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Cascade Bancorp 10-K 2005 Documents found in this filing:SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
For the
fiscal year ended: December 31, 2004
For the
transition period from ______ to ______
Commission file number: 0-23322
CASCADE
BANCORP
(Name of registrant as specified in its charter)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value (Title of Class) Indicate by check mark whether the registrant: (1)
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 [ ]
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[ ]
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of the voting stock held
by non-affiliates of the Registrant at June 30, 2004 (the last business day of the most recent second quarter) was $297,168,176 (based on the closing
price as quoted on the NASDAQ National Market on that date).
Indicate the number of shares outstanding of each of
the registrant’s classes of common stock, as of the latest practicable date. 16,825,928 shares of no par value Common Stock on February 28,
2005.
DOCUMENTS INCORPORATED BY REFERENCE Part III is incorporated by reference from the issuer’s definitive proxy statement for the annual meeting of shareholders to be held on April 25, 2005. CASCADE BANCORP
PART I ITEM 1. BUSINESS Company Cascade Bancorp (Bancorp) is an Oregon chartered
Financial Holding Company formed in 1990 and headquartered in Bend, Oregon, with its principal subsidiary Bank of the Cascades (the Bank). Together
these entities are referred to as (“the Company”). At December 31, 2004 the Company had total consolidated assets of approximately $1
billion, net loans of approximately $847 million and deposits of approximately $851 million.
Bank of the Cascades The Bank was chartered as an Oregon State bank and
opened for business in 1977, with headquarters in Bend, Oregon. The Bank is a community bank offering a full range of financial services to its
business and consumer clients, including residential mortgage, trust and investments. With the sustained increase in population and economy of its
Central Oregon market, the Company has enjoyed rapid growth in assets and profitability over the past decade. More recently the Company has diversified
its geographic footprint by expanding into growth markets of Portland and Southern Oregon. By year-end 2004 loans and deposits in those markets had
risen to 27% and 17%, respectively, of Company-wide totals. With each and every market expanding at a healthy pace in 2004, total assets reached $1
billion by year-end, up 36.8% for the year. At the end of 2004, the Bank had a total of 21 branches serving the communities in Central Oregon,
Salem/Keizer, Southern Oregon and Portland, up from 15 branches at year-end 2003.
On January 1, 2004 the Company completed its
acquisition of the $46 million (assets) Community Bank of Grants Pass, Oregon to complement its expansion into Southern Oregon. In addition, during
2004, the Company opened a total of five new offices between its Central and Southern Oregon markets. In Central Oregon, a branch opened in the Old
Mill district, East Bend in the Forum shopping center and West Bend in the new Safeway. In Southern Oregon, branches were opened in South Grants Pass
and Ashland. These actions have diversified the Bank’s markets and expanded its growth potential.
A significant portion of the Bank’s assets are
in Deschutes County, where it is the market share leader in customer deposits holding 33% market share. The Bank is also the market leader in
construction and commercial real estate lending, and has a large share of the local residential mortgage market. Over the past decade the population of
Deschutes County has grown at a rate among the fastest of all counties in the United States. This rapid growth has been driven by in-migration of
persons seeking a better quality of life. The Region is ranked in the “Six Best Vacation Destinations and Hometowns” by Time Magazine
and as one of the “Five Best Places to Retire” and the “Fourth Best Place for Families to Recreate in the United States” by
Money Magazine. With this growth has come increased business volume in real estate, service, healthcare, professional, and tourism/recreational
industries.
With a personal-touch relationship banking strategy,
the Bank offers a broad range of commercial and retail banking services to its customers. Lending activities serve small to medium-sized businesses,
municipalities and public organizations, professional and consumer relationships. The Bank provides commercial real estate loans, real estate
construction and development loans, commercial and industrial loans as well as consumer installment, line-of-credit, credit card, and home equity
loans. The Bank originates and services residential mortgage loans that are typically sold on the secondary market. The Bank provides consumer and
business deposit services including checking, money market, and time deposit accounts and related payment services, internet banking and electronic
bill payment. In addition, the Bank serves business customer deposit needs with electronic, e-commerce services, funds management services, collection
and disbursement services.
Employees The Company views its employees as an integral
resource in achieving its strategies and long term goals, and considers its relationship with its employees to be good. Bancorp has no employees other
than its executive officers, who are also employees of the Bank. The Company had 320 full-time employees as of December 31, 2004, up
3 from 283 at the prior year-end. This increase is primarily related to expanding into new markets in Southern Oregon and Portland, Oregon during the year. None of the employees of the Company are subject to a collective bargaining agreement. Business Strategy The Company targets strong growth markets and
deploys a distinctive community banking strategy within such markets. A key component of the Company’s business strategy is to recruit and retain
the best in-market bankers for competitive advantage. The business strategy is focused on personal-touch relationship banking, featuring premier
customer service and competitive financial products. The Company is strategically committed to utilizing advanced technology for the convenience of
customers, including “customer choice” access through branches, ATMs, Internet, and telephone.
The Company’s expansion into Southern Oregon is
based upon a community banking strategy, similar to the Company’s strategy in its Central Oregon and Salem regions. The Medford branch was opened
in mid-2003, after hiring a well-known banking executive from the area. The Company acquired the former Community Bank of Grants Pass on January 1,
2004, and during the year opened branches in south Grants Pass and Ashland, Oregon. The Company is targeting additional branch locations in Medford in
2005.
The Company’s Portland strategy is focused on
attracting high value business and professional banking customers in the downtown core. Key to the deployment of this strategy was the hiring of an
experienced Portland banking team from another financial institution in September, 2003.
In addition to targeting growth and increased market
share in its existing locations, the Company may also consider future expansion by de novo branching when it identifies market opportunities, as
occurred in Southern Oregon and Portland in 2003. The Company may also consider strategic partnerships or business acquisitions to expand its market
opportunities.
Risk Management The Company’s risk management objectives
include loan policies and underwriting practices designed to prudently manage credit risk. Funding policies are designed to maintain an appropriate
volume and mix of core relationship deposits augmented by time deposit balances to efficiently fund its loan and investment activities. The Company may
utilize borrowings or other wholesale funding from reliable counterparties such as the Federal Home Loan Bank and the Federal Reserve Bank. The Company
monitors and manages its sensitivity to changing interest rates by utilizing simulation analysis and scenario modeling.
Factors That May Affect Future Results Competition Commercial and consumer banking in Oregon is highly
competitive. The Company competes principally with other commercial banks, savings and loan associations, credit unions, mortgage companies, brokers
and other non-bank financial service providers. In addition to price competition for deposits and loans, competition exists with respect to the scope
and type of services offered, customer service levels, convenience, as well as competition in fees and service charges. In addition, improvements in
technology, communications and the Internet have intensified delivery channel competition. Competitor behavior may result in heightened competition for
banking and financial services and thus affect future profitability.
The Company competes for customers principally
through the effectiveness and professionalism of its bankers and its commitment to customer service. In addition, it competes by offering attractive
financial products and services, and by the convenient and flexible delivery of those products and services. The Company believes its community banking
philosophy, technology investments and focus on small and medium-sized business, professional and consumer accounts, enables it to compete effectively
with other financial service providers. In addition, the Company’s lending officers and senior managers have significant experience in their
respective marketplaces. This enables them to maintain close working relationships with their customers. In able to compete for larger loans, the Bank
may participate loans to other financial institutions for customers whose borrowing requirements exceed its lending limits.
4 Geographic Concentration The Company generates substantially all of its loans
and deposits from customers located within the Company’s Central Oregon, Salem, Southern Oregon and Portland service areas. As of December 31,
2004, approximately 59% of total loans and 72% of deposits are attributable to its Central Oregon banking business, while the remaining 41% and 28%,
respectively, stem from the Salem, Southern Oregon and Portland markets. The Company is thus subject to and is directly affected by the trends and
changes in the economic vitality of these regions. Because of the rapid population growth of Central Oregon over the past decade, and the tourism and
service nature of the economy in its primary Central Oregon market, its loan concentration has historically been in real estate construction and
commercial real estate loans.
Effects of Government Monetary Policy The earnings and growth of the Company are affected
not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The
Federal Reserve can and does implement national monetary policy for such purposes as curbing inflation and combating recession, by its open market
operations in U.S. Government securities, control of the discount rate applicable to borrowings from the Federal Reserve, and establishment of reserve
requirements against certain deposits. These activities influence growth of bank loans, investments and deposits, and also affect interest rates
charged on loans or paid on deposits. Future changes in monetary policies and their impact on the Company cannot be predicted with
certainty.
SUPERVISION AND REGULATION Bancorp and the Bank are extensively regulated under
Federal and Oregon law. These laws and regulations are primarily intended to protect depositors and the deposit insurance fund, not shareholders of the
Company. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the
particular statutory or regulatory provisions. Any change in applicable laws or regulations may have a material effect on the business and prospects of
the Company. The operations of the Company may be affected by legislative changes and by the policies of various regulatory authorities. Management is
unable to predict the nature or the extent of the effects on its business and earnings that fiscal or monetary policies, economic control or new
Federal or State legislation may have in the future.
Federal Bank Holding Company Regulation The Company is a one-bank financial holding company
within the meaning of the Bank Holding Company Act (“Act”), and as such, it is subject to regulation, supervision and examination by the
Federal Reserve Bank (“FRB”). The Company has been designated a Financial Holding Company as defined in the 1999 Gramm-Leach-Bliley Act (see
description below). The Company is required to file annual reports with the FRB and to provide the FRB such additional information as the FRB may
require.
The Act requires every bank holding company to
obtain the prior approval of the FRB before (1) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of
such shares); (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with
another bank holding company. The FRB will not approve any acquisition, merger or consolidation that would have a substantial anticompetitive result,
unless the anticompetitive effects of the proposed transaction are clearly outweighed by a greater public interest in meeting the convenience and needs
of the community to be served. The FRB also considers capital adequacy and other financial and managerial factors in reviewing acquisitions or
mergers.
With certain exceptions, the Act also prohibits a
bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company which is
not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks,
or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities, which by statute or by
FRB regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks. In making
this determination, the FRB
5 considers whether the performance of such activities by a bank holding company can be expected to produce benefits to the public such as greater convenience, increased competition or gains in efficiency in resources, which can be expected to outweigh the risks of possible adverse effects such as decreased or unfair competition, conflicts of interest or unsound banking practices. The Sarbanes-Oxley Act of 2002 In July 2002, the Sarbanes-Oxley Act of 2002 (the
“SOX”) was enacted with the intent of protecting investors by improving the accuracy and reliability of corporate disclosures. The SOX, among
other things: sets standards for director independence, requires enhanced financial disclosures; certifications by chief executive officer and chief
financial officer as to the accuracy of financial statements; completeness of disclosure and effectiveness of internal controls; greater independence
of audit functions; and increased penalties for accounting and auditing improprieties at publicly traded companies. The SOX directs the Securities and
Exchange Commission (“SEC”) and securities exchanges to adopt rules that implement these and other requirements. A number of rules have been
adopted and continue to be proposed and implemented pursuant to the SOX. Beginning for the year 2004, under section 404 of the Act, the Company was
required to document, assess, test and certify as to the effectiveness of its system of internal controls. In addition, its independent auditor was
required to audit and attest to such controls, and these reports are included in this filing.
USA Patriot Act Under the USA Patriot Act of 2001, adopted by the
U.S. Congress on October 26, 2001 to combat terrorism, FDIC insured banks and commercial banks were required to increase their due diligence efforts
for correspondent accounts and private banking customers. The USA Patriot Act requires the Bank to engage in additional record keeping or reporting,
requiring identification of owners of accounts, or of the customers of foreign banks with accounts, and restricting or prohibiting certain
correspondent accounts.
Financial Modernization Act On November 12, 1999 the Gramm-Leach-Bliley Act
became law, repealing the 1933 Glass-Steagall Act’s separation of the commercial and investment banking industries. The Gramm-Leach-Bliley Act
expands the range of nonbanking activities a bank holding company may engage in, while reserving existing authority for bank holding companies to
engage in activities that are closely related to banking. The new legislation creates a new category of holding company called a “Financial
Holding Company,” a subset of bank holding companies that satisfy the following criteria:
Financial holding companies may engage in any
activity that: (1) is financial in nature or incidental to such financial activity; (2) is complementary to a financial activity and does not pose a
substantial risk to the safety and soundness of depository institutions or the financial system generally. The Gramm-Leach-Bliley Act specifies certain
activities that are financial in nature. These activities include:
The Federal Reserve Board and the Secretary of the
Treasury have authority to decide whether other activities are also financial in nature or incidental to financial activity, taking into account
changes in technology, changes in the banking marketplace and competition for banking services.
6 The Company is a designated “Financial Holding
Company” but does not expect such designation to have a material effect on its financial condition or results of operations.
Federal and State Bank Regulation The Bank, as a Federal Deposit Insurance Corporation
(“FDIC”) insured bank which is not a member of the Federal Reserve System, is subject to the supervision and regulation of the State of
Oregon Department of Consumer and Business Services, Division of Finance and Corporate Securities, and to the supervision and regulation of the FDIC.
These agencies may prohibit the Bank from engaging in what they believe constitute unsafe or unsound banking practices.
The Community Reinvestment Act (“CRA”)
requires that, in connection with examinations of financial institutions within their jurisdiction, the FRB or the FDIC evaluate the record of the
financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the
safe and sound operation of those banks. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or
facility. The Bank’s current CRA rating is “Satisfactory”.
The Bank is also subject to certain restrictions
imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders or any related interest of such
persons. Extensions of credit: (1) must be made on substantially the same terms, collateral and following credit underwriting procedures that are not
less stringent than those prevailing at the time for comparable transactions with persons not described above; and (2) must not involve more than the
normal risk of repayment or present other unfavorable features. The Bank is also subject to certain lending limits and restrictions on overdrafts to
such persons. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the Bank or any officer,
director, employee, agent or other person participating in the conduct of the affairs of the Bank, the imposition of a cease and desist order, and
other regulatory sanctions.
Under the Federal Deposit Insurance Corporation
Improvement Act (“FDICIA”), each Federal banking agency is required to prescribe by regulation, non-capital safety and soundness standards
for institutions under its authority. These standards are to cover internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial
standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation. An institution, which fails to
meet these standards, must develop a plan acceptable to the agency, specifying the steps that the institution will take to meet the standards. Failure
to submit or implement such a plan may subject the institution to regulatory sanctions. The Company believes that the Bank meets substantially all the
standards that have been adopted.
Interstate Banking Legislation Under the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (“Riegle-Neal Act”), as amended, a bank holding company may acquire banks in states other than its home
state, subject to certain limitations. The Riegle-Neal Act also authorizes banks to merge across state lines, thereby creating interstate branches.
Banks are also permitted to acquire and to establish de novo branches in other states where authorized under the laws of those states.
Deposit Insurance As a member institution of the FDIC, the deposits of
the Bank are currently insured to a maximum of $100,000 per depositor through the Bank Insurance Fund (“BIF”), and the Bank is required to
pay semiannual deposit insurance premium assessments to the FDIC.
The Deposit Insurance Funds Act of 1996 (“Funds
Act”) eliminated the statutorily imposed minimum assessment amount, effective January 1, 1997. The Funds Act also authorizes assessments on Bank
Insurance Fund-assessable deposits and stipulates that the rate of assessment must equal one-fifth the Financing Corporation assessment rate that is
applied to deposits assessable by the Savings Association Insurance Fund. The Financing Corporation assessment rate for Bank Insurance Fund-assessable
deposits is 1.296 cents per $100 of deposits per year. The Bank’s FDIC insurance expense for 2004 was approximately $210,000.
7 Regulatory Capital The Federal bank regulatory agencies use capital
adequacy guidelines in their examination and regulation of bank holding companies and banks. If the capital falls below the minimum levels established
by these guidelines, the bank holding company or bank may be denied approval to acquire or establish additional banks or non-bank businesses or to open
facilities. At December 31, 2004 the Company is considered “well capitalized” according to these regulatory capital guidelines. See footnote
19 to the Consolidated Financial Statements in this report.
The FRB and FDIC promulgate risk-based capital
guidelines for banks and bank holding companies. Risk-based capital guidelines are designed to make capital requirements sensitive to differences in
risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent
capital as a percentage of total risk-weighted assets and off-balance sheet items. The guidelines are minimums, and the FRB has noted that bank holding
companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios well in
excess of the minimum. The current guidelines require all bank holding companies and banks to maintain a minimum risk-based total capital ratio equal
to 8%, of which at least 4% must be Tier 1 capital.
Tier 1 capital for bank holding companies includes
common stockholders’ equity, qualifying perpetual preferred stock (up to 25% of total Tier 1 capital, if cumulative; under a FRB rule, redeemable
perpetual preferred stock may not be counted as Tier 1 capital unless the redemption is subject to the prior approval of the FRB) and minority
interests in equity accounts of consolidated subsidiaries, less intangibles. Tier 2 capital includes: (1) the allowance for loan losses of up to 1.25%
of risk-weighted assets; (2) any qualifying perpetual preferred stock which exceeds the amount which may be included in Tier 1 capital; (3) hybrid
capital instrument; (4) perpetual debt; (5) mandatory convertible securities, and; (6) subordinated debt and intermediate term preferred stock of up to
50% of Tier 1 capital. Total capital is the sum of Tier 1 and Tier 2 capital less reciprocal holdings of other banking organizations, capital
instruments and investments in unconsolidated subsidiaries.
Banks’ and bank holding companies’ assets
are given risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance sheet items are given credit conversion factors to convert them to
asset equivalent amounts to which an appropriate risk-weight will apply. These computations result in the total risk-weighted assets.
Loans are generally assigned to the 100% risk
category, except for first mortgage loans fully secured by residential property, which carry a 50% rating. The Company’s investment securities,
mainly U.S. Government sponsored agency obligations, are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50%
risk-weight, and direct obligations of or obligations fully guaranteed by the United States Treasury or United States Government, which have 0%
risk-weight. Off-balance sheet items, direct credit substitutes, including general guarantees and standby letters of credit backing financial
obligations, are given a 100% conversion factor. Transaction related contingencies such as bid bonds, other standby letters of credit and undrawn
commitments, including commercial credit lines with an initial maturity of more than one year, have a 50% conversion factor. Short-term,
self-liquidating trade contingencies are converted at 20%, and short-term commitments have a 0% factor.
The FRB also has implemented a leverage ratio, which
is Tier 1 capital as a percentage of average total assets less intangibles, to be used as a supplement to risk-based guidelines. The principal
objective of the leverage ratio is to place a constraint on the maximum degree to which a bank holding company may leverage its equity capital base.
The FRB requires a minimum leverage ratio of 3%. However, for all but the most highly rated bank holding companies and for bank holding companies
seeking to expand, the FRB expects an additional cushion of at least 1% to 2%.
At December 31, 2004, the Company’s leverage,
Tier 1 capital and Total risked-based capital ratios were 10.11%, 10.11% and 11.40%, respectively.
The FDICIA also created a new statutory framework of
supervisory actions indexed to the capital level of the individual institution. Under regulations adopted by the FDIC, an institution is assigned to
one of five capital categories depending on its total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio, together with
certain subjective factors. Institutions that are deemed “undercapitalized”, depending on the category to which they are assigned, are
subject to certain mandatory supervisory corrective actions. At December 31, 2004, the Company is considered
“Well-capitalized”.
8 State Regulations Concerning Cash Dividends The principal source of Bancorp’s cash revenues
have been provided from dividends received from the Bank. The Oregon banking laws impose the following limitations on the payment of dividends by
Oregon state chartered banks. The amount of the dividend shall not be greater than its unreserved retained earnings, deducting from that, to the extent
not already charged against earnings or reflected in a reserve, the following: (1) all bad debts, which are debts on which interest is past due and
unpaid for at least six months, unless the debt is fully secured and in the process of collection; (2) all other assets charged off as required by the
Director of the Department of Consumer and Business Services or a state or federal examiner; (3) all accrued expenses, interest and taxes of the
institution.
In addition, the appropriate regulatory authorities
are authorized to prohibit banks and bank holding companies from paying dividends, which would constitute an unsafe or unsound banking practice. The
Bank and Bancorp are not currently subject to any regulatory restrictions on their dividends other than those noted above.
Check 21 The Check Clearing for the 21st Century Act, or
“Check 21” as it is commonly known, became effective October 28, 2004. Check 21 facilitates check collection by creating a new negotiable
instrument called a “substitute check,” which permits, but does not require, banks to replace original checks with substitute checks and
process check information electronically. Banks that do use substitute checks must comply with certain notice and recredit rights. Check 21 is expected
to cut the time and cost involved in physically transporting paper items and reduce float, i.e. the time between the deposit of a check in a bank and
the bank’s receipt of payment for that check. The Bank intends to utilize the Check 21 authority and currently possesses technology necessary to
process and exchange check information electronically.
At December 31, 2004, the Company conducted banking
services in 21 locations throughout Oregon. Twelve locations are in Central Oregon, four in Salem/Keizer, four in Southern Oregon and one in Portland.
All offices are free standing buildings with the exception of three branches, two which operate in leased space in supermarkets in Bend and the third
which operates on the 10th floor of the Pioneer Tower Building in Portland.
The main office and three other branch buildings are
owned and are situated on leased land. The Bank owns the land and buildings at seven branch locations. The Bank leases the land and buildings at eleven
branch locations. In addition, the Bank leases space for the Operations and Information Systems departments located in Bend. All leases include
multiple renewal options.
The main office is located at 1100 NW Wall Street,
Bend, Oregon, and consists of approximately 15,000 square feet (sq. ft.). The building is owned by the Bank and is situated on leased land. The ground
lease term is for 30 years and commenced June 1, 1989. There are ten renewal options of five years each. The current rent is $6,084 per month with
adjustments every five years by mutual agreement of landlord and tenant. The main bank branch occupies the ground floor. Human Resources, Investments
and Credit Services occupy approximately 8,400 square feet. A separate drive-up facility is also located on this site.
The Bank currently owns the Cascade Building in the
Old Mill district of Bend, which contains approximately 21,800 sq. ft. of space of which the Bank occupies 2,000 sq. ft. The remaining space is
partially leased by non-bank commercial businesses and the Bank is seeking tenants for the remainder. Partners in the construction of this building
have an option to purchase the building from the Company at a cost-plus price through February of 2007.
In 2004, the Bank purchased the Boyd Building with
26,035 square feet in downtown Bend. This building is now occupied by Credit Services, SBA and the Mortgage Division. Including Bank use, the space is
near full occupancy.
In the opinion of management, all of the Bank’s
properties are adequately insured.
9
The Company is from time to time a party to various
legal actions arising in the normal course of business. Management believes that there are no threatened or pending proceedings against the Company,
which, if determined adversely, would have a material effect on the business or financial position of the Company.
No matters were submitted to shareholders during the
fourth quarter of 2004.
10 PART II
Cascade Bancorp common stock trades on The NASDAQ
Small Cap Market tier of The NASDAQ Stock Market under the symbol CACB. The high and low sales prices and cash dividends shown below are retroactively
adjusted for stock dividends and splits and are based on actual trade statistical information provided by The NASDAQ Stock Market for the periods
indicated. Prices do not include retail mark-ups, mark-downs or commissions:
The Company declared a 25% (5:4) stock split in
March 2004. The Company announced a policy of declaring regular quarterly cash dividends in 1997. The dividends declared and paid listed below have
been retroactively adjusted for past stock dividends and stock splits.
At February 28, 2005, the Company had 20,000,000
shares of common stock authorized with 16,825,928 shares issued and outstanding, held by approximately 5,600 shareholders of record.
Information regarding securities authorized for
issuance under the Company’s equity plans is located on page 58 (Note 17) of this annual report and is incorporated by reference.
Cautionary Information Concerning Forward-Looking Statements The following section contains forward-looking
statements which are not historical facts and pertain to our future operating results. These statements include, but are not limited to, our plans,
objectives, expectations and intentions and are not statements of historical fact. When used in this report, the word “expects,”
“believes,” “anticipates” and other similar expressions are intended to identify forward-looking statements, which are made
pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially from those projected. Specific risks and uncertainties include, but are
not limited to, general business and economic conditions, changes in interest rates including timing or relative degree of change, and competitive
uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with
respect to future business conditions, strategies and decisions, and such assumptions are subject to change.
Results may differ materially from the results
discussed due to changes in business and economic conditions that negatively affect credit quality, which may be exacerbated by our concentration of
operations in the areas of Central Oregon, Salem, Southern Oregon and Portland. Likewise, competition or changes in interest rates could negatively
affect the net interest margin, as could other factors listed from time to time in the Company’s SEC reports. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only
11 as of the date hereof. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof, other than as may be required by SEC regulations. The following tables present certain financial and
statistical information with respect to the Company for the periods indicated. Most of the information is required by Guide 3, “Statistical
Disclosure by Bank Holding Companies”, published by the SEC. At the beginning of each table, information is presented as to the nature of data
disclosed in the table.
Critical Accounting Policies Critical accounting policies are defined as those
that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different
assumptions and conditions. We believe that our most critical accounting policies upon which our financial condition depends, and which involve the
most complex or subjective decisions or assessments are as follows:
Reserve for Loan Losses: Arriving
at an appropriate level of reserve for loan losses involves a high degree of judgment. The Company’s reserve for loan losses provides for probable
losses based upon evaluations of known and inherent risks in the loan portfolio. Management uses historical information to assess the adequacy of the
reserve for loan losses as well as the prevailing business environment as it is affected by changing economic conditions and various external factors
which may impact the portfolio in ways currently unforeseen. The reserve is increased by provisions for loan losses and by recoveries of loans
previously charged-off and reduced by loans charged-off. For a full discussion of the Company’s methodology of assessing the adequacy of the
reserve for loan losses, see Management’s Discussion and Analysis of Financial Condition and Results of Operation.
Mortgage Servicing Rights
(MSRs): Determination of the fair value of MSRs requires the estimation of multiple interdependent variables, the most impactful of
which is mortgage prepayment speeds. Prepayment speeds are estimates of the pace and magnitude of future mortgage payoff or refinance behavior of
customers whose loans are serviced by the Company. Errors in estimation of prepayment speeds or other key servicing variables could subject MSRs to
impairment risk. At least quarterly, the Company engages a qualified third-party to provide an estimate of the fair value of MSRs using a discounted
cash flow model with assumptions and estimates based upon observable market-based data and methodology common to the mortgage servicing market.
Management believes it applies reasonable assumptions under the circumstances, however, because of possible volatility in the market price of MSRs and
the vagaries of any relatively illiquid market, there can be no assurance that risk management and existing accounting practices will result in the
avoidance of possible impairment charges in future periods. See also Management’s Discussion and Analysis of Financial Condition and Results of
Operation, and footnote 6 of the Financial Statements.
The following selected financial data should be read
in conjunction with the Company’s consolidated financial statements and the accompanying notes, which are included in this Annual Report on Form
10-K, (in thousands, except per share data and ratios; unaudited):
12
13 Notes:
14
As outlined in guidance from the Securities and
Exchange Commission, the objective of the following discussion is to help investors and other interested parties to see the Company through the eyes of
management; to assist in providing context within which financial information can be better analyzed; and to provide information as to the quality and
variability of the Company’s earnings and cash flows such that the investor can more easily ascertain the likelihood whether past performance is
indicative of future performance.
This discussion highlights key information as
determined by management but may not contain all of the information that is important to you. For a more complete understanding, the following should
be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto as of December 31, 2004 and 2003 and for
each of the three years in the period ended December 31, 2004 included elsewhere in this report.
HIGHLIGHTS AND SUMMARY OF PERFORMANCE Overview & Business Strategy Management and directors of Cascade Bancorp have
developed and implemented long-term goals and strategies with the objective of achieving sustainable double-digit EPS growth for its shareholders while
progressively serving the banking and financial needs of its customers and communities. The Company’s business strategy includes: 1) operate in,
and expand into growth markets; 2) recruit and retain the best relationship bankers in such markets; 3) consistently deliver the highest level of
customer service, and; 4) apply state-of-the-art technology for the convenience of customers.
The Company’s original market is Central
Oregon, whose population has grown in the 98% percentile of the nation due largely to in-migration of ‘quality-of-life’ seekers. The region
has natural high-desert beauty, bountiful recreational and cultural choices, good weather, and premier healthcare. The Company and Bank have grown with
the community during the last 25 years, to a point of holding a 33% share of this fast growing market. The combination of a fast growing economy and
powerful market share contributed to sustained high performance over the past decade. In recent years, management has sought to augment this solid
growth by prudently expanding into other attractive Oregon markets, now including Salem, Portland, and Southern Oregon. The latter two markets were
entered in mid-2003, and during 2004 attained breakeven after less than one year of operation. At year-end 2004, loans and deposits in these new
markets total 27% and 17% respectively of total Company balances. This growth has had the additional benefit of diversifying the Company’s
concentration of assets into several Oregon markets. Investing in the start-up phase of the new markets slowed 2004 earnings growth from its historical
levels, however, earnings momentum appears positive at year-end. According to Thompson Financial, analysts’ current consensus for 2005 earnings
estimate for CACB is $1.10 per diluted share, an increase of 18% over 2004 actual earnings of $.93 per diluted share. The following table reflects the
strong and sustained growth and returns the Company has achieved:
Key Performance Indicators The Company has established the following
performance goals: 1) consistently exceed 12% growth in EPS; 2) consistently exceed 18% return on equity; 3) identify and prudently manage credit and
business risk; 4) strive to profitably diversify revenue sources and markets, and; 5) continuously seek technological advantage in its activities. In
order to achieve these goals, the Company has established key measures that specify annual and multi-year growth targets for loans and deposits, set
benchmarks for credit quality, and target the net interest margin. In addition, non-financial measurements are set with respect to sales and customer
relationship and retention goals
15 to assist management in directing and monitoring results. As
indicated by its financial success, the Company has generally achieved its goals by meeting or exceeding key performance benchmarks.
Highlights — 2004 Financial Performance For The Fourth Quarter
2004
For The Full Year
2004
The Company continued its strong and sustained loan
and deposit growth during 2004, leading to a 46.4% increase in loans while deposits grew 30.8%, driving year-end total assets over $1 billion for the
first time. Rapid loan and deposit increases stemmed from strong growth in new markets (Portland and Southern Oregon) augmented by double-digit
expansion in the combined Central Oregon and Salem markets. Aggregate loan totals in the Company’s new markets stood at $234.8 million at December
31, 2004 driven by an average organic loan growth of over $40 million each quarter of 2004 (excludes $36 million in loans from the acquisition of
Community Bank Grants Pass). Combined deposits were $147.8 million at year-end, enabling new markets to locally fund over 60% of their loan growth.
Loans in new markets have grown to 27.3% of total Company loans and 17.4% of deposits in just 18 months of operation.
For the year, 2004 net income was up 14.7% to $16.0
million. This year-over-year increase in net income was accomplished despite the initial earnings drag of expenditures in new markets in early 2004.
Earnings per share (diluted) for 2004 were $.93, up 7.7% from 2003. Return on equity was 20.4% for the full year and return on assets continued well
above peer banks at 1.83% for the full year 2004.
Loan growth and credit quality During the year ended December 31, 2004, total loans
outstanding increased 46.4% to $859.6 million. Portland and Southern Oregon markets contributed about two-thirds of total Company loan growth during
the fourth quarter, while loans in the Company’s Central Oregon market increased 16.7% (annualized) for the quarter.
Underlying loan credit quality remained sound, with
delinquent loans greater than 30 days past due at just .02% of total loans, while net loan charge-offs for the quarter were $.4 million, or .19%
(annualized) of total loans. The reserve for loan losses (which included reserves for unfunded loan commitments of approximately $2.1 million at
December 31, 2004, in accordance with industry peer group practice) increased 32.1% in 2004 to $12.4 million and stood at a prudent 1.44% of total
loans outstanding at year-end. The reserve was at 1.49% of loans for the third quarter and 1.60% a year ago. This ratio has trended modestly lower in
tandem with improving regional macro-economic fundamentals and enhanced geographic diversification, which reduced required reserves for commercial real
estate related loans. Based upon management’s analytical and evaluative assessment of loan quality, the Company believes that its reserve for loan
losses is at an appropriate level under current circumstances and prevailing economic conditions.
Deposit growth At December 31, 2004, deposits were $851.4 million,
up 30.8% or $200.2 million from a year ago. The Company continues to be successful in attracting and retaining non-interest commercial checking
accounts with its quality service and sophisticated deposit and treasury management products. This has led to a year-over-year
16 increase of 38.8% in non-interest checking balances, which now represent approximately 40% of total deposits. Management believes it is likely that 2004’s robust 30.8% growth rate in deposits will slow somewhat in 2005 as a stronger economy and higher market interest rates lure monies from the safe-haven of banks into stock or other investment vehicles. With the lower overall interest rate environment
during most of 2004, the Company continued its ongoing success in attracting non-interest bearing deposits, which averaged 38.9% of total deposits in
2004, while the Company’s average overall cost of funds fell to .63% in 2004 compared to .68% in 2003. Non-interest bearing accounts are viewed as
core relationship deposits.
Non-interest income and expense Non-interest income decreased 3.4% to $12.9 million
compared to 2003, as higher bank service fee income was offset by declining net mortgage revenues. 2004 service fee income was at $6.7 million, up
11.8% year over year, primarily as a result of growing customer transaction volumes and utilization of overdraft protection products. Mortgage revenue
appears to have stabilized after the refinance boom of 2003. Fourth quarter net mortgage revenue was $.5 million, comparable to the prior quarter, and
now represents 18.2% of non-interest income, down from nearly 30.9% for the same period in 2003. The Company originated $31.1 million in residential
mortgages during the fourth quarter, comparable to the $33.3 million in the immediately preceding quarter. For the full year 2004, mortgage
originations declined to $141.4 million from a record $304.7 million in 2003 as interest rates rose from their historical lows and noticeably slowing
mortgage refinance volumes.
Non-interest expense for the year increased 19.0%
compared to 2003. Expenses increased primarily for human resources, including staffing increases to meet growing business volumes and support for new
markets, along with incentive-based bonuses that are directly tied to the increasing profitability of the Company. Expenses incurred in new market
areas accounted for about two-thirds of the year over year increase in non-interest expenses. It is anticipated that non-interest expense growth in
2005 will be above 10% due to the full year effect of the Company’s new market expansion in 2004 coupled with further investment in operations
infra-structure, new branches, and recruitment of additional banking professionals.
RESULTS OF OPERATIONS — Years ended December 31, 2004, 2003, and 2002 Net Interest Income/Net Interest Margin Net interest income (gross interest income net of
funding costs) was $46.0 million in 2004 compared to $36.8 and $33.2 million in 2003 and 2002, respectively. In percentage terms, net interest income
was up 24.9% and 10.8% in 2004 and 2003, respectively. Four factors were broadly affecting net interest income over the report horizon. First, the
Company was able to sustain strong double-digit growth in both loans and deposits, which increased net interest income. Second, the generational low
interest rate climate compressed average yields on earning assets, tending to lower interest income. Third, the cost of funds also declined due to the
ongoing low interest-rate climate, tending to offset a portion of the impact of lower yields on assets. Fourth, over the past few months the Federal
Reserve has begun to gradually increase interest rates, leading to a modest uptick in loan yields and cost of funds since mid-2004. The following
provides insight into these component factors.
2004 interest income increased a strong 24.7% over
the prior year primarily as a result of a 46.4% growth in outstanding loans. Average yields on earning assets fell to 6.35% in 2004 compared to 6.68%
in 2003, however, with the prime rate increasing from a cycle low of 4% in mid-2004 to 5.25% by year-end, fourth quarter 2004 yields increased modestly
after 16 quarters of decline. In 2003 interest income advanced 7.7% as growth in earning assets offset the ongoing effects of low market interest
rates. Earning asset yields were 6.68% in 2003 compared to 7.69% in 2002.
While deposit volumes grew at 30.8% and 29.7% in
2004 and 2003, respectively, interest expense increased 22.5% in 2004 after a 14.0% decline in 2003. In the latter half of 2004, market rates began
increasing and rates paid on interest bearing liabilities was trending up at year-end. Having been at the trough in market interest rates, the cost of
interest bearing deposits and borrowings in 2004 averaged 1.00%, comparable to 1.06% in 2003 and 1.52% in 2002.
17 Compared to peer banks, the Company has historically
maintained a relatively low cost of funds. An important factor in achieving and sustaining this advantage has been the Company’s high percentage
of non-interest bearing deposits. Such deposits averaged about 38.9% and 37.5% of total deposits in 2004 and 2003, respectively, and are a reflection
of the Company’s relationship and business banking strategy, high customer service standards, and 33% deposit market share in Central Oregon.
Because of this relatively high proportion of non-interest bearing deposits, the overall cost of funds was .63% in 2004 compared to .68% in 2003, and
.97% for 2002. With broadly increasing competition for deposits as well as competitive new markets where the Company does not enjoy a large market
share, the proportion of non-interest bearing deposits may ease over time.
The above combination of factors caused the
Company’s net interest margin (NIM) to fall to 5.74% in 2004 from 6.03% in 2003 and 6.75% in 2002. The Company’s NIM has been in the high
90th percentile of all banks for a decade, and continues to be well above peer levels. The ongoing low interest rate climate has caused a
gradual decline in loan yields that compress against an already low cost of funds. Management forecasts that the net interest margin will likely remain
between 5.60% and 5.80% over the next 12 to 18 months assuming interest rates follow the financial markets expected gradual path to modestly higher
rates.
The Company has a very stable NIM profile according
to its interest rate risk model. The model predicts that the Company’s earnings would be slightly enhanced in the event of higher than expected
market interest rates, a result of its strong core deposit base (led by its 33% deposit market share in Central Oregon) and its growing portfolio of
floating rate loans. Floating rate loans have risen from 32% to 43% of total loans during the past three years. Over that horizon, fixed rate loans
have declined from 31% to 15%, while periodically adjustable loans (typically 3 to 5 year re-pricing) have increased from 37% to 42%. In the unlikely
event of a dramatic decline in interest rates (Fed Funds falling below 1%), the model predicts earnings growth would be satisfactory, but moderately
below expected levels because falling loan yields would compress against an already low cost of funds. The margin can also be affected by external
factors including aggressive price offerings on loans or deposits by competitors. Please see cautionary “Forward Looking Statements” as well
as further information on interest rate risk located in this report.
18 Average Balances and Average Rates Earned and Paid The following table sets forth for 2004, 2003, and
2002 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 Analysis of Changes in Interest Income and Expense For most financial institutions, including the
Company, the primary component of earnings is net interest income. Net interest income is the difference between interest income earned, principally
from loans and investment securities portfolio, and interest paid, principally on customer deposits and borrowings. Changes in net interest income
results from changes in volume, spread and margin. Volume refers to the dollar level of interest-earning assets and interest-bearing liabilities.
Spread refers to the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. Margin refers to net
interest income divided by interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing
liabilities.
The following table shows the dollar amount of the
increase (decrease) in the Company’s consolidated interest income and expense, and attributes such variance to “volume” or
“rate” changes. Variances that were immaterial have been allocated equally between rate and volume categories (dollars in
thousands):
Non-interest Income Total non-interest income was down 3.4% at $12.9
million from 2003, following a 38.5% increase in 2003. Higher bank service fee income in 2004 was offset by declining net mortgage revenues. 2004
service fee income was at $6.7 million, up 11.8% year over year, primarily as a result of growing customer transaction volumes and utilization of
overdraft protection products. Mortgage revenue appears to have stabilized after the refinance boom of 2003.
Home Mortgage Originations and Mortgage Related Revenue The Company’s 2004 mortgage originations
declined to $141.4 million from a record $304.7 million in 2003 and $224 million in 2002, as interest rates rose from their historical lows. Net
mortgage revenues decreased to $2.4 million in 2004, down 57.4% from $4.1 million in the prior year.
The general level and direction of interest rates
directly influence the volume and profitability of mortgage banking. Financial markets indicate a trend toward modestly higher interest rates in 2005,
and the Mortgage Bankers Association has predicted a slowdown in mortgage activity.
The Company mainly sells the residential mortgage
loans it originates to Fannie Mae, a U.S. Government sponsored enterprise. The Company services such loans for Fannie Mae and is paid approximately
.25% per annum
20 on the outstanding balances for providing this service. Such revenues are included in the above mortgage banking results. Mortgages serviced for Fannie Mae totaled $502.4 million at December 31, 2004 and $514.2 million at December 31, 2003, upon which were recorded related Mortgage Servicing Rights (MSRs) of approximately $4.7 million for each of these years. The Company capitalizes the estimated market value
of MSRs into income upon the sale of each originated mortgage loan. The Company amortizes MSRs in proportion to the servicing income it receives from
Fannie Mae over the estimated life of the underlying mortgages, considering prepayment expectations and refinancing patterns. In addition, the Company
amortizes, in full, any remaining MSRs balance that is specifically associated with a serviced loan that is refinanced or paid-off.
As a result of its fair value analysis, in 2004 the
Company recaptured previously recorded MSR valuation allowances totaling approximately $.3 million, reducing this allowance to zero. The carrying value
of the MSRs at December 31, 2004 was 0.93% of serviced loans compared to 0.91% a year ago.
Non-interest Expenses Total non-interest expenses for 2004 were $29.6
million, an increase of 19.0% compared to 2003, consistent with an increase of 18.2% in 2003. Expenses relating to new markets start-up costs were $4.5
million for 2004, which accounts for about two-thirds of the increase for the full year. 2004 expense increases occurred for human resources, including
staffing increases to meet growing business volumes and support for new markets, along with incentive-based bonuses that are directly tied to the
increasing profitability of the Company. During the periods presented, business growth drove higher expenses for new branch locations, equipment,
communication and information systems, marketing, postage, donations, legal and professional services. Despite increased expenses related to new
markets, the Company’s efficiency ratio remained stable at about 50.2%, notably better than peer banks for the report periods, as higher costs
were leveraged against increased revenues generated from the strong growth. It is anticipated that non-interest expense growth in 2005 will be above
10% due to the full year effect of the Company’s new market expansion in 2004 coupled with further investment in operations infra-structure, new
branches, and recruitment of additional banking professionals.
Income Taxes The provision for income taxes increased during the
periods presented primarily as a result of higher pre-tax income.
FINANCIAL CONDITION Total assets increased 36.8% to $1.005 billion at
December 31, 2004 compared to $734.7 million at December 31, 2003. The increase in total assets was driven by continued growth in loans, which grew
$272.4 million or 46.4% to $859.6 million at year-end 2004, following a 17.7% increase in 2003. Growth in total assets was primarily funded by a $200.2
million or 30.8% increase in deposits.
The Company had no significant derivative financial
instruments as of December 31, 2004 and 2003.
The following sections provide detailed analysis of
the Company’s financial condition, describing its loan portfolio composition and credit risk management practices (including those related to the
loan loss reserve), as well as investment portfolio, deposits, and capital position.
Loan Portfolio Composition Net loans represent 84% of total assets as of
December 31, 2004. The Company makes substantially all of its loans to customers located within the Company’s service areas. The Company has
historically had a loan concentration in real estate construction and commercial real estate lending. This is due to the rapid growth in population and
the nature of the tourism and service industry found in the Company’s primary Central Oregon market. In the past several years the Company has
increased the commercial loan portion of the portfolio for diversification, growth and interest rate risk management purposes. It is expected that the
proportion of commercial
21 loans will continue to expand by virtue of the new markets in Southern Oregon and Portland. However, real estate lending will continue to be a major concentration within the loan portfolio. The Company has no significant agricultural loans. The following table presents the composition of the
Company’s loan portfolio, at the dates indicated (dollars in thousands):
At December 31, 2004, the contractual maturities of
all loans by category were as follows (dollars in thousands):
Variable and adjustable rate loans contractually due
after one year totaled $553.8 million at December 31, 2004 and loans with predetermined or fixed rates due after one year totaled $111.3 at December
31, 2004.
Real Estate Loan Concentration Due to the rapid growth in population and the nature
of the tourism and service industry found in the Company’s primary Central Oregon market, (and to an important but lesser degree other banking
markets), real estate is frequently a material component of collateral for the Company’s loans. Risks associated with real estate loans include
fluctuating land values, national, regional and local economic conditions, changes in tax policies, and a concentration of loans within the Bank’s
market area.
Commercial Real Estate (CRE) loans represent the
largest category within the loan portfolio at approximately 39% of total loans outstanding as of December 31, 2004. Approximately 54% of such loans are
made to owner-occupied users of the commercial property, while 46% of CRE loans are to obligors who do not directly occupy the property. 2004 continued
to be a strong year in commercial real estate lending due to low interest rates, continued economic growth in Central Oregon and an apparent investor
preference for real estate assets as compared to financial assets. These factors also affect the trend toward increased non-owner occupied CRE loans as
a proportion of total commercial real estate. The expected source of repayment of CRE loans is generally the operations of the
22 borrower’s business, rents or the obligor’s personal income. Management believes that commercial real estate collateral provides an additional measure of security for loans. Management believes lending to owner-occupied businesses mitigates, but does not eliminate, commercial real estate risk. The following table shows the breakdown of the two categories (dollars in thousands):
Real estate construction loans represent 21% of
total loans and include residential/commercial development loans as well as lot loans. The steady growth in construction/lot lending reflects the
continued economic growth and in-migration into Central Oregon. This portfolio is diversified into three categories and are listed in the table below
(dollars in thousands):
Residential construction loans are generally made to
customers who own the property and whose credit profile supports permanent mortgage (take-out) financing at the end of the construction phase. The
Company maintains a list of approved local contractors, and the experience and background of contractors may factor into its lending
decisions.
Commercial construction loans finance the
development and construction of commercial properties. The expected source of repayment of these loans is typically the operations of the
borrower’s business or the obligor’s personal income.
Residential speculative construction lending
finances builders/developers of residential properties. Such loans may include financing the development and/or construction of residential
subdivisions. This activity may involve financing land purchase, infrastructure development (i.e. roads, utilities, etc.), as well as construction of
residences or multi-family dwellings for subsequent sale by developer/builder. Because the sale of developed properties is integral to the success of
developer business, loan repayment may be especially subject to the volatility of real estate market values.
All of the above lending activities are subject to
the varied risks of real estate lending. Such activity is subject to specialized underwriting, collateral and approval requirements, which mitigates,
but does not eliminate the risk that loans may not be repaid.
Lending and Credit Management The Company has a comprehensive risk management
process to control, underwrite, monitor and manage credit risk in lending. The underwriting of loans relies principally on an analysis of an
obligor’s historical and prospective cash flow augmented by collateral assessment, credit bureau information, as well as business plan assessment.
Ongoing loan portfolio monitoring is performed by a centralized credit administration function including review and testing of compliance to loan
policies and procedures. Internal and external auditors and bank regulatory examiners periodically sample and test certain credit files as well. Risk
of nonpayment exists with respect to all loans, which could result in the classification of such loans as non-performing. Certain specific types of
risks are associated with different types of loans.
23 Reserve for Loan Losses The reserve for loan losses represents
management’s recognition of the assumed and present risks of extending credit and the possible inability or failure of the obligors to make
repayment. The reserve is maintained at a level considered adequate to provide for loan losses based on management’s assessment of a variety of
current factors affecting the loan portfolio. Such factors include loss experience, review of problem loans, current economic conditions, and an
overall evaluation of the quality, risk characteristics and concentration of loans in the portfolio. The reserve is increased by provisions charged to
operations and reduced by loans charged-off, net of recoveries. No assurance can be given that, in any particular period, loan losses will not be
sustained that are sizable in relation to the amount reserved, or that changing economic factors or other environmental conditions could cause
increases in the loan loss provision.
Loan Loss Provision The Bank’s ratio of reserve for loan losses to
total loans was 1.44% at December 31, 2004, down from 1.59% at December 31, 2003, and 1.53% at December 31, 2002. The loan loss provision for 2004 was
$3.7 million, up from $2.7 million in 2003 and 2002. Provision expense is determined by the Company’s ongoing analytical and evaluative assessment
of the adequacy of the loan loss reserve. This assessment reflects a continued sound credit quality profile, with low delinquent loans, modest net loan
charge-offs and stable non-performing assets. At this date, management believes that its reserve for loan losses is at an appropriate level under
current circumstances and prevailing economic conditions.
Allocation of Reserve for Loan Losses The following table allocates the reserve for loan
losses among major loan types. The Company utilizes a systematic methodology to estimate and evaluate the inherent risk within the loan portfolio in
order to allocate the reserve. The Company’s methodology segments the loan portfolio into homogenous loan pools. Appropriate pool reserve rates
are established based on historical loss rates. Economic and concentration adjustments are also applied to selected pools to reflect current economic
conditions and concentration risk. The consumer reserve allocation is based mainly upon credit scoring methodology. Specific impairment evaluations are
conducted on loans in accordance with SFAS No. 114 as amended by SFAS No. 118. The unallocated portion of the reserve is based upon factors not
measured in the allocated or specific reserves, and/or relate to the margin of imprecision inherent in the estimation of such reserves. Factors include
uncertainties in economic or environmental conditions, uncertainty in identifying triggering events that directly correlate to subsequent loss rates
and risk factors that have not yet been manifested in historical loss experience. Examples of such factors could include originating loans in new or
unfamiliar markets, initiating new loan programs or products, or initiating specialty lending to industry sectors that may be new to the Company.
Although this allocation process may not accurately predict future credit losses by loan type or in aggregate, the total reserve for loan losses is
available to absorb losses that may arise from any loan type or category.
24 The following table sets forth the allocation of the
reserve for loan losses (dollars in thousands):
25 The following table summarizes the Company’s
reserve for loan losses and charge-off and recovery activity for each of the last five years (dollars in thousands):
The following table presents information with
respect to non-performing assets (dollars in thousands):
The accrual of interest on a loan is discontinued
when, in management’s judgment, the future collectibility of principal or interest is in doubt. Loans placed on nonaccrual status may or may not
be contractually past due at the time of such determination, and may or may not be secured. When a loan is placed on nonaccrual status, it is the
Bank’s policy to reverse, and charge against current income, interest previously accrued but uncollected. Interest subsequently collected on such
loans is credited to loan principal if, in the opinion of management, full collectibility of principal is doubtful. Interest income that was reversed
and charged against income for the years of 2004, 2003 and 2002 was insignificant.
26 At December 31, 2004, except as discussed above,
there were no potential material problem loans, where known information about possible credit problems of the borrower caused management to have
serious doubts as to the ability of such borrower to comply with the present loan repayment terms.
Investment Portfolio The following table shows the carrying value of the
Company’s portfolio of investments at December 31, 2004, 2003, and 2002 (dollars in thousands).
Mortgage-backed securities (MBS) are mainly
adjustable rate (ARM) MBS. Prepayment speeds on mortgages underlying MBS may cause the average life of such securities to be shorter (or longer) than
expected. The following is a summary of the contractual maturities and weighted average yields of investment securities at December 31, 2004 (dollars
in thousands):
27 Bank-Owned Life Insurance The Bank has purchased BOLI to protect itself
against the loss of key employees and certain directors due to death and to offset the Bank’s future obligations to its employees under its
retirement and benefit plans. During 2004, 2003 and 2002, the Bank purchased $4.9 million, $.3, and $.2 million of BOLI, respectively. The cash
surrender value of these life insurance policies was $14.1 million and $8.6 million at December 31, 2004 and 2003, respectively. The Bank recorded
income from the BOLI policies of $.7 million in 2004, $.4 million in 2003 and 2002.
Deposit Liabilities and Time Deposit Maturities Total deposits at year-end 2004 were $851.4 million,
an increase of $200.2 million or 30.7% compared to year-end 2003. Deposits averaged $758.5 million for the full year 2004, up 33.1% or $188.5 million
from the prior year average. This growth has been achieved by expanding market share in existing markets augmented by incremental deposit growth in new
markets. In addition, deposit flows across the banking industry may have benefited from customer indifference due to low the interest rate climate and
concerns arising from volatility of the stock market. These behaviors and bias could change and reduce deposit growth into the future.
A key competitive advantage in growing deposits has
been the Company’s ability to expand and retain relationships with its loyal customers. This advantage is evidenced in part by the Company’s
relatively high proportion of non-interest bearing (checking account) deposits, which reached approximately 40.0% of total deposits at year end, and
averaged 39.0% for the year. In 2004, non-interest-bearing demand was up $95.5 million or 38.9% and interest bearing demand (including money market
deposits) up $92.8 million or 28.7%. A portion of this rapid deposit growth is attributable to the deposit activity of several large
customers.
Time deposits increased slightly in 2004 after a
decline of $10.2 million in 2003. Generally, the Company does not attempt to attract high cost time deposits, as they are not believed to contribute to
its relationship banking strategy.
The following table summarizes the average amount
of, and the average rate paid on, each of the deposit categories for the periods shown (dollars in thousands):
As of December 31, 2004 the Company’s time
deposit liabilities had the following times remaining to maturity (dollars in thousands):
28 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 Bank’s 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 Bank’s 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 Bank has no brokered deposits at this time. The
Bank’s present funding mix is diverse, with approximately 68% of its checking account balances arising from business and public accounts and 32%
from consumers. The composition of money market and interest-bearing demand accounts was 42% business and 58% consumer. During the periods presented,
deposit growth has generally been sufficient to fund increases in loans. Management invests excess funds in short-term and overnight money market
instruments.
A further source of funds and liquidity is the
Company’s capability to borrow from reliable counterparties. The Bank utilizes its investment securities, certain loans, FHLB Stock and certain
deposits 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
to fund the Bank.
The Bank’s primary counterparty for borrowing
purposes is the Federal Home Loan Bank (FHLB). At December 31, 2004, the FHLB had extended the Bank a secured line of credit of $150.4 million that may
be accessed for short or long-term borrowings given sufficient qualifying collateral. The Bank also had $24.8 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 $26.0 million for the purchase of funds on a short-term basis from several commercial bank counterparties. At December 31, 2004 the Bank had
aggregate remaining available borrowing sources totaling $164.7 million, given sufficient collateral.
Liquidity may be affected by the Bank’s 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, approximately 1/3 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 December 31, 2004 the Bank had approximately
$324.8 million in outstanding commitments to extend credit, compared to approximately $199.5 million at year-end 2003. Management believes that the
Bank’s available resources will be sufficient to fund its commitments in the normal course of business.
JUNIOR SUBORDINATED DEBENTURES AND OTHER BORROWINGS In December 2004, the Company established a
subsidiary grantor trust (Cascade Bancorp Trust I) (the Trust), which issued $20 million of trust preferred securities (the TPS). The TPS are
subordinated to any other borrowings of the Company and are due and payable on March 15, 2035. The TPS pay quarterly interest at the 3-month London
Inter-Bank Offered Rate (LIBOR) plus 1.80%. The Trust used the proceeds received from the issuance of the TPS to purchase $20 million of junior
subordinated debentures (the Debentures) of the Company. The Debentures were issued with substantially the same terms as the TPS and are the sole
assets of the Trust. The Company’s obligations under the Debentures and related agreements, taken together, constitute a full and irrevocable
guarantee by the Company of the obligations of the Trust. 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 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. Upon
establishment of
29 the Trust, the Company also purchased a 3% minority interest in
the Trust totaling $619,000, which is included in other assets in Bancorp’s condensed balance sheet at December 31, 2004. Management believes that
as of December 31, 2004, the TPS meet applicable regulatory guidelines to qualify as Tier 1 capital.
During 2004 the Company’s increased its
long-term borrowings with FHLB to $29.7 million at year-end. These borrowings have a weighted average term to maturity of 3.4 years and bearing a
weighted average interest rate of 3.31%. The Company had short-term borrowings with FRB at December 31, 2004, of $6.9 million.
CAPITAL RESOURCES The Company’s total stockholders’ equity
at December 31, 2004 was $86.4 million, an increase of $24.7 million from December 31, 2003. 2004 equity was increased primarily by the net result of
issuance of $11.7 million in common stock related to the CBGP acquisition plus earnings of $16.0 million for the year, less cash dividends paid to
shareholders of $4.4 million. At year-end 2004, net unrealized gains on investment securities available-for-sale was $.8 million, relatively unchanged
from year-end 2003.
CONTRACTUAL OBLIGATIONS As of December 31, 2004, the Company has entered
into the following contractual obligations listed below (dollars in thousands):
OFF-BALANCE SHEET ARRANGEMENTS A schedule of significant off-balance sheet
commitments at December 31, 2004 is included in the following table (dollars in thousands):
See Note 12 of the Notes to Consolidated
Financial Statements included in Item 8 hereof for a discussion of the nature, business purpose, and importance of off-balance sheet
arrangements.
INFLATION The general rate of inflation over the past two
years, as measured by the Consumer Price Index, has not changed significantly, and management does not consider the effects of inflation on the
Company’s financial position and earnings to be material.
Interest Rate Risk and Asset and Liability Management The goal of the Company’s Asset and Liability
Management Policy is to maximize long-term profitability under the range of likely interest rate scenarios. The Board of Directors oversees
implementation of strategies to control interest rate risk. Management hires and engages a qualified independent service provider to assist in
modeling, monthly reporting and assessing interest rate risk. The Company’s methodology for analyzing interest rate risk
30 includes simulation modeling as well as traditional interest rate gap analysis. While both methods provide an indication of risk for a given change in interest rates, it is management’s opinion that simulation is the more effective tool for asset and liability management. The Company may take steps to alter its net sensitivity position by offering deposit and/or loan structures that tend to mitigate its risk profile. In addition, the Company may acquire investment securities, term borrowing structures, interest rate swaps or other hedging instruments with re-pricing characteristics that tend to moderate interest rate risk. However, there are no structured hedging instruments in use at this time. Because of the volatility of market rates, event risk and uncertainties described above, there can be no assurance of the effectiveness of management programs to achieve its risk management objectives. The January 1, 2004 acquisition of the Community Bank of Grants Pass did not have a material effect on the interest rate risk profile of the Company. To assess and estimate the degree of interest rate
risk, the Company utilizes a sophisticated simulation model that estimates the possible volatility of Company earnings resulting from changes in
interest rates. Management first establishes a wide range of possible interest rate scenarios over a two-year forecast period. Such scenarios include a
“Stable” or unchanged scenario and an “Estimated” or most likely scenario given current and forecast economic conditions. At this
time, the “Estimated” scenario approximates market expectations as to the pace and magnitude of fed funds rate increases as implied by the
euro-dollar yield curve. In addition, scenarios titled “Rising Rates” and “Declining Rates” are established to stress-test the
impact of more dramatic rate movements that are perceived as less likely, but may still possibly occur. Next, net interest income and earnings are
simulated in each scenario. Note that earnings projections include the effect of estimated loan and deposit growth that management deems reasonable,
however, such volume projections are not varied by rate scenario. Simulated earnings are compared over a two-year time horizon. The following table
defines the market interest rates used in the model for “Estimated” (most likely), “Rising” and “Declining” interest rate
scenarios. These market rates shown are reached gradually over the 2-year simulation horizon.
The following table presents percentage changes in
simulated future earnings under the above-described scenarios as compared to earnings under the “Stable” or unchanged rate scenario
calculated as of December 2004. The effect on earnings assumes no changes in non-interest income or expense between scenarios.
Management’s assessment of interest rate risk
and scenario analysis must be taken in the context of market interest rates and overall economic conditions. In the first half of 2004, market interest
rates remained near their lowest level in decades, but since that time the Federal Reserve has begun to gradually increase rates. At present, most
economists forecast this trend to modestly higher rates will continue. The yield curve also suggests that market participants are anticipating an
upward move in rates over the next several years. At year-end 2004, the national Federal Funds and Prime borrowing rates were at 2.25% and 5.25%,
respectively. In the persistent low rate environment of the past few years, the Company has experienced a modest decline in its net interest margin as
yields on its loan and investment portfolios compressed against an already low cost of funds.
In management’s judgment, at this date the
interest rate risk profile of the Company is relatively well balanced considering the range of outcomes under the different scenarios. The model
indicates that in “estimated” and “rising”
31 rate scenarios, the net interest margin remains within the recent range of 5.60% to 5.95%. This highest risk scenario is under the declining rate scenario wherein short-term rates fall to near zero. Under this scenario, yields on loans and securities would continue to compress against an already low cost of funds. In addition, many loans are subject to prepayment risk, and so would be more likely to refinance to lower rates under this scenario. Despite these factors, the model indicates that the net interest margin would likely remain near 5.00% even with rates falling to near zero, and that other financial performance benchmarks including ROA and ROE would still be sound (though lower than in other scenarios). Management has concluded that the degree of volatility under this scenario is acceptable because of its relatively low likelihood, and the relative cost of mitigating this risk. In the more likely scenarios where interest rates
tend to rise, the Company would generate higher earnings, all else equal. This is because of the composition and re-pricing mix of its assets and
liabilities. The loan portfolio is approximately 40.1% floating rate loans (generally re-pricing with the prime rate), 44.4% loans with adjustable
rates between 3 and 5 years, and 15.5% fixed rate loans. Because of this mix, floating rate loans would increase in yield should market rates go
higher, while yields on adjustable rate loans would re-price upward with some time lag. The re-pricing profile of liabilities is similar. Deposits are
approximately 40.0% demand deposits (with modest sensitivity to higher rates), 48.8% money market deposits (which are sensitive to market rates but
have historically lagged the pace of market rate changes), while time and savings deposits represent about 11.2% of total deposits. Thus, both assets
and liabilities would be expected to re-price upward in increasing rate scenarios, but with yields increasing at a relatively faster pace than
liabilities.
Management has also modeled a scenario where the
yield curve flattens dramatically. In this scenario, fed funds rate and 10 year treasury rates converge to within 25 basis points of each other at 4%
and 4.25%, respectively, by the end of the forecast period. At that point, the prime rate is forecast at 7%. Under this rate scenario, earnings show
minor variances to the stable rate scenario, but would fall below the results modeled in the “estimated” rate scenario. Management believes
this outcome is a consequence and benefit of its relatively low cost of funds and increasing volumes of floating rate loans.
In all scenarios, results are modeled using
management’s estimates as to growth in loans and deposits, and other balance sheet items, as well as the expected mix and pricing thereof. These
volume estimates are static in the various scenarios. Such estimates may be inaccurate. Model results are only indicative of interest rate risk
exposure under various scenarios. The results do not encompass all possible paths of future market rates, in terms of absolute change or rate of
change, or changes in the shape of the yield curve. Nor does the simulation anticipate changes in credit conditions that could affect results.
Likewise, scenarios do not include possible changes in volumes, pricing or portfolio management tactics that may enable management to moderate the
effect of such interest rate changes.
Simulations are dependent on assumptions and
estimations that management believes are reasonable, although the actual results may vary substantially, and there can be no assurance that simulation
results are reliable indicators of future earnings under such conditions. This is, in part, because of the nature and uncertainties inherent in
simulating future events including: (1) no presumption of changes in asset and liability strategies in response to changing circumstances; (2) model
assumptions may differ from actual outcomes; (3) uncertainties as to customer behavior in response to changing circumstances; (4) unexpected absolute
and relative loan and deposit volume changes; (5) unexpected absolute and relative loan and deposit pricing levels; (6) unexpected behavior by
competitors; (7) other unanticipated credit conditions or other events impacting volatility in market conditions and interest rates.
In the opinion of management, the use of interest
rate gap analysis is less valuable than the above method in measuring and managing interest rate risk. This is because it is a static measure of rate
sensitivity and does not capture the possible magnitude or pace of rate changes. At year-end 2004, the Company’s one-year cumulative interest rate
gap analysis indicates that rate sensitive liabilities maturing or available for re-pricing within one-year exceeded rate sensitive assets by
approximately $52.0 million.
32 Interest Rate Gap Table The Company considers its rate-sensitive assets to
be those that either contain a provision to adjust the interest rate periodically or mature within one year. These assets include certain loans and
leases and investment securities and interest bearing balances with FHLB. Rate-sensitive liabilities are those liabilities that are considered
sensitive to periodic interest rate changes within one year, including maturing time certificates, savings deposits, interest-bearing demand deposits
and junior subordinated debentures.
Set forth below is a table showing the interest rate
sensitivity gap of the Company’s assets and liabilities over various re-pricing periods and maturities, as of December 31, 2004 (dollars in
thousands):
33
The following reports, audited consolidated
financial statements and the notes thereto are set forth in this Annual Report on Form 10-K on the pages indicated:
34 REPORT OF SYMONDS, EVANS & COMPANY, P.C., To the Board of
Directors and
Stockholders of Cascade Bancorp We have audited
management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Cascade Bancorp
and its subsidiary, Bank of the Cascades (the Bank) (collectively, “Bancorp”) maintained effective internal control over financial reporting
as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Bancorp’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the effectiveness of Bancorp’s internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management’s assessment that Bancorp maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, Bancorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria. We have also audited, in accordance with the standards of the PCAOB, the
consolidated balance sheets of Bancorp as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in
stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004, and our report dated January 13, 2005
expressed an unqualified opinion on those consolidated financial statements. Portland, Oregon 35 REPORT OF SYMONDS, EVANS & COMPANY, P.C., To the Board of
Directors and
Stockholders of Cascade Bancorp We have audited
the accompanying consolidated balance sheets of Cascade Bancorp and subsidiary (collectively, “the Company”) as of December 31, 2004 and
2003, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cascade Bancorp and subsidiary as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States. Portland, Oregon 36 CASCADE BANCORP AND SUBSIDIARY
See accompanying notes. 37 CASCADE BANCORP AND SUBSIDIARY
See accompanying notes. 38 CASCADE BANCORP AND SUBSIDIARY
39 See accompanying notes. CASCADE BANCORP AND SUBSIDIARY
40 See accompanying notes. CASCADE BANCORP AND SUBSIDIARY
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