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CACB > SEC Filings for CACB > Form 10-Q on 13-May-2013All Recent SEC Filings

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Form 10-Q for CASCADE BANCORP


13-May-2013

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 25, 2013, including its audited 2012 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.

In this documents please note that "we" "our" "us" "Cascade" or the "Company" refer collectively to Cascade Bancorp ("Bancorp"), an Oregon chartered single bank holding company and its wholly-owned subsidiary, Bank of the Cascades (the "Bank").

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 II - Item 1A of this Quarterly Report on Form 10-Q and in Part I - Item 1A of the Company's Annual Report on Form 10-K filed with the SEC on March 25, 2013 for the year ended December 31, 2012.

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

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 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" in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012.

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 March 31, 2013 and December 31, 2012. Realization of deferred tax assets is generally dependent upon the Company generating future taxable income, and is subject to limitations arising from the $177.0 million capital raise completed by the Company in January 2011 (the "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.

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 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 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 primarily caused 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.

Financial Highlights and Summary of the First Quarter of 2013 (period ended March 31, 2013)

Net Income: $1.7 million or $0.04 per share compared to $1.1 million and $0.02 for the year ago quarter.

Loans: Gross loans up $19.0 million or 8.75% (annualized) compared to December 31, 2012.

Deposits: Total deposits up $28.0 million or 11.06% (annualized) compared to December 31, 2012.

Credit Quality: Remediated $57.2 million of loans classified as special mention or substandard during the first quarter of 2013, representing 6.52% of total loans.

Credit Quality: Reserve for loan losses at $24.5 million or 2.80% of loans. No loan loss provision was made in the first quarter of 2013.

Credit Quality: Net charge-offs for the quarter were $2.7 million, or 1.25% of loans (annualized) mainly related to resolution of special mention and substandard loans.

Credit Quality: Non-performing assets were 1.65% of total assets at March 31, 2013 compared to 2.03% at March 31, 2012.

Net Interest Margin ("NIM"): NIM was 3.92% at March 31, 2013 compared to 4.31% at March 31, 2012.

RESULTS OF OPERATIONS -Three Months ended March 31, 2013 and 2012

Summary of Priorities

The Company made continued and substantive progress toward its key priorities including (1) revitalizing quality loan and deposit growth; (2) reducing legacy special mention and substandard assets; and (3) improving fee income and efficiency. Management has set these priorities to achieve an improving core earnings trajectory underpinned by a quality loan portfolio. First quarter of 2013 loan growth was $19.0 million or 8.75% (annualized) compared to December 31, 2012 despite offsets related to ongoing remediation of special mention and substandard loans. Remediation during the first quarter of 2013 was substantial with a $57.2 million reduction in special mention and substandard loans, representing 6.52% of total loans, through targeted payoffs/paydowns, note sales and/or restructure of adversely risk rated legacy loans. Management believes the reserve for loan losses of $24.5 million at March 31, 2013 is ample to support achievement of this priority. Deposit balances increased in the first quarter of 2013 compared to December 31, 2012 and are elevated from the balances at March 31, 2012. Non-interest income in the first quarter of 2013 was $0.4 million higher than the first quarter of 2012 due to increased mortgage banking income and non-interest expense trends continued to improve.

Income Statement

Net Income

Net income for the quarter ended March 31, 2013 was $0.04 per share or $1.7 million, compared to $0.02 per share or $1.1 million for the first quarter of 2012. Net income for the quarter ended March 31, 2013 was higher than net income for the first quarter of 2012 primarily due to increased mortgage banking income as well as improved credit quality and the successful remediation of certain loans resulting in the Company not having to record a loan loss provision in the first quarter of 2013. The Company recorded a loan loss provision of $1.1 million for the quarter ended March 31, 2012. The provision for income taxes in the reported periods remains insignificant due to a 100% valuation allowance on the Company's deferred tax asset ("DTA").

Net Interest Income

Net interest income was $11.6 million for the first quarter of 2013, down $1.5 million compared to $13.1 million in the first quarter of 2012. Net interest income was lower year over year mainly due to a decline in yields on earnings assets as a result of the historically low interest rate market environment. Specifically, loan interest income in the first quarter of 2013 decreased $1.9 million compared to the first quarter of 2012 due to lower yields on the portfolio.

Interest expense for the first quarter of 2013 decreased $0.5 million or 33.5% compared to the first quarter of 2012. This improvement was due to the decreased rates on deposits in the low market rate environment.

Components of Net Interest Margin

The following tables set forth for the three months ended March 31, 2013 and 2012 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 and net interest margin for the Company (dollars in thousands):

                                                                    THREE MONTHS ENDED
(dollars in thousands)                          March 31, 2013                              March 31, 2012
                                                    Interest       Average                      Interest       Average
                                      Average        Income/      Yield or        Average        Income/      Yield or
                                      Balance        Expense        Rates         Balance        Expense        Rates
Assets
Investment securities               $   245,847     $   1,322          2.18 %   $   211,355     $   1,416          2.69 %
Interest bearing balances due
from other banks                         67,275            37          0.22 %       117,682            67          0.23 %
Federal funds sold                           23             -          0.00 %            23             -          0.00 %
Federal Home Loan Bank stock             10,273             -          0.00 %        10,472             -          0.00 %
Loans (1)(2)(3)                         880,006        11,238          5.18 %       884,590        13,113          5.96 %
Total earning assets/interest
income                                1,203,424        12,597          4.25 %     1,224,122        14,596          4.80 %
Reserve for loan losses                 (27,134 )                                   (43,608 )
Cash and due from banks                  29,750                                      34,064
Premises and equipment, net              34,287                                      34,099
Bank-owned life insurance                35,784                                      34,785
Accrued interest and other assets        18,633                                      29,375
Total assets                        $ 1,294,744                                 $ 1,312,837


Liabilities and Stockholders'
Equity
Interest bearing demand deposits    $   507,042           166          0.13 %   $   526,783           372          0.28 %
Savings deposits                         41,851             5          0.05 %        34,634             9          0.10 %
Time deposits                           129,148           333          1.05 %       157,790           616          1.57 %
Other borrowings                         66,356           474          2.90 %        60,000           474          3.18 %
Total interest bearing
liabilities/interest expense            744,397           978          0.53 %       779,207         1,471          0.76 %
Demand deposits                         385,263                                     375,457
Other liabilities                        23,068                                      23,637
Total liabilities                     1,152,728                                   1,178,301
Stockholders' equity                    142,016                                     134,536
Total liabilities and
stockholders' equity                $ 1,294,744                                 $ 1,312,837

Net interest income                                 $  11,619                                   $  13,125

Net interest spread                                                    3.71 %                                      4.04 %

Net interest income to earning
assets                                                                 3.92 %                                      4.31 %

(1) Average non-performing loans included in the computation of average loans for the three months ended March 31, 2013 and 2012 w as approximately $17.5 million and $9.0 million, respectively.

(2) Loan related fees, including prepayment penalties, recognized during the period and included in the yield calculation totaled approximately $0.5 million in 2013 and $0.6 million in 2012.

(3) Includes mortgage loans held for sale.

Analysis of Changes in Interest Income and Expense

The following table shows the dollar amount of increase (decrease) in the Company's consolidated interest income and expense for the three months ended March 31, 2013, and attributes such variance to "volume" or "rate" changes. Variances that were immaterial have been allocated equally between rate and volume categories (dollars in thousands):

                                           Quarter ended March 31,
                                                2013 over 2012
                                       Total           Amount of Change
                                      Increase           Attributed to
                                     (Decrease)       Volume        Rate
Interest income:
Interest and fees on loans          $     (1,875 )   $    (67 )   $ (1,808 )
Interest on investment securities            (94 )        229         (323 )
Other investment income                      (30 )        (28 )         (2 )
Total interest income                     (1,999 )        134       (2,133 )

Interest expense:
Interest on deposits:
Interest bearing demand                     (206 )        (14 )       (192 )
Savings                                       (4 )          2           (6 )
Time deposits                               (283 )       (111 )       (172 )
Other borrowings                               -           50          (50 )
Total interest expense                      (493 )        (73 )       (420 )

Net interest income                 $     (1,506 )   $    207     $ (1,713 )

Loan Loss Provision

The Company did not record a loan loss provision in the first quarter of 2013. A loan loss provision of $1.1 million was recorded in the first quarter of 2012. The decreased loan loss provision in the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 was a result of successful remediation of special mention and substandard loans over the periods. Management believes the reserve for loan losses is sufficient at March 31, 2013.

Net charge-offs in the first quarter of 2013 were $2.7 million compared to $1.1 million in the first quarter of 2012. A significant portion of these charge-offs related to the ongoing remediation of legacy special mention and substandard loans. At March 31, 2013, the reserve for loan losses was $24.5 million or 2.80% of outstanding loans compared to $27.3 million or 3.17% of outstanding loans at December 31, 2012.

The reserve for unfunded lending commitments was $0.4 million at March 31, 2013, which remained unchanged from December 31, 2012.

Non-Interest Income

Non-interest income in the first quarter of 2013 was $3.4 million as compared to $3.0 million a year earlier. The period-over-period increase in non-interest income was primarily related to a $0.5 million increase in net mortgage banking income primarily resulting from stronger residential mortgage origination volumes and related revenues.

Non-Interest Expense

Non-interest expense for the first quarter of 2013 was $13.3 million as compared to $13.9 million in the first quarter of 2012. The $0.6 million decrease in non-interest expense for the first quarter of 2013 was primarily due to decreases in both FDIC Insurance of $0.3 million related to decreased monetary assessments by the Federal Deposit Insurance Corporation ("FDIC") and a $0.4 million decrease in OREO expense resulting from sales of OREO properties.

Income Taxes

The first quarter of 2013 includes a $0.03 million tax credit compared to a provision for income taxes of $0.03 million in the first quarter of 2012. The income taxes recorded in the first quarters of 2013 and 2012 are estimated based upon management's current projections of estimated full-year pre-tax results of operations, estimated utilization of deferred tax assets on which a full valuation allowance was previously recorded, and other permanent book/tax differences.

As of March 31, 2013, the Company maintained a valuation allowance of $41.7 million against the deferred tax asset. There was no change from the valuation allowance at December 31, 2012.

Management determined the amount of the deferred tax valuation allowance at March 31, 2013 and December 31, 2012 by evaluating the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred tax assets and liabilities, and available tax planning strategies. The ability to utilize deferred tax assets is a complex process requiring in-depth analysis of statutory, judicial and regulatory guidance and estimates of future taxable income. The amount of deferred taxes recognized could be impacted by changes to any of these variables.

The issuance of common stock in connection with the Company's successful completion of its Capital Raise 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 and may be disallowed. The annual limitation placed on the Company's ability to utilize these potential tax deductions will equal the product of an applicable interest rate mandated under federal income tax laws and the Company's value immediately before the ownership change. The annual limitation imposed under Section 382 may limit the deduction for both the carryforward tax attributes and the built-in losses realized within five years of the date of the ownership change. 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.

Financial Condition

Capital Resources

Total stockholders' equity increased to $142.0 million at March 31, 2013, as compared to total stockholders' equity of $140.8 million at December 31, 2012. At March 31, 2013, the total common equity to total assets ratio was 10.7% and the Company's basic book value per share was $3.01 as compared to the total common equity to total assets ratio of 10.8% and basic book value per share of $2.97 at December 31, 2012.

At March 31, 2013, Bancorp's Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 10.72%, 14.31% and 15.58%, respectively, and the Bank's Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 10.69%, 14.27% and 15.54%, respectively, which meet regulatory benchmarks for a "well-capitalized" designation. Regulatory benchmarks for a "well-capitalized" designation are 5.00%, 6.00%, and 10.00% for Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital, respectively. However, in accordance with the memorandum of understanding ("MOU") with the FDIC and Oregon Division of Finance and Corporate Securities ("DFCS"), the Bank and Bancorp are required to maintain a Tier 1 leverage ratio of at least 10.00% to be considered "well-capitalized." Additional information regarding capital requirements can be found in Note 10 of the notes to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

From time to time the Company makes commitments to acquire banking properties or to make equipment or technology related investments of capital. At March 31, 2013, the Company had no material capital expenditure commitments apart from those incurred in the ordinary course of business.

Total Assets and Liabilities

Total assets were $1.3 billion at March 31, 2013, up $27.1 million from December 31, 2012. The increase in total assets during the first quarter of 2013 primarily resulted from an increase of $31.7 million in cash and cash equivalents and an increase of $21.7 million in net loans during the period, partially offset by a decrease of $24.9 million in investment securities available-for-sale. The increase in cash and cash equivalents at March 31, 2013 compared to December 31, 2012, was primarily a result of a $44.7 million increase in interest bearing deposits. A majority of the total cash at the Bank is held at the Federal Reserve Bank (the "FRB"). The increase in net loans during the first quarter of 2013 was primarily the result of increased commercial real estate ("CRE") and residential real estate loans. The increase in CRE loans was mainly due to a funding of office loans in our local markets. Over the next several years, the Bank is strategically working to increase loans to improve diversification of the loan portfolio. The decline in investment securities available-for-sale during the first quarter of 2013 was primarily the result of the principal pay downs of our mortgage-backed securities and the payoff of our short term commercial paper.

Total liabilities were $1.2 billion at March 31, 2013, a $25.8 million increase from December 31, 2012. This was primarily the result of a $28.0 million increase in total deposits. Additionally, between December 31, 2012 and March 31, 2013 there was a change in the mix of deposits as demand deposits decreased $22.8 million, while interest bearing deposits increased $44.7 million. This change was partly a result of an increase in reciprocal customer deposits, which enable relationship deposits to have full FDIC insurance. Reciprocal deposits are classified as brokered deposits. At March 31, 2013, such deposits increased by $17.6 million, the majority of which are classified as interest bearing demand deposits.

Total borrowings remained at $60.0 million at both March 31, 2013 and December 31, 2012.

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