SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE) |
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x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended: March 31, 2007 |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from ______ to ______ |
Commission file number: 0-23322
CASCADE BANCORP
(Exact name of Registrant as specified in its charter)
Oregon |
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93-1034484 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
1100 NW Wall Street
Bend, Oregon 97701
(Address of principal executive offices)
(Zip Code)
(541) 385-6205
(Registrants telephone number, including area
code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x |
No o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer x Non-accelerated file o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o |
No x |
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. 28,461,591 shares of no par value Common Stock as of April 30, 2007.
CASCADE BANCORP & SUBSIDIARY
FORM 10-Q
QUARTERLY REPORT
MARCH
31, 2007
INDEX
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Page |
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Item 1. |
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Condensed Consolidated Balance Sheets: |
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3 |
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Condensed Consolidated Statements of Income: |
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4 |
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5 |
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Condensed Consolidated Statements of Cash Flows: |
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6 |
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7 |
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Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
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16 |
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Item 3. |
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24 |
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Item 4. |
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24 |
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Item 1A. |
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25 |
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Item 4. |
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25 |
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Item 6. |
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25 |
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26 |
2
Cascade Bancorp & Subsidiary
Condensed Consolidated Balance
Sheets
March 31, 2007 and December 31, 2006
(Dollars in
thousands)
(unaudited)
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March 31, |
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December 31, |
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ASSETS |
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Cash and cash equivalents: |
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Cash and due from banks |
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$ |
61,815 |
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$ |
54,962 |
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Interest bearing deposits with Federal Home Loan Bank |
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10,459 |
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47 |
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Federal funds sold |
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7,800 |
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650 |
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Total cash and cash equivalents |
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80,074 |
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55,659 |
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Investment securities available-for-sale |
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106,852 |
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103,228 |
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Investment securities held-to-maturity |
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3,692 |
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3,695 |
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Federal Home Loan Bank stock |
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6,991 |
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6,991 |
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Loans, net |
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1,907,837 |
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1,863,677 |
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Premises and equipment, net |
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36,356 |
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40,553 |
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Goodwill |
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105,047 |
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105,047 |
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Core deposit intangibles |
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10,687 |
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11,082 |
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Bank-owned life insurance |
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32,188 |
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31,730 |
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Accrued interest and other assets |
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27,442 |
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27,652 |
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Total assets |
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$ |
2,317,166 |
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$ |
2,249,314 |
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LIABILITIES & STOCKHOLDERS EQUITY |
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Liabilities: |
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Deposits: |
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Demand |
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$ |
506,775 |
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$ |
509,920 |
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Interest bearing demand |
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894,141 |
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791,768 |
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Savings |
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44,466 |
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46,522 |
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Time |
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349,090 |
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313,406 |
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Total deposits |
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1,794,472 |
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1,661,616 |
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Junior subordinated debentures |
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68,558 |
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68,558 |
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Federal funds purchased |
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15,177 |
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Other borrowings |
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118,222 |
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171,290 |
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Customer repurchase agreements |
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38,227 |
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44,018 |
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Accrued interest and other liabilities |
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28,418 |
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27,579 |
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Total liabilities |
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2,047,897 |
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1,988,238 |
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Stockholders equity: |
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Common stock, no par value; 35,000,000 shares authorized; 28,446,129 issued and outstanding (28,330,259 in 2006) |
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163,321 |
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162,199 |
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Retained earnings |
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105,075 |
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98,112 |
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Accumulated other comprehensive income |
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|
873 |
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|
765 |
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Total stockholders equity |
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269,269 |
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261,076 |
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Total liabilities and stockholders equity |
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$ |
2,317,166 |
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$ |
2,249,314 |
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See accompanying notes.
3
Cascade Bancorp & Subsidiary
Condensed Consolidated Statements of
Income
Three Months ended March 31, 2007 and 2006
(Dollars in
thousands, except per share amounts)
(unaudited)
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Three months ended |
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2007 |
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2006 |
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Interest income: |
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Interest and fees on loans |
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$ |
39,837 |
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$ |
20,739 |
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Taxable interest on investments |
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1,316 |
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|
556 |
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Nontaxable interest on investments |
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80 |
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|
47 |
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Interest on federal funds sold |
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56 |
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265 |
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Interest on interest bearing deposits with Federal Home Loan Bank |
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81 |
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120 |
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Dividends on Federal Home Loan Bank stock |
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7 |
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Total interest income |
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41,377 |
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21,727 |
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Interest expense: |
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Deposits: |
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Interest bearing demand |
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6,875 |
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3,317 |
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Savings |
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57 |
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29 |
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Time |
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3,598 |
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513 |
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Junior subordinated debentures and other borrowings |
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4,301 |
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961 |
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Total interest expense |
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14,831 |
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4,820 |
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Net interest income |
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26,546 |
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16,907 |
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Loan loss provision |
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1,050 |
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1,100 |
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Net interest income after loan loss provision |
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25,496 |
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15,807 |
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Non-interest income: |
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Service charges on deposit accounts |
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2,207 |
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1,463 |
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Mortgage loan origination and processing fees |
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435 |
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|
457 |
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Gains on sales of mortgage loans, net |
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|
241 |
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|
102 |
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Card issuer and merchant services fees, net |
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|
887 |
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|
611 |
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Earnings on bank-owned life insurance |
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458 |
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169 |
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Other income |
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1,318 |
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|
422 |
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Total noninterest income |
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5,546 |
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3,224 |
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Non-interest expense: |
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Salaries and employee benefits |
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9,214 |
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5,855 |
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Occupancy and equipment, net |
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1,576 |
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|
1,037 |
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Communications |
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|
548 |
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|
295 |
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Advertising |
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317 |
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161 |
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Other expenses |
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4,145 |
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2,152 |
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Total noninterest expense |
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15,800 |
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9,500 |
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Income before income taxes |
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15,242 |
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|
9,531 |
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Provision for income taxes |
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5,721 |
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|
3,603 |
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Net income |
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$ |
9,521 |
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$ |
5,928 |
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Basic earnings per common share |
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$ |
0.34 |
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$ |
0.28 |
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Diluted earnings per common share |
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$ |
0.33 |
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$ |
0.27 |
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See accompanying notes.
4
Cascade Bancorp & Subsidiary
Condensed Consolidated Statements of
Changes in Stockholders Equity
Three Months Ended March 31, 2007 and
2006
(Dollars in thousands, except per share amounts)
(unaudited)
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Comprehensive |
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Common |
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Retained |
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Unearned |
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Accumulated |
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Total |
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Balance at December 31, 2005 |
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$ |
33,706 |
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$ |
70,571 |
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$ |
(442 |
) |
$ |
541 |
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$ |
104,376 |
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Comprehensive income: |
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Net income |
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$ |
5,928 |
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|
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|
5,928 |
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|
|
|
|
|
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|
5,928 |
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Other comprehensive loss, net of tax: |
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|
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Unrealized gains on securities available-for-sale |
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|
59 |
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59 |
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59 |
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|
|
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Comprehensive income |
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$ |
5,987 |
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Transfer to common stock due to implementation of SFAS 123R |
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(442 |
) |
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|
442 |
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Cash dividends paid |
|
|
|
|
|
|
|
|
(1,535 |
) |
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|
|
|
|
|
|
(1,535 |
) |
Stock-based compensation expense |
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|
|
|
273 |
|
|
|
|
|
|
|
|
|
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|
273 |
|
Stock options exercised (206,537) |
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|
993 |
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|
|
|
|
|
|
|
|
|
993 |
|
Tax benefit from non-qualified stock options exercised |
|
|
|
|
|
316 |
|
|
|
|
|
|
|
|
|
|
|
316 |
|
|
|
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|
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Balance at March 31, 2006 |
|
|
|
|
$ |
34,846 |
|
$ |
74,964 |
|
$ |
|
|
$ |
600 |
|
$ |
110,410 |
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|
|
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Balance at December 31, 2006 |
|
|
|
|
$ |
162,199 |
|
$ |
98,112 |
|
$ |
|
|
$ |
765 |
|
$ |
261,076 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income |
|
$ |
9,521 |
|
|
|
|
|
9,521 |
|
|
|
|
|
|
|
|
9,521 |
|
Other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Unrealized gains on securities available-for-sale |
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
108 |
|
|
108 |
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|
|
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|
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|
|
|
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|
|
|
|
|
|
|
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Comprehensive income |
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$ |
9,629 |
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|
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|
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|
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|
|
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|
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Cash dividends paid |
|
|
|
|
|
|
|
|
(2,558 |
) |
|
|
|
|
|
|
|
(2,558 |
) |
Stock-based compensation expense |
|
|
|
|
|
436 |
|
|
|
|
|
|
|
|
|
|
|
436 |
|
Stock options exercised (83,382) |
|
|
|
|
|
548 |
|
|
|
|
|
|
|
|
|
|
|
548 |
|
Tax benefit from non-qualified stock options exercised |
|
|
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
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|
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Balance at March 31, 2007 |
|
|
|
|
$ |
163,321 |
|
$ |
105,075 |
|
$ |
|
|
$ |
873 |
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$ |
269,269 |
|
|
|
|
|
|
|
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|
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See accompanying notes.
5
Cascade Bancorp & Subsidiary
Condensed Consolidated Statements of
Cash Flows
Three Months ended March 31, 2007 and 2006
(Dollars in
thousands)
(unaudited)
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Three months ended March 31, |
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2007 |
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2006 |
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||
|
|
|
|
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|
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Net cash provided by operating activities |
|
$ |
12,418 |
|
$ |
1,829 |
|
Investing activities: |
|
|
|
|
|
|
|
Proceeds from maturities, calls and prepayments of investment securities available-for-sale |
|
|
5,394 |
|
|
2,508 |
|
Purchases of investment securities available-for-sale |
|
|
(8,992 |
) |
|
(7,120 |
) |
Net increase in loans |
|
|
(44,725 |
) |
|
(82,528 |
) |
Purchases of premises and equipment |
|
|
(1,028 |
) |
|
(409 |
) |
Proceeds from sales of premises and equipment |
|
|
4,400 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(44,951 |
) |
|
(87,549 |
) |
Financing activities: |
|
|
|
|
|
|
|
Net increase in deposits |
|
|
132,856 |
|
|
50,803 |
|
Cash dividends paid |
|
|
(2,558 |
) |
|
(1,535 |
) |
Stock options exercised |
|
|
548 |
|
|
993 |
|
Tax benefit from non-qualified stock options exercised |
|
|
138 |
|
|
316 |
|
Proceeds from issuance of junior subordinated debentures |
|
|
|
|
|
27,320 |
|
Net decrease in federal funds purchased |
|
|
(15,177 |
) |
|
|
|
Net decrease in other borrowings |
|
|
(58,859 |
) |
|
(3,304 |
) |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
56,948 |
|
|
74,593 |
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
24,415 |
|
|
(11,127 |
) |
Cash and cash equivalents at beginning of period |
|
|
55,659 |
|
|
107,709 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
80,074 |
|
$ |
96,582 |
|
|
|
|
|
|
|
|
|
See accompanying notes.
6
Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated
Financial Statements
March 31, 2007
(unaudited)
1. Basis of Presentation
The accompanying interim condensed consolidated financial statements include the accounts of Cascade Bancorp (Bancorp), an Oregon chartered financial holding company, and its wholly-owned subsidiary, Bank of the Cascades (the Bank) (collectively, the Company or Cascades). The Bank also operates in Idaho under the name Farmers & Merchants, a Bank of the Cascades company. All significant inter-company accounts and transactions have been eliminated in consolidation.
The interim condensed consolidated financial statements have been prepared by the Company without audit and in conformity with accounting principles generally accepted in the United States for interim financial information. Accordingly, certain financial information and footnotes have been omitted or condensed. In the opinion of management, the condensed consolidated financial statements include all necessary adjustments (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. In preparing the condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheets and income and expenses for the periods. Actual results could differ from those estimates.
The condensed consolidated balance sheet data as of December 31, 2006 was derived from audited financial statements, but does not include all disclosures contained in the Companys 2006 Annual Report to Shareholders. The interim condensed consolidated financial statements should be read in conjunction with the December 31, 2006 consolidated financial statements, including the notes thereto, included in the Companys 2006 Annual Report to Shareholders.
All issued and outstanding shares, weighted average shares and per share amounts in the accompanying condensed consolidated financial statements have been retroactively adjusted to reflect a 5-for-4 stock split that was declared in October 2006.
Certain amounts for 2006 have been reclassified to conform with the 2007 presentation.
2. Investment Securities
Investment securities at March 31, 2007 and December 31, 2006 consisted of the following (dollars in thousands):
|
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Amortized |
|
Gross |
|
Gross |
|
Estimated |
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|
|
3/31/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency mortgage-backed securities |
|
$ |
76,146 |
|
$ |
665 |
|
$ |
209 |
|
$ |
76,602 |
|
U.S. Government and agency securities |
|
|
19,139 |
|
|
195 |
|
|
2 |
|
|
19,332 |
|
Obligations of state and political subdivisions |
|
|
5,356 |
|
|
19 |
|
|
13 |
|
|
5,362 |
|
U.S. Agency asset-backed securities |
|
|
3,837 |
|
|
31 |
|
|
|
|
|
3,868 |
|
Equity securities |
|
|
576 |
|
|
717 |
|
|
|
|
|
1,293 |
|
Mutual fund |
|
|
392 |
|
|
3 |
|
|
|
|
|
395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
105,446 |
|
$ |
1,630 |
|
$ |
224 |
|
$ |
106,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions |
|
$ |
3,692 |
|
$ |
18 |
|
$ |
29 |
|
$ |
3,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Amortized |
|
Gross |
|
Gross |
|
Estimated |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency mortgage-backed securities |
|
$ |
72,420 |
|
$ |
387 |
|
$ |
197 |
|
$ |
72,610 |
|
U.S. Government and agency securities |
|
|
19,128 |
|
|
195 |
|
|
5 |
|
|
19,318 |
|
Obligations of state and political subdivisions |
|
|
5,481 |
|
|
21 |
|
|
17 |
|
|
5,485 |
|
U.S. Agency asset-backed securities |
|
|
4,002 |
|
|
18 |
|
|
1 |
|
|
4,019 |
|
Equity securities |
|
|
576 |
|
|
830 |
|
|
|
|
|
1,406 |
|
Mutual fund |
|
|
388 |
|
|
2 |
|
|
|
|
|
390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
101,995 |
|
$ |
1,453 |
|
$ |
220 |
|
$ |
103,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions |
|
$ |
3,695 |
|
$ |
22 |
|
$ |
30 |
|
$ |
3,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the fair value and gross unrealized losses of the Banks investment securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2007:
|
|
Less than 12 months |
|
12 months or more |
|
Total |
|
||||||||||||
|
|
|
|
|
|
|
|
||||||||||||
|
|
Estimated |
|
Unrealized |
|
Estimated |
|
Unrealized |
|
Estimated |
|
Unrealized |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency mortgage-backed securities |
|
$ |
5,483 |
|
$ |
117 |
|
$ |
10,529 |
|
$ |
92 |
|
$ |
16,012 |
|
$ |
209 |
|
U.S Government and agency securities |
|
|
|
|
|
|
|
|
2,895 |
|
|
2 |
|
|
2,895 |
|
|
2 |
|
U.S. Agency asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions |
|
|
1,308 |
|
|
1 |
|
|
3,686 |
|
|
41 |
|
|
4,994 |
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,791 |
|
$ |
118 |
|
$ |
17,110 |
|
$ |
135 |
|
$ |
23,901 |
|
$ |
253 |
|
|
|
|
|
|
|
|
|
The unrealized losses on the above investment securities are primarily due to increases in market interest rates over the yields available at the time the specific investment securities were purchased by the Company. Management of the Company expects the fair value of these investment securities to recover as the investment securities approach their maturity dates or repricing dates, or if market yields for such investment securities decline. Management of the Company does not believe that any of the investment securities are impaired due to reasons of credit quality. Accordingly, management of the Company does not believe that any of the above gross unrealized losses on investment securities are other-than-temporary and, accordingly, no impairment adjustments have been recorded.
3. Loans and Reserve for Loan Losses
The composition of the loan portfolio at March 31, 2007 and December 31, 2006 was as follows (dollars in thousands):
Loan portfolio |
|
March 31, |
|
% of gross |
|
December 31, |
|
% of gross |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
579,627 |
|
|
30 |
% |
$ |
560,728 |
|
|
30 |
% |
Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction/lot |
|
|
610,677 |
|
|
32 |
% |
|
588,251 |
|
|
31 |
% |
Mortgage |
|
|
82,311 |
|
|
4 |
% |
|
80,860 |
|
|
4 |
% |
Commercial |
|
|
605,635 |
|
|
31 |
% |
|
606,340 |
|
|
32 |
% |
Consumer |
|
|
53,649 |
|
|
3 |
% |
|
51,083 |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
1,931,899 |
|
|
100 |
% |
|
1,887,262 |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less reserve for loan losses |
|
|
24,062 |
|
|
|
|
|
23,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Total loans, net |
|
$ |
1,907,837 |
|
|
|
|
$ |
1,863,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Mortgage real estate loans include mortgage loans held for sale of approximately $2,673,000 at March 31, 2007 and approximately $3,027,000 at December 31, 2006. In addition, the above loans are net of deferred loan fees of approximately $5,459,000 at March 31, 2007 and $5,664,000 at December 31, 2006.
Reserves for unfunded commitments (which are classified as other liabilities) totaled approximately $3.4 million at March 31, 2007 and $3.2 million at December 31, 2006.
Transactions in the reserve for loan losses for the three months ended March 31, 2007 and 2006 were as follows (dollars in thousands):
|
|
Three months ended |
|
||||
|
|
|
|
||||
Reserve for loan losses |
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
23,585 |
|
$ |
14,688 |
|
Loan loss provision |
|
|
1,050 |
|
|
1,100 |
|
Recoveries |
|
|
298 |
|
|
214 |
|
Loans charged off |
|
|
(871 |
) |
|
(180 |
) |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
24,062 |
|
$ |
15,822 |
|
|
|
|
|
|
|
|
|
At March 31, 2007 the Bank had approximately $781.6 million in outstanding commitments to extend credit, compared to approximately $713.9 million at year-end 2006.
4. Non-Performing Assets
Risk of nonpayment exists with respect to all loans, which could result in the classification of such loans as non-performing. The following table presents information with respect to non-performing assets at March 31, 2007 and December 31, 2006 (dollars in thousands):
|
|
March 31, |
|
December 31,
|
|
||
|
|
|
|
|
|
|
|
Loans on non-accrual status |
|
$ |
7,651 |
|
$ |
2,679 |
|
Loans past due 90 days or more but not on non-accrual status |
|
|
|
|
|
|
|
Other real estate owned |
|
|
|
|
|
326 |
|
|
|
|
|
|
|
|
|
Total non-performing assets |
|
$ |
7,651 |
|
$ |
3,005 |
|
|
|
|
|
|
|
|
|
Percentage of non-performing assets to total assets |
|
|
0.33 |
% |
|
0.13 |
% |
|
|
|
|
|
|
|
|
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 non-accrual 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 non-accrual 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. Interest income that was reversed and charged against income in 2007 and 2006 was immaterial.
During our normal loan review procedures, a loan is considered to be impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows, discounted at the loans effective interest rate or, as a practical expedient, at the loans observable market price or the fair market value of the collateral if the loan is collateral dependent. Impaired loans are currently measured at lower of cost or fair value. Certain large groups of smaller balance homogeneous loans, collectively measured for impairment, are excluded. Impaired loans are charged to the allowance when management believes, after considering economic and business conditions, collection efforts and collateral position that the borrowers financial condition is such that collection of principal is not probable. In addition, net overdraft losses are included in the calculation of the allowance for loan losses per the guidance provided by regulatory authorities early in 2005, Joint Guidance on Overdraft Protection Programs.
9
At March 31, 2007, impaired loans were approximately $7.4 million and related specific valuation allowances were $40,000. At December 31, 2006, impaired loans were approximately $2.7 million and related specific valuation allowances were $.4 million. Interest income recognized for cash payments received on impaired loans for the periods presented was insignificant.
5. Mortgage Servicing Rights
At March 31, 2007 and December 31, 2006, the Bank held servicing rights to mortgage loans with principal balances of approximately $493.9 million and $494.9 million, respectively. Because these loans are sold to Fannie Mae, a U.S. government sponsored enterprise, they are not included in loan balances in the accompanying condensed consolidated balance sheets. The sales of these mortgage loans are subject to specific underwriting documentation standards and requirements, which may result in repurchase risk. However, as of March 31, 2007, management is not aware of any material mortgage loans that will be subject to repurchase.
Other assets in the accompanying condensed consolidated balance sheets include capitalized mortgage servicing rights (MSRs) accounted for at the lower of origination value less accumulated amortization, or current fair value. The carrying value of MSRs was $4.0 and $4.1 million at March 31, 2007 and December 31, 2006, respectively. The fair value of MSRs was approximately $5.4 million at March 31, 2007 and $5.6 million at December 31, 2006. Activity in MSRs for the three months ended March 31, 2007 and 2006 was as follows (dollars in thousands): (See MD&A Non-Interest income).
|
|
Three months ended |
|
||||
|
|
|
|
||||
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
4,096 |
|
$ |
4,439 |
|
Additions |
|
|
212 |
|
|
249 |
|
Amortization |
|
|
(317 |
) |
|
(329 |
) |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
3,991 |
|
$ |
4,359 |
|
|
|
|
|
|
|
|
|
6. Time Deposits
Time deposits in excess of $100,000 aggregated approximately $189,158 and $199,532 at March 31, 2007 and December 31, 2006, respectively.
At March 31, 2007, the scheduled annual maturities of all time deposits were approximately as follows:
2007 |
|
$ |
269,000 |
|
2008 |
|
|
45,000 |
|
2009 |
|
|
14,000 |
|
2010 |
|
|
18,000 |
|
2011 |
|
|
3,000 |
|
|
|
|
|
|
|
|
$ |
349,000 |
|
|
|
|
|
|
7. Junior Subordinated Debentures
At March 31, 2007, the Company had established four subsidiary grantor trusts for the purpose of issuing trust preferred securities (TPS) and common securities. The common securities were purchased by the Company, and the Companys investment in the common securities of $2.1 million is included in accrued interest and other assets in the accompanying condensed consolidated balance sheets.
The TPS are subordinated to any other borrowings of the Company, and no principal payments are required until the related maturity dates (unless conditions are met as described below). The significant terms of each individual trust are as follows:
10
Issuance Trust |
|
Issuance |
|
Maturity date |
|
Junior subordinated |
|
Interest |
|
Effective rate at 3/31/07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cascade Bancorp Trust I (D) |
|
12/31/04 |
|
3/15/2035 |
|
$ |
20,619 |
|
3-month |
|
7.15% |
Cascade Bancorp Statutory Trust II (E) |
|
3/31/2006 |
|
6/15/2036 |
|
|
13,660 |
|
6.619% (B) |
|
6.62% |
Cascade Bancorp Statutory Trust III (E) |
|
3/31/2006 |
|
6/15/2036 |
|
|
13,660 |
|
3-month |
|
6.68% |
Cascade Bancorp Statutory Trust IV (F) |
|
6/29/2006 |
|
9/15/2036 |
|
|
20,619 |
|
3-month |
|
6.89% |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
|
|
|
$ |
68,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
(A) |
The Junior Subordinated Debentures (Debentures) were issued with substantially the same terms as the TPS and are the sole assets of the related trusts. The Companys obligations under the Debentures and related agreements, taken together, constitute a full and irrevocable guarantee by the Company of the obligations of the trusts. |
|
(B) |
The Debentures bear a fixed quarterly interest rate for 20 quarters, at which time the rate begins to float on a quarterly basis based on the three-month London Inter-Bank Offered Rate (LIBOR) plus 1.33% thereafter until maturity. |
|
(C) |
The three-month LIBOR in effect as of December 31, 2006 was 5.36%. |
|
(D) |
The TPS may be called by the Company at par at any time subsequent to March 15, 2010 and may be redeemed earlier upon the occurrence of certain events that impact the income tax or the regulatory capital treatment of the TPS. |
|
(E) |
The TPS may be called by the Company at par at any time subsequent to June 15, 2011 and may be redeemed earlier upon the occurrence of certain events that impact the income tax or the regulatory capital treatment of the TPS. |
|
(F) |
The TPS may be called by the Company at par at any time subsequent to September 15, 2011 and may be redeemed earlier upon the occurrence of certain events that impact the income tax or the regulatory capital treatment of the TPS. |
In accordance with industry practice, the Companys liability for the common securities has been included with the Debentures in the accompanying consolidated balance sheets. Management believes that at March 31, 2007 and December 31, 2006, the TPS meet applicable regulatory guidelines to qualify as Tier I capital.
Interest payments on all TPS are made on a quarterly basis on March 15, June 15, September 15 and December 15.
8. Other Borrowings
At March 31, 2007 the Bank had a total of $92.2 million in long-term borrowings from FHLB with maturities from 2008 to 2025, bearing a weighted-average interest rate of 4.83%. In addition, at March 31, 2007, the Bank had short-term borrowings with FHLB and FRB of approximately $26.0 million and $.1 million, respectively. At year-end 2006, the Bank had a total of $120.4 million in long-term borrowings from FHLB bearing a weighted-average interest rate of 4.77%. In addition, at December 31, 2006, the Bank had short-term borrowings with FHLB and FRB of approximately $48.8 million and 2.1 million, respectively. See Liquidity and Sources of Funds section on page 21 for further discussion.
9. Basic and Diluted Earnings Per Common Share
The Companys basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. The Companys diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding plus the incremental shares arising from the dilutive effect of stock-based compensation. All share and per share amounts have been retroactively adjusted to reflect the 5-for-4 stock split declared in October, 2006.
11
The numerators and denominators used in computing basic and diluted earnings per common share for the three months ended March 31, 2007 and 2006 can be reconciled as follows (dollars and share data in thousands):
|
|
Three months ended |
|
||||
|
|
|
|
||||
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,521 |
|
$ |
5,928 |
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - basic |
|
|
28,269 |
|
|
21,280 |
|
Basic net income per common share |
|
$ |
0.34 |
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
Incremental shares arising from stock-based compensation |
|
|
438 |
|
|
650 |
|
Weighted-average shares outstanding - diluted |
|
|
28,707 |
|
|
21,930 |
|
Diluted net income per common share |
|
$ |
0.33 |
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
10. Stock-Based Compensation
Under the Companys stock-based compensation plans approved by shareholders, the Companys Board of Directors (the Board) - at their discretion - may grant Incentive Stock Options (ISOs), Non-qualified Stock Options (NSOs) and/or restricted stock to key employees and directors. These stock-based compensation programs were established to reward employees and directors who contribute to the success and profitability of the Company and to give such employees and directors a proprietary interest in the Company, thereby enhancing their personal interest in the Companys continued success. These programs also assist the Company in attracting and retaining key employees and qualified corporate directors.
In addition, within the stock-based compensation programs, the Board - at their discretion - may establish and prescribe grant guidelines including various terms and conditions for the granting of stock-based compensation and the total number of shares authorized for this purpose. For ISOs, the option strike price must be no less than 100% of the stock price at the grant date; and for NSOs, the option strike price can be no less than 85% of the stock price at the grant date, and all grants to date have been at 100%. Restricted stock must be at fair market value on grant date. Generally, options become exercisable in varying amounts based on years of employee service and vesting schedules. All options expire after a period of ten years from date of grant.
Stock-based compensation expense related to stock options for the three months ended March 31, 2007 and 2006 was approximately $210,000 and $137,000, respectively. As of March 31, 2007, there was approximately $1,896,000 of unrecognized compensation expense related to nonvested stock options, which will be recognized over the remaining vesting periods of the underlying stock options.
The Company has historically granted the majority of its annual stock-based compensation awards during the first quarter of each year. During the three months ended March 31, 2007 and 2006, the Company granted 132,962 and 62,170 stock options respectively. The fair value of stock options granted during the three months ended March 31, 2007 and 2006 was $9.19 and $7.28 per option, respectively. The Company used the Black-Scholes option-pricing model with the following weighted-average assumptions to value options granted for the three months ended March 31, 2007 and 2006:
|
|
Three months ended March 31, |
|
||||
|
|
|
|
||||
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
|
Dividend yield |
|
|
1.3 |
% |
|
1.4 |
% |
Expected volatility |
|
|
29.9 |
% |
|
34.2 |
% |
Risk-free interest rate |
|
|
4.8 |
% |
|
4.3 |
% |
Expected option lives |
|
|
6 years |
|
|
6 years |
|
The dividend yield is based on historical dividend information. The expected volatility is based on historical volatility of the Companys common stock price. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for periods corresponding with the expected lives of the options granted. The expected option lives represent the period of time that options are expected to be outstanding giving consideration to vesting schedules and historical exercise and forfeiture patterns.
12
The Black-Scholes option-pricing model was developed for use in estimating the fair value of publicly-traded options that have no vesting restrictions and are fully transferable. Additionally, the model requires the input of highly subjective assumptions. Because the Companys stock options have characteristics significantly different from those of publicly-traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in the opinion of the Companys management, the Black-Scholes option-pricing model does not necessarily provide a reliable single measure of the fair value of the Companys stock options.
The following table presents the activity related to stock options under all plans for the three months ended March 31, 2007:
|
|
Options |
|
Weighted |
|
Weighted |
|
Aggregate |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2006 |
|
|
770,095 |
|
$ |
9.79 |
|
|
N/A |
|
|
N/A |
|
Granted |
|
|
132,962 |
|
|
27.32 |
|
|
N/A |
|
|
N/A |
|
Exercised |
|
|
(83,382 |
) |
|
7.22 |
|
|
N/A |
|
|
N/A |
|
Cancelled |
|
|
(7,443 |
) |
|
19.57 |
|
|
N/A |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at March 31, 2007 |
|
|
812,232 |
|
$ |
12.83 |
|
|
6.36 |
|
$ |
10,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, 2007 |
|
|
550,402 |
|
$ |
10.76 |
|
|
8.10 |
|
$ |
9,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition, during the three months ended March 31, 2007, the Company granted a total of 32,488 shares of nonvested restricted stock at a weighted average grant date fair value of $27.32 per share (approximately $888,000). The restricted stock is scheduled to vest over periods of one to four years from the grant date. Restricted stock is reported as an increase to common stock in the accompanying condensed consolidated financial statements at March 31, 2007 and December 31, 2006. The unearned compensation on restricted stock is being amortized to expense on a straight-line basis over the applicable vesting periods.
As of March 31, 2007, unrecognized compensation cost related to nonvested restricted stock totaled approximately $2.0 million. Total expense recognized by the Company for nonvested restricted stock for the three months ended March 31, 2007 and 2006 was approximately $.2 million and $.1 million, respectively. The following table presents the activity for nonvested restricted stock for the three months ended March 31, 2007.
|
|
Number of |
|
Weighted- |
|
Weighted- |
|
|||
|
|
|
|
|
|
|
|
|
|
|
Nonvested as of December 31, 2006 |
|
|
104,724 |
|
$ |
18.58 |
|
|
N/A |
|
Granted |
|
|
32,488 |
|
|
27.32 |
|
|
N/A |
|
Vested |
|
|
(4,406 |
) |
|
20.99 |
|
|
N/A |
|
Cancelled |
|
|
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested as of March 31, 2007 |
|
|
132,806 |
|
$ |
20.15 |
|
|
2.45 |
|
|
|
|
|
|
|
|
|
|
|
|
11. Mergers and Acquisitions
F&M Holding Company
On April 20, 2006, the Company completed its acquisition of F&M to facilitate its expansion into the Idaho market. F&Ms banking subsidiary, Farmers & Merchants State Bank (FMSB), operated 11 branches in Boise, Idaho and surrounding markets, and now operates 12 branches under the Farmers & Merchants Bank name in Idaho. In exchange for 100% of the outstanding common stock of F&M, the stockholders of F&M received 6,656,249 shares of the Companys common stock (valued at $124,552) and $22,500 in cash (less a holdback of $3,902 related to the uncertain collectibility of specific F&M loans). The common stock issued was valued at $18.71 per share, representing an average of the closing market prices for two days before and after the date the acquisition terms were agreed to and announced.
13
Upon completion of this acquisition, F&M was merged into the Company. Accordingly, the assets and liabilities of F&M were recorded in the Companys consolidated balance sheet at their estimated fair market values as of the acquisition date. The acquisition was accounted for using the purchase method of accounting.
At March 31, 2007, the holdback amount has been reduced to $1.9 million as certain loans have either paid-off or been upgraded and therefore removed from the holdback.
The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the date of acquisition (dollars in thousands):
Cash and cash equivalents |
|
$ |
(8,350 |
) |
Investment securities |
|
|
106,159 |
|
Loans, net |
|
|
493,900 |
|
Premises and equipment, net |
|
|
16,479 |
|
Core deposit intangibles (CDI) |
|
|
11,800 |
|
Goodwill |
|
|
98,695 |
|
Other assets |
|
|
3,302 |
|
|
|
|
|
|
Total assets acquired |
|
|
721,985 |
|
Deposits |
|
|
482,707 |
|
Borrowings |
|
|
82,589 |
|
Other liabilities |
|
|
9,637 |
|
|
|
|
|
|
Total liabilities assumed |
|
|
574,933 |
|
|
|
|
|
|
Total purchase price |
|
$ |
147,052 |
|
|
|
|
|
|
The accompanying condensed consolidated financial statements include the results of operations of F&M only since April 20, 2006, the date of acquisition. The following unaudited summary information presents the condensed consolidated results of operations of the Company for the three months ended March 31, 2007 and 2006 on a pro forma basis, as if the F&M acquisition had occurred at January 1, 2006 (dollars and share data in thousands):
|
|
Three Months Ended |
|
||||
|
|
|
|
||||
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
26,546 |
|
$ |
24,426 |
|
Loan loss provision |
|
|
1,250 |
|
|
1,700 |
|
|
|
|
|
|
|
|
|
Net interest income after loan loss provision |
|
|
25,296 |
|
|
22,726 |
|
Non-interest income |
|
|
5,546 |
|
|
4,684 |
|
Non-interest expense |
|
|
15,600 |
|
|
14,651 |
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
15,242 |
|
|
12,759 |
|
Provision for income taxes |
|
|
5,721 |
|
|
4,811 |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,521 |
|
$ |
7,948 |
|
|
|
|
|
|
|
|
|
Net income per common share |
|
|
|
|
|
|
|
Basic |
|
$ |
0.34 |
|
$ |
0.28 |
|
Diluted |
|
$ |
0.33 |
|
$ |
0.28 |
|
Average shares outstanding |
|
|
|
|
|
|
|
Basic |
|
|
28,269 |
|
|
27,936 |
|
Diluted |
|
|
28,707 |
|
|
28,626 |
|
The pro forma results include the accretion of the fair value adjustments on loans and deposits, the additional depreciation on fair value adjustments of premises, and the amortization of the CDI. The pro forma number of average common shares outstanding includes adjustments for shares issued for the acquisition and the impact of additional dilutive securities. The pro forma results presented do not reflect potential cost savings or revenue enhancements anticipated from the acquisition, and are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of the periods presented, nor are they necessarily indicative of future consolidated results.
14
12. Core Deposit Intangibles
Net unamortized CDI totaled $10.7 million at March 31, 2007 and $11.1 million at December 31, 2006. Amortization expense related to the CDI during the three months ended March 31, 2007 and 2006 totaled $395,000 and $26,000, respectively.
Annual amortization expense for the net CDI is estimated to be as follows (in thousands):
Year ending December 31, |
|
|||
|
|
|||
2007 |
|
$ |
1,186 |
|
2008 |
|
|
1,581 |
|
2009 |
|
|
1,533 |
|
2010 |
|
|
1,476 |
|
2011 |
|
|
1,476 |
|
After 2011 |
|
|
3,435 |
|
13. Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 155, Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140. SFAS No. 155 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to permit fair value remeasurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided that the whole instrument is accounted for on a fair value basis. SFAS No. 155 also amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to allow a qualifying special-purpose entity to hold a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 was effective for all financial instruments acquired or issued by the Company after January 1, 2007. The adoption of SFAS No. 155 did not have a material impact on the Companys condensed consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140. SFAS No. 156 requires all separately recognized servicing assets and liabilities to be initially measured at fair value. In addition, entities are permitted to choose to either subsequently measure servicing rights at fair value and report changes in fair value in earnings, or amortize servicing rights in proportion to and over the estimated net servicing income or loss and assess the rights for impairment. Beginning with the fiscal year in which an entity adopts SFAS No. 156, it may elect to subsequently measure a class of servicing assets and liabilities at fair value. Post adoption, an entity may make this election as of the beginning of any fiscal year. An entity that elects to subsequently measure a class of servicing assets and liabilities at fair value should apply that election to all new and existing recognized servicing assets and liabilities within that class. The effect of remeasuring an existing class of servicing assets and liabilities at fair value is to be reported as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The statement also requires additional disclosures. SFAS No. 156 was effective as of the beginning of an entitys first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 156 did not have a material impact on the Companys condensed consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No 109 (FIN 48). FIN 48 establishes a recognition threshold and measurement for income tax positions recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a two-step evaluation process for tax positions. The first step is recognition and the second is measurement. For recognition, an enterprise judgmentally determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position. If the tax position meets the more-likely-than-not recognition threshold it is measured and recognized in the financial statements. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. Tax positions that meet the more-likely-than-not recognition threshold at the effective date of FIN 48 may be recognized or, continue to be recognized, upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48 shall be reported as an adjustment to the opening balance of retained earnings for that fiscal year. FIN 48 was effective for fiscal years beginning after December 15, 2006. Accordingly, the Company adopted FIN 48 during the first quarter of 2007. The adoption of FIN 48 did not have a material impact on the Companys condensed consolidated financial statements.
15
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. SFAS No. 157 does not require any new fair value measurements; rather, it provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. The Company is currently evaluating the impact that SFAS No. 157 may have on its future consolidated financial statements.
On September 20, 2006, the FASB ratified Emerging Issue Task Force (EITF) Issue 06-5, Accounting for Purchases of Life Insurance Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (FTB 85-4), Accounting for Purchases of Life Insurance (EITF 06-5). EITF 06-5 addresses the methods by which an entity should determine the amounts that could be realized under an insurance contract at the consolidated balance sheet date when applying FTB 85-4, and whether the determination should be on an individual or group policy basis. EIFT 06-5 is effective for fiscal years beginning after December 15, 2006. The adoption of EITF 06-5 did not have a material impact on the Companys condensed consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 provides entities with an option to report certain financial assets and liabilities at fair value. If elected, subsequent changes in fair value would be reported in earnings and the Company would be required to make additional disclosures related to the election to use fair value reporting. It also requires the Company to display the fair value of those assets and liabilities on the face of the balance sheet for which the Company has elected to use fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that SFAS No. 159 may have on its future consolidated financial statements.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Companys unaudited condensed consolidated financial statements and the notes thereto as of March 31, 2007 and the operating results for the three months then ended, included elsewhere in this report.
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 States of Oregon and Idaho generally, including the Oregon communities of Central Oregon, Northwest Oregon, Southern Oregon, and the Idaho communities in Ada, Canyon and Payette counties, specifically. 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 Companys 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.
16
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 Companys 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. The reserve may be 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 Companys methodology of assessing the adequacy of the reserve for loan losses, see Managements Discussion and Analysis of Financial Condition and Results of Operation in the Companys Annual Report on Form 10K.
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. On a quarterly basis, 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 Managements Discussion and Analysis of Financial Condition and Results of Operations-Non-Interest Income, and footnote 6 of the Condensed Consolidated Financial Statements.
Highlights for the First Quarter of 2007
|
|
Earnings Per Share: at $0.33 up 22.6% year-over-year and down compared to $0.36 for the immediately preceding linked-quarter which included $.02 per share of tax related benefits |
|
|
|
|
|
Net Income: up 60.6% year-over-year at $9.5 million and down compared to $10.2 million for the immediately preceding linked-quarter |
|
|
|
|
|
Loan Growth: loans up 70.6% year-over-year and 9.5% on linked-quarter basis (annualized) |
|
|
|
|
|
Deposit Growth: deposits up 60.8% year-over-year and 32.0% on a linked-quarter basis (annualized) |
|
|
|
|
|
Net Interest Margin: decreased to 5.34% vs. 5.85% year-over-year and 5.54% for the linked-quarter |
|
|
|
|
|
Credit Quality: delinquent loans at .05% of total loans; net charge-offs at .12% (annualized) |
Financial Performance for the First Quarter:
The Company reported first quarter 2007 diluted earnings per share (EPS) at $0.33 per share, up 22.6% from the $0.27 reported for the same quarter in 2006. Net income for the first quarter of 2007 was $9.5 million versus $5.9 million for the first quarter of 2006. The year-over-year increase was largely due to Cascades inclusion of Farmers & Merchants State Bank (F&M) of Idaho which was acquired on April 20, 2006. The first quarters EPS of $0.33 was down from $0.36 for the prior quarter ended December 31, 2006, which benefited from tax related adjustments of approximately $0.02 per share. The net interest margin continued to compress at 5.34% for the quarter due to higher cost of funds and seasonal factors affecting average non-interest bearing deposits (see discussion below). Return on equity was 14.7% for the first quarter of 2007 and return on assets was a solid 1.70%.
17
Loan and deposit volumes turned upward towards the end of the first quarter of 2007, indicating the Company may be emerging from its seasonal slow period that has been exacerbated by the nationwide downturn in real estate.
Loan Growth and Credit Quality:
At March 31, 2007, Cascades loan portfolio was $1.9 billion, up 70.6% compared to the year ago period, largely due to Cascades inclusion of loans from the F&M acquisition on April 20, 2006. Loan growth during the current quarter was approximately $44.6 million or 9.5% on a linked-quarter basis (annualized). Because much of this loan growth occurred late in the quarter, its effect on interest income was muted for the first quarter as a whole.
Credit quality metrics remain solid at March 31, 2007, with delinquent loans greater than 30 days past due at 0.05% of total loans compared to 0.18% at December 31, 2006. Meanwhile, first quarter of 2007 net loan charge-offs were 0.12% (annualized) of total average loans as compared to 0.17% for the linked-quarter. Non-performing assets (NPAs) were at $7.7 million or 0.33% of total assets, compared to $3.0 million at year-end 2006. The increase in NPAs is concentrated in three real estate development loans in the Southern Oregon region where real estate has softened more than in other markets within Cascades footprint. These NPAs are adequately reserved for in Cascades reserve for loan losses. Note that residential real estate mortgage delinquency rates in the State of Oregon were the second lowest in the country at 2.6% for the fourth quarter of 2006, while Idaho was tenth at 3.4% compared to a national average of 4.95%. As an aside, and although not a broad based indicator, the delinquency rate within Cascades portfolio of originated/sold residential mortgage loans was under 0.25% in Oregon and under 0.50% in Idaho.
Cascades provision for loan losses and commitments was $1.3 million for the first quarter of 2007, compared to $1.1 million in the year ago period and $1.5 million for the linked-quarter. The reserve for loan (and commitment) losses was stable at 1.42% of total loans at March 31, 2007, unchanged from December 31, 2006, and compared to 1.40% a year ago. Of this aggregate amount, the portion classified as a reserve for loan commitments is approximately 0.18% of gross loans. This amount is recorded as a separate liability in the accompanying condensed consolidated financial statements. Management believes these reserves are at an appropriate level based upon its evaluation and analysis of portfolio credit quality and prevailing economic conditions.
Deposit Growth:
At March 31, 2007, deposits were $1.8 billion, up 60.8% compared to the year ago period, largely due to the acquisition of F&M in April 2006. While average deposits were flat at $1.7 billion on a linked-quarter basis, Cascade experienced a rebound in deposits late in the first quarter of 2007. At March 31, 2007, deposits were up 32.0% (annualized) compared to December 31, 2006. Included in this increase was a relatively large customer relationship deposit and a modest increase in brokered funds which accounted for approximately one half of this increase.
Importantly, it appears that non-interest bearing deposits may have stabilized after several quarters of decline. At quarter-end March 31, 2007, non-interest bearing deposits were comparable to balances at December 31, 2006. However, average non-interest bearing deposits during the first quarter of 2007 declined as compared to the immediately preceding quarter, due to seasonal slowing exacerbated by the nationwide downturn in real estate. Average non-interest bearing deposits were 28.7% of total deposits for the current quarter compared to an average of 31.9% in the prior quarter. At March 31, 2007, non-interest bearing balances were 28.2% of total deposits compared to 30.7% at year-end 2006.
Net Interest Margin and Interest Rate Risk:
Cascade reported a decline in its net interest margin (NIM) to 5.34% for the first quarter of 2007, compared to 5.54% for the preceding quarter and 5.86% for the year ago quarter. The NIM compression was primarily a function of higher overall cost of funds resulting from the decline in average non-interest bearing deposits discussed above. The overall cost of funds (including interest bearing and non-interest bearing) for the first quarter of 2007 was 3.03% as compared to 2.81% in the immediately preceding quarter and 1.72% for the year ago period. The average cost of funds paid on interest bearing liabilities for the first quarter of 2007 was 4.00% as compared to 3.85% in the preceding quarter and 2.71% for the year ago quarter. Yields on earning assets during the first quarter of 2007 were modestly higher at 8.31% compared to 8.28% in the immediately preceding quarter and 7.52% in the year ago quarter. Looking forward, management expects the NIM may continue to ease as a result of ongoing competitive pricing pressures and a persistent flat yield curve that can affect both rate and mix of funding sources.
18
The NIM can also be affected by factors beyond market interest rates, including loan or deposit volume shifts and/or aggressive rate offerings by competitor institutions. Cascades financial model indicates a relatively stable interest rate risk profile within a reasonable range of rate movements around the forward rates currently predicted by financial markets. Because of its relatively high proportion of non-interest bearing funds, Cascades NIM is most adversely affected in the event short term market rates fall to a very low level. See cautionary Forward Looking Statements and Cascades Form 10-K report for further information on risk factors including interest rate risk.
Non-Interest Income and Expense:
Non-interest income for the first quarter of 2007 was $5.5 million, 72.0% above the year ago period primarily due to the inclusion of F&M results and as compared to $4.7 million on a linked-quarter basis. For the first quarter of 2007, residential mortgage originations totaled $42.5 million, up 11.9% from the year ago period. Related net mortgage revenue was $.7 million, an increase of 22.1% compared to $.6 million for the year ago period and compared to $.8 million for the prior quarter.
Non-interest expense for the first quarter of 2007 increased 64.2% compared to the first quarter of 2006 primarily as a result of the acquisition of F&M. As compared to the immediately preceding quarter, non-interest expense was up 2.9% mainly due to the effect of annual merit salary increases as well as increased staffing levels to support Cascades infrastructure and ongoing growth goals.
RESULTS OF OPERATIONS Three Months ended March 31, 2007 and 2006
Net Interest Income
With the acquisition of F&M and ongoing growth in its Oregon markets, net interest income increased 57.0% for the first quarter ended March 31, 2007, as compared to the same quarter in 2006. Higher yields earned on this larger base of earning assets exceeded the affect of higher cost of funds on incremental liability balances. During the first quarter of 2007, yields earned on assets increased to 8.31% for the current quarter, as compared to 8.28% in the immediately preceding quarter and 7.52% for the year ago quarter. Meanwhile, the average rates paid on interest bearing liabilities for the quarter ended March 31, 2007 was at 4.00% versus 3.85% in the prior quarter and 2.71% a year ago.
Primarily because of higher loan volumes and yields, total interest income increased approximately $19.7 million (or 90.4%) for the three months ended March 31, 2007 as compared to the same period in 2006. Increased volumes of interest bearing deposits and borrowings in conjunction with higher interest rates paid caused total interest expense to increase approximately $10.0 million (or 207.7%) for the three months ended March 31, 2007, as compared to the same period in 2006.
Average Balances and Average Rates Earned and Paid
The following table sets forth for the quarter ended March 31, 2007 and 2006 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):
19
|
|
Quarter ended March 31, 2007 |
|
Quarter ended March 31, 2006 |
|
||||||||||||||
|
|
|
|
|
|
||||||||||||||
|
|
Average |
|
Interest |
|
Average |
|
Average |
|
Interest |
|
Average |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable securities |
|
$ |
98,906 |
|
$ |
1,316 |
|
|
5.40 |
% |
$ |
54,661 |
|
$ |
556 |
|
|
4.13 |
% |
Non-taxable securities (1) |
|
|
9,095 |
|
|
107 |
|
|
4.77 |
% |
|
6,450 |
|
|
65 |
|
|
4.09 |
% |
Interest bearing balances due from FHLB |
|
|
6,260 |
|
|
81 |
|
|
5.25 |
% |
|
11,356 |
|
|
120 |
|
|
4.29 |
% |
Federal funds sold |
|
|
4,567 |
|
|
56 |
|
|
4.97 |
% |
|
24,291 |
|
|
265 |
|
|
4.42 |
% |
Federal Home Loan Bank stock |
|
|
6,991 |
|
|
7 |
|
|
0.41 |
% |
|
3,241 |
|
|
|
|
|
0.00 |
% |
Loans (1)(2)(3)(4) |
|
|
1,897,656 |
|
|
39,911 |
|
|
8.53 |
% |
|
1,076,155 |
|
|
20,800 |
|
|
7.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets/interest income |
|
|
2,023,475 |
|
|
41,478 |
|
|
8.31 |
% |
|
1,176,154 |
|
|
21,806 |
|
|
7.52 |
% |
Reserve for loan losses |
|
|
(23,975 |
) |
|
|
|
|
|
|
|
(14,931 |
) |
|
|
|
|
|
|
Cash and due from banks |
|
|
66,011 |
|
|
|
|
|
|
|
|
47,534 |
|
|
|
|
|
|
|
Premises and equipment, net |
|
|
39,091 |
|
|
|
|
|
|
|
|
22,759 |
|
|
|
|
|
|
|
Bank-owned life insurance |
|
|
31,902 |
|
|
|
|
|
|
|
|
16,105 |
|
|
|
|
|
|
|
Accrued interest and other assets |
|
|
140,944 |
|
|
|
|
|
|
|
|
15,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,277,448 |
|
|
|
|
|
|
|
$ |
1,262,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits |
|
$ |
823,393 |
|
$ |
6,875 |
|
|
3.39 |
% |
$ |
533,033 |
|
$ |
3,317 |
|
|
2.52 |
% |
Savings deposits |
|
|
45,120 |
|
|
57 |
|
|
0.51 |
% |
|
34,600 |
|
|
29 |
|
|
0.34 |
% |
Time deposits |
|
|
319,281 |
|
|
3,598 |
|
|
4.57 |
% |
|
69,851 |
|
|
513 |
|
|
2.98 |
% |
Other borrowings and F&M Holdback |
|
|
316,868 |
|
|
4,301 |
|
|
5.50 |
% |
|
84,341 |
|
|
961 |
|
|
4.62 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities/interest expense |
|
|
1,504,662 |
|
|
14,831 |
|
|
4.00 |
% |
|
721,825 |
|
|
4,820 |
|
|
2.71 |
% |
Demand deposits |
|
|
478,677 |
|
|
|
|
|
|
|
|
416,803 |
|
|
|
|
|
|
|
Other liabilities |
|
|
30,812 |
|
|
|
|
|
|
|
|
18,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,014,151 |
|
|
|
|
|
|
|
|
1,156,784 |
|
|
|
|
|
|
|
Stockholders equity |
|
|
263,297 |
|
|
|
|
|
|
|
|
106,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
2,277,448 |
|
|
|
|
|
|
|
$ |
1,262,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net interest income |
|
|
|
|
$ |
26,647 |
|
|
|
|
|
|
|
$ |
16,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread |
|
|
|
|
|
|
|
|
4.32 |
% |
|
|
|
|
|
|
|
4.81 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income to earning assets (5) |
|
|
|
|
|
|
|
|
5.34 |
% |
|
|
|
|
|
|
|
5.86 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Yields on tax-exempt municipal loans and securities have been stated on a tax-equivalent basis. |
(2) |
Average non-accrual loans included in the computation of average loans was insignificant for 2007 and 2006. |
(3) |
Loan related fees recognized during the period and included in the yield calculation totalled approximately $1,471,000 in 2007 and $849,000 in 2006. |
(4) |
Includes mortgage loans held for sale. |
(5) |
NIM has been adjusted to reflect municipal loans and securities on a tax-equivalent basis. |
Analysis of Changes in Interest Income and Expense
The following table shows the dollar amount of increase (decrease) in the Companys consolidated interest income and expense for the quarter ended March 31, 2007, 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):
20
|
|
2007 compared to 2006 |
|
|||||||
|
|
|
|
|||||||
|
|
Total |
|
Amount of Change |
|
|||||
|
|
|
|
|
||||||
|
|
|
Volume |
|
Rate |
|
||||
|
|
|
|
|
|
|
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
19,111 |
|
$ |
15,878 |
|
$ |
3,233 |
|
Investments and other |
|
|
561 |
|
|
208 |
|
|
353 |
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
19,672 |
|
|
16,086 |
|
|
3,586 |
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
Interest on deposits: |
|
|
|
|
|
|
|
|
|
|
Interest bearing demand |
|
|
3,558 |
|
|
1,807 |
|
|
1,751 |
|
Savings |
|
|
28 |
|
|
9 |
|
|
19 |
|
Time deposits |
|
|
3,085 |
|
|
1,832 |
|
|
1,253 |
|
Other borrowings |
|
|
3,340 |
|
|
2,649 |
|
|
691 |
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
10,011 |
|
|
6,297 |
|
|
3,714 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
9,661 |
|
$ |
9,789 |
|
$ |
(128 |
) |
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan Losses and Unfunded Commitments
At March 31, 2007, the reserve for losses on loans and loan commitments was 1.42% of outstanding loans, as compared to 1.40% for the year ago period. The loan loss provision was $1.1 million for first quarter of 2007 and 2006, respectively. Provision expense is determined by the Companys ongoing analytical and evaluative assessment of the adequacy of the reserve for loan losses. At this date, management believes that its reserve for loan losses is at an appropriate level under current circumstances and prevailing economic conditions.
Non-Interest Income
Non-interest income increased 72.0% for the quarter ended March 31, 2007 compared to the year ago period, largely due to the acquisition of F&M. Increases were evident in service charges on deposit accounts, increased income related to card issuer and merchant services, earnings on bank-owned life insurance and other income. Service charge revenue increased primarily due to increased customer base in connection with the F&M acquisition and the utilization of overdraft protection products. Card issuer and merchant services income increased primarily as a result of the F&M acquisition. Earnings on bank-owned life insurance increased due to the purchase of additional life insurance contracts late in the fourth quarter of 2006. Other income increased as a result of F&M and a gain of approximately $.4 million on the sale of the Companys cascade building located in the old mill district of Bend.
Mortgage revenue increased due to an increase in mortgage originations, as the Company originated $42.5 million in residential mortgages during the quarter ended March 31, 2007, compared to $38.0 million for the year ago quarter and $47.1 million for the immediately preceding quarter.
Generally accepted accounting principles allow for MSRs to be carried at the lower of origination value less accumulated amortization (book value) or fair value. At March 31, 2007, the Company serviced $493.9 million in mortgage loans on behalf of its customers, representing approximately 3,700 mortgage loans. The Companys MSRs had a book value of $4.0 million compared to a fair value of approximately $5.4 million. Thus, there was no MSR valuation adjustment for the current quarter. At March 31, 2007, expressed as a percentage of loans serviced, the book value of MSR was .81% of serviced mortgage loans, while fair value was approximately 1.10% of serviced mortgages. Fair value as a percentage of loans serviced was estimated at 1.15% a year ago.
21
Non-Interest Expense
Non-interest expense increased 66.3% for the first quarter of 2007 as compared to the first quarter of 2006. Expenses increased primarily due to the acquisition of F&M and attendant higher staffing levels, occupancy related costs and CDI amortization. In addition, other expenses grew with strong business volumes.
Income Taxes
Income tax expense increased between the periods presented primarily as a result of higher pre-tax income.
FINANCIAL CONDITION
At March 31, 2007 total assets increased 3.0% to $2.3 billion compared to $2.2 billion at December 31, 2006. Increases in cash and cash equivalents and organic loan growth during the first quarter of 2007 contributed to the overall increase. Asset growth was funded primarily by increased interest-bearing deposits during the first quarter of 2007. Included in this increase is a relatively large customer relationship deposit and a modest increase in brokered funds which accounted for approximately one half of this increase. Also, deposit growth is a function of ongoing growth in relationship customer balances and is positively impacted by the strong economies in which Cascade operates. In addition, the Company was able to reduce its federal funds purchased and other borrowings in the first quarter of 2007, as a result of increased deposits.
The Company had no material off balance sheet derivative financial instruments as of March 31, 2007 and December 31, 2006.
LIQUIDITY AND SOURCES OF FUNDS
The objective of liquidity management is to maintain ample cash flows to meet obligations for depositor withdrawals, fund the borrowing needs of loan customers, and to fund ongoing operations. Core relationship deposits are the primary source of the Banks liquidity. As such, the Bank focuses on deposit relationships with local business and consumer clients who maintain multiple accounts and services at the Bank. Management views such deposits as the foundation of its long-term liquidity because it believes such core deposits are more stable and less sensitive to changing interest rates and other economic factors compared to large time deposits or wholesale purchased funds. The Banks customer relationship strategy has resulted in a relatively higher percentage of its deposits being held in checking and money market accounts, and a lesser percentage in time deposits. The Banks present funding mix is diverse, with approximately 73% of its checking account balances arising from business and public accounts and 27% from consumers. The composition of money market and interest-bearing demand accounts was 48% business and 52% consumer. Management invests excess funds in short-term and overnight money market instruments.
To supplement its funding sources, the Bank utilizes brokered deposits. At March 31, 2007, brokered deposits totaled approximately $95.5 million, down from $114.3 million at December 31, 2006. A further source of funds and liquidity is the Companys capability to borrow from reliable counterparties. The Bank utilizes its investment securities, certain loans and FHLB Stock to provide collateral to support its borrowing needs.
Policy requires the analysis and testing of liquidity to ensure ample cash flow is available under a range of circumstances. Management believes that its focus on core relationship deposits coupled with access to borrowing through reliable counterparties provides reasonable and prudent assurance that ample liquidity is available. However, depositor or counterparty behavior could change in response to competition, economic or market situations including relative returns available in stock or bond markets or other unforeseen circumstances, which could have liquidity implications that may require different strategic or operational actions.
The Banks primary counterparty for borrowing purposes is the Federal Home Loan Bank (FHLB). At March 31, 2007, the FHLB had extended the Bank a secured line of credit of $785.6 million that may be accessed for short or long-term borrowings given sufficient qualifying collateral. As of March 31, 2007, the Bank had collateral with which to pledge for FHLB borrowings totaling $327.1 million. The Bank also had $57.4 million in short-term borrowing availability from the Federal Reserve Bank that requires specific qualifying collateral. In addition, the Bank maintained unsecured lines of credit totaling $105.0 million for the purchase of funds on a short-term basis from several commercial bank counterparties. At March 31, 2007, the Bank had remaining available borrowing capacity on its aggregate lines of credit totaling $823.3 million given sufficient collateral. However at March 31, 2007, the Companys collateral availability limited such borrowing capacity to approximately $489.5 million in aggregate.
22
Liquidity may be affected by the Banks routine commitments to extend credit. Historically a significant portion of such commitments (such as lines of credit) have expired or terminated without funding. In addition, more than one-third of total commitments pertain to various construction projects. Under the terms of such construction commitments, completion of specified project benchmarks must be certified before funds may be drawn. At March 31, 2007, the Bank had approximately $781.6 million in outstanding commitments to extend credit, compared to approximately $713.9 million at year-end 2006. Management believes that the Banks available resources will be sufficient to fund its commitments in the normal course of business.
JUNIOR SUBORDINATED DEBENTURES
The purpose of the Companys $68.6 million of trust preferred securities was to fund the cash portion of the F&M acquisition, to support general corporate purposes and to augment regulatory capital. Management believes the securities qualify as Tier 1 regulatory capital and are priced at a competitive level. The Companys obligations under the Debentures and related agreements, taken together, constitute a full and irrevocable guarantee by the Company of the obligations of the Trusts. The TPS are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the Indenture related to the Debentures. The TPS may be called by the Company at par at varying times subsequent to September 15, 2011, and may be redeemed earlier upon the occurrence of certain events that impact the income tax or the regulatory capital treatment of the TPS. See footnote 8 of the accompanying condensed consolidated financial statements for additional details.
OTHER BORROWINGS
At March 31, 2007 the Bank had a total of $92.2 million in long-term borrowings from FHLB with maturities from 2008 to 2025, bearing a weighted-average interest rate of 4.83%. In addition, at March 31, 2007, the Bank had short-term borrowings with FHLB and FRB of approximately $26.0 million and $.1 million, respectively. At year-end 2006, the Bank had a total of $120.4 million in long-term borrowings from FHLB bearing a weighted-average interest rate of 4.77%. In addition, at December 31, 2006, the Bank had short-term borrowings with FHLB and FRB of approximately $48.8 million and 2.1 million, respectively.
CAPITAL RESOURCES
The Companys total stockholders equity at March 31, 2007 was $269.3 million, an increase of $8.2 million from December 31, 2006. The increase primarily resulted from net income for the three months ended March 31, 2007 of $9.5 million, less cash dividends paid to shareholders of $2.6 million during the same period. In addition, at March 31, 2007 the Company had accumulated other comprehensive income of approximately $.9 million.
At March 31, 2007, the Companys Tier 1 and total risked-based capital ratios under the Federal Reserve Boards (FRB) risk-based capital guidelines were 10.20% and 11.47%, respectively. The FRBs minimum risk-based capital ratio guidelines for Tier 1 and total capital are 4% and 8%, respectively.
OFF-BALANCE SHEET ARRANGEMENTS
A summary of the Banks off-balance sheet commitments at March 31, 2007 and December 31, 2006 is included in the following table (dollars in thousands):
|
|
March 31, |
|
December 31, |
|
||
|
|
|
|
|
|
|
|
Commitments to extend credit |
|
$ |
724,777 |
|
$ |
660,786 |
|
Commitments under credit card lines of credit |
|
|
31,021 |
|
|
29,284 |
|
Standby letters of credit |
|
|
25,851 |
|
|
23,825 |
|
|
|
|
|
|
|
|
|
Total off-balance sheet financial instruments |
|
$ |
781,649 |
|
$ |
713,895 |
|
|
|
|
|
|
|
|
|
23
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. The Companys market risk arises principally from interest rate risk in its lending, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Management considers interest rate risk to be a significant market risk, which could have the largest material effect on the Companys financial condition and results of operations.
There has not been any material change in the market risk disclosure contained in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedure
As required by Rule 13a-15 under the Exchange Act of 1934, the Company carried out an evaluation of the effectiveness of the design and operation of the Companys disclosure controls and procedures as of the end of the period covered by this report. This evaluation was carried out under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and the Companys Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective as of the end of the period covered by this report.
Changes in Internal Controls
During the first quarter of 2007, the Company had no changes to identified internal controls that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
24
There are no material changes to the risk factors disclosed in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
Item 4. Submission of Matters to a Vote of Security Holders
(a), (b), (c): The Company held its annual meeting of shareholders on April 23, 2007. The record date for the meeting was February 23, 2007, at which time there were 28,410,764 shares of common stock outstanding. Holders of 26,183,185 shares (92.2%) were present at the meeting in person or by proxy.
Proposal 1. Election of Directors:
The following persons were elected as directors to serve the terms stated below:
Name |
|
Term expires |
|
Votes FOR |
|
Votes WITHHELD |
|
|
|
|
|
|
|
Gary L. Hoffman |
|
2010 |
|
25,975,988 |
|
161,886 |
Patricia L. Moss |
|
2010 |
|
26,050,546 |
|
87,338 |
Thomas M. Wells |
|
2010 |
|
26,003,081 |
|
134,803 |
The following directors continue with terms of office that expire after the annual meeting: Gary L. Capps (2008), James E. Petersen (2008), Ryan R. Patrick (2008), Jerol E. Andres (2009), Henry H. Hewitt (2009), Judith A. Johansen (2009), and Clarence Jones (2009.
Proposal 2. |
Ratifying the appointment of Symonds, Evans & Company, P.C. as the Companys independent auditors for 2007: |
Votes FOR |
|
Votes AGAINST |
|
Votes ABSTAIN |
|
|
|
|
|
26,060,334 |
|
54,660 |
|
22,889 |
(a) Exhibits
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32 Certification Pursuant to Section 906
25
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
CASCADE BANCORP |
|
|
|
|
|
(Registrant) |
|
|
|
|
|
|
|
Date 5/7/07 |
By |
/s/ Patricia L. Moss |
|
|
|
|
|
Patricia L. Moss, President & CEO |
|
|
|
|
|
|
Date 5/7/07 |
By |
/s/ Gregory D. Newton |
|
|
|
|
|
Gregory D. Newton, EVP/Chief Financial Officer |
26