Cascade Bancorp in Bend, Ore., has been a darling of investors for years, but lately it has fallen out of favor.
Though it is still viewed as a top performer — its net interest margin remains well above the industry average — Cascade's earnings have slightly missed estimates in each of the last three quarters, and investors have punished the stock.
The $2.3 billion-asset Cascade said April 12 that first-quarter net income rose 61% from a year earlier, to $9.5 million, largely because of the April 2006 purchase of the $650 million-asset Farmers and Merchants State Bank of Idaho, which was merged with Bank of the Cascades. But earnings per share of 33 cents missed the average of analyst estimates by 2 cents, and the market sent its shares down 4% that day.
Cascade's stock has fallen 25% this year.
Analysts say the stock, which was trading at $23.31 late Wednesday, continues to trade at a premium to banking companies of similar size, because the long-term trends in Cascade's high-growth markets remain strong.
But investors are apparently spooked, because the recent slowdown in housing construction is hampering loan and deposit growth, as well as credit quality. On top of this, Cascade's margin continues to be squeezed by competitive pricing pressure on deposits, while the yield curve remains inverted.
Patricia L. Moss, Cascade's president and chief executive, said in an interview Tuesday that investors should not worry that the current trends are permanent, and she emphasized that her company is working its way through the headwinds.
In its earnings report, Cascade said that its net interest margin fell 51 basis points from a year earlier and 20 basis points from the fourth quarter, to 5.34%. It also said that nonperforming assets had more than doubled from the fourth quarter, to $7.7 million, or 0.33% of total assets, because of three problem loans for construction projects in southern Oregon.
Matthew T. Clark, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc. in New York, said that investors are responding to the fact that Cascade's growth has moderated. "There is now more normalized growth occurring, and investors are trying to rationalize that," Mr. Clark said. He lowered his earnings estimates by 5 cents for this year, to $1.35, because he expects the margin to decline further by as much as 17 basis points this year.
Cascade's markets have slowed, but over the long term the region will continue to attract retirees from the more expensive regions of the West, and the large baby-boom generation has just started retiring, Mr. Clark said.
Though he accumulation of goodwill after its acquisition reduced Cascade's returns on assets and equity, the ratios should improve as the goodwill is digested, he said. Cascade's ROA fell 20 basis points from a year earlier, to 1.7%, and its ROE fell 800 basis points, to 14.67%. .
Ms. Moss agreed with Mr. Clark that investors should think more about Cascade's long-term performance.
"We hope that investors would take comfort in the fact that, while we have these headwinds, they aren't surprises to us, and that we're actually being proactive about trying to mitigate some of the challenges," Ms. Moss said.
For starters, Cascade plans to hire about 10% to 15% more employees in Idaho to beef up loan production and solicit more low-cost deposits, which should help ease margin pressure, she said.
Brett Rabatin, an analyst at First Horizon National Corp.'s FTN Midwest Securities Research Corp. in Nashville, said Cascade has done well gathering core deposits from its commercial borrowers. Core deposits made up 81% of total deposits at March 31.
Mr. Rabatin said Cascade would have to cut costs after first-quarter noninterest expenses jumped 64.2% from a year earlier, to $15.6 million, mainly as a result of the acquisition.
Still, Ms. Moss said that since its efficiency ratio is 48.61%, Cascade does not need to cut expenses significantly.
She also said that while here may be some uptick in nonperforming assets, chargeoffs should remain steady.The net chargeoff rate was 0.12% of total loans, compared with a net recovery rate of 0.01% a year earlier.
Mr. Rabatin lowered his earnings estimates by 12 cents for this year and next, buthe said he is still bullish on Cascade's long-term prospects. "Their markets are very likely to have better growth in the next five years than most of the ones out there," Mr. Rabatin said. "They also have a great fortress balance sheet — given their funding mix, high loan-loss reserves...and excellent loan portfolio.
