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CACB > SEC Filings for CACB > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for CASCADE BANCORP

Form 10-Q for CASCADE BANCORP


14-Aug-2014

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 31, 2014, including its audited 2013 consolidated financial statements and the notes thereto as of December 31, 2013 and 2012 and for each of the years in the three-year period ended December 31, 2013.

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. Forward-looking statements are subject to various risks and uncertainties that may cause our actual results to differ materially and adversely from our expectations as indicated in the forward-looking statements. These risks and uncertainties include: the general condition of, and changes in, the economy of the States of Oregon and Idaho generally, and Central, Southern and Northwest Oregon, as well as the greater Boise/Treasure Valley, Idaho area; our ability to maintain asset quality and expand our market share or net interest margin; and expected cost savings, synergies and other related benefits of our recently completed merger with Home might not be realized within the expected timeframe and costs or difficulties relating to the integration might be greater than expected. Further, actual results may be affected by competition with other financial institutions; customer acceptance of new products and services; the regulatory environment in which we operate; and general trends in the local, regional and national banking industry and economy. 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 31, 2014 for the year ended December 31, 2013. However, you should be aware that these factors are not an exhaustive list, and you should not assume these are the only factors that may cause our actual results to differ from our expectations

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

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements for the year ended December 31, 2013 included in our Annual Report on Form 10-K filed with the SEC on March 31, 2014. 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. As of June 30, 2014, this change has not had 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, 2013.

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.
Deferred tax assets are recognized subject to management's judgment that realization is "more likely than not." Uncertain tax positions that meet the more likely than not recognition threshold are measured to determine the amount of benefit to recognize. An uncertain tax position is measured at the amount of benefit that management believes has a greater than 50% likelihood of


realization upon settlement. Tax benefits not meeting our realization criteria represent unrecognized tax benefits. We account for interest and penalties as a component of income tax expense.
The Company reversed its deferred tax asset, or 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 the Company's DTA would be realized. Management's determination resulted from consideration of both the positive and negative evidence available that can be objectively verified. For a full discussion of the Company's considerations, see "Deferred Income Taxes" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013. As of June 30, 2014 and December 31, 2013, the Company had a net deferred tax asset of $70.0 million and $50.1 million, respectively. 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 and estimates as to the deductibility of prior 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 which in turn are influenced by regional and national economic trends and conditions. Economic conditions in both Idaho and Oregon have improved from the severe economic downturn in 2007 through 2009, and both regions have experienced gains in employment and real estate prices since such time. Economic conditions and real estate prices have also improved nationally since the economic downturn. However lingering effects of the economic downturn, including fiscal imbalances, continue to affect employment and business and consumer confidence to various degrees and the future direction of both the national and regional economies 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 affect the Company's financial condition and results of operations.

Financial Highlights and Summary of the Second Quarter of 2014 (period ended June 30, 2014)

Net Loss for the Second Quarter of 2014: $4.7 million, or $0.08, per common share in the second quarter of 2014 compared to $46.4 million, or $0.98, per common share for the second quarter of 2013. The current quarter includes $9.9 million of merger related expenses (pre-tax).

Stockholders Equity/Book Value per Share: Stockholders' equity increased to $306.9 million, or $4.25, per share, at June 30, 2014 compared to $188.7 million, or $3.97 per share, at December 31, 2013. The increase was mainly a result of the acquisition of Home Federal Bancorp, Inc. ("Home").

Loans: Gross loans are up $398.9 million, or 40.1%, compared to December 31, 2013. The increase was a result of the addition of acquired and acquired covered loans of $378.3 million in the acquisition of Home.

Deposits: Total deposits are up $774.7 million, or 66.4%, compared to December 31, 2013. The increase was a result of the deposits acquired from Home at a fair value of $760.6 million.

Credit Quality: Reserve for loan losses at $20.5 million, or 1.47%, of total loans compared to $20.9 million, or 2.08%, of total loans at December 31, 2013; no loan loss provision was recorded in the first quarter of 2014 or 2013.

Credit Quality: Non-performing assets improved to 0.80% of total assets at June 30, 2014 compared to 0.81% at December 31, 2013.

Net Interest Margin ("NIM"): NIM was 3.98% for the quarter ended June 30, 2014 compared to 3.75% for the quarter ended June 30, 2013.

On May 16, 2014 (the "Acquisition Date"), the Company completed the acquisition of Home (the "Merger") in a stock and cash transaction valued at $241.4 million. The transaction value includes $122.2 million in cash and the issuance of 24,309,131 shares of common stock issued by the Company. The completion of the Merger provided an expanded geographic footprint for the Company and increased the size of the balance sheet wherein the combined companies expect to realize economies of scale and other operating efficiencies.


RESULTS OF OPERATIONS -Three and Six Months Ended June 30, 2014 and 2013

Loans acquired in the Merger are recorded at fair value with no allowance for loan losses brought forward in accordance with purchase accounting principles. The net fair value adjustment to acquired loans from the Home acquisition was $6.1 million, representing a valuation adjustment for interest rate and credit quality which will be accreted over the life of the loans (approximately 10 years).

At June 30, 2014, $53.6 million or 14.2% of the $378.3 million in acquired and acquired covered loans were covered under loss sharing agreements with the Federal Deposit Insurance Commission ("FDIC"). These loss sharing agreements will expire five years after the date of the FDIC agreements for non-single family covered assets and ten years after the acquisitions date for single-family covered assets.
The Company has determined it will report on a cash basis any potential future benefits and/or costs incurred with respect to the remaining loss share receivables (or payables) under these agreements. The remaining benefit and/or cost of the FDIC Agreements are not expected to be material to the Company's financial condition. In the acquired loan portfolio, $53.6 million in loans remain covered loans at June 30, 2014 of which 81.4% are currently performing. Estimated future losses on acquired covered loans are included in the fair value purchase accounting mark.

Total net loans and loans held-for-sale outstanding at June 30, 2014 was $1.4 billion, an increase of $393.9 million from December 31, 2013. Of this total, $378.3 million was from the Home acquired and acquired covered loan portfolio. The organic growth in loans was primarily attributable to increased balances of shared national credits in the commercial and industrial portfolio.

For the six months ended June 30, 2014, originated loan balances increased by $20.4 million mainly due to an increased commercial and industrial portfolio, primarily related to the Company's syndicated national credit portfolio.

Loans categorized as special mention and substandard totaled $102.6 million at June 30, 2014 as compared to $85.1 million at December 31, 2013. The increase was primarily a result of the acquisition of Home whose acquired portfolio included $32.1 million of special mention and substandard loans at June 30, 2014. The credit quality of the Company's originated loans continued to improve with special mention and substandard loans decreasing by $14.6 million from the balance at December 31, 2013. Remediation was accomplished through credit upgrades owing to improved obligor cash flows as well as payoffs/paydowns and/or charge offs related to the restructure of adversely risk rated loans. Non-performing assets as of June 30, 2014 were 0.80% of total assets as compared to 0.81% at December 31, 2013, including Home acquired and acquired covered non-performing loans. Net charge-offs during the second quarter of 2014 were $1.3 million; year to date there are net charge-offs of $0.4 million. The Company made no provision for loan losses as management believes the reserve for loan losses of $20.5 million at June 30, 2014 is adequate.

Total deposits as of June 30, 2014 were $1.9 billion, which represents an increase of $774.7 million from the balance at December 31, 2013. The increased balance was primarily a result of $760.6 million in fair value of added deposits from the acquisition of Home. As of June 30, 2014, 52.1% of total deposits are in checking account balances.

Non-interest income was $4.8 million in the second quarter of 2014 compared to non-interest income of $3.5 million in the second quarter of 2013, primarily due to an increase in service charges and card issuer and merchant fees, in part attributable to the additional Home customers. Non-interest expense increased $10.9 million in the second quarter of 2014 as compared to the second quarter of 2013, due primarily to merger related expenses of $9.9 million in the second quarter of 2014.

As a result of the Merger, goodwill of $75.8 million was recorded. Goodwill represents the excess of the purchase price of $241.4 million less the fair value of the net identifiable assets acquired of $165.6 million. The goodwill is not amortized but the Company will periodically assess (at least on an annual basis) whether events or changes in circumstances indicate that the carrying amount of goodwill may be impaired.

Income Statement

The Company's financial results for the second quarter of 2014 include revenues and expenses generated by assets acquired in the Merger since the Acquisition Date.

Net (Loss) Income

Net loss for the quarter ended June 30, 2014 was $0.08 per share, or $4.7 million, compared to net income of $0.98 per share, or $46.4 million, for the second quarter of 2013. The decrease in net income in the second quarter of 2014 compared to the same


period in 2013 was primarily the result of an income tax benefit of $51.7 million being recorded in the second quarter of 2013 as a result of releasing the valuation allowance against the Company's DTA. The net loss for the second quarter 2014 also includes $9.9 million in transactional expenses related to our merger with Home.

Net loss for the six months ended June 30, 2014 was $3.7 million or $0.09 per share, compared to net income of $48.1 million or $1.02 per share for the six months ended June 30, 2013. The decreased net income for the six months ended June 30, 2014 compared to the same period in 2013 was primarily the result of the income tax benefit as described above. The net loss for the six months ended June 30, 2014 includes $10.8 million in transaction expenses related to our merger with Home.

Net Interest Income

Net interest income was $15.7 million for the second quarter of 2014, as compared to $11.5 million in the second quarter of 2013.

Total interest income increased $3.8 million from $12.4 million in the second quarter of 2013 to $16.2 million in the second quarter of 2014. The increase was due primarily to the addition of earning assets acquired in the Merger. Accretion of the Home fair value discount is accreted over the remaining term to maturity of the acquired loans into interest income on loans. Accretion will vary in the event of payoffs or paydowns of specific loans. For the quarter ended June 30, 2014, accretion was approximately $0.4 million.

Total interest expense for the second quarter of 2014 decreased $0.4 million compared to the second quarter of 2013. Interest expense for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 decreased $1.0 million. This improvement in both periods was primarily due to a reduction in borrowings at June 30, 2014 compared to the year-ago periods. Other borrowing expense was nil for the three and six months ended June 30, 2014 compared to $0.5 million and $0.9 million in the three and six months ended June 30, 2013, respectively. This is due to the Company having no borrowings as of June 30, 2014 due to increased liquidity, partially as a result of the Merger. Deposit interest expense for the three and six months ended June 30, 2014 was slightly increased compared to the same periods in 2013 as a result of increased deposits acquired as a result of the Merger.

The net interest margin for the second quarter of 2014 was 3.98%, this compares to the prior quarter net interest margin of 3.83%. As described above, the Company's strategic aim is to moderate duration risk in the combined balance sheet and better position the bank to benefit from rising market interest rates. In part, this strategy will include redeployment of long duration Home investment securities into a combination of floating and adjustable-rate assets. These actions are expected to occur over the next several quarters. Internal forecasts as to the effect of this strategy will be a net interest margin estimated between 3.65% to 3.75% by the fourth quarter of 2014 (inclusive of discount accretion of fair value marks). Because future interest rates are unpredictable and the execution of the Company's redeployment strategy is uncertain no assurance can be given as to the achievement of the net interest margin forecast.

Components of Net Interest Margin

The following tables set forth the components of the Company's net interest margin for the three and six months ended June 30, 2014 and 2013. 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 June 30,
                                          2014                                      2013
                                          Interest      Average                     Interest      Average
                            Average        Income/     Yield or       Average        Income/     Yield or
                            Balance        Expense       Rates        Balance        Expense       Rates
Assets
Investment securities    $   305,757     $   2,020        2.65 %   $   226,690     $   1,381        2.44 %
Interest bearing
balances due from other
banks                         67,571            45        0.27 %       102,951            66        0.26 %
Federal funds sold                22             -           - %            22             -           - %
Federal Home Loan Bank
stock                         17,426             -           - %        10,185             -           - %
Loans (1)(2)(3)            1,187,936        14,147        4.78 %       888,087        10,933        4.94 %
Total earning
assets/interest income     1,578,712        16,212        4.12 %     1,227,935        12,380        4.04 %
Reserve for loan losses      (21,529 )                                 (24,241 )
Cash and due from banks       36,742                                    31,406
Premises and equipment,
net                           38,676                                    34,513
Bank-owned life
insurance                     44,158                                    36,005
Deferred tax asset            55,899                                         -
Goodwill                      37,494                                         -
Accrued interest and
other assets                  32,252                                    17,343
Total assets             $ 1,802,404                               $ 1,322,961


Liabilities and
Stockholders' Equity
Interest bearing demand
deposits                 $   709,598           217        0.12 %   $   527,481           182        0.14 %
Savings deposits              90,916             7        0.03 %        44,233             6        0.05 %
Time deposits                184,249           319        0.69 %       128,048           261        0.82 %
Other borrowings               1,978             1        0.20 %        59,560           460        3.10 %
Total interest bearing
liabilities/interest
expense                      986,741           544        0.22 %       759,322           909        0.48 %
Demand deposits              534,552                                   397,716
Other liabilities             32,020                                    20,844
Total liabilities          1,553,313                                 1,177,882
Stockholders' equity         249,091                                   145,079
Total liabilities and
stockholders' equity     $ 1,802,404                               $ 1,322,961
Net interest income                      $  15,668                                 $  11,471

Net interest spread                                       3.90 %                                    3.56 %

Net interest income to
earning assets                                            3.98 %                                    3.75 %

(1) Average non-performing loans included in the computation of average loans for the three months ended June 30, 2014 and 2013 was approximately $9.3 million and $13.2 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 2014 and $0.4 million in 2013.

(3) Includes loans held for sale.


                                                        Six Months Ended June 30,
(dollars in thousands)                       2014                                      2013
                                             Interest      Average                     Interest      Average
                               Average        Income/     Yield or       Average        Income/     Yield or
                               Balance        Expense       Rates        Balance        Expense       Rates
Assets
Investment securities       $   249,439     $   3,348        2.71 %   $   236,216     $   2,703        2.31 %
Interest bearing balances
due from other banks             56,888            72        0.26 %        86,184           103        0.24 %
Federal funds sold                   22             -           - %            23             -           - %
Federal Home Loan Bank
stock                            13,679             -           - %        10,228             -           - %
Loans (1)(2)(3)               1,091,964        24,896        4.60 %       884,069        22,171        5.06 %
Total earning
assets/interest income        1,411,992        28,316        4.04 %     1,216,720        24,977        4.14 %
Reserve for loan losses         (21,506 )                                 (25,680 )
Cash and due from banks          31,944                                    29,610
Premises and equipment, net      35,751                                    34,400
Bank-owned life insurance        40,419                                    35,894
Deferred tax asset               52,932                                         -
Goodwill                         18,851                                         -
Accrued interest and other
assets                           24,208                                    16,897
Total assets                $ 1,594,591                               $ 1,307,841


Liabilities and
Stockholders' Equity
Interest bearing demand
deposits                    $   626,127           392        0.13 %   $   517,319           348        0.14 %
Savings deposits                 71,512            11        0.03 %        42,049            11        0.05 %
Time deposits                   160,541           502        0.63 %       128,595           594        0.93 %
Other borrowings                  4,464             6        0.27 %        62,939           934        2.99 %
Total interest bearing
. . .
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