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CACB > SEC Filings for CACB > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for CASCADE BANCORP

Form 10-Q for CASCADE BANCORP


14-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Company's unaudited condensed consolidated financial statements and the notes thereto, included elsewhere in this Quarterly Report on Form 10-Q. 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 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 27, 2012, including its audited 2011 consolidated financial statements and the notes thereto as of December 31, 2011 and 2010 and for each of the years in the three-year period ended December 31, 2011.

Cautionary Information Concerning Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements about the Company's plans and anticipated results of operations and financial condition. 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 words "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 could cause actual results to differ materially from those projected, including, among others, the risk factors disclosed in Part 1 - Item 1A of the Company's Annual Report on Form 10-K filed with the SEC on March 27, 2012 for the year ended December 31, 2011.

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.

Critical Accounting Policies and Accounting Estimates

The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

The Company considers accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company's financial statements. Accounting policies related to the reserve for loan losses are considered to be critical, as these policies involve considerable subjective judgment and estimation by management.

During the year ended December 31, 2011, the Company revised and continued to enhance its methodology for estimating the adequacy of the reserve for loan losses. The significant revisions to the methodology included (1) the application of historical loss factors by risk rating for each loan segment, as compared to the prior method which utilized blended historical loss factors, (2) a change to historical look-back periods, and (3) refinement of the qualitative factors and application thereof used to adjust the estimated historical loss factors. The reserve for loan losses at September 30, 2012 and December 31, 2011 were significantly affected by the revisions and enhancements to the Company's methodology, as well as the effects of the charge-offs incurred in the 2011 Bulk Sale of certain loans (see Note 2 to the condensed consolidated financial statements included in this Quarterly Report) on its historical loss factors.

The issuance of common stock in connection with the Company's successful completion of its Capital Raise (see Note 2 to the condensed consolidated financial statements included in this Quarterly Report) in the first quarter of 2011 resulted in an "ownership change" of the Company, as broadly defined in
Section 382 of the Internal Revenue Code. As a result of the ownership change, utilization of the Company's net operating loss carryforwards and certain built-in losses under federal income tax laws will be subject to annual limitation. Given the limited carryforward period assigned to these tax deductions in excess of this annual limit, some portion of these potential deductions will be lost and, consequently, the related tax benefits may not be recorded in the financial statements.

At September 30, 2012, the Company continued to conclude it was more likely than not that its deferred tax asset would not be realized. Accordingly it has maintained a full valuation allowance that has reduced its deferred tax asset to zero. The determination as to utilization of deferred tax assets requires significant judgment, the use of estimates and the interpretation of complex tax laws. The Company continues to evaluate available evidence, including its forecasts of future taxable income and related operating results, to determine whether some or all of its deferred income tax assets may become realizable.

For additional information regarding critical accounting policies, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Accounting Estimates" included in

Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended
December 31, 2011.

There have been no significant changes in the Company's application of critical accounting policies since December 31, 2011.

Revision to Previously Reported Financial Information

As previously reported in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, management discovered an error in the computation of the Bank's regulatory capital for purposes of the Bank's FDIC Call Reports. This Call Report error affected the Bank's regulatory capital disclosures in certain of the Company's prior filings with the SEC including disclosures about the Bank's compliance with a regulatory order applicable to the Bank. The correction of the error had no effect on the Company's consolidated balance sheet, income statements of operations, stockholders' equity, or the amounts or disclosure of the regulatory capital or regulatory capital ratios of Bancorp. The Company believes the error will not affect the Bank's status with respect to its outstanding regulatory agreements with the Federal Deposit Insurance Corporation ("FDIC") or the Oregon Department of Consumer and Business Services, Division of Finance & Corporate Securities ("DFCS").

For additional information regarding the revisions to previously reported financial information, refer to Note 16 to the condensed consolidated financial statements included in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Revision to Previously Reported Financial Information" included in Part I, Item 2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012.

Status of the Regulatory Order

On August 27, 2009, the Bank stipulated to the issuance by the FDIC and DFCS of an order to cease and desist (the "Order"). Management believes the Bank is in substantial compliance with the requirements of the Order and expects that the Order will be lifted in due course. Management also believes that the error in the Bank's Call Reports did not contravene the Order. Further, management believes that if the Order is removed the Bank may remain subject to an informal supervisory directive or memorandum of understanding, the terms of which would likely continue to impose certain limitations on the Bank's operations.

New Proposed Capital Rules

On June 12, 2012, the three federal banking regulators (including the Federal Reserve and the FDIC) jointly announced that they were seeking comment on three sets of proposed regulations relating to capital (the "Proposed Rules"). The Proposed Rules would apply to both depository institutions and (subject to certain exceptions not applicable to the Company) their holding companies. Although parts of the Proposed Rules would apply only to large, complex financial institutions, substantial portions of the Proposed Rules would apply to the Bank and Bancorp. The Proposed Rules include requirements contemplated by the Dodd-Frank Act as well as certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010, which standards are commonly referred to as "Basel III".

The Proposed Rules include new risk-based and leverage capital ratio requirements, which would be phased in beginning in 2013 and be fully implemented January 1, 2015, and would refine the definition of what constitutes "capital" for purposes of calculating those ratios. The proposed new minimum capital level requirements applicable to Bancorp and the Bank under the Proposed Rules would be: (i) a new common equity Tier 1 risk-based capital ratio of 4.5%;
(ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); (iii) a total risk-based capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. Common equity Tier 1 capital would consist of retained earnings and common stock instruments, subject to certain adjustments.

The Proposed Rules would also establish a "capital conservation buffer" of 2.5% above the new regulatory minimum risk-based capital requirements. The conservation buffer would consist entirely of common equity Tier 1 capital and, when added to the capital requirements, would result in the following minimum ratios: (i) a common equity Tier 1 risk-based capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its capital level is below the buffer amount.

The Proposed Rules would also revise the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels do not meet certain thresholds. These revisions would be phased in beginning in 2013 and be fully implemented January 1, 2015. The prompt correction action rules would be modified to include a common equity Tier 1 capital component and to increase certain other capital requirements for the various thresholds. For example, under the proposed prompt corrective action rules, insured depository institutions would be required to meet the following capital levels in order to qualify as "well capitalized": (i) a new common equity Tier 1 risk-based capital ratio of 6.5%; (ii) a Tier 1 risk-based capital ratio of 8% (increased from 6%); (iii) a total risk-based capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (unchanged from current rules).

The Proposed Rules set forth certain changes in the methods of calculating certain risk-weighted assets, which in turn would affect the calculation of risk based ratios. These new calculations would take effect beginning January 1, 2015. Under the Proposed Rules, higher or more sensitive risk weights would be assigned to various categories of assets, including residential mortgages, certain credit facilities that finance the acquisition, development or construction of real property, certain exposures or credits that are 90 days past due or on nonaccrual, foreign exposures and certain corporate exposures. In addition, the Proposed Rules include (i) alternative standards of credit worthiness consistent with the Dodd-Frank Act; (ii) greater recognition of collateral and guarantees; and (iii) revised capital treatment for derivatives and repo-style transactions.

As of the date of this filing, final regulations have not been issued. We cannot predict at this time when or in what form final rules will be adopted.

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/Treasure Valley, Idaho area. The uncertain depth and duration of the present sluggish economic conditions could 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 or remain depressed for an uncertain amount of time. Unemployment rates in these areas continue to be high 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 uneven consumer spending driven by elevated unemployment and uncertainty. Recently, the national and regional economies and real estate price declines have appeared to show signs of stabilization. However, elevated unemployment, business and consumer confidence, national fiscal policy and other indicators continue to suggest that the future direction of the economy remains uncertain.

CASCADE BANCORP

Selected Consolidated Financial Highlights

(In thousands, except per share data and ratios; unaudited)



                                                       Year over Year Quarter                   Linked Quarter
                                                3rd Qtr         3rd Qtr          %           2nd Qtr          %
                                                 2012            2011          Change         2012          Change
Balance Sheet Data (at period end)
Investment securities                         $   275,886     $   136,287        102.4 %   $   269,100          2.5 %
Loans, gross                                      862,673         929,321         -7.2 %       845,517          2.0 %
Total assets                                    1,296,429       1,392,799         -6.9 %     1,276,874          1.5 %
Total deposits                                  1,070,506       1,148,126         -6.8 %     1,053,863          1.6 %
Non-interest bearing deposits                     413,017         417,947         -1.2 %       386,413          6.9 %
Total common shareholders' equity (book)          139,279         158,516        -12.1 %       136,656          1.9 %
Tangible common shareholders' equity
(tangible) (1)                                    139,279         154,711        -10.0 %       136,656          1.9 %
Income Statement Data
Interest income                               $    13,462     $    16,174        -16.8 %   $    13,797         -2.4 %
Interest expense                                    1,171           2,654        -55.9 %         1,289         -9.1 %
Net interest income                                12,291          13,520         -9.1 %        12,508         -1.7 %
Loan loss provision                                     -          52,800       -100.0 %             -          0.0 %
Net interest income after loan loss
provision                                          12,291         (39,280 )     -131.3 %        12,508         -1.7 %
Noninterest income                                  3,233           2,822         14.6 %         3,439         -6.0 %
Noninterest expense                                13,699          25,418        -46.1 %        14,165         -3.3 %
Income (loss) before income taxes                   1,825         (61,876 )     -103.0 %         1,782          2.4 %
Provision for income taxes                              -           7,456       -100.0 %           (25 )     -100.0 %
Net income                                          1,825         (54,420 )     -103.4 %         1,757          3.9 %
Share Data
Basic net income per common share             $      0.04     $     (1.16 )     -103.4 %   $      0.04          0.0 %
Diluted net income per common share           $      0.04     $     (1.16 )     -103.4 %   $      0.04          0.0 %
Book value per common share                   $      2.95     $      3.36        -12.3 %   $      2.89          1.9 %
Tangible book value per common share          $      2.95     $      3.28        -10.1 %   $      2.89          1.9 %
Basic average shares outstanding                   47,142          47,092          0.1 %        47,133          0.0 %
Fully diluted average shares outstanding           47,293          47,092          0.4 %        47,284          0.0 %
Key Ratios
Return on average total shareholders'
equity (book)                                        5.25 %       -100.92 %     -105.2 %          5.23 %       -0.4 %
Return on average total shareholders'
equity (tangible)                                    5.25 %       -102.85 %     -105.1 %          5.23 %       -0.4 %
Return on average total assets                       0.56 %        -13.78 %     -104.1 %          0.55 %       -1.8 %
Net interest spread                                  3.81 %          3.26 %       16.9 %          3.92 %       -2.8 %
Net interest margin                                  4.07 %          3.70 %       10.0 %          4.18 %       -2.6 %
Total revenue (net int inc + non int inc)     $    15,524     $    16,342         -5.0 %   $    15,947         -2.7 %
Efficiency ratio (2)                                88.25 %        155.53 %      -43.3 %         88.82 %       -0.6 %
Credit Quality Ratios
Reserve for credit losses                     $    37,193     $    32,567         14.2 %   $    39,769         -6.5 %
Reserve for credit losses to ending gross
loans                                                4.31 %          3.50 %       23.0 %          4.93 %      -12.5 %
Non-performing assets (NPAs) (3)              $    19,617     $    42,781        -54.1 %   $    21,682         -9.5 %
Non-performing assets to total assets                1.51 %          3.07 %      -50.7 %          1.70 %      -10.9 %
Delinquent >30 days to total loans (excl.
NPAs)                                                0.77 %          0.27 %      189.8 %          0.51 %       49.7 %
Net Charge off's (NCOs)                             2,577          62,881        -95.9 %         5,731        -55.0 %
Net loan charge-offs (annualized)                    1.21 %         23.27 %      -94.8 %          2.70 %      -55.2 %
Provision for loan losses to NCOs                    0.00 %         83.97 %     -100.0 %          0.00 %        0.0 %
Bank Capital Ratios (4)(5)
Tier 1 capital leverage ratio                       10.58 %         11.10 %       -4.7 %         10.44 %        1.3 %
Tier 1 risk-based capital ratio                     13.60 %         16.45 %      -17.3 %         13.48 %        0.9 %
Total risk-based capital ratio                      14.88 %         17.72 %      -16.0 %         14.76 %        0.8 %
Bancorp Capital Ratios (4)
Tier 1 capital leverage ratio                       10.60 %          9.74 %        8.8 %         10.47 %        1.2 %
Tier 1 risk-based capital ratio                     13.64 %         14.75 %       -7.5 %         13.53 %        0.8 %
Total risk-based capital ratio                      14.92 %         16.02 %       -6.9 %         14.81 %        0.7 %

Notes:

(1) Excludes core deposit intangible and other identifiable intangible assets, related to the acquisition of F&M Holding Company.
(2) Efficiency ratio is noninterest expense divided by (net interest income + noninterest income).
(3) Nonperforming assets consist of loans contractually past due 90 days or more, nonaccrual loans and other real estate owned.
(4) Computed in accordance with FRB and FDIC guidelines.
(5) The Bank Capital Ratios for 3rd Qtr 2011 have been adjusted to correct an error in the computation of the Bank's regulatory capital, which is discussed in Note 16 to the condensed financial statements included in the Quarterly Report on Form 10-Q for the quarter ended June 30, 2012.

Financial Highlights and Summary of the Third Quarter of 2012

Third Quarter Net Income: $1.8 million or $0.04 per share

Credit Quality: Reserve for loan losses at $35.6 million or 4.13% of loans. No loan loss provision was made in the third quarter of 2012.

Credit Quality: Net charge-offs for the quarter were $2.6 million, or 1.21% of loans (annualized), down from $5.7 million for the second quarter of 2012. Charge offs for the third quarter of 2011 were $62.9 million of which approximately $54.1 million was a result of the Bulk Sale discussed in Note 2 to the Company's condensed consolidated financial statements included in this Quarterly Report.

Credit Quality: Non-performing assets were 1.51% of total assets at September 30, 2012, compared to 1.70% at June 30, 2012 and 3.07% at September 30, 2011.

Loans: Gross loans were up $17.2 million during the third quarter of 2012 as a result of efforts to revitalize lending activities and reduced runoff and paydowns on existing loans. Gross loan balances are down $34.9 million from December 31, 2011 as a result of loan payoffs and paydowns in the first six months of 2012.

Deposits: Total deposits were up $16.6 million during the third quarter of 2012, mainly a result of seasonally higher non-interest bearing deposits. Year over year deposits are lower by $77.6 million due primarily to reduced public fund deposits and a runoff of price sensitive CDs in the first six months of 2012.

Net Interest Margin ("NIM"): NIM was 4.07% at September 30, 2012 compared to 4.18% at June 30, 2012 and 4.04% at December 31, 2011.

The Company recorded net income of $0.04 per share or $1.8 million in the third quarter of 2012. This compares to the second quarter 2012 net income of $0.04 per share or $1.8 million. The September 2011 Bulk Sale of approximately $110.0 million (carrying amount) of certain non-performing, substandard and related performing loans, and OREO (discussed in Note 2 to the Company's condensed consolidated financial statements included in this report) resulted in a net loss of ($1.16) per share or ($54.4) million in the third quarter of 2011.

For the third quarter of 2012, net interest income was $12.3 million compared to $12.5 million for the second quarter of 2012. This 1.7% decrease was mainly a result of the lower average loan volumes which caused interest income to decline by $336 thousand as compared to the second quarter of 2012. Interest expense was reduced by $119 thousand in the third quarter of 2012 as compared to the preceding quarter of 2012 partially offsetting lower interest income.

Non-interest income and non-interest expense from the third quarter of 2012 decreased by $206 thousand and $466 thousand, respectively, from the second quarter 2012 levels. Non-interest income in the third quarter of this year decreased compared to the second quarter of 2012 primarily due to a valuation allowance of $139 thousand applied against the fair value of Mortgage Servicing Rights ("MSRs"). The decrease in non-interest expense in the third quarter of 2012 as compared to the second quarter of 2012 was due to higher non-recurring expenses in the prior quarter of 2012 including increased salaries and benefits, including healthcare costs, incentive compensation and director compensation in the form of vested stock grants. The current quarter also benefited from reversals of previously accrued professional fees of $248 thousand in the third quarter of 2012.

At September 30, 2012, gross loans were up $17.2 million as compared to the second quarter of 2012 as a result of efforts to revitalize lending activities as well as reduced runoff and paydowns on existing loans. Management has implemented incentive and targeted marketing programs to refocus lending and branch staff toward production. Loan balance declines in the first two quarters of 2012 and were due to customer payoffs and paydowns resulting from debt deleveraging associated with the sluggish economy and a highly competitive market for quality loans. Loans declined by $69.0 million, primarily due to the Bulk Sale discussed above and in Note 2 to the condensed consolidated financial statements.

At September 30, 2012 total deposits were $1.1 billion, an increase of $16.6 million from the second quarter of 2012, a decrease of $16.3 million from December 31, 2011, and down $77.6 million from the third quarter a year ago. The increase in deposits during the third quarter of 2012 was caused by seasonal factors including customers having additional cash during the summer months, that increased demand account deposits. The reduction in total deposits since December 31, 2011 was primarily a result of movement of municipal deposits to the Oregon State sponsored municipal funds pool which carries an advantageous rate of return for public entities. Also, time deposits have declined due to runoff of higher priced CDs. On a year over year basis, the decline in deposits resulted primarily from lower internet deposits, the movement of municipal deposits described above and customer net deposit migration. Internet deposits decreased $31.3 million year-over-year owing to the Bank's planned call and prepayment of internet deposits during 2011 including approximately $28.0 million in the fourth quarter of 2011. At September 30, 2012, the Bank had no wholesale or internet sourced deposits. Total non-interest bearing deposits have increased $41.4 million over December 31, 2011 and at September 30, 2012 represent approximately 39% of the Bank's total deposits compared to 34% at year end. Currently the Bank's non-interest bearing deposits are fully insured by the FDIC's Transaction Account Guarantee (TAG) Program regardless of the balance in the account. The TAG program is scheduled to expire at December 31, 2012; upon expiration non-interest bearing deposits will be insured up to a maximum of $250 thousand per account. After this change, we may see shifts in the categories of accounts held by customers.

At September 30, 2012, the Bank's Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 10.58%, 13.60% and 14.88, respectively. Regulatory minimums for a "well-capitalized" bank are 5%, 6%, and 10% for Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital, respectively, although the Bank must maintain a Tier 1 leverage ratio of at least 10% in order to be deemed "well-capitalized" under the Order. Bancorp's Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios were 10.60%, 13.64% and 14.92%, respectively, as of September 30, 2012.

RESULTS OF OPERATIONS - Nine and Three Months ended September 30, 2012 and 2011

Income Statement

Net Income

For the nine months ended September 30, 2012, the Company recorded net income of $0.10 per share or $4.6 million. Year-to-date results include a loan loss provision of $1.1 million, which was made in the first quarter of 2012. Primarily due to the Bulk Sale loss discussed above and in Note 2 to the condensed consolidated financial statements included in this Quarterly Report, for the nine-month period ended September 30, 2011, the Company recorded net loss before extraordinary gain of $(1.27) per share or $(54.2) million and net loss of $(0.50) per share or $(21.4) million after an extraordinary gain on the . . .

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