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CACB > SEC Filings for CACB > Form 10-K/A on 29-Mar-2013All Recent SEC Filings

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Form 10-K/A for CASCADE BANCORP


29-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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, 2012 and 2011 and for each of the years in the three-year period ended December 31, 2012 included in Item 8 of this Annual Report on Form 10-K.


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Cautionary Information Concerning Forward-Looking Statements

This Annual Report on Form 10-K 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 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 could cause actual results to differ materially from those projected, including among others, the risk factors described in Item 1A of this report.

These forward-looking statements speak only as of the date of this report. 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.

Cease and Desist Order Terminated in March 2013

On March 7, 2013, the FDIC and DFCS terminated the Order issued to the Bank in August 2009. In connection with this termination, the Bank has entered into a memorandum of understanding with the FDIC and the DFCS. The memorandum of understanding requires, among other things, that the Bank maintain a Tier 1 leverage capital ratio of 10.0% and continue to reduce the level of adversely classified assets. The memorandum of understanding continues to prohibit the Bank from paying dividends without the prior written consent from the FDIC and DFCS.

2011 Capital Raise

In January 2011, the Company completed a $177.0 million capital raise described in Item 1 of this report. Capital Raise proceeds in the amount of $167.9 million (net of offering costs) were received on January 28, 2011, of which approximately $150.4 million was contributed to the Bank. Approximately $15.0 million of the Capital Raise proceeds were used to extinguish $68.6 million of the Company's junior subordinated debentures (the "Debentures") and $3.9 million of related accrued interest payable, resulting in a pre-tax extraordinary gain of approximately $54.9 million ($32.8 million after tax). During the second quarter of 2011, the Company received an additional $0.2 million in proceeds from the issuance of an additional 50,000 shares of common stock in connection with the completion of the Capital Raise. See Note 2 in Item 8 of this report for additional information regarding the Capital Raise.

2011 Bulk Sale of Distressed Assets

In September 2011, the Bank entered into a Commercial Loan Purchase Agreement and Residential Loan Purchase Agreement with a third party pursuant to which the Bank sold approximately $110.0 million (carrying amount) of certain non-performing, substandard, and related performing loans and approximately $2.0 million of OREO in the Bulk Sale, also described in Item 1 of this report. In connection with the Bulk Sale, the Bank received approximately $58.0 million in cash from the buyer, incurred approximately $3.0 million in related closing costs, and recorded loan charge-offs totaling approximately $54.0 million. See Note 2 in Item 8 of this report for additional information regarding these transactions.

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 estimated 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 (which consists of our reserve for loan losses and our reserve for loan


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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 and considers qualitative factors including economic conditions and a range of other factors in its determination of the reserve. On an ongoing basis, the Company seeks to enhance and refine its methodology such that the reserve is at an appropriate level and responsive to changing conditions. However, the Company's methodology may not accurately estimate inherent loss or external factors and changing economic conditions may impact the loan 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 "Loan Portfolio and Credit Quality" below in this Item 7.

Deferred Income Taxes

The provision (credit) for income taxes is based on income and expenses as reported for consolidated financial statement purposes using the "asset and liability method" for accounting for deferred taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision (credit) for income taxes. A valuation allowance, if needed, reduces deferred tax assets to the expected amount to be realized.

Income tax positions that meet a more-likely-than-not recognition threshold are measured as the largest amount of income tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with income tax positions taken that exceeds the amount measured as described above would be reflected as a liability for unrecognized income tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized income tax benefits would be classified as additional income taxes in the consolidated statements of operations.

Due to cumulative losses incurred by the Company in prior years and related considerations, the Company is unable to conclude that it is more likely than not that it will realize its net deferred tax asset and, accordingly, has recorded a valuation allowance to fully offset its deferred tax asset at December 31, 2012 and 2011. Realization of deferred tax assets is generally dependent upon the Company generating future taxable income, and is subject to limitations arising from the 2011 Capital Raise that could result in permanent impairment of a material portion of the Company's deferred tax assets and/or limit deductibility of certain losses.

As broadly defined in Section 382 of the Internal Revenue Code, the issuance of common stock in connection with the Company's Capital Raise in 2011 resulted in an "ownership change" of the Company. As a result of the ownership change, utilization of the Company's net operating loss carry-forwards, tax credit carry-forwards and certain built-in losses under federal income tax laws will be subject to annual limitations and may be disallowed. The annual limitation imposed under Section 382 may limit the deduction for both the carry-forward tax attributes and the built-in losses realized within one to five years of the date of the ownership change. Given the complexity of application of Section 382 and the carry-forward limitations, a material portion of these potential attributes may be disallowed.

Other Real Estate Owned and Foreclosed Assets

Other real estate owned and other foreclosed assets acquired through loan foreclosure are initially recorded at estimated 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 loan losses. Due to the subjective nature of establishing the asset's fair value when it 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 non-interest expense. Operating costs associated with the assets after


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acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other non-interest expenses.

Economic Conditions

The Company's business is closely tied to the economies of Oregon and the greater Boise/Treasure Valley, Idaho area. The Company's financial performance is directly and consequentially affected by the ability of borrowers to pay interest on, and repay principal of, outstanding loans. The slow recovery and uncertain economic outlook constrains business and consumer incomes, cash reserves, and the value of collateral securing loans. Business activity has stabilized generally, along with real estate values, with modestly increasing prices evident in housing. Similarly, unemployment rates have stabilized yet with only modest improvement despite the recovering economy. Businesses are facing challenges due to elevated unemployment and economic uncertainty. The uncertain state of the economy and slow recovery could cause further deterioration of the economies of our primary markets, resulting in an adverse effect on the Company's financial condition and results of operations

Consolidated Results of Operations - Years ended December 31, 2012, 2011, and 2010
Net Income/Loss

Our consolidated results of operations are dependent to a large degree on our net interest income. We also generate other income primarily through service charges and fees, card issuer and merchant service fees, earnings on bank-owned-life insurance ("BOLI") and mortgage banking income. Our operating expenses consist in large part of compensation, employee benefits expense, occupancy, communications, equipment, insurance expenses, professional and outside services, and expenses related to OREO. Interest income and cost of funds are affected significantly by general economic conditions, particularly changes in market interest rates, and by government policies and actions of regulatory authorities.

In 2012 the Company recorded net income of $6.0 million, compared to a net loss of ($47.3) million in 2011 and a net loss of ($13.7) million in 2010. During these periods, net income (loss) per share was $0.13, ($1.08) and ($4.87), respectively. The return to profitability in 2012 is attributable to significantly reduced credit costs, including a lower loan loss provision and reduced cost incurred in connection with the disposition of OREO. The Company recorded a $1.1 million loan loss provision in 2012, significantly below the $75.0 million loan loss provision made in 2011 and the $24.0 million loan loss provision made in 2010. 2012 OREO-related expenses declined to $1.7 million, compared to $17.9 million in 2011 and $14.6 million in 2010. 2012 also benefited from revitalized residential mortgage originations which contributed $4.3 million to 2012 net income, compared to $0.5 million in 2011 and $0.6 million in 2010.

Net Interest Income

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 typically result 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.

Net interest income was $49.9 million in 2012, a $5.5 million or 10.0% decrease from 2011. Net interest income decreased $5.8 million or 9.5% in 2011 over 2010. Yields earned on assets decreased to 4.52% for 2012 as compared to 4.66% in 2011 and 4.87% in 2010 due to declining market interest rates and because lower yielding securities increased while loan balances decreased. Meanwhile, the average rates paid on interest bearing liabilities for 2012 decreased to 0.67% compared to 1.24% in 2011 and 1.55% in 2010.

2012 total interest income decreased $12.2 million or 18.2% due mainly to significantly lower average earning loans. 2011 total interest income decreased approximately $17.9 million or 21.0% also due to lower average earning loans as well as interest reversals on loans being placed on non-accrual, and interest foregone on non-performing loans. Total interest expense declined by $6.7 million or 57.3% in 2012 as compared to 2011


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mainly due to reduced volumes of time deposits and borrowings which carry higher rates than core deposits. Similarly 2011 interest expense declined $12.0 million or 50.7% as compared to 2010 as higher cost liabilities were reduced including borrowings from FHLB and extinguishment of the Debentures.

The overall decline in net interest income from 2010 through 2012 was largely a result of declining average loan balances over the same periods. The Company is working to increase loan balances through continued marketing efforts in our banking area.

Net Interest Margin (NIM)

The Company's net interest margin ("NIM") increased to 4.11% for 2012 compared to 3.85% for 2011 and 3.51% for 2010. The increase was primarily due to lower cost of funds resulting from a reduction in higher cost liabilities.


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The following table presents further analysis of the components of Cascade's NIM and sets forth for 2012, 2011, and 2010 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:

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                                            Year ended December 31, 2012                                             Year ended December 31, 2011                                             Year ended December 31, 2010
                         Average Balance       Interest Income/       Average Yield or Rates      Average Balance       Interest Income/       Average Yield or Rates      Average Balance       Interest Income/       Average Yield or Rates
                                                    Expense                                                                  Expense                                                                  Expense
Assets
Interest on            $        257,987      $             5,839                   2.26 %       $        134,370      $             4,961                   3.69 %       $        132,093      $             5,613                   4.25 %
securities
Interest bearing
balances due from                83,735                      208                   0.25 %                211,952                      533                   0.25 %                223,393                      561                   0.25 %
banks & FRB
Federal funds sold                   23                        -                   0.00 %                  2,261                        2                   0.09 %                  3,025                        5                   0.17 %
Federal Home Loan                10,441                        -                   0.00 %                 10,472                        -                   0.00 %                 10,472                        -                   0.00 %
Bank stock
Loans(1)(2)(3)                  862,057                   48,832                   5.66 %              1,080,120                   61,604                   5.70 %              1,377,674                   78,801                   5.72 %
Total earning
assets/interest               1,214,243                   54,879                   4.52 %              1,439,175                   67,100                   4.66 %              1,746,657                   84,980                   4.87 %
income
Reserve for loan                (39,691 )                                                                (38,768 )                                                                (56,677 )
losses
Cash and due from                30,142                                                                   32,280                                                                   79,662
banks
Premises and                     33,906                                                                   34,610                                                                   36,362
equipment, net
Accrued interest and             59,751                                                                   85,638                                                                  108,920
other assets
Total assets           $      1,298,351                                                         $      1,552,935                                                         $      1,914,924
Liabilities and
Stockholders' Equity
Interest bearing       $        501,141                    1,051                   0.21 %       $        482,526                    2,100                   0.44 %       $        664,254                    4,811                   0.72 %
demand deposits
Savings deposits                 36,910                       23                   0.06 %                 33,445                       55                   0.16 %                 30,680                       78                   0.25 %
Time deposits                   144,485                    2,017                   1.40 %                268,592                    5,559                   2.07 %                535,906                   11,791                   2.20 %
Other borrowings                 60,000                    1,908                   3.18 %                156,963                    3,990                   2.54 %                303,433                    7,060                   2.33 %
Total interest
bearing                         742,536                    4,999                   0.67 %                941,526                   11,704                   1.24 %              1,534,273                   23,740                   1.55 %
liabilities/interest
expense
Demand deposits                 394,382                                                                  399,251                                                                  342,760
Other liabilities                24,260                                                                   27,919                                                                   15,390
Total liabilities             1,161,178                                                                1,368,696                                                                1,892,423
Stockholders' equity            137,173                                                                  184,239                                                                   22,501
Total liabilities
and stockholders'      $      1,298,351                                                         $      1,552,935                                                         $      1,914,924
equity
Net interest income                          $            49,880                                                      $            55,396                                                      $            61,240
Net interest spread                                                                3.85 %                                                                   3.42 %                                                                   3.32 %
Net interest income                                                                4.11 %                                                                   3.85 %                                                                   3.51 %
to earning assets

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(1) Average non-accrual loans included in the computation of average loans w as $11.1 million for 2012, $48.4 million for 2011 and $105.7 million in 2010.

(2) Loan related fees recognized during the period and included in the yield calculation totaled approximately $0.5 million in 2012, $2.0 million in 2011, and $2.1 million in 2010.

(3) Includes mortgage loans held for sale.


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Changes in Interest Income and Expense

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:

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                                             Year ended December 31,                                                      Year ended December 31,
                                                  2012 over 2011                                                               2011 over 2010
                     Total Increase (Decrease)           Amount of Change Attributed to           Total Increase (Decrease)           Amount of Change Attributed to
                                                          Volume                  Rate                                                 Volume                  Rate
Interest income:
Interest and fees   $             (12,772 )        $       (12,438 )      $          (334 )      $             (17,197 )        $       (17,020 )      $          (177 )
on loans
Interest on
investment                            878                    4,564                 (3,686 )                       (652 )                     99                   (751 )
securities
Interest on
interest bearing                     (325 )                   (322 )                   (3 )                        (28 )                    (29 )                    1
deposits
Interest on
federal funds                          (2 )                     (2 )                    -                           (3 )                     (1 )                   (2 )
sold
Total interest                    (12,221 )                 (8,198 )               (4,023 )                    (17,880 )                (16,951 )                 (929 )
income
Interest expense:
Interest on
deposits:
Interest bearing                   (1,049 )                     81                 (1,130 )                     (2,711 )                 (1,316 )               (1,395 )
demand
Savings                               (32 )                      6                    (38 )                        (23 )                      7                    (30 )
Time deposits                      (3,542 )                 (2,569 )                 (973 )                     (6,232 )                 (5,881 )                 (351 )
Other borrowings                   (2,082 )                 (2,465 )                  383                       (3,070 )                 (3,408 )                  338
Total interest                     (6,705 )                 (4,947 )               (1,758 )                    (12,036 )                (10,598 )               (1,438 )
expense
Net interest        $              (5,516 )        $        (3,251 )      $        (2,265 )      $              (5,844 )        $        (6,353 )      $           509
income

Loan Loss Provision

The loan loss provision was $1.1 million in 2012, $75.0 million in 2011 and $24.0 million in 2010. The decrease in 2012 was a result of lower charge-offs in the current year, and reflects a generally improving credit risk profile. The 2011 increase in our provision level over 2010 was mainly due to charge-offs incurred in the Bulk Sale, as well as risk rating changes within the loan portfolio and higher than expected loss on impaired loans. At December 31, 2012, the reserve for loan losses was approximately $27.3 million while the reserve for unfunded commitments was $0.4 million, as compared to a reserve for loan losses of $43.9 million and a reserve for unfunded commitments of $1.6 million at December 31, 2011.

The Bank maintains pooled and impaired loan reserves with additional consideration of qualitative factors and unallocated reserves in reaching its determination of the total reserve for loan losses. The level of reserves is subject to review by the Bank's regulatory authorities who may require adjustments to the reserve based on their evaluation and opinion of economic and industry factors as well as specific loans in the portfolio. For further discussion, see "Critical Accounting Policies and Estimates" and "Loan Portfolio . . .

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