective for the first semiannual assessment period
of 1996, assessment rates were lowered by four cents per $100 of assessable
deposits for all risk categories, subject to the statutory requirement that
all institutions pay at least $2,000 annually for FDIC insurance. The
four-cent reduction in BIF rates utilizes the "adjustment" procedure
established by the FDIC Board to change rates within a five-cent range without
first having to seek public comment.
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's 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 1.256 cents per $100 of deposits
per year. The Bank's FDIC insurance expense for 1997 was approximately
$20,000 and management anticipates that the FDIC insurance expense for 1998
will be approximately $30,000 based upon deposits held at December 31, 1997.
DIVIDENDS
The principal source of the Company'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: (1) no dividends may be paid which would impair capital; (2) until the
surplus fund of a bank is equal to 50% of its capital, no dividends may be
declared unless there has been carried to the surplus account no less than one
fifth of its net profits for the dividend period; and (3) dividends are
payable only out of a bank's undivided profits.
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 the Company are
not currently subject to any regulatory restrictions on their dividends other
than those noted above.
CAPITAL ADEQUACY
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.
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The FRB and FDIC have adopted risk-based capital guidelines for banks
and bank holding companies. The risk-based capital guidelines are designed to
make regulatory capital requirements more 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
Federally-regulated 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 are mainly U.S. Government
sponsored agency obligations which 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. In converting
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.
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%.
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As of December 31, 1997, the Company was in compliance with applicable
capital requirements, as shown in the following tables (dollars in thousands):
Risk Based Capital Ratios:
Amount Ratio
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Tier 1 capital . . . . . . . . . . . . . . $ 23,573 13.15%
Minimum Tier 1 capital requirement . . . . 7,173 4.00%
Total capital. . . . . . . . . . . . . . . 25,622 14.29%
Minimum total capital requirement. . . . . 14,346 8.00%
Risk Weighted Assets . . . . . . . . . . . $ 179,327 N/A
Leverage Ratio:
Amount Ratio
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Tier 1 capital . . . . . . . . . . . . . . $ 23,573 9.63%
Minimum leverage requirement . . . . . . . 7,341 3.00%
Average adjusted total assets. . . . . . . 244,704 N/A
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 which are deemed to be "undercapitalized" depending on the
category to which they are assigned are subject to certain mandatory
supervisory corrective actions. Under the regulations, the Company is
considered "well capitalized."
MONETARY POLICY
The earnings of a bank holding company are affected by the policies of
regulatory authorities, including the FRB, in connection with the FRB's
regulation of the money supply. Various methods employed by the FRB are open
market operations in United States Government securities, changes in the
discount rate on member bank borrowings and changes in reserve requirements
against member bank deposits. These methods are used in varying combinations
to influence overall growth and distribution of bank loans, investments and
deposits, and their use may also effect interest rates charged on loans or
paid on deposits. The monetary policies of the FRB have had a significant
effect on the operating results of commercial banks in the past and are
expected to continue to do so in the future.
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", 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.
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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 the Annual Report to Shareholders for the year ended
December 31, 1997 (in thousands, except per share data and ratios; unaudited):
Years ended December 31,
------------------------------------------
1997 1996 1995 1994 1993
INCOME STATEMENT DATA
Interest income $18,836 $15,812 $13,904 $10,081 $8,395
Interest expense 4,787 4,052 3,769 2,156 1,778
Net interest income 14,049 11,760 10,135 7,925 6,617
Loan loss provision 1,075 432 481 311 254
Net interest income after
loan loss provision 12,974 11,328 9,654 7,614 6,363
Noninterest income 4,310 4,020 3,099 2,443 3,062
Noninterest expense 9,379 8,113 7,144 6,294 5,734
Income before income taxes 7,905 7,235 5,609 3,763 3,691
Provision for income taxes 2,864 2,722 1,977 1,379 1,341
Net income $5,041 $4,513 $3,632 $2,384 $2,350
SHARE DATA
Basic earnings per common share (1) $1.18 $1.06 $0.85 $0.57 $0.77
Diluted earnings per common
share (1) $1.15 $1.04 $0.84 $0.56 $0.77
Book value per common share (1) $5.81 $5.65 $4.56 $3.55 $2.89
Cash dividends per common share (1) $0.45 - - - -
Ratio of dividends declared to
net income 39.13% - - - -
Basic weighted average shares of
common stock outstanding (1)(5) 4,255 4,266 4,266 4,182 3,042
Fully diluted weighted average
shares of common stock out-
standing (1)(5) 4,378 4,338 4,305 4,261 3,042
BALANCE SHEET DATA (AT PERIOD END)
Investment securities $44,400 $27,797 $13,368 $32,648 $18,532
Loans, net 153,025 131,627 124,711 96,927 72,844
Total assets 242,611 201,277 177,562 146,803 115,093
Total deposits 211,345 171,082 152,438 128,260 105,189
Total shareholders' equity (5) 24,236 23,572 19,040 14,811 8,793
SELECTED RATIOS
Return on average total assets 2.23% 2.39% 2.24% 1.78% 2.20%
Return on average total
shareholders' equity (5) 20.73% 21.04% 21.36% 16.98% 30.83%
Net interest spread 6.23% 6.11% 5.97% 5.96% 6.38%
Net interest margin 7.17% 7.09% 6.92% 6.71% 7.05%
Efficiency ratio (2) 51.09% 51.41% 53.28% 60.71% 59.24%
ASSET QUALITY RATIOS
Reserve for loan losses to
ending total loans 1.32% 1.26% 1.30% 1.18% 1.22%
Nonperforming assets to end-
ing total assets (3) 0.04% 0.04% 0.04% 0.00% 0.17%
Net loan charge-offs to
average loans 0.48% 0.28% 0.00% 0.08% 0.14%
CAPITAL RATIOS
Average shareholders' equity
to average assets (5) 10.77% 11.33% 10.47% 10.51% 7.29%
Leverage ratio (4) 9.63% 11.48% 10.64% 9.68% 7.60%
Total risk-based capital
ratio (4) 14.29% 16.51% 14.29% 14.69% 11.93%
- -----------------
(1) Adjusted to reflect 10% stock dividends declared in 1994, 1995 and 1996
and a two-for-one stock split in 1997.
(2) Efficiency ratio is noninterest expense divided by (net interest income +
noninterest income - non-recurring items).
(3) Nonperforming assets consist of nonaccrual loans and loans contractually
past due 90 days or more.
(4) Computed in accordance with FRB and FDIC guidelines.
(5) 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.
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
The following table sets forth the Company's unaudited data regarding
operations for each quarter of 1997, 1996 and 1995. 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):
1997 Quarters Ended
------------------------------- ---------
Dec. 31 Sept. 30 June 30 Mar. 31
-------- -------- -------- --------
Interest income $ 5,230 $ 4,914 $ 4,599 $ 4,093
Interest expense 1,302 1,239 1,195 1,051
-------- -------- -------- --------
Net interest income 3,928 3,675 3,404 3,042
Loan loss provision 468 231 280 96
-------- -------- -------- --------
Net interest income after
loan loss provision 3,460 3,444 3,124 2,946
Noninterest income 1,135 1,217 1,026 932
Noninterest expense 2,671 2,398 2,164 2,146
-------- -------- -------- --------
Income before income taxes 1,924 2,263 1,986 1,732
Provision for income taxes 618 802 784 660
-------- -------- -------- --------
Net income $ 1,306 1,461 $ 1,202 $ 1,072
======== ======== ======== ========
Weighted average number of
shares outstanding (1) 4,214 4,269 4,269 4,266
Net income per share (1) $0.31 $0.34 $0.28 $0.25
1996 Quarters Ended
-----------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31
-------- -------- -------- --------
Interest income $ 4,244 $ 4,103 $ 3,762 $ 3,703
Interest expense 1,072 1,054 969 957
-------- -------- -------- --------
Net interest income 3,172 3,049 2,793 2,746
Loan loss provision 137 147 66 82
-------- -------- -------- --------
Net interest income after
loan loss provision 3,035 2,902 2,727 2,664
Noninterest income 1,180 987 939 914
Noninterest expense 2,328 2,089 1,830 1,866
-------- -------- -------- --------
Income before income taxes 1,887 1,800 1,836 1,712
Provision for income taxes 712 677 690 643
-------- -------- -------- --------
Net income $ 1,175 1,123 1,146 1,069
======== ======== ======== ========
Weighted average number of
shares outstanding (1) 4,266 4,266 4,266 4,266
Basic earnings per share (1) $0.28 $0.26 $0.27 $0.25
Fully diluted weighted average
number of shares outstanding 4,343 4,346 4,346 4,346
Fully diluted earnings
per share (1) $0.27 $0.26 $0.26 $0.25
- ----------------------
(1) Adjusted to give retroactive effect to a two-for-one stock split declared
in July 1997 and 10% stock dividends declared in June 1996 and 1995.
<PAGE>
AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID
The following table represents the Company's average balance sheets as well as
certain rates earned and rates paid for the years ended December 31, 1997,
1996 and 1995 (dollars in thousands):
Year ended December 31, 1997
---------------------------------
Interest Average
Average Income/ Yield or
Balance Expense Rates
--------- --------- -------
Assets
Taxable securities $ 35,898 $ 2,507 6.98%
Non-taxable securities (1) 1,751 74 4.23%
Federal funds sold 8,646 467 5.40%
Loans (2)(3)(4) 149,698 15,788 10.55%
--------- ---------
Total earning assets/interest income 195,993 18,836 9.61%
Reserve for loan losses (1,784)
Cash and due from banks 18,922
Premises and equipment, net 4,710
Accrued interest and other assets 7,921
---------
Total assets $ 225,762
=========
Liabilities and Stockholders' Equity
Interest bearing demand deposits $ 102,484 $ 3,083 3.01%
Savings deposits 13,027 284 2.18%
Time deposits 19,846 998 5.03%
Other borrowings 6,269 422 6.73%
--------- --------
Total interest bearing liabilities/
interest expense 141,626 4,787 3.38%
Demand deposits 58,062
Other liabilities 1,755
---------
Total liabilities 201,443
Stockholder's equity 24,319
---------
Total liabilities and stockholders'
equity $ 225,762
==========
---------
Net interest income $ 14,049
=========
Net interest spread 6.23%
=======
Net interest income to earning assets 7.17%
=======
Year ended December 31, 1996
---------------------------------
Interest Average
Average Income/ Yield or
Balance Expense Rates
--------- --------- -------
Assets
Taxable securities $ 18,717 $ 1,273 6.80%
Non-taxable securities (1) 2,155 94 4.36%
Federal funds sold 7,241 381 5.26%
Loans (2)(3)(4) 137,798 14,064 10.21%
--------- ---------
Total earning assets/interest income 165,911 15,812 9.53%
Reserve for loan losses (1,764)
Cash and due from banks 14,530
Premises and equipment, net 3,810
Accrued interest and other assets 6,729
---------
Total assets $ 189,216
=========
Liabilities and Stockholders' Equity
Interest bearing demand deposits $ 83,154 $ 2,530 3.04%
Savings deposits 12,975 286 2.20%
Time deposits 17,235 873 5.07%
Other borrowings 5,173 363 7.02%
--------- --------
Total interest bearing liabilities/
interest expense 118,537 4,052 3.42%
Demand deposits 46,886
Other liabilities 2,348
---------
Total liabilities 167,771
Stockholder's equity 21,445
---------
Total liabilities and stockholders'
equity $ 189,216
=========
---------
Net interest income $ 11,760
=========
Net interest spread 6.11%
=======
Net interest income to earning assets 7.09%
=======
Year ended December 31, 1995
---------------------------------
Interest Average
Average Income/ Yield or
Balance Expense Rates
--------- --------- -------
Assets
Taxable securities $ 18,964 $ 1,227 6.47%
Non-taxable securities (1) 2,876 122 4.24%
Federal funds sold 2,812 155 5.51%
Loans (2)(3)(4) 121,883 12,400 10.17%
--------- ---------
Total earning assets/interest income 146,535 13,904 9.49%
Reserve for loan losses (1,417)
Cash and due from banks 10,447
Premises and equipment, net 3,337
Accrued interest and other assets 3,476
---------
Total assets $ 162,378
=========
Liabilities and Stockholders' Equity
Interest bearing demand deposits $ 73,426 $ 2,384 3.25%
Savings deposits 13,227 304 2.30%
Time deposits 13,506 621 4.60%
Other borrowings 6,892 460 6.67%
--------- --------
Total interest bearing liabilities/
interest expense 107,051 3,769 3.52%
Demand deposits 36,353
Other liabilities 1,967
---------
Total liabilities 145,371
Stockholder's equity 17,007
---------
Total liabilities and stockholders'
equity $ 162,378
=========
---------
Net interest income $ 10,135
=========
Net interest spread 5.97%
=======
Net interest income to earning assets 6.92%
=======
- ----------------
(1) Yields on tax-exempt securities have not been stated on a tax-equivalent
basis.
(2) Average non-accrual loans included in the computation of average loans was
insignificant for 1997, 1996 and 1995.
(3) Loan related fees recognized during the period and included in the yield
calculation totaled approximately $1,012,000 in 1997, $780,000 in 1996
and $849,000 in 1995.
(4) Includes mortgage loans held for sale.
<PAGE>
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 dollar
amounts to changes in volume as well as changes in rates. Rate/volume
variances which were immaterial have been allocated equally between rate and
volume changes (dollars in thousands).
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------
1997 over 1996 1996 over 1995
----------------------------- ------------------------------
Total Amount of Change Total Amount of Change
Increase Attributed to Increase Attributed to
(Decrease) Volume Rate (Decrease) Volume Rate
---------- -------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 1,724 $ 1,235 $ 489 $ 1,664 $ 1,617 $ 47
Taxable securities 1,234 1,184 50 46 (16) 62
Non-taxable securities (20) (18) (2) (28) (31) 3
Federal funds sold 86 75 11 226 238 (12)
---------- -------- -------- ---------- ------- -------
3,024 2,476 548 1,908 1,808 100
Interest expense:
Interest on deposits:
Interest bearing demand 553 583 (30) 146 308 (162)
Savings (2) 1 (3) (18) (6) (12)
Time deposits 125 131 (6) 252 181 71
Other borrowings 59 76 (17) (97) (118) 21
---------- -------- -------- ---------- ------- -------
Total interest expense 735 791 (56) 283 365 (82)
---------- -------- -------- ---------- ------- -------
Net interest spread $ 2,289 $ 1,685 $ 604 $ 1,625 $ 1,443 $ 182
---------- -------- -------- ---------- ------- ------
---------- -------- -------- ---------- ------- ------
</TABLE>
<PAGE>
Interest Rate Sensitivity Table
Set forth below is a table showing the interest rate sensitivity of the
Company's assets and liabilities over various repricing periods and maturities,
as of December 31, 1997. Maturities are based on contractual terms and
repricing amounts are based on actual historical experiences (dollars in
thousands):
<TABLE>
<CAPTION>
After 90 After
days one year After
Within within within five
90 days one year five years years Total
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Investments & fed funds sold $ 11,508 $ 9,085 $ 28,393 $ 3,914 $ 52,900
Loans 70,810 25,738 53,031 5,996 155,575
--------- --------- ---------- --------- ---------
Total interest earning assets $ 82,318 $ 34,823 $ 81,424 $ 9,910 $ 208,475
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
INTEREST BEARING LIABILITIES:
Interest-bearing demand deposits $ 46,234 $ 36,217 $ 29,030 $ - $ 111,481
Savings deposits - - 5,164 7,906 13,070
Time deposits 6,768 11,888 2,898 40 21,594
--------- --------- ---------- --------- ---------
Total interest bearing deposits 53,002 48,105 37,092 7,946 146,145
--------- --------- ---------- --------- ---------
Other borrowings - - - - 5,000
Total interest bearing liabilities $ 53,002 $ 53,105 $ 37,092 $ 7,946 $ 151,145
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Interest rate sensitivity gap $ 29,316 $ (18,282) $ 44,332 $ 1,964 57,330
Interest rate gap as a percentage
of total interest earning assets 14.06% (8.77%) 21.26% 0.94% 27.50%
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Cumulative interest rate sensitivity gap $ 29,316 $ 11,034 $ 55,366 $ 57,330 $ 57,330
Cumulative interest rate gap as a percentage
of total interest earning assets 14.06% 5.30% 26.56% 27.50% N/A
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
</TABLE>
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 labilities (deposits and borrowings). The
Company's historical business activity tends to originate loans with
maturities and repricing terms which are shorter than those of deposit
relationships. These maturity and repricing differences create a natural
interest rate risk profile whereby the Company will tend to generate higher
earnings should market interest rates rise and lower earnings should interest
rates fall.
The Company analyzes this risk by simulation modeling and by traditional
interest rate gap analysis. Both methods provide an indication of risk for a
given change in interest rates. These methods of analyses are dependent on
assumptions and estimations that management believes reasonable, although the
actual results may vary substantially.
The Bank's simulation analysis forecasts net interest income and
earnings given unchanged interest rates (stable rate scenario). The model
then estimates a percent change from the stable rate scenario in the event of
rising and falling market interest rates over one and two year time horizons.
The simulation model estimates that in the event of a 1.5 percent reduction in
market interest rates, earnings could be adversely impacted up to
approximately 11.2 percent, while a similar increase in market rates would
have a favorable impact of approximately 16.0 percent. Because of
uncertainties as to the extent of refinance activity, competitive loan pricing
spreads, product volumes and mix, and other unexpected changes in economic
behavior related to movements in market rates, no assurance can be made that
simulation results are reliable indicators of earnings under such conditions.
<PAGE>
At year end 1997, the Company's one year cumulative interest rate gap
analysis indicates that rate sensitive assets maturing or available for
repricing within one-year exceeded rate sensitive liabilities by approximately
$11.0 million. A year earlier, rate sensitive assets exceeded maturing or
available for repricing rate sensitive liabilities by $12.3 million. It is
the Company's 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.
LOAN PORTFOLIO
Interest earned on the loan portfolio is the primary source of income
for the Company. Net loans represent 63% of total assets as of December 31,
1997. Although the Company strives to serve the credit needs of its service
area, its primary focus is on real estate related and commercial credits. The
Company makes substantially all of its loans to customers located within the
Company's service areas. The Company has no loans defined as highly leveraged
transactions by the Federal Reserve Bank. The
Company has no significant agricultural loans.
The following table presents the composition of the Company's loan
portfolio, at the dates indicated (dollars in thousands):
December 31,
--------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Commercial $ 30,059 $ 22,485 $ 21,711 $ 20,114 $ 17,929
Real Estate:
Construction 30,863 34,375 33,984 22,259 18,237
Mortgage 23,396 19,774 24,750 18,656 12,222
Commercial 52,356 42,391 31,019 25,054 16,456
Installment 18,901 14,666 15,271 13,333 11,220
------- ------- ------- ------- -------
155,575 133,691 126,735 99,416 76,064
Less:
Reserve for
loan losses 2,048 1,691 1,651 1,172 930
Deferred loan fees 502 373 372 325 200
------- ------- ------- ------- -------
2,550 2,064 2,023 1,497 1,130
------- ------- ------- ------- -------
$153,025 $131,627 $124,712 $ 97,919 $ 74,934
======= ======== ======== ======== ========
At December 31, 1997, the 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 $ 24,520 $ 5,470 $ 69 $ 30,059
Real Estate:
Construction 25,636 4,205 1,022 30,863
Mortgage 20,119 1,541 1,736 23,396
Commercial 19,804 31,946 606 52,356
Installment 6,469 9,869 2,563 18,901
---------- ---------- ---------- ----------
$ 96,548 $ 53,031 $ 5,996 $ 155,575
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Variable rate loans due after one year totaled $33,800 at December 31,
1997 and loans with predetermined or fixed rates due after one year totaled
$25,227 at December 31, 1997.
<PAGE>
LENDING AND CREDIT MANAGEMENT
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 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. 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 Company 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 Company. 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 Company manages the general risks inherent in the loan portfolio by
following loan policies and underwriting practices designed to result in
prudent lending activities. The following table presents information with
respect to non-performing assets (dollars in thousands):
December 31,
-------------------------------------
1997 1996 1995 1994 1993
----- ------ ------ ------ ------
Loans on non-accrual status $ 43 $ 50 $ 45 $ - $ 128
Loans past due 90 days
or more but not on
non-accrual status 45 27 21 4 64
Other real estate owned 9 - - - -
----- ----- ----- ------ ------
Total non-performing assets $ 97 $ 77 $ 66 $ 4 $ 192
===== ===== ===== ====== ======
Percentage of non-performing
assets to total assets .04% .04% .04% .00% .17%
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 was insignificant
for the periods presented.
At December 31, 1997, 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.
<PAGE>
ALLOCATION OF RESERVE FOR LOAN LOSSES
The Company does not normally allocate the reserve for loan losses to
specific loan categories. An allocation to these major categories is made
below for presentation purposes. This allocation process does not necessarily
measure anticipated future credit losses; rather, it seeks to measure the Bank's
assessment at a point in time of perceived credit loss exposure and the impact
of current and anticipated economic conditions. A schedule dividing the reserve
for loan losses into allocated and unallocated categories is furnished below
for the end of each of the last five years (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
Percentage Percentage Percentage
of loans in of loans in of loans in
each each each
category to category to category to
Amount total loans Amount total loans Amount total loans
------ ----------- ------ ------------ ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 188 20% $ 145 17% $ 153 17%
Real Estate:
Construction 236 20 227 26 218 27
Mortgage 81 15 78 15 80 20
Commercial 245 33 186 32 148 24
Installment 102 12 92 10 94 12
Unallocated 1,196 - 963 - 958 -
----- ----------- ------ ------------ ------ -----------
$2,048 100% $1,691 100% $1,651 100%
===== =========== ====== ============ ====== ===========
<CAPTION>
December 31,
------------------------------------------
1994 1993
-------------------- --------------------
Percentage Percentage
of loans in of loans in
each each
category to category to
Amount total loans Amount total loans
------ ----------- ------ ------------
<S> <C> <C> <C> <C>
Commercial $ 120 20% $ 173 23%
Real Estate:
Construction 123 22 100 24
Mortgage 83 19 38 16
Commercial 126 25 82 22
Installment 86 14 82 15
Unallocated 634 - 455 -
----- ----------- ------ ------------
$1,172 100% $ 930 100%
===== =========== ====== ============
</TABLE>
<PAGE>
RESERVE FOR LOAN LOSSES
The provision for loan losses charged to operating expense is based on the
Company's loan loss experience and such other factors which, in management's
judgement, should be considered in estimating possible loan losses.
Management monitors the loan portfolio to ensure that the reserve for loan
losses is adequate to cover outstanding loans on non-accrual status and any
current loans deemed to be in serious doubt of repayment according to each
loan's repayment plan. 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,
-------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Loans outstanding at
end of period $ 155,575 $ 133,691 $ 126,735 $ 99,416 $ 76,064
Average loans outstanding
during the period $ 149,698 $ 137,798 $ 121,883 $ 86,072 $ 70,080
Reserve balance,
beginning of period $ 1,691 $ 1,651 $ 1,172 $ 930 $ 771
Recoveries:
Commercial 16 2 70 22 5
Real Estate:
Construction - - - - -
Mortgage 2 - - - -
Commercial - - 1 - -
Installment 42 28 30 4 3
-------- --------- --------- --------- ---------
60 30 101 26 8
Loans charged off:
Commercial (80) (212) (24) (53) (48)
Real Estate:
Construction - - - - -
Mortgage (442) (50) - - (3)
Commercial - - (2) - -
Installment (256) (160) (77) (42) (53)
-------- --------- --------- --------- ---------
(778) (422) (103) (95) (104)
-------- --------- --------- --------- ---------
Net loans charged-off (718) (392) (2) (69) (96)
Provision charged to
operations 1,075 432 481 311 254
-------- --------- --------- --------- ---------
Reserve balance,
end of period $ 2,048 $ 1,691 $ 1,651 $ 1,172 $ 930
Ratio of net loans
charged-off to average
loans outstanding .48% .28% .00% .08% .14%
======= ======= ====== ====== ======
Ratio of reserve for loan
losses to loans at end
of period 1.32% 1.26% 1.30% 1.18% 1.22%
======= ======= ====== ====== ======
<PAGE>
INVESTMENT PORTFOLIO
The following table shows the carrying value of the Company's portfolio
of investments at December 31, 1997, 1996 and 1995 (dollars in thousands).
See Notes 1 and 3 of Notes to Consolidated Financial Statements for more
information about investment securities at December 31, 1997 and 1996.
December 31,
------------------------------------
1997 1996 1995
-------- -------- --------
U.S. Treasury securities $ 3,083 $ 4,009 $ 4,558
U.S. Government and
agency securities 38,339 20,468 5,408
Obligations of state and
political subdivisions 1,030 2,013 2,190
-------- -------- --------
Total debt securities 42,452 26,490 12,156
Federal Home Loan Bank stock 1,416 1,307 1,212
Equity Securities 532 - -
--------- -------- --------
Total investment securities $ 44,400 $ 27,797 $13,368
========= ======== ========
The following is a summary of the contractual maturities and weighted
average yields of investment securities at December 31, 1997 (dollars in
thousands):
<TABLE>
<CAPTION>
Due in Due after one year Due five years
One year or less through five years through ten years
-------------------- ------------------- ------------------
Weighted Weighted Weighted
Carrying average Carrying average Carrying average
value yield (1) value yield (1) value yield (1)
------- ----------- -------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Available-for-sale
- ------------------
U.S. Treasury securities $ - - $ 3,083 6.51% $ - -
U.S. Government agencies - - 36,326 6.67% 2,013 7.30%
------- -------- -------
- 39,409 2,013
Held-to-maturity
- ----------------
Obligations of state and
political subdivisions 40 4.60% 990 5.01% - -
Federal Home Loan Bank stock (2) - - - - 1,416 5.98%
Equity Securities (2) - - - - 532 -
------- -------- -------
40 990 1,948
------- -------- -------
Total $ 40 4.60% $ 40,399 6.61% $ 3,961 7.05%
======= ====== ======== ===== ======= ======
</TABLE>
- -------------------
(1) Yields on tax-exempt securities have not been stated on a tax equivalent
basis.
(2) No stated maturity.
<PAGE>
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):
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------------
1997 1996 1995
DEPOSIT LIABILITIES Average Average Average
--------------- --------------------- ---------------------
Rate Rate Rate
Amount Paid Amount Paid Amount Paid
--------------- ------------------- ---------------------
<S> <C> <C> <C>
Demand $ 58,062 N/A $ 46,886 N/A $ 36,353 N/A
Interest-bearing
demand 102,484 3.01% 83,154 3.04% 73,426 3.25%
Savings 13,027 2.18% 12,975 2.20% 13,227 2.30%
Time 19,846 5.03% 17,235 5.07% 13,506 4.60%
--------- --------- ---------
Total Deposits $ 193,419 $ 160,250 $ 136,512
--------- --------- ---------
--------- --------- ---------
</TABLE>
As of December 31, 1997 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.......... $ 1,425 38.35% $ 5,348 29.91%
Over 3 months
through 6 months........ 810 21.80% 4,941 27.64%
Over 6 months
through 12 months....... 1,376 37.03% 4,756 26.60%
Over 12 months............ 105 2.82% 2,833 15.85%
---------------------- -----------------------
Total.................. $ 3,716 100.00% $ 17,878 100.00%
---------------------- -----------------------
---------------------- -----------------------
- ----------------
(1) Time deposits of $100,000 or more represent 1.76% of total deposits as of
December 31, 1997.
(2) All other time deposits represent 8.46% of total deposits as of December
31, 1997.
ITEM 2. PROPERTY
MAIN OFFICE. The Bank's Main Office opened in September of 1990 and is
located at 1100 N. W. 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
$4,600 per month with adjustments every five years by mutual agreement of
landlord and tenant. The main branch and administrative offices occupy the
main floor, and the mortgage lending office occupies approximately 2,400
square feet on the second floor. An expansion of approximately 6,000 square
feet for bank operations, training and human resources was completed in 1996.
A separate data processing and drive-up facility is also located on site.
THIRD & REVERE BRANCH. The Bank's original Main Office was located at
1700 N. E. Third Street, Bend, Oregon. The building now serves as a branch of
the Bank and provides approximately 4,800 square feet of space. The building
is owned by the Bank and is situated on leased land. The ground lease is for
50 years and commenced in August 1976. Currently the monthly rental is
$4,280. The monthly rental amount is subject to change every five years based
upon a percentage of the increase in appraised value of the property.
SOUTH BEND BRANCH. The South Bend Branch opened in March 1979 and
consists of approximately 2,500 square feet. The building is owned by the
Bank and is situated on leased land. The lease terms extend through November
2028. Currently the monthly rental is $2,908. The monthly rental amount is
subject to change every three years by a percentage equal to the
increase/decrease in the consumer price index.
SUNRIVER BRANCH. The Sunriver Branch opened in April 1980 and is
located at the Sunriver Mall, Sunriver, Oregon. Construction was completed on
a new free standing branch building of 2,330 square feet in September, 1997
and is near the previously existing branch. The new lease term extends
through 2012 (subject to seven options to extend of five years each). The
monthly rental is $1,836. The monthly rental amount is subject to change
every five years based on any percentage increase in the real market
value of the premises. The previously existing lease was canceled as a
condition of the new building lease.
SISTERS BRANCH. The Sisters Branch commenced operations in November
1985 when the Bank purchased the branch from another financial institution.
The branch is located at 175 S. E. Main, Sisters, Oregon and consists of
approximately 2,200 square feet. The building and land are owned by the Bank.
This branch added a drive-up ATM in 1997.
REDMOND BRANCH. The Redmond Branch opened in June of 1992 and consists
of approximately 3,800 square feet. The land and building are leased. The
lease term extends to 2022. The current monthly rental is $3,271 and is
subject to change every five years with a 3 percent per year escalation
clause.
PRINEVILLE BRANCH. The Prineville Branch was acquired in April 1994
from the Resolution Trust Corporation. The Branch is located at 103 W. Third
Street, Prineville, Oregon and consists of approximately 2,014 square feet.
The building and land are owned by the Bank.
EAST BEND BRANCH. The East Bend Branch opened in December, 1995 and is
located in the Safeway Supermarket. The Bank leases 600 square feet of floor
space. The lease term extends through 2000 with two options to extend the
term by five years each. The current monthly rental is $2,750. Monthly
rental is subject to change every five years by a percentage equal to the
increase/decrease in the consumer price index.
CASCADE FINANCE. Cascade Finance opened in January, 1997 and currently
rents space in the administrative offices of the Bank for $750 per month.
Cascade Finance anticipates moving to a new leased location in April, 1998.
The new facility is located at 2650 N.E. Highway 20, Suite B, Bend, Oregon
and consists of 774 square feet of floor space. The lease term extends
through 2002 with one five year term. The monthly rent will be $986 subject
to change annually by 3 percent of the minimum rent.
In the opinion of management all of the Bank's properties are adequately
insured.
<PAGE>
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.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information called for by this item is located on page 8 of the
Company's Annual Report to Shareholders for the year ended December 31, 1997,
and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The five year selected financial data called for by this item is located
on page 10 of this annual report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information called for by this item is located on pages 5, 6 and 7
of the Company's Annual Report to Shareholders for the year ended December 31,
1997, and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information called for by this item is located under Interest Rate
Sensitivity and Loan Portfolio in Part 1 of this annual report on Form 10-K
and can be located on pages 14 and 15.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is located on pages 11 through
28 of the Company's Annual Report to Shareholders for the year ended December
31, 1997, and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information called for by this item is located on pages 2, 3 and 8
of the Company's definitive proxy statement for the annual meeting of
shareholders to be held on April 27, 1998, and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is located on page 4 and 5 of
the Company's definitive proxy statement for the annual meeting of
shareholders to be held on April 27, 1998, and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is located on page 1 of the
Company's definitive proxy statement for the annual meeting of shareholders to
be held on April 27, 1998, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is located on page 8 of the
Company's definitive proxy statement for the annual meeting of shareholders to
be held on April 27, 1998, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on
Form 10-K.
(1) The financial statements required in this Annual Report are listed
in the accompanying Index to Consolidated Financial Statements,
and are incorporated herein by reference.
(2) Financial Statement Schedules.
All financial statement schedules are omitted since the required
information is not present or not present in amounts sufficient to
require submission of the schedule or because the information
required is included in the consolidated financial statements or
notes thereto.
(3) Exhibits.
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, filed as exhibit 3.2 to registrant's
Form 10-QSB report for the quarter ended March 31, 1995, and
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 SALARY CONTINUATION AGREEMENT. Between Roger J. Shields and
registrant. Filed as an exhibit to registrant's
Registration Statement on Form 10-SB, filed in January,
1994, and incorporated herein by reference.
10.4 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.
10.5 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 page 22 of the Company's Annual
Report to Shareholders for the year ended December 31, 1997,
and is incorporated herein by reference.
13.1 1997 Annual Report to Shareholders. Portions of the
registrant's annual report to shareholders are incorporated
by reference as noted above. With the exception of the
portions specifically incorporated herein by reference, the
1997 Annual Report to Shareholders is not deemed filed as
part of this Form 10-K, Annual Report.
21.1 SUBSIDIARIES OF REGISTRANT. Filed as Exhibit 21.1 to
registrant's Form 10-KSB for the year ended December 31,
1996, and incorporated herein by reference.
23.1 CONSENT OF INDEPENDENT AUDITORS; SYMONDS, EVANS & LARSON,
P.C.
27.1 FINANCIAL DATA SCHEDULE.
(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, 1997.
<PAGE>
CASCADE BANCORP
Index to Consolidated Financial Statements
(Item 13(a))
Annual
Report to
Shareholders
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . 10
Consolidated Balance Sheets at December 31, 1997 and 1996. . . . . . . 11
For the Years Ended December 31, 1997, 1996 and 1995:
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . 12
Consolidated Statements of Changes in Stockholders' Equity. . . . . . 13
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . 14
Notes to Consolidated Financial Statements . . . . . . . . . . . . . 15-28
<PAGE>
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/ Roger J. Shields /s/ Patricia L. Moss
- ------------------------- ---------------------------
Roger J. Shields Patricia L. Moss
President Chief Financial Officer
March 16, 1998 March 16, 1998
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.
/s/ Jerry E. Andres March 16, 1998
- ------------------------------------- ----------------------------
Jerry E. Andres, Director Date
/s/ Gary L. Capps March 16, 1998
- ------------------------------------- ----------------------------
Gary L. Capps, Director Date
/s/ Gary L. Hoffman March 16, 1998
- ------------------------------------- ----------------------------
Gary L. Hoffman, Director Date
/s/ Patricia L. Moss March 16, 1998
- ------------------------------------- ----------------------------
Patricia L. Moss, Director/ Date
Executive Vice President
/s/ James E. Petersen March 16, 1998
- ------------------------------------- ----------------------------
James E. Petersen, Director/ Date
Assistant Secretary
/s/ Roger J. Shields March 16, 1999
- ------------------------------------- ----------------------------
Roger J. Shields, Director/President Date
/s/ Jacob M. Wolfe March 16, 1998
- ------------------------------------- ----------------------------
Jacob M. Wolfe, Director Date
Form 10-K, December 31, 1997
<PAGE>
Exhibit 13.1
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, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997 included in this annual report to shareholders.
The following discussion includes certain forward-looking statements.
Those statements may involve a number of risks and uncertainties which could
cause actual results to differ materially from the expectation stated,
including the following: slower than expected growth in the Company's
business, deterioration of business conditions generally or specifically in
the banking industry, regulatory changes involving banking, competitive
factors, and general market conditions.
RESULTS OF OPERATIONS - Years ended December 31, 1997, 1996 and 1995
Overview
Net income was $5.0 million in 1997, up 11.7 percent from the $4.5
million earned in 1996. Net income in 1996 represented a 24.2 percent
increase from 1995's net income of $3.6 million. The increases in 1997 and
1996 were primarily a result of increased net interest income related to
higher volumes of loans and investments funded by growth in deposits. During
1997, the Company repurchased 2.5 percent of its outstanding stock and
announced its intention to repurchase an additional 2.5 percent during 1998.
Earnings growth enabled (Basic) Earnings Per Share to improve to $1.18 in 1997
as compared to $1.06 in 1996 and $.85 in 1995, while Return on Equity remained
relatively stable at approximately 21.6 percent during the same three-year
period.
Net Interest Income
Net interest income increased 19.5 percent in 1997 to $14.0 million as
compared to 1996, and increased 16.0 percent to $11.8 million in 1996 as
compared to 1995. Interest income increased $3.0 million in 1997 as compared
to 1996 primarily due to an $11.9 million growth in average loans outstanding
plus an $18.3 million increase in average agency securities in the Bank's
investment portfolio. Interest income increased $1.9 million in 1996 as
compared to 1995 primarily due to an increase in the volume of loans with
average loans increasing $15.9 million. At December 31, 1997 loans totaled
$155.6 million as compared to $133.7 million at year end 1996. Investments at
year end 1997 were $44.4 million compared to $27.8 million at year end 1996.
Funding was provided from total deposit growth of $40.3 million or 23.5
percent. Interest expense increased only $.7 million in 1997 as compared to
1996 because a large portion of the deposit growth was in demand and low cost
interest bearing demand deposits. Interest expense increased only $.3 million
in 1996 as compared to 1995 primarily due to increased volume in interest
bearing demand and time deposits. The Company's net interest margin improved
from 6.92% in 1995 to 7.09% in 1996 to 7.17% in 1997 as yields on earning
assets increased from 9.49% in 1995 to 9.53% in 1996 to 9.61% in 1997% while
average rates paid declined from 3.52% in 1995 to 3.42% in 1996 to 3.38% in
1997.
Loan Loss Provision
The loan loss provision increased during 1997 as compared to 1996 and
decreased during 1996 as compared to 1995. The increase in 1997 was a
function of loan growth and also reflects final resolution of certain real
estate construction loans. The decrease in 1996 was primarily due to a
decrease in the volume of loan growth. The Bank's ratio of reserve for loan
losses to total loans was 1.32 percent at December 31, 1997 as compared to
1.27 percent at December 31, 1996. Management believes the reserve for loan
losses is adequate to absorb potential losses on identified nonperforming
assets as well as general losses at historical and projected levels.
Noninterest Income
Noninterest income increased 7.2 percent to $4.3 million in 1997. This
compared to an increase of 29.7 percent to $4.0 million in 1996. These
increases were primarily the result of higher service charge on deposit
accounts due to increases in the number of customer accounts and transactions
during the periods presented. Although mortgage loan origination and
processing fees also contributed to the increases between the periods
presented, the 1997 mortgage loan originations decreased slightly compared to
1996 while mortgage loan originations increased from 1995. The increase in
service charges and mortgage loan origination and processing fees in 1997 was
partially offset by a decrease in the gains on sales of mortgage loans which
was due to an increased interest rate environment and a more competitive
market. Because the origination volume of residential mortgage loans is, in
part, dependent upon the general level and direction of interest rates, there
can be no assurance that income from origination fees and gains on sales of
residential mortgage loans will continue to significantly contribute to the
Company's future earnings. In addition, capitalized mortgage servicing rights
which are amortized over the expected lives of mortgage loans are subject to
rapid amortization in the event of accelerated customer refinancing activity.
Capitalized mortgage servicing rights totaled approximately $1.3 million at
December 31, 1997 as compared
<PAGE>
to $.6 million at December 31, 1996. Another contributing factor to the 29.7
percent increase in total noninterest income in 1996 was the decrease in
realized losses on sales of investment securities available-for-sale of
approximately $.2 million. In addition, the net increase in other income in
1996 was primarily attributable to an increase in the income earned on life
insurance policies of approximately $.2 million.
Noninterest Expense
Total 1997 noninterest expense was $9.4 million, an increase of $1.3
million or 15.6 percent from 1996. This is compared to an increase of 13.6
percent in 1996 over 1995. Salaries and benefits increased $.8 million in
1997 as staffing increased to maintain customer service for significantly
increased volumes of customer accounts and transaction activity. It is
anticipated that this human resources trend will continue into 1998. Expenses
for occupancy and equipment costs increased $.2 million in 1997 as compared to
1996 primarily to support increased transaction activity as well as expanded
delivery of automated services. The overall increases in 1996 as compared to
1995 were primarily attributed to the Company's increased size and activity
levels.
Income Taxes
The provision for income taxes increased between the periods presented
primarily as a result of higher pre-tax income. In addition, the effective
tax rate in 1997 and 1995 was less than in 1996 primarily due to state income
tax credits.
FINANCIAL CONDITION
The Company continued to experience strong growth in 1997 with total
assets increasing 20.5 percent to $242.6 million at December 31, 1997 compared
to $201.3 million at December 31, 1996. This growth was primarily due to
increases in loans and investments which were funded by strong deposit growth.
Because deposit growth exceeded loan demand in 1997, the Company increased its
investments in available-for-sale securities by approximately $17.5 million.
Loan growth was concentrated in real estate and commercial loan categories,
up $10.1 million and $7.6 million, respectively. Deposit growth was
concentrated in demand and interest bearing demand deposits, up $36.1 million
or 25.6 percent to $176.7 million at December 31, 1997.
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. The
Company has established a plan to detect and modify effected computer
applications and anticipates that the cost of addressing the issue will not be
material to its future operating results or financial condition.
The Company had no derivative financial instruments as of December 31,
1997 and 1996.
CASCADE FINANCE
Cascade Finance, a wholly-owned subsidiary of Cascade Bancorp was
capitalized in 1997. At year end 1997, Cascade Finance had $2.0 million in
consumer installment loans outstanding, predominately for new and used
automobile financing. Management does not anticipate Cascade Finance will
have a material impact on the Company's consolidated financial condition or
results of operations in 1998.
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.
At December 31, 1997 the Bank maintained five unsecured lines of credit
totaling $17.0 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 in the amount of $11.2 million which may be accessed
for short or long-term borrowings. At December 31, 1997 the Bank had a term
borrowing of $5.0 million from the FHLB which was pre-paid in January 1998.
This pay off will not have a material effect on the Bank's cost of funds or
liquidity position.
At December 31, 1997, the Bank had approximately $55.6 million in
outstanding commitments to extend credit. Management anticipates that some of
these commitments are expected to expire or terminate without funding.
Management believes that the Bank's existing sources of liquidity will enable
the Bank to fund its requirements in the normal course of business.
<PAGE>
CAPITAL RESOURCES
The Company's total stockholders' equity at December 31, 1997 was $24.2
million, which was an increase of $.7 million from December 31, 1996. Equity
was increased by earnings of $5.0 million for the year. Offsetting this
increase were cash dividends which totaled $1.9 million during 1997. In
addition, during the fourth quarter of 1997, the Company repurchased 118,632
shares of its common stock outstanding pursuant to a Board of Directors
authorized program. This had the effect of reducing equity by $2.8 million.
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.
At December 31, 1997 net unrealized gains on investment securities available-
for-sale increased to $.3 million as compared to $.1 million at December 31,
1996.
Bank regulatory agencies have established capital adequacy standards
which are used extensively in their monitoring and control of the industry.
These standards relate the level of capital to a banks risk profile by
assigning different risk weights to various asset classes and certain off-
balance sheet items. Regulators require that banks maintain minimum ratios of
4 percent and 8 percent for Tier I capital and Total risk-based capital,
respectively. At December 31, 1997, the Company significantly exceeded these
benchmarks with Tier 1 capital of 13.1 percent and Total risk-based capital of
14.3 percent. This was compared to 15.4 percent and 16.5 percent for Tier 1
capital and Total risk-based capital at December 31, 1996.
INTEREST RATE RISK
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 labilities (deposits and borrowings). The
Company's historical business activity tends to originate loans with
maturities and repricing terms which are shorter than those of deposit
relationships. These maturity and repricing differences create a natural
interest rate risk profile whereby the Company will tend to generate higher
earnings should market interest rates rise and lower earnings should interest
rates fall.
The Company analyzes this risk by simulation modeling and by traditional
interest rate gap analysis. Both methods provide an indication of risk for a
given change in interest rates. These methods of analyses are dependent on
assumptions and estimations that management believes reasonable, although the
actual results may vary substantially.
The Bank's simulation analysis forecasts net interest income and
earnings given unchanged interest rates (stable rate scenario). The model
then estimates a percent change from the stable rate scenario in the event of
rising and falling market interest rates over one and two year time horizons.
The simulation model estimates that in the event of a 1.5 percent reduction in
market interest rates, earnings could be adversely impacted up to
approximately 11.2 percent, while a similar increase in market rates would
have a favorable impact of approximately 16.0 percent. Because of
uncertainties as to the extent of refinance activity, competitive loan pricing
spreads, product volumes and mix, and other unexpected changes in economic
behavior related to movements in market rates, no assurance can be made that
simulation results are reliable indicators of earnings under such conditions.
At year end 1997, the Company's one year cumulative interest rate gap
analysis indicates that rate sensitive assets maturing or available for
repricing within one-year exceeded rate sensitive liabilities by approximately
$11.0 million. A year earlier, rate sensitive assets exceeded maturing or
available for repricing rate sensitive liabilities by $12.3 million.
It is the Company's 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.
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.
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 FDIC.
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) included provisions to reform the federal deposit insurance system,
including the implementation of risk-based deposit insurance premiums. The
FDICIA also permits the FDIC to make special assessments on insured depository
institutions in amounts determined by the FDIC to be necessary to give it
adequate assessment income to repay amounts borrowed from the U.S. Treasury
and other sources or for any other purpose the FDIC deems necessary. Pursuant
to the FDICIA, the FDIC implemented a transitional risk-based insurance
premium system on January 1, 1993. Generally, banks are assessed insurance
premiums according to how much risk they are deemed to present to the BIF.
Banks with higher levels of capital and involving a low degree of supervisory
concern are assessed lower premiums than banks with lower levels of capital or
involving a higher degree of supervisory concern.
Effective for the first semiannual assessment period of 1997, assessment
rates were lowered by four cents per $100 of assessable deposits for all risk
categories. The reduction in BIF rates utilizes the "adjustment" procedure
established by the FDIC Board to change rates within a five-cent range without
first having to seek public comment.
As a result of the reduction in assessment rates, deposit insurance
expense has decreased during the periods presented.
<PAGE>
MARKET INFORMATION
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: Dain Rausher Inc., Pacific Crest Securities, Black & Company Inc., and
Herzog, Heine, Geduld, 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.
1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ---- ----------- ----------- ----------- -----------
High $ 15.38 $ 20.50 $ 23.75 $ 28.50
Low 10.63 12.88 17.25 20.50
1996
- ----
High $ 9.01 $ 9.43 $ 11.00 $ 11.42
Low 7.73 8.49 9.38 9.96
The Company declared a two-for-one stock split in July, 1997 and a 10
percent stock dividend in June, 1996. The Company also announced the
establishment of regular quarterly cash dividends in 1997. Below is a record
of all cash dividends paid during the period from January 1, 1997 through
February 23,1998:
Declared and paid in January 1997 $0.25 per share (1)
Declared in July 1997
and paid in August 1997 $0.10 per share
Declared in October 1997
and paid in November 1997 $0.10 per share
Declared in January 1998
and paid in February 1998 $0.12 per share
___________
(1) Adjusted to reflect the two-for-one stock split declared in July, 1997.
At February 23, 1998, the Company had 4,144,862 shares of common stock
outstanding held by approximately 2,100 shareholders of record.
STOCK PERFORMANCE GRAPH
<PAGE>
REPORT OF SYMONDS, EVANS & LARSON, 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, 1997 and 1996, 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, 1997.
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 generally accepted auditing
standards. 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
SYMONDS, EVANS & LARSON, P.C.
Portland, Oregon
January 21, 1998
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS 1997 1996
------------ ------------
Cash and cash equivalents:
Cash and due from banks $ 21,053,706 $ 19,567,608
Federal funds sold 8,500,000 9,325,000
------------ ------------
Total cash and cash equivalents 29,553,706 28,892,608
Investment securities available-for-sale 41,953,637 24,476,627
Investment securities held-to-maturity, estimated
fair value of $2,452,975 ($3,320,502 in 1996) 2,445,957 3,320,207
Loans, net 153,024,926 131,626,742
Mortgage loans held for sale 1,876,186 610,650
Premises and equipment, net 5,057,388 4,280,754
Accrued interest and other assets 8,699,681 8,068,985
------------ ------------
Total assets $242,611,481 $201,276,573
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $ 65,199,160 $ 51,484,370
Interest bearing demand 111,481,437 89,144,726
Savings 13,070,325 12,511,495
Time 21,593,851 17,941,503
------------ ------------
Total deposits 211,344,773 171,082,094
Accrued interest and other liabilities 2,030,284 1,622,430
Long-term debt 5,000,000 5,000,000
------------ ------------
Total liabilities 218,375,057 177,704,524
Commitments and contingencies
(Notes 1, 4, 9,15 and 16)
Stockholders' equity:
Common stock, no par value; 10,000,000 shares
authorized; 4,172,238 shares issued and
outstanding(2,132,967 in 1996) 10,365,015 13,058,417
Retained earnings 13,568,644 10,442,535
Net unrealized gains on investment securities
available-for-sale, net of income taxes 302,765 71,097
------------ ------------
Total stockholders' equity 24,236,424 23,572,049
------------ ------------
Total liabilities and stockholders' equity $242,611,481 $201,276,573
============ ============
See accompanying notes
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------ ----------- ------------
Interest income:
Interest and fees on loans $15,788,357 $14,063,738 $12,399,845
Taxable interest on investment
securities 2,402,987 1,177,535 1,160,082
Nontaxable interest on investment
securities 73,646 94,143 121,889
Interest on federal funds sold 467,300 381,567 155,669
Dividends on Federal Home Loan Bank
stock 103,300 95,100 66,700
------------ ----------- -----------
Total interest income 18,835,590 15,812,083 13,904,185
Interest expense:
Deposits:
Interest bearing demand 3,082,614 2,529,619 2,384,073
Savings 284,093 285,762 304,480
Time 998,334 872,806 620,797
Long-term debt 398,367 357,105 386,888
Federal funds purchased 23,105 6,260 73,303
------------ ----------- -----------
Total interest expense 4,786,513 4,051,552 3,769,541
------------ ----------- -----------
Net interest income 14,049,077 11,760,531 10,134,644
Loan loss provision 1,075,109 432,141 480,779
------------ ----------- -----------
Net interest income after loan loss
provision 12,973,968 11,328,390 9,653,865
Noninterest income:
Service charges on deposit accounts 1,810,072 1,551,146 1,374,019
Mortgage loan origination and
processing fees 1,092,786 1,051,381 772,115
Gains on sales of mortgage loans, net 399,947 496,782 429,186
Mortgage loan servicing fees, net 223,086 197,424 182,250
Merchant bankcard fees, net 324,625 262,914 217,357
Realized losses on sales of
investment securities available-
for-sale (173,937)
Other 459,838 459,973 298,696
----------- ---------- -----------
Total noninterest income 4,310,354 4,019,620 3,099,686
Noninterest expense:
Salaries and employee benefits 5,175,149 4,412,356 3,864,590
Equipment 898,156 724,954 755,336
Occupancy 668,023 623,385 583,562
Supplies 284,756 274,363 239,593
Communications 305,428 272,086 223,276
Third-party account services 293,071 240,202 91,217
Advertising 269,236 229,366 198,123
Deposit insurance premiums and
assessments 20,473 75,033 155,548
Other 1,465,189 1,261,361 1,032,931
------------ ---------- -----------
Total noninterest expense 9,379,481 8,113,106 7,144,176
------------ ---------- -----------
Income before income taxes 7,904,841 7,234,904 5,609,375
Provision for income taxes 2,863,700 2,721,900 1,977,100
----------- ---------- -----------
Net income $5,041,141 $4,513,004 $3,632,275
========== ========== ===========
Basic earnings per common share $ 1.18 $ 1.06 $ .85
========== ========== ===========
Diluted earnings per common share $ 1.15 $ 1.04 $ .84
========== ========== ===========
See accompanying notes
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net unrealized
gains (losses)
on investment
securities
Number available-for- Total
of Common Retained sale, net of stockholders'
shares stock earnings income taxes equity
---------- ----------- ----------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 1,762,783 $ 7,093,607 $ 8,262,066 $ (544,738) $ 14,810,935
Net change on unrealized gains
(losses) on investment securities
available-for-sale, net of
income taxes of
approximately $366,000 - - - 596,745 596,745
10% stock dividend 176,278 2,159,405 (2,159,405) - -
Net income - - 3,632,275 - 3,632,275
----------- ----------- ----------- ------------- ----------
Balance at December 31, 1995 1,939,061 9,253,012 9,734,936 52,007 19,039,955
Net change in unrealized gains
(losses) on investment securities
available-for-sale, net of income
taxes of approximately $12,000 - - - 19,090 19,090
10% stock dividend 193,906 3,805,405 (3,805,405) - -
Net income - - 4,513,004 - 4,513,004
----------- ----------- ----------- ------------- ----------
Balance at December 31, 1996 2,132,967 13,058,417 10,442,535 71,097 23,572,049
Net change in unrealized gains (losses)
on investment securities available-for-
sale, net of income taxes of
approximately $143,000 - - - 231,668 231,668
Cash dividends paid
(aggregating $.45 per share) - - (1,915,032) - (1,915,032)
Two-for-one stock split 2,132,967 - - - -
Stock options exercised 24,936 100,000 - - 100,000
Repurchases of common stock (118,632) (2,793,402) - - (2,793,402)
Net income - - 5,041,141 - 5,041,141
---------- ------------ ------------ --------- --- ----------
Balance at December 31, 1997 4,172,238 $ 10,365,015 $ 13,568,644 $ 302,765 $ 24,236,424
========== ============ ============ ========= =============
</TABLE>
See accompanying notes
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- -----------
Cash flows from operating activities:
Net income $5,041,141 $ 4,513,004 $ 3,632,275
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 715,253 694,005 675,639
Loan loss provision 1,075,109 432,141 480,779
Provision for deferred income taxes 421,000 527,000 145,000
Discounts (premiums) on sales of
mortgage loans, net 295,053 53,436 (429,186)
Realized losses on sales of
investment securities available-
for-sale - - 173,937
Dividends on Federal Home Loan Bank
stock (103,300) (95,100) (66,700)
Deferred benefit plan expenses 270,000 271,000 125,000
Increase in accrued interest and
other assets (1,127,283) (2,163,666) (232,630)
Increase in accrued interest and
other liabilities 137,854 267,180 127,059
Originations of mortgage loans (84,908,075)(87,996,351) (63,695,364)
Proceeds from sales of mortgage
loans 83,299,690 90,208,110 62,107,191
------------ ------------ ------------
Net cash provided by
operating activities 5,116,442 6,710,759 3,043,000
Cash flows from investing activities:
Purchases of investment securities
available-for-sale (41,026,887)(23,838,205) -
Proceeds from maturities and calls
of investment securities
available-for-sale 23,923,471 9,320,018 11,100,987
Proceeds from sales of investment
securities available-for-sale - - 7,798,750
Purchases of investment securities
held-to-maturity (5,400) (1,073,016) (212,000)
Proceeds from maturities and calls
of investment securities held-to-
maturity 982,950 1,383,215 1,380,961
Other loan originations, net (22,473,293) (7,347,528) (28,265,172)
Purchases of premises and equipment, net (1,491,887) (1,404,123) (712,568)
Purchases of life insurance contracts (130,000) (615,000) (3,111,500)
Surrender of life insurance contracts 111,457 - -
------------ ------------ ------------
Net cash used in investing
activities (40,109,589)(23,574,639) (12,020,542)
Cash flows from financing activities:
Net increase in deposits 40,262,679 18,644,027 24,178,424
Stock options exercised 100,000 - -
Repurchases of stock (2,793,402) - -
Cash dividends paid (1,915,032) - -
Net decrease in short-term
borrowings - - (2,900,000)
Proceeds from issuance of long-
term debt - - 5,000,000
------------ ------------ ------------
Net cash provided by financing
activities 35,654,245 18,644,027 26,278,424
------------ ------------ ------------
Net increase in cash and cash
equivalents 661,098 1,780,147 17,300,882
Cash and cash equivalents at
beginning of the year 28,892,608 27,112,461 9,811,579
------------ ------------ ------------
Cash and cash equivalents at end
of the year $29,553,706 $28,892,608 $27,112,461
============ ============ ============
See accompanying notes
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPALS OF CONSOLIDATION
The accompanying 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"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
DESCRIPTION OF BUSINESS
The Bank conducts a general banking business. Its activities include the
usual lending and deposit functions of a commercial bank: commercial, real
estate, installment, credit card and mortgage loans; checking and savings
accounts; automated teller machines (ATMs); and safe deposit facilities. The
Bank also originates and sells mortgage loans into the secondary market.
Cascade Finance was formed in January 1997 as a consumer finance company which
offers consumer loans. The activities of Cascade Finance were not significant
to Bancorp's consolidated financial position or results of operations as of
and for the year ended December 31, 1997.
METHOD OF ACCOUNTING
The Company prepares its consolidated financial statements in conformity with
generally accepted accounting principles 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 generally accepted
accounting principles 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.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
During 1997, 1996 and 1995, noncash transactions resulted from changes in the
net unrealized gains (losses) on investment securities available-for-sale, net
of income taxes, as disclosed in the accompanying consolidated statements of
changes in stockholders' equity. In addition, during 1997 and 1996, noncash
investing activities resulted from the net capitalization of approximately
$695,000 and $575,000, respectively, in originated mortgage servicing rights.
During 1997, 1996 and 1995, the Bank paid approximately $4,747,000, $4,032,000
and $3,731,000, respectively, in interest expense.
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,
1997 or 1996.
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 a separate component of stockholders'
equity, 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 over the period to maturity.
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.
LOANS
Loans are stated at the amount of unpaid principal, reduced by any deferred
loan fees and reserves for loan losses. 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; underlying
collateral values; 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.
<PAGE>
The Company 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. An impaired loan must be valued using the present value of
expected future cash flows discounted at the loan's effective interest rate,
the loan's observable market price or the fair value of the loan's underlying
collateral. The Company primarily measures impairment on all large balance
nonaccrual loans (typically commercial and commercial real estate loans) based
on the fair value of the underlying collateral. 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 as described above. Generally, the Company evaluates a loan for
impairment when it is placed on nonaccrual status. All of the Company's
impaired loans at December 31, 1997 and 1996 were on nonaccrual status.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet 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.
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 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, 1997 and 1996, mortgage loans held for sale were carried at cost,
which approximated estimated market value.
At December 31, 1997 and 1996, the Bank held servicing rights to approximately
$174,294,000 and $143,008,000, respectively, in mortgage loans which have been
sold into the secondary market. These mortgage loans are being serviced for
the Bank by another financial institution under a subservicing agreement and
are not included in the accompanying consolidated balance sheets. The sale of
these mortgage loans are subject to technical underwriting exceptions and
related repurchase risks. Such risks are considered in the determination of
the reserve for loan losses.
Effective January 1, 1996, the Company prospectively adopted Statement of
Financial Accounting Standards (SFAS) No. 122, "Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65" (SFAS 122). SFAS 122
required the Bank to recognize as separate assets the rights to service
mortgage loans which are acquired through loan origination activities
subsequent to December 31, 1995. In June 1996, SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (SFAS 125) was issued which superseded SFAS 122 and also
established standards for when transfers of financial assets (e.g., loan
participations), including those with continuing involvement by the
transferor, should be considered a sale. SFAS 125 also established standards
for when a liability should be considered extinguished. SFAS 125 was
generally effective for transfers of assets and extinguishments of liabilities
after December 31, 1996, applied prospectively. Earlier adoption or
retroactive application of SFAS 125 was not permitted. In addition, in
December 1996, SFAS 127 was issued which deferred the effective date of
certain provisions of SFAS 125 for one year. The effect of adopting SFAS 125
and SFAS 127 was not significant to the Company's consolidated financial
condition or results of operations.
During the years ended December 31, 1997 and 1996, the Bank capitalized
approximately $836,000 and $600,000, respectively, in mortgage servicing
rights. The capitalized mortgage servicing rights are being amortized in
proportion to, and over the period of, estimated net servicing income. During
the years ended December 31, 1997 and 1996, the amortization of the
capitalized mortgage servicing rights totaled approximately $141,000 and
$25,000, respectively. The net amount of capitalized mortgage servicing
rights at December 31, 1997 and 1996 (approximately $1,270,000 and $575,000,
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
mortgage servicing rights at December 31, 1997 and 1996 was determined based
on comparisons to current market transactions involving mortgage servicing
rights with similar portfolio characteristics and estimates of the net present
value of expected future cash flows. The predominant risk characteristics of
the underlying loans used to stratify the capitalized mortgage servicing
rights for purposes of measuring impairment include, but are not limited to,
interest rates, interest types (i.e., fixed and variable) and loan types.
Each strata is then discounted to reflect the present value of the expected
future cash flows utilizing current market assumptions including discount
rates, prepayment speeds and delinquency rates. Impairment, if any, related
to mortgage servicing rights is recognized through a valuation allowance. No
valuation allowance was required as of and for the years ended December 31,
1997 and 1996.
<PAGE>
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.
Subsequent write-downs to net realizable value, if any, or any disposition
gains or losses are included in noninterest income and expense. Other real
estate was not significant at December 31, 1997 and 1996.
STOCKHOLDERS' EQUITY
The Bank, as a state-chartered bank, is prohibited from declaring or paying
any dividend in an amount greater than undivided profits. At December 31,
1997, approximately $4,931,000 was available for the payment of dividends to
Bancorp with prior regulatory approval.
In June 1997, the Company declared a two-for-one stock split. In June 1996
and 1995, the Company declared 10% stock dividends. 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 splits and stock dividends.
During 1997, the Company repurchased 118,632 shares of its common stock for
$2,793,402. As of December 31, 1997, the Company's Board of Directors (the
Board) had approved an additional repurchase of up to 2.5% of its outstanding
common stock. In January 1998, the Company repurchased 27,376 shares of its
common stock for $759,878.
In January 1998, the Company declared a $.12 per share cash dividend which
totaled approximately $500,000 and was payable to stockholders of record as of
January 26, 1998.
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.
OTHER RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1997, the Company adopted the provisions of SFAS No. 129,
"Disclosure of Information about Capital Structure" (SFAS 129). SFAS 129
prescribes reporting standards for securities issued by an entity, including
options, warrants, debt and stock. An entity is required to provide
information about the pertinent rights and privileges of the various
securities outstanding. In addition, the entity shall disclose the number of
shares issued upon conversion or exercise of securities during the most recent
annual fiscal period. The required disclosures of SFAS 129 are included
within the accompanying consolidated financial statements and notes.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130) and
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131) were issued.
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains, and losses) in a full set
of general-purpose financial statements. Accordingly, any unrealized gains or
losses on available-for-sale securities will be recognized as a component of
comprehensive income. SFAS 130 will be retroactively effective for the
Company beginning in the year ending December 31, 1998.
SFAS 131, in general, requires that public business enterprises report
financial and descriptive information about its material reportable operating
segments and also establishes standards for related disclosures about products
and services, geographic areas and major customers. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by key management personnel in deciding
how to allocate resources and in assessing performance. SFAS 131 will be
retroactively effective for the Company beginning in the year ending December
31, 1998. Management believes that SFAS 131 will not have a material effect
on the Company's results of operations or financial condition; however,
management is currently studying the effect of SFAS 131 related to future
disclosure requirements.
RECLASSIFICATIONS
Certain amounts in 1995 and 1996 have been reclassified to conform with the
1997 presentation.
<PAGE>
2. CASH AND DUE FROM BANKS
The Bank is required to maintain an average reserve balance ($3,463,000 and
$3,570,000 at December 31, 1997 and 1996, respectively) with the Federal
Reserve Bank 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 Federal Reserve Bank in excess of this amount.
3. INVESTMENT SECURITIES
Investment securities at December 31, 1997 and 1996 consisted of the
following:
Gross Gross Estimated
Amortized unrealized unrealized fair
1997 cost gains losses value
- ------ ----------- ---------- --------- -----------
Available-for-sale
- ------------------
U.S. Government and
agency securities $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
Federal Home Loan Bank stock 1,416,164 - - 1,416,164
----------- --------- --------- -----------
$ 2,445,957 $ 7,018 $ - $ 2,452,975
=========== ========= ========= ===========
1996
- ----
Available-for-sale
- ------------------
U.S. Government and
agency securities $20,372,543 $ 95,022 $ - $20,467,565
U.S. Treasury securities 3,989,347 19,715 - 4,009,062
----------- --------- --------- -----------
$24,361,890 $ 114,737 $ - $24,476,627
=========== ========= ========= ===========
Held-to-maturity
- ----------------
Obligations of state and
political sub-divisions $2,012,743 $ 3,103 $ 2,808 $ 2,013,038
Federal Home Loan Bank stock 1,307,464 - - 1,307,464
---------- --------- --------- -----------
$3,320,207 $ 3,103 $ 2,808 $ 3,320,502
========== ========= ========= ===========
The amortized cost and estimated fair value of investment securities at
December 31, 1997, 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 after one year through five years $38,933,419 $39,409,250
Due after five years through ten years 2,000,000 2,012,500
Equity securities 531,887 531,887
------------ -----------
$41,465,306 $41,953,637
============ ===========
Held-to-maturity
- ----------------
Due in one year or less $39,968 $40,044
Due after one year through five years 989,825 996,767
Federal Home Loan Bank stock 1,416,164 1,416,164
----------- ----------
$2,445,957 $2,452,975
=========== ==========
<PAGE>
The Bank, as a member of the Federal Home Loan Bank of Seattle (the FHLB), is
required to maintain an investment in capital stock of the FHLB. The FHLB
stock is not actively traded but is redeemable by the FHLB at its current book
value.
Investment securities with a carrying value of approximately $10,070,000 and
$11,519,000 at December 31, 1997 and 1996, respectively, were pledged to
secure public deposits and for other purposes as required or permitted by law.
4. LOANS
Loans at December 31, 1997 and 1996 consisted of the following:
1997 1996
------------ ------------
Commercial $ 30,058,992 $ 22,485,269
Real estate:
Construction 30,862,916 34,375,243
Mortgage 23,395,618 19,774,232
Commercial 52,356,507 42,390,479
Installment 18,901,259 14,665,629
------------ ------------
155,575,292 133,690,852
Less:
Reserve for loan losses 2,048,561 1,691,260
Deferred loan fees 501,805 372,850
------------ ------------
2,550,366 2,064,110
------------ ------------
Loans, net $153,024,926 $131,626,742
============ ============
The Bank's branches are located in Deschutes County and Crook County, Oregon.
The result of doing business in this geographic region has been growth in loan
demand. A substantial portion of the Bank's loans are collateralized by real
estate in this geographic area and, accordingly, the ultimate collectibility
of a substantial portion of the Bank's loan portfolio is susceptible to
changes in the local market conditions.
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, 1997 and 1996, the portion of these loans participated
to third parties (which are not included in the accompanying consolidated
financial statements) totaled approximately $3,567,000 and $8,043,000,
respectively. The Bank also purchases participated loans from other financial
institutions that have similar lending philosophies and guidelines as the
Bank. The amount of loan participations purchased from other financial
institutions at December 31, 1997 and 1996 totaled approximately $431,000 and
$479,000, 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
31,1997, 1996 and 1995 were as follows:
1997 1996 1995
---------- ----------- ----------
Balance at beginning of year $1,691,260 $1,651,352 $1,172,238
Loan loss provision 1,075,109 432,141 480,779
Loans charged-off (777,505) (422,170) (103,371)
Recoveries of loans previously
charged-off 59,697 29,937 101,706
----------- ----------- ----------
Balance at end of year $2,048,561 $1,691,260 $1,651,352
=========== =========== ==========
Impaired loans as of and for the years ended December 31, 1997 and 1996 were
not significant. Loans past due 90 days or more and still accruing interest
were approximately $45,000 and $27,000 at December 31, 1997 and 1996,
respectively.
<PAGE>
6. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 and 1996 consisted of the
following:
1997 1996
---------- ----------
Land $ 184,600 $ 184,600
Buildings and leasehold improvements 4,737,370 3,915,909
Furniture and equipment 4,042,012 3,588,484
---------- ----------
8,963,982 7,688,993
Less accumulated depreciation and amortization 3,906,594 3,408,239
---------- ----------
$5,057,388 $4,280,754
========== ==========
7. TIME CERTIFICATES OF DEPOSIT
Time certificates of deposit in excess of $100,000 aggregated approximately
$3,716,000 and $2,399,000 at December 31, 1997 and 1996, respectively. The
related interest expense on time certificates of deposit in excess of $100,000
was approximately $169,000, $176,000 and $135,000 in 1997, 1996 and 1995,
respectively.
At December 31, 1997, the scheduled annual maturities of all time certificates
of deposit were approximately as follows:
1998 $18,656,000
1999 2,018,000
2000 315,000
2001 315,000
2002 250,000
Thereafter 40,000
------------
$21,594,000
============
8. BORROWINGS
At December 31, 1997 and 1996, the Bank had $5,000,000 in long-term borrowings
from the FHLB which were due in May 1998 and bore interest at a fixed rate of
6.96%. The borrowings were collateralized by a blanket pledge agreement on
the FHLB stock, any funds on deposit with the FHLB, investment securities and
loans. In January 1998, the Bank paid-off its long-term borrowings with the
FHLB.
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 contract amounts of these instruments reflect the extent of the
Bank's involvement in these particular classes of financial instruments. As
of December 31, 1997 and 1996, the Bank held no 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 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.
A summary of the Bank's off-balance sheet financial instruments at December
31, 1997 and 1996 is approximately as follows:
1997 1996
----------- ----------
Commitments to extend credit $48,945,000 $46,183,000
Commitments under credit card lines of credit 5,318,000 3,460,000
Standby letters of credit 1,356,000 918,000
----------- -----------
Total off-balance sheet financial instruments $55,619,000 $50,561,000
=========== ===========
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 a fee. 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
<PAGE>
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 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 guarantees
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 for income taxes for the years ended December 31, 1997, 1996 and
1995 was approximately as follows:
1997 1996 1995
---------- ---------- ----------
Current $2,442,700 $2,194,900 $1,832,100
Deferred 421,000 527,000 145,000
---------- ---------- ----------
Provision for income taxes $2,863,700 $2,721,900 $1,977,100
========== ========== ==========
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, 1997, 1996 and 1995 were
approximately as follows:
1997 1996 1995
---------- ---------- ----------
Expected federal income tax at statutory
rate of 34% $2,687,600 $2,459,900 $1,907,200
Effect of nontaxable interest income, net (43,000) (55,600) (48,800)
State income taxes, net of federal effect 200,400 316,100 122,700
Other, net 18,700 1,500 (4,000)
----------- ---------- ----------
Provision for income taxes $ 2,863,700 $2,721,900 $1,977,100
=========== ========== ==========
The components of the net deferred tax assets and liabilities at December 31,
1997 and 1996 were approximately as follows:
1997 1996
----------- ----------
Assets:
Loan loss provision $ 652,000 $ 551,000
Deferred compensation expense 253,000 150,000
Deferred life insurance expenses 81,000 -
Other 62,000 55,000
Total deferred tax assets 1,048,000 756,000
---------- ----------
Liabilities:
Deferred loan fees 325,000 178,000
Mortgage servicing rights 487,000 222,000
FHLB stock dividends 174,000 134,000
Net unrealized gains on investment securities
available-for-sale 186,000 44,000
Interest earned on life insurance policies 176,000 87,000
Other 75,000 45,000
--------- ----------
Total deferred tax liabilities 1,423,000 710,000
--------- ----------
Net deferred tax assets (liabilities) $(375,000) $ 46,000
========== ==========
The Company made income tax payments of approximately $2,520,000, $2,680,000
and $2,234,000 during 1997, 1996 and 1995, respectively.
<PAGE>
11. BASIC AND DILUTED EARNINGS PER COMMON SHARE
During the fourth quarter of 1997, the Company retroactively adopted SFAS 128,
"Earnings Per Share" (SFAS 128). SFAS 128 requires the Company to disclose
basic earnings per common share 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 calculated by dividing net
income by the weighted-average number of common shares outstanding plus
dilutive common shares related to stock options.
The numerators and denominators used in calculating basic and diluted earnings
per common share for the years ended December 31, 1997, 1996 and 1995 can be
reconciled as follows:
Net
income Shares Per-share
(numerator) (denominator) amount
---------- ------------- ----------
1997
- -------
Basic earnings per common share
Income available to common stock-
holders $5,041,141 4,255,339 $ 1.18
=========
Effect of assumed conversion of
stock options 123,045
---------- ----------
Diluted earnings per common share $5,041,141 4,378,384 $ 1.15
========== ========== =========
1996
- ----
Basic earnings per common share
Income available to common stock-
holders $4,513,004 4,265,934 $ 1.06
=========
Effect of assumed conversion of stock
options - 72,039
---------- ----------
Diluted earnings per common share $4,513,004 4,337,973 $ 1.04
========== ========== =========
1995
- ----
Basic earnings per common share
Income available to common stock-
holders $3,632,275 4,265,934 $ .85
=========
Effect of assumed conversion of stock
options - 38,799
---------- ----------
Diluted earnings per common share $3,632,275 4,304,733 $ .84
========== ========== =========
The above computations have not been adjusted to reflect the repurchase of the
Company's common stock in January 1998 (see Note 1) and the issuance of
additional stock options in January 1998 (see Note 14).
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, 1997 was as follows:
Balance at December 31, 1996 $1,679,625
Additions 4,348,495
Repayments (4,577,995)
----------
Balance at December 31, 1997 $1,450,125
==========
<PAGE>
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 employer contributions to the Plan are
at the discretion of the Board, not to exceed the amount deductible for
federal income tax purposes. Employees vest in the employer contributions
over a period of five years. Employer contributions to the Plan which were
charged to operations were approximately $628,000, $578,000 and $468,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
OTHER BENEFIT PLANS
During the fourth quarter of 1995, the Bank established deferred compensation
plans for 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 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 the participants. The cash surrender value of
these policies at December 31, 1997 and 1996 were approximately $4,054,000 and
$3,913,000, respectively, and are included in accrued interest and other
assets in the accompanying consolidated balance sheets.
The amount of expense charged to operations in 1997, 1996 and 1995 related to
the deferred compensation plans was approximately $122,000, $111,000 and
$100,000, respectively. The amount of expense charged to operations in 1997,
1996 and 1995 for the salary continuation and fee continuation plans was
approximately $147,000, $160,000 and $25,000, 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 (expense) in 1997, 1996 and 1995 was approximately
$123,000, $162,000 and ($39,000), 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 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.
During 1996, the Company adopted SFAS 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 defines a "fair value-based method" of
accounting for employee stock options and encourages all entities to adopt
that method of accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation for
those plans using the "intrinsic value-based method" under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(Opinion 25). Substantially all of the Company's stock options have no
intrinsic value at grant date, and under Opinion 25, no compensation cost is
recognized for them. SFAS 123 requires that an employer's financial
statements include certain disclosures about stock-based compensation
arrangements regardless of the method used to account for them. In addition,
SFAS 123 is applicable only to options granted subsequent to December 31,
1994. The Company has elected to continue to apply the accounting provisions
of Opinion 25 and disclose pro forma amounts that reflect the difference
between compensation cost, if any, included in net income and the related cost
measured by the fair value-based method, including tax effects, that would
have been recognized in the income statement if the fair value-based method
had been used.
The effect of applying the fair value-based method of SFAS 123 to stock
options granted in the years ended December 31, 1997, 1996 and 1995 resulted
in an estimated weighted-average grant date fair value of $3.83, $2.54 and
$1.67, 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 would have been as follows:
<PAGE>
1997 1996 1995
---------- ---------- ----------
Net income As reported $5,041,141 $4,513,004 $3,632,275
Pro forma 4,905,554 4,458,164 3,604,796
Basic earnings per common
share As reported $1.18 $1.06 $.85
Pro forma 1.15 1.05 .85
Diluted earnings per common
share As reported $1.15 $1.04 $.84
Pro forma 1.12 1.03 .84
The Company used the Black-Scholes option-pricing model with the following
weighted-average assumptions to value options granted:
1997 1996 1995
---------- --------- ---------
Dividend yield 1.6% 1.6% 1.6%
Expected volatility 35.8% 31.8% 29.4%
Risk-free interest rate 5.8% 6.2% 5.5%
Expected option lives 5 years 5 years 5 years
Because SFAS 123 is applicable only to options granted subsequent to December
31, 1994, the proforma effect for 1997, 1996 and 1995 may not be
representative of the effects on reported results in future years.
At December 31, 1997, 194,382 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, 1997, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
Weighted- Weighted- Weighted-
Options average Options average Options average
out- exercise out- exercise out- exercise
standing price standing price standing price
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year 147,168 $ 5.01 116,040 $ 4.29 79,860 $ 3.76
Granted 60,750 11.16 35,638 7.62 37,390 5.48
Forfeited (3,000) 10.88 (4,510) 7.03 (1,210) 5.48
Exercised (24,936) 4.01 - - - -
--------- -------- --------
Balance at end of year 179,982 $ 7.13 147,168 $ 5.01 116,040 $ 4.29
--------- ------- -------- ------ -------- ---------
</TABLE>
Information regarding the number, weighted-average exercise price and
weighted-average remaining contractual life of options by range of exercise
price at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Options outstanding Exercisable options
----------------------------------- -----------------------
Weighted-
Weighted- average Weighted
exercise remaining average
Exercise Number of average contractual Number of exercise
price range options price life (years) options price
----------------- --------- ----------- ------------ ---------- -----------
<C> <C> <C> <C> <C> <C>
$ 3.76 57,233 $ 3.76 6 57,233 $ 3.76
5.48 33,759 5.48 7 33,759 5.48
7.62 31,240 7.62 8 31,240 7.62
10.88 - 18.25 57,750 11.16 9 48,000 0.88
--------- ----------- --------- -----------
179,982 $ 7.13 7.5 170,232 $ 6.82
========= ========== =========== ========= ===========
</TABLE>
Exercisable options as of December 31, 1996 and 1995 totaled 137,578 and
98,664, respectively.
In January 1998, ISO's for an additional 46,000 shares were granted at $28 per
share, subject to the Company meeting certain performance standards in 1998.
<PAGE>
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, 1997,
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:
1998 $ 236,000
1999 236,000
2000 236,000
2001 203,000
2002 203,000
Thereafter 3,247,000
-----------
Total minimum payments $ 4,361,000
===========
Total rental expense was approximately $236,000, $240,000 and $213,000 in
1997, 1996 and 1995, 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, 1997.
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" (SFAS
107), 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 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 have significant value. These include such off-balance
sheet items as core deposit intangibles and mortgage loan servicing rights
originated prior to the Company's adoption of SFAS 122 as superseded by SFAS
125. 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, 1997
and 1996.
Because SFAS 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 used 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.
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
certificates of deposits is calculated by discounting the scheduled cash
flows using the December 31, 1997 and 1996 rates offered on these instruments.
Long-term debt: The estimated fair value of long-term debt is calculated
discounting the scheduled cash flows using quoted rates from FHLB as of
December 31, 1997 and 1996.
Off-balance sheet financial instruments: The estimated fair value of off-
balance sheet financial instruments (primarily commiments to extend credit)
is determined based on fees currently charged for similar commitments.
Management estimates that these fees approximate $367,000 and $346,000
as of December 31, 1997 and 1996, respectively.
<PAGE>
The estimated fair values of the Company's significant on-balance sheet
financial instruments at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 29,553,706 $ 29,554,000 $ 28,892,608 $ 28,893,000
Investment securities:
Available-for-sale 41,953,637 41,954,000 24,476,627 24,477,000
Held-to-maturity 2,445,957 2,453,000 3,320,207 3,321,000
Loans, net (including
mortgage loans held
for sale) 156,780,000 154,901,112 132,237,392 132,565,000
Financial liabilities:
Deposits 211,379,000 211,344,773 171,082,094 171,270,000
Long-term debt 5,000,000 5,000,000 5,000,000 5,046,000
</TABLE>
17. REGULATORY MATTERS
Bancorp and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet 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, Bancorp 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. Bancorp 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 Bancorp and the Bank to maintain minimum amounts and ratios (set forth
in the table below) of Tier 1 capital (as defined in the regulations) to
average assets (as defined), and Tier 1 and total capital (as defined) to
risk-weighted assets (as defined). Management believes that as of December 31,
1997, Bancorp and the Bank meet or exceed all relevant capital adequacy
requirements.
As of December 31, 1997, the most recent notification from the Federal Reserve
Bank and the Federal Deposit Insurance Corporation categorized Bancorp and the
Bank as well capitalized under the regulatory framework for prompt correction
action. To be categorized as well capitalized, Bancorp 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
Bancorp's or the Bank's regulatory capital categorization.
Bancorp's actual and required capital amounts and ratios are presented in the
following table (dollars in thousands):
<TABLE>
<CAPTION>
To be well capitalized
For capital under prompt corrective
Actual adequacy purposes action provisions
-------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997:
Tier 1 capital
(to average assets) $ 23,573 9.6% $ 9,788 4.0% $ 12,235 5.0%
Tier 1 capital
(to risk-weighted assets) 23,573 13.1 7,173 4.0 10,760 6.0
Total capital
(to risk-weighted assets) 25,622 14.3 14,346 8.0 17,933 10.0
December 31, 1996:
Tier 1 capital
(to average assets) 23,190 11.5 8,096 4.0 10,120 5.0
Tier 1 capital
(to risk-weighted assets) 23,190 15.4 6,027 4.0 9,041 6.0
Total capital
(to risk-weighted assets) 24,881 16.5 12,054 8.0 15,068 10.0
</TABLE>
<PAGE>
The Bank's actual and required capital amounts and ratios are presented in the
following table (dollars in thousands):
<TABLE>
<CAPTION>
To be well capitalized
For capital under prompt corrective
Actual adequacy purposes action provisions
---------------- ----------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997:
Tier 1 capital
(to average assets) $18,570 7.6% $9,771 4.0% $12,214 5.0%
Tier 1 capital
(to risk-weighted assets) 18,570 10.4 7,163 4.0 10,744 6.0
Total capital
(to risk-weighted assets) 20,565 11.5 14,325 8.0 17,907 10.0
December 31, 1996:
Tier 1 capital
(to average assets) 22,479 11.1 8,082 4.0 10,103 5.0
Tier 1 capital
(to risk-weighted assets) 22,479 14.9 6,041 4.0 9,062 6.0
Total capital
(to risk-weighted assets) 24,170 16.0 12,082 8.0 15,103 10.0
</TABLE>
18. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Cascade Bancorp (Parent Company only) is
presented as follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION> December 31,
--------------------------------
1997 1996
-------------- ---------------
<S> <C> <C>
Assets:
Cash $ 4,042,545 $ 710,724
Equity securities available-for-sale 531,887
Investment in subsidiaries 19,661,992 22,861,325
------------ --------------
Total assets $ 24,236,424 $ 23,572,049
============ ==============
Stockholders' equity $ 24,236,424 $ 23,572,049
============ ==============
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Expenses:
Administrative $ 34,893 $ 20,514 $ 13,701
Amortization - - 3,706
---------- ----------- -----------
Total expenses 34,893 20,514 17,407
---------- ----------- -----------
Loss before income taxes
and equity in undistributed net
earnings of subsidiaries $ (34,893) $ (20,514) $ (17,407)
Income tax benefit 13,957 8,209 6,962
---------- ---------- -----------
Loss before equity in undistributed
net earnings of subsidiaries (20,936) (12,305) (10,445)
Equity in undistributed net earnings
of subsidiaries 5,062,077 4,525,309 3,642,720
---------- ---------- -----------
Net income $5,041,141 $4,513,004 $ 3,632,275
========== ========== ===========
</TABLE>
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $5,041,141 $4,513,004 $3,632,275
Adjustments to reconcile net income
to net cash used by operating activities:
Undistributed net earnings of
subsidiaries (5,062,077) (4,525,309) (3,642,720)
Decrease in other assets - - 3,706
----------- ------------ ------------
Net cash used by operating activities (20,936) (12,305) (6,739)
Cash flows used by investing activities
purchase of equity securities (531,887) - -
Cash flows from financing activities:
Investment in Cascade Finance (500,000) - -
Cash dividends paid (1,915,032) - -
Dividends from the Bank 8,993,078 - -
Repurchases of stock (2,793,402) - -
Stock options exercised 100,000 - -
Decrease in due from Bank - 6,962 5,048
---------- ------------ ------------
Net cash provided by financing activities 3,884,644 6,962 5,048
---------- ------------ ------------
Net increase (decrease) in cash 3,331,821 (5,343) (1,691)
Cash at beginning of year 710,724 716,067 717,758
---------- ------------ ------------
Cash at end of year $4,042,545 $710,724 $716,067
========== ============ ============
</TABLE>
These financial statements have not been reviewed for accuracy or relevance by
the Federal Deposit Insurance Corporation.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Cascade Bancorp of our report dated January 21, 1998, included in the 1997
Annual Report to Shareholders of Cascade Bancorp.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8) pertaining to the Cascade Bancorp Incentive Stock Option Plan of our
report dated January 21, 1998, with respect to the consolidated financial
statements of Cascade Bancorp incorporated by reference in the Annual Report
(Form 10-K) for the year ended December 31, 1997.
SYMONDS, EVANS & LARSON, P.C.
Portland, Oregon
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 21,054
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,954
<INVESTMENTS-CARRYING> 2,446
<INVESTMENTS-MARKET> 2,453
<LOANS> 155,575
<ALLOWANCE> 2,049
<TOTAL-ASSETS> 242,611
<DEPOSITS> 211,345
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,030
<LONG-TERM> 5,000
0
0
<COMMON> 10,365
<OTHER-SE> 13,871
<TOTAL-LIABILITIES-AND-EQUITY> 242,611
<INTEREST-LOAN> 15,788
<INTEREST-INVEST> 2,580
<INTEREST-OTHER> 467
<INTEREST-TOTAL> 18,835
<INTEREST-DEPOSIT> 4,763
<INTEREST-EXPENSE> 4,786
<INTEREST-INCOME-NET> 14,049
<LOAN-LOSSES> 1,075
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,379
<INCOME-PRETAX> 7,905
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
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<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.15
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<ALLOWANCE-OPEN> 1,691
<CHARGE-OFFS> 778
<RECOVERIES> 60
<ALLOWANCE-CLOSE> 2,049
<ALLOWANCE-DOMESTIC> 2,049
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
