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CACB > SEC Filings for CACB > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for CASCADE BANCORP


9-Aug-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. In this regard, as of June 30, 2013 management implemented a homogeneous pool approach to estimating reserves for consumer and small business loans. This change is not expected to have a material effect on the level of the reserve for loan losses. 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

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 Company reversed its DTA valuation allowance as of June 30, 2013 resulting in a net deferred tax asset of $50.4 million at that date. This compares to no deferred tax asset as of December 31, 2012 as it was fully reserved against. There are a number of tax issues that impact the deferred tax asset balance including changes in temporary differences between the financial statement and tax recognition of revenue and expenses, estimates as to the deductibility of prior losses and potential consequence of Section 382 of the Internal Revenue Code.

For the quarter ended June 30, 2013, management determined it was more likely than not that a significant portion of our DTA would be realized. Management's decision was based upon evidence including its earnings performance trend, expected continued profitability, and improvement in the Company's financial condition.

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.

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 which in turn are influenced by regional and national economic trends and conditions. Idaho and Oregon have been experiencing improved economic trends including gains in employment and increased real estate activity. National and regional economies and real estate prices are also stabilizing and in certain cases improved, however lingering effects of the recent downturn including fiscal imbalances, continue to affect employment and business and consumer confidence to some degree and the future direction of the economy remains uncertain. The Company's markets continue to be sensitive to real estate values and unemployment rates continue to be higher than prior to the downturn. An unforeseen economic shock or a return of adverse economic conditions could cause deterioration of local economies, resulting in an adverse effect on the Company's financial condition and results of operations.

Financial Highlights and Summary of the Second Quarter of 2013 (period ended June 30, 2013)

Net Income for the Second Quarter of 2013: $46.4 million or $0.98 per common share which included a one-time release of its Deferred Tax Asset ("DTA") valuation allowance resulting in a $51.7 million non-recurring credit to income taxes. Also included in net income for the second quarter of 2013 are certain expense items that partially offset the tax credit, the largest of which was a $3.8 million prepayment penalty to extinguish high-rate FHLB advances which will reduce future borrowing costs. Net income for the second quarter of 2012 was $1.8 million or $0.04 per common share.

Net Income for the Six Months Ended June 30, 2013: $48.1 million or $1.02 per share compared to $2.8 million or $0.06 per share for the six months ended June 30, 2012.

Stockholder Equity/Book Value per Share: Including the release of DTA valuation allowance, equity increased to $187.9 million or $3.95 per share at June 30, 2013 compared to $140.8 million or $2.97 per share at December 31, 2012.


Loans: Gross loans up $54.4 million or 6.34% compared to December 31, 2012.

Deposits: Total deposits up $28.0 million or 2.60% compared to December 31, 2012.

Credit Quality: Reserve for loan losses at $22.7 million or 2.49% of loans compared to $27.3 million or 3.17% of loans at December 31, 2012.

Credit Quality: Net charge-offs for the quarter were $2.9 million mainly related to resolution of special mention and substandard loans.

Credit Quality: Non-performing assets were 0.84% of total assets at June 30, 2013 compared to 1.94% at December 31, 2012.

Net Interest Margin ("NIM"): NIM was 3.75% at June 30, 2013 compared to 4.11% at December 31, 2012.

RESULTS OF OPERATIONS -Three and Six ended June 30, 2013 and 2012

Net income and shareholder equity was significantly and positively affected by the release of it the Company's deferred tax asset valuation allowance at June 30, 2013. The release of the DTA allowance is recorded as a $51.7 million credit to income taxes in the Company's income statement for the three and six months ended June 30, 2013. Previously the Company had reported no DTA because it had maintained a full allowance against it. The release of the DTA valuation allowance was taken because the Company has concluded it is more likely than not that its deferred tax asset will be realized as it generates future taxable income. During the second quarter of 2013 the Company incurred certain charges that partially offset the DTA tax credit; the largest of which was a $3.8 million prepayment penalty to extinguish high-rate FHLB advances. This payoff is expected to reduce Company borrowing costs in the future by approximately $0.5 million per quarter. With the release of DTA at June 30, 2013, Shareholder Equity increased to $187.9 million or $3.95 per share as compared to $140.8 million or $2.97 per share at December 31, 2012.

Total loans outstanding increased to $928.3 million at June 30, 2013, a year to date increase of $69.6 million. The growth was attributable to increased shared national credits in the commercial and industrial portfolio as well as growth in the owner-occupied commercial real estate and residential mortgage portfolios.

Loan quality continued to improve with remediation of special mention and substandard loans. Loans categorized as such totaled $107.1 million at June 30, 2013 as compared to $175.6 at December 31, 2012. Of this $68.5 million reduction during the first half of 2013, $11.3 million of special mention and substandard loans was reduced in the second quarter of 2013. Remediation was accomplished through credit upgrades owing to improved obligor cash flows as well as payoffs/paydowns, note sales and/or charge offs related to the restructure of adversely risk rated loans. Non-performing assets as of June 30, 2013 improved to 0.84% of total assets as compared to 1.94% at December 31, 2012. During the second quarter of 2013, the Company made a provision for loan losses of $1.0 million partially offsetting $2.9 million in net charge offs. A portion of these charge-offs relates to the remediation of legacy substandard loans. Management believes the reserve for loan losses of $22.7 million at June 30, 2013 is sufficient.

Although the growth in total deposits leveled off during the second quarter of 2013, total deposits as of June 30, 2013 were $28.0 million higher than the balance at December 31, 2012, primarily due to increased interest bearing demand deposits in the first quarter of 2013. Non-interest income of $3.5 million in the second quarter of 2013 remained relatively constant to non-interest income of $3.4 million in the second quarter of 2012, while non-interest expense in the second quarter of 2013 was $5.1 million higher than the second quarter of 2012 primarily due to a $3.8 million prepayment penalty of FHLB advances. During the second quarter of 2013 the Company also recorded $1.3 million expense for human resource related items including incentive and severance obligations, a $1.0 million provision for loan losses, and $0.4 million associated with branch consolidation costs.

Income Statement

Net Income

Net income for the quarter ended June 30, 2013 was $0.98 per share or $46.4 million, compared to $0.04 per share or $1.8 million for the second quarter of 2012. Net income for the quarter ended June 30, 2013 was higher than net income for the second quarter of 2012 primarily due to the one-time benefit for income taxes of $51.7 million related to the release of the DTA valuation allowance. Excluding the impact of the $51.7 million DTA valuation allowance, we recorded a net loss of $5.3 million in the second quarter of 2013, mainly due to certain non-recurring items including penalties of $3.8 million related to the prepayment of FHLB advances.

Net Interest Income


Net interest income was $11.5 million for the second quarter of 2013, down $1.0 million compared to $12.5 million in the second quarter of 2012. Net interest income for the six months ended June 30, 2013 was $2.5 million lower compared to the six months ended June 30, 2012. These declines were primarily due to reductions in yields on earnings assets resulting from the historically low interest rate market environment. Specifically, loan interest income in the second quarter of 2013 decreased $1.3 million compared to the second quarter of 2012 and decreased $3.2 million in the six months ended June 30, 2013 compared to the same period in 2012, mainly due to lower yields on our loan portfolio during the first half of 2013.

Interest expense for the second quarter of 2013 decreased $0.4 million compared to the second quarter of 2012. Interest expense decreased $0.9 million in the six months ended June 30, 2013 compared to the six months ended June 30, 2012. This improvement was primarily due to the decreased rates on deposits in the low interest rate market environment. During the second quarter of 2013, the Company prepaid $60.0 million of FHLB advances bearing a weighted average rate of 3.17% which we anticipate will reduce our interest expense going forward.


Components of Net Interest Margin

The following tables set forth for the three and six months ended June 30, 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 June 30,
(dollars in thousands)                     2013                                      2012
                                           Interest      Average                     Interest      Average
                             Average        Income/     Yield or       Average        Income/     Yield or
                             Balance        Expense       Rates        Balance        Expense       Rates
Assets
Investment securities     $   226,690     $   1,381        2.44 %   $   259,449     $   1,512        2.34 %
Interest bearing balances
due from other banks          102,951            66        0.26 %        80,681            60        0.30 %
Federal funds sold                 22             -           - %            23             -           - %
Federal Home Loan Bank
stock                          10,185             -           - %        10,472             -           - %
Loans (1)(2)(3)               888,087        10,933        4.94 %       853,297        12,225        5.76 %
Total earning
assets/interest income      1,227,935        12,380        4.04 %     1,203,922        13,797        4.61 %
Reserve for loan losses       (24,241 )                                 (41,760 )
Cash and due from banks        31,406                                    27,180
Premises and equipment,
net                            34,513                                    33,811
Bank-owned life insurance      36,005                                    35,048
Accrued interest and
other assets                   17,343                                    25,688
Total assets              $ 1,322,961                               $ 1,283,889


Liabilities and
Stockholders' Equity
Interest bearing demand
deposits                  $   527,481           182        0.14 %   $   502,019           276        0.22 %
Savings deposits               44,233             6        0.05 %        36,639             5        0.05 %
Time deposits                 128,048           261        0.82 %       148,303           534        1.45 %
Other borrowings               59,560           460        3.10 %        60,000           474        3.18 %
Total interest bearing
liabilities/interest
expense                       759,322           909        0.48 %       746,961         1,289        0.69 %
Demand deposits               397,716                                   377,112
Other liabilities              20,844                                    24,407
Total liabilities           1,177,882                                 1,148,480
Stockholders' equity          145,079                                   135,409
Total liabilities and
stockholders' equity      $ 1,322,961                               $ 1,283,889
Net interest income                       $  11,471                                 $  12,508

Net interest spread                                        3.56 %                                    3.92 %

Net interest income to
earning assets                                             3.75 %                                    4.18 %

(1) Average non-performing loans included in the computation of average loans for the three months ended June 30, 2013 and 2012 was approximately $13.2 million and $9.1 million, respectively.


(2) Loan related fees, including prepayment penalties, recognized during the period and included in the yield calculation totaled approximately $0.4 million in 2013 and $0.4 million in 2012.

(3) Includes loans held for sale.

                                                      Six Months Ended June 30,
(dollars in thousands)                     2013                                      2012
                                           Interest      Average                     Interest      Average
                             Average        Income/     Yield or       Average        Income/     Yield or
                             Balance        Expense       Rates        Balance        Expense       Rates
Assets
Investment securities     $   236,216     $   2,703        2.31 %   $   235,402     $   2,928        2.50 %
Interest bearing balances
due from other banks           86,184           103        0.24 %        99,181           127        0.26 %
Federal funds sold                 23             -           - %            23             -           - %
Federal Home Loan Bank
stock                          10,228             -           - %        10,472             -           - %
Loans (1)(2)(3)               884,069        22,171        5.06 %       868,943        25,338        5.86 %
Total earning
assets/interest income      1,216,720        24,977        4.14 %     1,214,021        28,393        4.70 %
Reserve for loan losses       (25,680 )                                 (42,684 )
Cash and due from banks        29,610                                    30,623
Premises and equipment,
net                            34,400                                    33,955
Bank-owned life insurance      35,894                                    34,917
Accrued interest and
other assets                   16,897                                    27,531
Total assets              $ 1,307,841                               $ 1,298,363


Liabilities and
Stockholders' Equity
Interest bearing demand
deposits                  $   517,319           348        0.14 %   $   514,401           648        0.25 %
Savings deposits               42,049            11        0.05 %        35,637            14        0.08 %
Time deposits                 128,595           594        0.93 %       153,046         1,150        1.51 %
Other borrowings               62,939           934        2.99 %        60,000           948        3.18 %
Total interest bearing
liabilities/interest
expense                       750,902         1,887        0.51 %       763,084         2,760        0.73 %
Demand deposits               391,524                                   376,284
Other liabilities              21,859                                    24,022
Total liabilities           1,164,285                                 1,163,390
Stockholders' equity          143,556                                   134,973
Total liabilities and
stockholders' equity      $ 1,307,841                               $ 1,298,363
Net interest income                       $  23,090                                 $  25,633

Net interest spread                                        3.63 %                                    3.98 %

Net interest income to
earning assets                                             3.83 %                                    4.25 %

(1) Average non-performing loans included in the computation of average loans for the six months ended June 30, 2013 and 2012 was approximately $15.3 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 $1.0 million in both 2013 and 2012.

(3) Includes 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 and six months
ended June 30, 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):
                                        Three Months Ended June 30,
                                              2013 over 2012
                                      Total           Amount of Change
                                     Increase          Attributed to
                                    (Decrease)      Volume        Rate
Interest income:
Interest and fees on loans        $    (1,292 )    $   500     $ (1,792 )
Interest on investment securities        (131 )       (191 )         60
Other investment income                     6           17          (11 )
Total interest income                  (1,417 )        326       (1,743 )

Interest expense:
Interest on deposits:
Interest bearing demand                   (94 )         14         (108 )
Savings                                     1            1            -
Time deposits                            (273 )        (73 )       (200 )
Other borrowings                          (14 )         (3 )        (11 )
Total interest expense                   (380 )        (61 )       (319 )

Net interest income               $    (1,037 )    $   387     $ (1,424 )



                                        Six Months Ended June 30,
                                             2013 over 2012
                                     Total          Amount of Change
                                    Increase         Attributed to
                                   (Decrease)     Volume        Rate
Interest income:
Interest and fees on loans        $   (3,167 )   $   440     $ (3,607 )
Interest on investment securities       (225 )        10         (235 )
Other investment income                  (24 )       (17 )         (7 )
Total interest income                 (3,416 )       433       (3,849 )

Interest expense:
Interest on deposits:
Interest bearing demand                 (300 )         4         (304 )
Savings                                   (3 )         3           (6 )
Time deposits                           (556 )      (183 )       (373 )
Other borrowings                         (14 )        46          (60 )
Total interest expense                  (873 )      (130 )       (743 )

Net interest income               $   (2,543 )   $   563     $ (3,106 )


Loan Loss Provision

The Company recorded a loan loss provision of $1.0 million in the second quarter of 2013. The Company did not make a loan loss provision in the second quarter of 2012. The year-to-date provision as of June 30, 2013 is $1.0 million while the year-to-date provision for June 30, 2012 was $1.1 million.

Net charge-offs in the second quarter of 2013 were $2.9 million compared to $5.7 million in the second quarter of 2012. A significant portion of charge-offs related to the ongoing remediation of legacy special mention and substandard loans. At June 30, 2013, the reserve for loan losses was $22.7 million or 2.49% of outstanding loans compared to $27.3 million or 3.17% of outstanding loans at December 31, 2012.

. . .

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