The Company is a designated “Financial Holding
Company” but does not expect such designation to have a material effect on its financial condition or results of operations.
Federal and State Bank Regulation
The Bank, as a Federal Deposit Insurance Corporation
(“FDIC”) insured bank which is not a member of the Federal Reserve System, is subject to the supervision and regulation of the State of
Oregon Department of Consumer and Business Services, Division of Finance and Corporate Securities, and to the supervision and regulation of the FDIC.
These agencies may prohibit the Bank from engaging in what they believe constitute unsafe or unsound banking practices.
The Community Reinvestment Act (“CRA”)
requires that, in connection with examinations of financial institutions within their jurisdiction, the FRB or the FDIC evaluate the record of the
financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the
safe and sound operation of those banks. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or
facility. The Bank’s current CRA rating is “Satisfactory”.
The Bank is also subject to certain restrictions
imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders or any related interest of such
persons. Extensions of credit: (1) 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 (2) must not involve more than the
normal risk of repayment or present other unfavorable features. The Bank is also subject to certain lending limits and restrictions on overdrafts to
such persons. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the Bank or any officer,
director, employee, agent or other person participating in the conduct of the affairs of the Bank, the imposition of a cease and desist order, and
other regulatory sanctions.
Under the Federal Deposit Insurance Corporation
Improvement Act (“FDICIA”), each Federal banking agency is required to prescribe by regulation, non-capital safety and soundness standards
for institutions under its authority. These standards are to cover internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial
standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation. An institution, which fails to
meet these standards, must develop a plan acceptable to the agency, specifying the steps that the institution will take to meet the standards. Failure
to submit or implement such a plan may subject the institution to regulatory sanctions. The Company believes that the Bank meets substantially all the
standards that have been adopted.
Interstate Banking Legislation
Under the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (“Riegle-Neal Act”), as amended, a bank holding company may acquire banks in states other than its home
state, subject to certain limitations. The Riegle-Neal Act also authorizes banks to merge across state lines, thereby creating interstate branches.
Banks are also permitted to acquire and to establish de novo branches in other states where authorized under the laws of those states.
Deposit Insurance
As a member institution of the FDIC, the deposits of
the Bank are currently insured to a maximum of $100,000 per depositor through the Bank Insurance Fund (“BIF”), and the Bank is required to
pay semiannual deposit insurance premium assessments to the FDIC.
The Deposit Insurance Funds Act of 1996 (“Funds
Act”) eliminated the statutorily imposed minimum assessment amount, effective January 1, 1997. The Funds Act also authorizes assessments on Bank
Insurance Fund-assessable deposits and stipulates that the rate of assessment must equal one-fifth the Financing Corporation assessment rate that is
applied to deposits assessable by the Savings Association Insurance Fund. The Financing Corporation assessment rate for Bank Insurance Fund-assessable
deposits is 1.296 cents per $100 of deposits per year. The Bank’s FDIC insurance expense for 2004 was approximately $210,000.
7
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, 2004 the Company is considered “well capitalized” according to these regulatory capital guidelines. See footnote
19 to the Consolidated 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 profiles 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: (1) the allowance for loan losses of up to 1.25%
of risk-weighted assets; (2) any qualifying perpetual preferred stock which exceeds the amount which may be included in Tier 1 capital; (3) hybrid
capital instrument; (4) perpetual debt; (5) mandatory convertible securities, and; (6) subordinated debt and intermediate term preferred stock of up to
50% of Tier 1 capital. Total capital is the sum of Tier 1 and Tier 2 capital less reciprocal holdings of other banking organizations, capital
instruments and investments in unconsolidated subsidiaries.
Banks’ and bank holding companies’ assets
are given risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance sheet items are given credit conversion factors to convert them to
asset equivalent amounts to which an appropriate risk-weight will apply. These computations result in the total risk-weighted assets.
Loans are generally assigned to the 100% risk
category, except for first mortgage loans fully secured by residential property, which carry a 50% rating. The Company’s investment securities,
mainly U.S. Government sponsored agency obligations, are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50%
risk-weight, and direct obligations of or obligations fully guaranteed by the United States Treasury or United States Government, which have 0%
risk-weight. Off-balance sheet items, direct credit substitutes, including general guarantees and standby letters of credit backing financial
obligations, are given a 100% conversion factor. Transaction related contingencies such as bid bonds, other standby letters of credit and undrawn
commitments, including commercial credit lines with an initial maturity of more than one year, have a 50% conversion factor. Short-term,
self-liquidating trade contingencies are converted at 20%, and short-term commitments have a 0% factor.
The FRB also has implemented a leverage ratio, which
is Tier 1 capital as a percentage of average total assets less intangibles, to be used as a supplement to risk-based guidelines. The principal
objective of the leverage ratio is to place a constraint on the maximum degree to which a bank holding company may leverage its equity capital base.
The FRB requires a minimum leverage ratio of 3%. However, for all but the most highly rated bank holding companies and for bank holding companies
seeking to expand, the FRB expects an additional cushion of at least 1% to 2%.
At December 31, 2004, the Company’s leverage,
Tier 1 capital and Total risked-based capital ratios were 10.11%, 10.11% and 11.40%, respectively.
The FDICIA also created a new statutory framework of
supervisory actions indexed to the capital level of the individual institution. Under regulations adopted by the FDIC, an institution is assigned to
one of five capital categories depending on its total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio, together with
certain subjective factors. Institutions that are deemed “undercapitalized”, depending on the category to which they are assigned, are
subject to certain mandatory supervisory corrective actions. At December 31, 2004, the Company is considered
“Well-capitalized”.
8
State Regulations Concerning Cash Dividends
The principal source of Bancorp’s cash revenues
have been provided from dividends received from the Bank. The Oregon banking laws impose the following limitations on the payment of dividends by
Oregon state chartered banks. The amount of the dividend shall not be greater than its unreserved retained earnings, deducting from that, to the extent
not already charged against earnings or reflected in a reserve, the following: (1) all bad debts, which are debts on which interest is past due and
unpaid for at least six months, unless the debt is fully secured and in the process of collection; (2) all other assets charged off as required by the
Director of the Department of Consumer and Business Services or a state or federal examiner; (3) all accrued expenses, interest and taxes of the
institution.
In addition, the appropriate regulatory authorities
are authorized to prohibit banks and bank holding companies from paying dividends, which would constitute an unsafe or unsound banking practice. The
Bank and Bancorp are not currently subject to any regulatory restrictions on their dividends other than those noted above.
Check 21
The Check Clearing for the 21st Century Act, or
“Check 21” as it is commonly known, became effective October 28, 2004. Check 21 facilitates check collection by creating a new negotiable
instrument called a “substitute check,” which permits, but does not require, banks to replace original checks with substitute checks and
process check information electronically. Banks that do use substitute checks must comply with certain notice and recredit rights. Check 21 is expected
to cut the time and cost involved in physically transporting paper items and reduce float, i.e. the time between the deposit of a check in a bank and
the bank’s receipt of payment for that check. The Bank intends to utilize the Check 21 authority and currently possesses technology necessary to
process and exchange check information electronically.
At December 31, 2004, the Company conducted banking
services in 21 locations throughout Oregon. Twelve locations are in Central Oregon, four in Salem/Keizer, four in Southern Oregon and one in Portland.
All offices are free standing buildings with the exception of three branches, two which operate in leased space in supermarkets in Bend and the third
which operates on the 10th floor of the Pioneer Tower Building in Portland.
The main office and three other branch buildings are
owned and are situated on leased land. The Bank owns the land and buildings at seven branch locations. The Bank leases the land and buildings at eleven
branch locations. In addition, the Bank leases space for the Operations and Information Systems departments located in Bend. All leases include
multiple renewal options.
The main office is located at 1100 NW Wall Street,
Bend, Oregon, and consists of approximately 15,000 square feet (sq. ft.). 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. The current rent is $6,084 per month with
adjustments every five years by mutual agreement of landlord and tenant. The main bank branch occupies the ground floor. Human Resources, Investments
and Credit Services occupy approximately 8,400 square feet. A separate drive-up facility is also located on this site.
The Bank currently owns the Cascade Building in the
Old Mill district of Bend, which contains approximately 21,800 sq. ft. of space of which the Bank occupies 2,000 sq. ft. The remaining space is
partially leased by non-bank commercial businesses and the Bank is seeking tenants for the remainder. Partners in the construction of this building
have an option to purchase the building from the Company at a cost-plus price through February of 2007.
In 2004, the Bank purchased the Boyd Building with
26,035 square feet in downtown Bend. This building is now occupied by Credit Services, SBA and the Mortgage Division. Including Bank use, the space is
near full occupancy.
In the opinion of management, all of the Bank’s
properties are adequately insured.
9
| 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 are 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 |
No matters were submitted to shareholders during the
fourth quarter of 2004.
10
PART II
| ITEM 5. |
|
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS |
Cascade Bancorp common stock trades on The NASDAQ
Small Cap Market tier of The NASDAQ Stock Market under the symbol CACB. The high and low sales prices and cash dividends 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. Prices do not include retail mark-ups, mark-downs or commissions:
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
2004
|
|
|
|
|
|
|
|
|
High |
|
$18.78 |
|
$20.00 |
|
$19.65 |
|
$22.44 |
Low |
|
$15.42 |
|
$15.48 |
|
$16.96 |
|
$18.53 |
2003
|
|
|
|
|
|
|
|
|
High |
|
$12.33 |
|
$14.79 |
|
$15.08 |
|
$13.86 |
Low |
|
$11.19 |
|
$11.60 |
|
$13.40 |
|
$14.32 |
The Company declared a 25% (5:4) stock split in
March 2004. The Company announced a policy of declaring regular quarterly cash dividends in 1997. The dividends declared and paid listed below have
been retroactively adjusted for past stock dividends and stock splits.
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
|
Per Share
|
|
Per Share
|
|
Per Share
|
|
Per Share
|
2005 |
|
$ .08 |
|
N/A |
|
N/A |
|
N/A |
2004 |
|
$ .06 |
|
$ .06 |
|
$ .07 |
|
$ .07 |
2003 |
|
$ .06 |
|
$ .06 |
|
$ .06 |
|
$ .06 |
At February 28, 2005, the Company had 20,000,000
shares of common stock authorized with 16,825,928 shares issued and outstanding, held by approximately 5,600 shareholders of record.
Information regarding securities authorized for
issuance under the Company’s equity plans is located on page 58 (Note 17) of this annual report and is incorporated by reference.
| ITEM 6. |
|
SELECTED FINANCIAL DATA |
Cautionary Information Concerning Forward-Looking Statements
The following section contains forward-looking
statements which are not historical facts and pertain to our future operating results. These statements include, but are not limited to, our plans,
objectives, expectations and intentions and are not statements of historical fact. When used in this report, 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, changes in interest rates including timing or relative degree of change, and competitive
uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with
respect to future business conditions, strategies and decisions, and such assumptions are subject to change.
Results may differ materially from the results
discussed due to changes in business and economic conditions that negatively affect credit quality, which may be exacerbated by our concentration of
operations in the areas of Central Oregon, Salem, Southern Oregon and Portland. Likewise, competition or changes in interest rates could negatively
affect the net interest margin, as could 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
11
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,
other than as may be required by SEC regulations.
The following tables present certain financial and
statistical information with respect to the Company for the periods indicated. Most of the information is required by Guide 3, “Statistical
Disclosure by Bank Holding Companies”, published by the SEC. At the beginning of each table, information is presented as to the nature of data
disclosed in the table.
Critical Accounting Policies
Critical accounting policies are defined as those
that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different
assumptions and conditions. We believe that our most critical accounting policies upon which our financial condition depends, and which involve the
most complex or subjective decisions or assessments are as follows:
Reserve for Loan Losses: Arriving
at an appropriate level of reserve for loan losses involves a high degree of judgment. The Company’s reserve for loan losses provides for probable
losses based upon evaluations of known and inherent risks in the loan portfolio. Management uses historical information to assess the adequacy of the
reserve for loan losses as well as the prevailing business environment as it is affected by changing economic conditions and various external factors
which may impact the portfolio in ways currently unforeseen. The reserve is increased by provisions for loan losses and by recoveries of loans
previously charged-off and reduced by loans charged-off. For a full discussion of the Company’s methodology of assessing the adequacy of the
reserve for loan losses, see Management’s Discussion and Analysis of Financial Condition and Results of Operation.
Mortgage Servicing Rights
(MSRs): Determination of the fair value of MSRs requires the estimation of multiple interdependent variables, the most impactful of
which is mortgage prepayment speeds. Prepayment speeds are estimates of the pace and magnitude of future mortgage payoff or refinance behavior of
customers whose loans are serviced by the Company. Errors in estimation of prepayment speeds or other key servicing variables could subject MSRs to
impairment risk. At least quarterly, the Company engages a qualified third-party to provide an estimate of the fair value of MSRs using a discounted
cash flow model with assumptions and estimates based upon observable market-based data and methodology common to the mortgage servicing market.
Management believes it applies reasonable assumptions under the circumstances, however, because of possible volatility in the market price of MSRs and
the vagaries of any relatively illiquid market, there can be no assurance that risk management and existing accounting practices will result in the
avoidance of possible impairment charges in future periods. See also Management’s Discussion and Analysis of Financial Condition and Results of
Operation, and footnote 6 of the Financial Statements.
The following selected financial data should be read
in conjunction with the Company’s consolidated financial statements and the accompanying notes, which are included in this Annual Report on Form
10-K, (in thousands, except per share data and ratios; unaudited):
|
|
|
|
Years ended December 31,
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
Balance
Sheet Data (at period end)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities |
|
|
|
$ |
47,069 |
|
|
$ |
34,270 |
|
|
$ |
28,571 |
|
|
$ |
25,885 |
|
|
$ |
24,293 |
|
Loans,
gross |
|
|
|
|
862,708 |
|
|
|
589,491 |
|
|
|
500,924 |
|
|
|
423,172 |
|
|
|
358,674 |
|
Total
assets |
|
|
|
|
1,004,809 |
|
|
|
734,712 |
|
|
|
578,359 |
|
|
|
488,753 |
|
|
|
423,293 |
|
Total
deposits |
|
|
|
|
851,397 |
|
|
|
651,154 |
|
|
|
501,962 |
|
|
|
425,258 |
|
|
|
358,198 |
|
Non-interest
bearing deposits |
|
|
|
|
340,652 |
|
|
|
245,378 |
|
|
|
209,524 |
|
|
|
162,676 |
|
|
|
128,249 |
|
Core Deposits
(1) |
|
|
|
|
824,814 |
|
|
|
635,177 |
|
|
|
483,505 |
|
|
|
391,443 |
|
|
|
333,150 |
|
Total
shareholders’ equity (2) |
|
|
|
|
86,432 |
|
|
|
61,756 |
|
|
|
51,188 |
|
|
|
41,680 |
|
|
|
34,981 |
|
12
|
|
Years
ended December 31,
|
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
Income
Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
$ |
50,911 |
|
|
$ |
40,835 |
|
|
$ |
37,897 |
|
|
$ |
38,298 |
|
|
$ |
35,523 |
|
|
Interest
expense |
|
|
4,903 |
|
|
|
4,003 |
|
|
|
4,657 |
|
|
|
8,771 |
|
|
|
9,959 |
|
|
Net
interest income |
|
|
46,008 |
|
|
|
36,832 |
|
|
|
33,240 |
|
|
|
29,527 |
|
|
|
25,564 |
|
|
Loan
loss provision |
|
|
3,650 |
|
|
|
2,695 |
|
|
|
2,680 |
|
|
|
3,690 |
|
|
|
2,751 |
|
|
Net
interest income after loan loss provision |
|
|
42,358 |
|
|
|
34,137 |
|
|
|
30,560 |
|
|
|
25,837 |
|
|
|
22,813 |
|
|
Non-interest
income |
|
|
12,940 |
|
|
|
13,400 |
|
|
|
9,663 |
|
|
|
7,829 |
|
|
|
5,983 |
|
|
Non-interest
expenses |
|
|
29,577 |
|
|
|
24,854 |
|
|
|
21,023 |
|
|
|