<PAGE>
[LOGO]
1998 ANNUAL REPORT
SEC FORM 10-K
To provide you more complete information about
Cascade Bancorp, we have included our Form 10-K,
as filed with the Securities and Exchange
Commission, with our Annual Report. A table of
contents is on page 2.
[GRAPHIC]
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 1998
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number: 0-23322
-------
CASCADE BANCORP
(Name of registrant as specified in its charter)
Oregon 93-1034484
(State of Incorporation) (IRS Employer Identification #)
1100 NW Wall Street, Bend, Oregon 97701
(Address of principal executive offices) (Zip Code)
(541) 385-6205
(Registrants telephone number)
--------------------------
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of
the Exchange Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the registrant: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained, 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 ]
---
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. $96,225,820 AGGREGATE MARKET VALUE AS OF FEBRUARY 12, 1999, BASED ON THE
AVERAGE BID AND ASKED PRICE.
Indicate the number of shares outstanding of each of the registrants classes of
common stock, as of the latest practicable date. 6,238,432 SHARES OF NO PAR
VALUE COMMON STOCK ON FEBRUARY 12, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III is incorporated by reference from the issuer's definitive proxy
statement for the annual meeting of shareholders to be held on April 26, 1999.
<PAGE>
CASCADE BANCORP
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
PART I PAGE
Item 1. BUSINESS.........................................................3
Item 2. PROPERTIES......................................................16
Item 3 LEGAL PROCEEDINGS...............................................17
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............17
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................18
Item 6. SELECTED FINANCIAL DATA.........................................19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................21
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......26
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........27
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................27
PART III
Item 10 through 13
Part III, items 10 through 13 are incorporated by reference
from the Company's definitive proxy statement issued in
conjunction with the Company's Annual Meeting of Shareholders
to be held on April 26, 1999. (Executive Officers,
Compensation arrangements, Director and Management Ownership;
Related Party Transactions)
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K..................................................28
SIGNATURES....................................................................29
<PAGE>
PART I
ITEM 1. 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, 1998 the Company had total
consolidated assets of approximately $301 million, net loans of $203 million and
deposits of $271 million. In its main Deschutes County business area, the
Company is the market share leader in customer deposits, construction and
commercial real estate lending as well as in residential mortgage origination
and financing.
BANK OF THE CASCADES
The Bank was chartered as a state bank in March 1976 and opened
for business in February 1977. Bank of the Cascades is a community bank which
operates a full service commercial and consumer banking business within and
adjacent to the communities of Bend, Redmond, Sunriver, Sisters and Prineville,
in Deschutes and Crook County, Oregon. 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.
The bank operates eight offices throughout Central Oregon. Two new offices are
scheduled to open in the first quarter of 1999. The Bank entered a new market in
Salem, Oregon with a full service branch office in January 1999. In addition,
the Bank will open a second office in Redmond, Oregon later in the quarter,
bringing total banking offices to ten. For further details see Item 7 of
Management's Discussion and Analysis of Financial Condition and Results of
Operations elsewhere in this report.
The Bank offers a broad range of commercial and personal banking
services to its customers. Lending activities target small to medium-sized
businesses as well as consumers. The Bank provides commercial real estate loans,
real estate construction and development loans, commercial and industrial loans
as well as consumer installment, line-of-credit, credit card, and home equity
loans. The Bank originates residential mortgage loans that are typically sold on
the secondary market. The Bank offers a broad range of consumer and business
deposit services from checking accounts to money market and certificate of
deposit accounts.
In mid 1999 the Company intends to offer Trust and Investment
services, initially in Central Oregon. Trust services will focus on the personal
trust needs of existing and prospective clients by providing living and
testamentary trust, asset and financial management, and fiduciary services.
Retail investment services, including stock brokerage, mutual fund and fixed
income services, are expected to be provided by a licensed on-site broker
through a broker/dealer agent relationship. In addition, the Company intends to
open a Loan Production Office (LPO) in suburban Portland in 1999, targeting
small to medium sized commercial real estate, construction and business lending
in that market. For further details see Item 7 of Management's Discussion and
Analysis of Financial Condition and Results of Operations elsewhere in this
report.
CASCADE FINANCE
Cascade Finance opened in January 1997 and is based in Bend,
Oregon. Cascade Finance purchases local retail installment contracts and offers
direct consumer loans. At year-end 1998, Cascade Finance had approximately $5
million in consumer installment loans outstanding; predominately 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 1999.
3
<PAGE>
BUSINESS STRATEGY
- ------------------------------------------------------------------------------
- BROADEN CUSTOMER RELATIONSHIPS
- PROVIDE UNCOMPROMISING CUSTOMER SERVICE
- APPLY TECHNOLOGY FOR THE CONVENIENCE OF CUSTOMERS
- COMMITTMENT TO HOMETOWN COMMUNITIES
- ------------------------------------------------------------------------------
During its 22-year commitment to provide hometown banking services
to Central Oregon communities, the Company has become the market share leader in
both the lending and deposit businesses in the Deschutes County business area.
Its strategy is to profitably grow its business by attracting and retaining high
value relationship customers. This is accomplished by offering uncompromising
customer service and a broad array of products and financial services.
Additionally, the Company is committed to providing convenient customer access
to its products and services. Therefore, the Company applies advances in bank
technology and delivery systems to the benefit of its customers. As an example
of its commitment to technology, in 1998 the Company became one of only a few
Oregon community banks to deliver Internet banking and bill paying services to
its customers, which complement its traditional delivery channels of convenient
branch and ATM locations.
In addition to targeting growth and increased market share in its
existing locations, the Company may also consider future expansion by de novo
branching where it identifies market opportunities (such as the new Salem and
Redmond offices). The Company may also consider making selective business
acquisitions to expand its market opportunities.
The Company's broad risk management objectives are to develop loan
policies and underwriting practices designed to prudently manage credit risk,
and to maintain an appropriate mix of core deposits and time deposit balances to
efficiently fund its loan and investment activities. The Company does not use
brokered deposits as a source of funds. The Company monitors its sensitivity to
changing interest rates primarily by utilizing simulation analysis in addition
to traditional interest rate gap calculations.
EMPLOYEES
Bancorp has no employees other than its executive officers, who
are also employees of the Bank. As of December 31, 1998, the Company had 185
full-time equivalent employees including 6 full-time equivalent employees at
Cascade Finance. 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.
COMPETITION
Commercial and consumer banking in Central Oregon, and in the
State of Oregon as a whole, is highly competitive. The Company competes
principally with other commercial banks, savings and loan associations, credit
unions, mortgage companies, and other financial service providers 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 its
commitment to customer service, the relative attractiveness of its products and
services, as well as by providing convenience in delivering those products and
services. The Company believes its hometown banking philosophy and its focus on
small and medium-sized businesses, professionals and consumers enables it to
compete effectively with other financial service providers. In addition, the
Company's lending officers and senior managers have significant experience in
their respective marketplaces. This enables them to maintain close working
relationships with their customers. To serve customers whose borrowing
requirements exceed its lending limits, the Bank may participate loans to other
financial institutions.
4
<PAGE>
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.
For most financial institutions, including the Company, the
primary component of earnings is net interest income. Net interest income is the
difference between interest income earned, principally from loans and investment
securities portfolio, and interest paid, principally on customer deposits and
borrowings. Changes in net interest income result from changes in volume, spread
and margin. Volume refers to the dollar level of interest-earning assets and
interest-bearing liabilities. Spread refers to the difference between the yield
on interest-earning assets and the cost of interest-bearing liabilities. Margin
refers to net interest income divided by interest-earning assets and is
influenced by the level and relative mix of interest-earning assets and
interest-bearing liabilities.
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIAL
The following table shows the dollar amount of the increase (decrease)
in the Company's consolidated interest income and expense, and attributes such
variance to "volume" or "rate" changes. Variances that were immaterial have been
allocated equally between rate and volume categories. (Dollars in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------------
1998 over 1997 1997 over 1996
--------------------------------------- -----------------------------------
Amount of Change Amount of Change
Total Attributed to Total Attributed to
Increase ----------------------- Increase ----------------------
(Decrease) Volume Rate (Decrease) Volume Rate
---------- --------- --------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 3,469 $ 3,446 $ 23 $ 1,724 $ 1,235 $ 489
Taxable securities 110 273 (163) 1,234 1,184 50
Non-taxable securities (32) (31) (1) (20) (18) (2)
Federal funds sold 70 78 (8) 86 75 11
-------- -------- -------- -------- -------- -------
Total interest income 3,617 3,766 (149) 3,024 2,476 548
Interest expense:
Interest on deposits:
Interest bearing demand 435 535 (100) 553 583 (30)
Savings 20 23 (3) (2) 1 (3)
Time 296 276 20 125 131 (6)
Other borrowings (357) (413) 56 59 76 (17)
-------- -------- -------- -------- -------- -------
Total interest expense 394 421 (27) 735 791 (56)
-------- -------- -------- -------- -------- -------
Net interest spread $ 3,223 $ 3,345 $ (122) $ 2,289 $ 1,685 $ 604
-------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------
</TABLE>
5
<PAGE>
AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID
The following table sets forth for 1998, 1997 and 1996 information
with regard to average balances of assets and liabilities, as well as total
dollar amounts of interest income from interest-earning assets and interest
expense on interest-bearing liabilities, resultant average yields or rates, net
interest income, net interest spread, net interest margin and the ratio of
average interest-earning assets to average interest-bearing liabilities for the
Company. (Dollars in thousands):
<TABLE>
<CAPTION>
Years ended Years ended Years ended
December 31, 1998 December 31, 1997 December 31, 1996
---------------------------- ---------------------------- ---------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield or Average Income/ Yield or Average Income/ Yield or
Balance Expense Rates Balance Expense Rates Balance Expense Rates
--------- ----------------- --------- ----------------- ------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Taxable securities $ 39,954 $ 2,617 6.55% $ 35,898 $ 2,507 6.98% 18,717 $ 1,273 6.80%
Non-taxable securities (1) 1,003 42 4.19% 1,751 74 4.23% 2,155 94 4.36%
Federal funds sold 10,107 537 5.31% 8,646 467 5.40% 7,241 381 5.26%
Loans (2)(3)(4) 182,280 19,257 10.56% 149,698 15,788 10.55% 137,798 14,064 10.21%
--------- -------- --------- -------- ------- --------
Total earning assets 233,344 22,453 9.62% 195,993 18,836 9.61% 165,911 15,812 9.53%
Reserve for loan losses (2,264) (1,784) (1,764)
Cash and due from banks 17,827 18,922 14,530
Premises and equipment, net 5,394 4,710 3,810
Other Assets 9,855 7,921 6,729
--------- --------- -------
Total assets $ 264,156 $ 225,762 189,216
--------- --------- -------
--------- --------- -------
LIABILITIES & STOCKHOLDER'S
EQUITY
Int. bearing demand deposits $ 120,530 $ 3,518 2.92% $ 102,484 $ 3,083 3.01% 83,154 $ 2,530 3.04%
Savings deposits 14,086 304 2.16% 13,027 284 2.18% 12,975 286 2.20%
Time deposits 25,295 1,294 5.12% 19,846 998 5.03% 17,235 873 5.07%
Other borrowings 780 65 8.33% 6,269 422 6.73% 5,173 363 7.02%
--------- -------- --------- -------- ------- --------
Total interest bearing
liabilities 160,691 5,181 3.22% 141,626 4,787 3.38% 118,537 4,052 3.42%
Demand deposits 75,826 58,062 46,886
Other liabilities 2,263 1,755 2,348
--------- --------- -------
Total liabilities 238,780 201,443 167,771
Stockholders' equity 25,376 24,319 21,445
--------- --------- -------
Total liabilites & equity $ 264,156 $ 225,762 189,216
--------- --------- -------
--------- --------- -------
-------- -------- -------
Net interest income $ 17,272 $ 14,049 $11,760
-------- -------- -------
-------- -------- -------
Net interest spread 6.40% 6.23% 6.11%
----- ----- -----
----- ----- -----
Net interest income to earning assets 7.40% 7.17% 7.09%
----- ----- -----
----- ----- -----
</TABLE>
- ---------------------
(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 1998, 1997 and 1996.
(3) Loan related fees included in the above yield calculations: $1,236,000 in
1998, $1,012,000 in 1997 and $780,000 in 1996.
(4) Includes mortgage loans held for sale.
6
<PAGE>
LOAN PORTFOLIO COMPOSITION
Interest earned on the loan portfolio is the primary source of income
for the Company. Net loans represent 67% of total assets as of December 31,
1998. 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
Companys service area. 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 Companys loan
portfolio, at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
------------ ------------- ------------- ------------- ------------
Commercial............................. $ 31,280 $ 30,059 $ 22,485 $ 21,711 $ 20,114
Real Estate:
Construction.................. 44,875 30,863 34,375 33,984 22,259
Mortgage...................... 36,671 23,396 19,774 24,750 18,656
Commercial.................... 70,524 52,356 42,391 31,019 25,054
Installment............................ 22,693 18,901 14,666 15,271 13,333
------------ ------------- ------------- ------------- ------------
206,043 155,575 133,691 126,735 99,416
Less:
Reserve for loan losses....... 2,636 2,048 1,691 1,651 1,172
Deferred loan fees............ 864 502 373 372 325
------------ ------------- ------------- ------------- ------------
3,500 2,550 2,064 2,023 1,497
------------ ------------- ------------- ------------- ------------
$ 202,543 $ 153,025 $ 131,627 $ 124,712 $ 97,919
------------ ------------- ------------- ------------- ------------
------------ ------------- ------------- ------------- ------------
</TABLE>
At December 31, 1998, the maturities of all loans by category were
as follows (dollars in thousands):
<TABLE>
<CAPTION>
Due after
one, but Due
Due within within five after five
Loan Category one year years years Total
- --------------------------- -------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Commercial.................. $ 24,034 $ 6,619 $ 627 $ 31,280
Real Estate:
Construction....... 35,357 9,163 355 44,875
Mortgage........... 24,302 3,105 9,264 36,671
Commercial......... 17,216 50,347 2,961 70,524
Installment................. 16,053 6,339 301 22,693
--------------- --------------- ------------- ---------------
$ 116,962 $ 75,573 $ 13,508 $ 206,043
--------------- --------------- ------------- ---------------
--------------- --------------- ------------- ---------------
</TABLE>
Variable rate loans due after one year totaled $52,678 at December 31,
1998 and loans with predetermined or fixed rates due after one year totaled
$36,403 at December 31, 1998.
7
<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 Companys customer base and the growth experienced in the Companys
market area, real estate is frequently a material component of collateral for
the Companys loans. The expected source of repayment of these loans is generally
the operations of the borrower's business or personal income; however, real
estate collateral 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 has a comprehensive risk management process to control,
underwrite, monitor and manage credit risk in lending. 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. Making the majority of commercial real
estate loans to owner-occupied users of the property mitigates the commercial
real estate risk.
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):
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
-------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Loans on non-accrual status......................... $ 172 $ 43 $ 50 $ 45 $ -
Loans past due 90 days or more
but not on non-accrual status ................... - 45 27 21 4
Other real estate owned............................. 409 9 - - -
-------- --------- --------- ---------- -----------
Total non-performing assets......................... $ 581 $ 97 $ 77 $ 66 $ 4
-------- --------- --------- ---------- -----------
-------- --------- --------- ---------- -----------
Percentage of non-performing assets
to total assets.................................. .19% .04% .04% .04% .00%
</TABLE>
The accrual of interest on a loan is discontinued when, in managements
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 Banks policy to reverse, and charge against current
income, interest previously accrued but uncollected. Interest subsequently
collected on such loans is credited to loan principal if, in the opinion of
management, full collectibility of principal is doubtful. If interest on
nonaccrual loans had been accrued, such income would have been insignificant for
the periods presented.
At December 31, 1998, 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.
8
<PAGE>
RESERVE FOR LOAN LOSSES
The provision for loan losses charged to operating expense is based on
the Companys 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 Companys reserve for loan losses and
charge-off and recovery activity for each of the last five years (dollars in
thousands):
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Loans outstanding at
end of period........................ $ 206,043 $ 155,575 $ 133,691 $ 126,735 $ 99,416
----------- ------------- ------------ ------------ -------------
----------- ------------- ------------ ------------ -------------
Average loans outstanding
during the period................... $ 182,280 $ 149,698 $ 137,798 $ 121,883 $ 86,072
----------- ------------- ------------ ------------ -------------
----------- ------------- ------------ ------------ -------------
Reserve balance,
Beginning of period ................. $ 2,048 $ 1,691 $ 1,651 $ 1,172 $ 930
Recoveries:
Commercial........................... 2 16 2 70 22
Real Estate:
Construction...................... - - - - -
Mortgage.......................... 1 2 - - -
Commercial........................ - - - 1 -
Installment.......................... 39 42 28 30 4
----------- ------------- ------------ ------------ -------------
42 60 30 101 26
Loans charged off:
Commercial........................... (254) (80) (212) (24) (53)
Real Estate:
Construction...................... - - - - -
Mortgage.......................... (91) (442) (50) - -
Commercial........................ - - - (2) -
Installment.......................... (288) (256) (160) (77) (42)
----------- ------------- ------------ ------------ -------------
(633) (778) (422) (103) (95)
----------- ------------- ------------ ------------ -------------
Net loans charged-off................... (591) (718) (392) (2) (69)
Provision charged to operations......... 1,179 1,075 432 481 311
----------- ------------- ------------ ------------ -------------
Reserve balance, end of period.......... $ 2,636 $ 2,048 $ 1,691 $ 1,651 $ 1,172
----------- ------------- ------------ ------------ -------------
----------- ------------- ------------ ------------ -------------
Ratio of net loans charged-off
to average loans outstanding......... .32% .48% .28% .00% .08%
----------- ------------- ------------ ------------ -------------
----------- ------------- ------------ ------------ -------------
Ratio of reserve for loan losses
to loans at end of period............ 1.28% 1.32% 1.26% 1.30% 1.18%
----------- ------------- ------------ ------------ -------------
----------- ------------- ------------ ------------ -------------
</TABLE>
9
<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,
-------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- ------------------------ -----------------------------
% of loans % of loans % of loans
in each in each in each
category to category to category to
Amount total loans Amount total loans Amount total loans
------------ ------------ ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Commercial................ $ 189 15% $ 188 20% $ 145 17%
Real Estate:
Construction............ 331 22 236 20 227 26
Mortgage................ 199 18 81 15 78 15
Commercial.............. 221 34 245 33 186 32
Installment............... 320 11 102 12 92 10
Unallocated............... 1,376 - 1,196 - 963 -
------------ ----------- ----------- ----------- ------------ -----------
$ 2,636 100% $ 2,048 100% $ 1,691 100%
------------ ----------- ----------- ----------- ------------ -----------
------------ ----------- ----------- ----------- ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1995 1994
--------------------------- --------------------------------
% of loans % of loans
in each in each
Amount category to Amount category to
total loans total loans
---------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Commercial................... $ 153 17% $ 120 20%
Real Estate:
Construction............... 218 27 123 22
Mortgage................... 80 20 83 19
Commercial................. 148 24 126 25
Installment.................. 94 12 86 14
Unallocated.................. 958 - 634 -
---------- ----------- ------------ -------------
$ 1,651 100% $ 1,172 100%
---------- ----------- ------------ -------------
---------- ----------- ------------ -------------
</TABLE>
10
<PAGE>
INVESTMENT PORTFOLIO
The following table shows the carrying value of the Companys portfolio
of investments at December 31, 1998, 1997 and 1996 (dollars in thousands).
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1998 1997 1996
-------------- --------------- -------------
<S> <C> <C> <C>
U.S. Treasury securities................................... $ 3,109 $ 3,083 $ 4,009
Obligations of U.S. Government agencies.................... 26,849 38,339 20,468
Obligations of state and political subdivisions............ 1,410 1,030 2,013
Mortgage-backed securities................................. 14,891 - -
Corporate debt securities.................................. 631 - -
-------------- -------------- -------------
Total debt securities................................ 46,890 42,452 26,490
-------------- -------------- -------------
Federal Home Loan Bank stock............................... 1,529 1,416 1,307
Equity securities.......................................... 2,532 532 -
-------------- -------------- -------------
Total investment securities....................... $ 50,951 $ 44,400 $ 27,797
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
The following is a summary of the contractual maturities and weighted
average yields of investment securities at December 31, 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
Weighted
Carrying Average
Type and maturity value Yield (1)
- -------------------------------------- --------------- -------------
<S> <C> <C>
U.S. Treasury Securities
Due within 1 year $ 1,003 6.61%
Due after 1 but within 5 years 6.68%
2,106
------------
Total U.S. Treasury Securities 3,109 6.66%
U.S. Government Agencies
Due after 1 but within 5 years 26,849 6.55%
------------
Total U.S. Government Agencies 26,849 6.55%
State and Political Subdivisions
Due within 1 year 155 4.13%
Due after 1 but within 5 years 4.37%
1,255
------------
Total State and Political Subdivisions 1,410 4.33%
Corporate Debt Securities
Due after 1 but within 5 years 5.51%
631
------------
Total Corporate Bonds 631 5.51%
Mortgage-Backed Securities 14,891 5.91%
------------
Total Debt Securities 46,890 6.27%
Equity securities 4,061
------------ --------
Total Securities $ 50,951 6.27%
------------ --------
------------ --------
</TABLE>
(1) Yields on tax-exempt securities have not been stated on a tax
equivalent basis.
11
<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,
--------------------------------------------------------------------------------
1998 1997 1996
Deposit Liabilities Average Average Average
- --------------------------------- --------------------------- ------------------------ ------------------------
Amount Rate Paid Amount Rate Paid Amount Rate Paid
- --------------------------------- --------------------------- ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand............................ $ 75,826 N/A $ 58,062 N/A $ 46,886 N/A
Interest-bearing demand........... 120,530 2.92% 102,484 3.01% 83,154 3.04%
Savings........................... 14,086 2.16% 13,027 2.18% 12,975 2.20%
Time.............................. 25,295 5.12% 19,846 5.03% 17,235 5.07%
------------- ------------- -------------
Total Deposits................. $ 235,737 $ 193,419 $ 160,250
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
As of December 31, 1998 the Company's time deposit liabilities had
the following times remaining to maturity (dollars in thousands):
<TABLE>
<CAPTION>
Time deposits of All other
$100,000 or more (1) Time deposits (2)
------------------------------ ---------------------------
Remaining time to maturity Amount Percent Amount Percent
- ------------------------------------ ------------------------------ ---------------------------
<S> <C> <C> <C> <C>
3 months or less.................... $ 2,867 36.26% $ 8,066 35.22%
Over 3 months
Through 6 months................. 2,019 25.54% 5,445 23.78%
Over 6 months
Through 12 months................ 2,017 25.51% 5,667 24.74%
Over 12 months...................... 1,003 12.69% 3,725 16.26%
------------------------------ ---------------------------
Total......................... $ 7,906 100.00% $ 22,903 100.00%
------------------------------ ---------------------------
------------------------------ ---------------------------
</TABLE>
- -------------------
(1) Time deposits of $100,000 or more represent 2.92% of total deposits as of
December 31, 1998.
(2) All other time deposits represent 8.46% of total deposits as of December
31, 1998.
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.
12
<PAGE>
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 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
described above, and (ii) must not involve more than the normal risk of
repayment or present other unfavorable features. The Bank is also subject to
certain lending limits and restrictions on overdrafts to such persons. A
violation of these restrictions may result in the assessment of substantial
civil monetary penalties on the Bank or any officer, director, employee,
agent or other person participating in the conduct of the affairs of the
Bank, the imposition of a cease and desist order, and other regulatory
sanctions.
13
<PAGE>
Under the Federal Deposit Insurance Corporation Improvement Act
(FDICIA), each Federal banking agency is required to prescribe by regulation,
non-capital safety and soundness standards for institutions under its
authority. These standards are to cover internal controls, information
systems and internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, compensation, fees and benefits, such
other operational and managerial standards as the agency determines to be
appropriate, and standards for asset quality, earnings and stock valuation.
An institution, which fails to meet these standards, must develop a plan
acceptable to the agency, specifying the steps that the institution will take
to meet the standards. Failure to submit or implement such a plan may subject
the institution to regulatory sanctions. The Company believes that the Bank
already meets substantially all the standards that are likely to be adopted,
and therefore does not believe that the implementation of these regulatory
standards will materially affect the Company's business operations.
INTERSTATE BANKING LEGISLATION
Under the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act"), bank holding companies are
permitted to acquire banks located in any state regardless of the state law
in effect at the time. The Interstate Act also provides for the nationwide
interstate branching of banks. Under the Interstate Act, both national and
state chartered banks, including Oregon, are permitted to merge across state
lines and thereby create interstate branch networks.
DEPOSIT INSURANCE
As a member institution of the FDIC, the deposits of the Bank
are currently insured to a maximum of $100,000 per depositor through the Bank
Insurance Fund ("BIF"), and the Bank is required to pay semiannual deposit
insurance premium assessments to the FDIC.
The 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 1998 was approximately $32,000
and management anticipates that the FDIC insurance expense for 1999 will be
approximately $37,000 based upon deposits held at December 31, 1998.
14
<PAGE>
REGULATORY DIVIDEND RESTRICTIONS
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.
REGULATORY CAPITAL
The Federal bank regulatory agencies use capital adequacy
guidelines in their examination and regulation of bank holding companies and
banks. If the capital falls below the minimum levels established by these
guidelines, the bank holding company or bank may be denied approval to
acquire or establish additional banks or non-bank businesses or to open
facilities. At December 31, 1998 the Company is considered well capitalized"
according to these regulatory capital guidelines. See footnote 17 to the
Financial Statements in this report.
The FRB and FDIC promulgate risk-based capital guidelines for
banks and bank holding companies. Risk-based capital guidelines are designed
to make capital requirements sensitive to differences in risk profile among
banks and bank holding companies, to account for off-balance sheet exposure
and to minimize disincentives for holding liquid assets. Assets and
off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items. The
guidelines are minimums, and the FRB has noted that bank holding companies
contemplating significant expansion programs should not allow expansion to
diminish their capital ratios and should maintain ratios well in excess of
the minimum. The current guidelines require all bank holding companies and
banks to maintain a minimum risk-based total capital ratio equal to 8%, of
which at least 4% must be Tier 1 capital.
Tier 1 capital for bank holding companies includes common
stockholders' equity, qualifying perpetual preferred stock (up to 25% of
total Tier 1 capital, if cumulative; under a FRB rule, redeemable perpetual
preferred stock may not be counted as Tier 1 capital unless the redemption is
subject to the prior approval of the FRB) and minority interests in equity
accounts of consolidated subsidiaries, less intangibles. Tier 2 capital
includes: (I) the allowance for loan losses of up to 1.25% of risk-weighted
assets; (ii) any qualifying perpetual preferred stock which exceeds the
amount which may be included in Tier 1 capital; (iii) hybrid capital
instrument; (iv) perpetual debt; (v) mandatory convertible securities and
(vi) subordinated debt and intermediate term preferred stock of up to 50% of
Tier 1 capital. Total capital is the sum of Tier 1 and Tier 2 capital less
reciprocal holdings of other banking organizations, capital instruments and
investments in unconsolidated subsidiaries.
Banks' and bank holding companies' assets are given
risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance sheet
items are given credit conversion factors to convert them to asset equivalent
amounts to which an appropriate risk-weight will apply. These computations
result in the total risk-weighted assets.
Loans are generally assigned to the 100% risk category, except
for first mortgage loans fully secured by residential property, which carry a
50% rating. The Companys investment securities, mainly U.S. Government
sponsored agency obligations, are assigned to the 20% category, except for
municipal or state revenue bonds, which have a 50% risk-weight, and direct
obligations of or obligations fully guaranteed by
15
<PAGE>
the United States Treasury or United States Government, which have 0%
risk-weight. Off-balance sheet items, direct credit substitutes, including
general guarantees and standby letters of credit backing financial
obligations, are given a 100% conversion factor. Transaction related
contingencies such as bid bonds, other standby letters of credit and undrawn
commitments, including commercial credit lines with an initial maturity of
more than one year, have a 50% conversion factor. Short-term,
self-liquidating trade contingencies are converted at 20%, and short-term
commitments have a 0% factor.
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%.
The FDICIA also created a new statutory framework of
supervisory actions indexed to the capital level of the individual
institution. Under regulations adopted by the FDIC, an institution is
assigned to one of five capital categories depending on its total risk-based
capital ratio, Tier 1 risk-based capital ratio, and leverage ratio, together
with certain subjective factors. Institutions that are deemed
"undercapitalized", depending on the category to which they are assigned, are
subject to certain mandatory supervisory corrective actions.
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
affect on the operating results of commercial banks in the past and are
expected to continue to do so in the future.
ITEM 2. PROPERTIES
At December 31, 1998, the Company conducted banking services in
eight locations in Deschutes and Crook counties in Central Oregon. All
offices are free standing buildings except one location, which is leased
space in a supermarket. The main office/administrative center and three other
branch buildings are owned and are situated on leased land. The Bank owns
land and building at two branch locations. The Bank leases land and building
at two branch locations. All leases include multiple renewal options. Cascade
Finance is housed in separate leased retail space in Bend, Oregon.
The Bank's Main Office and Administrative Center is located at
1100 NW Wall Street, Bend, Oregon, and consists of approximately 15,000
square feet. The building is owned by the Bank and is situated on leased
land. The ground lease term is for 30 years and commenced June 1, 1989. There
are ten renewal options of five years each. Monthly rental is $4,600 per
month with adjustments every five years by mutual agreement of landlord and
tenant. The main bank branch occupies the ground floor. Mortgage lending,
administrative and operational functions occupy approximately 8,400 square
feet. A separate data processing and drive-up facility is also located on
site. Certain other operations are located in an adjacent building subject to
a short-term lease agreement.
In addition to the above, the Bank has opened a new Salem
branch in January 1999. The branch is located in the Capitol Center building
in downtown Salem, Oregon. The land and the building are leased with bank and
office space of 8,200 square feet. The lease term, with options, extends to
2058. The current monthly office space lease is $9,949 and is subject to
change annually based on a rate schedule
16
<PAGE>
included in the lease. The monthly ground lease is $2,167 and is subject to
change annually. Further, a downtown Redmond, Oregon branch office is
scheduled to open during the first quarter of 1999. This is the Bank's second
location serving the Redmond community. The building and land are leased with
bank and office space of 4,800 square feet. The lease term extends to 2028.
The current monthly lease amount is $4,320 and is subject to change annually
based on a rate schedule included in the lease. See footnote 15 in the
accompanying Consolidated Financial Statements for a summarization of future
minimum lease payment obligations.
In the opinion of management all of the Bank's properties are
adequately insured.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time a party to various legal
actions arising in the normal course of business. Management believes that
there is no threatened or pending proceedings against the Company, which, if
determined adversely, would have a material effect on the business or
financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
<PAGE>
PART II
ITEM 5. MARKET FOR CASCADE BANCORP'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Cascade Bancorp common stock trades on The NASDAQ Small Cap
Market tier of The NASDAQ Stock Market under the symbol CACB. The primary
market makers are: Dain Rauscher Wessels Inc., Pacific Crest Securities,
Black & Company Inc., Herzog, Heine, Geduld, Inc., and Keefe, Bruyette &
Woods, Inc.
The high and low sales prices shown below are retroactively
adjusted for stock dividends and splits and are based on actual trade
statistical information provided by The NASDAQ Stock Market for the periods
indicated.
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
1998
----
High $22.67 $22.00 $22.94 $20.25
Low $17.33 $17.67 $15.13 $16.38
1997
High $10.25 $13.67 $15.83 $19.00
Low $7.09 $8.59 $11.50 $13.67
</TABLE>
The Company declared a three-for-two stock split in June 1998 and a
two-for-one stock split in July 1997. The Company also announced the
establishment of regular quarterly cash dividends in 1997.
DIVIDENDS DECLARED AND PAID
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
PER SHARE PER SHARE PER SHARE PER SHARE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1999 $.09 N/A N/A N/A
1998 $.08 $.08 $.09 $.09
1997 $.16 None $.07 $.07
</TABLE>
(1) Dividends declared and paid have been adjusted to reflect the three-for-
two stock split declared in June 1998 and the two-for-one stock split
declared in July 1997.
At February 12, 1999, the Company had 6,238,432 shares of
common stock outstanding held by approximately 2,500 shareholders of record.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the Company's consolidated financial statements and the accompanying
notes which are included in this Annual Report on Form 10-K, (in thousands,
except per share data and ratios; unaudited):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
INCOME STATEMENT DATA 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income............................................ $22,453 $18,836 $15,812 $13,904 $10,081
Interest expense........................................... 5,181 4,787 4,052 3,769 2,156
Net interest income........................................ 17,272 14,049 11,760 10,135 7,925
Loan loss provision........................................ 1,179 1,075 432 481 311
Net interest income after loan loss provision.............. 16,092 12,974 11,328 9,654 7,614
Noninterest income......................................... 5,611 4,310 4,020 3,099 2,443
Noninterest expense........................................ 12,446 9,379 8,113 7,144 6,294
Income before income taxes................................. 9,257 7,905 7,235 5,609 3,763
Provision for income taxes................................. 3,491 2,864 2,722 1,977 1,379
Net income................................................. $5,766 $5,041 $4,513 $3,632 $2,384
SHARE DATA
Basic earnings per common share (1)........................ $0.93 $0.79 $0.71 $0.56 $0.38
Diluted earnings per common share (1)...................... $0.90 $0.77 $0.69 $0.56 $0.37
Book value per common share (1)............................ $4.32 $3.87 $3.77 $3.04 $2.37
Cash dividends per common share (1)........................ $0.34 $0.30 - - -
Ratio of dividends declared to net income.................. 36.70% 37.99% - - -
Basic Weighted shares outstanding (1)(5)................... 6,227 6,383 6,399 6,399 6,273
Diluted weighted shares outstanding (1)(5)................. 6,423 6,567 6,507 6,458 6,392
BALANCE SHEET DATA (AT PERIOD END)
Investment securities...................................... $50,951 $44,400 $27,797 $13,368 $32,648
Loans, net................................................. 202,543 153,025 131,627 124,711 96,927
Total assets............................................... 300,774 242,611 201,277 177,562 146,803
Total deposits............................................. 270,863 211,345 171,082 152,438 128,260
Total shareholders' equity (5)............................. 26,922 24,236 23,572 19,040 14,811
SELECTED RATIOS
Return on average total shareholders' equity (5)........... 22.72% 20.73% 21.04% 21.36% 16.98%
Return on average total assets............................. 2.18% 2.23% 2.39% 2.24% 1.78%
Net interest spread........................................ 6.40% 6.23% 6.11% 5.97% 5.96%
Net interest margin........................................ 7.40% 7.17% 7.09% 6.92% 6.71%
Efficiency ratio (2)....................................... 54.39% 51.09% 51.41% 53.28% 60.71%
ASSET QUALITY RATIOS
Reserve for loan losses to ending total loans.............. 1.28% 1.32% 1.26% 1.30% 1.18%
Nonperforming assets to ending total assets (3)............ 0.19% 0.04% 0.04% 0.04% 0.00%
Net loan charge-offs to average loans...................... 0.32% 0.48% 0.28% 0.00% 0.08%
CAPITAL RATIOS
Average shareholders' equity to average assets (5)......... 9.61% 10.77% 11.33% 10.47% 10.51%
Leverage ratio (4)......................................... 8.99% 9.63% 11.48% 10.64% 9.68%
Total risk-based capital ratio (4)......................... 12.47% 14.29% 16.51% 14.29% 14.69%
</TABLE>
(1) Adjusted to reflect 10% stock dividends declared in 1994, 1995 and 1996, a
two-for-one stock split in 1997 and a Three-for-two stock split in 1998.
(2) Efficiency ratio is noninterest expense divided by (net interest income +
noninterest income - non-recurring items).
(3) Nonperforming assets consist of nonaccrual loans, loans contractually past
due 90 days or more and other real estate owned.
(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.
19
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
The following table sets forth the Company's unaudited data
regarding operations for each quarter of 1998 and 1997.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):
<TABLE>
<CAPTION>
1998 Quarters Ended
-----------------------------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Interest income $ 6,218 $ 5,892 $ 5,354 $ 4,989
Interest expense 1,374 1,352 1,239 1,216
------------ ------------ ------------ -----------
Net interest income 4,844 4,540 4,115 3,773
Loan loss provision 503 308 284 84
------------ ------------ ------------ -----------
Net interest income after loan loss provision 4,341 4,232 3,831 3,689
Noninterest income 1,402 1,501 1,491 1,217
Noninterest expense 3,345 3,231 3,047 2,823
------------ ------------ ------------ -----------
Income before income taxes 2,398 2,502 2,275 2,083
Provision for income taxes 885 967 836 804
------------ ------------ ------------ -----------
Net income $ 1,513 $ 1,535 $ 1,439 $ 1,279
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
Weighted average number
of shares outstanding (1) 6,227 6,230 6,223 6,228
Basic earnings per share (1) $0.24 $0.25 $0.23 $0.21
Fully diluted weighted average number
of shares outstanding (1) 6,409 6,427 6,431 6,440
Fully diluted earnings per share (1) $0.24 $0.24 $0.22 $0.20
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) 6,320 6,414 6,399 6,399
Basic earnings per share (1) $0.21 $0.22 $0.19 $0.17
Fully diluted weighted average number
of shares outstanding (1) 6,515 6,617 6,623 6,633
Fully diluted earnings per share (1) $0.20 $0.22 $0.18 $0.17
</TABLE>
- -------------------
(1) Adjusted to give retroactive effect to a three-for-two stock split
declared in June 1998 and a two-for-one stock split declared in
July, 1997.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
audited consolidated financial statements and the notes thereto as of
December 31, 1998 and 1997 and for each of the three years in the period
ended December 31, 1998 included elsewhere in this report.
When used in the following discussion, the word "expects," "believes,"
"anticipates" and other similar expressions are intended to identify
forward-looking statements, which are made pursuant to the safe harbor
provisions of the private securities litigation reform act of 1995. Such
forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those projected.
Specific risks and uncertainties include, but are not limited to, general
business and economic conditions, and other factors listed from time to time
in the Company's SEC reports. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publish revised
forward-looking statements to reflect the occurrence of unanticipated events
or circumstances after the date hereof.
HIGHLIGHTS
The Company's 1998 net income was $5.8 million, up 14.4% from the $5.0
million earned in 1997. Net income in 1997 represented an 11.7% increase from
1996's net income of $4.5 million. Increased earnings in 1998 and 1997 were
primarily a result of higher net interest income, as the continuing strong
local economy of Central Oregon coupled with successful lending programs
enabled the Company to increase outstanding loans as well as investment
portfolio assets. The growth in earning assets was funded by a similar strong
expansion in customer deposit balances. Progressively higher earnings have
led to improved earnings per share while return on equity has remained above
20% in each of the years reported. Diluted earnings per share reached $.90 in
1998 compared to $.77 in 1997 and $.69 in 1996, while return on equity was
22.7% in 1998 compared to 20.7% in 1997 and 21.0% in 1996. Both non-interest
income and non-interest expenses grew in tandem with expanded business levels.
The Company anticipates opening two new branch banking offices in 1999,
bringing total branch locations to ten. The Bank entered the Salem, Oregon
market with a full service branch office in January 1999. In addition, the
Bank will open in Redmond, Oregon late in the first quarter of 1999. This
will be a second branch serving the Redmond community. The new branch offices
are not expected to be material to the financial results of the Company in
1999. Management anticipates the offices to achieve break-even financial
results within one to three years, however there can be no assurance that
future profitability will be achieved.
In mid 1999 the Company intends to offer Trust and Investment services,
initially in Central Oregon. Trust services will focus on the personal trust
needs of existing and prospective clients by providing living and
testamentary trust, asset and financial management, and fiduciary services.
Retail investment services, including stock brokerage, mutual fund and fixed
income services, are expected to be provided by a licensed on-site broker
through a broker/dealer agent relationship. In addition, the Company intends
to open a Loan Production Office (LPO) in suburban Portland in 1999,
targeting small to medium business and commercial real estate lending in that
rapidly growing market. These activities are not expected to be material to
the financial results of the Company in 1999. Management anticipates
break-even financial results for these activities within one to three years,
however there can be no assurance that future profitability will be achieved.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NET INTEREST INCOME
Net interest income increased 22.9% in 1998 to $17.3 million, as loan
volumes and customer
21
<PAGE>
deposits continued to expand with the strong local economy of Central Oregon.
1997 net interest income increased 19.5% to $14.0 million compared to 1996.
Interest from loans and investment activities increased $3.6 million in 1998
compared to 1997 due to a $32.6 million growth in average loans outstanding
plus a $3.3 million increase in average investment securities. Interest
income increased $3.0 million in 1997 compared to 1996 as average loans
increased $11.9 million. Funding sources in 1998 grew to support higher
earning assets with deposits totaling $270.9 million at year end, an increase
of $59.5 million or 28.2% compared to year end 1997. Similarly, 1997 deposits
of $211.3 million exceeded year end 1996 by $40.3 million or 23.5%. Despite
markedly higher deposit volumes, Interest expense increased only $.4 million
in 1998 compared to 1997 because a large portion of the deposit growth was in
interest-free checking accounts and low cost interest bearing demand
deposits. $5 million in FHLB borrowings were paid off in early 1998. In 1997,
deposit interest expense increased $.7 million compared to 1996. The Company's
net interest margin expanded from 7.09% in 1996, to 7.17% in 1997 and to
7.40% in 1998. Yields on earning assets in 1996, 1997, and 1998 were 9.53%,
9.61%, and 9.62%, respectively. Average rates paid on deposits and borrowings
declined from 3.42% in 1996 to 3.38% in 1997 to 3.22% in 1998. Declines in
the general level of market interest rates in the second half of 1998 were
beginning to modestly effect yields and the interest margin late in the
fourth quarter of 1998. Modest compression of the margin is expected to
continue into 1999 in the absence of significant volatility in market
interest rates.
LOAN LOSS PROVISION
The loan loss provision increased during the periods presented to keep
pace with loan growth. The Bank's ratio of reserve for loan losses to total
loans was 1.28% at December 31, 1998 as compared to 1.32% at December 31,
1997. 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 expected levels.
NONINTEREST INCOME
Noninterest income increased 30.2% to $5.6 million in 1998 compared to
$4.3 million the prior year, while 1997 noninterest income was 7.2% above
1996. In part, these increases were a function of growing customer
transaction account activity, which generated increased fees during the
periods presented. Service charges on deposit accounts increased to $1.9
million in 1998, up from $1.8 million in 1997 and $1.6 million in 1996.
Residential mortgage loan origination and processing fees also contributed to
higher noninterest income, increasing to $1.8 million in 1998, up from $1.1
million in both 1997 and 1996. This increase was due to higher mortgage loan
origination volumes, which totaled $147 million in 1998 compared to $85
million and $88 million in 1997 and 1996 respectively. The origination and
refinance of residential mortgage loans, and related fee income is dependent
upon the general level and direction of interest rates. Therefore there can
be no assurance that origination fees and gains on sales of residential
mortgage loans will contribute to the Company's future earnings. The Bank
commenced in-house servicing of residential mortgage loans in March 1998.
Serviced loans are bank originated residential mortgages that have been sold
to FNMA. The mortgages were previously sub-serviced by another financial
institution. Primarily due to higher volumes of serviced loans, 1998 mortgage
servicing fees increased 120.7% to $492,000 after a 13.0% increase in 1997.
Related mortgage servicing rights are amortized in proportion to estimated
net servicing income. In the event of rapid customer refinancing or
prepayment activity, market valuation of capitalized mortgage servicing
rights could be impaired. Capitalized mortgage servicing rights totaled
approximately $2.3 million at year end 1998 as compared to $1.3 million at
year end 1997, and $.6 million at year end 1996. Other Income was $426,000
higher in 1998 over 1997 due to increased Visa interchange revenue of
$65,000, higher earnings on life insurance policies of $52,000 and $52,000 in
additional ATM usage fees on non-bank customers
NONINTEREST EXPENSE
Total 1998 noninterest expense was $12.5 million, an increase of $3.1
million or 32.7% from 1997. This is compared to an increase of 15.6% in 1997
over 1996. Salaries and benefits increased $1.9 million in 1998 as staffing
increased to ensure quality customer service was maintained in tandem with
markedly higher customer account transaction activity. 1997 salary and benefits
increased $.8 million from 1996. It
22
<PAGE>
is anticipated that this human resources trend will continue into 1999 owing
to staff additions for new branch offices in Salem and Redmond, Oregon.
Expenses for occupancy and equipment costs increased $.3 million in 1998
compared to 1997 primarily due to higher data processing and network costs in
the delivery of customer products and services. Similarly, higher 1997
occupancy and equipment expense was attributable to growing 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. The effective tax rate in
1997 was lower than other years due to a state income tax rebate.
FINANCIAL CONDITION
The Company continued to experience strong growth in 1998 with total
assets increasing 24.0% to $300.8 million at December 31, 1998 compared to
$242.6 million at December 31, 1997. The higher total assets were funded
primarily by an increase in deposits, which also compensated for the payoff
of a $5 million FHLB term borrowing. Loans outstanding totaled $205.5 million
at year end 1998, $50.0 million higher than a year earlier, an increase of
32.2%. Loan growth was concentrated in real estate categories, up $45.5
million. Investments at year end 1998 were $51.0 million compared to $44.4
million at year end 1997. Strong deposit growth funded increased earning
assets. Total deposits at year end 1998 were $270.9 million, an increase of
$59.5 million or 28.2% compared to year end 1997. Deposit growth was
concentrated in noninterest bearing demand accounts, up $50.3 million or
77.2% to $115.5 million at December 31, 1998. $22.6 million of this increase
was a one time transfer late in 1998 of certain customer account balances
that were previously paid interest as interest bearing demand accounts.
The Company had no off balance sheet derivative financial instruments as
of December 31, 1998 and 1997.
YEAR 2000 DISCLOSURE
The Year 2000 (Y2K) issue may pose unique challenges to all businesses
due to the inability of some computers and computer software programs to
accurately recognize, for years after 1999, dates which are often expressed
as a two digit number. This inability to recognize date information
accurately could potentially affect computer operations and calculations, or
could cause computer systems to not operate at all. Accordingly, Y2K may
precipitate related consequences that are not possible to foresee.
Major business risks associated with the Year 2000 issue may include,
but are not limited to, infrastructure failures, disruptions to the economy
in general, disruption of private and government activities, excessive cash
withdrawal activity and/or reduced financial liquidity. In addition,
increased problem loans and credit losses may impact the Company in the event
borrowers fail to prepare for Y2K. The above risks could expose the Company
to loss of revenues, litigation and asset quality deterioration.
The federal banking regulators have issued several statements providing
guidance to financial institutions on the steps the regulators expect
financial institutions to take to become Year 2000 compliant. Each of the
federal banking regulators is also examining the financial institutions under
its jurisdiction to assess each institution's compliance with the outstanding
guidance. If an institution's progress in addressing the Year 2000 problem is
deemed by its primary federal regulator to be less than satisfactory, the
institution will be required to enter into a memorandum of understanding with
the regulator which will, among other things, require the institution to
promptly develop and submit an acceptable plan for becoming Year 2000
compliant and to provide periodic reports describing the institution's
progress in implementing the plan. Failure to satisfactorily address the Year
2000 problem may also expose a financial institution to other forms of
enforcement action that its primary federal regulator deems appropriate to
address the deficiencies in the institution's Year 2000 remediation program.
23
<PAGE>
The Company has completed an assessment of the Year 2000 issue,
considering the risk that date fields in existing computer applications might
fail to recognize the year 2000 and therefore create erroneous results. Based
upon the results of our assessment, testing, certification and remediation
activities to date, management believes that the Company is well prepared to
respond to the issue and run successfully in the year 2000 and beyond.
The Company has identified mission critical computer applications and
related processes and has formalized plans to address potential issues that
may arise as a result of the date change. An application, system or process
is mission critical if it is deemed vital to the successful continuance of a
core business activity. For substantially all mission critical applications
the Company has performed tests and has obtained performance certifications
on hardware, software, and environmental systems except for the applications
noted below. The Company has also required and received certifications from
substantially all major software application vendors to ensure that their
systems are Year 2000 compliant, except for the applications noted below. The
Company has confirmed that substantially all mission critical systems have
the capacity to process information with dates beyond December 31, 1999
except for the applications noted below.
The status of all mission critical systems that were not fully Y2K
tested and/or remediated as of December 31, 1998 is as follows: 1) Proof of
deposit systems and related applications were remediated and tested for Y2K
compliance on Jan. 20, 1999. 2) The bankcard processing application will not
be fully Y2K tested under Federal Financial Institutions Examination Council
guidelines until March 31 1999; any required remediation would be
subsequently undertaken. 3) The computer application interfacing mortgage
sales transactions with the purchaser of such mortgages will be Y2K tested by
March 31 1999 and any required remediation would be subsequently undertaken.
Management is presently unaware of any issue that could have the effect of
delaying or preventing successful Y2K compliance of these applications by
June 30, 1999.
At year-end 1998, a Year 2000 Contingency Plan was in place that
addressed mission critical as well as non-critical applications. For each
non-critical application, the contingency plan details how tasks can be
accomplished if the application is not operational. Under FFIEC bank
regulatory guidelines, a financial institution is not required to have a
contingency plan for mission-critical systems and applications if the system
or application has been remediated, tested, and implemented as Y2K compliant.
Mission critical applications will rely on the above-described testing,
certification and remediation program to ensure all such systems and
applications are Year 2000 compliant. If the Company experiences system
failures due to unforeseen Y2K events, the Company's current Business
Contingency Plan will be implemented. This plan is designed to enable the
Company to function in the event of a short-term business interruption owing
to unexpected and/or emergency circumstances. Operating under this plan and
depending on the nature of the interruption, the Company may provide only
limited services, may revert to manual recording of customer and
counter-party transactions and/or may revert to manual updating of financial
records. The encoding and processing of checks and drafts may be performed at
a contingency site. Alternate check presentment, delivery and settlement
methods may be implemented. Transactions previously executed via wire
transfer and/or Federal Reserve Account maintenance activity may revert to
telephonic methodology. The Business Contingency Plan is tested annually but
there can be no assurance as to its effectiveness under Y2K contingent
circumstances.
The Company has identified and formally contacted its significant
customers, suppliers and counterparties regarding Y2K. In so doing the
Company has encouraged their Y2K testing and remediation and has requested
Y2K compliance certifications from these parties. Management believes these
significant parties will test and take steps necessary to achieve Y2K
compliance, however, no assurance can be made that their response to the Y2K
situation will not precipitate adverse consequences for the Company. In
addition, the Company has acknowledged that increased problem loans and
credit losses could ensue due to Y2K, and has considered this contingent risk
in the determination of its allowance for loan losses. Although management
believes the allowance for loan losses is adequate at December 31, 1998,
there can be no assurance as to the future adequacy of the allowance for loan
losses in respect to the yet unknown affect of Y2K .
24
<PAGE>
The Company anticipates that the costs of testing and remediating
applications and systems for Y2K will not be material to future operating
results or financial condition. Apart from internal staff hours allocated to
Y2K testing and assurance, expenditures related to Y2K issues total
approximately $55,000 to date,
Although management believes that it has tested, analyzed and certified
mission critical applications with respect to Year 2000 compliance, there can
be no assurance that the Company will not be impacted by unanticipated Year
2000 contingent circumstances.
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.
LIQUIDITY
The Company analyzes and manages its liquidity to ensure the
availability of sufficient funds to meet depositor withdrawals as well as to
fund borrowing needs of its loan customers. The Bank's stable deposit base is
the foundation of its long-term liquidity since these funds are not subject
to significant volatility as a result of changing interest rates and other
economic factors. A further source of liquidity is the Bank's ability to
borrow funds from a variety of reliable counterparties. In addition, the Bank
has substantial available-for-sale investment securities that could be
liquidated to provide an additional source of liquidity.
At December 31, 1998 the Bank maintained five unsecured lines of credit
totaling $17.5 million for the purchase of funds on a short-term basis. The
Bank is also a member of the Federal Home Loan Bank (FHLB) which provides a
secured line of credit of $12.1 million that may be accessed for short or
long-term borrowings. At December 31, 1998 the Bank had no short or long term
borrowings.
At December 31, 1998, the Bank had approximately $78 million in
outstanding commitments to extend credit. Approximately one-third of the
commitments pertains to various construction projects. Under the terms of
such commitments, completion of specified project benchmarks must be
certified before funds may be drawn. In addition, it is anticipated that a
portion of the commitments will expire or terminate without funding.
Management believes that the Bank's available resources will be sufficient to
fund its commitments in the normal course of business.
CAPITAL RESOURCES
The Companys total stockholders equity at December 31, 1998 was $26.9
million, an increase of $2.7 million from December 31, 1997. 1998 equity was
increased by earnings of $5.8 million for the year less cash dividends paid
to shareholders of $2.1 million during 1998. In addition, during 1998, the
Company repurchased 46,944 shares of its common stock outstanding pursuant to
a Board of Directors authorized program. This had the effect of reducing
equity by $.9 million during the year. At year end 1998, net unrealized gains
on investment securities available-for-sale decreased to $.2 million from $.3
million a year earlier.
25
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK AND ASSET AND LIABILITY MANAGEMENT
The Company's profitability, like most financial institutions, depends to
a large extent upon its net interest income, which is the difference between
the interest earned on assets (loans and investments), versus the interest
expense paid on its liabilities (deposits and borrowings). The Company's
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.
It is the Company's Asset and Liability management policy to manage
interest rate risk to maximize long term profitability under the range of
likely interest rate scenarios. The Board of Directors oversees
implementation of strategies to control interest rate risk. The Company may
take steps to alter its net sensitivity position by offering deposit and/or
loan structures that tend to counter the natural rate risk profile of the
Company. In addition, the Company may acquire investment securities, interest
rate swaps or other hedging instruments with repricing characteristics that
tend to moderate interest rate risk. Because of the volatility of market
rates and uncertainties described above there can be no assurance of the
effectiveness of management programs to achieve a targeted moderation of risk.
The Company analyzes interest rate risk by simulation modeling and by
traditional interest rate gap analysis. While both methods provide an
indication of risk for a given change in interest rates, it is management's
opinion that simulation is the more effective tool for asset and liability
management. Analyses are dependent on assumptions and estimations that
management believes are 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 percentage change from the stable rate scenario under scenarios
of rising and falling market interest rates over one and two year time
horizons. The simulation model estimates that in the event of a decline of
1.5% in market interest rates, earnings could be adversely impacted up to
approximately 9.9%, while a similar increase in market rates would have a
favorable impact of approximately 11.3%. Because of uncertainties as to the
extent of customer behavior, refinance activity, absolute and relative loan
and deposit pricing levels, competitor pricing and market behavior, product
volumes and mix, and other unexpected changes in economic events impacting
movements and volatility in market rates, there can be no assurance that
simulation results are reliable indicators of earnings under such conditions.
At year end 1998, 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 $6.2 million. A year earlier, rate sensitive assets exceeded
maturing or available for repricing rate sensitive liabilities by $11.0
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.
26
<PAGE>
INTEREST RATE GAP TABLE
Set forth below is a table showing the interest rate sensitivity Gap of
the Company's assets and liabilities over various repricing periods and
maturities, as of December 31, 1998. Maturities are based on contractual
terms and repricing amounts are based on actual historical experiences
(dollars in thousands):
<TABLE>
<CAPTION>
After 90
days After
Within within One year
90 one within five After five
days Year years years Total
-------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Investments & fed funds sold $ 9,453 $ 155 $ 49,793 $ - $ 59,401
Loans 74,591 42,371 75,573 13,508 206,043
-------- ---------- ----------- ---------- ---------
Total interest earning assets $ 84,044 $ 42,526 $ 125,366 $ 13,508 $ 265,444
-------- ---------- ----------- ---------- ---------
-------- ---------- ----------- ---------- ---------
INTEREST BEARING LIABILITIES:
Interest-bearing demand deposits $ 42,969 $ 43,662 $ 22,950 $ - $ 109,581
Savings deposits - - 6,026 8,915 14,941
Time deposits 10,934 15,148 4,727 - 30,809
-------- ---------- ----------- ---------- ---------
Total interest bearing deposits 53,903 58,810 33,703 8,915 155,331
Other borrowings - - - - -
-------- ---------- ----------- ---------- ---------
Total interest bearing liabilities $ 53,903 $ 58,810 $ 33,703 $ 8,915 $ 155,331
-------- ---------- ----------- ---------- ---------
-------- ---------- ----------- ---------- ---------
Interest rate sensitivity gap $ 30,141 $ (16,284) $ 91,663 $ 4,593 $ 110,113
Interest rate gap as a percentage
of total interest earning assets 11.35% (6.13%) 34.53% 1.73% 41.48%
-------- ---------- ----------- ---------- ---------
-------- ---------- ----------- ---------- ---------
Cumulative interest rate sensitivity gap $ 30,141 $ 13,857 $ 105,520 $ 110,113 $ 110,113
Cumulative interest rate gap as a
Percentage of total earning assets 11.35% 5.22% 39.75% 41.48% N/A
-------- ---------- ----------- ---------- ---------
-------- ---------- ----------- ---------- ---------
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For financial statements, see Index to Consolidated Financial Statements
on page 28.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
27
<PAGE>
PART III
Part III is incorporated by reference from the Company's definitive
proxy statement issued in conjunction with the Company's Annual Meeting of
Shareholders to be held April 26, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The financial statements required in this Annual Report
are listed in the accompanying Index to Consolidated Financial
Statements on page 30.
(2) Financial Statement Schedules.
All financial statement schedules are omitted because they are
not applicable or not required, or because the required
information is included in the consolidated financial
statements or the notes thereto.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the
last quarter of the fiscal year ended December 31, 1998.
(c) Exhibits.
The list of exhibits has been intentionally omitted. Upon
written request, we will provide to you, without charge, a
copy of the list of exhibits as filed with the Securities and
Exchange Commission. Additionally, we will furnish you with a
copy of any exhibit upon written request. Written requests to
obtain a list of exhibits or any exhibit should be sent to
Bank of the Cascades, 1100 NW Wall Street, Bend, Oregon 97701,
Attention: Investor Relations.
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/ Patricia L. Moss /s/ Gregory D. Newton
- ------------------------------------- ------------------------------------
Patricia L. Moss Gregory D. Newton
President/Chief Executive Officer Senior Vice President/Chief Financial
Date: February 22, 1999 Officer
Date: February 22, 1999
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 February 22, 1999
- ----------------------------------------------- -----------------------
Jerry E. Andres, Director Date
/s/ Gary L. Capps February 22, 1999
- ----------------------------------------------- -----------------------
Gary L. Capps, Director/Chairman Date
/s/ Gary L. Hoffman February 22, 1999
- ----------------------------------------------- -----------------------
Gary L. Hoffman, Director/Vice Chairman Date
/s/ Patricia L. Moss February 22, 1999
- ----------------------------------------------- -----------------------
Patricia L. Moss, Director/President/CEO Date
/s/ Ryan R. Patrick February 22, 1999
- ----------------------------------------------- -----------------------
Ryan R. Patrick, Director Date
/s/ James E. Petersen February 22, 1999
- ----------------------------------------------- -----------------------
James E. Petersen, Director/Assistant Secretary Date
/s/ Roger J. Shields February 22, 1999
- ----------------------------------------------- -----------------------
Roger J. Shields, Director Date
/s/ Jacob M. Wolfe February 22, 1999
- ----------------------------------------------- -----------------------
Jacob M. Wolfe, Director Date
29
<PAGE>
CASCADE BANCORP
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(ITEM 14(a))
PAGE
Report of Independent Auditors................................................31
Consolidated Balance Sheets at
December 31, 1998 and 1997...............................................32
For the Years Ended December 31, 1998, 1997 and 1996:
Consolidated Statements of Income........................................33
Consolidated Statements of Changes in Stockholders' Equity...............34
Consolidated Statements of Cash Flows....................................35
Notes to Consolidated Financial Statements....................................36
30
<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, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted
accounting principles.
Symonds, Evans & Larson, P.C.
January 15, 1999
Portland, Oregon
31
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ------ ------------------ ------------------
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 18,388,900 $ 21,053,706
Federal funds sold 8,450,000 8,500,000
------------------ ------------------
Total cash and cash equivalents 26,838,900 29,553,706
Investment securities available-for-sale 48,012,491 41,953,637
Investment securities held-to-maturity,
estimated fair value of $2,952,327
($2,452,975 in 1997) 2,938,489 2,445,957
Loans, net 202,543,262 153,024,926
Mortgage loans held for sale 2,119,642 1,876,186
Premises and equipment, net 5,984,501 5,057,388
Accrued interest and other assets 12,337,131 8,699,681
------------------ ------------------
Total assets $ 300,774,416 $ 242,611,481
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $ 115,532,163 $ 65,199,160
Interest bearing demand 109,580,561 111,481,437
Savings 14,940,897 13,070,325
Time 30,809,110 21,593,851
------------------ ------------------
Total deposits 270,862,731 211,344,773
Accrued interest and other
liabilities 2,990,003 2,030,284
Long-term debt - 5,000,000
------------------ ------------------
Total liabilities 273,852,734 218,375,057
Commitments and contingencies
(Notes 1, 4, 9, 15 and 16)
Stockholders' equity:
Common stock, no par value;
10,000,000 shares authorized;
6,226,082 shares issued and
outstanding (4,172,238 in 1997) 9,545,545 10,365,015
Retained earnings 17,218,415 13,568,644
Accumulated other comprehensive income 157,722 302,765
------------------ ------------------
Total stockholders' equity 26,921,682 24,236,424
------------------ ------------------
Total liabilities and
stockholders' equity $ 300,774,416 $ 242,611,481
================== ==================
</TABLE>
See accompanying notes.
32
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ----------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 19,256,895 $ 15,788,357 $ 14,063,738
Taxable interest on investment securities 2,504,127 2,402,987 1,177,535
Nontaxable interest on investment securities 41,518 73,646 94,143
Interest on federal funds sold 537,271 467,300 381,567
Dividends on Federal Home Loan Bank stock 112,800 103,300 95,100
--------------- --------------- ----------------
Total interest income 22,452,611 18,835,590 15,812,083
Interest expense:
Deposits:
Interest bearing demand 3,518,361 3,082,614 2,529,619
Savings 303,702 284,093 285,762
Time 1,293,588 998,334 872,806
Long-term debt 36,734 348,000 356,541
Other borrowings 28,472 73,472 6,824
--------------- --------------- ----------------
Total interest expense 5,180,857 4,786,513 4,051,552
--------------- --------------- ----------------
Net interest income 17,271,754 14,049,077 11,760,531
Loan loss provision 1,179,399 1,075,109 432,141
--------------- --------------- ----------------
Net interest income after loan loss provision 16,092,355 12,973,968 11,328,390
Noninterest income:
Service charges on deposit accounts 1,947,138 1,810,072 1,551,146
Mortgage loan origination and processing fees 1,788,001 1,092,786 1,051,381
Gains on sales of mortgage loans, net 198,129 399,947 496,782
Mortgage loan servicing fees, net 492,402 223,086 197,424
Merchant bankcard fees, net 300,348 324,625 262,914
Other 885,419 459,838 459,973
--------------- --------------- ----------------
Total noninterest income 5,611,437 4,310,354 4,019,620
Noninterest expense:
Salaries and employee benefits 7,045,542 5,175,149 4,412,356
Equipment 1,092,319 898,156 724,954
Occupancy 793,219 668,023 623,385
Third-party account services 409,217 293,071 240,202
Supplies 393,344 284,756 274,363
Communications 382,498 305,428 272,086
Advertising 352,955 269,236 229,366
Other 1,977,258 1,485,662 1,336,394
--------------- --------------- ----------------
Total noninterest expense 12,446,352 9,379,481 8,113,106
--------------- --------------- ----------------
Income before income taxes 9,257,440 7,904,841 7,234,904
Provision for income taxes 3,491,400 2,863,700 2,721,900
--------------- --------------- ----------------
Net income $ 5,766,040 $ 5,041,141 $ 4,513,004
=============== =============== ================
Basic earnings per common share $ .93 $ .79 $ .71
=============== =============== ================
Diluted earnings per common share $ .90 $ .77 $ .69
=============== =============== ================
</TABLE>
See accompanying notes.
33
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ACCUMULATED
NUMBER OTHER TOTAL
OF COMPREHENSIVE RETAINED COMPREHENSIVE COMMON STOCKHOLDERS'
SHARES INCOME EARNINGS INCOME STOCK EQUITY
--------- -------------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 1,939,061 $ 9,734,936 $ 52,007 $ 9,253,012 $ 19,039,955
Comprehensive income:
Net income - $ 4,513,004 4,513,004 - - 4,513,004
Other comprehensive income
- unrealized gains on
securities available-for-
sale, net of income taxes
of approximately
$12,000 - 19,090 - 19,090 - 19,090
---------------
Comprehensive income $ 4,532,094
===============
10% stock dividend 193,906 (3,805,405) - 3,805,405 -
--------- ----------- ------------- ------------- -------------
Balance at December 31, 1996 2,132,967 10,442,535 71,097 13,058,417 23,572,049
Comprehensive income:
Net income - $ 5,041,141 5,041,141 - - 5,041,141
Other comprehensive income
- unrealized gains on
securities available-for-
sale, net of income
taxes of approximately
$143,000 - 231,668 - 231,668 - 231,668
---------------
Comprehensive income $ 5,272,809
===============
Cash dividends paid
(aggregating $.30 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)
--------- ----------- ------------- ------------- -------------
Balance at December 31, 1997 4,172,238 13,568,644 302,765 10,365,015 24,236,424
Comprehensive income:
Net income - $ 5,766,040 5,766,040 - - 5,766,040
Other comprehensive income
- unrealized losses on
securities available-for-
sale, net of income tax
benefit of approximately
$91,000 - (145,043) - (145,043) - (145,043)
--------------
Comprehensive income $ 5,620,997
==============
Cash dividends paid (aggregating
$.34 per share) - (2,116,269) - - (2,116,269)
Three-for-two stock split 2,086,119 - - - -
Stock options exercised 14,669 - - 42,473 42,473
Repurchases of common stock (46,944) - - (861,943) (861,943)
--------- ----------- ------------- ------------- -------------
Balance at December 31, 1998 6,226,082 $ 17,218,415 $ 157,722 $ 9,545,545 $ 26,921,682
========= ============= ============= ============= =============
</TABLE>
34
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,766,040 $ 5,041,141 $ 4,513,004
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,478,815 715,253 694,005
Loan loss provision 1,179,399 1,075,109 432,141
Provision for deferred income taxes 27,000 279,000 515,000
Discounts on sales of mortgage loans, net 822,870 295,053 53,436
Dividends on Federal Home Loan Bank stock (112,800) (103,300) (95,100)
Deferred benefit plan expenses 396,000 270,000 271,000
Increase in accrued interest and other assets (2,822,725) (1,033,079) (2,151,666)
Increase in accrued interest and other liabilities 563,719 137,854 267,180
Originations of mortgage loans (146,507,292) (84,860,279) (87,996,351)
Proceeds from sales of mortgage loans 145,440,966 83,299,690 90,208,110
--------------- --------------- ----------------
Net cash provided by operating activities 6,231,992 5,116,442 6,710,759
Cash flows from investing activities:
Purchases of investment securities available-for-sale (21,957,636) (41,026,887) (23,838,205)
Purchases of investment securities held-to-maturity (563,903) (5,400) (1,073,016)
Proceeds from maturities and calls of investment
securities available-for-sale 15,663,174 23,923,471 9,320,018
Proceeds from maturities and calls of investment
securities held-to-maturity 184,171 982,950 1,383,215
Other loan originations, net (50,697,735) (22,473,293) (7,347,528)
Purchases of premises and equipment, net (1,782,254) (1,491,887) (1,404,123)
Purchases of life insurance contracts (1,423,900) (130,000) (615,000)
Surrender of life insurance contracts 49,066 111,457 -
--------------- --------------- ----------------
Net cash used in investing activities (60,529,017) (40,109,589) (23,574,639)
Cash flows from financing activities:
Net increase in deposits 59,517,958 40,262,679 18,644,027
Stock options exercised 42,473 100,000 -
Repurchases of common stock (861,943) (2,793,402) -
Cash dividends paid (2,116,269) (1,915,032) -
Repayment of long-term debt (5,000,000) - -
--------------- --------------- ----------------
Net cash provided by financing activities 51,582,219 35,654,245 18,644,027
--------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents (2,714,806) 661,098 1,780,147
Cash and cash equivalents at beginning of the year 29,553,706 28,892,608 27,112,461
--------------- --------------- ----------------
Cash and cash equivalents at end of the year $ 26,838,900 $ 29,553,706 $ 28,892,608
=============== =============== ================
</TABLE>
See accompanying notes.
35
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Cascade Bancorp (Bancorp), a 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 the Company's consolidated financial position or results
of operations as of and for the years ended December 31, 1998 and 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 1998, 1997 and 1996, noncash transactions resulted from
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 1998,
1997 and 1996, noncash investing activities resulted from the net
capitalization of approximately $1,021,000, $695,000 and $575,000,
respectively, in originated mortgage servicing rights.
During 1998, 1997 and 1996, the Bank paid approximately
$5,138,000, $4,747,000 and $4,032,000, respectively, in interest
expense.
36
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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, 1998 or 1997.
Investment securities that are not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and are reported at fair value, with unrealized gains and
losses excluded from earnings and reported as other comprehensive income,
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.
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
See accompanying notes
37
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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, 1998 and 1997 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, 1998 and 1997, mortgage loans held for sale were
carried at cost, which approximated estimated market value.
At December 31, 1998 and 1997, the Bank held servicing rights to
approximately $232,916,000 and $174,294,000, respectively, in mortgage
loans which have been sold into the secondary market. Such mortgage loans
are not included in the accompanying balance sheets. Beginning in March
1998, the Bank began in-house servicing of these mortgage loans.
Previously, such mortgage loans were sub-serviced by another financial
institution. 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.
During the years ended December 31, 1998, 1997 and 1996, the Bank
capitalized approximately $1,620,000, $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, 1998, 1997 and 1996, the amortization of the capitalized
mortgage servicing rights totaled approximately $599,000, $141,000 and
$25,000, respectively. The net amount of capitalized mortgage servicing
rights at December 31, 1998 and 1997 (approximately $2,291,000 and
$1,270,000, 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, 1998 and 1997 was
determined by management based on comparisons to current
See accompanying notes
38
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
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 at December 31, 1998 and 1997 totaled
approximately $409,000 and $9,000, respectively.
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, 1998, approximately $8,719,000 was available for the payment
of dividends to Bancorp with prior regulatory approval.
In June 1998, the Company declared a three-for-two stock split; in June
1997, the Company declared a two-for-one stock split; and in June 1996,
the Company declared a 10 percent stock dividend. 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 the stock dividend.
During 1998, the Company repurchased 46,944 shares of its common stock
for $861,943, and during 1997, the Company repurchased 118,632 shares of
its common stock for $2,793,402. As of December 31, 1998, approximately
95,000 shares remain authorized for possible repurchase under the
Company's stock repurchase plan.
In January 1999, the Company declared a $.09 per share cash dividend
which totaled approximately $560,000 and is payable to stockholders of
record as of January 25, 1999.
See accompanying notes
39
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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
Beginning in the year ended December 31, 1998, the Company retroactively
adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 established 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 are recognized as a component of comprehensive income.
Beginning in the year ended December 31, 1998, the Company also
retroactively adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). 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.
Management believes that based on the materiality standards of SFAS 131
the Company primarily operates in one business segment. In addition, the
related disclosures of SFAS 131 are included within the accompanying
consolidated financial statements and notes as applicable.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," (SFAS 133) was issued. SFAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. As of
December 31, 1998, the Company had no derivative instruments or hedging
activities.
In October 1998, SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained After the Securitization of Mortgage Loans Held for Sale by a
Mortgage Banking Enterprise," (SFAS 134) was issued. SFAS 134 is
effective for the first fiscal quarter beginning after December 15, 1998.
As of December 31, 1998, the Company had not entered into any transaction
for which SFAS 134 would apply.
There were no other accounting standards recently issued that had a
significant effect on the Company's financial statements.
RECLASSIFICATIONS
Certain amounts in 1997 and 1996 have been reclassified to conform with
the 1998 presentation.
See accompanying notes
40
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
2. CASH AND DUE FROM BANKS
The Bank is required to maintain an average reserve balance ($1,050,000
and $2,066,000 at December 31, 1998 and 1997, 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, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
1998 cost gains losses value
---- ---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Government and
agency securities $ 26,538,402 $ 318,438 $ 7,350 $ 26,849,490
Mortgage-backed
securities 15,064,132 29,777 202,794 14,891,115
U.S. Treasury securities 2,995,217 113,783 - 3,109,000
Equity securities 2,529,512 2,724 - 2,532,236
Corporate debt securities 632,505 - 1,855 630,650
---------------- --------------- ---------------- ----------------
$ 47,759,768 $ 464,722 $ 211,999 $ 48,012,491
---------------- --------------- ---------------- ----------------
---------------- --------------- ---------------- ----------------
HELD-TO-MATURITY
Obligations of state and
political subdivisions $ 1,409,525 $ 17,393 $ 3,555 $ 1,423,363
Federal Home Loan
Bank stock 1,528,964 - - 1,528,964
---------------- --------------- ---------------- ----------------
$ 2,938,489 $ 17,393 $ 3,555 $ 2,952,327
---------------- --------------- ---------------- ----------------
---------------- --------------- ---------------- ----------------
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
---------------- --------------- ---------------- ----------------
---------------- --------------- ---------------- ----------------
</TABLE>
See accompanying notes
41
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
3. INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated fair value of investment securities at
December 31, 1998, 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.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
------------------ ------------------
<S> <C> <C>
AVAILABLE-FOR-SALE
Due in one year or less $ 998,479 $ 1,002,800
Due after one year through five years 29,167,645 29,586,340
Mortgage-backed securities 15,064,132 14,891,115
Equity securities 2,529,512 2,532,236
------------------ ------------------
$ 47,759,768 $ 48,012,491
------------------ ------------------
------------------ ------------------
HELD-TO-MATURITY
Due in one year or less $ 154,969 $ 155,025
Due after one year through five years 1,254,556 1,268,338
Federal Home Loan Bank stock 1,528,964 1,528,964
------------------ ------------------
$ 2,938,489 $ 2,952,327
------------------ ------------------
------------------ ------------------
</TABLE>
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 $12,861,000
and $10,070,000 at December 31, 1998 and 1997, respectively, were pledged
to secure public deposits and for other purposes as required or permitted
by law.
4. LOANS
Loans at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
Commercial $ 31,279,762 $ 30,058,992
Real estate:
Construction 44,874,991 30,862,916
Mortgage 36,670,954 23,395,618
Commercial 70,524,183 52,356,507
Installment 22,693,633 18,901,259
------------------ ------------------
206,043,523 155,575,292
Less:
Reserve for loan losses 2,635,820 2,048,561
Deferred loan fees 864,441 501,805
------------------ ------------------
3,500,261 2,550,366
------------------ ------------------
Loans, net $ 202,543,262 $ 153,024,926
------------------ ------------------
------------------ ------------------
</TABLE>
See accompanying notes
42
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
4. LOANS (CONTINUED)
As of December 31, 1998 and 1997, the Bank's branches were 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, 1998 and 1997, the portion of these loans
participated to third parties (which are not included in the accompanying
consolidated financial statements) totaled approximately $2,015,000 and
$3,567,000, 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, 1998 and 1997 totaled
approximately $105,000 and $431,000, 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, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ------------------ ------------------
<S> <C> <C> <C>
Balance at beginning of year $ 2,048,561 $ 1,691,260 $ 1,651,352
Loan loss provision 1,179,399 1,075,109 432,141
Loans charged-off (634,077) (777,505) (422,170)
Recoveries of loans previously
charged-off 41,937 59,697 29,937
----------------- ----------------- ------------------
Balance at end of year $ 2,635,820 $ 2,048,561 $ 1,691,260
----------------- ----------------- ------------------
----------------- ----------------- ------------------
</TABLE>
Impaired loans as of and for the years ended December 31, 1998 and 1997
were not significant. Loans past due 90 days or more and still accruing
interest were also insignificant at December 31, 1998 and 1997.
6. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
Land $ 184,600 $ 184,600
Buildings and leasehold improvements 5,452,177 4,737,370
Furniture and equipment 5,085,815 4,042,012
------------------ ------------------
10,722,592 8,963,982
Less accumulated depreciation and amortization 4,738,091 3,906,594
------------------ ------------------
$ 5,984,501 $ 5,057,388
------------------ ------------------
------------------ ------------------
</TABLE>
See accompanying notes.
43
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
7. TIME CERTIFICATES OF DEPOSIT
Time certificates of deposit in excess of $100,000 aggregated
approximately $7,906,000 and $3,716,000 at December 31, 1998 and 1997,
respectively. Interest expense on time certificates of deposit in excess
of $100,000 was approximately $307,000, $169,000 and $176,000 in 1998,
1997 and 1996, respectively.
At December 31, 1998, the scheduled annual maturities of all time
certificates of deposit were approximately as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 26,081,000
2000 3,429,000
2001 683,000
2002 480,000
2003 131,000
Thereafter 5,000
----------------
$ 30,809,000
----------------
----------------
</TABLE>
8. BORROWING AGREEMENTS
The Bank participates in the Cash Management Advance Program (the
Program) with the FHLB. Under the Program, the Bank may borrow up to a
maximum of approximately $12,068,000 with interest at the FHLB's cash
management rate. Borrowings outstanding under the Program are
collateralized by a blanket pledge agreement on the FHLB stock, any funds
on deposit with the FHLB, investment securities and loans. As of December
31, 1998, there were no borrowings outstanding from the FHLB. As of
December 31, 1997, the Bank had $5,000,000 in borrowings outstanding from
the FHLB, which bore interest at a fixed rate of 6.96%.
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, 1998 and
1997, 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.
See accompanying notes.
44
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
9. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (CONTINUED)
A summary of the Bank's off-balance sheet financial instruments
at December 31, 1998 and 1997 is approximately as follows:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
Commitments to extend credit $ 65,858,000 $ 48,945,000
Commitments under credit card lines of credit 10,889,000 5,318,000
Standby letters of credit 785,000 1,356,000
------------------ ------------------
Total off-balance sheet financial instruments $ 77,532,000 $ 55,619,000
------------------ ------------------
------------------ ------------------
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of fees. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if it is deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation of the
counterparty. The Bank typically does not obtain collateral related to
credit card commitments. Collateral held for other commitments varies but
may include accounts receivable, inventory, property and equipment 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, 1998,
1997 and 1996 was approximately as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ------------------ ------------------
<S> <C> <C> <C>
Current:
Federal $ 2,851,400 $ 2,280,700 $ 1,727,900
State 613,000 304,000 479,000
----------------- ------------------ ------------------
3,464,400 2,584,700 2,206,900
Deferred 27,000 279,000 515,000
----------------- ------------------ ------------------
Provision for income taxes $ 3,491,400 $ 2,863,700 $ 2,721,900
----------------- ------------------ ------------------
----------------- ------------------ ------------------
</TABLE>
See accompanying notes.
45
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
10. INCOME TAXES (CONTINUED)
The provision for income taxes results in effective tax rates which are
different than the federal income tax statutory rate. The nature of the
differences for the years ended December 31, 1998, 1997 and 1996 were
approximately as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ------------------ ------------------
<S> <C> <C> <C>
Expected federal income tax at statutory
rate of 34% $ 3,147,500 $ 2,687,600 $ 2,459,900
Effect of nontaxable interest income, net (26,700) (43,000) (55,600)
State income taxes, net of federal effect 404,700 200,400 316,100
Other, net (34,100) 18,700 1,500
----------------- ------------------ ------------------
Provision for income taxes $ 3,491,400 $ 2,863,700 $ 2,721,900
----------------- ------------------ ------------------
----------------- ------------------ ------------------
</TABLE>
The components of the net deferred tax assets and liabilities at
December 31, 1998 and 1997 were approximately as follows:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
Assets:
Loan loss provision $ 838,000 $ 652,000
Deferred compensation expense 405,000 253,000
Deferred life insurance expenses 121,000 81,000
Other 145,000 62,000
------------------ ------------------
Total deferred tax assets 1,509,000 1,048,000
Liabilities:
Deferred loan fees 236,000 325,000
Mortgage servicing rights 880,000 487,000
FHLB stock dividends 218,000 174,000
Unrealized gains on investment securities
available-for-sale 95,000 186,000
Earnings on life insurance policies 292,000 176,000
Other 45,000 75,000
------------------ ------------------
Total deferred tax liabilities 1,766,000 1,423,000
------------------ ------------------
Net deferred tax liabilities $ (257,000) $ (375,000)
------------------ ------------------
------------------ ------------------
</TABLE>
The Company made income tax payments of approximately $3,267,000,
$2,520,000 and $2,680,000 during 1998, 1997 and 1996, respectively.
11. BASIC AND DILUTED EARNINGS PER COMMON SHARE
The Company's basic earnings per common share is computed by dividing net
income by the weighted-average number of common shares outstanding during
the period. The Company's diluted earnings per common share is computed
by dividing net income by the weighted-average number of common shares
outstanding plus dilutive common shares related to stock options.
See accompanying notes.
46
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
11. BASIC AND DILUTED EARNINGS PER COMMON SHARE (CONTINUED)
The numerators and denominators used in computing basic and diluted
earnings per common share for the years ended December 31, 1998, 1997 and
1996 can be reconciled as follows:
<TABLE>
<CAPTION>
Net
income Shares Per-share
(numerator) (denominator) amount
-------------- -------------- --------------
<S> <C> <C> <C>
1998
----
Basic earnings per common share -
Income available to common stockholders $ 5,766,040 6,227,123 $ .93
--------------
--------------
Effect of assumed conversion of stock options - 195,816
-------------- ------------- --------------
Diluted earnings per common share $ 5,766,040 6,422,939 $ .90
-------------- ------------- --------------
-------------- ------------- --------------
1997
----
Basic earnings per common share -
Income available to common stockholders $ 5,041,141 6,383,008 $ .79
--------------
--------------
Effect of assumed conversion of stock options - 184,568
-------------- -------------
Diluted earnings per common share $ 5,041,141 6,567,576 $ .77
-------------- ------------- --------------
-------------- ------------- --------------
1996
----
Basic earnings per common share -
Income available to common stockholders $ 4,513,004 6,398,901 $ .71
--------------
--------------
Effect of assumed conversion of stock options - 108,058
-------------- -------------
Diluted earnings per common share $ 4,513,004 6,506,959 $ .69
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
The above computations have not been adjusted to reflect the issuance of
additional stock options in January 1999 (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.
See accompanying notes.
47
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
12. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
An analysis of activity with respect to loans to directors and officers
of the Bank for the year ended December 31, 1998 was as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1997 $ 1,450,125
Additions 1,712,266
Repayments (1,484,085)
------------------
Balance at December 31, 1998 $ 1,678,306
------------------
------------------
</TABLE>
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 $755,000, $628,000 and $578,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
OTHER BENEFIT PLANS
The Bank has 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 substantially all
of the key executives and the Board are for periods of fifteen years and
ten years, respectively. The benefits are subject to certain vesting
requirements, and vested amounts are generally payable upon termination
in either a lump sum or monthly installments.
The Bank annually expenses amounts sufficient to accrue for the present
value of the benefits payable to the participants under these plans.
The plans also include death benefit provisions for certain participants.
To assist in the funding of the plans, the Bank has purchased life
insurance policies on the majority of the participants. The cash
surrender value of these policies at December 31, 1998 and 1997 was
approximately $5,521,000 and $4,054,000, respectively, and is included in
accrued interest and other assets in the accompanying consolidated
balance sheets.
See accompanying notes.
48
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
13. BENEFIT PLANS (CONTINUED)
As of December 31, 1998 and 1997, the liabilities related to the deferred
compensation plans included in the accompanying consolidated balance
sheets totaled approximately $509,000 and $327,000, respectively. The
amount of expense charged to operations in 1998, 1997 and 1996 related to
the deferred compensation plans was approximately $182,000, $122,000 and
$111,000, respectively. As of December 31, 1998 and 1997, the liabilities
related to the salary continuation and fee continuation plans included in
the accompanying consolidated balance sheets totaled approximately
$546,000 and $332,000, respectively. The amount of expense charged to
operations in 1998, 1997 and 1996 for the salary continuation and fee
continuation plans was approximately $214,000, $147,000 and $160,000,
respectively. For financial reporting purposes, such expense amounts have
not been adjusted for income earned on the life insurance policies. The
net amount of income earned (net of related policy load charges,
mortality costs and surrender charges incurred) on the life insurance
policies which was included in other noninterest income in 1998, 1997 and
1996 was approximately $196,000, $123,000 and $162,000, 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 the
fair market value at the date of grant. Generally, options become
exercisable in varying amounts based on years of employee service,
commencing one year from the date of grant. All options expire after a
period of ten years.
SFAS No. 123, "Accounting for Stock-Based Compensation," (SFAS 123)
requires companies, such as Bancorp, that use the intrinsic value method
to account for employee stock options to provide pro forma disclosures of
the net income and earnings per share effect of applying the fair
value-based method of accounting for stock options. The effect of
applying the fair value-based method to stock options granted in the
years ended December 31, 1998, 1997 and 1996 resulted in an estimated
weighted-average grant date fair value of $6.29, $2.55 and $1.69,
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:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income As reported $ 5,766,040 $ 5,041,141 $ 4,513,004
Pro forma 5,553,108 4,905,554 4,458,164
Basic earnings per common share As reported $ .93 $ .79 $ .71
Pro forma .89 .77 .70
Diluted earnings per common share As reported $ .90 $ .77 $ .69
Pro forma .86 .75 .69
</TABLE>
49
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
14. STOCK OPTION PLAN (CONTINUED)
The Company used the Black-Scholes option-pricing model with the
following weighted-average assumptions to value options granted:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Dividend yield 1.6% 1.6% 1.6%
Expected volatility 36.3% 35.8% 31.8%
Risk-free interest rate 4.6% 5.8% 6.2%
Expected option lives 5 years 5 years 5 years
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, the proforma effects for 1998, 1997 and 1996 may not
be representative of the effects on reported results in future years.
At December 31, 1998, 224,228 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, 1998, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- --------------------- ----------------------
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 269,973 $ 4.75 220,752 $ 3.34 174,060 $ 2.86
Granted 68,998 18.67 91,125 7.44 53,457 5.08
Forfeited (1,654) 12.42 (4,500) 7.25 (6,765) 4.69
Exercised (14,669) 2.90 (37,404) 2.67 - -
--------- ---------- --------- --------- --------- ----------
Balance at end of year 322,648 $ 7.77 269,973 $ 4.75 220,752 $ 3.34
--------- ---------- --------- --------- --------- ----------
--------- ---------- --------- --------- --------- ----------
</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, 1998 is as follows:
<TABLE>
<CAPTION>
Options outstanding Exercisable options
--------------------------------------- ---------------------
Weighted-
Weighted- average Weighted-
average remaining average
Exercise Number of exercise contractual Number of exercise
price range options price life (years) options price
------------ --------- ---------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
$ 2.51 72,378 $ 2.51 5 72,378 $ 2.51
3.65 50,637 3.65 6 50,637 3.65
5.08 46,860 5.08 7 46,860 5.08
7.25-12.17 84,525 7.45 8 73,230 7.25
18.67 68,248 18.67 9 52,123 18.67
--------- ---------
322,648 $ 7.77 7.1 295,228 $ 7.14
--------- ---------- ------------ --------- ---------
--------- ---------- ------------ --------- ---------
</TABLE>
See accompanying notes.
50
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
14. STOCK OPTION PLAN (CONTINUED)
Exercisable options as of December 31, 1997 and 1996 totaled 255,348 and
206,367, respectively.
In January 1999, ISO's for an additional 55,000 shares were granted at
$17.75 per share, subject to the Company meeting certain performance
standards in 1999.
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,
1998, 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:
1999 $ 403,000
2000 453,000
2001 448,000
2002 460,000
2003 419,000
Thereafter 4,897,000
----------------
Total minimum payments $ 7,080,000
----------------
----------------
Total rental expense was approximately $286,000, $236,000 and
$240,000 in 1998, 1997 and 1996, 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, 1998.
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
51
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
16. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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, 1998 and 1997.
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.
LOANS: The estimated fair value of loans is calculated by discounting
the contractual cash flows of the loans using December 31, 1998 and
1997 origination rates. The resulting amounts are adjusted to
estimate the effect of changes in the credit quality of borrowers
since the loans were originated.
DEPOSITS: The estimated fair value of demand deposits, consisting of
checking, savings and certain interest bearing demand deposit
accounts, is represented by the amounts payable on demand. The
estimated fair value of certificates of deposit is calculated by
discounting the scheduled cash flows using the December 31, 1998 and
1997 rates offered on these instruments.
LONG-TERM DEBT: The estimated fair value of long-term debt is
calculated by discounting the scheduled cash flows using quoted rates
from FHLB as of December 31, 1997.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: The estimated fair value of
off-balance sheet financial instruments (primarily commitments to
extend credit) is determined based on fees currently charged for
similar commitments. Management estimates that these fees approximate
$500,000 and $367,000 as of December 31, 1998 and 1997, respectively.
See accompanying notes.
52
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
16. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's significant on-balance sheet
financial instruments at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
---------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 26,838,900 $ 26,839,000 $ 29,553,706 $ 29,554,000
Investment securities:
Available-for-sale 48,012,491 48,012,000 41,953,637 41,954,000
Held-to-maturity 2,938,489 2,952,000 2,445,957 2,453,000
Loans, net (including mort-
gage loans held for sale) 204,662,904 207,758,000 154,901,112 156,780,000
Financial liabilities:
Deposits 270,862,731 270,960,000 211,344,773 211,379,000
Long-term debt - - 5,000,000 5,000,000
</TABLE>
17. REGULATORY MATTERS
Bancorp and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and
possibly additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the Company's
consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, 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, 1998, Bancorp and the Bank meet or
exceed all relevant capital adequacy requirements.
As of December 31, 1998, the most recent notifications 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.
See accompanying notes.
53
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
17. REGULATORY MATTERS (CONTINUED)
Bancorp's actual and required capital amounts and ratios are presented in
the following table (dollars in thousands):
<TABLE>
<CAPTION>
Regulatory minimum
Regulatory minimum to be "well capitalized"
to be under prompt correc-
Actual "adequately capitalized" tive action provisions
----------------------- ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998:
Tier 1 capital (to average
assets) $ 26,391 9.0% $ 11,740 4.0% $ 14,676 5.0%
Tier 1 capital
(to risk-weighted assets) 26,391 11.3 9,312 4.0 13,968 6.0
Total capital
(to risk-weighted assets) 29,027 12.5 18,624 8.0 23,281 10.0
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
</TABLE>
The Bank's actual and required capital amounts and ratios are presented
in the following table (dollars in thousands):
<TABLE>
<CAPTION>
Regulatory minimum
Regulatory minimum to be "well capitalized"
to be under prompt correc-
Actual "adequately capitalized" tive action provisions
----------------------- ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998:
Tier 1 capital (to average
assets) $ 22,347 7.7% $ 11,627 4.0% $ 14,534 5.0%
Tier 1 capital
(to risk-weighted assets) 22,347 9.7 9,244 4.0 13,865 6.0
Total capital
(to risk-weighted assets) 24,879 10.8 18,488 8.0 23,109 10.0
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 14,326 8.0 17,907 10.0
</TABLE>
See accompanying notes.
54
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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,
-------------------------------
1998 1997
------------- --------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 574,438 $ 4,042,545
Due from Cascade Finance 1,900,000 -
Equity securities available-for-sale 2,532,236 531,887
Investment in subsidiaries 23,808,005 19,661,992
Other assets 110,672 -
------------- --------------
Total assets $ 28,925,351 $ 24,236,424
------------- --------------
------------- --------------
Liabilities:
Accrued liabilities $ 103,669 $ -
Due to the Bank 1,900,000 -
------------- --------------
Total liabilities 2,003,669 -
Stockholders' equity 26,921,682 24,236,424
------------- --------------
Total liabilities and stockholders' equity $ 28,925,351 $ 24,236,424
------------- --------------
------------- --------------
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
1998 1997 1996
-------------- ------------- --------------
<S> <C> <C> <C>
Interest and dividend income $ 19,323 $ - $ -
Expenses:
Administrative 102,000 34,893 20,514
Other 119,525 - -
-------------- ------------- --------------
Total expenses 221,525 34,893 20,514
-------------- ------------- --------------
Loss before income tax benefit and equity in
undistributed net earnings of subsidiaries (202,202) (34,893) (20,514)
Income tax benefit 74,462 13,957 8,209
-------------- ------------- --------------
Loss before equity in undistributed net
earnings of subsidiaries (127,740) (20,936) (12,305)
Equity in undistributed net earnings
of subsidiaries 5,893,780 5,062,077 4,525,309
-------------- ------------- --------------
Net income $ 5,766,040 $ 5,041,141 $ 4,513,004
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
See accompanying notes.
55
<PAGE>
CASCADE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
18. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
1998 1997 1996
-------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,766,040 $ 5,041,141 $ 4,513,004
Adjustments to reconcile net income
to net cash used by operating activities:
Undistributed net earnings of subsidiaries (5,893,780) (5,062,077) (4,525,309)
Increase in other assets (110,672) - -
Increase in accrued liabilities 103,669 - -
-------------- ------------- --------------
Net cash used by operating activities (134,743) (20,936) (12,305)
Cash flows used by investing activities -
purchases of equity securities available-
for-sale (1,997,625) (531,887) -
Cash flows from financing activities:
Investments in Cascade Finance (500,000) (500,000) -
Cash dividends paid (2,116,269) (1,915,032) -
Dividends from the Bank 2,100,000 8,993,078 -
Repurchases of stock (861,943) (2,793,402) -
Stock options exercised 42,473 100,000 -
Increase in due from Cascade Finance (1,900,000) - -
Decrease in due from the Bank - - 6,962
Increase in due to the Bank 1,900,000 - -
-------------- ------------- --------------
Net cash provided (used) by
financing activities (1,335,739) 3,884,644 6,962
--------------- ------------- --------------
Net increase (decrease) in cash
and cash equivalents (3,468,107) 3,331,821 (5,343)
Cash and cash equivalents at beginning of year 4,042,545 710,724 716,067
-------------- ------------- --------------
Cash and cash equivalents at end of year $ 574,438 $ 4,042,545 $ 710,724
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
These financial statements have not been reviewed for accuracy
or relevance by the Federal Deposit Insurance Corporation.
See accompanying notes.
56
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
INDEX DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule (for SEC use only).
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We 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 15, 1999, with respect to the consolidated financial
statements of Cascade Bancorp and subsidiaries included in the Annual Report
(Form 10-K) for the year ended December 31, 1998.
/s/ Symonds, Evans & Larson, P.C.
March 8, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 18,388,900
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,450,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,012,991
<INVESTMENTS-CARRYING> 2,938,489
<INVESTMENTS-MARKET> 2,952,327
<LOANS> 206,043,523
<ALLOWANCE> 2,635,820
<TOTAL-ASSETS> 300,774,416
<DEPOSITS> 270,862,731
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,990,003
<LONG-TERM> 0
0
0
<COMMON> 9,545,545
<OTHER-SE> 17,376,137
<TOTAL-LIABILITIES-AND-EQUITY> 300,774,416
<INTEREST-LOAN> 19,256,895
<INTEREST-INVEST> 2,658,445
<INTEREST-OTHER> 537,271
<INTEREST-TOTAL> 22,456,611
<INTEREST-DEPOSIT> 5,115,651
<INTEREST-EXPENSE> 5,180,857
<INTEREST-INCOME-NET> 17,276,754
<LOAN-LOSSES> 1,179,399
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 12,446,352
<INCOME-PRETAX> 9,257,440
<INCOME-PRE-EXTRAORDINARY> 9,257,440
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,766,040
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.90
<YIELD-ACTUAL> 0
<LOANS-NON> 172
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,048,561
<CHARGE-OFFS> 634,077
<RECOVERIES> 41,937
<ALLOWANCE-CLOSE> 2,635,820
<ALLOWANCE-DOMESTIC> 2,635,820
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
