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CACB > SEC Filings for CACB > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for CASCADE BANCORP

Form 10-Q for CASCADE BANCORP


12-Nov-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 due to management's determination that it was more likely than not that a significant portion of our DTA would be realized. Management's decision was based upon evidence including the Company's positive earnings performance trend, expected continued profitability, and financial condition improvement. As of September 30, 2013, the Company has a deferred tax asset of $51.5 million. 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.

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 recently 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 severe economic downturn in 2008 and 2009, 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 and adversely effect the Company's financial condition and results of operations.

Financial Highlights and Summary of the Third Quarter of 2013 (period ended September 30, 2013)

Net Income for the Third Quarter of 2013: $1.5 million or $0.03 per common share after a $0.6 million income tax provision. Net income for the third quarter of 2012 was $1.8 million or $0.04 per common share; there was no income tax provision recorded during this period.

Net Income for the Nine Months Ended September 30, 2013: $49.6 million or $1.05 per share including a $51.2 million income tax benefit, mainly due to the second quarter DTA recapture. This compares to net income for the nine months ended September 30, 2012 of $4.6 million or $0.10 per share after a $0.1 million income tax provision.

Stockholders Equity/Book Value per Share: Equity increased to $186.9 million or $3.93 per share at September 30, 2013 compared to $140.8 million or $2.97 per share at December 31, 2012. The year to date increase was mainly a result of the DTA valuation allowance release in the second quarter of 2013.

Loans: Gross loans are up $81.7 million or 9.52% compared to December 31, 2012.


Deposits: Total deposits are up $119.4 million or 11.09% compared to December 31, 2012.

Credit Quality: Reserve for loan losses at $21.7 million or 2.28% of loans compared to $27.3 million or 3.17% of loans at December 31, 2012; no provision was recorded in the third quarter of 2013.

Credit Quality: Net charge-offs for the third quarter of 2013 were $1.0 million, as compared to $2.6 million in the third quarter of 2012, with the decrease mainly related to lower frequency and severity of resolution of special mention and substandard loans.

Credit Quality: Non-performing assets improved to 0.88% of total assets at September 30, 2013 compared to 1.94% at December 31, 2012.

Net Interest Margin ("NIM"): NIM was 3.81% at September 30, 2013 compared to 4.11% at December 31, 2012.

RESULTS OF OPERATIONS -Three and Nine Months Ended September 30, 2013 and 2012

Total loans and loans held-for-sale outstanding increased to $950.6 million at September 30, 2013, a year-to-date increase of $91.9 million. The growth was primarily attributable to increased balances of 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 $103.3 million at September 30, 2013 as compared to $175.6 million at December 31, 2012. Of the $72.2 million reduction, $68.5 million of special mention and substandard loans were remediated in the first half 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 September 30, 2013 improved to 0.88% of total assets as compared to 1.94% at December 31, 2012. Charge-offs during the third quarter of 2013 were $1.0 million, however the Company made no provision for loan losses as management believes the reserve for loan losses of $21.7 million at September 30, 2013 is adequate.

Total deposits as of September 30, 2013 were $119.4 million higher than the balance at December 31, 2012, primarily due to an influx of deposits from the Bank's public entities, such a municipalities, as well as an increase in title company funds at the end of the third quarter.

Non-interest income of $3.6 million in the third quarter of 2013 remained relatively consistent to non-interest income of $3.2 million in the third quarter of 2012, while non-interest expense in the third quarter of 2013 was also comparable to the third quarter of 2012.

Income Statement

Net Income

Net income for the quarter ended September 30, 2013 was $0.03 per share or $1.5 million, compared to $0.04 per share or $1.8 million for the third quarter of 2012. Net income for the quarter ended September 30, 2013 includes a $0.6 million provision for income taxes. No provision was made for the quarter ended September 30, 2012.

Year-to-date net income through September 30, 2013 was $1.05 per share or $49.6 million, compared to $0.10 per share or $4.6 million for the same period in 2012. The increase is primarily due to an income tax benefit of $51.2 million realized through the reversal of the valuation allowance against the Company's deferred tax asset.

Net Interest Income

Net interest income was $12.1 million for the third quarter of 2013, comparable to $12.3 million in the third quarter of 2012. Net interest income for the nine months ended September 30, 2013 was $2.8 million lower compared to the nine months ended September 30, 2012. The decline is primarily due to continued reductions in yields on earnings assets mainly resulting from the historically low interest rate environment. Specifically, interest income in the third quarter of 2013 decreased $1.0 million compared to the third quarter of 2012 and decreased $4.4 million in the nine months ended September 30, 2013 compared to the same period in 2012, mainly due to lower loan portfolio yields.


Interest expense for the third quarter of 2013 decreased $0.7 million compared to the third quarter of 2012. Interest expense decreased $1.6 million in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. This improvement was primarily due to lower rates on deposits and reduced borrowing expenses. During the second quarter of 2013, the Company prepaid $60.0 million of FHLB advances bearing a weighted average rate of 3.17%.

Components of Net Interest Margin

The following tables set forth the components of the Company's net interest margin for the three and nine months ended September 30, 2013 and 2012. The tables present average balance sheet information, interest income and yields on average interest-earning assets, interest expense and rates paid on average interest-bearing liabilities, net interest income, net interest spread and net interest margin for the Company (dollars in thousands):


                                                 Three Months Ended September 30,
                                          2013                                      2012
                                          Interest      Average                     Interest      Average
                            Average        Income/     Yield or       Average        Income/     Yield or
                            Balance        Expense       Rates        Balance        Expense       Rates
Assets
Investment securities    $   211,652     $   1,356        2.54 %   $   280,244     $   1,533        2.20 %
Interest bearing
balances due from other
banks                        108,422            71        0.26 %        64,705            36        0.22 %
Federal funds sold                22             -           - %            23             -           - %
Federal Home Loan Bank
stock                         10,083             -           - %        10,464             -           - %
Loans (1)(2)(3)              924,822        11,080        4.75 %       846,382        11,893        5.59 %
Total earning
assets/interest income     1,255,001        12,507        3.95 %     1,201,818        13,462        4.46 %
Reserve for loan losses      (22,410 )                                 (37,190 )
Cash and due from banks       32,307                                    29,598
Premises and equipment,
net                           34,085                                    33,653
Bank-owned life
insurance                     36,225                                    35,294
Accrued interest and
other assets                  65,509                                    21,652
Total assets             $ 1,400,717                               $ 1,284,825


Liabilities and
Stockholders' Equity
Interest bearing demand
deposits                 $   551,667           193        0.14 %   $   479,681           224        0.19 %
Savings deposits              46,360             6        0.05 %        37,913             5        0.05 %
Time deposits                141,924           235        0.66 %       139,236           462        1.32 %
Other borrowings              24,239            16        0.26 %        60,000           480        3.18 %
Total interest bearing
liabilities/interest
expense                      764,190           450        0.23 %       716,830         1,171        0.65 %
Demand deposits              423,351                                   405,283
Other liabilities             24,078                                    24,693
Total liabilities          1,211,619                                 1,146,806
Stockholders' equity         189,098                                   138,019
Total liabilities and
stockholders' equity     $ 1,400,717                               $ 1,284,825
Net interest income                      $  12,057                                 $  12,291

Net interest spread                                       3.72 %                                    3.81 %

Net interest income to
earning assets                                            3.81 %                                    4.07 %

(1) Average non-performing loans included in the computation of average loans for the three months ended September 30, 2013 and 2012 was approximately $12.0 million and $10.3 million, respectively.

(2) Loan related fees, including prepayment penalties, recognized during the period and included in the yield calculation totaled approximately $0.3 million in 2013 and $0.4 million in 2012.

(3) Includes loans held for sale.


                                                  Nine Months Ended September 30,
                                          2013                                      2012
                                          Interest      Average                     Interest      Average
                            Average        Income/     Yield or       Average        Income/     Yield or
                            Balance        Expense       Rates        Balance        Expense       Rates
Assets
Investment securities    $   227,938     $   4,059        2.38 %   $   250,459     $   4,462        2.38 %
Interest bearing
balances due from other
banks                         93,678           173        0.25 %        87,606           163        0.25 %
Federal funds sold                22             -           - %            23             -           - %
Federal Home Loan Bank
stock                         10,180             -           - %        10,469             -           - %
Loans (1)(2)(3)              897,803        33,251        4.95 %       861,368        37,231        5.77 %
Total earning
assets/interest income     1,229,621        37,483        4.08 %     1,209,925        41,856        4.62 %
Reserve for loan losses      (24,578 )                                 (40,839 )
Cash and due from banks       30,519                                    30,277
Premises and equipment,
net                           34,294                                    33,853
Bank-owned life
insurance                     36,006                                    35,043
Accrued interest and
other assets                  33,194                                    25,558
Total assets             $ 1,339,056                               $ 1,293,817


Liabilities and
Stockholders' Equity
Interest bearing demand
deposits                 $   528,894           541        0.14 %   $   502,744           872        0.23 %
Savings deposits              44,164            17        0.05 %        36,401            18        0.07 %
Time deposits                133,087           829        0.83 %       148,409         1,612        1.45 %
Other borrowings              49,897           949        2.54 %        60,000         1,429        3.18 %
Total interest bearing
liabilities/interest
expense                      756,042         2,336        0.41 %       747,554         3,931        0.70 %
Demand deposits              402,249                                   386,021
Other liabilities             21,944                                    24,246
Total liabilities          1,180,235                                 1,157,821
Stockholders' equity         158,821                                   135,996
Total liabilities and
stockholders' equity     $ 1,339,056                               $ 1,293,817
Net interest income                      $  35,147                                 $  37,925

Net interest spread                                       3.67 %                                    3.92 %

Net interest income to
earning assets                                            3.82 %                                    4.20 %

(1) Average non-performing loans included in the computation of average loans for the nine months ended September 30, 2013 and 2012 was approximately $17.6 million and $9.5 million, respectively.

(2) Loan related fees, including prepayment penalties, recognized during the period and included in the yield calculation totaled approximately $1.2 million in 2013 and $1.4 million in 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 nine months
ended September 30, 2013, and attributes such variance to "volume" or "rate"
changes (dollars in thousands):
                                       Three Months Ended September 30,
                                                2013 over 2012
                                     Total             Amount of Change
                                    Increase            Attributed to
                                   (Decrease)        Volume          Rate
Interest income:
Interest and fees on loans        $    (813 )     $    1,105      $ (1,918 )
Interest on investment securities      (177 )           (376 )         199
Other investment income                  35               25            10
Total interest income                  (955 )            754        (1,709 )

Interest expense:
Interest on deposits:
Interest bearing demand                 (31 )             34           (65 )
Savings                                   1                1             -
Time deposits                          (227 )              9          (236 )
Other borrowings                       (464 )           (287 )        (177 )
Total interest expense                 (721 )           (243 )        (478 )

Net interest income               $    (234 )     $      997      $ (1,231 )



                                       Nine Months Ended September 30,
                                               2013 over 2012
                                      Total            Amount of Change
                                     Increase            Attributed to
                                    (Decrease)        Volume        Rate
Interest income:
Interest and fees on loans        $    (3,980 )     $  1,574     $ (5,554 )
Interest on investment securities        (403 )         (402 )         (1 )
Other investment income                    10             11           (1 )
Total interest income                  (4,373 )        1,183       (5,556 )

Interest expense:
Interest on deposits:
Interest bearing demand                  (331 )           45         (376 )
Savings                                    (1 )            4           (5 )
Time deposits                            (783 )         (167 )       (616 )
Other borrowings                         (480 )         (241 )       (239 )
Total interest expense                 (1,595 )         (359 )     (1,236 )

Net interest income               $    (2,778 )     $  1,542     $ (4,320 )


Loan Loss Provision

The Company did not record a loan loss provision during the third quarter of 2013 or 2012. The year-to-date provision as of September 30, 2013 is $1.0 million while the year-to-date provision for September 30, 2012 was $1.1 million.

Net charge-offs in the third quarter of 2013 were $1.0 million compared to $2.6 million in the third quarter of 2012. At September 30, 2013, the reserve for loan losses was $21.7 million or 2.28% 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 September 30, 2013, which remained unchanged from December 31, 2012.

Non-Interest Income

Non-interest income was as follows for the periods presented below (dollars in
thousands):
                     Three Months       Three Months                    Nine Months       Nine Months
                       Ended              Ended                           Ended              Ended
                     September 30,      September 30,                  September 30,      September 30,
                         2013               2012          % Change         2013               2012          % Change
Service charges on
deposit accounts   $          766     $          791        (3.2 )%   $       2,245     $        2,471        (9.1 )%
Card issuer and
merchant services
fees, net                     847                694        22.0  %           2,473              1,970        25.5  %
Earnings on BOLI              224                234        (4.3 )%             659                751       (12.3 )%
Mortgage banking
income, net                 1,284              1,104        16.3  %           3,504              2,948        18.9  %
Other income                  516                410        25.9  %           1,628              1,500         8.5  %
Total non-interest
income             $        3,637     $        3,233        12.5  %   $      10,509     $        9,640         9.0  %

Service charges on deposit accounts decreased during both the third quarter and . . .

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