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| CACB > SEC Filings for CACB > Form 10-Q on 29-Oct-2009 | All Recent SEC Filings |
29-Oct-2009
Quarterly Report
The following discussion should be read in conjunction with the Company's unaudited condensed consolidated financial statements and the notes thereto as of September 30, 2009 and the operating results for the nine months and three months then ended, included elsewhere in this 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 Form 10-K filed with the Securities and Exchange Commission on March 13, 2009; including its 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.
Cautionary Information Concerning Forward-Looking Statements
This quarterly report on Form 10-Q 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 predict future events, results or performance, and such statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain risks and uncertainties and the Company's success in managing such risks and uncertainties may cause actual results to differ materially from those projected, including among others, the risk factors described in our annual report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on March 13, 2009 as well as the following factors: our inability to comply in a timely manner with the cease and desist order with the Federal Deposit Insurance Corporation ("FDIC") and the Oregon Division of Finance and Corporate Securities ("DFCS"), under which we are currently operating, could lead to further regulatory sanctions or orders, which could further restrict our operations and negatively affect our results of operations and financial condition; local and national economic conditions could be less favorable than expected or could have a more direct and pronounced effect on us than expected and adversely affect our results of operations and financial condition; the local housing/real estate market could continue to decline for a longer period than we anticipate; the risks presented by a continued economic recession, which could continue to adversely affect credit quality, collateral values, including real estate collateral and OREO properties, investment values, liquidity and loan originations, reserves for loan losses and charge offs of loans and loan portfolio delinquency rates and may be exacerbated by our concentration of operations in the States of Oregon and Idaho generally, and the Oregon communities of Central Oregon, Northwest Oregon, Southern Oregon and the greater Boise area, specifically; we may be compelled to seek additional capital in the future to augment capital levels or ratios or improve liquidity, but capital or liquidity may not be available when needed or on acceptable terms; interest rate changes could significantly reduce net interest income and negatively affect funding sources; competition among financial institutions could increase significantly; competition or changes in interest rates could negatively affect net interest margin, as could other factors listed from time to time in the Company's SEC reports; the reputation of the financial services industry could further deteriorate, which could adversely affect our ability to access markets for funding and to acquire and retain customers; and an existing regulatory requirements, changes in regulatory requirements and legislation and our inability to meet those requirements, including capital requirements and increases in our deposit insurance premium, could adversely affect the businesses in which we are engaged, our results of operations and financial condition.
These forward-looking statements speak only as of the date of this quarterly report on Form 10-Q. 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
Regulatory Order
On August 27, 2009 the Bank entered into an agreement with the FDIC, its principal federal banking regulator, and the DFCS which requires the Bank to take certain measures to improve its safety and soundness.
In connection with this agreement, the Bank stipulated to the issuance by the FDIC and the DFCS of a cease-and-desist order against the Bank based on certain findings from an examination of the Bank conducted in February 2009 based upon financial and lending data measured as of December 31, 2008 (the "Order"). In entering into the stipulation and consenting to entry of the order, the Bank did not concede the findings or admit to any of the assertions therein.
Under the Order, the Bank is required to take certain measures to improve its capital position, maintain liquidity ratios, reduce its level of non-performing assets, reduce its loan concentrations in certain portfolios, improve management practices and board supervision and to assure that its reserve for loan losses is maintained at an appropriate level.
Among the corrective actions required are for the Bank to develop and adopt a plan to maintain the minimum capital requirements for a "well-capitalized" bank, including a Tier 1 leverage ratio of at least 10% at the Bank level beginning 150 days from the issuance of the order. At September 30, 2009, the Company's Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 4.22%, 5.38% and 8.61%, respectively, meeting the regulatory benchmarks for "adequately capitalized" and the Bank's Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 5.76%, 7.34% and 8.61%, respectively, meeting the regulatory benchmarks for "adequately-capitalized." These ratios include a reduction of 80 basis points in the Tier 1 leverage ratio and 102 basis points in the Tier 1 risk-based and total risk-based capital ratios related to a disallowance of $18.7 million or approximately 54% of the Company's deferred income tax assets based upon a regulatory accounting calculation standard that is not directly applicable under generally accepted accounting principles ("GAAP"). Management's assessment is primarily dependent on historical taxable income and projections of future taxable income, which are directly related to the Company's core earnings capacity and its prospects to generate core earnings in the future. Projections of core earnings and taxable income are inherently subject to uncertainty and estimates that may change given uncertain economic outlook, banking industry conditions and other factors. Regulatory benchmarks for an "adequately-capitalized" designation are 4%, 4% and 8% for Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital, respectively; "well-capitalized" benchmarks are 5%, 6%, and 10%, for Tier 1 leverage, Tier 1 risk-capital and total risk-based capital, respectively. However, as mentioned above, pursuant to the Order the Bank is required to maintain a Tier 1 leverage ratio of at least 10% in order to be considered "well-capitalized."
In addition, the Bank must retain qualified management and must notify the FDIC and the DFCS in writing when it proposes to add any individual to its board of directors or to employ any new senior executive officer. On September 3, 2009, the Company announced the appointment of a new Executive Officer to the Company and Bank to the position of Executive Vice President and Chief Credit Officer. Under the Order the Bank's board of directors must also increase its participation in the affairs of the Bank, assuming full responsibility for the approval of sound policies and objectives and for the supervision of all the Bank's activities.
The Order further requires the Bank to ensure the level of the reserve for loan losses is maintained at appropriate levels to safeguard the book value of the Bank's loans and leases, and to reduce the amount of classified loans as of the date of the Order to no more than 75% of capital within 120 days of the date of the Order. The Bank also must adopt and implement plans to reduce delinquent loans and reduce loans and other extensions of credit to borrowers in the troubled commercial real estate market sector. The Order also requires the Bank to develop a written three-year strategic plan, a plan for improving and sustaining earnings, and a plan to preserve liquidity.
The Order restricts the Bank from taking certain actions without the consent of the FDIC and the DFCS, including paying cash dividends, and from extending additional credit to certain types of borrowers.
The Order further requires the Bank to maintain a primary liquidity ratio (net cash, net short-term and marketable assets divided by net deposits and short-term liabilities) of at least 15%. During the second quarter of 2009, the Company substantially increased its interest bearing balances held mainly at the Federal Reserve Bank (FRB). This action was taken to bolster the Bank's liquidity as part of its contingency planning to help ensure ample and sufficient liquidity under a wide variety of adverse stress-test conditions. At September 30, 2009 the balances held at the FRB were $294.3 million or approximately 13% of total assets and our primary liquidity ratio was 20.25%. This contingent liquidity has the effect of lowering the Company's net interest income because such assets presently earn only an overnight rate of 0.25%, which is below the cost of deposits. Subject to the restriction on liquidity ratios in the Order, the Company intends to redeploy such assets into higher earning loans and investments at such time as management and the board of directors believes is prudent and within the context of the Order.
Written Agreement
On October 26, 2009, the Company entered into a written agreement with the Federal Reserve Bank of San Francisco (the "Reserve Bank") and DFCS (the "Written Agreement"), which requires the Company to take certain measure to improve its safety and soundness. Under the Written Agreement, the Company is required to develop and submit for approval, a plan to maintain sufficient capital at the Company and the Bank within 60 days of the Written Agreement. The Company must notify the Reserve Bank in writing within 30 days after any quarter in which any of the Company or the Bank's capital rations fall below the approved plan's minimum ratios.
In addition, the Written Agreement restricts the Company from taking certain actions without the consent of Reserve Bank and DFCS, including paying any dividends, taking dividends from the Bank and making any distributions of interest, principal or other sums on subordinated debt or trust preferred securities. The Written Agreement further requires the Company to notify the Reserve Bank and the DFCS in writing when it proposes to add any individual to its board of directors or to employ any new senior executive officer.
We may also face additional restrictions from the Board of Governors of the Federal Reserve based on the Bank's capitalization and other conditions giving rise to the Order. The consequences of the Bank failing to become "well-capitalized" could include additional restrictions on activities and loans.
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 Credit Losses: The Company's reserve for credit losses provides for possible 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" in Management's Discussion and Analysis of Financial Condition and Results of Operation in the Company's Annual Report on Form 10K filed with the SEC on March 13, 2009.
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" below and footnote 7 of the Condensed Consolidated Financial Statements.
Deferred Income Taxes: As of September 30, 2009 and December 31, 2008, the Company had recorded net deferred income tax assets ("DTA") (which are included in other assets in the accompanying condensed consolidated balance sheets) of approximately $34.6 million and $22.2 million, respectively. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is "more likely than not" that all or a portion of the deferred tax asset will not be realized. "More likely than not" is defined as greater than a 50% chance. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Management's assessment is primarily dependent on historical taxable income and projections of future taxable income, which are directly related to the Company's core earnings capacity and its prospects to generate core earnings in the future. Projections of core earnings and taxable income are inherently subject to uncertainty and estimates that may change given uncertain economic outlook, banking industry conditions and other factors. Management is considering certain transactions that would increase the likelihood that a DTA will be realized. Specifically, it is contemplating the effect of a possible exchange of existing trust preferred securities (TPS) (see note 9) for cash whereby the TPS would be extinguished resulting in a taxable gain and thereby increasing the likelihood that the Company's DTA would be fully realized. Any possible exchange of TPS would be subject to approval by the Federal Reserve Bank of San Francisco (the "Reserve Bank") pursuant to the written agreement discussed in note 15. Management may also consider other transactions including the sale of marketable securities, the sale and leaseback of Bank branches and liquidation of Bank owned life insurance. Execution of certain transactions may be considered viable but changing market conditions, tax laws, and other factors could affect the success thereof. Based upon management's analysis of available evidence, it has determined that it is "more likely than not" that the Company's deferred income tax assets as of September 30, 2009 will be fully realized and therefore no valuation allowance was recorded. However, the Company can give no assurance that in the future its DTA will not be impaired since such determination is based on projections of future earnings and the possible effect of the transactions discussed above, which are subject to uncertainty and estimates that may change given economic conditions and other factors. Due to the uncertainty of estimates and projections, it is reasonably possible that the Company will be required to record adjustments to the valuation allowance in future reporting periods.
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 further deterioration of these local economies, resulting in an adverse effect on the Company's financial condition and results of operations. Real estate values in these areas have declined and may continue to fall. Unemployment rates in these areas have increased significantly and could increase further. Business activity across a wide range of industries and regions has been impacted 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 declining value of collateral securing those loans, is reflective of 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 effect on the condition and results of operations of 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 the sale of lots or completed residences have reduced ability to service their loan obligations and the market value of underlying collateral has been and continues to be adversely affected. 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 of $44.6 million and $12.6 million in the nine month and three month periods ended September 30, 2009. The local and regional economy also has a direct impact on the volume of bank deposits. Core deposits have declined since mid-2006 because business and retail customers have realized a reduction in cash available to deposit in the Bank. However, core deposits are showing signs of stabilization in the third quarter of 2009 as indicated by an increase in average balances in non-interest bearing accounts in the current quarter after declining for 10 consecutive quarters.
Highlights and Summary of Performance - Third Quarter of 2009
· Third Quarter Net Loss Per Share: of ($0.45) or ($12.6 million) mainly due to $22 million provision for loan losses compared to net income per share of $0.01 or $0.3 million a year-ago
· Total Deposits: up 4.8% compared to a year-ago primarily in time deposits to enhance liquidity.
· Total Loans: down 18.2% compared to a year-ago.
· Credit Quality: Reserve for credit losses at 3.21% of total loans.
· Credit Quality: Non-performing assets (NPA's) at $197.3 million down from $204.1 million for prior quarter.
· Interest Bearing Balances held at Federal Reserve Bank: approximately $294.3 million or 13% of assets to enhance liquidity.
· Net Interest Margin: 3.13% vs. 3.52% in the linked-quarter mainly due to the effects of increased average balances held at Federal Reserve Bank.
Cascade reported a third quarter 2009 net loss of $12.6 million or $0.45 per share compared to net income of $0.3 million or $0.01 per share for the year-ago quarter primarily due to elevated loan loss provision expense, decreased net interest income, and an increase in noninterest expense due to OREO valuation charges. Loans were lower mainly due to management's actions to strategically reduce outstanding loans, declining loan originations and increased loan charge-offs. Management actions to lower loan volumes included loan sales or loan participations as well as non-renewal of mainly transaction-only loans where the Company does not consider itself to be the customer's primary bank based upon the overall balance of its banking and deposit relationship with the customer. Non-performing assets (NPA's) were $197.3 million down from $204.1 million in the linked-quarter. The third quarter 2009 provision for loan losses totaled $22.0 million (pre-tax) with net loan charge-offs of $31.3 million (pre-tax) primarily due to declining real estate appraised values backing collateral dependent loans. Net interest income was lower for the third quarter of 2009 primarily due to reduced interest and loan fee income related to the decline in loan volumes and interest reversed and foregone on NPA's. Non-interest income increased $2.6 million for the three months ended September 30, 2009 compared to the year-ago level primarily due to a one-time gain recorded on the sale of the Bank's credit card merchant business of $3.2 million described below. Non-interest expenses were higher primarily due to OREO valuation adjustments of approximately $9.0 million and FDIC insurance of $1.8 million for the quarter. OREO and FDIC expenses were $0.4 million and $0.5 million in the year ago third quarter, respectively.
Total deposits at September 30, 2009, were $1.8 billion, up 4.8% compared to the year-ago quarter mainly as a result of increased time deposits. Non-interest bearing deposits decreased 3.9% from the year ago quarter, but increased modestly to $428.9 million or by $4.0 million compared to the linked-quarter. Customer time deposits increased as did those from internet and brokered sources. The Company is restricted from acquiring additional brokered deposits under the terms of the Order discussed above and is managing its deposit strategy accordingly.
The net interest margin (NIM) was 3.13% for the third quarter of 2009 compared to 3.52% for the linked-quarter and 4.42% in the year-ago period mainly due to balances held with Federal Reserve Bank for liquidity purposes. Federal Reserve Bank balances were $294.3 million or approximately 13% of total assets at September 30, 2009 and were insignificant at December 31, 2008. This had the effect of lowering the Company's NIM for the quarter ended September 30, 2009 by 32 basis points because such assets presently earn a low overnight rate of 0.25% which is below the average cost of deposits. Subject to the restriction on liquidity ratios in the Order, the Company intends to prudently redeploy such assets into higher earning loans and investments over time. The NIM was also lower by 7 basis points compared to the linked-quarter due to interest reversals and interest foregone on non-performing assets. On September 1, 2009, the Company sold its merchant card processing business and certain miscellaneous assets utilized in connection with that business. The Company recognized a pre-tax net gain resulting from the sale of the merchant card processing business of approximately $3.2 million in the third quarter of 2009.
Pursuant to the Order discussed above, the Bank is required to develop and adopt a plan to maintain the minimum capital requirements for a "well-capitalized" bank, including a Tier 1 leverage ratio of at least 10% at the Bank level beginning 150 days from the issuance of the Order. At September 30, 2009, the Company's Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 4.22%, 5.38% and 8.61%, respectively, meeting the regulatory benchmarks for "adequately capitalized" and the Bank's Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 5.76%, 7.34% and 8.61%, respectively, meeting the regulatory benchmarks for "adequately-capitalized." These ratios include a reduction of 80 basis points in the Tier 1 leverage ratio and 102 basis points in the Tier 1 and total risk-based capital ratios related to a disallowance of $18.7 million or approximately 54% of the Company's deferred tax assets based upon a regulatory accounting calculation standard that is not directly applicable under generally accepted accounting principles ("GAAP"). Regulatory benchmarks for "adequately-capitalized" designation are 4%, 4% and 8% for Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital, respectively; "well-capitalized" benchmarks are 5%, 6%, and 10%, for Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital, respectively. However, as mentioned above, pursuant to the Order the Bank is required to maintain a Tier 1 leverage ratio of at least 10% in order to be considered "well-capitalized."
Loan portfolio and credit quality
At September 30, 2009, Cascade's loan portfolio was approximately $1.7 billion, down $127.0 million and $374.0 million when compared to the linked-quarter and a year-ago, respectively. Loans have declined primarily due to reduced loan originations, an increase in loan charge-offs and management's strategic loan reduction program that included select loan sales and loan participations as well as non-renewal of mainly transaction only loans where the Company does not consider itself to be the customer's primary bank based upon the overall balance . . .
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