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| CACB > SEC Filings for CACB > Form 10-K on 13-Mar-2009 | All Recent SEC Filings |
13-Mar-2009
Annual Report
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, 2008 and 2007 and for each of the years in the three-year period ended December 31, 2008 included elsewhere in this report.
Cautionary Information Concerning Forward-Looking Statements
This annual report on Form 10-K 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," "could," "may," "will," "should," "plan," "predicts," "projections," "continue" and other similar expressions constitute forward-looking statements, as do any other statements that expressly or implicitly
Results may differ materially from the results discussed due to changes in business and economic conditions that negatively affect credit quality, which may be exacerbated by our concentration of operations in the States of Oregon and Idaho generally, including the Oregon communities of Central Oregon, Northwest Oregon, Southern Oregon, and the greater Boise area, specifically. Likewise, competition or changes in interest rates could negatively affect the net interest margin, as could other factors listed from time to time in the Company's SEC reports. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof. Readers should carefully review all disclosures filed by the Company from time to time with the SEC.
Recent Developments
Financial Overview: Goodwill Impairment and Other Adjustments as of December 31, 2008
Subsequent to year end 2008 and after the issuance of its earnings release on January 29, 2009, the Company made adjustments which are reflected in the financial results for the fourth quarter and for the year ended December 31, 2008. The Company maintains risk based capital above regulatory benchmarks for "well-capitalized" banks at 10.22% after taking into account the effect of these items. The adjustments include:
º A noncash after-tax goodwill impairment charge of $105.0 million, resulting in the elimination of all previously recorded goodwill. Goodwill impairment is a noncash accounting adjustment that does not affect cash flow, capital or liquidity. Tier 1 and total regulatory capital ratios are unaffected by this adjustment;
º An increase in provision for loan losses totaling $14.8 million resulting from the following factors; (i) a $5.1 million increase mainly to increase the unallocated portion of the reserve for loan losses to 15%; (ii) an increase in specific reserves of approximately $9.7 million for certain real estate secured credits;
º A $22.9 million charge against the balance sheet item "reserve for credit losses" mainly resulting from valuation write-downs of nonperforming collateral dependent land development loans, with a corresponding reduction in nonperforming asset balances;
º A valuation adjustment of approximately $0.8 million to an OREO property based on receipt of an appraisal.
Including the noncash goodwill charge of ($3.76) per share and other adjustments, the net loss for the full year 2008 totals ($4.82) per share or ($134.6 million) as compared to a net loss of ($0.76) per share or ($21.2 million) disclosed in our preliminary unaudited earnings release dated January 29, 2009. The above adjustments arose subsequent to the release date. The Company applied extensive procedures in its preliminary earnings report, including analysis from independent 3rd party experts and thorough examination of all significant estimates. However, subsequent to that date additional evidence arose as to the depth and duration of the current economic conditions, including evidence of the unprecedented weakness in banking stocks in general and a significant decline in the Company's stock price in particular, which most directly resulted in the noncash goodwill impairment as discussed below. Certain of these adjustments were also a result of the subsequent information as to the condition and capacity of various obligors and appraisal valuation updates.
Goodwill is an intangible (noncash) asset that was booked mainly in connection with the accounting for the acquisition of F&M bank in Idaho in 2006. Goodwill impairment is a noncash accounting adjustment that writes-down this intangible asset. It does not affect cash flow, capital or liquidity, but reduces existing book value to a level very near "tangible" book value. Underscoring the 'intangible' aspect of goodwill is that Tier 1 and Total regulatory capital ratios are unaffected by this adjustment, and accordingly, the Company's risk based capital continues to exceed regulatory benchmarks as a "well-capitalized". The goodwill impairment reflected the 3rd party accounting firm's recently updated interim impairment testing indicating the estimated fair value of the Company's reporting unit as less than its book value resulting in a noncash after-tax impairment charge of $105.0 million, eliminating all previously recorded goodwill.
On October 3, 2008, Congress approved the $700 billion Emergency Economic Stabilization Act of 2008 (EESA). The first phase of implementation of EESA included a $250 billion Treasury Capital Purchase Program. The Company applied for up to three-percent of its total risk-weighted assets in capital, which would be in the form of non-cumulative perpetual preferred stock of the institution with a dividend rate of 5% until the fifth anniversary of the investment, and 9% thereafter. The Company's application is currently designated as "pending." In addition, the Company is currently seeking private equity capital to bolster the Company's capital and liquidity positions in this time of uncertainty and economic challenge. The Company may not be able to obtain either TARP or private equity financing or it may be only available on terms that are unfavorable to the Company and its shareholders. The Company believes that an investment by the Treasury through the TARP Program may be conditioned on the Company's receipt of private equity capital. In addition, the Bank is currently undergoing its annual regulatory exam. If as a result of that exam the Bank is downgraded to "adequately capitalized" by regulatory standards, the Bank may no longer be eligible to receive funds through the TARP Program. In the event additional capital is not available from the TARP Program or on acceptable terms through available financing sources, the Company may instead take additional steps to preserve capital, including slowing or reducing lending, selling certain assets, and/or increasing loan participations. The Company reduced its cash dividend to $.01 in the third quarter of 2008, and we eliminated our cash dividend at year end as part of its effort to preserve capital under current adverse economic conditions.
On October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program (TLGP). The final rule was adopted on November 21, 2008. The FDIC stated that its purpose is to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks of 31 days or greater, thrifts, and certain holding companies, and by providing full coverage of all transaction accounts, regardless of dollar amount. Inclusion in the program was voluntary. Participating institutions are assessed fees based on a sliding scale, depending on length of maturity. Shorter-term debt has a lower fee structure and longer-term debt has a higher fee. The range is from 50 basis points on debt of 180 days or less, and a maximum of 100 basis points for debt with maturities of one year or longer, on an annualized basis. A 10-basis point surcharge is added to a participating institution's current insurance assessment in order to fully cover all transaction accounts. The Bank elected to participate in both parts of the TLGP, and Bancorp elected to participate in the senior unsecured debt portion of the program. The amount of greater than 30 day unsecured senior debt that is eligible for the program is limited to 125% of the amount of such debt outstanding as of September 30, 2008. If there was no unsecured senior debt outstanding at September 30, 2008, the amount available under the program is limited to two percent of total liabilities as of September 30, 2008. As the Company did not have any unsecured senior debt outstanding as of September 30, 2008, the maximum amount of unsecured senior debt that can be issued under the program is limited to two percent of its total liabilities as of September 30, 2008. On February 12, 2009 the Bank issued $41 million of TLGP under this program comprised of $16 million floating rate and $27 million fixed rate notes maturing February 12, 2012.
On February 25, 2009 the Treasury announced the terms and conditions for the Capital Assistance Program (CAP). The purpose of the CAP is to restore confidence throughout the financial system that the nation's largest banking institutions have a sufficient capital cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers. Under CAP, federal banking supervisors will conduct forward-looking assessments to evaluate the capital needs of the major U.S. banking institutions under a more challenging economic environment. Should that assessment indicate that an additional
Capital provided under the CAP will be in the form of a preferred security that is convertible into common equity at a 10 percent discount to the price prevailing prior to February 9th. CAP securities will carry a 9 percent dividend yield and would be convertible at the issuer's option (subject to the approval of their regulator). After 7 years, the security would automatically convert into common equity if not redeemed or converted before that date. Companies who participate in the CAP will be subject to similar conditions as are imposed under the TARP Program.
Critical Accounting Policies and Accounting Estimates
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 Credit Losses: The Company's reserve for credit losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio and related loan commitments. Arriving at an estimate of the appropriate level of reserve for credit losses (reserve for loan losses and loan commitments) involves a high degree of judgment and assessment of multiple variables that result in a methodology with relatively complex calculations and analysis. Management uses historical information to assess the adequacy of the reserve for loan losses as well as consideration of the prevailing business environment. On an ongoing basis the Company seeks to refine its methodology such that the reserve is responsive to the effect that qualitative and environmental factors have upon the loan portfolio. However, external factors and changing economic conditions may impact the portfolio and the level of reserves in ways currently unforeseen. The reserve for loan losses is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. The reserve for loan commitments is increased and decreased through non interest expense. For a full discussion of the Company's methodology of assessing the adequacy of the reserve for credit losses, see "Reserve for Credit Losses" later in this report.
Other Real Estate Owned and Foreclosed Assets: Other real estate owned or other foreclosed assets acquired through loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the reserve for loans losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expenses.
Mortgage Servicing Rights (MSRs): Determination of the fair value of MSRs requires the estimation of multiple interdependent variables, the most impactful of which is mortgage prepayment speeds. Prepayment speeds are estimates of the pace and magnitude of future mortgage payoff or refinance behavior of customers whose loans are serviced by the Company. Errors in estimation of prepayment speeds or other key servicing variables could subject MSRs to impairment risk. On a quarterly basis, the Company engages a qualified third party to provide an estimate of the fair value of MSRs using a discounted cash flow model with assumptions and estimates based upon observable market-based data and methodology common to the mortgage servicing market. Management believes it applies reasonable assumptions under the circumstances, however, because of possible volatility in the market price of MSRs, and the vagaries of any relatively illiquid market, there can be no assurance that risk management and existing accounting practices will result in the avoidance of possible impairment charges in future periods. See also "Non-Interest Income" later in this item and footnote 7 of the Company's Consolidated Financial Statements.
Goodwill and other intangibles: Net assets of entities acquired in purchase transactions are recorded at fair value at the date of acquisition. Identified intangibles are amortized on a straight-line basis over the period benefited. Goodwill is not amortized, although it is reviewed for impairment on an annual basis or if events or circumstances indicate a potential impairment. The impairment test is performed in two phases. The first step is to estimate the fair value of the reporting
Economic Conditions
The Company's business is closely tied to the economies of Idaho and Oregon in general and is particularly affected by the economies of Central, Southern and Northwest Oregon, as well as the Greater Boise, Idaho area. The uncertain depth and duration of the present economic downturn could continue to cause deterioration of these local economies, resulting in an adverse affect on the Company's financial condition or results of operations. Unemployment rates have increased significantly and are expected to increase further. Business activity across a wide range of industries and regions is greatly reduced and local governments and many businesses are facing serious challenges due to the lack of consumer spending driven by elevated unemployment and uncertainty.
The Company's financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, is highly dependent upon on the business environment in the markets where the Company operates. The present significant downturn in economic activity and declining real estate values has had a direct and adverse affect on the condition and results of operations for the Company. This is particularly evident in the residential land development and residential construction segments of the Company's loan portfolio. Developers or home builders whose cash flows are dependent on sale of lots or completed residences experienced reduced ability to service their loan obligations and the market value of underlying collateral was adversely effected, The impact on the Company has been an elevated level of impaired loans, an associated increase in provisioning expense and charge-offs for the Company leading to a net loss for 2008. In addition, the Company experience declining deposit resources because business and retail customers saw a reduction in overall level of assets and cash available to deposit in the bank. As a consequence the Company increased its use of higher priced and more volatile wholesale funds.
Highlights and Summary of Performance - Q4 and Full Year 2008 Financial Performance
º Full Year 2008 Net Loss Per Share: at ($4.82) per share or ($134.6) million compared to earnings of $1.05 per share and $30.0 million net income in 2007.
º Fourth Quarter 2008 Net Loss Per Share: at ($4.92) per share or ($137.6) million compared to earnings of $0.01 per share and $0.3 million net income, respectively for the year ago quarter.
º Capital Ratio: exceeds regulatory benchmarks for "well-capitalized" designation at 10.22% total risk based capital.
º Fourth Quarter Provision for Loan Losses: at $61.3 million with net charge-offs of $64.0 million; year-end reserve for credit losses at $48.2 million or 2.46% of total loans.
º Total Loans: down 4.2% year-over-year and down 4.6% on a linked-quarter basis.
º Total Deposits: up 7.6% year-over-year, and up 2.1% on a linked-quarter basis.
º Net Interest Margin: at 4.09% for Q4-08 (4.42% as adjusted for interest reversals) compared to 4.42% linked quarter.
º Non-Cash after-tax Goodwill Impairment of $105.0 million: Results in the elimination of all previously recorded goodwill. Goodwill impairment is a noncash accounting adjustment that does not affect cash flow, capital or liquidity. Tier 1 and Total regulatory capital ratios are unaffected by this adjustment.
º Cash Dividend: Board of Directors omit dividend for current quarter; was $.01 in prior quarter.
Total interest income decreased approximately $33.5 million (or 19.5%) for 2008 primarily because of lower average yields, including interest reversed, and interest foregone on non-performing loans. Total interest expense for 2008 also declined by approximately $20.4 million (or 32.4%) for 2008 as compared to 2007 as a result of lower rates and reduced volumes of interest bearing deposits and borrowings. Accordingly, net interest income decreased to $95.4 million or 12.1% in 2008 over 2007. Yields earned on assets decreased to 6.40% for 2008, as compared to 8.21% in 2007. Meanwhile, the average rates paid on interest bearing liabilities for 2008 decreased to 2.49% compared to 4.01% in 2007.
Loan portfolio and credit quality
At December 31, 2008, Cascade's loan portfolio was $1.96 billion, down 4.2% as compared to a year-ago and down 4.6% on a linked-quarter basis. Management believes that overall loan balances and growth will likely remain muted until such time as the economic downturn runs its course. The Bank's residential development loans continue to be the most negatively effected by the downturn including several relatively large credits in both Idaho and Central Oregon being classified as non performing during the fourth quarter, necessitating write-downs to estimated fair value and prompting the significant provision and charge-offs discussed above. "See Loans - Loan Portfolio Comparison" below.
At December 31, 2008, loans delinquent >30 days were at 0.33% of total loans compared to 0.21% for the linked-quarter and 0.47% at year-end 2007. This compares favorably to peer banks whose average delinquency rates were 0.89% at prior quarter end. At December 31, 2008 the delinquency rate in our commercial real estate (CRE) portfolio was just 0.40%. CRE loans represent the largest portion of Cascade's portfolio at 36% of total loans. Delinquencies in our commercial loan portfolio were just 0.36%; this portfolio represents 30% of total loans. These statistics are one indication that as of year-end 2008 most of the Company's total loans are performing well despite the economic conditions.
Non-performing loans (NPL's) increased to $120.5 million in the fourth quarter of 2008 mainly due to several large residential development project loans where the Bank determined that, more likely than not, certain borrowers would be unable to repay principal and interest according to the contractual terms of their loans. Upon such determination the Bank promptly charges down the balance of such loans to estimated fair value. NPL's represented 5.3% of total assets at December 31, 2008 and compares with 4.5% for prior quarter and 1.9% a year ago. Net loan charge-offs for the quarter were $64.0 million arising mainly from deteriorating market prices for collateral dependent non-performing loans. This compares with $8.2 million in net charge-offs in the prior quarter and $6.5 million for the year ago quarter.
Other Real Estate Owned (OREO) represents real estate loan collateral now owned by the Bank which is carried at approximate estimated fair value of $52.7 million at December 31, 2008 as compared to $37.2 million in the prior quarter. The OREO balance is net of a fourth quarter 2008 OREO valuation charge of $5.3 million that is accounted for as non-interest expense (see below). OREO is largely residential development or construction related properties. Note that this amount excludes a $13.8 million performing OREO commercial building because tenant revenues exceed the interest income previously received on the underlying loan.
Non-performing assets (NPA's) include NPL's plus non-performing OREO properties as discussed above. NPA's total $159.4 million or 7.0% of total assets compared to $109.1 million or 4.5% of total assets for the linked-quarter. The Company carries NPA's at the estimated fair value; however, because of the uncertain real estate market, forward assurances cannot be given as to the timing of ultimate disposition of such assets or that selling price will be at or above carrying fair value. The orderly resolution of non-performing loans and OREO properties is a priority for management.
At December 31, 2008 the total reserve for credit losses was $48.2 million or 2.46% of total loans. Management believes the reserve for credit losses is at an appropriate level based on evaluation and analysis of portfolio credit quality in conjunction with prevailing economic conditions and estimated fair values of collateral supporting non performing loans. With uncertainty as to the depth and duration of the real estate slowdown and its economic effect on the communities within Cascades' banking markets, forward assurances cannot be given that the reserve will be adequate in future periods or that the level of NPA's will subside. Further provisioning and charge-offs may be required before values stabilize. See "Loans - Real Estate Loan Concentration" Below.
Customer relationship deposits increased slightly during the fourth quarter to $1.4 billion or 1.4% at December 31, 2008, as compared to the linked-quarter and is down 8.7% when compared to a year-ago. The year-over-year decline is predominately a result of the economic downturn's direct negative effect on retail and business customer cash available to deposit in their bank. Consistent efforts to retain and serve customers have proven successful with total customer numbers remaining constant. To provide additional customer assurances, the Company has chosen to participate in the FDIC's temporary 100% guarantee of . . .
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